I have a $5M stock portfolio that generates $130k a year in dividends. How should I invest my excess?

You are young and you are already wealthy with your dividends. Congratulations.

Picture with money icon with text about 5 million dollars

It seems as though you are getting a return of 2.6 percent from the dividends which seems reasonable.

What you haven’t told us is how you got the money. Did you invest it yourself or did you inherit it?

If you invested it, then, as other people here have said, just continue what you did to get to this point.

If you inherited, you need to educate yourself a little bit.

Ways to invest

There are two major ways that you can invest your money:

  1. Stocks, where you buy a share in the profits of a company. Stock picking, the process of identifying good stocks to buy for your portfolio is both time consuming and difficult. This is not for everybody. On the other hand, if you are not interested in picking stocks yourself there is always the possibility to buy an Index Fund. Index Funds are cheap and over time this premium will pay off.
  2. Bonds, are perceived to be safer than stocks because you are certain to get a specified return from it. However that is not the whole story. If you buy bonds dear, as they are at this particular time, and you sell when rates are higher you will lose money. That is why I don’t recommend buying bonds at this time.

Index Funds

As I mentioned above, the trouble with stock picking is that it is tedious and time consuming.

Even if buy companies that seem to offer good value you will never be sure that they will advance.

That is why my advice is an Index Fund – one that buys all the stocks in the Index.

Because they are so cheap – you will only pay between 0.1 and 0.2 percent in charges a year – over time your money will grow nicely.

If you add in extra money each month and keep it for more than 20 years, you will not only get rich but also outperform most money managers.

The only downside that I can see with an Index Fund is that it is boring – you will always follow the index.

You will never be able to brag to your colleagues or neighbors about how much your portfolio has appreciated.

But that may not be so bad in the end.

TIPS

When I say that you should not buy bonds at this time there is one exception: TIPS.

TIPS are bonds that indexed to the inflation.

That way you can hedge against the possibility that money will inflate away and you will lose all your money.

My advice

My advice would then be to buy 75 percent of an Index Fund and 25 percent TIPS.

That way you will be guaranteed a certain income while at the same time being well exposed to the stock market.

Don’t worry if the market begins to go down.

It only means that your underlying stocks have become cheaper and that you can buy more for the same amount of money.

Good luck!

 

 

 

 

 

 

 

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