Multiple Engines Make You Faster

The wealthy didn't become that way by accident.

They use proven methods passed down over generations to generate consistent income, grow their capital, and maintain lasting prosperity.

When I got to Wall St and began working with ultra-high net worth families. I saw so many different investment strategies, company structures and wealth preservation tactics that my head began to spin.

The point of WealthSystems.ai is to schematically break these down, detail how they all work together, and work together as a community to help everyone build their own Wealth System.

It’s the “how they work together” part that makes it a wealth system.

Now, back to what I learned and how I applied it.

A lot of the estate and tax stuff was interesting, but what really caught my eye were the portfolios. How were they constructed? Which positions have they held the longest, are they trading or holding long-term… so many dimensions that drive capital appreciation & income, too.

Without calling them and asking them “hey why did you buy XYZ stock?” I couldn’t study much about their capital appreciation strategies.. but the winning income strategies appeared plain as day.

Wealth Engines Make You Faster

The really big accounts had 100+ positions, all generating income. Dividends from US Equities were the vast majority of this, with some partnership interests in Oil & Gas assets and related cash flowing enterprises.

The fascinating thing was the use of different payment schedules to virtually guarantee a constant stream of incoming distributions.

These portfolios featured intelligent layering of payment schedules. There are a whole group of monthly payers, semi-annual and annual. As you can imagine, a monthly payer divides the total yield by 12 - resulting in a smaller (but more frequent) payment.

Weighing in at the opposite end of the spectrum, the annual payers provide one payday per year.

Some of the these clients had 12 annual payers that were evenly spaced out so they received “the big one” every month.

Then they received distributions from semi-annuals multiple times each quarter.

The bulk of their portfolio were the classic quarterly payers. Most dividend-paying companies follow this schedule because it aligns with accounting cycles and the operational cadences.

…and then they had a handful of monthly payers that kicked in a small amount, but contributed constantly. This is a clean view with identifying information removed.

It’s incredible how one of the best months, June, doesn’t even have an annual distribution that month. The quarterlies and monthlies + a single semi-annual were enough to make it the third richest month.

I felt like I was staring inside a Rolls Royce engine.

Speaking of nerdy things that add power to your wealth system, let’s talk about capital structure a bit - specifically preferred equity.

You can think of preferred equity as a hybrid sitting between stock and bonds.

Preferred shareholders own a piece of the company like common stock. However, preferred shares also have bond-like qualities that make them act more like fixed-income… another term for debt or bonds.

The key distinction is in how they are treated regarding dividends and claims on company assets. Issuers (the companies) pay preferred shareholders before common stockholders when distributing profits.

These dividend payments are usually fixed at time of issuance and paid quarterly. If the company omits or defers payments, restrictions kick in on things like common dividends until “preferred” or “pref holders” or “the pref” are made whole again.

In case of liquidation, preferred shareholders also have a priority claim ahead of common stock on the proceeds from asset sales. This gives them a buffer compared to common shareholders who are last in line after all creditors and obligations are paid.

You'll typically find preferred shares issued by financial services companies as well as utilities and telecoms. They represent a way for businesses to raise capital without diluting common shareholders.

In exchange, they offer investors a higher and steadier stream of income.

How can preferred equity benefit a wealth system?

First off, the yields are consistently greater than dividends from common shares of the same company. Preferred dividends can run anywhere from 5-9% depending on credit quality and interest rates. The average dividend yield in the US Markets is close to 3%.

That's a major income upgrade.

You also gain priority over common stock dividends which are more vulnerable to reduction or suspension during downtimes. Pref shares put you first in line to receive your share of profits ahead of the commoners… but well behind Bond holders. This security is the “killer feature” that keeps money in bonds in the first place… it sure isn’t the returns.

As we constantly call out here — it’s never free money. There are trade-offs. On the downside, preferred shares offer much less upside compared to common shares if the stock price takes off. Also, a lot of these shares are "callable" meaning the company can redeem shares at par value after a set date. This pulls the rug out from under you if redemptions happen during a period of declining issuance.

The only sure bet is building more engines.

They provide safety (should one engine fail) and this effort also increases your range. That’s the major big benefit of a multi-engine wealth system - you gain speed, extend your range and decrease your risk of losing altitude.

See you up there.

Update: Thank you so much for spreading the word on social media, across finance and technology communities, in Discord/Slack and wherever else investors, builders and nerds like us gather.

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👋 Thank you for reading Wealth Systems. I started this in November 2023 to share the systems, technology, and mindsets that I encountered on Wall Street.

💡The BIG IDEA is share practical knowledge so we can each build and optimize our own wealth engines and combine them into a wealth system.

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