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Use This Unique Twist on an Old Income Strategy

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I once had a subscriber write in response to some questions I asked about readers' long-term investing goals.

"At this age, I don't buy green bananas," he said.

I had to laugh; my father used the same line for years. But it does bring up a great point. I'm willing to bet that if you are reading this, you aren't 22 years old and starting your first job out of college (and if you are, good job -- you're ahead of the game).

But one of the main tenets of my income investing strategy -- what I call the " Daily Paycheck " strategy -- is to not only build a portfolio that paysdividends every day, but to reinvest those payments so they continue to grow larger.

I've shown you before how reinvesting your dividends can add up faster than you'd think. But I know there are a lot of income investors out there who love daily dividends , but couldn't give a lick about reinvesting. You want, and often need, that cash right now.

If you're in this group, I have a solution. And it means you can keep enjoying yourdividends as they are paid, but also get to reinvest to earn even larger payments in the future.

I call it "yield optimization" (it's not as scary as it sounds), and it's something I've been doing lately in my real-money Daily Paycheck portfolio to boost my income stream dramatically.

Regulardividend reinvestment is simple. You buy a stock, and anydividends earned are used to buy moreshares .

Yield optimization works differently. You buy a stock, but you can keep the dividends as they are paid. Instead, you reinvest your capital gains into higher-yielding securities when you sell the position.

This allows you to keep cashingdividends , but you also earn higherdividends over time as you put your original investment -- plus the capital gains -- to work in a new holding.

Action to Take --> Here's how it works in the real world...

I noticed my master limitedpartnership ( MLPs ) holdings in The Daily Paycheck were now among my lowest-yielding assets. This is understandable, given the across-the-board gains of this asset class. One of my holdings, NuStar Holdings ( NSH ) , has gained more than +20% since September, but now onlyyields about 5.0%.

That's a red flag that it's time for me to do someyield optimization.

By selling NuStar, I'm able to reinvest my original dollars, plus the extra +20% I've earned, into a higher-yielding position.

My original investment in NuStar was about $3,400. Now that amount is more than $4,100 after the rise in share price. But this $4,100 is only earning a 5.0%yield .

If I put that cash into another security paying 7.0%, I'm actually boosting my income earned on those dollars by +40%. And that's saying nothing about future capital gains.

Now, reinvesting your gains from a previous holding is nothing new. But I'm betting few income investors have thought about how much income they are missing by not taking advantage of this technique. If you're an investor looking to boost your income, I think you'll be pleased with the results.

-- Amy Calistri

A graduate of both Columbia University and The University of Texas, Amy's experience includes managing $5 million in trust funds, economic consulting and financial risk management. Read more...

P.S. -- If you want to earn more cash from your portfolio, I invite you to read a short informational course I put together that explains the details of my "Daily Paycheck" strategy. It's free, and I provide a handful of income ideas to get you started. Click here to start reading.

Disclosure: Neither Amy Calistri nor StreetAuthority, LLC hold positions in any securities mentioned in this article.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.