Investing

How to Build Multiple Income Streams

WHY BUILD MULTIPLE INCOME STREAMS

The reason investors should build multiple income streams is avoid the risk of relying on a single source of income. If an investor had a stock portfolio that paid her $50,000 in dividend or interest income a year, but some of the securities cut the dividend or coupon, then the investor could face an income shortage. Likewise, if a real estate investor who relied only on his real estate investments for income suddenly loses income because of sustained vacancy or some unwelcome changed market conditions, then he needs to replace the income in very short notice.

By having multiple income streams, an investor insulates herself from the loss or temporary curtailment of a single income source and diversifies income concentration risks.

DIVIDEND PAYING STOCKS

Other than funding their retirement accounts and paying down one’s mortgage, the first area I recommend investors to focus on is dividend paying stocks, funds, or ETFs that focus on such stocks. In my non-retirement portfolio, I own dividend payers like Phillip Morris (PM), Yum Brands (YUM), Kinder Morgan (KMI), and Qualcomm (QCOM).

When you select individual dividend stocks, keep these things in mind:

  • Don’t only pick the highest yielding stocks. In fact, I’d generally be cautious of stocks with a yield higher than 6-7%, which often is a sign that the dividend is unsustainable and a cut could occur.
  • Avoid stocks with overly high payout ratio. If a stock has a payout ratio above 70%, be cautious. There are stocks like ATT and Phillip Morris that may have higher payout ratios (the amount of net income paid out as dividends).  If a payout ratio is already high or unrealistically high, it leaves little room for growth. This is related to the point of picking the highest yielding stocks above.
  • Growth is important. As noted above, it isn’t the total yield of a stock that’s important; the growth of the dividend is very important too, as illustrated by the stocks of Microsoft (MSFT) and McDonalds (MCD). Fifteen years ago, MSFT didn’t pay a dividend, now it yields 3%.  During the past 13 years, MSFT’s dividend has grown at 13% per year.  If you own $100,000 worth of MSFT stock, you’d receive $3,000 of dividend per year. A similar story with McDonalds (MCD).  As of mid-2015, MCD’s 10 year dividend growth rate was 19.5%. Currently, MCD stock yields 3.3%.  If you own $100,000 worth of MCD stock, you’d receive $3,300 of dividend per year.

Dividend income stream

Let’s say you retire with a cool $1 million in savings. You invest in a basket of dividend stocks with an average yield of 4%.  To be conservative, let’s assume the stocks do not appreciate at all but that the dividend grows by 3% a year.

  • In 10 years, the 4% dividend will grow to 5.4%, providing $54k
  • In 20 years, the 4% dividend will grow to 7.2%, providing $72k

Of course, if you buy a diversified dividend portfolio, most likely the stocks will appreciate as well, but even using the conservative assumptions above, you’d generate a decent amount of income, and it’ll be your first step to building multiple income streams.

Below are some good dividend stocks resources:

https://www.dividendchannel.com/slideshows/safe-dividend-stocks/

http://mdi.morningstar.com/

BOND PORTFOLIO

Because I’m still a ways from retirement, my bond holdings are limited to a few mutual funds in my 401K or IRA. However, as retirement nears, I will increase my bond holdings.  Currently, long-term Treasure rates are about 2.5-3% for 10-30 year bonds, which are very low by historical standards.  Investors who pursue corporate bonds can increase yields to 3-4%.

Municipal bonds (Munis) could be attractive due to tax status. Currently, some California municipal high yield bonds are yielding 4%.  For someone in the 28% tax bracket, that translates to a 5.6% yield since municipal bond interests are tax-free. So for every $100,000 a retiree puts into munis at such a rate, she can expect $5,600 in tax-free income.

While I may not invest heavily in bonds now, I will definitely look to them for income as I near retirement.

ANNUITIES

Annuities are financial instruments that pay a guarantee amount per month / year.  Someone who wants to ensure they don’t run out of money during retirement can buy a lump sum retirement near or during retirement to earn a guaranteed amount.

Using an illustrative example, I highlight how much a 65 year old male must pay to generate $1,000 of monthly income for the rest of his life.  As a person ages, the amount needed to purchase an annuity to generate $1,000/month goes time simply due to the fact of a shorter life span. Annuities are one way to build multiple income streams.

Age Payments Begin

Amount Needed to Purchase

65

$167,105

70

$119,540

75

$77,569

80

$47,976

 

Since this is not an article focused solely on annuities, I will refer you to other resources that can explain in greater detail.

Page 4 of the following primer from Fidelity showcases how an annuity can help an investor build a sustainable stream of income:

https://www.fidelity.com/bin-public/060_www_fidelity_com/documents/DFIA%20Educational%20Web%20Brochure.pdf

 

RENTAL INCOME PROPERTIES

In the past 3 years, I have had the good fortune of acquiring two good rental properties. While they required some minor repairs and upgrades, they have served me and the tenants well. I own two properties: one is a multi-family residence and the other is a single family home, which generate gross income of $2,700 and $1,995/month, respectively.

Assuming 2.5% increase in rent per year, these properties will pay out $47,000 and $35,000 per year in 15 years on a gross basis (pre-tax and maintenance).  My plan is to pay off the mortgage by the time I retire in 15 years, which means I’ll need to accelerate principal payments. My investment properties will likely account for 35-40% of expected retirement income. Rental income will play an important role in my quest to build multiple income streams.

FRANCHISE BUSINESS

I don’t currently own a franchise but I’ve done quite a bit of research on the topic by reading franchise / restaurant books, attending franchise expos, talking to franchisees, business owners, and my accountant about it.  The appeal of a franchise business is that all the procedures and steps have been created and the owner / operator is really following a proven model, which lessens mistakes and shortens the learning curve.

Admittedly, a franchise could be cost-prohibitive for many people, with a Subway requiring nearly $300,000 and a McDonalds up to $2 million to start.  If I were to buy into a franchise, I will likely require a Small Business Administration (SBA) loan. Given that I have other obligations, it’s unlikely that I’ll actually operate a franchise restaurant. However, I can see myself co-investing with an investor/operator, which would allow me to be a passive investor, which I very much prefer.

One franchise that interests me is Jimmy John’s, a sandwich franchise with an average per store revenue of $1.4 million per year. Assuming a net profit margin of 7%, the net income would be $98k. At 10%, it’d be $140k; at 15%, it’d be $210k.  After all debt is paid off and assuming 50% ownership, a partial owner would get half of the income mentioned above.

Whether it’s Jimmy John’s or another franchise, I hope to invest in a franchise business in 7-10 years.

NON-FRANCHISE BUSINESS

For some entrepreneurs, a franchise is either too expensive or restrictive. For such people, starting their own business, whether it’s a restaurant, a babysitting service, tax preparation, or business consulting, is a better option. For people who have a full time job, it may be too risky to quit and work on the business full time until the business can support their lifestyle.

I know a 65 year old consultant who’s been involved in the real estate business for most of his life. He now consults large  investors +$500/hr for his advice. Despite the big ticket price, he is in high demand simply because his knowledge and expertise are wanted.  You may not be able to charge $600/hr, but as you build expertise in an area, you’ll be able to command an attractive fee for your service.

Some simple side businesses you can run from your home with minimal overhead and little special skills include home cleaning, dog walking, and babysitting. If you’re good at cooking, you can start a home meal cooking and delivery business. Take an inventory of your skills and experience and use that to earn extra income.

WEB-BASED BUSINESS

There are many versions of web-based businesses for individuals, ranging from selling goods via eBay or Amazon to blogging to sending information products.

MattMoneyMan.com is a new venture I started in early 2015. It’s a personal finance and investing blog. Over time, I hope to build a loyal audience by providing sound advice they will want to share with others.

Since starting, I’ve been blogging once or twice a month and it’s gotten some traction in terms of audience building. The next steps are to build a newsletter and an email list to further build a relationship with readers.

MattMoneyMan.com is still in its early infancy, so I look to successful web entrepreneurs like Craig Ballantyne of Early to Rise and Jeff Walker of Product Launch Formula as unofficial mentors and people I aspire toward.

My sincere hope is to be able to build a successful web-based business so I can leave my day job and just be a full time blogger / information product entrepreneur. Successful information product specialists can make well over $1 million per year, so it’s a goal worth aspiring toward.

SUMMARY

You may have other ideas, but for me, generating income through a stock portfolio, bond portfolio, real estate income properties, franchise business, and a web-based informational product business will be how I hope to generate income so I can quit my day job.

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