Market liquidation: how I continue to generate passive income

I was entrusted with the finances of my family. This is not a task that I take lightly since a mistake on my part could leave us on the street. OK, that’s hyperbole, but that’s the weight I feel, and bear markets don’t make the weight any lighter. However, I have a playbook that I’ve lived with for years, and the massive market sell-offs are actually a great time for me to continue growing my passive income stream. Here’s how I make slowdowns work for me.

Safety first

I consider it my job to ensure that my family has the financial wherewithal to handle financial adversity in relative stride. To that end, I have a laddered portfolio of certificates of deposit (CDs) with about six months of living expenses. One of the six CDs I own matures every two months and rolls automatically if I don’t prevent this process from happening. Essentially, I always have access to cash if I really need it, which makes buying stocks less stressful. The key is that this vital safety net is on autopilot. I thought about it once, setting it up, and now I never have to think about it again. I just know it’s there.

“Keep it simple” is a vital mantra for me because I just can’t juggle too many things at once. I share this because this same logic is also important to my approach to investing.

Focus on success

One of the suggestions you’ll find in Benjamin Graham’s iconic book The smart investor is to focus on companies with a long history of success. A quick way to find such companies is to look for names with a long history of annual dividend increases. Dividend Achievers (10+ years of increasing dividends), Dividend Aristocrats (25+ years), and Dividend Kings (50+ years) are all great places to start. From there, you have to dig a little to find well-run companies with modest leverage. Once you have a diverse list of names you like, do nothing. Hold on.

The market goes up and, as we saw in 2022, goes down. Wait for the stocks you like to come to you. I don’t have a fixed buy point, but I generally only add when the dividend yield of a company I like is trading at the high end of its historical yield range. This suggests the price is at least cheap by historical standards.

During the bear market of the COVID-19 pandemic, I bought a Real Estate Investment Trust (REIT) Federal Real Estate (FRT 1.67%), which has a 50+ year streak of annual dividend increases under its belt (it’s the longest streak in the REIT space). This REIT has a small retail portfolio that focuses on affluent regions with large populations. Development and redevelopment are key skills of the company. Retail was deeply out of favor during the pandemic, but this company has proven time and time again that it can weather adversity and still reward dividend investors like me.

During this year’s downturn, meanwhile, I added Texas Instruments (TXN 1.82%) and Medtronic (MDT 0.83%). Both are higher dividend growth names with long histories of annual dividend hikes that had unique issues, but it took a bear to finally bring them down to attractive levels. That said, investments appear all the time, so I also added Kellogg (K 0.30%) between those two bear markets when investors were bearish on the iconic food stock due to company-specific issues, including a fire at a production plant and a strike. Kellogg’s dividend has not increased every year, but has steadily increased over time. Notably, Kellogg is actually up about 15% this year as its production issues have eased.

Blind adherence to a plan

Here’s the next big step: I settle all of these new purchases on dividend reinvestment, just like almost all of my stock holdings (and, basically, my CD safety net). This is the ultimate simple gesture for me. From my approach, I know that I own businesses that put shareholder return value at the top of the priority list. I picked the dividend names that I think are the long-term winners, so I know I have some great companies in my diversified portfolio. And I put them on autopilot, letting myself watch quarterly dividend checks turn into additional shares of big companies.

During bear markets, I actually find it comforting to see myself adding even more to a list of stocks I own. Remember, though, these are dividend-paying stocks, so every stock I add actually increases the passive income I generate. It’s a slow process, but my dividend income has been steadily increasing for years without me having to do much. Simple is good; the autopilot is even better. When I retire, I plan to start collecting these dividend checks to supplement my Social Security payments.

Slow and steady

I would be lying if I said I didn’t pay much attention to my wallet. I constantly monitor the news of my 20 or so stocks and listen to most earnings conference calls. If something fundamental changes, I will rethink my commitment to a stock. But what I don’t do is constantly worry about the price of my holdings rising and falling in an ever-volatile stock market. I basically eliminated that from my process by focusing on dividends, dividend yield, dividend reinvestment, and my ever-growing passive income stream. In my world of investing, stock market sell-offs are just another opportunity to invest and reinvest in great dividend-paying stocks.

Reuben Gregg Brewer has held positions at Federal Realty Investment Trust, Kellogg, Medtronic and Texas Instruments. The Motley Fool fills positions and endorses Texas Instruments. The Motley Fool has a disclosure policy.

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