9% Yield—True Passive Income…

“Here—this is what you need to read,” my dad said to me as he tossed onto my lap a flimsy newsprint publication.

I was 14 or 15 at the time, visiting my dad in St. Louis, where he served as one of the grand poohbahs of a snack-food company you’d probably recognize.

What landed on my lap was the Value Line Investment Survey, a financial newsletter focused on a collection of 1,700 stocks. Each week, Value Line analyzed scores of stocks in various industries, offering up a few paragraphs of analysis and expectations, along with a heaping ton of data, topped by a buy-sell-hold recommendation.

I didn’t really know what to do with it, but I saw several issues spread across my dad’s desk, and I knew he’d made great money investing in stocks… and I wanted to make great money, so reading Value Line seemed a good start.

Boy, was it…

Fifteen years later, I was married and in a job where I finally had enough disposable income to begin investing in a Charles Schwab account I’d opened as a college freshman.

Because I was raised by grandparents on a fixed income in a lower-middle-class lifestyle, I was highly attuned to income investing. Sure, I wanted growth, and I sought out growth, but money landing in my account every quarter really appealed to me…

So, I gravitated toward growth stocks that paid out a respectable dividend.

One of the very first I bought, based on reading through my own Value Line subscription, was Wisconsin Energy, now known as WEC Energy Group—a major utility provider in the upper Midwest. After I bought the shares, I had Schwab send me the physical certificates that I then sent to Wisconsin Energy so that I could enroll in their dividend reinvestment plan (DRiP), by which all my quarterly dividends were converted into additional shares of company stock.

That so-called “DRiP” is the real story I want to share with you in this dispatch…

See, the investment world too often shuns dividend investing, far more eager to own fast-growth momentum stocks. I get that. Growth and momentum are what sends share prices racing from $10 to $100 in relatively short order. Besides, lots and lots of investors view the stock market as a racetrack and they want to bet on what they think is the fastest horse in the field.

Of course, the problem with growth and momentum investing is that Wall Street has the patience of a mayfly’s lifespan (24 hours or so). If a company misses earnings by as little as a penny, or if sales slow, or profit margins shrink, or any of a bunch of other “what if” moments, the stock price very often gets hammered.

I never really cottoned to the “gets hammered” part of that equation.

So, dividend stocks were my jam.

Looking back on Wisconsin Energy explains my thinking…

I’ve always considered the idea that the tail wags the dog when it comes to dividends, by which I mean that dividends literally force stocks higher. I’ll explain that more in tomorrow’s dispatch, but the basic idea is that as dividends rise, the stock must rise too, otherwise you end up with ridiculously large yields, and Wall Street isn’t going to allow that.

Wisconsin Energy was a great stock to own in a DRiP. (To be clear, I sold out of the stock after owning it for a decade or so, but the analysis below is still relevant.)

When I bought the shares in the early ’90s, the stock was in the $9 or $10 range. Today, it’s about $96. So let’s call that a 10x over 30 years.

But along with the 10x in stock price, Wisconsin Energy has paid out a cumulative $40.10 in regular and special dividends over the years. So a $9 or $10 investment is today worth about $130 per share. That’s a 9% annualized return.

Now, that might not twirl many Twinkies, but inflation over that period was about 3% per year.

So a very boring utility tripled the rate of inflation.

And it did so with vastly less volatility than the stock market as a whole.

In the world of stocks, there’s something called “beta,” which is basically a measure of volatility. The S&P as a whole has a beta of 1. Wisconsin Energy’s parent company (WEC) sports a beta of just 0.56… nearly half as volatile as the market itself.

Honestly, that’s what I really care about: bunches of dividends that rise over time, which drives the stock price higher, while doing so with very little volatility.

A sleep-well-at-night stock, basically.

Like I said, I love a good bit of growth (which is why I’ve snapped up Coinbase stock recently). But I want my portfolio pumped full of stocks like Wisconsin Energy, because I know the income will be solid and the stock price will reflexively rise alongside the dividends.

The proof I point to is a Passive Income portfolio I put together last February for my readers. Last month, I calculated returns for the stocks in that portfolio for the International Living conference in Vegas, and of the 15 stocks, only 1 was down. The others were up between 3.9% and 29.5%.

The cumulative, annualized yield was 7.5%.

I’ll take that any day in a retirement income portfolio: big dividends and respectable/big returns.

Right now, I’m putting together a new Passive Income portfolio for readers like you… you can sign up to be first-in-line to get the details right here.