Why Income Matters

If you’ve read my work for a while, you know that I have a lot of respect for my grandfather. He’s actually the reason I got into the financial world.

He wasn’t a stockbroker or a portfolio manager. In fact, as the owner of an auto supply store in Fort Smith, Arkansas, he was about as far removed from Wall Street as you could get.

But he was a savvy investor who knew a thing or two about the importance of income.

Apart from his dividend-paying stocks and his bonds, he also owned a small warehouse that threw off rental income. The key was that his income sources were diverse, which gave him protection in the event that one of his stocks or bonds blew up.

My grandfather never actually retired – he was the entrepreneurial sort who preferred to die with his boots on – but the income streams he put together supported my grandmother for more than a decade after he was gone. They could have easily continued to do so for decades more.

My grandfather also had his own version of Peter Lynch’s mantra of “buying what you know.” Lynch, the former manager of the Fidelity Magellan fund and the most successful retail mutual fund manager in history, was known to troll the malls looking for investment ideas.

Well, in my grandfather’s version of “buying what you know,” he liked to invest in local Arkansas companies. He liked the idea of physically being able to keep an eye on his investments, and he reasoned that he’d be better able to understand a company in his backyard than one hundreds or thousands of miles away.

It just so happened that a little retailer you might have heard of – Walmart – was a local Arkansas company, headquartered about an hour and a half from Fort Smith.

My grandfather believed in the company and was an early investor.

And when the shares exploded in the decades that followed, he rode it all the way up.

In Lynch’s words, my grandfather nabbed a “10-bagger,” making over 10 times his money on that investment.

Here’s the thing: Walmart made him a boatload of money, but he had no way of knowing that would happen when he originally bought it. And he certainly wasn’t banking on it supporting him or my grandmother in retirement. Had he lived longer, he might have sold some of it to rebalance or to splurge on some of life’s little indulgences.

But it was never his plan to live off of his capital gains because those can evaporate in a heartbeat.

This is exactly why I write my own income-based newsletter, and why I recently brought these beliefs to bear in this special video presentation.

Just like my personal approach, my goal is to help you meet that basic baseline of income you need to fund your retirement. Don’t get me wrong, I like scoring big with capital gains as much as the next guy.

In our model portfolio, we have several positions that have given us bigger price returns than income returns thus far, but capital gains definitely come second to my recommended low-risk, but automatic income-producing funds. The 19 funds in my portfolio have an average yield of just shy of 8%.