A 'Model Portfolio' That Grows Your Income

May 24, 2021

I love passive income. Getting paid to literally do nothing is great. Having said that, earning passive income does require occasional doses of activity. You need to check on investments every so often, perhaps making adjustments as necessary. However, the more income I make, the less effort I want to put in to keep making it. I want it to self-regulate and not become a burden to me.

I can think of something I love even more than passive income. It's when my passive income is actively growing. When my passive income streams provide a growing level of income over time. As many of you know, I'm an income investor and I invest for immediate income. This means I want my portfolio to earn income and earn it now. These dividends coming in are a form of irrevocable returns.

Recently, High Dividend Opportunities crossed the $2 million mark in annual revenues. We achieved this milestone by making our members millions of dollars in recurring income, working towards their retirement.

When formulating a portfolio to meet my needs and generate a high level of income, I want and expect a high degree of safety and reliability. These picks can not only pay their dividends now, they have plenty of gas in the tank to keep growing them into the future as well.

Pick #1: Realty Income - Yield 4.3% & Growing!

Every investor should be familiar with the concept of compounding returns. If you have $10,000 that earns a return of 10% you have $11,000, then the following year you have $11,000 earning 10% and now you have $12,100 etc. In other words, even though you are earning the same 10% return/year, in future years you are earning 10% on a larger investment.

The power of compounding is not limited to the principal, it works on your dividends as well! There is perhaps no better example of the power of compounding dividends than Realty Income (O), yielding 4.3%.

O considers the dividend to be a key element to their investor base, and a strategic decision of their management team. Having trademarked "The Monthly Dividend Company", O has been paying their investors growing monthly dividends even before they went public.

As a public company, O kept raising its dividends and started raising it every quarter. For the past 23-years, O's dividend has been raised every single quarter.

Some might laugh at how small some of these raises are. O's last raise was from $0.2345/month to $0.2350/month. Yet it is the consistency of O's raises that lead to an impressive compounding effect over time. Here is a look at how much income you would have received from O if you invested $10,000 in 1996, assuming no reinvestment.

       Source: Portfolio Visualizer

Your income would have climbed from $757 the first year to $2,492, up 329%. Over the same period, cumulative inflation was 68.8%, so your income climbed materially faster than inflation even if you were taking out every penny to spend.

If you reinvested the dividend, well then your income really skyrocketed growing From $757 to over $11,000:

       Source: Portfolio Visualizer

The power of compounding is incredible, whether you are retired and you want to ensure that your income growth exceeds inflation or you are young and building up an income stream for your future retirement.

O has been able to raise their dividend consistently through numerous economic environments since they were founded in 1969. O has been through hyperinflation, stagflation, recessions, booms, bubbles, bursting bubbles, and pandemics. The one thing that has remained consistent? It keeps hiking its monthly dividend!

At 4.3%, O isn't even close to the highest yielding pick in our portfolio. But in exchange for the lower yield, you get a raise every single quarter, and the dividend is paid on a monthly basis, which is a big plus to me personally! Additionally, with their acquisition of Vereit (VER), O's dividend is likely to grow much faster than average next year. See that big jump from 2012 to 2013 in the charts above? That was the last time O acquired a large publicly traded company with stock.

Pick #2 - Colony Credit Yield 6.0%

We jumped at the opportunity when Colony Credit (CLNC), (current yield 6.0%) suspended its dividend and based on our analysis we were confident that the dividend would be re-instated and we added more to our shares of CLNC at under $5/share. An article on CLNC was actually one of our very first articles here on EWT.

They indeed restarted this March with a $0.10 quarterly distribution, and last week, CLNC announced a dividend increase to $0.14/quarter. Today CLNC trades at $9.38 and yields 6.0% (or at a yield of 11.2% at the original price of $5/share).

The best part is that CLNC isn't done yet. CLNC's dividend is still very low as a percentage of book value compared to their peers:

The reason CLNC's dividend is still not high enough for our portfolio (only at 6%) is that over 20% of their book value is sitting in cash. CLNC was in the process of liquidating their legacy portfolio when COVID hit, and decided it was prudent to preserve cash and shore up their balance sheet. This was exactly the right decision, and it prevented CLNC from being a "forced seller" or having to cut a sharkish deal with a lender like Ladder Capital (LADR) had to with Koch.

CLNC is a new company, recently internalizing and ending their management agreement with Colony Capital (CLNY). Mike Mazzei took over as CEO in April 2020, and he has a long history in the industry and was one of the founders of LADR. Even after paying the internalization fees, CLNC has over $300 million in cash on hand and they have a leverage ratio of only 1.1 times, while their peers carry debt/equity of over 2 times. The current management has the luxury of having the capital to direct the future of CLNY.

Over the rest of 2021, CLNC will be deploying their cash and leveraging up which will cause their earnings, and their dividend, to grow. Bringing their dividend in line with peers, CLNC would be capable of as much as $1.15/year in dividends, which would be over a 12% yield at current prices.

We believe that management is likely to remain biased towards being conservative, so our base case is that they seek to have a dividend of around 8% of "book value", which would translate to approximately $1/year, for a yield of 10.7% at current prices (since CLNC still trades at a big discount to book value).

An investment in CLNC today will provide you a 6% yield. As they redeploy their capital, CLNC will continue raising their dividend. While the timing is not perfectly predictable, we expect the process to take 1 to 1.5 years.

Investors who are willing to delay their gratification and settle for "only" a 6% yield today will be rewarded with a yield on capital of 10-12% within a couple of years.

Pick #3 Enterprise Products Partners L.P.  - Yield 7.6%

Enterprise Products Partners L.P. (EPD) provides vital infrastructure and energy services needed for the U.S. supercharged economic recovery. EPD has been a regular dividend raiser since 1999 and the fundamentals of this company remain extremely strong. It benefits from:

1.            An Investment-Grade Credit Rating

2.            A big 7.4% yield with 1.6x coverage and 22 years of consistent growth

3.            A Cheap valuation with +30% upside.

4.            It enjoys remarkably high insider ownership of 32%. This has in the past aligned management interest with shareholders and resulted in one of the best-run midstream companies in America.

EPD today is in the sweetest spot. Demand for natural gas and "Natural Gas Liquids" - the main drivers of EPD's revenues - are soaring. We are also on the verge of a new commodity supercycle with its main driver being higher inflation expectations, pent-up demand, and weakening U.S. dollar, and increased demand for commodities from India, among many other factors.

EPD is set to benefit immediately from filling its idle capacity and increase add-on projects. In the medium and long-term, its strong balance sheet, key locations, and footprint put it in a key position to sustain fast growth.

Source: Dreamstime


When building a portfolio to provide strong passive income to our bank accounts, it's always a massive plus to have strong immediate income options that also regularly increase their dividends. If you have 30 years until retirement with a 10% return, it only takes $500 a month to reach $1 million. If you save $1000 a month, you can reach over $2 million. With picks like these, you can cross that finish line even faster and stronger as they raise their dividends helping you move towards the goal and increasing your returns.

These types of options do not last for long; often when investors expect more dividend increases on the horizon, the price gets higher, as they value the company on the potential dividend in the future vs. its current dividend.

Income investing is about finding reliable sources of dividend income both now, and for years to come. These firms are set to continue to raise their dividends either for this year, or for the foreseeable future as well. Don't wait too long to add these gems to your portfolio and enjoy the benefits they have to offer you.

Now go find a glass, fill it with your favorite beverage, and celebrate the sunset of another day. With a portfolio full of picks like these, you can do this daily and not have to stress what's going on in the market.

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