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Lifetime passive income: The Paycheck Pot In Action

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MJ DeMarco

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Want to earn a passive income every single month for the rest of your life? And be able to survive a recession or a market collapse?

Earn (and save) enough money to build a Paycheck Pot, a lump-sum portfolio that yields a passive income EVERY MONTH through the use of market investments such as dividend stocks, preferred bonds, closed end funds, and ETFs. AND have it represent VERY LITTLE of your net worth. When it does, you can OUTLAST market collapses, recessions, and more.

PLEASE NOTE: I am NOT reliant on the income from my paycheck pot as it represents a very small portion of my income/net worth as I believe trading one master (a job) to another master (Wall Street) is not financial independence, but dependence.

Attached below is my monthly "paycheck" from my Paycheck Pot (PP) including the instruments where a Dividend was paid.


IMG_0706.JPG

In the last couple of weeks there's been a lot of posts/questions regarding the Paycheck Pot.

For instance, here's one:


If you haven't heard of "The Paycheck Pot" -- WTF is wrong with you!!??? ;)

This is an integral part of the money system I described in The Millionaire Fastlane. Moreover, I explain the PP in great detail in Unscripted, specifically Chapter 48.

The Paycheck Pot (PP) is how you can "retire early" and focus on passion projects that might not have economic viability, aren't great time investments (like my big time involvement here) but are more selfishly focused on yourself as opposed to market centered. Maybe you want to write (like me) save the whales, spread the gospel, run for office, or start another company and go without a salary for 2 years. Doesn't matter your REASON, what does matter is HOW you can do it.

At the moment I have multiple brokerage accounts, most used for options and speculative/experimental stuff (part of the FU Pot, again CH 48, Unscripted). However one of them is a dedicated Paycheck Pot which I actively manage to the total tune of about 1 hour per week. At this moment in my life, my PP is pretty small because I have other interests that pay a lot more, and better.

To create the effect of the paycheck option in the Paycheck Pot, I instructed TD Ameritrade to literally DRAW UP A CHECK for me every month and mail it to me ... as if I was getting paid a paycheck. This little strategy helps me fire the feedback loop and keeps me actively reminded to "check in" on the Paycheck Pot to manage it. Had this money been simply automatically deposited to my account, I would have not noticed it or the amount, much less written about it.

In my PP I focus on dividend stocks and CEF's using mostly dividend capture strategies and covered calls (when available).

Here's my process:

1) I subscribe to the newspaper Barrons, and every Saturday (or Sunday) I retreat to my patio and smoke a cigar while reading it. I pay attention to their dividend pages and highlight companies approaching their X-Dividend date, the date you need to own the stock to get the dividend. From that list (usually about 100 companies) I highlight companies that might be attractive targets to own for a short period of time, at most, 3 months. This list is usually only 5 to 10.

2) On Monday I look into these companies and check their chart for any technical issues. Technical issues would be described as 1) Overbought conditions 2) Technical breakdowns confirmed by a historical backtest (I.E.: In the last X years, when Stock XYZ falls below it's 200DMA, 72% of the time it results in a lost within the next 30 days.) 3) Historical time to recovery (I use Dividend.com for that) and 4) Pending news and/or sentiment.

In other words, I'm looking at the RISK for holding the stock for 3 days to 3 months. If you aren't aware, whenever a company goes X-dividend, the market makers open the stock LOWER by the dividend, so on paper, the "gain" is a wash. I will also write covered calls on the stock if available to minimize some of the downside risk (although that also "washes" on X-DD). This is why I will hold for a bit and cycle through various instruments.

3) When the stock recovers (sometimes it can take weeks, or not at all) I will sell. Basically I'm looking for A) recovery + a tiny profit or B) Sell before earnings. There are very few things I will hold through earnings.

4) Repeat the process.

5) Collect check.

Here's another example I posted some years ago:


(I made a pretty big profit on MZA again).

Now some of the disclaimers/realities:

  1. The $7,000 check about was on an account size of $400,000 leveraged with portfolio margin. To do this without the margin, you'd need about $600K to $1M on the high end.
  2. I did not OWN all those stocks the entire month. I'd sell something and buy something to replace it. On some instruments, my holding period would only be days, at most, a week. Some stocks I hold until earnings and then sell, Southern Company (which BTW I just sold) and Chevron.
  3. The average paycheck from this "Paycheck Pot" pot is about $5,000 depending on WHAT is going X-DIV and how active I am.
  4. In this account, I'm not concerned about "capital appreciation" or market returns although the account is up nicely -- this is BECAUSE the market has been up.
  5. In a sideways (to down) market, I would expect capital appreciation to be marginal, ZERO or perhaps negative.
  6. In a down market, the paycheck would be the same, but the account value that generates the return would suffer, in many instances, MORE than the check itself.
  7. If the stock market CRASHED (and $400,000 turned into $200,000) my life WOULD NOT BE IMPACTED. This is why I stress that investing your entire net worth into the STOCK MARKET (as the mainstream financial punditry advises) is foolish... swapping one master (A JOB) for another (WALL STREET) is not financial INDEPENDENCE, it's financial DEPENDENCE. I'm not dependent on the paycheck, although it's nice to see a paycheck appear every month, one that pays for my bills many times over with a lot left over.
  8. This has tax implications (as does a profitable business) so be prepared to keep up with your estimated tax payments.
  9. The dividends (due to the holding period) will not likely be "qualified" hence generating taxes at your marginal rate. Not good.
  10. The account (paycheck) is dependent on good stocks going X-div and their technical condition. In April, the check was only $1,768 due to not finding favorable candidates. The next month it jumped to $5,900. Next month should be about the same.
  11. If I did not have a business that earned profits every single month, my paycheck pot risk capital would probably be about 10X, and optimally NEVER amount to more than 20% of net worth. There is NO scenario where I recommend investing your entire net worth, 50%, 33%, and much less 20%, into the stock market. Id rather lose 1.5% per year on inflation sitting in cash or in speculative business ventures.
  12. The paycheck pot became possible early in my life (mid-30s) because I EARNED A LOT OF MONEY QUICKLY through BUSINESS and ENTREPRENEURSHIP, not because I scrimped and saved on coffee from my $50K year job, living like a pauper for most of my young adult life. Compound interest via your business is the best wealth builder out there.

Paycheck Pot: A monthly paycheck you can count on to pay bills. If you own everything CLEAR (including your house) your expenses can be shockingly small.

F*ck You Pot: A larger allocation invested (or not invested) in multiple other enterprises; your hobby business, speculative stocks, real estate, LLC partnerships, and yes, money market cash -- a call option on opportunity and market implosions.

From Unscripted...

UC-MoneySystem.png

Final note: Earning thousands a month from an investment that takes me a few hours feels oddly different than earning money from a business. Earning profit from business is like earning a true paycheck, earning profit from the Paycheck Pot feels like winning money.
 

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socaldude

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The dividend capture strategy is my favorite. I have stopped doing it as a lot of the good underlyings seem to be overbought. But I didn't start making consistent money until my only objective was to capture the dividend. I use covered calls to lower my cost basis and to exit trades. I've noticed buying the stock 10 days out for the run up in price helps offset the drop in the exdiv date.
 

Doug Smith

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Thanks for posting this. The money system is by far my favorite (and most read) sections of TMF and Unscripted. I appreciate you posting the specific process step by step above. Super motivating, at least to me.
 

Siddhartha

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The Paycheck pot is a beautiful concept that revved me up both in TMF and US; however I try not to focus on now because I don't want to get caught up dreaming/fixating on something not in front of me.

One day though, I'll get to look forward to chooching a Liga Privada or Sharon's Rose with a cup of bold coffee and cause money market mayhem.
 

luniac

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great idea for a 3rd book cause im still confused due to not understanding the stock market at all.
could be aimed at the richer crowd.
the first page could say in big bold letter, "If you're poor, stay away!"
 
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MJ DeMarco

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if the stock market isn't your main source of investment income
My business is, and always will be, my main source of investment income, until it doesn't. Then I have the paycheck pot to backstop it. Not all businesses start profitable, especially ones that are more "me" focused.

I'm assuming you don't stay all cash?
Not entirely, but moreso than any one would recommend. I'm also anticipating some very big expenses in the near term pertaining to a housing swap and a second home.

great idea for a 3rd book cause im still confused due to not understanding the stock market at all.
It is a bit Americanized and also "cart before the horse" stuff. Talking about it can easily turn into a "what color Ferrari?" situation.
 

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@MJ DeMarco I don't disagree with this strategy to achieve income for the paycheck pot.

I do think it is probally more active than many would want and requires some skill as well.

I for example am ramping up my new business and not looking so much at the stock market. So I've been personally more conserative with my dividend plays.
 
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MJ DeMarco

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@MJ DeMarco I don't disagree with this strategy to achieve income for the paycheck pot.

I do think it is probally more active than many would want and requires some skill as well.
Yes, it's a bit more complicated than a simple "buy and hold" dividend strategy as I described in Unscripted. This is a more leveraged and actively managed version of it, although a few hours a month is not terribly "active."

The simple version is to cycle not days or weeks, but months and years.

requires some skill as well.
I thank you for the compliment but it's not that difficult to recognize a pattern where risk is elevated. It involves a little bit of knowledge, but not something terribly difficult to learn.

For instance, here is an instrument I looked at today and PASSED. X-Dividend is tomorrow.

25647

Based on the potential triple top and other elevated technical indicators (W%/OBV) I passed on this stock.

There is clearly more downside risk. Holding this stock for a few days doesn't appear to be a good short term outlook, although the medium/longer term trend is up.
 

lludwig

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I thank you for the compliment but it's not that difficult to recognize a pattern where risk is elevated. It involves a little bit of knowledge, but not something terribly difficult to learn.
To clarify I'm referring to the average business owner and their knowledge of the techniques you describe.
 

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Counter2828

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Thanks for the explanation MJ. Do I need to live in the US to be able to invest in this? btw. Yesterday I ordered Unscripted and TMF, can't wait!
 
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ZF Lee

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Want to earn a passive income every single month for the rest of your life?

Earn (and save) enough money to build a Paycheck Pot, a lump-sum portfolio that yields a passive income EVERY MONTH through the use of market investments such as dividend stocks, preferred bonds, closed end funds, and ETFs.

Attached below is my monthly "paycheck" from my Paycheck Pot (PP) including the instruments where a Dividend was paid.

View attachment 25623

In the last couple of weeks there's been a lot of posts/questions regarding the Paycheck Pot.

For instance, here's one:


If you haven't heard of "The Paycheck Pot" -- WTF is wrong with you!!??? ;)

This is an integral part of the money system I described in The Millionaire Fastlane. Moreover, I explain the PP in great detail in Unscripted, specifically Chapter 48.

The Paycheck Pot (PP) is how you can "retire early" and focus on passion projects that might not have economic viability, aren't great time investments (like my big time involvement here) but are more selfishly focused on yourself as opposed to market centered. Maybe you want to write (like me) save the whales, spread the gospel, run for office, or start another company and go without a salary for 2 years. Doesn't matter your REASON, what does matter is HOW you can do it.

At the moment I have multiple brokerage accounts, most used for options and speculative/experimental stuff (part of the FU Pot, again CH 48, Unscripted). However one of them is a dedicated Paycheck Pot which I actively manage to the total tune of about 1 hour per week. At this moment in my life, my PP is pretty small because I have other interests that pay a lot more, and better.

To create the effect of the paycheck option in the Paycheck Pot, I instructed TD Ameritrade to literally DRAW UP A CHECK for me every month and mail it to me ... as if I was getting paid a paycheck. This little strategy helps me fire the feedback loop and keeps me actively reminded to "check in" on the Paycheck Pot to manage it. Had this money been simply automatically deposited to my account, I would have not noticed it or the amount, much less written about it.

In my PP I focus on dividend stocks and CEF's using mostly dividend capture strategies and covered calls (when available).

Here's my process:

1) I subscribe to the newspaper Barrons, and every Saturday (or Sunday) I retreat to my patio and smoke a cigar while reading it. I pay attention to their dividend pages and highlight companies approaching their X-Dividend date, the date you need to own the stock to get the dividend. From that list (usually about 100 companies) I highlight companies that might be attractive targets to own for a short period of time, at most, 3 months. This list is usually only 5 to 10.

2) On Monday I look into these companies and check their chart for any technical issues. Technical issues would be described as 1) Overbought conditions 2) Technical breakdowns confirmed by a historical backtest (I.E.: In the last X years, when Stock XYZ falls below it's 200DMA, 72% of the time it results in a lost within the next 30 days.) 3) Historical time to recovery (I use Dividend.com for that) and 4) Pending news and/or sentiment.

In other words, I'm looking at the RISK for holding the stock for 3 days to 3 months. If you aren't aware, whenever a company goes X-dividend, the market makers open the stock LOWER by the dividend, so on paper, the "gain" is a wash. I will also write covered calls on the stock if available to minimize some of the downside risk (although that also "washes" on X-DD). This is why I will hold for a bit and cycle through various instruments.

3) When the stock recovers (sometimes it can take weeks, or not at all) I will sell. Basically I'm looking for A) recovery + a tiny profit or B) Sell before earnings. There are very few things I will hold through earnings.

4) Repeat the process.

5) Collect check.

Here's another example I posted some years ago:


(I made a pretty big profit on MZA again).

Now some of the disclaimers/realities:

  1. The $7,000 check about was on an account size of $400,000 leveraged with portfolio margin. To do this without the margin, you'd need about $600K to $1M on the high end.
  2. I did not OWN all those stocks the entire month. I'd sell something and buy something to replace it. On some instruments, my holding period would only be days, at most, a week. Some stocks I hold until earnings and then sell, Southern Company (which BTW I just sold) and Chevron.
  3. The average paycheck from this "Paycheck Pot" pot is about $5,000 depending on WHAT is going X-DIV and how active I am.
  4. In this account, I'm not concerned about "capital appreciation" or market returns although the account is up nicely -- this is BECAUSE the market has been up.
  5. In a sideways (to down) market, I would expect capital appreciation to be marginal, ZERO or perhaps negative.
  6. In a down market, the paycheck would be the same, but the account value that generates the return would suffer, in many instances, MORE than the check itself.
  7. If the stock market CRASHED (and $400,000 turned into $200,000) my life WOULD NOT BE IMPACTED. This is why I stress that investing your entire net worth into the STOCK MARKET (as the mainstream financial punditry advises) is foolish... swapping one master (A JOB) for another (WALL STREET) is not financial INDEPENDENCE, it's financial DEPENDENCE. I'm not dependent on the paycheck, although it's nice to see a paycheck appear every month, one that pays for my bills many times over with a lot left over.
  8. This has tax implications (as does a profitable business) so be prepared to keep up with your estimated tax payments.
  9. The dividends (due to the holding period) will not likely be "qualified" hence generating taxes at your marginal rate. Not good.
  10. The account (paycheck) is dependent on good stocks going X-div and their technical condition. In April, the check was only $1,768 due to not finding favorable candidates. The next month it jumped to $5,900. Next month should be about the same.
  11. If I did not have a business that earned profits every single month, my paycheck pot risk capital would probably be about 10X, and optimally NEVER amount to more than 20% of net worth. There is NO scenario where I recommend investing your entire net worth, 50%, 33%, and much less 20%, into the stock market. Id rather lose 1.5% per year on inflation sitting in cash or in speculative business ventures.
  12. The paycheck pot became possible early in my life (mid-30s) because I EARNED A LOT OF MONEY QUICKLY through BUSINESS and ENTREPRENEURSHIP, not because I scrimped and saved on coffee from my $50K year job, living like a pauper for most of my young adult life. Compound interest via your business is the best wealth builder out there.

Paycheck Pot: A monthly paycheck you can count on to pay bills. If you own everything CLEAR (including your house) your expenses can be shockingly small.

F*ck You Pot: A larger allocation invested (or not invested) in multiple other enterprises; your hobby business, speculative stocks, real estate, LLC partnerships, and yes, money market cash -- a call option on opportunity and market implosions.

From Unscripted...

View attachment 25622

Final note: Earning thousands a month from an investment that takes me a few hours feels oddly different than earning money from a business. Earning profit from business is like earning a true paycheck, earning profit from the Paycheck Pot feels like winning money.
Great outline of steps!

Somehow that corporate finance class from last semester must have paid off, because some of the vocab is making sense to me than a couple of weeks ago!

1) I subscribe to the newspaper Barrons, and every Saturday (or Sunday) I retreat to my patio and smoke a cigar while reading it. I pay attention to their dividend pages and highlight companies approaching their X-Dividend date, the date you need to own the stock to get the dividend. From that list (usually about 100 companies) I highlight companies that might be attractive targets to own for a short period of time, at most, 3 months. This list is usually only 5 to 10.

2) On Monday I look into these companies and check their chart for any technical issues. Technical issues would be described as 1) Overbought conditions 2) Technical breakdowns confirmed by a historical backtest (I.E.: In the last X years, when Stock XYZ falls below it's 200DMA, 72% of the time it results in a lost within the next 30 days.) 3) Historical time to recovery (I use Dividend.com for that) and 4) Pending news and/or sentiment.
Pending news and sentiments can sometimes be hard to diagnose to see if its just wind or a real force.

Do you just rely on the newspaper Barrons or cross-check the content with other publications as well, for multiple opinions?

And do you look into foreign markets for sources of paypot checks? Dividends from oversea countries?
Or you prefer being at home with the US market?
 
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MJ DeMarco

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To clarify I'm referring to the average business owner and their knowledge of the techniques you describe.
Understood. I'm simply saying that it's completely learnable and not too difficult, like a business owner who learns how to hire an employee and manage a payroll.

Do you just rely on the newspaper Barrons or cross-check the content with other publications as well, for multiple opinions?
I start at Barrons, cross-check on Dividend.com, and research further on Think or Swim.

I don't really care about opinions, more of the micro/macro-environment that's going on (so sentiment was probably the wrong word)... unlike options, when you buy stocks you don't get paid a premium for holding volatility, so if volatility is high, I tend to avoid the stock. For instance, last period's QualComm dividend (which I received the period before) I avoided because there was too much going on.

And do you look into foreign markets for sources of paypot checks? Dividends from oversea countries?
Yes and yes.
 

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While I applaud your contribution with the concept of a PP, I find it amazing how people are this financially illiterate you have to explain basic ideas like this to them.

If someone asked me a question about living off of a money system, I would say...

Yes, you can live off of dividends, royalties, rental income, bond coupons, etc. Isn't that one of the reasons for starting a business in the first place???!!! So you don't have to work till you're 70??!!

Yes, a 5% dividend stock is superior to a 2.6% 30 Y US Bond (and by the looks of it, the yield will only drop from here on out), provided the stock doesn't lose value over the next 5 or so years, which you can easily determine just by examining the state of the US economy and spending an easy 15 minutes looking over the income statement and balance sheet through the 10K.

IT'S BASIC MATH AND FINANCE. A high school kid who gets an A in calculus can easily learn finance.

Just because the insipid finance field cloaks everyday terms in arcane language ("EBITDA," "Book Value") doesn't mean it's difficult.

Most of finance is common sense that god forbid, people don't need a con artist like Suze Orman or the "I get calls from idiots every day" Dave Ramsey to lay out in specific detail.
 
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Ozz81

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Hi everyone!

My strategy is much more passive and much more similar to the one described in Unscripted. I allocated a large sum to a dividend portfolio. I'm picking 3 companies for each of the 11 sectors/indiustries, for a total of 33 companies.

Basically, I own a tiny fraction of 33 businesses and each one of them is about 3% of my portfolio. This way, my risk is very widely diversified. I used to have a company of my own. 100% under my control but 100% risk concentration. Now, I have no control on the businesses, but I can buy and sell all of them in 1 minute and I don't depend on any single one of them for my living expenses.

I don't care about price fluctuations, I only care about dividend coverage and sustainability. I plan to never use the principal and live off the dividends. If the market goes down 40%, I don't care as long as the underling businesses that I own are in good health and willing to maintain the dividend. I know it will happen, I know I will be pissed, but my investment goal is income generation, not capital appreciation.

This way, my job is to check my portfolio for quality once every quarter and that's it. I know, very boring :D

Hopefully, if history repeats itself, those companies will increase their dividend over time and in the long run even the principal will remain on top of inflation.

This is my Paycheck Pot and I feel comfortable with it, but there's no one size that fits all, I know.

What do you think?
 

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What do you think?
I personally like this method better IMHO. I at least like to hold things for one year for if not longer so it falls into long term capital gains.

Though of course like in 2008 you have to watch as many did cut their dividend. The company needs a very long history (with the funds to match) to keep paying out the dividend and ever increasing that dividend.

Dividend Aristocrats are at least a good starting point to look for these companies.
 
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MTF

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@Ozz81, my strategy is pretty much the same, though I don't invest in every sector (IMO some sectors, like banking, have a much lower chance of increasing dividends for decades to come when compared to, say, consumer staples) and only limit myself to multinational companies with at least 10+ years, and ideally 25+ years of consistent dividend growth.

I don't care about price fluctuations, either. There was already a period of several weeks during which my portfolio took a pretty big hit (10% or so down), but I didn't worry because none of the dividends were cut and soon the stocks recovered anyway. Like you, I care only about income. I don't plan to sell any of the stocks unless they cut their dividend.

This way, my job is to check my portfolio for quality once every quarter and that's it. I know, very boring :D
That's a good paycheck pot. Boring, but effective. There's enough excitement coming from the business income, no need for more stress from what is supposed to be a hands-free investment.
 
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MJ DeMarco

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What do you think?
Well done, this is the more traditional version I describe in Unscripted. It won't yield as much but it should exhibit less volatility and definitely less taxes.
 

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When the stock recovers (sometimes it can take weeks, or not at all) I will sell. Basically I'm looking for A) recovery + a tiny profit or B) Sell before earnings. There are very few things I will hold through earnings.
@MJ DeMarco what do you mean by "sell before earnings"?
 

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@MJ DeMarco what do you mean by "sell before earnings"?
When a company reports quarterly earnings ... it causes extreme price movements in the stock, either UP or DOWN. Option sellers are paid a premium for carrying a position through earnings, owners of stock are not. I rarely hold anything through earnings unless I get paid for the risk.
 

illmasterj

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When a company reports quarterly earnings ... it causes extreme price movements in the stock, either UP or DOWN. Option sellers are paid a premium for carrying a position through earnings, owners of stock are not. I rarely hold anything through earnings unless I get paid for the risk.
Got it, thank you.

I am similar to @Ozz81 in that I have been buying and holding for income. Its modest income that covers our rent and utilities but is a step in the right direction.

A mentor encouraged me to begin position trading as he felt it was a good fit for my personality. I didn't pursue it due to the time involved but what you have proposed appeals to me.

My guess is, after doing this for a few years you end up with your own spreadsheet/shortlist of stocks to buy in/out of. Assuming they remain healthy/well priced you are good to go.
 

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After reading unscript, I have to and hate to admit that MJ knows about investment and paycheck pot more than most financial advisers including me.
 

fluffhead

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I've been looking to get more active with my investments. Been a bit since I read Unscripted...this post makes me feel like its time for a re-read....right after TMF :)
 

fluffhead

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@MJ DeMarco are you looking at any fundamental trends here at all or strictly making sure that the technical indicators align?
 

Eskil

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This might be helpful to some too:
 
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MJ DeMarco

MJ DeMarco

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@MJ DeMarco are you looking at any fundamental trends here at all or strictly making sure that the technical indicators align?
For short term dividend captures, I rarely look at fundamentals outside of price action, recent trend, and technical status.

For longer term holds (set it and forget it as described in Unscripted) I definitely consider fundamentals ... how stable the dividend is, earnings history, industry/sector outlook, coverage ratio, cash flow ... many of the stock websites have tools for analysis. I use Dividend.com which is focused on Dividend stocks.
 

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