How I Doubled My Income In 2022

Co-produced with “Hidden Opportunities”

We all saw the headlines – the S&P 500 experienced the worst yearly decline since the Great Financial Crisis (‘GFC’). However, most investors missed the footnote that S&P 500 companies spent a record amount on dividends in 2022. A record $565 billion was paid out by S&P 500 companies as dividends in 2022, up 10% YoY (Source).

This trend is expected to continue in 2023 despite a slowing economy as more companies that suspended or cut their dividends early in the pandemic are resuming/increasing payouts.

I doubled my income in this bear market

The High Dividend Opportunities Model Portfolio collects income from a wide range of securities. During this bear market, we mainly focused on sectors experiencing tailwinds from this macro-climate and some robust industries that experience inelastic demand no matter how the economy fares. We have been buyers of discounted income, and below are a few notable types of securities that have contributed to our income growth.

• Deeply discounted CEFs: I bought several Closed-End Funds to grow my income. Dropping share prices made them trade at attractive discounts to their NAV. A few attractive CEFs to note are the Reaves Utility Income Fund (UTG), built with robust and recession-resistant businesses, and the distribution growers – John Hancock Financial Opportunities Fund (BTO) and Cohen & Steers REIT and Preferred and Income Fund (RNP)

• Top performing BDCs: We have been insisting that BDCs are built to thrive in a rising rate environment. With objectives to provide mission-critical funding to small businesses in America, BDCs are required to distribute 90% of their net income. We have been getting pay raises from some of our top-quality BDCs – Ares Capital (ARCC), TriplePoint Venture Growth (TPVG), and Capital Southwest Corp. (CSWC).

• Asset-rich MLPs: Midstream is the place to be if you seek natural protection against inflation and non-volatile cash flow from energy. 2022 was an excellent year for the energy sector, and we grew our income from a couple of Dividend Aristocrats – Enterprise Products Partners (EPD) and Magellan Midstream Partners (MMP).

• Ignored and shamed energy sector: We also captured tailwinds from high commodity prices through exposure to mineral royalty firms like Dorchester Minerals (DMLP)

• Myopic ignorance of fixed-income securities: Interest rates may be high now. There may be risk-free alternatives today in the form of money market funds, U.S. Treasuries, and other sovereign debt. But make no mistake, these yields will disappear when the rates are lowered, and your income will dry out. Preferred securities from quality REITs, insurance companies, and other top-tier companies are trading at deep discounts. Several of our top buy preferreds are issued by firms carrying investment-grade or higher ratings. The issuers are highly profitable and pay paltry amounts towards preferred dividends compared to their net income. The preferred dividends are safe, and we have no problem riding the bear market by growing our income from these deeply discounted securities.

Don’t time the market

Bear markets are usually indicative of fearful investors. They often make the mistake of slowing down, pausing their investing, or worse, selling in the market’s weakness. You may think you can wait until stock prices hit bottom before buying, but that’s attempting to time the market, which you should never do. Even if you’re “right” this time, it sets a bad precedent and is not a sustainable approach, particularly in retirement.

I can’t recall ever once having seen the name of a market timer on Forbes’ annual list of the richest people in the world. If it were truly possible to predict corrections, you’d think somebody would have made billions by doing it. – Peter Lynch

It is essential to be patient and tune out of the daily market drama. Staying invested through the rumble has proven to be very rewarding in the long run.

Maintain allocation limits in your investments

When we are in a bull market, it is easy to get emotional and place much more capital into a single investment than is advisable. It may be rewarding, but remember one thing – even the best companies can make the worst decisions. Today they are excellent dividend stewards (and perhaps have been for decades), but we maintain no control over the decision-making. We must do our best to protect ourselves from drastic changes to the company’s structure and objectives.

Diversification is an ally for an income investor. Instead of sourcing your passive income from a small number of companies, you can have 40-50 of them from leading industry sectors of America.

I believe in America

America is a nation built with an aspiration to create something greater for ourselves and each other. The American Dream is the idea that anyone can attain their own version of success regardless of where they were born or the economic background they were born into. The U.S. has a highly diverse workforce working hard in various jobs and industries to achieve the American dream. Corporate America is an excellent place to invest for long-term success in your financial well-being.

In its brief 232 years of existence … There has been no incubator for unleashing human potential like America. Despite some severe interruptions, our country’s economic progress has been breathtaking. Our unwavering conclusion: Never bet against America. – Warren Buffett

There will always be temporary headwinds in the form of economic challenges, unfavorable regulations, poor policymaking, etc. However, remember that American innovation and entrepreneurship are unparalleled and are often at their finest during crises.

I can sleep well at night knowing that my capital is placed on some of America’s finest business leaders and innovators. Adopting the Income Method ensures that I collect regular fees from these solid companies.

Dividend payers are better companies

The Income Method is built on the idea of investing capital to collect regular income from the invested capital. Dividends are often paid by sustainably profitable companies that can share excess profits with shareholders.

It takes a robust business to support dividend raises – irrespective of market cycles. Such companies have outperformed the markets long-term while rewarding investors with sizable income. Source

Yes, some payers do reduce their dividends during difficult times. But the change in dividends during past recessions has been very manageable, especially with a well-diversified portfolio.

Note: The dividend reduction during the Great Financial Crisis can be considered an anomaly in the series. This is mainly due to fundamental failures in the financial system, which are unlikely to repeat due to regulatory oversight that has since been established.

If you are out of cash to invest, there is no reason to panic and sell your holdings. As income investors, our next cash infusion is right around the corner in the form of a dividend payment. Within High Dividend Opportunities, we highly recommend reinvesting at least 25% of your dividends into buying additional shares at discounted prices.

Let me give you an analogy: Suppose you own a rental property and are collecting steady rent payments. The property’s value is bound to fluctuate with market conditions, but the rent has a steady upward movement to keep up with inflation pressures. From time to time, you are bound to invest some of your profits to upgrade the property – replacing the roof, painting the walls, and energy-efficient windows. These cost money, but they enhance your investment’s value and improve the property’s rent-earning potential. If property prices in your area are down 20% YoY, does that prevent you from replacing an old furnace?

This is how I see dividend reinvestment. It is a way to use some excess proceeds to buy more shares and thicken the income stream over time. In 2022, dividend reinvestment was a powerful yet underrated tool – we could reinvest our big (and growing) dividends into deeply discounted shares. This prudent addition snowballed our income from several top portfolio names.

Conclusion

Bear markets can be tough on portfolios, but they can have a silver lining. There’s opportunity in the chaos, especially for dividend investors – our income can be grown by spending less.

I don’t believe in timing the market. People can be right once or twice, but it is not a sustainable investing technique (certainly not in your retirement). I like to buy discounted securities and get paid to wait for the upside. And there will be upside because these are some of the robust companies of America managed by some of the most capable leaders this great nation has produced. I believe in the American dream and consider it an essential vehicle for long-term investors to utilize to attain their financial dreams.

I doubled my passive income stream in 2022 by making prudent decisions to buy the dip and reinvest my dividends. There is still a lot of opportunity in these market conditions, and I look forward to enhancing my income further in 2023 and beyond.