Recession Worries? Recurrent Income Is Your Best Friend

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Co-authored with Treading Softly

Have you ever received the dreaded pink slip? For many, it was only a recession or two ago that you heard the rumblings and the rumors around the office of the company having to downsize and let people go or lay them off.

That dreaded pink slip was starting to be handed out.

You may have rushed over to the page that showed your seniority amongst your union members and looked through the names, hoping that there were enough individuals who were unlucky enough to be below you to protect you and insulate you from being laid off.

It’s a terrifying feeling to wonder if your employment is on the edge because of the performance of the economy. I mean, in all honesty, you work hard day after day, week after week, trying to help the company succeed and help the economy flourish. But the decisions and choices of others or of the company itself may one day lead to your own downfall through no fault of your own – Unemployment.

For others, you may be offered a buyout. "Have a great rest of your life!" They say. Here is your early retirement opportunity. It’s not that they don’t need you. It’s that they feel they can potentially replace you with someone who is younger and cheaper.

Both situations put a lot on your plate almost immediately. You have next to no time to plan or think. You’re going to be hit with a tidal wave of emotion.

I can remember the last time a strong recession hit Canada, and my brother literally was going to a page that showed the union’s seniority and counting down the names hoping that he wouldn’t be laid off as he had young children at home needing to be fed. It’s a scary time for many, and as we look forward to a coming recession that is to arrive on your front door, the question is, are you gonna be in that position? And what should you do if you are?

Fool’s Gold or Fools Ignore?

What comes to mind are two very important things. One is that not everything that shines is gold. The other is that fools rush in where angels fear to tread. What do these have to do with your situation if you’re on the precipice of a forced retirement or forced unemployment?

That’s a great question.

When it comes to the stock market, so many will preach index investing to you. Jack Bogle, a famous investor, has said that it’s better just to buy a cheap, low-cost index fund and invest in the swaths of the market. You know, that was a good suggestion a long time ago. Unfortunately, the indexes that he recommended you buy back then are now so heavily consolidated that you’re really only investing in about five individual companies, and those companies are all extremely overpriced. The other issue is that the index fund isn’t going to be able to pay your bills, and if you’re out of work, neither are you.

This means that traditional investing philosophy and thoughts no longer meet you where you are. They no longer meet your needs where you are needing. It’d be like telling you that you could go pick up bread for dinner, but that bread was going to be located in Asia, and you live in North America. That’s great information, but it’s going to be useless for you if you can’t make it there. Instead, you need to close the gap between what you need and what is available for you. I’ll be honest with you, very few companies that send you bills in the mail will care if you’re employed or not. They simply want the money for the services they’re providing.

So how will you meet those needs? I have an answer for you. It comes in two words. Income Method.

Meet The Method of The Madness

The heart of the Income Method is extremely simple to understand, and the Income Method is an investment philosophy designed to get you paid by the very companies that you hold.

How many of us spent years grumbling that our savings account was paying us next to no interest? But if you want to get a car loan from the same bank, they charge you a whole bunch of interest. Doesn’t seem fair, right? Yet, when it comes to the stock market, so many of us suspend this mental understanding and play mental gymnastics to try to explain why it’s better not to get paid today in the hope of a payoff down the road.

As a shareholder and as an investor, I demand payment. Therefore, if a company is not willing to pay me to be a holder of their company, then I’m not going to hold it. Thus, my Income Method is a lens through which I view the entire market and exclude hundreds of different companies simply because they don’t think I’m worth paying to be part of their shareholders. When you don’t have a job or you’re forced into retirement that you weren’t expecting, you’re going to need income too. Those companies that don’t think you’re worth a grain of salt to pay money to probably aren’t worth a millisecond of your time.

Part of being a good income investor is being able to buy companies that are going to pay you a steady, strong stream of income. Another big part of this is what we call The Rule of 42; while it sounds like a fancy, exciting thing, it’s very simple as well. This rule means that you should have at least 42 different holdings – the key to this is that it drives diversification. If one of these holdings falls and cuts their dividend by 50%, then your entire income stream is not ruined. You may see a 1% reduction in your overall income pouring into your account – that’s manageable and fixable. However, if you only held 10 holdings and one of them cut their dividend by 50%, well, now you’re down a 5% drop – that is a much bigger amount.

The other rule that we try to keep in place while following the Income Method is The Rule of 25. This rule tells you that you should be reinvesting at least 25% of everything that’s coming into your portfolio back into your portfolio. The reason is that if you’re unemployed or retired, it doesn’t mean your life is over, and your income needs to continue to rise so you can meet the expenses as they rise over the years. If you meet somebody who lives on a fixed income, they will tell you that the longer they’re on that fixed income, the harder it is to find extra money after their bills are paid. Bills rise – it’s a fact of life that the companies that provide you services are going to continue to charge you more and more for those over the years. Likewise, you need an income stream that is continuing to grow. I recommend that you reinvest at least 25% of that money back into your portfolio to ensure that it continues to grow.

My personal portfolio yields over 10%. That means that every $100,000 of my portfolio’s value is paying me at least $10,000 in annual dividends. That amount of money can be a game changer if you’re forced into early retirement or unemployment. Suddenly, the bills that seem insurmountable will seem much more manageable if your portfolio is paying you an outsized amount of income.

When the chips are down and the dust is settled, I want you to be successful. The beautiful thing about the stock market and the Income Method is that my success is not determined by yours. What this means is that I’m not trying to game the market and trade in and out, hoping that someone else is foolish enough to buy a security that I no longer think is valuable. It means that my success is not predicated upon the failure of someone else. This means that every single one of us reading this article can succeed in unison without the other having to fail. You can do it. I can do it. Your neighbor can do it. Millions can do it simultaneously and succeed together.

That’s the beauty of my Income Method. That’s the beauty of income investing.