The DIFCCO Strategy - Solidify that income with checks in the mail and option premiums

Alright folks, if you've been around the passive income block enough times (thank you Robert Kiyosaki for branding Asset column charts in our heads) then you know the whole name of the game is to get those checks rolling in the mail and ultimately, to outdo your expenses. Once that happens you will have obtained True Financial Independence and you can then sit back, relax and realize that you have no life since you spent all your time reading purple books on financial independence instead of spending it with friends and family.

But seriously, since you are still here and you are obviously not about to hang out with the wife or hubby, let's talk about building passive income.

The DIFCCO Strategy

First off, this is my own little strategy but it is nothing new - once you've read over a 100 books or so on Finance or Success you realize that there are approximately 3 ideas floating out there that have been re-packaged 97 times. At the same time, kuddos to me for coming up with a cool sounding name. (Order 66 was taken - damn you George Lucas!)

DIFCCO stands for Divdend Fundamental Analyis Covered Call Options - had I switched the Covered Call Options with the Dividends and dropped the Fundamental Analysis it would have been CCIDO (pronounced kiddo) which is kinda cool. Alas, I needed the Fundamental Analysis portion and the I after D in Dividends for that matter.

Essentially, I wanted to come up with a way for creating passive income without having to buy real estate and all the debt and headaches that come along with it. (Yes, I know, I can hear the masses now - leverage, leverage, leverage - but please read on) I have read and worked through most of the process as prescribed by Rich Dad in his Team Advisor book - "The ABCs of Real Estate Investing" by Ken McElroy. I can truly say that for real estate investment it is a great plan and I was able to track down some decent deals in my area. The only problems I had were in the down payment and the debt. It is not that I could not afford the down payment, I just couldn't believe how little cashflow and how much potential hassle-factor I would receive for a sizeable down payment.

In this area, I found that a $30,000 down payment would deliver approximately $175 in passive cashflow. Not bad in the grand scheme of things but this was for a 4-plex and I'm guessing that tenants need attention from time to time. So I asked myself, what's so bad about dividend stocks if I could create the same income? Yes, I know ... no control over the investment, no leverage, no phantom cashflow. But for those who really don't want to shoulder the large amount of debt as required by a piece of invesment property and the tenant headaches that come along with it, this might be a decent option for creating passive income. Read on!

D Stands for Dividend

First, let's identify a dividend stock that is going to put a check in the mail.

Below is a simple screen for id'ing a high yielder (not too high) and a link to a free stock screener.

1) Use a Dividend Yield Screen of 8 - 20% (anything above 20% is typically bad news.)

2) The Market Cap should be >= $1 billion - no small caps.

3) ROE >= 10%

4) The Fundamental Grade should be >= C (use the StockScouter link)

5) Institutional ownership >= 30%

6) Recommendation > = Hold from analysts

7) EPS Growth next year > = 1

Consider the list that you get from this screen as a research list only! Of course you should take the painstaking pangs of performing a fundamental analysis on these stocks. (you didn't think it would be that easy did you?)

Thus we have accounted for DIF in DIFCCO or at least we've started on the F.

Now, here's the link for the stock screener. I told you I would provide it - http://moneycentral.msn.com/investor/controls/finderpro.asp

You can easily match that $175 monthly from a 4-plex. Sure you lose out on phantom cash-flow but you also miss out on those pesky tenants and all the repairs that come along with the building. Who ever heard of a dividend stock needing the toilet unclogged?

Also, make sure the stock is option-able as it will play a part later in our strategy. Go to http://www.cboe.com/DelayedQuote/QuoteTable.aspx to find out. Enter the ticker symbol. If it does not come up with quotes then it is not an option-able stock.

Of course the company could reduce or cut the dividend altogether (vacancy losses) but in that case you should surf to a new dividend payer. This will contribute to higher transaction costs and potential tax consequences but will just chalk that up to vacancy loss yet again.

The resulting list you receive from the dividend screen is merely just that – an initial list … we really need to perform a fundamental analysis on this stock in order to determine if it is invest-able – if invest-table is even a word.

If you would like to read up on investing in dividend stocks, here's a great book available at Amazon.

The Standard & Poor's Guide to Building Wealth with Dividend Stocks (Standard & Poor's Guide to)

I will continue with the Fundamental Analysis of DIFCCO in another post at a later date.
Please stay tuned - same Bat-Time, same Bat-Channel.

AB