Strategic Allocation: Navigating The Usd 5 Million Investment Landscape

Investing $5 million requires a specific strategy that involves assembling a collection of assets that will generate the highest possible income while minimising risk. The first step is to outline your financial goals, whether that be retirement, charitable donations, or purchasing a second home. Next, determine your investment timeline and risk appetite. If you're a beginner, consider starting with investments like ETFs or index funds. You can also consult a financial advisor to help you navigate the various options available, including dividend-paying stocks, certificates of deposit, money market accounts, annuities, real estate, and alternative assets like fine art and private company investments.

Dividend-paying stocks

When you’re looking for ways to receive regular dividend payments, you generally have two options: stocks that pay dividends and funds that hold stocks that pay dividends. Here’s a closer look at both options:

Investing in Dividend-Paying Stocks

Investing in a dividend-paying stock is no different from investing in any other stock. You’ll need a brokerage account, which can be easily set up through an online broker, to place a trade. Once your account is set up and funded, you can choose which dividend stocks to invest in. Your broker may even be able to help you identify dividend stocks with large payouts through its research offerings.

Some companies to consider include:

• Johnson & Johnson: This company earns a wide economic moat rating due to its diverse revenue base, solid pipeline, and exceptional cash flow. Johnson & Johnson has raised its dividends for 25 consecutive years or more, qualifying it as a dividend aristocrat.
• Verizon Communications: Verizon is a leader in communication and technology services, providing the majority of mobile phone services in the US. It is the highest-yielding stock on Morningstar's list of the best dividend stocks to buy, trading 24% below the fair value estimate of $54 per share.
• Exxon Mobil: In early May, the oil giant announced it closed its acquisition of Pioneer Natural Resources. Exxon qualifies as a dividend aristocrat and Morningstar believes the stock is worth $138, with shares currently trading 18% below that.
• Comcast Corp Class A: Comcast trades 32% below Morningstar's fair value estimate of $56. The company has increased its dividend payout by 15% annually, on average.
• Medtronic: Medtronic is the largest pure-play medical device maker and a key partner for its hospital customers. It has raised its dividend for 46 consecutive years, earning it dividend aristocrat status.
• Duke Energy: One of the largest regulated utilities in the US, Duke has carved out a narrow economic moat due to the constructive regulatory environments in which much of its business operates. The company's dividend policy is to pay out 65% to 75% of earnings.
• Starbucks: Starbucks is a newcomer to the list of best dividend stocks. The company generates strong free cash flow and management targets a 50% dividend payout ratio longer-term.
• PNC Financial Services: PNC is one of the larger regional banks in the US with a fairly diversified fee base. Its capital return strategy has been deemed appropriate by Morningstar.
• Kinder Morgan: Kinder Morgan's assets span natural gas, natural gas liquids, oil, and liquefied natural gas. The company will enjoy growth opportunities from artificial intelligence and data center demand.

Investing in Dividend Funds

If you’re not quite sure which high-dividend stocks to choose, a dividend fund may be a better option. Mutual funds and exchange-traded funds (ETFs) focused on dividends hold a basket of stocks that pay dividends. Some funds focus on stocks with high dividend yields, while others look for companies that have consistently paid and grown their dividends over time.

By choosing a fund, you won’t have to worry about closely tracking individual stocks because the fund’s diversification should shelter you from having too much exposure to a single stock.

Considerations

Keep in mind that if you own dividend stocks or funds in a taxable brokerage account, you’ll need to pay taxes on the income you receive, even if you reinvest those dividends. If you want to avoid taxes, you’ll need to own the shares in a tax-advantaged account such as an IRA or 401(k).

Be sure to research any dividend stocks carefully before investing. Companies with high payouts today may be forced to cut payments if their business suffers.

Certificates of Deposit and Money Market Accounts

Certificates of Deposit (CDs) and Money Market Accounts (MMAs) are both federally insured savings accounts that earn interest. However, they differ in several ways.

CDs are a type of savings account that pays a fixed interest rate on money held for an agreed-upon period. CD rates are usually higher than savings accounts, but you lose withdrawal flexibility. If you withdraw your CD funds early, you'll be charged a penalty. CDs are a safer and more conservative investment than stocks and bonds, but they offer a lower opportunity for growth.

MMAs are a type of deposit account offered by most banks and credit unions. They are fully liquid, meaning account holders can access their funds at any time, though there may be restrictions on the number of withdrawals allowed per month. MMAs typically earn higher interest than regular savings accounts and offer some of the conveniences of checking accounts. They are variable and can fluctuate with changes to interest rates and market conditions.

When deciding between a CD and an MMA, consider your financial goals and risk appetite. If you want the option to add and withdraw money regularly and are looking for checking account-like perks, an MMA may be a better choice. If you want to lock in a higher interest rate and are comfortable with less access to your funds, a CD may be a better option.

• CDs have higher interest rates than MMAs but offer less access to your money.
• CDs require you to keep your money in the account for a set term, while MMAs allow you to withdraw funds at any time without penalty.
• MMAs typically have larger minimum balance requirements than CDs.
• MMAs offer features such as debit cards, ATM access, and check-writing abilities, which are not usually available with CDs.
• CD rates are typically fixed, while MMA rates are variable and can change over time.

Annuities

There are different types of annuities:

• Immediate or Deferred: Immediate annuities are purchased by people who have received a large lump sum of money and want to exchange it for future cash flows. Deferred annuities, on the other hand, are designed to grow on a tax-deferred basis and provide guaranteed income at a future date specified by the annuitant.
• Fixed, Variable, or Indexed: Fixed annuities offer a guaranteed minimum interest rate and fixed periodic payments. Variable annuities provide the potential for larger future payments if the annuity fund performs well, but payments may be smaller if the fund performs poorly. Indexed annuities are fixed annuities that provide returns based on the performance of an equity index, such as the S&P 500 index.
• Accumulation Phase: During this phase, investors fund the annuity with either a lump-sum payment or periodic payments.
• Annuitization Phase: This is the payout phase, where the annuitant starts receiving payments for a fixed period or for the rest of their life.

Real estate

If you're looking for a more hands-off approach, you could consider investing in rental properties and hiring a property management company to take care of the day-to-day tasks. This will reduce your returns, but it can also save you a lot of time and hassle.

Another option is to invest in real estate investment trusts (REITs). REITs are companies that own income-generating rental properties or the mortgages on those properties. They offer diversification and are obligated to pay out 90% of their taxable income as dividends to shareholders. However, these dividends are taxed at a higher rate than those paid on stocks.

If you're interested in a more active role, you could consider "flipping" houses. This involves buying a home, renovating it, and then selling it for a profit. This can be risky, as there are a lot of factors that can go wrong, such as budget overruns or a downturn in the market. But it can also be very lucrative, especially if you focus on high-end homes.

For an even more hands-on approach, you could become a professional syndicator. This involves pooling resources from multiple investors to purchase a property, and then managing all aspects of the rental business. Syndicators typically receive fees for running the deal, as well as a share of the profits.

• YieldStreet: An alternative investment platform offering access to multifamily real estate properties. You can invest as little as $15,000 and earn quarterly dividends from rents collected.
• RealtyMogul: An institutional-quality real estate investing platform offering access to commercial and industrial properties. You can earn up to 20% IIR or more by investing in high-quality buildings.
• Roofstock: A company that helps you manage the purchase of multiple properties to build a portfolio. They offer a simple-to-use dashboard for tracking your returns.
• AcreTrader: A crowdfunded real estate site that allows you to invest in parcels of farmland and earn returns through rents and price appreciation. The minimum investment is around $15,000.

Remember, investing $5 million is a significant decision, and it's important to do your own research and consult with a financial advisor to determine the best strategies for your specific situation and goals.

Master Limited Partnerships (MLPs)

MLPs are considered low-risk, long-term investments that provide a slow but steady income stream. They are often in stable yet slow-growing industries, like pipeline construction, and earn income based on long-term service contracts. MLPs are also extremely tax-efficient for investors. They are treated as pass-through entities for tax purposes, meaning that the MLP itself does not pay taxes on its revenues. Instead, investors are taxed on their portions of the MLP's earnings and can benefit from deductions.

However, the tax filing requirements for MLPs are complex. Investors are required to pay state income taxes in each state the MLP operates in, which can increase costs. Additionally, MLPs are subject to various risks, including interest rate risk, volatility risk, and legislative risk. They are also concentrated in the energy sector, making them sensitive to shifts in oil and gas prices.

Despite these considerations, MLPs can be a valuable part of an investment portfolio. They offer higher income payments than many other alternatives and provide stable cash flows and consistent cash distributions.

Frequently asked questions