One of the pleasures of my university days was flatting with a bunch of friends in an old villa in Remuera, Auckland.
The place was falling apart. One night, I awoke to hear weatherboards falling off the side of the house.
But there were many stimulating conversations. I majored in finance and English lit, but my other flatmates were doing maths, physics, and engineering. One has gone on to enjoy a distinguished career at top global universities.
As we had part-time jobs to pay our way, we were often home very late.
One pleasure was watching the Seinfeld TV show into the night. It was hugely popular in the 1990s.
‘The Stock Tip’, Seinfeld, circa 1990. Source: IMDb
I recall watching ‘The Stock Tip’ episode with my flatmate.
Jerry Seinfeld does his stand-up routine at the start of the show:
‘I’m not an investor. People always tell me, you should have your money working for you. I’ve decided I’ll do the work. I’m gonna let the money relax.’
My flatmate, the physics guy, said that he thought the purpose of money was to be able to do something useful today.
Ever the finance guy, I said I thought the purpose of money was to be able to not worry about tomorrow.
Jerry Seinfeld may have an income of around $70 million a year. He can afford to let his money relax a little.
But he has also invested for tomorrow in another way. Much of his income probably comes from royalties from the Seinfeld show. He worked hard through the 1990s. Now he doesn’t have to.
Then I got to thinking about the large portfolios I manage for our Wholesale Investors.
In particular, a portfolio that generated almost NZD $125,000 in passive dividend income last financial year.
A portfolio that we had started building years ago from a smaller capital sum, but had been consistently added to over time.
While the running yield (annual income return from dividends) is in the vicinity of 6% — including on about 15% of leverage (borrowed funds using broker margin) — when I analyse that more carefully, I find a ‘secret sauce’.
That running yield is based on the dividend return that the 30 or so stocks in that portfolio generate on average today.
But the return on the entry price is actually much higher.
Let me give you an example:
Rio Tinto is the world’s second-largest minerals and mining company.
Source: Mining Technology
Rio Tinto plc [LSE:RIO], one of the long-term holdings in the portfolio, posts a projected dividend yield of just over 8% according to Google Finance.
That’s at a recent share price of about £49.
But our entry price for this share has averaged around £37.50.
So, while the return on the shares today may be 8%, the actual return on our holding in this portfolio is more like 10.5%. At the average entry price.
That provides a very strong level of income that is also tax-efficient.
This is how investors may build a strong passive-income portfolio. Become financially free. And in some cases, see their portfolio earn more than they do.
Jerry Seinfeld was right when he said he could let his money relax because he was doing the work. His work paid a royalty and set him up for enormous passive income for life.
Most investors do not have hit comedy shows watched from Remuera to Utah. And rerun on Netflix. But they do have the opportunity to invest for tomorrow and compound their dividend income over time.
That’s something we’re focused on with our Quantum Income Strategy that we apply to our Wholesale Managed Accounts.
Speaking of which: this week, we are opening for free consultations on these Managed Accounts. (Available until 22 May).
They’re a solution for Wholesale and Eligible Investors where we help you set up and manage a global brokerage account following our Quantum Income Strategy.
It’s focused on prosperity. And tomorrow.
Because that’s what gives financial freedom.
Editor, Wealth Morning
This article is general in nature and should not be construed as any financial or investment advice. Wealth Morning Managed Accounts are only available to Eligible Investors and Wholesale Investors (not to Retail Investors) as defined in the Financial Markets Conduct Act (2013).