"Income Investing, Purchasing Power and Total Return on Investments"

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What is Total Return

In other places on this site I go through all the reasons why our entire financial markets culture has switched from emphasizing investing for income and investing for total investing return.

But I want to make the distinction clear, because it's especially important to income investors.

Stock total return refers to the rise in stock value plus any dividends paid.

Most people today care only about the price appreciation of total return investing.

Many people will recommend investments to you simply on the basis of the expectation in a rise in market price.

Oh, IBM's going to go up.

Oh, Microsoft's going to go up.

Whatever investment we're talking about, maybe the market price will go up and maybe it won't.

I say -- so what? Who cares?

Remember our Master Goal for Income Investors -- to Preserve and Increase Purchasing Power.

PURCHASING power!

What can you purchase with a share of stock? Nothing!

You must sell it, then buy something with the money you have left.

But you'll owe at least 15% of that to the government, so where the preservation of purchasing power there?

Many many financial books add dividends to increase in market value to arrive at total return -- but you can't spend the increase in market price without incurring capital gains taxes and robbing yourself of the future stream of income from the dividends.

Much as I admire Dr. Jeremy Siegel's work, I couldn't but notice in his first book Stocks for the Long Run that when referring to the great increase stocks made from 1804 forward, he spoke of an increase in their "purchasing power."

Sorry, Dr. Siegel, but you can't buy anything with paper profits, no matter how large, until you sell them and pay taxes.

And then you are no longer participating in their future growth.

And nobody is going to hold stocks for 190 years!

Now, in his latest book The Future for Investors, Dr. Siegel strongly makes the point that a large percentage in the increase of the growth in stocks over the long run comes from reinvested dividends.

So I do believe that all of us still saving for retirement should reinvest our dividends.

In fact, even after we retire we should reinvest as many dividends as possible, to provide for growth in the future (Unless you plan to die within a few of retirement. Myself, I plan to live way past 100, so I know I need to make my money last a very long time.)

So where I must part company with Dr. Siegel in that I'm not so impressed with the numbers on paper.

Paper Profits and Total Yield are NOT Purchasing Power

Purchasing power is the money you can spend without touching the shares that are generating that stream of income.

I do NOT want you to EVER sell a stock unless and until you can tell it's another Enron or WorldCom and you simply must sell to reduce your loss.

Shares of stock in successful companies paying an ever-increasing amount of dividends is the goal. That's what will feed you and keep you warm when you're no longer working and it's cold outside.

The current market price of those shares of stock may or may not look good on your brokerage statement, but they won't buy you anything unless you're stupid enough to fall for the propaganda and sell them.

Please don't.

The Holy Grail of academic financial specialists is Asset Allocation

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