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Maintaining a balanced retirement portfolio composed of a diversified set of securities selected from a wide spectrum of market sectors, structures, and asset classes is a must in turbulent times such as these. Being highly diversified in only the best-of-breed dividend paying as well as growth and value securities increases the likelihood of capital preservation by providing a robust margin of safety. Never put all your eggs in one basket, as the saying goes.
Furthermore, the best way to achieve future financial freedom is by implementing a long-term buy and hold strategy, ensuring you never run out of money. It’s “time in” the market, not “timing” the market that creates true wealth. Quality high-yield income producing investments are the heart of the Diversified Cash Flow Method. What do I mean by quality? The following are my top five quality covenants.
Clark’s Top 5 Quality Covenants
One of my abiding mantras is “quality over quantity.” The word “quality” implies the opportunities meet all five of my quality covenants. These quality covenants increase the odds of obtaining dependable income streams coupled with a substantial margin of safety. It’s a top down method of investing. We start by identifying companies with strong long-term growth stories and drill down from there. The following are my five Quality Covenants:
- Long-term growth story intact
- Sound valuation fundamentals
- Predictable and growing cash flow
- Adequate coverage
- Healthy dividend yield or growth potential
Now, let’s turn our attention to another important facet of the Diversified Cash Flow Method, wealth creation vis-a-vie capital appreciation.
Diversified Cash Flow Method Doctrine
The defining attribute of the Diversified Cash Flow Method is you always keep a portion of your assets allocated to securities with the potential for substantial capital appreciation as well as income generation. This will ensure you have an adequate level of wealth in case of an expensive emergency or for when your expenses increase when it comes time for long term care such as assisted living and nursing home care, which Medicare does not pay for.
Income received from dividend-paying stocks are an entirely suitable source of funds for retirement. Nonetheless, by relying solely on these alone, you’re selling yourself short. The saying “never put all your eggs in one basket” comes to mind. Along with the proverb is “excess of everything is bad.” This means that everything in life should only be in the correct and adequate quantity. Excess of anything causes harm.
For instance, REITs provide a great source of income. Yet, to qualify as a REIT, a company must distribute at least 90 percent of its taxable income annually in the form of dividends. Often, the stock will actually drop by the same amount as the dividend paid in the following days. It’s logical since the company is giving away an asset. This is why you need a portion of your retirement portfolio dedicated to growth and value stocks focused on capital appreciation. If you really want to create wealth over the years, it’s important to allocate a portion of your portfolio to growth and value stocks that reinvest their profits rather than return them to shareholders. Now here is a little more about me.