An Investment Strategy to build a Cash Flow Machine

The purpose of this post is to discuss how to build a cash flow machine through dividend income investing.

There’s a few things you should know about my dividend investment strategy before we begin, though.

📊 Philosophy

Mainly, a stock is NOT something that you buy to watch it go up and down on a chart.

For the sake of this investment strategy, each share is an ownership position entitling you to a portion of earnings.

Once you become a shareholder in a particular company, typically, earnings are paid out in the form of dividends on a quarterly basis.

Now, most dividend investors build positions in 30 or more companies. On the other hand, my investment strategy is focussed on simplicity.

Frankly, there’s just not enough exceptional stocks that exist in the first place. Nor is there enough time available to discover, analyze and understand them all well enough to justify owning them.

I’d rather own 6 to 12 exceptional stocks that I truly understand.

In my opinion, it’s easier to follow and understand your portfolio when it consists of fewer stock holdings.

Since the focus is on adding income producing assets, there is no concern for stock price fluctuations because of the long term time frame.

Stocks are purchased with a holding time of 5 to 10 years or more.

📈 Diversification

Admittedly, even though diversification is important, I somewhat tend to avoid ETF’s due to their lack of predictable dividend income growth.

I mean, an individual equity like Enbridge (ENB) can offer you a 10% dividend income growth rate per year, and it’s quite difficult to overlook that.

However, since I understand its importance, I will look to diversify with S&P 500 index ETFS’s.

In addition to adding ETF’s to the portfolio for diversification purposes, I will also use ETF’s for investment products that I know little about. For example, bonds.

Based on my experience overall, I still maintain that dividend investing is the best and most rewarding strategy of all.

Though I’ve day traded crude oil in the past, I do not incorporate any day trading into my current investment strategy at all.

However, I have been putting cash to work frequently.

Since the brokerage I invest with has such low commission fees, I purchase stocks by dollar cost averaging on a bi-weekly or monthly basis.

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The Rules to my Dividend Investment Strategy:

  1. Acquire stocks frequently—every pay day or once a month. The more cash flow coming in, the more money there is to allocate into more income producing assets.
  2. Income produced from dividends must offset the cost of the commission paid within 1 year.
  3. Stocks purchased must only be companies that I fully understand and have an appreciation for.
  4. Stocks purchased must comply with how I analyze long term stocks. For reference, check out ‘How to buy long term stocks‘.
  5. Other than monthly income stocks such as REITS, equities owned must also be companies that increase their dividend payments on an annual basis.


💻 Analysis

When looking for stocks to purchase, I look for companies that have a relatively low P/E ratio.

Additionally, I look for companies that have continued to increase their dividend consistently for more than 10 years.

I also take debt levels as well as their dividend payout ratio into consideration.

In addition to the earnings per share, I pay close attention to the branding and marketing of a company.

If you’re looking to read more about how to analyze stocks, check out ‘How to buy long term stocks’ here.

Since I consider myself a part owner in each company I purchase, I only invest in companies that I have a personal appreciation for.

📆 Consistency

Consistency is actually the most important factor when it comes to long term wealth creation.

After all, saving $25.00 per pay is better than not investing at all.

After I locate stocks that fit in with my investment strategy, I keep track of these pre-selected equities in a Google Finance portfolio.

Whenever I have the extra dollars available, I acquire shares of the best priced asset from my Google Finance stock list at that particular time.

I don’t worry about the price, nor do I worry about steep market corrections.

I view market corrections as an opportunity to buy additional income, and I look at declining stock prices as a chance to buy dividend income on sale.

Moreover, as I mentioned in my financial goals for 2017, my current plan is to save a minimum of 10% of my salary strictly for investment purposes.

❗️ Commission Rule

As mentioned above as one of the primary rules, when an equity is purchased, the dividend income must offset the cost of the transaction.

To be more specific, the dividend amount paid must be equal or more than the cost of the commission fee paid to acquire the shares.

That way, my commission fee will be paid back and invested into another equity within a year or less.

Example:

Commission: $4.95

Purchase 3 shares of ENB

Each share pays $2.44 in annual dividend income.

2.44 x 3 = 7.32

7.32 – 4.95 = $2.97

In my opinion, offsetting the cost of the commission fee in one year or less is the only way to justify frequent purchases of equities.

Otherwise, in the situation that you have extremely high commission fees, you’ll eat into your profits and the strategy will cease to make sense.

💰 Conclusion

I see no reason for over complicating an investment strategy.

Unless you’re getting closer to retirement or unless your cash flow goes towards your mortgage, I see no reason for holding cash.

When it comes to my investment strategy, the only cash I hold is for an emergency.

From my perspective, I see no reason to treat your savings any different than how your employer treats your stock sharing plan—invest regularly into equities.

Long term dollar cost averaging into quality companies will always be better than cash based assets on the dividends alone.

The fundamental basis of this investment strategy is simple:

  • Set aside 10% or more of each pay regularly into a brokerage account
  • Get rid of cash often to acquire high quality, income producing assets

Although this strategy is not suitable for everyone, it’s the perfect investment strategy for someone tryna add cash flow and elude the 9 to 5 lifestyle.

Question: What’s your investment strategy? What do you think about dividend investing?

12 Comment

  1. Thanks for sharing your philosophy. Most of my investments have been on autopilot and I really need to take a hard look one of these days and restructure my portfolio. Like you, I used to trade more, but now prefer to focus on dividend growth. I like the sound of building a cash flow machine. Hope your new job has given you a good chance to pick up some extra shares.

  2. Graham says: Reply

    Thanks for reading and commenting.
    As long as you own quality investments, having your investments on autopilot is often the best strategy. Building a cash flow machine does sound a lot better than dealing with the stress that comes long with day trading. The new job has definitely provided me with an opportunity to pick up some shares. I’m currently contributing the maximum amount that they match. Even better, the company pays a dividend of more than 4%. Thanks for stopping by!

  3. Have you considered buying stocks through the Robinhood app where there are no commission fees 🙂 It might save you a couple of bucks along the way!!!

  4. Graham says: Reply

    Thanks for the recommendation! I could definitely benefit from this app but it looks like it’s not available in Canada yet. Perhaps I can take advantage once they expand into Canada. Have a great week!

  5. ETF’s are interesting, I haven’t looked seriously into them however. I am always looking to add dividend growers. Today was a nice little dip, maybe more on the way!

    1. Hey Mr Defined Sight,
      Thanks for reading and commenting!
      I’m always on the lookout for dividend growers too. ETFs are a lower cost way to diversify compared to mutual funds. They are great way for me to add sectors and industries to my portfolio that I know little about. I’m always hoping for market dips as well. Thanks again 🙂

  6. I have some very similar rules for my dividend investment strategy, however, I don’t have the commission rule because I use Robinhood and have $0 commissions. So technically every stock I buy has greater dividends than the commission. =)

    #Winning
    -Andrew

    1. Graham says: Reply

      You are definitely winning by avoiding commissions! I looked into the Robinhood app as another commenter pointed it out as an option to save on commissions. However, it’s currently not available in Canada. Although I do pay fairly low commission, my returns would certainly be improved without the extra fees. Nevertheless, I find buying on a regular basis and continually adding dividend income to be a very rewarding strategy. Thanks for commenting and best of luck with building your dividend snowball!

  7. Good stuff! I like ENB, especially the 10% dividend growth. Also as dollar is weakening that should help the dividend for US investors like myself.

    I built my dividend machine about eight years ago and thanks to it, I was able to retire a year ago. The dividend machine runs like a well oiled machine pumping cold hard cash every month. Though, it does require monitoring, occasional tuneup, and a few updates every once in a while to stay on track.

  8. Graham says: Reply

    Hey Mr. ATM,
    Thanks for commenting! Glad to hear you’re a fan of ENB too. Though I’m not able to benefit from the higher U.S. dollar, I’ve been picking up additional shares during the recent dip.

    Congratulations on reaching FI within such a short period of time. It’s extremely impressive and motivating to hear! I’ll have to check out your blog to learn from your experience. Also, I’m really looking forward to monitoring and updating my portfolio for a living. That sounds like an ideal job to me! Have a great day! 🙂

  9. Thanks for sharing your philosophy and strategy, Graham. I’ve yet to dive into building a dividend portfolio, but it is something I want to learn more about and tackle soon. I know it can play a vital role in reaching FIRE. Thanks, again.

    1. Graham says: Reply

      Hey Cody, I hope this post helped with your understanding of the concept of DI. Although dividend investing is not for everyone. If you’re ok with market fluctuations, are more income orientated and you enjoy analyzing companies – dividend investing is the way to go. Otherwise, index investing is probably the best way to go. Thanks for commenting! Hope you’re having a great week!

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