Maximizing Returns: Strategies To Achieve 400% Investment Growth

Making 4% on your investments is a popular topic, with many people seeking to understand how to achieve this. The 4% rule is a well-known concept in retirement planning, suggesting that retirees withdraw 4% of their retirement savings each year to ensure their funds last. This rule is based on historical data and aims for a balance between a steady income and maintaining an adequate account balance. While it's not a guarantee, it offers a simple guideline for retirement planning.

To achieve a 4% yield, investors can consider a mix of investment-grade bonds, municipal bonds, stocks, mutual funds, ETFs, dividend-paying stocks, and more. It's important to remember that investments carry risks, and it's always recommended to consult a financial professional for personalised advice.

Dividend stocks

The average dividend yield of some of the top dividend stocks is 12.69%. However, a high dividend yield isn't always a good thing. Falling stock prices can increase dividend yields, and some companies go into debt by overspending on their dividends.

When choosing a dividend stock, it's important to evaluate the dividend yield and payout ratio. A payout ratio that is too high means the company is putting a large percentage of its income into paying dividends. Dividend yields over 4% should be carefully scrutinised, and those over 10% are considered risky.

Some examples of stocks with high dividend yields include:

• Arbor Realty Trust Inc (ABR)
• AG Mortgage Investment Trust Inc (MITT)
• Franklin BSP Realty Trust Inc (FBRT)
• Seven Hills Realty Trust (SEVN)
• Alexander's Inc (ALX)
• Washington Trust Bancorp, Inc (WASH)
• Amerisafe Inc (AMSF)
• Bloomin Brands Inc (BLMN)
• Artisan Partners Asset Management Inc (APAM)
• Altria Group Inc (MO)
• Marketwise Inc (MKTW)
• CVR Energy Inc (CVI)
• Dine Brands Global Inc (DIN)
• Pangaea Logistics Solutions Ltd (PANL)

It's important to note that dividends in taxable brokerage accounts are taxed in the year they occur. Therefore, for investors with taxable accounts and in high-income brackets, dividend stocks may not be the most tax-efficient option.

Diversification

• A well-diversified portfolio typically includes a mix of stocks, bonds, and alternative investments such as real estate, commodities, or cash. Diversification within each asset class is also important, such as investing in large, mid, and small-cap companies across various industries and geographic regions.
• Diversification helps lower overall investment risk by tapping into the concept of correlation. By combining investments that don't move in the same way, your portfolio has low correlation, protecting against extreme declines. For example, when stock prices fall, bonds typically rise, so owning both can reduce volatility in your portfolio's value.
• Mutual funds and exchange-traded funds (ETFs) are great tools for achieving diversification. These funds provide instant diversification by offering professionally managed collections of individual stocks or bonds across various industries and markets.
• Regular portfolio rebalancing is crucial to maintaining diversification over time. Market movements can cause your asset allocation to drift from your intended strategy. For example, a strong stock market run may increase the equity portion of your portfolio beyond your target allocation. By periodically rebalancing, you can maintain your desired level of risk and keep your portfolio aligned with your long-term goals.
• While diversification is essential, it's important not to overdo it. Excessive diversification can lead to unnecessary costs and overlap in your investments. The goal is to find the right balance between diversifying your portfolio and maintaining a focused investment strategy.
• Diversification does not guarantee profits or protect against all losses. It is more about risk management than maximising returns. A diversified portfolio may underperform compared to a winning individual investment, but it can provide stability and reduce potential losses.

Capital gains

There are strategies to minimise capital gains tax:

• Hold your investment for more than a year: This allows you to qualify for the long-term capital gains tax rate, which is typically lower than the short-term rate.
• Use tax-advantaged accounts: Invest in accounts like 401(k) plans, individual retirement accounts, or 529 college savings accounts, where investments grow tax-free or tax-deferred.
• Rebalance with dividends: Instead of reinvesting dividends, use them to invest in underperforming assets. This avoids selling strong performers and incurring capital gains tax.
• Utilise the home sales exclusion: If you've owned and used your home as your primary residence for at least two years out of the last five, you may exclude up to $250,000 in capital gains from a home sale ($500,000 for married couples filing jointly).
• Explore tax-loss harvesting: This strategy involves selling specific assets at a loss to offset gains and reduce taxable income.
• Consider a robo-advisor: Robo-advisors employ tax-loss harvesting strategies and manage your investments automatically.

Compound interest

For example, let's say you have $100 and it earns 5% interest each year. At the end of the first year, you will have $105. At the end of the second year, you will have $110.25. Not only did you earn $5 on the initial $100 deposit, but you also earned $0.25 on the $5 of interest from the previous year. While 25 cents may not seem like much, it adds up over time. If you never add another dime to that account, in 10 years, you will have more than $162, and in 25 years, you will have almost $340, thanks to the power of compound interest.

The Rule of 72 is a useful way to estimate how your investment will grow over time. By dividing 72 by your expected rate of return (interest rate), you can determine how long it will take for your investment to double in value. For instance, if you have an expected rate of return of 9%, your investment will double in value about every 8 years (72 divided by 9 equals 8).

Real estate

Rental Properties

Rental properties are a good choice if you have DIY skills, patience in managing tenants, and the time to manage the property properly. While financing can be obtained with a low down payment, it requires substantial cash upfront for maintenance and to cover periods when the property is empty or tenants don't pay rent. Over time, the income generated from rental properties can be leveraged to acquire more properties, creating multiple income streams that can offset costs and losses.

Real Estate Investment Groups (REIGs)

REIGs are ideal for those with some capital who want to own rental real estate without the hassle of hands-on management. They are similar to small mutual funds, pooling money from multiple investors to buy or build rental properties. A single investor can own one or multiple units, while a management company handles the maintenance, advertising, and tenant interviews for a percentage of the monthly rent. REIGs provide income and appreciation while being more hands-off than owning rentals directly.

House Flipping

House flipping involves buying undervalued properties and quickly reselling them for a profit. It requires significant experience in real estate valuation, marketing, and renovation. Flippers often aim to pay for properties in cash and must accurately estimate renovation costs to ensure profits. There is a risk of losses if properties take longer to sell, as carrying costs can add up.

Real Estate Investment Trusts (REITs)

REITs are ideal for investors who want exposure to real estate without the traditional transaction. They are companies that use investors' money to purchase and operate income-producing properties, such as malls or office buildings. REITs are traded on major exchanges like stocks and tend to pay high dividends, making them attractive for retirement investing. They also provide diversification into non-residential real estate, which may not be feasible for individual investors.

Online Real Estate Platforms

Online real estate investing platforms, also known as real estate crowdfunding, allow investors to pool their resources to invest in large commercial or residential projects. This option provides diversification into real estate without requiring a large investment stake. However, it can be riskier, as projects may be on crowdfunding sites due to an inability to secure traditional financing. Additionally, investments tend to be illiquid, with funds locked up for several years.

Becoming a Landlord

Becoming a landlord by buying an investment property and renting it out is a well-known way to invest in real estate. It offers the potential to build equity over time and benefit from increases in property value. It also provides tax advantages, such as deductions for mortgage interest, property taxes, repairs, and depreciation. However, it requires a high initial cost, significant ongoing effort, and access to cash can be limited.

Remember, real estate investing carries risks, and markets can go up and down. It is essential to consider your financial situation, temperament, and time commitment before diving into any of these investment strategies.

Frequently asked questions