For a long time I wanted to provide some insights into how I perceive my portfolio and why I chose income investing as my strategy.
Why do we invest? What is "wealth" ?
Throughout history, investments have been described by the "income" they produce. It is an investment's income generating capacity that drives it's economic value, and ultimately it's market price, not the other way around. But a huge, competitive money management industry uses simple yardsticks to showcase their performance. Thus, market price and "growth" have become paramount, even though for small, retail investors it is far less important.
During most of our working lives, we focus on our income. How much money we are making; if we transfer to a new company, how much many we will be making?
If you think about the 18th and 19th literature, life was horrible back then and if you do not have income to survive you would be in a bad place. Even the upper class was described related to the income they produce. This definitely reflects how we think of our financial prospects.
Income and market value
Back in 2018 when I started investing, it was very confusing to me why it seems I was bombarded daily with charts about how much the market price of certain well-known stocks move throughout the day.
Since I started my investing career with the same mindset I had when I thought about my work life, i.e. to generate income, it felt like I had very little resources to learn about income investing.
I think the best metaphor about this clash of perspectives (income vs market value) is Donald Duck's uncle Scrooge Mc Duck which had a swimming pool filled with gold coins, who would regularly go swimming in a pool of money.
While wallowing in one's wealth, be it a pool of gold coins or one's portfolio at a brokerage, is satisfying for some, for me the ultimate purpose of my wealth is to generate a reliable income stream.
As retail investors we have only one person to satisfy: ourselves; we are not obligated to accept price appreciation and paper profits as the measurement of success.
About 84 years ago an economist named John Burr Williams wrote a book called The theory of investment value in which he basically said that the value of a company is the discounted present value of all future cash flows (primary cash dividends but also residual value received by selling the company). Although less known then Benjamin Graham and David Dodd's Security Analysis, it does complement that work.
The lesson for all of us is that income should come first and then the market valuation will inevitably follow. In other words, the ability to generate an income stream is what drives the economic value, not the other way around.
On days where everything seems to be crashing and friends and colleagues ask us "what are you going to do!?" our answer would be probably something in the line of
What I always do: reinvest my river of cash in what looks like bargain prices, raising my income stream!"
As we re-invest dividends to create an ever-increasing income stream, the economic value of our portfolio grows. If "Mr. Market" is rational (and viewed on a long-term it always is), the market value of our portfolio will grow to reflect the economic value.
Even though I am still a beginner, I did catch some "turbulent" times in late 2018 and especially in March 2020 and I learned that focusing on income is physiologically less stressful and a strategy that is very easy to follow through thick and thin.
Choices, choices...
During my not-so-long investment career, I used 3 main strategies that could potentially allow me to reach my goals:
Dividend Growth Investing
Closed-end funds
Selling options
I decided to focus exclusively on Dividend Growth Investing because I have enough time until I need to actually use my income (10-15 years) and I think this strategy compounds better. But also an important thing for me is that in my view this environment post-2022 will be beneficial for companies that have very good balance sheets and generate strong cashflows.
Regarding selling options I believe that selling puts is very close to a form of "leveraged value investing". I had pretty good results in the period that I've tried it. But again going back to the current environment, it is better suited in a bull market and I think those times are behind us.
Regarding closed-end funds, there are so many idiosyncrasies with this products (mostly retail investors, less institutional ownership, leverage) that in my view they should be part of every income investor's portfolio. Especially the pure income type of funds that invests in senior, secured, floating-rate loans, because they are so fungible that it would be very easy to take profits on your positions and re-invest to grow your income.
Even though I don't own closed-end funds anymore, I will most likely own them after I build the foundation of my portfolio on dividend growth stocks.
Resources
DGI:
The source where I feel I get the most benefit from is
https://www.dividendgrowthinvestor.com
It has a wealth of articles explaining how to build a DGI portfolio and I do something very similar to this.
Dave Van Knapp was also influential for the Stock Screener I maintain at https://qualuation.com/
https://dailytradealert.com/dave-van-knapps-dividend-growth-investing-lessons/
Also a good book on the subject is Nathan Winklepeck's Dividend Growth Machine.
https://www.amazon.com/Dividend-Growth-Machine-Supercharge-Investment/dp/1541117077
Closed-end funds:
By far the author that influenced me the most is Steven Bavaria on SeekingAlpha.
He also has an excellent book "The Income Factory".
https://seekingalpha.com/author/steven-bavaria
https://www.amazon.com/Income-Factory-Investors-Consistent-Lifetime-ebook/dp/B07WGR2DK6
Another great income investor is Steve Selengut.
Even though when the following book was written he was mostly using dividend stocks, the strategy fits very well with closed-end funds.
https://www.amazon.com/Brainwashing-American-Investor-Steven-Selengut-ebook/dp/B07TGFPR85