Co-produced with Treading Softly
A common question that runs through my inbox as an author on investing and retirement is like, “I have $X to invest, where would you put it today?” or “I just started and saved $X, where do I start?”
I know I probably get these types of questions because High Dividend Opportunities is designed to help retirees, income investors, and anyone looking to earn income from the market, set up their portfolios, and start paying dividends. As such, I’m in a unique position to receive this question often, as many new members set foot in the starting blocks and can’t wait to begin their income investing journey in earnest.
So if I was just starting out, where would I put $100,000 to work? I’m so glad you asked! Let’s talk about it.
You have a debt? High interest debt in particular?
Before you put that money to work in the market, the biggest question to address is the other end of your equation, debt. High interest debt kills savings and income. Think of it this way, if your investment is earning 7% but your credit card is carrying 18% interest (many private label credit cards have interest rates over 20%!), then you are leading. a losing battle.
So before you get excited about those dividends and the potential benefit of growing your income over the years, let’s defeat an equally powerful enemy – compound interest on your debt.
Refinance revolving debt – like credit cards or lines of credit – into fixed rate debt like a personal loan or debt consolidation loan. Or better yet, pay it back in full. If you can’t eliminate it, refinancing can reduce the rate exponentially, making repayment and service easier.
As rates rise, that means mortgages, loans, and other debt become more expensive and less likely to benefit from refinancing. If you have a low-rate mortgage, paying it off early might not be the best mathematical choice, but the mental benefit of being debt-free is worth it for many people.
Have a reserve account or supplement it
A shocking number of us cannot afford an unexpected expense. According to a 2022 telephone survey, 56% of Americans could not cover an unexpected expense of $1,000.
This means one thing, so many of us don’t have the proper emergency savings fund that we should have. Many of my regular readers will recall that I have repeatedly stated that in this inflationary market and environment, “your money is trash.” I’m sticking with that for an investment portfolio. I have also said many times that this does not apply to your emergency cash savings.
You need it. If you don’t have it, take some of your $100,000 and set it aside in this account. Inflation doesn’t matter when you can’t afford to fix your air conditioner or your car. Many suggest setting aside a year of expenses, or 6 months. I would aim to start with $1000 if you have nothing and build it from there.
Put it to work Earn an income
Once you’ve covered these two other extremely important areas to consider, now is the time to put those dollars to work. I’d like to believe that many of my readers can say they have a reserve account and covered debt, but if they don’t, don’t skip these steps on your way to building personal wealth. long-term.
When it comes to the US stock market, we have been blessed with access to the greatest wealth generator in known history. Consistently and repeatedly, the stock market has generated wealth in the United States economy for decades and centuries.
I like to imagine my financial health as the foundation of my whole lifestyle. To approach a mental picture, my financial health is the foundation of my home while my lifestyle is the frame and the boards. If your foundation is cracked, crumbling, or broken, your home may survive a short time without it before it all comes crashing down.
That’s why those in debt and near the brink of bankruptcy can keep up appearances for a brief period before the facade crumbles around them.
So what would I use in my foundation?
Fixed income and many things
I would invest heavily in fixed income securities and funds first. 40% of your portfolio at least, more for those who are more risk averse. Why? Fixed-income securities have many advantages:
- Priority in dividend or coupon payments over ordinary shares.
- More price stability thanks to fixed maturities and PAR values functioning as anchors.
- Less price volatility under normal conditions.
When it comes to fixed income securities, I personally look for “set and forget” type investments. I know that many investors or services like to trade preferred stocks or baby bonds and make a lot of money doing it, but that’s not my flair or my goal. I am looking to buy and hold until maturity or until my shares are redeemed. I buy fixed income securities to know what my income will be for my entire holding period. It makes budgeting easier and my expectations are easier to predict.
A focus on value and the middle market
Then I would skip investments in low-yielding mega-caps like Coca-Cola (KO) or Kellogg (K) and focus on middle market and value investing. These investments not only generate 40% of US GDP (gross domestic product) per year, but they are also often undervalued relative to the rest of the market. I’m looking to make my money work for me and get the best possible income out of my portfolio. This means that I buy from top notch and blue chip BDCs (business development companies) such as Ares Capital (ARCC), and sole proprietorships generating high levels of cash flow now without the burden of large debt.
Don’t jump on real estate or commodities
Finally, I would look to inflation and recession resistant holdings. As such, my eyes turn to REITs for their real estate holdings and long-term leases or agency MBS holdings. Both can be relied on to enjoy stable income and watch it grow with inflation for equity REITs. My personal portfolio has seen multiple increases from mortgage REITs and real estate REITs.
We also cannot forget the very important investments focused on raw materials or energy. MLPs (Master Limited Partnerships) often function as toll bridges over the path of oil or other mined raw materials reaching your front door. I’ve invested heavily in natural gas-focused investments like Enterprise Product Partners (EPD) and Antero Midstream (AM) which are both highly exposed to moving natural gas.
Where would I put $100,000 to work? I’m so glad you asked.
For simplicity :
- Erase your expensive debts
- Make sure you have an emergency fund
- Make it work in the market.
Personally, I like to invest in opportunities that yield more than 7%. In the market, as we have done recently, there are many opportunities to exceed my target and continue to buy quality investments.
Your retirement will benefit from having strong income-generating powerhouses stored in the foundation of your lifestyle. They will provide you with income, stability and a level of comfort that you will enjoy for decades.
By the way, I’m also often asked if it’s a good time to buy in the market, and my answer is simple. If you can find a yield that suits you, then yes.