Investing For Immediate Income

Jun. 27, 2018 4:12 PM ETBIP, KNOP, AMZA, CEN, LUMN, OXLC, UNIT, BIP.UN:CA94 Comments25 Likes

Summary

  • Immediate-income investing if often overlooked.
  • It provides readily available funds to investors.
  • It also beats out dividend growth investing over a 10-year timeframe.

Investment Thesis

Investing for immediate income is readily becoming a necessary step for many individuals. This type of investing requires additional diligence to avoid sucker yields and weakly covered dividends that pose great risks, however immediate income investing is highly rewarding also.

Immediate Income Investing Defined

Immediate income investing: Investing with a taxable account seeking immediate high return via dividends.

This type of investing can be considered a sub-set of dividend investing. Many Seeking Alpha author's specialize in one type or another of dividend investing. Many focus on dividend growth investing - investing in companies that systematically grow their dividends providing a growing revenue stream on the same investments. Immediate income investing is slightly different - its timeframe is normally much shorter. It seeks return now, not later.

Why is this appealing to me and becoming necessary for others? Personally, I want access to my returns incase some crazy life event comes up, or if I can't add as much capital per month as desired that my portfolio will add the extra for me. It rapidly becomes necessary for others who are facing retirement realizing that their 401K's are not nearly enough to cover their coming expenses.

Consider this staggering fact: The average American family has only $95,776 saved for retirement. According to the CDC, Centers for Disease Control and Prevention, the average American lifespan is 78.8 years. Rounding to 80 years, this retirement savings would provide $6385.06 per year spread over their 15 years of retirement. OUCH.

How Does Immediate Income Compare to Dividend Growth Investing

Immediate income focuses on high immediate income to see returns in a short timeframe. But how does it stack up over 10 years compared to dividend growth investing.

Building this model we'll use two assumptions:1. No dividends will be reinvested2. The growth and yields of the portfolios will be static meaning no change in the yield growth year to year

Immediate Income Investing: 10 years, no reinvestment, 10% yield

Capital Invested Dividend Yield Total Dividends Received
10,000 10% 1000
10,000 10% 2000
10,000 10% 3000
10,000 10% 4000
10,000 10% 5000
10,000 10% 6000
10,000 10% 7000
10,000 10% 8000
10,000 10% 9000
10,000 10% 10,000

After 10 years, a total of $10,000 worth of dividends have been received. Achieving a total yield of 10% is possible through careful screening and diligence. Knot Offshores Partner LP (KNOP) offers approximately a 10% yield, has no immediate plans of growing their dividend, and it is solidly covered.

Dividend Growth Investing: 10 years, no reinvestment, 5% yield, 8% annual dividend growth

Capital Invested Dividend Yield Total Dividends Received
10,000 5% 500
10,000 5.4% 1040
10,000 5.83% 1623
10,000 6.30% 2253
10,000 6.8% 2933
10,000 7.35% 3668
10,000 7.93% 4461
10,000 8.57% 5318
10,000 9.25% 6243
10,000 9.99% 7242

After 10 years of focusing on dividend growth investing, a total of $7242 worth of dividends have been collected. while this is nothing to scoff at, it is over 25% worse after 10 years than immediate income. I used Brookfield Infrastructure Partners LP (BIP) as a phenomenal model for dividend growth investing, currently it yields about 5% and offers a goal of 8% dividend growth per year.

Sample Portfolio

How does this style of investing look in real life instead of simply on paper? Lets examine a sample portfolio with some solid immediate income stocks:

Ticker Annual Dividend Yield Share Price
KNOP 2.08 9.45% 22.27
UNIT 2.40 11.34% 20.57
OXLC 1.61 15.57% 10.37
CTL 2.16 11.52% 18.83
AMZA 1.32 18.18% 7.26
CEN 1.25 14.01% 8.88

This sample portfolio contains varying degrees of dividend safety.

KNOP's dividend is strongly covered as previously mentioned, so also is UNIT's and CTL's dividends. Both of UNIT and CTL are suffering from a general market misconception of their stock values - creating a perfect time to buy shares for a higher than normal yield.

OXLC is a monthly paying dividend stock that bears a greater risk - and this higher yield, however OXLC has paid its dividend like clockwork.

AMZA and CEN are both master limited partnership focused funds. CEN is a closed end fund, while AMZA is an exchange traded fund. AMZA and CEN both have been beaten up share price wise along with the entire MLP focused market, however both offer solid yields that are expected to rise as MLP's continue to strengthen.

Investing an equal weight of the $10,000 into each of the stocks above - or $1666.66 into each stock.

Ticker Share Purchased Annual Payout
KNOP 74 153.92
UNIT 81 194.4
OXLC 160 257.6
CTL 88 190.08
AMZA 229 302.28
CEN 187 233.75
Total $1332.03

With this sample portfolio, the majority of the $10,000 was invested, any partial shares were discarded and not reconsidered in any following calculations. This $10,000 now pays you 1332.03 annually - yielding 13% in predictable income.

Investor Takeaway

For those with a short term window and needing immediate return on their funds, investing in immediate income focused securities offers a chance to out perform dividend growth investing. However both offer unique risks the largest of which is falling for sky-high unsustainable yields. Due diligence is always required, but I will always point out which investment opportunities fall into these two categories and why.

This article was written by

Treading Softly profile picture
3.18K Followers
The #1 Service for Income Investors and Retirees, +9% dividend yield.

Immediate income investing - high yield, strong coverage and limited capital depreciation. MLPs, REITs, CEFs and various other securities are examined to see who fits the bill to fund the future.

Treading Softly is a proud part of the High Dividend Opportunities research team, the #1 marketplace for income seekers on Seeking Alpha.

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Disclosure: I am/we are long KNOP, BIP, OXLC, UNIT, CEN, AMZA, CTL. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

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