What Aunt Ida taught me about passive income

On January 31, 1940, history was made in one of the quietest ways to one of the most unassuming people.

That was when Ida May Fuller opened her mailbox to see America’s very first monthly Social Security check ever issued: check No. 00-000-001. It was for $22.54, the equivalent of $539.55 today.

As for Ida May herself, she was a spinster who was far from destitute but also far from rich. There was nothing reportedly remarkable about her except, perhaps, for the fact that she went to school with Calvin Coolidge, the 30th president of the United States.

Born on September 6, 1874, on a farm near Ludlow, Vermont, I’m sure that Ida had her own personal moments of triumph and hardship. And despite the fact that she never married or had children, I imagine she made an impact on others just like they did on her.

But as to what those impacts were, we don’t know. They weren’t monumental enough to make the history books. The only recordable thing she ever did – that we know of, anyway – was walk into her local Social Security office in November 1939 to ask whether she qualified for checks or not.

Yet that was exactly enough to point us to an important investment truth we can still apply today.

A small number of people are born into money. Even fewer get rich by winning the lottery.

Most of the time, it’s a series of boring, unremarkable steps that lead ordinary people into positions of wealth.

That was the case for Ida with her under-the-radar lifestyle. She worked hard. She didn’t live outside her means, and she invested in the new Social Security system once it debuted.

This was a mandated investment, admittedly. But it’s one that paid off nicely for her nonetheless.

Actually, it paid off enormously since she paid a total of $24.75 into the program over a period of less than three years. And while her employer matched that amount, it still only added up so much.

That didn’t matter though.

Ida didn’t pass away until 1975 – when she was 100 years old. By then, she had collected over $22,000 in Social Security benefits.

That’s almost 900 times what she put into it on her own!

Now, for all of you younger readers out there, I’m sorry. I’m not trying to throw salt on an open wound.

I’m fully aware that today’s Social Security situation looks very different than it did back in Aunt Ida’s day. Between life expectancy growing and birth rates dropping over the decades, the math has changed dramatically.

It’s become much more expensive to fund retirees, and it’s going to get more expensive still until it’s outright unsustainable. As such, most younger people don’t expect to get anything out of the program at all.

Yet there are still ways to follow Ida’s investment lead and secure a comfortable retirement all the same.

It will almost undoubtedly take you more than three years to hit your goals. Her situation was literally one in multiple millions.

But the results are just as worthwhile and, these days, much more reliable as well.

A few Saturdays ago, I noted how it’s not just the U.S. government that’s struggling with its pension system. Germany is too. As are Spain, France, and Italy, just to name a few more.

Unfortunately, governments can make all the promises they want to. They can even mean the pledges in question.

However, it doesn’t mean they’ll be able to follow through in the long term.

That’s why I rely instead on researching high-quality companies that pay dividends. This practice tends to be as reliable as investing in Social Security was 90 years ago.

Better yet, it’s more transparent.

Remember that Aunt Ida had no idea what to expect when she walked into that office in 1940. But income investors can open up their brokerage accounts and see exactly how much dividend cash they’re making whenever they’d like.

And, trust me, there is something very satisfying about that ability.

Last week, I wrote about the so-called “dividend puzzle.” It’s an explanation of how companies can – and do – grow from paying their shareholders directly instead of reinvesting that money into their businesses.

Some academics argue that dividends destroy shareholder value. But in doing so, they ignore decades of real-world evidence provided by renowned researchers… not to mention enormous dividend-paying success stories like ExxonMobil (XOM), JPMorgan Chase (JPM), Procter & Gamble (PG), and Microsoft (MSFT).

Or, in the case of the real estate investment trusts (REITs) I follow so closely, global warehouse giant Prologis (PLD), senior housing landlord Welltower (WELL), and retail king Realty Income (O).

These companies are experts on growing their respective businesses. Yet they still manage to reward their shareholders year after year with “bonuses” for sticking with them.

Add those quarterly or monthly payments up over years or, better yet, decades, and they can make all the difference.

Another potential Social Security substitute is Schwab U.S. Dividend Equity ETF (SCHD).

I don’t normally recommend exchange-traded funds because they tend to hold dozens of companies in a single category – both the strong and the weak. And I much prefer to research individual businesses to weed out the bad from the good.

However, I’m happy to make certain exceptions. And SCHD is one of them.

To quote Schwab, “The fund’s goal is to track as closely as possible, before fees and expenses, the total return of the Dow Jones U.S. Dividend 100TM Index” with the intention of offering “a straightforward, low-cost fund” that’s “focused on the quality and sustainability of dividends.”

As such, all the companies it holds have recorded at least a decade straight of dividend payments with higher (but still safe) yields. The result is a collection of some of America’s most impressive businesses across a diverse array of sectors.

Consumer staples, energy stocks, financials, healthcare players, industrials… SCHD holds them all. And if one holding does happen to come under pressure, the others can make up for it, keeping the larger ETF’s share price afloat.

That’s something the U.S. government just can’t offer since it’s one giant entity instead of a collection of independent assets.

Back in Ida May’s day, that distinction didn’t matter. In fact, the U.S. government was one of the safest possible places to invest in.

Today, we have to take her under-the-radar approach in a different direction, it’s true. But as I’ve seen time and time again, the results can be just as powerful if we only have the patience to see it through.

Happy SWAN investing!

Brad Thomas
Editor, The Wide Moat Daily

In honor of the 250th anniversary of The United States of America’s Declaration of Independence, let’s talk about the real estate investment trusts (REITs) that came out of it.

That’s not a cheap gimmick to get you to watch the latest episode of The Wide Moat Show.

The economic opportunities our Founding Fathers opened when they committed to the self-evident truths “that all men are created equal… endowed by their Creator with certain unalienable Rights” including “Life, Liberty, and the Pursuit of Happiness”…?

They’re widespread and enormous.

So we’re more than happy to point even just a few of them out right here.