Financial Plans

I’ve got a job making about a thousand bucks a week, and after a few changes I should get rid of my independent health insurance in favor of a work benefits package and have $300/month more in my pocket on top of that.  Aside from that I have no chance of a raise as-is, and need to get back into college to get more skills.  My only other option seems to fall around doing some amp repair work part-time.

This doesn’t quite work for me.  I need another source of long-term income as a stabilizer; not a savings account, but a solid source of extra money.  Bonds, mutual funds, and retirement plans come to mind, but these don’t fit my needs.  Instead, I’ve taken it upon myself to do some stock market investment!

My stocks in AAPL and IMB did pretty well actually.  IMB kept dropping and cancelled their dividend, so I bought more.  Each time IMB spiked by $2-$3, I sold a chunk of it and bought back later, making a good $200-$400 of profit in the process and easing back my losses.  AAPL I sold at its peak and made a couple hundred, a good profit for me too.  Still, this doesn’t hold up as a sustainable income.

I now hold SFI, CSE, LFL, TMA, and various other stocks with good yield and potential growth.  I didn’t buy these for growth potential; I bought them for their dividend yield.  They have good estimated growth and thus should perform well enough for me:  they won’t fall and cancel their dividends like IMB.  I’ll buy more of whatever I buy every month; and as I do, these stocks will also buy more of themselves from an income source generated by them.

Yes, that’s right, dividends come from your ownership of stock.  If I pay just $500 out of pocket each month, I still wind up with $1500, then $1600, then $1700, then $2000 going in every 3 months.  Of course, that makes sense; the more I buy, the more shares I have to earn me profit sharing revenue (dividends).  Dividends automatically re-invest, so every dollar of dividend I earn gets me more stock to earn me more dividends.  Over time my income flow grows on its own.

This fascinates me to no end.  I use Income Investor to figure out which stocks to examine for investment, and carefully choose the ones I like best based on yield and potential upside.  E*Trade has a research center to pull up all kinds of news and performance information on any symbol, so I can research into the business to decide if I think they’ll do well.  Place a good investment, and I have a sudden pay raise.

It gets better than that too.  Say I have a 10% yield stock paying $1/share dividend on $40 shares.  With 400 shares I get 10 shares in the first quarter, then 410 shares gets me 10.25 shares, then 420.25 shares gets me about 10.5 shares, if the stock price never changes.  If it goes up before the first pay to $80/share I only get 5 shares, which means the next quarter I get $405 instead of $410; but if the stock goes down to $20, I get 20 shares, and the next quarter has a $420 dividend.  I win either way:  my stocks gain value, or I start accruing more stock (and thus more income) faster.

It doesn’t stop there.  What if that stock did double?  400 shares, $40, $16000 in there suddenly just became $32000, and this stock now has a 5% yield.  I bought in at 10% yield on $16000, got 100% growth and now have $32000.  I find another 10% yield stock, sell all 400 original shares, and now I have 10% yield on $32000.  The yield versus the original $16000 scales to 20% though– twice as much money, twice the dividends, twice 10%.  (Of course I’d probably sell half or 3/4 of the original stock to keep a stake for a while.)

Growth helps me immensely, far more than growth in a typical stock.  Lack of growth doesn’t hurt me.  Loss helps me as long as the company doesn’t die out or cancel their dividend.  If a company has liquidity issues and cuts, suspends, or cancels their dividend, I lose until their stock price comes back up and I can sell (possibly never).  For the most part, a diverse portfolio will keep this from bothering me too much; over time I should break my salary, maybe in 10 years.  That’d work very well for me!


~ by John Moser on April 23, 2008.

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