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Exotic assets and compound interest

The focus of this article will be on some additional exotic assets, some which may be politically and financially riskier than others, and I will introduce some new concepts such as compound interest, dividend growth investing, and dividend compounding. These are strategies and techniques which are important for anyone trying to achieve a sustainable passive income stream.

Royalties

Royalties are an excellent source of passive income if you hold the right catalogue. Specifically if we think of the political risks then owning royalities is a low risk political investment. For investors who are risk adverse and who want passive income there are many kinds of royalties to choose from, such as the more familiar music artist royalties, but also less familiar royalties such as film, intellectual property, or energy.

Copyright law is currently strongly enforced in the United States and intellectual property if you choose the right royalties is a great way to diversify into exotic intangible assets. While the risk of holding these sorts of royalties are not political, you do have the risk of copyright infringement, or of espionage, where patents and or copyright law might simply be ignored. This can effect the profit potential of entire industries, such as music, film, or software.

Royalties exchanges

Royalties exchanges are exchanges where you can buy and sell royalties to a market. It is similar to the stock market where you can buy patents, or participate in auctions. In auctions the price of the royalties is not set but is negotiated through the auction process. It must be noted that if people do not have a very strong level of understanding of the industries involved then they may pay too high of a price for certain assets so a strong deep understanding may be necessary to do well in these markets. At the same time holding some royalties if they are chosen carefully and spread across different industries, can help to balance a portfolio and spread risk just as exposure to other exotic assets can do.

Dividend reinvestment (DRIP)

Dividend reinvestment programs are mechanisms which allow investors to redirect their dividend yields into repurchasing additional shares or fractional shares in the underlying equity on the dividend payment date. Dividend reinvestment strategies are very important and in future articles I will be detailing why it is so important. In this article I will explore the basic and most necessary concepts in dividend reinvestment and the fundamental concept to understand how this works is compounding.

Compound interest

The mathematical formula for compound interest is A = P(1+r/n)^nt. This formula is very powerful because it can produce a snowball effect which can all but guarantee that if a certain amount of value is input at a certain rate that after a certain period of time the individual investor will be a millionaire for instance. This compounding effect applies to anything, and any kind of value can be compounded in this way.

Compounding dividends

Dividends can be compounded through the DRIP (dividend reinvestment plan). In fact, if you're a passive income investor it is one of the best ways to increase your passive income generating capability and income stream over time. Dividend growth investing is a strategy for growing your holding of dividend paying stocks by reinvesting the dividend yield into purchasing more stocks over time. I will explore this strategy in more detail at a later date but it is important to first fully understand how compounding works thoroughly and then you can utilize a spread sheet to predict from year to year, even predict the year, that you'll reach your sustainability goal. Once you are financially sustainable, and once your compounding is at a level where you're financially independent, then your wealth will compound indefinitely through your dividend reinvestment plan.

Compounding the dividend growth into a dividend growth machine

All of what you have learned so far is just a means to a end. The end goal is to achieve financial independence, to be financially sustainable. In order to achieve this goal it may require techniques, and while you've learned a brief introduction to one of the fundamental techniques which is compound interest, it is important to know how that technique can be leveraged. Compound interest and dividend reinvestment can allow for the creation of dividend growth machines, which are able to growth capital and wealth entirely through automatic reinvestment, among other techniques. The concept of a dividend growth machine is very powerful, and the ability to build these machines are enabled specifically by the power of compound interest.

Break the sustainable growth barrier

It is very important if you're going to become a dividend growth investor to set goals. DRIP is a strategy for achieving a specific goal of financial independence. This particular goal requires you reach a state of being financially sustainable. When your dividend income from yield is enough to support you indefinitely, through compounding, where your yearly profit continues to grow and out paces inflation, even with reinvestment, then you're financially independent, and you've broke the sustainable growth barrier.

Set a target annual dividend income goal and invest specifically to meet that goal. If your goal is to achieve an annual dividend income in an area with a high cost of living then you know you have to invest aggressively so that through compounding effects your dividend growth machine can reach the goal of an annual in dividend income. If you're a younger investor you have more time to make mistakes, and you may be more able to recover from risks, but if you're older you may not have a much time, and may need to be more careful, but it is up to you to determine your risk tolerance and how aggressive you'd like to be.

High risk political investments

Some investments might be interesting as a diversification but are also high risk. These investments exist in the legal grey area and include industries such as gambling, escort/sex, cannabis, or other related industries. In these cases there may be some interesting political investments but they are high risk as well, so if you choose to hold these investments you must be aware that there are no guarantees. Of course I will be discussing some of these high risk political investments, specifically the digital token based opportunities, but it is unknown if these opportunities will be seen as securities or not, or if the national or local government will view their activities as legal or illegal.

Opportunities that will be covered include Cottontail Group, Lottoshares, Cannabiscoin, and many digital similar tokens. Trade these at your own risk and be prepared to lose. On the other hand there is the chance that these activities will be legalized, that legal clarity will be provided, and as this happens the risks may not remain as high yet the rewards could be great for people who had the forsight to guess the political trends.


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