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A direct stock purchase plan (DSPP) is a plan that allows investors to purchase stock in a company without a broker and get it directly from the company instead.
With DSSPs, there are often no brokerage fees. Meanwhile, discounts to the share prices may be available for larger purchases. With shares purchased through a DSPP, investors have the same profit and loss opportunities, access to dividends, as well as stockholder voting rights.
However, direct stock purchase plans may not be right for every investor. Learn more about buying stock direct from companies through a DSPP, including the pros and cons.
Direct Stock Purchase Plan, Explained
What is a direct stock purchase plan? Typically, many investors use a broker to buy shares of stock. But you can sometimes purchase stocks directly from companies, no broker required. This is what it means to participate in a direct stock purchase plan.
Many blue-chip stocks tend to offer DSPPs. For example, let’s say Company X offers a plan that allows investors to buy $500 or more worth of company stock directly from it, up to $250,000 a year, with some service and transaction fees.
With a DSPP, investors directly purchase shares, sometimes at a small discount. Discounts can range from 1% to 10% to encourage investors to buy more shares.
However, because many brokerage accounts now waive fees and commissions entirely for many investors, the savings difference is smaller than it used to be. 💡 Quick Tip: Did you know that opening a brokerage account typically doesn’t come with any setup costs? Often, the only requirement to open a brokerage account — aside from providing personal details — is making an initial deposit.
Pros and Cons of a DSPP
Direct stock purchase plans have benefits and drawbacks. These include:
Pros:
• No broker needed. Investors can purchase shares of stock directly from the company.
• Very little money is required to get started, and the process is typically simple to do. Good for long-term investing.
• Some DSPP programs offer dividend reinvestment plans.
Cons:
• An investor may not achieve portfolio diversification because not all stocks offer DSPPs.
• Companies may put maximum limits on how much an individual investor can purchase.
• When selling DSPP stocks, multiple types of fees can sometimes be charged.
How To Invest in a DSPP
Armed with information about how to buy directly from companies, investors may want to explore what specific opportunities exist. Perhaps they already have a publicly traded company in mind. In that case, they can go to that company’s investor relations website to see if the company offers this type of investment opportunity.
They can also search on the Internet to see which direct stock purchase plans are available.
More specifically, if someone wants to buy stocks in this way, they typically open an account and make deposits into it. Usually, these deposits are automatically made monthly through an ACH funds transfer from the investor’s bank account. In some cases you can write checks as well.
Then, that dollar amount is applied toward purchasing shares in that company’s stock, which can include fractional shares. For example, let’s say that one share of a company’s stock currently costs $20. If an investor sets up an ACH withdrawal of $50 monthly, then, each month they have purchased 2.5 shares of that company’s stock.
One of the benefits of investing through a direct stock purchase plan is the ability to incrementally invest in an inexpensive way. This might make it a good choice for some first-time investors with smaller amounts of money to invest, with initial deposits ranging from $100 to $500. In some cases, initial deposit minimums can be waived if you purchase a certain dollar value of stock every month. But again, it may be difficult to achieve portfolio diversification with DSPP.
Companies With DSPPs
A number of large, well-established companies offer DSPPs. Companies with direct stock purchase plans include Walmart, The Coca-Cola Company, Starbucks, and Home Depot, and Best Buy, among others. 💡 Quick Tip: How to manage potential risk factors in a self-directed investment account? Doing your research and employing strategies like dollar-cost averaging and diversification may help mitigate financial risk when trading stocks.
What to Consider Before Buying DSPPs
When online investing was new, people typically needed to pay significant fees to brokers to buy stock. In that era, direct stock purchase plans could be money-savers for investors. Over time, though, fees for online investing have lessened, making this less distinctive of a benefit.
In addition, many DSPPs charge initial setup fees, and may have other investment fees, including ones for each purchase transaction or sale. Although they may be small, these fees can build up over time. And it may be challenging to re-sell shares without the use of a broker, which makes this investment strategy more of a long-term one.
Plus, any time a share is purchased, some degree of stock volatility comes along with it — how much depends upon what is happening with that specific company and the overall levels of turbulence in the market.
Here’s something else to consider: When owning stock in just one company, or only a couple of them, portfolios aren’t diversified. When you diversify your investment assets, it helps to spread out the degree of risk. That’s because, if one stock’s value decreases, others may rise to balance out that portfolio.
The Takeaway
Direct stock purchase plans are when individual investors can directly purchase shares of that company’s stock without the need for broker involvement. The benefits of DSPPs potentially include purchasing company shares at a discount, and not needing a broker to make the transaction.
The downside of DSPPs is that a limited number of companies offer them, which means that an investor who invests solely through DSPPs may not have the best portfolio diversification. Plus, with brokerage commissions and fees rapidly shrinking, in many cases to zero, DSPPs have become a less essential way of cutting down trading costs for investors.
Ready to invest in your goals? It’s easy to get started when you open an investment account with SoFi Invest. You can invest in stocks, exchange-traded funds (ETFs), and more. SoFi doesn’t charge commissions, but other fees apply (full fee disclosure here).
Invest with as little as $5 with a SoFi Active Investing account.
FAQ
What is the difference between a brokerage and a direct stock purchase?
The main difference between a brokerage and a direct stock purchase is this: With a direct stock purchase, an investor buys shares of one company. A brokerage, on the other hand, offers multitudes of different stock options an investor may choose from.
What is direct stock vs portfolio stock?
With direct stock, an investor purchases shares of stock directly from a company. A portfolio refers to a collection of different types of investments an investor may have, including stocks, bonds, or stock funds, to name a few.
What is the difference between DSPP and DRIP?
By using a DRIP (dividend reinvestment plan), investors can buy more stock in companies whose shares they own by reinvesting what they earn from dividends. With a DSPP, an investor can purchase stock directly from a company. Unlike a DRIP, they don’t have to use dividends to purchase shares.
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MILWAUKEE, Sept. 14, 2023 /PRNewswire/ — Northwestern Mutual, a leading financial security company, announced today that Anne F. Ackerley and Andrew J. Harmening have been appointed to serve on its Board of Trustees. As a mutual company with a responsibility to policyowners, Northwestern Mutual has a Board of Trustees elected by its policyowners with responsibility … [Read more…]
Looking to build wealth with the best income-generating assets? As you set out on the path to financial freedom, understanding the different types of income-generating assets can truly change your life. This is because you can invest in assets that will generate you income, earning you more passive income. Today’s article will introduce you to…
Looking to build wealth with the best income-generating assets?
As you set out on the path to financial freedom, understanding the different types of income-generating assets can truly change your life.
This is because you can invest in assets that will generate you income, earning you more passive income.
Today’s article will introduce you to a range of assets that reliably bring in cash, giving you peace of mind and the freedom to live life on your own terms.
From traditional investments like stocks and bonds to more creative options like peer-to-peer lending or real estate, income-generating assets give you the power to diversify your portfolio and build wealth over time.
Related content:
What are income generating assets?
Before we begin, I want to talk about the basics on income-generating assets, in case you are new to the subject or if you want a background first.
Income-generating assets are investments that, as the name suggests, generate income for you. These are assets that provide you with a steady cash flow, allowing you to earn passive income and build your wealth over time.
Examples include rental real estate and dividend-paying stocks (we will go over 17 different types of income-generating assets below in more detail).
There are several benefits of the best income-generating assets such as:
Passive income: You earn money without actively working, and this can provide financial freedom and the ability to focus on other things in life. You can earn money in your sleep, while on vacation, making dinner, and more.
Diversification: You can diversify your investments so that all of your income is not coming from just one source.
Wealth building: Earning income and generating a steady cash flow can help you build your wealth over time.
Note: Please keep in mind that there is no one-size-fits-all approach when investing in any of these income-producing assets. Everyone is different and while one asset may work great for someone, it may not be the right asset for you. I recommend doing as much research as you can if you are interested in one of the asset investments I talk about below.
Types Of Income Generating Assets
There are many types of income-generating assets. Some may be more traditional such as dividend-paying stocks, and others may be more alternative income-generating assets, such as selling stock photos, and even renting out your driveway.
Today, I will talk about 17 different types of income-generating assets, but this is not a full list of the best income-producing assets. There are many, many more!
The different types of income-generating assets that I will talk about today include:
1. Dividend-paying stocks
One of the best assets to invest in are dividend-paying stocks.
Dividends are simply a payment in cash or stock that public companies distribute to their shareholders.
The amount of a dividend is determined by a company’s board of directors, and they are given as a way to reward those who have stock in their company. Both private and public companies pay dividends, but not all companies pay dividends.
How do dividends work? If you own shares of a dividend-paying stock, then a dividend is paid per share of that stock. So, if you have 10 shares in Company ABC, and they pay $5 in cash dividends each year, then you will get $50 in dividends that year. While dividends can be paid on a monthly, quarterly, or yearly basis, they are most commonly paid out quarterly — so, four times a year. In this example, the $5 in cash dividends the company pays each year will most likely be distributed as $1.25 per quarter for each share of stock.
The most common type of dividends are cash dividends. Shareholders may choose to get this deposited right into their brokerage account. Stock dividends are another common type of dividend. In this case, shareholders get extra shares of stock instead of cash.
Both cash dividends and stock dividends are great income-generating assets that will earn more money for you.
As a shareholder, you can earn income when companies distribute profits to their shareholders. Look for stocks with a history of consistent dividend payouts and a high dividend yield. Keep in mind that dividend stocks are still subject to market fluctuations, and just because a company has paid a dividend in the past does not mean that they always will in the future.
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2. High-yield savings accounts and CDs
High-yield savings accounts and CDs are a great way to grow your savings, but most people have their money in accounts with low rates. Unfortunately, that means many of you are losing out on some easy money.
Savings accounts at brick-and-mortar banks are known for having really low interest rates. That’s because they have a much higher overhead — paying for the building, paying the tellers to help you in person at the bank, etc.
High-yield savings accounts offer an easy option for earning interest on your cash. Online banks often offer higher interest rates than traditional banks. As of the writing of this blog post, you can easily find high-yield savings accounts that can earn you above 4.00%.
Certificates of Deposit (CDs), another form of income-generating assets, are FDIC insured and provide a guaranteed interest rate over a specific term. Remember that access to your money is limited during the term of the CD. You will agree upon the term before putting your money in the CD. The terms typically vary in length from around 3 months to 5 years.
Money market accounts are also offered by banks and often with a higher yield than other types of savings accounts.
3. Real estate
Real estate is one of the most common income-generating assets that people think of.
Investing in rental properties is a popular way to generate steady cash flow. You can earn rental income from tenants, and properties typically appreciate in value over time.
Location and property management are important factors that can impact your return on investment.
By investing in real estate, you may be investing in residential properties, commercial real estate, short-term rentals, REITs, and more.
Recommended reading: How This Woman In Her 30s Owns 7 Rental Homes
4. Real estate investment trusts (REITs)
An REIT is a company that owns and manages income-producing real estate. They then sell shares to investors like stock.
By investing in REITs, you can make money in the real estate market without actually owning real estate.
So, if you don’t want to be a landlord, then this may be something for you to look into. This makes it much more passive than actually owning real estate and having to manage it.
You can even diversify your income stream with REITs by investing in different property types, such as residential homes, commercial office space, industrial, and retail store properties.
5. Bonds
Bonds are fixed-income investments that are issued by governments and companies. If you own a bond, you receive interest payments from borrowers on a regular basis.
An easy way to explain this is: When you buy a bond, you are giving someone a loan and they are agreeing to pay you back with interest.
Bonds with higher credit ratings are generally a safer investment but may offer lower interest rates.
6. Mutual funds
Mutual funds gather funds from investors to invest in stocks, bonds, or other securities. Basically, the funds are pooled together and there’s a fund manager who chooses the best investments.
Income-generating assets like this have multiple types of mutual funds available for multiple types of investors. Some of these fund types include bond funds, stock funds, balanced funds, and index funds.
Mutual funds typically have higher fees because they have fund managers who are actively trying to beat the market.
With a mutual fund, you get diversification because the fund manager mixes the assets in it.
7. Index funds and exchange-traded funds (ETFs)
ETFs and index funds are popular options for those who are looking to diversify their portfolio of income-generating assets.
This is because index funds and ETFs track a specific market index and invest in a wide range of stocks or other assets, instead of picking and choosing stocks in an attempt to beat the market. This is what makes them different from mutual funds.
They often have lower fees and higher diversification compared to actively managed funds.
8. Annuities
Annuities are long-term investments offered by insurance companies that give you a guaranteed income stream to build wealth. In exchange for a lump-sum payment or periodic contributions (such as monthly or annually), you’ll receive steady payments in the future.
The way it works is you pay premiums into the annuity for a set amount of time. Later, you stop paying premiums, and the annuity starts sending regular payments to you. Some are even set up to pay you back with a lump sum.
Annuities can be fixed or variable. A fixed annuity offers a guaranteed payment amount — which means a predictable income for you. As for a variable annuity, the payment amount does vary, depending on how the market is doing.
9. Websites and blogs
Starting a website can generate income through the money-making assets of advertising, affiliate marketing, or the sale of products and services.
Since I started Making Sense of Cents, I have earned over $5,000,000 from my blog through affiliate marketing, sponsored partnerships, display advertising, and online courses. These income-generating assets make sense for building wealth.
Blogging allows me to travel as much as I want, have a flexible schedule — and I earn a great income doing it.
Now, it’s not entirely passive, but I do earn semi-passive income from my blog.
You can learn how to start a blog in my How To Start a Blog FREE Course.
Here’s a quick outline of what you will learn:
Day 1: Why you should start a blog
Day 2: How to decide what to write about (your blog niche!)
Day 3: How to create your blog (in this lesson, you will learn how to start a blog on WordPress)
Day 4: The different ways to make money with your blog
Day 5: My advice for making passive income with your blog
Day 6: How to get pageviews
Day 7: Other blogging tips to help you see success
Recommended reading: The 25 Most-Asked Blogging Questions To Get You Started Today
10. Royalties and intellectual property
Intellectual property, such as patents, copyrights, and trademarks, can generate income through licensing fees or royalties. This particular option is good for creative professionals, such as authors, musicians, and inventors, who are looking for income-generating assets.
Royalties are a way to earn income from your creative work or intellectual property. By granting others permission to use or distribute your intellectual property, you can receive ongoing payments known as royalties.
Whether you’re a musician, author, inventor, or artist, royalties offer a passive income stream as your creations continue to generate revenue over time.
Royalties can be paid out periodically or as a lump sum on these passive income assets, depending on your agreement with the licensee.
11. Stock photos
If you have a talent for photography, you can monetize your skills by selling stock photos on platforms such as Shutterstock or Adobe Stock. The more high-quality images you upload, the more potential passive income you can generate.
With stock photography, you simply upload photos that you have taken to a platform such as DepositPhotos, turning your pictures into income-generating assets. Then, you will receive a commission whenever someone buys one of your stock photos.
Stock photos are used for all sorts of reasons by websites, companies, blogs, and more. Businesses need stock photos because they are not usually in the business of taking photos of everything that they need. Instead, they can use stock photos to make their content, website, or business more visually appealing.
Some examples of stock photography include pictures of:
Travel, vacations, landmarks, outdoor adventures
Family members, such as parents, children, family gatherings
Food and drink
Cars, boats, RVs
Businesses, pictures of people in meetings, in an office.
Sports, professional events
Animals, such as household pets or wildlife
The photo possibilities are almost endless for this type of income-generating asset.
Recommended reading: 18 Ways You Can Get Paid To Take Pictures
12. Crowdfunding and peer-to-peer lending
Crowdfunding platforms enable you to invest in real estate deals with a smaller amount of money than buying real estate up front, giving you a passive income through rental income or even a property increasing in value.
Peer-to-peer lending platforms allow you to lend money directly to borrowers. Typically you can earn higher returns than traditional savings accounts, though there’s always the risk of a borrower not paying you back.
Both of these types of assets — crowdfunding and peer-to-peer lending — use technology to connect investors with those looking for funding.
13. Renting out storage space
If you own unused land or unused space in your home, renting it out for storage can be a simple way to generate passive income.
You can offer storage solutions for vehicles or boats. If you have a smaller space, then offer it to store personal belongings. You can rent out your driveway, closet, basement, attic, and more. You can even rent out a shelf.
A website where you can list your storage space is Neighbor. You can earn $100 to $400+ each month on this platform. This depends on the demand in your area and the type of income-generating assets you are renting out. And, you can choose who, what, and when — who to rent to, what things are stored, and when it will happen.
You can learn more at Neighbor Review: Make Money Renting Your Storage Space.
14. Short-term rentals
Short-term rentals can be a lucrative income-generating asset if you own properties in popular tourist destinations or business hubs.
Websites like Airbnb provide a platform to rent out your property to travelers for short periods, potentially generating higher returns than traditional long-term leases.
Furnished Finder is another website for short-term rentals. This is a way to connect with travel nurses in need of short-term housing.
Keep in mind that rental income can be affected by local regulations, potential vacancies, or seasonal fluctuations.
15. Car rentals
Car rental platforms like Turo allow you to rent out your car when you’re not using it. Assets that generate cash flow include your own wheels, and that means no significant initial investment besides the cost of the car you already own.
Be mindful of risks such as wear and tear, insurance, and potential damage caused by renters.
It’s an affordable alternative to traditional rental car companies for customers, and it’s a good way to make money if you’re already working from home and don’t need your car, or are a two-car household.
Turo is one of a few different places to rent out your car, turning your vehicle into one of your income-generating assets. Your car is covered by Turo with up to a $1 million insurance policy. You can also pick the dates for when your car is available and set your rates.
Turo says you can earn an average of $706 per month by listing your car on their site.
16. RV rentals
Similarly to car rentals, RV rentals can provide additional income by renting out your recreational vehicle when you’re not using it. Your RV could easily become one of your income-generating assets.
You may be able to earn $100 to $300 a day, or even more, by renting out your RV on RVShare.
If you have an RV that is just sitting there and not being used, then you may be able to earn an income with it by renting it out to others who are interested in RVing. Cash flow-generating assets like RVs are a win-win for both you and the renter who wants to experience life in a recreational vehicle.
You can learn more at How To Make Extra Money By Renting Out Your RV.
17. Vending machines
With a vending machine business, you can generate income by selling a variety of products, from food to fishing supplies, beauty products to baby items, and more.
You may be able to earn $1,000+ a month by running a vending machine business. That’s enough reason to take a closer look at income-producing assets like this.
You can learn more at How To Start A Vending Machine Business – How I Make $7,000 Monthly.
Questions about income generating assets
Here are common questions that you may have about income-generating assets:
How do I start passive income from nothing?
Starting passive income from nothing requires creativity and resourcefulness. You can begin by identifying skills you possess or interests that can be turned into income-generating opportunities.
What are the assets that generate income?
The assets I talked about above include:
Dividend-paying stocks and stock market investing
High-yield savings accounts and CDs
Real estate
Bonds
Mutual funds
Index funds and exchange-traded funds
Annuities
Websites and online businesses
Royalties and intellectual property
Stock photos
Crowdfunding and peer-to-peer lending
Renting out your storage space
Car rentals
RV rentals
Vending machines
How do I start buying income generating assets?
There are traditional investments or more creative options. Do as much research as you can before deciding which option fits you best.
What are good assets to buy?
After deciding if you want to purchase traditional investments or more creative options, choose an asset that you can afford and best fits your lifestyle.
What are the best assets to buy for beginners?
For beginners seeking income-generating assets, you may want to look into:
Dividend-paying stocks for your investment portfolio
Crowdfunded real estate investing: Platforms like Fundrise allow smaller investments with lower risk exposure.
ETFs and index funds: They provide diversification and passive income through dividends.
What is income generating real estate?
Income-generating real estate refers to properties that produce regular rental income, such as apartments, commercial properties, or short-term vacation rentals.
How do I start passive income in real estate?
There are a few ways that you can earn passive income from real estate, including:
Buying a property, such as an apartment building or duplex, and renting it out to tenants
Using real estate crowdfunding platforms
Investing in REITs
How to make passive income with real estate without owning property?
You don’t need to actually own property in order to make money with real estate. Instead, you can earn passive income from real estate by investing in REITs and using real estate crowdfunding platforms.
This is an option for those who want to be diversified with their income-generating assets but don’t want to spend all of their money or time on a single piece of real estate.
How to make $1,000 a day in passive income?
Making $1,000 a day in passive income with assets that produce income will not be easy. If it were easy, then everyone would be doing it, after all.
Making $1,000 a day in passive income may require a large amount of money up front, diversifying into different assets mentioned above, and lots of patience from you because it will take time to make that kind of money.
You may want to start off by focusing on building multiple income streams and reinvesting your profits as you earn them.
What to think about before investing in income producing assets?
There are many different things to think about when it comes to income-generating assets. You want to find the best assets to invest your money in that will also be the best fit for you.
Remember, as I said at the beginning of this article, not everything will be applicable to everyone. Everyone is different! You may prefer to create a stock photo portfolio and hate real estate, whereas someone else may really enjoy being a real estate investor — or it may even be the other way around.
Here are some of my tips if you are interested in income-generating assets:
Do your research and talk to experts —I recommend researching as much as you can on the asset you are interested in. And, if you still have questions, don’t be afraid to talk to an expert.
Diversify — One of the important parts of building a successful income-generating portfolio is finding ways to be diversified.
Think about the risks —When making money, there’s usually some sort of risk. I recommend evaluating the risks and seeing what you are comfortable with.
What are the best books on income generating assets?
Some highly recommended books on income-generating assets include:
The Simple Path to Wealth by JL Collins
The Millionaire Real Estate Investor by Gary Keller
The Little Book of Common Sense Investing by John C. Bogle
Income Generating Assets — Summary
I hope you enjoyed this article on the best income-generating assets. As you learned, there are many different types of assets that you can invest in so that you can earn an income.
The best income-producing assets, if they’re right for you, can truly change your life.
With these assets, you can build wealth through a reliable passive income, giving you peace of mind and freedom to live life on your own terms.
Are you looking to build income-generating assets? What are your favorite ways?
Lately, I probably haven’t been winning many friends with my somewhat pessimistic view on the real estate market.
A couple weeks back, I warned that affordability was set to take a major blow, as a result of higher home loan interest rates and surging home prices.
And just last week, I cautioned readers that the housing market might be cooling, at least in some parts of the country.
Interest Still High, Quality Perhaps Not
The issue I see materializing is a lack of qualified buyers, not necessarily a lack of interest from prospective home buyers.
In other words, properties that are listed at seemingly astronomical prices will continue to receive bids, but if the buyers aren’t actually able to obtain financing at those sky-high prices, it all means nothing.
There are a few different issues at hand. For one, there is the prospective buyer who got pre-qualified to buy a home two months ago, when both interest rates and home prices were significantly lower.
For this individual, they may find that they can no longer actually afford what they thought they could, once their lender says their mortgage rate is no longer 3.5%.
This is especially true for those who were just squeaking by in the affordability department, as many often are.
It’s simple math really. If a borrower’s DTI ratio is now too high, the lender won’t be able to offer them a loan. And with rates and prices higher, there’s no easy way around a higher monthly housing payment.
That is, unless you buy down your rate, or bring more money in at closing to reduce your loan amount.
[Watch Out for the Adjustable-Rate Mortgage Pitch!]
Down Payment Dilemmas
Unfortunately, that brings us to another issue. Most homeowners probably don’t have a surplus amount of cash to put down on a home, especially seeing that prices have risen dramatically nationwide.
For example, cash set aside for a 20% down payment may only go as far as 10% nowadays, or even less, based on markedly higher listing prices.
This creates an issue when making a big offer for several reasons. For one, it means you’ll need to find a lender willing to offer a loan with a LTV ratio greater than 80%, or secondary financing to arrange a combo loan. There’s also mortgage insurance to contend with.
In any case, financing can get chancy if the loan is no longer straight-up vanilla.
Secondly, those who are already putting down less than 20% will have few places to turn if (and when) the appraisal comes in low.
Let’s face it – some of these properties are listed for way too much these days, and without supporting comparable sales, lenders won’t be able to assign sufficient appraised values. So when the properties don’t appraise, these offers will fall through.
For the market to hold up, it will need sustained interest from qualified buyers, not just any old buyer. I’m talking a buyer with plenty of assets and income who can adapt when things go awry.
This will be especially important as investor interest wanes.
The alternative, of course, is looser underwriting guidelines, creative financing, inflated appraisals, and another housing crisis.
Northwestern Mutual doubles down on commitment in the fight against childhood cancer, reignites social media #LemonTopChallenge for Childhood Cancer Awareness Month Company announces additional major investments toward cancer research and scholarships and enacts local activations MILWAUKEE, Sept. 14, 2023 /PRNewswire/ — Every day, more than 1,000 children worldwide are diagnosed with childhood cancer. Today Northwestern … [Read more…]
The path to a clean divorce is riddled with obstacles. If not handled correctly, a mortgage can be the last holdout linking your finances with your ex-spouse. Regardless of financials, divorce can be an exhausting and emotionally draining process. Now, what to do about it?
As we noted in a blog post last year, refinancing after divorce is difficult. More than any other financial investment, a mortgage is truly the biggest hurdle on your path toward independence. Because the house is the largest asset for most families, it is a ripe bargaining chip for divorce settlements. The mortgage becomes a liability as opposed to an asset. “Divorcing” your mortgage is not an easy process—in the eyes of your mortgage lender, you remain married and responsible for the mortgage until you decide to refinance or sell.
Is It Worth Leaving Your Ex?
What comes next is a chance to perform a cost-benefits analysis on your situation. If you are close to paying off your mortgage, is it worth staying on the loan? If you are far away from repayment, is there a way to get to equity and cash out?
This decision is no simpler when it comes to occupancy issues. Who gets to keep the marital house?
Who Gets What in the Divorce?
With or without children, the social and economic anxieties of divorce can be taxing. Even when it’s an amicable split, divorcees must grapple with the negotiating terms of settlement: alimony payments, custody battles, and liabilities. When it finally comes to divorcing the mortgage, many people would rather surrender the house and save themselves another battle. On the other hand, some divorcees decide to ride out their mortgage together, cohabitating until they have repaid the loan.
Why Would Anyone in Their Right Mind Want to Live With Their Ex?
It’s hard to tell, but as New York Magazine reported, couples who undergo this special form of purgatory usually do so for the benefit of children. Otherwise, couples will choose to cohabitate for financial reasons. This is yet another reason to avoid becoming house poor and keeping some money stashed away in your own savings account. And even if it is for the benefit of children, the cohabitation situation is bizarre. We see it again and again on television sitcoms and big screen movies, from The Real O’Neals to the 2006 film The Break-Up starring Jennifer Anniston and Vince Vaughn. Today, more people are simply grinning and bearing it.
Fortunately, you are not Jennifer Anniston’s character from the film. With a little guidance you can navigate both divorce and refinancing your mortgage.
Going Solo to Refinance Your Mortgage
The hard truth is that there is only one way to remove your spouse’s name from the mortgage: you must refinance the mortgage in your name only. Since you had originally applied with two names (and two salaries) the lender needs to recalculate the loan’s interest rate for a single payer.
Just as before, you will have to pass the lender’s eligibility test on your own merit. Due to the hit on your combined income, you may have to make a larger down payment or ask for a cosigner. Remember, the mortgage cannot be more than 28 to 30% of your gross income, and your total monthly debt payments cannot exceed 43% of your gross income. They will also factor in child support and alimony payments.
If you can pass each of the lender’s eligibility requirements, then you move on to your final challenge: the quitclaim deed.
A quitclaim deed transfers the ownership of a property without it being sold. The same type of deed is used if you want to add someone to the deed, like a new husband or wife in the future. No money is involved here, but you will need your ex-spouse to sign the deed in the presence of your lender for it to be valid. Remember! The quitclaim deed only refers to ownership. You still need to refinance your mortgage for your spouse to be taken off of payments.
Give Me Equity or Give Me Death
If you choose to go the equity route, it involves more number crunching than tactics. For example, if you and your spouse own a house valued at $500,000 with an outstanding mortgage balance of $100,000 both of you could split the property’s equity 50-50 for a clean $200,000 each. (The other $100,000 from the house sale would finish off the loan.) Your share of equity is determined by premarital assets, if the home is covered in a prenuptial agreement, and whether you made any improvements to the property.
In cases of property and divorce, laws vary dramatically. Be sure to attain legal advice before taking any of these steps. Because of how costly and meticulous the path toward independence can be for soon-to-be divorcees, it is important to have a true understanding of your financials.
Take the time to think of worst case scenarios. Will the divorce be amicable? Can you and your ex decide on an equity agreement? With a mortgage, the best you can hope for is that they will.
The banking industry and its allies are ramping up their efforts to combat federal regulators’ plan to increase capital requirements on banks with at least $100 billion of assets.
Initially opting for a passive approach focused on research papers and a website dedicated to sussing out the “price tag” of higher capital requirements, bankers and bank lobbyists are taking the fight to regulators more directly through advertising campaigns and procedural challenges.
“The industry appears more willing to battle the regulators on this issue than any in recent memory, which suggests that we could see litigation on the other side of the rule being finalized,” said Isaac Boltansky, director of policy research at BTIG.
On Tuesday, several top banking and financial industry groups sent a joint letter to the Federal Reserve, Federal Deposit Insurance Corp. and Office of the Comptroller of the Currency asking them to issue a new proposal for their so-called Basel III endgame package to close data-disclosure gaps. The groups accuse the agencies of drawing from “nonpublic” data for their proposals, thus violating standards of the Administrative Procedure Act, or APA.
“To remedy this violation, the agencies must make available the various types of missing material — along with any and all other evidence and analyses the agencies relied on in proposing the rule — and re-propose the rule,” the groups wrote. “To remain consistent with what the agencies themselves have determined to be an ‘appropriate’ comment period, the agencies should provide for a new 120-day comment period in the re-proposal.”
Representatives from the Fed and OCC declined to comment on the letter. The FDIC did not respond to an interview request on Tuesday.
The letter was co-signed by the Bank Policy Institute, American Bankers Association, Financial Services Forum, Institute of International Bankers, Securities Industry and Financial Markets Association and the U.S. Chamber of Commerce. It cites several violations of “basic legal obligations” under the APA, potentially setting the stage for a legal challenge should the proposal be enacted.
Boltansky said it is unlikely that the letter will actually compel regulators to issue a new proposal, but he said it could make them think twice about finalizing the rule as is.
“It is difficult to envision the banking regulators pulling and reproposing, but the letter from industry groups will add even more pressure for the standard to be softened prior to finalization,” he said.
The letter comes less than a week after BPI, which represents banks with more than $100 billion of assets, launched its “Stop Basel Endgame” advertising campaign, a nationwide push to draw attention to the risks the rules present to the banking sector, the U.S. economy and individual households. The effort includes print and radio ads in Washington, D.C., and other select markets as well as targeted online ad buys.
“The current Basel proposal is unacceptable, and BPI is committed to ensuring that lawmakers, regulators and the public fully understand how this proposal will affect every person and every business in this country,” BPI President and CEO Greg Baer said. “The largest media campaign in the organization’s history is underway, and our goal is to force regulators to justify to the public why they are imposing these costs and pushing still more economic activity into the shadow banking system.”
Banks themselves have gotten in on the effort to undermine recent regulatory proposals, which call for additional risk-weighted capital requirements and new resolution standards for banks between $100 billion and $250 billion of assets. On Tuesday, Goldman Sachs released a survey of small-business owners in which 84% of respondents said they were “concerned that the proposal will negatively impact their ability to access capital in an already difficult market.”
On Monday, JPMorgan Chase CEO Jamie Dimon ripped the proposal during an on-stage appearance at Barclays Global Financial Services Conference, calling it “hugely disappointing.”
In fiery remarks, Dimon said the proposed risk capital rules would result in U.S. banks facing more stringent regulatory obligations than their international peers, undermining the initial goal of the international standards on bank regulation. “What was the goddamn point of Basel in the first place?” he said.
Dimon said the rules would likely drive certain activities — including mortgage lending and financing leveraged lending by nonbanks — out of the banking sector entirely. He argued that if that is the intended outcome the Fed, FDIC and OCC had in mind, they should have said so explicitly, adding that the proposal marks a low point in relations between banks and their regulators.
“I’m not sure it’s a great thing that we have this constant battle with regulators as opposed to open, thoughtful things. We used to have real conversation with regulators — there is none anymore in the United States. Like, virtually none,” he said. “This stuff is just all from up top and imposed down below. And then … we simply have to take it. They’re judge, jury and hangman, and that is what it is.”
Proponents of the potential changes say the all-out push by bankers and industry groups to combat the proposal was to be expected.
“Wall Street’s latest attack on these modest and sensible rules is as baseless as it is unsurprising,” said Dennis Kelleher, head of the consumer advocacy group Better Markets. “Wall Street is going to do and say anything to try to stop any increase in capital, no matter how baseless or false.”
Regulators released their risk-capital proposal at the end of July along with a potential change to their global systemically important bank, or GSIB, surcharge that could have a meaningful impact on some foreign banks.
Much of the 1,000-page Basel III endgame proposal is focused on justifications for the rule changes, including recent bank failures and disparate treatments of operational risks by large banks. Currently, banks are able to rely on internal models for managing these risks which, the documents notes, “include a degree of subjectivity, which can result in varying risk-based capital requirements for similar exposures.”
The Fed estimates the changes will lead to a 16% aggregate increase in capital requirements for the affected banks, with the largest burden falling on GSIBs, which are set to see their capital obligations increase by 19%.
Dimon, however, said the actual increase will be closer to 25% by JPMorgan’s calculations, though the exact impacts of the potential changes have been a subject of debate since they were proposed. Fed Vice Chair for Supervision Michael Barr, in remarks made during a public meeting about the proposals, said the central bank intends to “collect additional data to refine our estimates of the rule’s effects.”
The recent push by bank trade groups adds to the mounting opposition that has been building against the Fed’s capital proposal for the past year. Republicans and some moderate Democrats in Washington questioned whether new rules were necessary in the months before the proposal was rolled out, and thus far the proposal has few vocal champions on Capitol Hill.
But regulators do not need the backing of Congress to enact the rule changes, which fall within the regulatory framework codified by the Dodd-Frank Act of 2010 and modified by the Economic Growth, Regulatory Relief and Consumer Protection Act of 2018.
Kelleher said bank failures earlier this year underscore the importance of having a well capitalized banking system. He added that the rule changes would apply additional protection from the highest-risk activities at the 35 biggest banks in the country.
“It’s no different than when banks require their customers to put up a down payment when they buy a house,” he said. “The homeowner then has to absorb the first 20% of losses on the house, which protects the bank from losses. The American people should be protected as well.”
The FDIC said its “problem list” of banks grew to 117 institutions in the second quarter as reported net income earned by FDIC insured commercial banks and thrifts plunged.
It’s the highest total for the infamous list since mid-2003, as assets of troubled banks increased from $26 billion to $78 billion, including a whopping $32 billion from recent failure Indymac Bank.
Net income earned by all FDIC insured institutions during the second quarter totaled just $5 billion, a $31.8 billion, or 86.5 percent decline, from the same period in 2007.
Aside from the fourth quarter of last year, earnings were the lowest for the industry since the fourth quarter of 1991.
“By any yardstick, it was another rough quarter for bank earnings, but the results were not unexpected as the industry coped with financial market disruptions, the housing slump, worsening economic conditions and the overall downturn in the credit cycle,” said FDIC Chairman Sheila C. Bair, in a release.
“More banks will come on the list as credit problems worsen,” she added. “Assets of problem institutions also will continue to rise.”
The FDIC said higher provisions for loan losses were to blame for the drop in profits, especially at a few large institutions (probably Countrywide and Indymac), though more than 50 percent of all insured institutions reported lower net income.
A staggering $50.2 billion was set aside for bad loans, primarily tied to real estate, during the second quarter, up from $11.4 billion a year earlier.
Net charge-offs for 1-4 family residential mortgage loans increased 821.9 percent from a year ago to $5.8 billion, while home equity loan charge-offs surged 632.7 percent to $2.8 billion.
The dollar amount of loans 90 days or more behind in mortgage payments increased by $26.7 billion, or 20 percent, during the quarter, similar to the $26.2 billion rise in the first quarter and the $27 billion jump in the fourth quarter of 2007.
As of the end of June, 2.04 percent of all loans and leases were considered non-current, the highest level since 1993.
The dismal results caused the FDIC’s Deposit Insurance Fund reserve ratio to fall to 1.01 percent during the quarter, and because it now lies below 1.15 percent, the FDIC must develop a “restoration plan” aimed at raising it back to at least 1.15 within five years.
Asset turnover ratio is a calculation used to measure the value of a company’s assets relative to its sales or revenue. It’s used to evaluate how well a company is doing at using its assets to generate revenue.
Similar to cash flow, the asset turnover ratio compares the company’s total assets over the course of a year to its sales. In simpler terms, it shows the dollar amount the company is earning in sales compared to the dollar amount of its assets. It can be calculated annually or over a shorter or longer period of time.
Why Is Asset Turnover Ratio Important?
Although having cash on hand is important for growing and maintaining a business, other types of business assets are also important, as is how a company chooses to use them. Liquid assets can include cash, stock, and anything else the company owns that could be easily liquidated into cash. Fixed assets are things the company owns that are not as easily turned into cash. This could include real estate, copyrights, equipment, etc.
For business owners, asset turnover ratio can be important when applying for loans and learning about their company’s cash flow. A higher asset turnover ratio indicates that a company is efficiently generating sales from its assets, while a low ratio indicates that it isn’t. A higher asset turnover ratio also shows that a company’s assets don’t need to be replaced or discarded, that they are still in good condition.
A higher ratio is preferable for investors, as well. Investors can look at the asset turnover ratio when evaluating the risk of investing in a company, or when comparing similar companies to one another. Each industry has different norms for asset turnover ratios, so it’s best to only compare companies within the same sector. For instance, a utility company or construction company is more likely to have a higher number of assets than a retail company.
Know, too, that asset turnover ratio is only one of many calculations that comprise the list of financial ratios that investors can employ. 💡 Quick Tip: How do you decide if a certain trading platform or app is right for you? Ideally, the investment platform you choose offers the features that you need for your investment goals or strategy, e.g., an easy-to-use interface, data analysis, educational tools.
Formula for Calculating Asset Turnover Ratio
It’s fairly simple to calculate asset turnover ratio, which is one reason it’s such a useful tool for investors. Asset turnover ratio can be calculated using the following formula, which divides total (net) sales or revenue by average total assets:
Net Sales = Gross annual sales minus returns, allowances, and discounts. Total sales can be found on a company’s income statement (typically part of an earnings report).
Beginning Assets = Assets at the beginning of the year
Ending Assets = Assets at the end of the year
Total Assets = Generally a company will include calculated average total assets on their balance sheet. However, sometimes additional calculations will need to be made.
Calculating Total Assets
The value of a company’s total assets includes the value of its fixed assets, current assets, accounts receivable, and liquid assets (cash).
• Accounts receivable are accounts that hold expected revenues that come from when customers use credit to buy goods and services.
• Fixed assets are generally physical items such as equipment or real estate.
• Current assets are things that the company predicts will be converted into cash within the next year, such as inventory or accounts receivable that will be liquidated.
The formula for calculating total assets is:
Total Assets = Cash + Accounts Receivable + Fixed Assets + Current Assets
Example of Calculating Asset Turnover Ratio
To give an example of the ratio calculation, if a company has $2,000,000 in average assets and $500,000 in sales over the course of a year, the calculation of its asset turnover would be:
500,000 / 2,000,000 = 0.25 = 25% asset turnover ratio
Interpreting Asset Turnover
Sticking with the example above, we’ve calculated a 25% asset turnover ratio. What that means, exactly, is that the company’s assets generated 25% of net sales over the course of the year. In other words, every $1 in assets that the company owns generated $0.25 in net sales revenue. Again, this can be helpful when using various business valuation methods and trying to determine whether an investment fits your overall strategy.
Factors that can Cause Low Asset Turnover
There are several reasons why a company might have a low asset turnover. These include:
• More production capacity than is needed
• Inadequate inventory management
• Poor methods of customer money transaction
• Poor use of fixed assets
The ratio can also change significantly from year to year, so just because it’s low one year doesn’t mean it will remain low over time.
What Is a Good Asset Turnover Ratio?
Investors can use the asset turnover ratio as part of comparing and evaluating stocks. But what is considered a good number for asset turnover?
In general, the higher the number the better — and a number higher than 1 is ideal. This is because a value greater than 1 means the dollar value generated by assets is greater than the dollar amount that the assets cost. A higher number means a company is generating sales efficiently and not wasting assets.
Conversely, a number less than 1 means that assets are generating less than the amount of their dollar value. If a company isn’t effective at generating sales with its assets, it most likely wouldn’t be a great investment — which, again, is important to know if you’re building an investment portfolio.
Since each industry has its own standards for a “good” asset turnover ratio, there isn’t one specific number to look for. For companies in the utilities industry, ratios are generally lower than companies in retail.
Companies can work on improving their asset turnover ratio by increasing sales, decreasing manufacturing costs, and improving their inventory management. Other ways they can improve include adding new products and services that don’t require the use of assets, and selling any unsold inventory still on hand.
What Does a High Ratio Imply About a Company?
If you’re using technical analysis techniques to get some clarity around a company as a possible investment target, you’ll want to get down to brass tacks: What, exactly, is a high ratio telling you?
The answer is that a high ratio implies that a company is in good standing. It’s generating value with its assets, which can signal that it may be a solid investment. But, again, there are no guarantees.
Limitations of Using Asset Turnover Ratio
While asset turnover ratio is a useful tool for evaluating companies, like any calculation, it has its limitations. It is useful for comparing similar companies, but isn’t a sufficient tool for doing a complete stock analysis of any particular company.
Also, a company’s asset turnover ratio could vary widely from year to year, making it an unreliable measure for potential long-term investments. Even if the ratio has been similar in years past, this doesn’t mean it will continue to remain consistent. However, investors can look at the long term trendline of the ratio to get a general indication of whether it’s improving or not.
Since asset turnover is typically calculated once a year, if a company made even a few large purchases this could skew their ratio. This is fairly common, as companies might have certain monthly expenses but occasionally need to invest large sums of money into equipment, office renovations, or other common business needs. 💡 Quick Tip: The best stock trading app? That’s a personal preference, of course. Generally speaking, though, a great app is one with an intuitive interface and powerful features to help make trades quickly and easily.
Drawbacks of Asset Turnover Ratio in Stock Analysis
The limitations outlined above play into some of the potential drawbacks of the asset turnover ratio when analyzing stocks, too. Mostly, it comes down to the fact that as a single ratio, which doesn’t reveal the total health or financial picture for a single company. For that reason, it’s probably a good idea to use the ratio in tandem with other analysis tools and methods.
For instance, other ratios that can be used to gain an understanding of a company’s financials are the debt-to-equity ratio, its P/E ratio, and even looking at its net asset value.
The Difference Between Asset Turnover and Fixed Asset Turnover
Fixed asset turnover and asset turnover are two different ratios that can tell you about a company, and for investors, it’s important to understand the difference between the two.
In short, and to recap, asset turnover ratio looks at average total assets of a company — “total,” in this case, being the important qualifier. On the other hand, fixed asset turnover ratio looks at a company’s fixed assets to measure performance.
Investing With SoFi
Knowing how to calculate asset turnover ratio can be useful for investors who are evaluating companies as they start building an investment portfolio. While the formula is simple — Asset turnover = Net Sales / Average Total Assets — it’s important to remember that the calculations work best when comparing companies within one industry, rather than across various industries.
Additionally, there are other metrics by which to evaluate a company or value its stock. The asset turnover ratio can be helpful, but it has its limitations. As always, speak with a financial professional if you feel like you’d benefit from more guidance.
Ready to invest in your goals? It’s easy to get started when you open an investment account with SoFi Invest. You can invest in stocks, exchange-traded funds (ETFs), and more. SoFi doesn’t charge commissions, but other fees apply (full fee disclosure here).
For a limited time, opening and funding an Active Invest account gives you the opportunity to get up to $1,000 in the stock of your choice.
FAQ
How can you improve asset turnover ratio?
Some ways that a company can improve its asset turnover ratio include increasing its revenues, selling some of its assets, renting or leasing assets rather than purchasing them, and optimizing its inventory and ordering systems.
Is an asset turnover of 1.5 good?
Yes, an asset turnover ratio of 1.5 is a sign that a company is on solid financial footing. It indicates that a company’s total assets are generating enough revenue from its current assets.
Can asset turnover ratio be negative?
Yes, and a negative asset turnover ratio would be a signal that a company lost money during the year, rather than earned it. A negative number represents that its liabilities or expenditures exceeded its assets.
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