I had a long conversation this past weekend with my sister, Katherine Schuber.
The conversation was all about Katherine’s income and how she could grow it. I’ll show you why I’m telling this story, and the advice I shared with Katherine, in just a moment. So stick with me for a second here. The payoff’s coming — I promise…
Katherine is an amazing portrait artist, and she’s been very successful in building income from her business. Below is one of her paintings of my daughter Emma:
While Katherine is an expert at her art business, she’s relatively inexperienced when it comes to investing.
This weekend, we spent some time talking about income investing and the best way for her to steadily grow the income she gets from her investment money. As we talked about dividend stocks, the conversation turned to ways that investors can grow the amount of income they receive each month.
Today, I want to discuss three different ways that investors can grow the income they receive from their investment accounts. Hopefully, the ideas I talked about with Katherine will help you grow your own investment-based income over the next few months…
Income Growth Strategy #1: Leverage
The first way to grow your investment income is a strategy that I consider to be very risky. In fact, I would recommend you avoid this method, because it could really hurt you over the long run. Still, I think it is important to discuss because many income investors fall into this trap, and I don’t want you to be hurt.
Investors who use “leverage” to grow their income typically borrow money to invest more. Most brokerage accounts will allow you to borrow from them (while paying your brokerage interest) and use that money to buy more shares of stock.
In a bull market, this strategy can work out fine. If you have an account with $50,000 in capital and you borrow another $50,000 to buy shares of dividend stocks, you’ll actually own $100,000 in stock.
You’ll collect all of the dividends from these shares and make money if the stocks that you own trade higher. In fact, you’ll make a lot more money because you own twice as much stock.
This type of investing is often called “margin investing.” And while it can help you collect twice as many dividend checks and grow your money quickly, it can also really hurt you in a bad market.
Suppose you have a $50,000 account and borrow another $50,000 from your broker to buy shares. Once again, you will now own $100,000 in stock.
Now, if the market drops by 25%, your $100,000 in stock will likely lose 25% of its value and you’ll be left with $75,000 in stock positions. But keep in mind you still owe $50,000 to your broker. After repaying the loan, you’re…