How to Build a Kick Ass Yield
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How is your savings account doing these days? I bet you are really building a lot of wealth from earning that 0.75%! That is the current interest yield we are earning for money we keep in our savings accounts right now.
Let’s just say that we don’t keep that much in our savings accounts anymore. Earning less than 1% on our money feels like a slap in the face.
Our emergency fund, which is invested in certificates of deposit, isn’t much better.
We recently moved some of our emergency funds into a CD ladder that is bringing in a whopping 1.0% return! What a joke.
Note – Our emergency fund needs to be available to us, which is why we have chosen a combination of certificates of deposit and savings accounts. Certainly not the best option to earn income but one that works for an emergency fund.
The yield is so darn low on our emergency fund that we have even started investigating if we actually need $50K saved. If we don’t need that entire amount, then you can bet where it is going.
Yep – top notch dividend stocks that will pay us a kick ass yield instead of next to nothing.
If you are fine with earning a safe, low yield on your money – then certificate of deposit and savings accounts are probably your best option. However, if you want to actually build wealth and let your money work for you – then I strongly suggest looking at putting money into dividend stocks.
Building a Kick Ass Yield
Do you want a different option to invest your money that can at least double the yield of the average savings account? What about tripling your return?
Would you believe that the current yield we are earning from our dividend stocks is 600% higher than our savings account? Yes, we are currently earning around 4.50% on our dividend income portfolio compared to 0.75% in our savings account.
While there are always risks involved when you invest in the stock market, they can be limited and controlled. I would much rather take a calculated risk managing our money by investing in top notch companies that pay a dividend compared to a low guaranteed yield.
How to Earn Over 3% Yield in the Stock Market
If you do your due diligence and screen for top companies that pay a dividend, there is no reason why you can’t eventually earn a 3% yield (likely higher) on your money.
We screen for dividend stocks before we make any purchases by using several pieces of criteria. One screen is to look for stocks that have a current yield over 2.50%. You could set this filter higher in your analysis and find plenty of good companies that are paying 3.0% or higher.
It is a good idea to understand the difference between current yield and yield on cost before you get too much further along. Current yield is the annual dividend divided by the most recent share price. The yield on cost is the annual dividend divided by the price you purchased a stock for.
If you have a long term mindset, then you can eventually push your dividend yield even higher by holding on to companies. As companies raise their dividends over time, your yield on cost (YOC) grows.
My wife and I own a stock that is returning over 9% that we purchased over 7 years ago!
Here is a quick summary of how we are earning a 4.50% yield on our stocks in the Money Sprout Index.
How We Earn a 4.5% Yield
We currently own 28 stocks in the Money Sprout Index. The combined yield on cost on these stocks is currently at 4.50%. You will not find a better yield anywhere at a bank.
Yield on Cost = 4.50% (actually 4.49%)
- 28 stocks owned
- lowest yield on cost – 2.54% (WMT)
- highest yield on cost – 9.30% (ED)
- stocks owned from all 10 sectors
Stocks that we are currently buying every month like WalMart (WMT) generally have the lowest yield on cost (i.e. 2.54%). This is because we are adding new shares normally at higher prices to our average which brings the yield lower.
On the other hand, stocks that we have owned for many years and are not actively buying tend to have the highest yield on cost. For example, Consolidated Edison (ED) was the first dividend stock we ever purchased over 7 years ago – which is earning over 9%.
We have held these shares, reinvested the dividends into new shares of stock, and enjoyed annual dividend increases by the company. All of these factors have combined for a kick ass yield of over 9%!
Note – I normally calculate future dividend income based on a YOC of 4.375%. However, as we begin to invest in more REIT’s and other dividend producing assets, our yield has crept up to around 4.50%.
Taking all 28 stocks in our portfolio and balancing them out, we have an awesome yield of over 4% that will continue to grow over time.
How much are you earning again in that savings account?
If you don’t have the stomach to watch the stock market go up and down, then investing in dividend stocks may not be for you. Keep your money in a low interest bearing account that is safe.
In the meantime, for those of us wanting to build wealth with our money – investing in dividend stocks is a great option. While there may be a little more risk involved when investing in stocks, proper screening of companies and taking a long term approach can limit most issues.
I don’t know about you, but I am not comfortable with my money being lazy earning less than 1% for my family. I want to build wealth and let my money work harder for me – which is not going to happen by playing it safe.
What about you?