Investing in stocks to hedge against your lifestyle costs

A few years ago, before I had a personal finance blog of my own and was just an anonymous reader, I was a huge fan of Jacob of Early Retirement Extreme. His progress and achievements are admirable, but his methods are not for the faint of heart (including taking cold showers in order to save on utility costs). One of his tactics for accumulating so much wealth so fast on such a modest income was that, if he couldn’t afford an activity with his passive income from investments, he simply would not partake in it. Instead, he would forego indulging in that spend and put the money into his investment accounts until they paid out enough in dividends to let him go back to it again.

This requires a lot of discipline I don’t possess, but it doesn’t mean my goal isn’t to ultimately replace my salary or full-time income with passive income from investments — I’m just ok with taking more than a few years to do so.

One of the most interesting ways to generate passive income for your spending in one category, is to own stock in the company providing you the product or service

– effectively making them pay you for your use of their business. 

This isn’t a new idea. There’s hundreds of articles and posts out there telling you that purchasing $2,000 of Apple stock is better than spending the same amount on a new Mac, or putting a years worth of soft-drink spending into Coca-Cola stock is better than buying a can from a vending machine every day. But that doesn’t make it any less of a fun way to look at how you’re spending your money and find any opportunities where you might be able to profit from a company you purchase from.

Stocks to buy to hedge against your lifestyle costs

REITPaying rent/mortgage and owning REITs

This was #2 on my list of 5 Stocks Every Millennial Needs To Have In Their Portfolio. With home prices what they are in Canada, plenty of young people feel either like they’ll never be able to afford a house, or that they need to over-extend themselves immediately to get in before the prices go up even more. Both of these scenarios are stressful, and I feel like most 20-somethings don’t realize there’s quick and easy way to get into the property game without saving up tens of thousands of dollars for a down-payment. Owning a REIT (Real Estate Investment Trust) is a short-order way to invest a small amount of money (I’d suggest starting with at least $1,000) and be a part of the ups & downs of the real estate market, while collecting a monthly dividend. It will take a long time and a big investment for the payout to resemble your rent or mortgage payment, but wouldn’t it be nice to get even a little bit of cash back back from property ownership every time your housing costs go out of your own bank accounts? I lean more towards commercial REITs than residential, but there are plenty of options to choose from.

AsktheEditors_cellphones2012_610x426Paying for cable/internet/cellphone and owning stock in your provider

I don’t own any shares of Rogers Communications, my cellphone provider, but I do own some stock in Shaw, who supplies my internet. Shaw’s monthly dividend means negates more than a quarter of my monthly bill, which makes my internet service feel very affordable. At present I have no plans to quadruple my holdings in Shaw, but at least in the meantime I’m effectively getting their services at a discount: I pay them my balance each month, and then they immediately pay me a little bit back in a dividend. Communications tech stocks are usually some of the best dividend payers out there, though the volatility of their stock might make you a bit ill. Best to buy and then look away, only checking in every quarter or two.

MW-CO587_KRFT_0_20140729155238_OR

source // Kraft stock took a tumble last week so it might be a good time to buy — after all, can you imagine a world without Oreos?

Buying groceries and owning General Mills, Pepsi, Kraft, etc.

As a healthful shopper when it comes to food, my grocery bill is often terrifyingly high. I’m not willing to eat less nutritiously just to be more frugal, so one of the ways to make high food costs easier to swallow is to own shares in some of the major food processors and providers. You’ll never have to make the “Pepsi or Coca-cola?” choice again because you can buy and hold both long term in your portfolio. Many of these companies have decades of dividend raises behind them and make excellent holdings for the long term, particularly in things like your retirement portfolio. After all, people will always need food.

 

where-to-buy-common-household-items-in-nyc-for-the-lowest-priceBuying household and personal care items and owning Proctor & Gamble, Unilever, General Electric, etc. 

If you’re a good budgeter and well versed in tracking your spending, you already know how much you spend or dish soap or laundry detergent every year, and aybe a new washer was needed after your old one went kaput. In any case, you’re spending a lot of money to keep your home going, and owning stocks in the companies that make the products you use every day might make these bills easier to manage.

Of course, the potential for lifestyle hedging doesn’t stop there. You can buy stocks in publishing companies that make your favorite books and magazines, fast food companies where you get your lunch every week, airlines you use to fly around the globe etc — and yes, of course Starbucks where you get your daily coffee. You will still need to invest in more than consumer goods and services to build a well-diversified portfolio, but sometimes owning shares in companies you interact with every day can make managing your money a little more interesting.

What are your thoughts on owning stocks in businesses you buy from? Any others that are your favorites?

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Comments

  1. Investing to hedge against your expenses is a great idea. You can even create a table to help keep track of your progress so you’ll know where the break even point is :D Example: http://tinyurl.com/k38dmpf I particularly like REITs to offset the cost of housing because their yields are very generous haha. If you drive then you can buy stocks in energy companies like Suncor, Husky, or Royal Dutch Shell. When they increase their dividends you will earn more passive income to pay for your gasoline :)

  2. I get better investing advice from my taxi driver. Heed the above advice at your own risk.

  3. I think it’s a great idea to own share in business you buy from. I currently own shares of RBC where I do all my banking and I’m very satisfied with the return. Funny you post this today as I’m currently researching on my current cable/internet/cellphone provider Bell for that exact reason ! Obviously it’s not the only factor in my decision making process but It’s nice to be able to think of it this way.

  4. I definitely like the idea, though there aren’t really any NZ businesses that qualify for me and investing in international companies from here is a little beyond my current level of knowledge/comfort zone.

  5. That’s the name of the game. Be part of the circle. Receive dividends from some of the best, solid long term dividend payers and in turn continue to use/purchase their products. Fuel costs for a car can be looked at this way as well. Own shares of CVX, XOM, RDS, BP or any energy company for that matter and have their dividends pay for your annual fuel cost. Great story. Thanks for sharing.

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