Invest Like A Multi-Millionaire

Most people would do just about anything for a million dollars. Sure, a cool million isn’t what it used to be, but it is still a life changing sum of money that, if invested wisely, could reap a significant chunk of passive annual income spanning generations. The problem is, that human beings are impulsive creatures, and in this fast-paced world of cool consumerism, money has become an incredibly difficult thing for people to hold onto. In a culture where 70% of lottery winners end up going broke within 3 years, it’s apparent that many Americans struggle to cultivate a healthy relationship with money. Even if the average American was able to hold onto a significant portion of their salary, and modified their spending habits to consistently save money year after year, simply saving that money in a personal savings account would fall well short of the steps needed to ensure one’s needs were met throughout their retirement. A 2018 study found that 29% of baby boomers aged 65 to 72 were still working. According to a recent Transamerica survey, the median savings balance among baby boomers is a mere $144,000. It goes without saying, that even with an anticipated monthly Social Security payout of $1,300, $144,000 falls well short of providing any semblance of a comfortable retirement, given that the standard rule of thumb for determining a conservative retirement nest egg is to withdraw 4% annually over an estimated 20-year timeframe. I’m too lazy to do the math, but 4% of $144,000 might secure you four sold walls at a self-storage facility in Palm Springs. On a side note, I have seriously considered living in a storage locker for a brief period of time in my mid-twenties. I don’t understand why storage companies will not even consider the idea given this country’s current housing crisis.

When assessing the future retirement outlook for Millennials, a recent survey by Millman.com showed that 45% of Millennials don’t even have access to an employer sponsored retirement plan. According to conservative estimates, the average Millennial earning a median income will have to habitually save 9% of their salary pretax. While not unreasonable, the average person between the ages of 21 and 36 has the majority of his or her savings in cash. Any expert will adamantly explain that an individual will never be able to accumulate the money they need to retire without significant exposure to equities.

Given the dismal financial outlook of current and future generations of Americans reaching retirement age, it might be important to understand a bit about how the richest 10% of Americans invest, store, transfer, and ensure generational longevity with their amassed wealth.

While roughly 52% of Americans own some form of stock, 84% of stocks owned by US households are held by the wealthiest 10% of Americans. The top 10% of wealthy Americans have a minimum net worth of $2,079,069. One of the differences between the top 10% of wealthy Americans and the Baby Boomers with a meager $144,000 in retirement savings is the way in which the wealthy 10% make their money work for them. There are three investment strategies that, when employed in combination, create the potential for significant and guaranteed streams of passive income. So, what are three of the investment strategies the wealthiest 10% employ to ensure long term generational wealth? The typical investment portfolio of the average millionaire hitting retirement age is comprised of stable, high income yielding stocks(stocks that collectively realize a dividend of 4%), and at least one income generating property on top of their fully owned primary residence. And finally, the third piece of the generational wealth puzzle is to ensure privacy, ease of transfer, and a significantly lower tax burden by placing these appreciating assets in one or more trusts designed to guarantee longevity and outright control.

Dividend Yielding Stocks

Today, there are over 3,671 domestic companies listed on US stock exchanges. These companies and their related stock can be casually split into two distinct categories.

1) Growth Stocks

2) Income Generating Stocks (stocks that pay a dividend)

The average millionaire has 7 streams of passive income, and income generating stocks(stocks that pay a dividend) are one such vehicle that enables a steady and reliable rate of return. While growth stocks tend to be more glamorous (such as stocks like Facebook, Amazon, Netflix, and Google), they choose to take their profits and use them to facilitate growth (i.e. increase stock price and market capitalization to secure quarterly bonuses). The way these companies generate growth is by investing the bulk of their profits into research, branding, and product development.

Of all the so-called FAANG stocks(Facebook, Apple, Amazon, Netflix, Google), the most popular and well performing tech stocks, Apple is the only one that pays a dividend ($0.73/share). The way a company manages its money is, in simple terms, wholly dependent upon the evenly matched game of Tug-of-War waged by Democrats and Republicans in an effort to further their wealthy donors’ interests by continually amending the corporate tax law. The Tax Cuts and Jobs Act signed by President Trump in 2017 lowered the corporate tax rate from 35% to 21%. Corporate income tax still remains the third-largest source of federal revenue, though the 2017 law will save corporations $1.35 trillion over the next ten years. Various loopholes exist which are routinely exploited, permitting corporations like Amazon and Netflix to pay an effective tax rate of -1% and -3% respectively. That’s right. They pay zero Federal taxes.

“The specter of big corporations avoiding all income taxes on billions in profits sends a strong and corrosive signal to Americans: that the tax system is stacked against them, in favor of corporations and the wealthiest Americans.” – Matthew Gardner, Senior Fellow at the Institute on Taxation and Economic Policy (ITEP)

I have included the preceding statistics and touched on the United States’ current corporate tax policy to further illustrate the means through which wealth is accumulated and retained via the oftentimes swift evolution of legislation that enables the rich to further distance themselves from the true pulse of the country.

To further illustrate the gradual decline in the common man’s ability to invest in transparent and profitable ventures, consider the first recorded public company to offer a regular dividend: The Dutch East India Company. They offered a generous 18% annual dividend to their loyal shareholders for close to 200 years (1602 – 1800). Nowadays, the most reputable of dividend yielding stocks barely registers a return of 4%. In addition, 47% of stocks pay no dividend at all.

Given the nature of, and the relatively low tax burden created by income generating dividends, it comes as no surprise that the wealthiest Americans take full advantage of what is truly a time-tested investment vehicle. In essence, investing in high yield dividend stocks generates virtually guaranteed long term residual income from a single injection of capital. In addition, the principal investment is subject to steady appreciation as a result of a continually increasing stock price, where the average historic increase in a given stock’s value is 7% annually (on top of a guaranteed income derived from dividends paying out at a rate of anywhere from 1% -9%)

Dividend paying stocks are stable, time tested investment vehicles that still value the common investor in an age where the majority of corporations are opting to remain privatized, and those that do go public refrain from any form of profit sharing. Dividend paying stocks are, in many ways, a fading opportunity for consistent returns in an era dominated by rapid growth and market capitalization fueled by executives seeking bonuses for hitting a targeted price. Hardly anything is guaranteed nowadays.

A company like Verizon pays a dividend of 4.2%. That means, for every $100,000 of shares owned, the shareholder will receive an annual dividend of $4,200. Additionally, the most reputable and stable of dividend paying companies routinely raise the dividend. AT&T, a direct competitor of Verizon, has consistently raised its dividend every year for the past 35 years. Their current dividend yield sits at 7%. That means for every $100,000 of shares owned, the shareholder would receive $7,000 in annual passive income.

The stock portfolio of the average wealthy American is comprised almost entirely of dividend yielding “income generating” stocks. Using the top 10% of wealthy Americans as an example, if their net worth were $2,079,069, and using the median home value in the United States($320,000) as a reference, this would mean that barring any additional real estate holdings, which is unlikely, the top 10% of wealthy Americans have an average of $1.75 million invested in the stock market. It would be easy to create a diversified portfolio of dividend paying stocks with even a conservative yield of 5%. At that rate, $1.75 million would reap an annual passive income of around $88,000. Of course, many investors choose to reinvest this money into their portfolios and purchase more stock. This is known as dividend reinvestment, and is comparable to the benefits of compound interest.

Real Estate

Along with investing in income generating stocks, wealthy Americans likewise invest heavily in real estate, which brings to mind another characteristic of the wealthiest 10%, the ability to secure loans and/or private capital. In our United States, access to capital is virtually endowed upon us by the founding fathers as a birthright. What does the pursuit of happiness even look like without the freedom provided through the ingenuity of the American capitalist? vThat freedom? Other people’s money. Why risk your own money when you can use someone else’s at no risk to your personal assets (one of the many benefits of forming your own corporation). Perhaps the most meaningful perk of the wealthiest 10% of Americans is the endless opportunity afforded through profiting off of other people’s millions. How many times has Donald Trump declared bankruptcy? He obviously did things right.

In taking full advantage of the opportunity afforded through low interest loans or private capital, the most viable options for generating routine passive income come through investing in multi-unit residential properties or commercial land located in developing areas of the country (preferably with low property tax and rising property values, such as Nevada, Alabama, Louisiana, or West Virginia). Another alternative is to invest in what is known as a real estate investment trust. A real estate investment trust (REIT) is a company that owns, and in most cases operates, income producing real estate in a diversified portfolio that realizes a consistent return of anywhere from 5% - 10%. REITs own a large portfolio of commercial real estate, and share profits with shareholders in the form of dividends. Again, wealthy investors invest a principal amount and live solely on the quarterly “dividends”. However, there is no tactile ownership of physical property when investing in REITs, and therefore no realized appreciation other than the often times volatile fluctuation of the share price. REITs are considered a risky investment by most conservative analysts due to the historic ebb and flow of the real estate market. A 10% yield means nothing if the share price drops 90%.

There is no greater asset than real estate. It serves as a reliable store of wealth with historic patterns of appreciation, and holds the greatest potential for long term security. There is a finite amount of available land. Its value is intrinsic, and less susceptible to the emotional whims and mass hysteria that can send a company’s share price plummeting. Land is THE appreciating asset with a value tied to scarcity due to an ever increasing demand.

Trusts

To summarize, a well-balanced portfolio of dividend yielding stocks, along with a significant investment in diversified real estate holdings are two of the primary means of realizing generational wealth. However, no worthwhile estate is complete without its incorporation into a trust, particularly a dynasty trust with a primary purpose of protecting the future appreciation of any assets from repeated taxation. The main purpose of most trusts is to pass wealth between generations without incurring various forms of estate tax. Dynasty trusts have been a powerful tool to preserve and transfer the wealth of America’s richest families.

In addition, when looking to maximize the financial benefits of a particular type of trust, an individual is free to set up a trust through a company that operates in a state with low taxes and strong asset protection laws. The trust is therefore tied to the laws of the state in which it was filed(created). Tennessee-chartered dynasty trusts are popular among the super-rich, as Tennessee consistently ranks as one of the most trust friendly states in the country due to its low taxes and strong asset protection laws. Any homeowner with reasonable equity and assets contained within an investment vehicle outside of a tax friendly retirement fund should consider a trust due to the constantly changing legislation governing probate.

Trusts are the primary vehicle through which the super-rich preserve their assets for generations. Some states set limits on the length of time a trust can be in place, while other states allow some trusts to remain intact for upwards of 400 years. Imagine the amount of wealth that could be generated from even the most conservative of investment portfolios, all the while sustaining the lifestyle of generations of family members through income generating dividend stocks, while the principal sits untouched with permission to freely appreciate (relatively) tax-free for 400 years!

A strong portfolio of appreciating assets that yield guaranteed income, along with the generational protection of a trust, are just a few of the strategies wealthy Americans employ when considering an unlimited array of investments.

Most millionaires are painstakingly frugal, and seek to limit unnecessary expenditures whenever possible. Their lifestyle is made possible through a principal nest egg engineered to yield long term sustainable income. They live well within their means, and are wise enough not to showcase their wealth. “Have more than you show, speak less than you know.” It’s the motto they live by.

To make a long story short, our system is designed to benefit the rich. Consider this. Why does the CEO of a publicly traded company opt to collect a modest salary and $3 million in exercisable stock options per year? The answer lies in the tax code, which is designed to benefit those individuals willing to faithfully invest in the ingenuity of the American capitalist. Long-term capital gains are taxed separately from one’s ordinary income, and ordinary income is taxed FIRST. In other words, long term capital gains and dividends(which are taxed at a maximum rate of 20%-22%) will not push an individual’s ordinary income into a higher tax bracket. A $3 million dollar salary would undoubtedly fall into the 50% tax bracket, whilst $3 million in stock options offered at a fraction of their real cost will only ever be subject to a maximum tax rate of 22%. Not only that, but stocks are an asset class that can be afforded a “step-up basis” when transferred to a living heir upon the principal’s death. In other words, the “cost” of the stock is “stepped up” to the value of an individual share at the date of death. No taxes are required on any appreciation up to that point. That’s quite a benefit, considering a relative could have held a given stock for 50 years and seen exponential growth during that time.

If there is a lesson to be learned here, it is that wealth is most commonly the result of a series of mindful, intentional acts. In other words, the biggest difference between a multi-millionaire business owner and a day laborer making minimum wage… is mindset. Some of you might argue with me and say that opportunity is the rare commodity that most people lack. I don’t disagree. But the best opportunities will never come knocking. Instead, they must be discovered. Knowledge is the greatest asset of all.

It takes mindful action to set out and achieve anything worthwhile in this world. Success is a mindset, and is the product of a brand of effort forged through countless failures. The difference between most men and women is the quality of their mindset. Mindset cannot be bought. The value of this article will be measured by the quality and quantity of failures you will endure before stumbling upon your success. The goal is not to become a millionaire, it is to achieve wealth, and wealth is a mindset that can’t be bought.