It started out as an experiment. It wound up being one of the greatest investment discoveries we've ever found.
About two years ago, StreetAuthority co-founder Paul Tracy approached me with an idea. He wanted me to build a portfolio of dividend stocks that would pay out more than 30 dividend checks a month -- one for every day of the year. In order to show he was serious, he gave me $200,000 and a dedicated brokerage account to get started.
I must admit, I was a little skeptical at first. The idea seemed too good to be true. But two and a half years, more than 900 dividends and over $40,900 worth of income later, the results have been far better than anyone could have imagined.
Since I started my portfolio back in December 2009, my initial $200,000 investment has grown to $275,649, giving a total return of 37.8%. Even better, the payments I received from my portfolio in 2012 averaged about $1,357 per month...
I call this method of investing the Daily Paycheck strategy. Simply put, by creating a portfolio of high-yielding dividend stocks that pay distributions regularly and have a history of raising their payouts, I've successfully built an income machine that pays me each and every day.
The best part is you can do the same.
And you don't need $200,000 either. My results are fully scalable. So whether you have $1,000,000 to invest or $10,000, you can still earn a steady income stream using this strategy.
Now, admittedly, there's another step to my strategy that has helped me accelerate my income stream these past few years, and I would be doing you a disservice if I didn't share it with you.
See, while it's tempting to take the cash that my portfolio is generating (who wouldn't want an extra $1,357 per month in the bank), I've found I can earn even more money by simply reinvesting my dividends. By using my dividends to purchase more shares, compounding takes over. As a result, my next payment will be larger, which then buys more shares, and so on.
Consider two income investors, both of whom start a Daily Paycheck portfolio with just $20,000. But one of those investors chooses to take the cash and spend it as he pleases. The other decides he wants to reinvest his dividends.
Assuming they both earn a 7% yield, the chart on the right shows you the difference compounding can make. After 10 years the investor who reinvested his dividends is generating $2,754 in annual income -- nearly double the amount earned with no reinvestment.
And if the holdings happened to boost their dividends by just 5% annually -- something even giant blue chip AT&T (NYSE: T) has been able to beat -- the portfolio earns 278.5% more income when compared to the investor who didn't reinvest. In fact, the investor who reinvests could be generating an effective yield of 26.5% based on his initial $20,000 investment.
If you have even a little bit more time on your investment horizon (or more money to invest, or additional dollars to invest each year), then the numbers only get better. And keep in mind that these are conservative estimates. They don't include one penny of capital appreciation.
Of course, I understand if you want your money now and you choose not to reinvest your dividends.
By not reinvesting your dividends, you will sacrifice the benefit of compound growth. But even so, the average yield on my portfolio is still 6.6% -- more than three times the average yield of the S&P 500 -- and many times more than the average savings account...
Before I started The Daily Paycheck portfolio, I was anxious about generating a portfolio that could support me once I retired. I'm no longer anxious. Like my company portfolio, my personal portfolio is generating more and more income every month. And I know that when retirement comes, I can just flick off the dividend reinvestment switch and start living off the income.
That's the power of my Daily Paycheck strategy, and it's something I want every investor to experience.
[Note: So now that you know the idea behind my newsletter, I bet you are wondering how I pick stocks to add to my real money portfolio. I call that the "Dividend Trifecta." A three-part system that includes finding double-digit yielders and stable dividend growth, but that's just part of it... Click here to learn more.]
Chief Investment Strategist -- The Daily Paycheck
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Disclosure: In accordance with company policies, StreetAuthority always provides readers with at least 48 hours advance notice before buying or selling any securities in any "real money" model portfolio. Members of our staff are restricted from buying or selling any securities for two weeks after being featured in our advisories or on our website, as monitored by our compliance officer.