- Our Income Factory® strategy evolved through a long series of articles here on Seeking Alpha, culminating in a book, a Marketplace service and more than 12,000 followers.
- But the ideas are pretty simple, and represent a strategy that is an alternative, not a competitor, of traditional growth-based strategies.
- Many investors find that getting most or all of their total return in cash they can re-invest to create their own growth, helps them sleep better through market turmoil.
- Here's a quick summary of the entire Income Factory strategy - the "Cliff Notes" - and some practical investment ideas for getting started.
- I do much more than just articles at Inside the Income Factory: Members get access to model portfolios, regular updates, a chat room, and more. Learn More »
The Income Factory® is just a cute name I came up with over the past decade to describe a way of thinking about investing that actually goes back centuries, but seemed to have gotten lost recently as "growth" and "market price" became the primary focus of so many investors. Of course, the name "Income Factory" eventually resonated with many readers, and despite some original objection from commenters and other authors who found the concept too far "outside the box" of conventional investing, by now it's grown to over 12,000 followers, a book published by McGraw-Hill and a popular MarketPlace service here on Seeking Alpha.
It all started one day when I realized that when Ford builds a new manufacturing plant, once it's completed and put into operation Ford probably never thinks about what the plant's "market value" is. Instead, it focuses on how many cars and trucks it produces, and how to grow that output over time, by reinvesting in new machines, improving its efficiency, etc.
It dawned on me that, as a long-term investor, wasn't that the way I should think about my investment portfolio? As a factory, or an engine, whose purpose was to generate income? Income that I could reinvest and compound myself (i.e. "grow the factory") and therefore continually produce more income year after year.
I was familiar with the "rule of 72," the handy rule of thumb that shows how fast an income stream will grow over time, depending on the rate at which it is compounded. For example, if you compound an income stream at a rate of 10%, then 72 divided by 10 tells you your income stream will double itself (and redouble itself, etc.) about every 7.2 years. If you grow your income at a rate of 8%, then 72 divided by 8 tells you your income will double and re-double every nine years.
So if I could achieve an average cash distribution yield of 8 to 10% and continually reinvest and compound it, I would be doubling and re-doubling my income about every seven to nine years. That, of course, would equate to what has historically been an "equity return" over the past century or so. It would also provide plenty of growth for someone devising an investment strategy aimed at building a retirement income 30 or 40 years out. For example, a portfolio yielding 8%, reinvested and compounded, would double in nine years, be 4 times its original value in 18 years, be 8 times in 27 years and be 16 times its starting amount in 36 years, etc. And of course that's before counting any additional contributions made to the portfolio (the "Income Factory") from outside savings or other sources.
Hey, Where Are the "Growth" Stocks?
When I first described this strategy, where you could achieve an 8%-10% equity return and grow your portfolio at that rate merely by reinvesting and compounding a steady, high-yield distribution, even if the distribution itself never grew, I got all sorts of objections from more "traditional" investors. "Where are the growth stocks?" they said.
"Income funds are fine for old people and retirees, but young investors have to own growth stocks." That was the constant refrain. But I painstakingly explained that investing in a growth company that earned 10% per year on its capital, and then paid the stockholders 2% and kept the other 8% and reinvested it internally in their business, was no different than a business or fund that earned 10%, but paid all of it out to shareholders who reinvested it themselves and created their own growth. From the stockholders' standpoint it made no difference.
Finally, even the most skeptical critics had to admit that "total return" is "total return," regardless of how you earn it. And in investing, total return equals the sum of (1) the cash distributions you receive, and (2) the increase or decrease in the market price of the investment paying you those distributions. So if you receive a 10% cash distribution and have zero capital appreciation, or receive zero cash distribution and your stock price goes up by 10%, in both cases the total return is the same: 10%. It doesn't matter if the split is 5% and 5%, or 2% and 8%, etc.
Cash in the Pocket and Sleeping Well At Night
Once investors understand the basic idea that cash distributions are just as valuable as internal growth, then other advantages can begin to be appreciated, especially psychological and emotional ones. Most serious retail investors, who have grown up on the fundamental investing philosophy of Benjamin Graham, Warren Buffett and John Bogle, know – intellectually – that a long-term, buy-and-hold equity strategy (whether indexed or otherwise) is best. But they find – emotionally – that the volatile short-term ups and downs are more than they can handle. Their left brain may say “Wait, let’s ride it out,” while their right brain says “Let’s get out of here!”
These are the investors for whom an Income Factory approach can be a real advantage. Receiving virtually all of your total return in the form of a "river of cash" that flows in constantly, even when markets tank, can be a real psychological advantage. An investor who is "creating their own growth" through re-investing and compounding, knows their income is actually growing faster during downturns, because the "new machines" they are re-investing in are selling at bargain prices. Meanwhile typical growth investors are nervously watching their portfolios shrink while only collecting puny 1% or 2% yields.
This is not an argument against Vanguard's John Bogle, Princeton Professor Burton Malkiel, or others who pointed out that it was both practically and mathematically impossible for the majority of investors to beat the average, and their best bet was to try to achieve the average as efficiently as possible through indexing. That's the theory and it works. In fact, I would advise those intrepid investors who have the iron nerve to buy index and other broadly diversified mainstream equity funds and to hold tight to them through all sorts of volatile periods, like 2008/2009 or the recent COVID-induced crash, to definitely pursue that strategy.
The challenge with conventional indexing, or other traditional equity "growth" strategies, is the risk associated with losing one's nerve, exiting the market and "moving to cash" during bear markets, crashes or other scary periods. Being partly or fully on the sidelines when the growth train starts up again and pulls out of the station is what drags down the lifetime performance of millions of investors.
The Income Factory gives investors an alternative that can help avoid a lot of the nail-biting during risky periods by turning our attention to the growth of our income and away from the paper gains and losses that can be so distracting and distressing in the short-term but seldom impact our results over the long-term, especially if we've been faithfully reinvesting and compounding through all sorts of market environments.
I have long been inspired by famed money manager Charles Ellis, who wrote the classic investing book, Winning the Loser’s Game. In it, Ellis compares investing to amateur tennis, where more points are lost by making bad shots than are won by making winners. The “bad shots” most amateur (and some professional) money managers make are their attempts to either beat or time the market, or hedge it with so-called "safer" but lower return assets, instead of accepting an average equity return achieved as economically as possible through indexing.
Our Income Factory, by focusing us on just steadily "hitting the ball back over the net" by reinvesting and compounding through all sorts of markets, is intended to help us avoid the "bad shots" that are so easy to make at times of market stress and volatility. Income Factory investors prefer not to put themselves to the test of having to watch their portfolios plunge during market reversals without the offsetting comfort of having a river of cash to reinvest at bargain prices and sky-high yields.
For a taste of the sort of high yielding investments we include in our Income Factories, check out some of these funds, which have good long-term records, while also paying out high current yields:
- Lazard Global Total Return & Income (LGI)
- Eaton Vance Tax Advantaged Global Dividend Inc (ETG)
- Oxford Lane Capital (OXLC)
- PIMCO Global StocksPLUS & Income (PGP)
- Royce Value Trust (RVT)
- Cohen & Steers Infrastructure (UTF)
- Reaves Utility Income (UTG)
- Advent Convertible & Income Fund (AVK)
- Eagle Point Credit (ECC)
- Owl Creek Capital (ORCC)
- John Hancock Investors (JHI)
- PGIM Global high Yield (GHY)
I look forward to your comments and questions. Happy New Year!
Disclaimer: My articles published on Inside the Income Factory or elsewhere on Seeking Alpha, including comments, chat room and other messages, represent my own opinion based on personal knowledge and experience. I am not an investment “expert,” counselor or professional advisor, and while my articles may reflect substantially the strategies I employ in my own investing, there is no assurance that these strategies will be successful, either for me personally or for my readers. In other words, while I do my best, there is no warranty or guarantee that the ideas expressed are correct or accurate, and I urge all readers to take my opinions for what they are – “opinions” – and to do your own due diligence on, and check out personally, every investment idea, stock or fund that I may present, so you can make your own informed decisions.
I launched Inside the Income Factory because many of my 12,000 followers and readers of The Income Factory® (McGraw-Hill, 2020) asked for more interactive dialogue. Here's what members say:
- "Learned the hard way how exceptional Steven Bavaria and the Income Factory is"
- "Eternally grateful"
- "His investment approach and superior record are literally an 'open book' "
- "Allowed us to hop off the roller coaster"
- "Steven is where I make my money"
- "Worth every penny"
Readers who try us seem to like us, as we're in the top 5% of trial subscriptions that convert to paid. Click here to learn more.
This article was written by
Steven Bavaria has 50 years of credit, investing, journalism, and investing experience and is a graduate of New England School of Law. His Income Factory® philosophy, outlined in his book “The Income Factory”, is a disciplined strategy meant to maximize cash income with peace of mind in all market environments.Steven leads Inside the Income Factory investing group service where hundreds of subscribers learn and implement this strategy alongside him. The Income Factory is built through portfolios of a variety of high-yielding securities. Growth is created by reinvesting and compounding the river of cash, so that income continues to grow through all sorts of markets - up, down, or sideways. Other features include a chat room and education content so you can learn alongside others. Learn more.
Analyst’s Disclosure: I/we have a beneficial long position in the shares of ALL THE FUNDS MENTIONED either through stock ownership, options, or other derivatives. 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.
Seeking Alpha's Disclosure: Past performance is no guarantee of future results. No recommendation or advice is being given as to whether any investment is suitable for a particular investor. Any views or opinions expressed above may not reflect those of Seeking Alpha as a whole. Seeking Alpha is not a licensed securities dealer, broker or US investment adviser or investment bank. Our analysts are third party authors that include both professional investors and individual investors who may not be licensed or certified by any institute or regulatory body.