My Passive Income Journal

My High Yield Diversified Income Portfolio

How to Construct a High Yield Diversified Investment Portfolio with REITs, Dividend ETFs, High Yield Corporate Bonds and P2P Lending

Here is a window into my type of portfolio. Constructing a well-diversified investment portfolio is a critical step toward achieving your long-term financial goals. Diversification means spreading your investments across different asset classes to help reduce risk and potentially increase returns. A high yield diversified income portfolio is the first step in my opinion. It’s an opinion not shared by too many, but it’s the right one for me.

In this article, we’ll discuss how to construct a portfolio with 25% allocation to each of the following asset classes: REITs, dividend ETFs, high yield corporate bonds, and P2P lending. This article journals how I constructed my high yield diversified income portfolio.

In this previous article I mention that my personal belief is to sort your cashflow first. For me, this meant dedicating my initial investments to constructing a high yield diversified income portfolio. Contrary to popular advice, maximizing steady, reliable & passive income streams first is the key.  This is done by regularly acquiring assets that are specifically designed to produce the highest regular output of income coupled with the steadiest movement of the underlying capital. Additionally, these assets should have a fair and affordable cost structure.

The aim is to build up an initial portfolio of these diversified assets in order to replace our base income requirements as quickly as possible. Once our base expenses are covered by the income produced by this cash-flow portfolio, we are essentially free from the stress of feeding and clothing ourselves and paying for shelter. 

Step 1: Determine Your Investment Goals and Risk Tolerance

Before investing in any asset class, it’s important to determine your investment goals and risk tolerance.

DON’T SKIP THIS STEP – get professional help if you need it. Your investment goals will guide your investment decisions and help you stay focused on achieving your long-term financial objectives. Risk tolerance refers to the level of risk you’re willing to take on in pursuit of those objectives.

REITs, dividend ETFs, high yield corporate bonds and P2P lending each come with their own level of risk and potential reward. REITs, for example, can provide a reliable stream of income but are subject to fluctuations in the real estate market. High yield corporate bonds offer higher returns but come with a higher risk of default. P2P lending can provide higher returns than traditional fixed income investments but comes with a higher risk of borrower default.

It’s important to understand the risks and potential rewards of each asset class and determine which ones align with your investment goals and risk tolerance.

Step 2: Choose a Mix of REITs

When choosing a mix of REITs, look for funds with a diversified mix of properties across different sectors. REIT ETFs are my preference here. Look for a mix of residential, commercial, and industrial REITs to diversify your portfolio across different types of properties. Aim for a mix of REITs with a high dividend yield and a low expense ratio to maximize potential returns.

My Passive Income Portfolio

Step 3: Choose a Mix of Dividend ETFs

When choosing a mix of dividend ETFs, look for funds with a diversified mix of dividend-paying stocks across different sectors. Consider the fund’s expense ratio, dividend yield, and performance history. Look for funds with a low expense ratio, a high dividend yield, and a history of strong performance. One single ETF might be all you need here – just don’t double-up on the underlying holdings if using more than one ETF. I personally use a mix of a high yield dividend ETF, a covered call ETF and a dividend aristocrat ETF.

Step 4: Choose a Mix of High Yield Corporate Bonds

When choosing a mix of high yield corporate bonds, look for bonds with a solid credit rating, a high yield and a manageable debt-to-equity ratio. Consider the bond’s maturity date, as longer-term bonds offer higher yields but come with a higher risk of interest rate fluctuations. You might find a corporate bond ETF is a simpler answer here.

Step 5: Choose a Mix of P2P Lending Platforms

When choosing a mix of P2P lending platforms, look for platforms with a history of strong performance and a diverse mix of borrowers. Consider the platform’s fees and minimum investment requirements. Look for platforms with a track record of providing consistent returns and a low default rate. I personally use two different platforms targeting two different types of P2P borrower demographics.

Step 6: Rebalance Your Portfolio

Once you’ve constructed your portfolio with 25% allocation to each of these asset classes, it’s important to monitor and rebalance your portfolio regularly. While you are accumulating and building the portfolio, rebalancing involves buying more assets that fall below the 25% allocation to keep the portfolio to its target allocation. Strategically using dividends and distributions from each holding to manually keep the portfolio growing in a balanced manner will mean not switching on any automatic reinvestment options.

For example, if your REITs have performed well and now make up 30% of your portfolio, you may want to stop buying REITs for a while and buy more dividend ETFs, high yield corporate bonds or P2P lending investments to bring your portfolio back to its target allocation of 25% each. I aim to rebalance the best I can each time I buy. I also do not get too hung up on rebalancing and am happy with a bit of short term deviation away from the 25% allocation – too much trading can get unnecessarily expensive, especially whilst the portfolio is small.

In Summary – My high yield diversified income portfolio

Constructing a portfolio with 25% allocation to REITs, dividend ETFs, high yield corporate bonds and P2P lending can help you achieve a diversified investment portfolio that aligns with your investment goals and risk tolerance. By following these steps, you can choose a mix of investments that provides the potential for high returns while minimizing risk. This is exactly how I have constructed my cashflow portfolio as explained here.

Remember to regularly monitor and rebalance your portfolio to ensure that it stays on track and aligned with your investment goals. I do this every time I buy for the cashflow portfolio. Diversification is not a one-time event but an ongoing process that requires attention and adjustment over time.

We are aiming for 25% REITS, 25% Dividend ETFs, 25% HY corporate bonds and 25% P2P lending.

By following these steps and investing in a mix of REITs, dividend ETFs, high yield corporate bonds, and P2P lending, you can achieve a well-diversified investment portfolio that can help you achieve your long-term financial objectives. A high yield diversified income portfolio’s (or cashflow portfolio’s) aim is to build up an initial portfolio of these diversified assets in order to replace our base income requirements as quickly as possible. Once our base expenses are covered by the income produced by this high yield diversified income portfolio, we are essentially free from the stress of feeding and clothing ourselves and paying for shelter. 

This post is very much my own personal journal and outlines what I have done. The purpose is to share this with you for motivation, interest and to spur you on to do your own research into the topic. This portfolio shows how I have achieved covering all my base expenses with this high yield diversified income portfolio. Your mileage will no doubt differ, because you are not me.

It is NOT personal financial advice.

Cheers

Hugh Walker