How far is financial freedom from where you stand today? The average investor focuses on retirement, but I’d like to take a moment to talk about financial freedom.
What exactly do I mean when I say financial freedom? I mean the ability to live comfortably through the investments you hold. Could what you have invested right now not just sustain your bare necessities, but also allow you to live a comfortable life?
The answer to the question above might not be as far off as you think. In today’s environment there are a number of investments that can bring you a dividend yield of between 6%-10%. What you may find surprising is that these investments are not all that risky compared to the general market (based on beta).
If you assume that you can build a portfolio that has an average annual yield of 8% and is composed of stocks that you feel safe in, then what must your portfolio’s value be to satisfy your annual needs? How much money do you need to have invested? What implications could a dividend-centric portfolio have in your life?
What if you had $600k in your portfolio? Based on an average annual dividend yield of 8% you would receive (pre-tax) $48,000 annually in dividend income. If you have little debt and are not paying for your child’s education or maintaining a large house, $48,000 can go a long way. Depending on your lifestyle, $48,000 might be enough for you to live comfortably.
The most important aspect of being financially free through a passive means of income (dividends), is that you are opening up another resource for yourself; time. Working every day for 8 or more hours limits what you can accomplish outside of work. The number of hours you have before you go to bed are limited and the level of motivation you have after getting off work is reduced.
Think about what you’d like to accomplish in life. You may find that you have a host of things you’d like to pursue, yet are unable to pursue because of a time constraint. Being financially free can break those barriers.
When setting your financial and investment goals, consider what it would take and what it would look like if you were financially free.
While you think about the possibilities, here are a few stocks to ponder:
(I’m not recommending your run out and buy these, but I want you get sense of what’s out there to be bought.)
Triangle Capital (TCAP) – Yield of 9.30%, Beta of .44 and a Payout Ratio of 70%
Terra Nitrogen Company (TNH) – Yield of 15.70%, Beta of .46 and a Payout Ratio of 65%
PDL BioPharma, Inc. (PDLI) – Yield of 9.50%, Beta of .26, Payout Ratio of 98%
AFP Provida SA ( PVD) – Yield of 12.76%, Beta of 1.22, Payout Ratio of 26%