Chapter 1: The Need for a New Strategy

When my initial plan for generating low-risk passive income faltered, I realized I had to devise a fresh strategy that not only met my financial goals but also aligned with my ethical beliefs. By applying various filtering criteria, I pinpointed companies that offered dividends exceeding my previous earnings while being socially responsible. This isn't a "get rich quick" scheme; rather, it's a path open to anyone willing to engage in ethical investing.

In early 2019, I found high-yield savings accounts with interest rates around 2.4%, just below the inflation rate of about 3%. These accounts posed no risk, as they were backed by major banks and insured by the FDIC up to $250,000, allowing easy access to my funds. While limited to six transactions monthly, this was far better than locking my money in options like:

• Long-term Certificates of Deposit (CDs) with minimal liquidity.
• Bonds that tied up funds for decades at low-interest rates.
• Volatile stocks that provided no regular income.

My primary objective was to generate consistent earnings while ensuring easy access to my capital. Initially, everything seemed to be working well.

However, just months later, banks began slashing rates. The interest banks pay is directly influenced by what they earn from loans, which is ultimately determined by the Federal Reserve's interest rate decisions. As illustrated in the accompanying chart, my income and plans were adversely affected.

With the onset of the COVID-19 pandemic, interest rates plummeted to near zero. Although this was necessary to stabilize the economy, it severely impacted my finances. My once 2.4% interest account dwindled to 0.5%. To put this in perspective, what started as $1,000 monthly dropped to less than $210, an almost 80% decrease in expected revenue. This situation was untenable, prompting the need for a new plan.

Chapter 2: A Focus on Dividends

To meet my income expectations with manageable risk and liquidity, I turned my attention to dividends. Well-managed companies often distribute excess profits to shareholders as dividends, typically on a quarterly basis. For example, a company declaring a $1 dividend means shareholders receive $1 for each share owned. Thus, the goal became identifying companies with favorable dividend yields compared to their stock prices.

However, a challenge emerged: many companies boasting high dividend yields contribute to environmental destruction, ranging from fossil fuel extraction to weapons manufacturing. Extensive research was necessary.

Searching for dividend-paying companies yielded over 2,700 options, overwhelming at first. To simplify my search, I established criteria to narrow this down significantly:

1. Has the dividend shown positive growth over the past five years? If dividends are stagnant or declining, the company may not be healthy.
2. Has the company reported positive earnings for at least four consecutive quarters? This indicates sustainability rather than reliance on savings to pay dividends.
3. Is the dividend yield above 3%? Low yields wouldn't provide sufficient income, while excessively high yields could signal potential red flags.

This process reduced my list to about 163 options. Next, I applied an "ethical" filter to further refine my choices.

Chapter 3: Defining Ethical Standards

What constitutes "ethical" investing? For instance, companies involved in energy delivery, such as Consolidated Edison, may rely on fossil fuels but are actively transitioning to cleaner energy solutions. In contrast, firms like Kellogg, which engaged in labor disputes over fair wages, presented a more complex ethical dilemma. Despite my initial concerns, the resolution favored the employees, validating my decision to hold onto my investment.

Evaluating companies like Silvercrest Asset Management, which provides wealth management services to high-net-worth individuals, posed another challenge. While not focused on social good, the dividends generated from such companies could still benefit my portfolio.

Additionally, companies like Mobile Telesystems, a major telecommunications provider in Russia, raised concerns due to their association with the local regime. However, as they operate independently, I felt comfortable maintaining an investment in them.

Ultimately, every investor must decide their threshold for "ethical" standards, recognizing that no company is perfect. It's essential to gather as much information as possible and make the best choices available.

Chapter 4: Building a Diverse Portfolio

After narrowing down to 75 acceptable companies, the next step involved ensuring diversity within my investments. Investing all my money in one high-yield stock could lead to significant risk. Therefore, I aimed to spread my investments across 30 to 50 companies, ultimately settling on 47, with none exceeding 3% of my portfolio's total value.

The dividend yields of these companies ranged from 3.7% to 11.8%, collectively yielding an annual rate of 5.5%. This shift transformed my monthly income from $1,000 to nearly $2,300. It's important to note that dividend payouts fluctuate, requiring careful financial planning.

In addition to diversifying individual stocks, I ensured that my investments spanned various industries. The pandemic highlighted the risks of concentrating in one sector, like airlines. My largest investment is in banking services, constituting 32% of my portfolio, which might be too high, followed by stable Real Estate Investment Trusts (REITs).

Prior to making purchases, I analyzed stock prices over different time frames. If a stock was near its peak, it was likely overpriced, while those fluctuating around their historical averages appeared more promising.

With this strategy, I could weather fluctuations in stock value. If dividend payments remain stable, I anticipate recouping my initial investments in about 18 years. However, rising dividends will expedite this return.

Chapter 5: Measuring Success

To assess my portfolio's performance, I compared the unrealized gains in stock value alongside dividend income. Remarkably, only seven of my stocks lost value, while the remaining 40 increased in worth. Over the course of 2021, my investments rose by 37.3%.

Comparing my performance against major indices, I outperformed the S&P 500 by 39%, the NASDAQ by 74%, and the Dow Jones by 99%. At my peak, my portfolio exceeded the S&P 500 by 129%, the Dow by 137%, and the NASDAQ by a staggering 227%. However, it's essential to note that I experienced fluctuations, sometimes even losses, which could impact net worth if I had sold at those moments.

Unlike many investors focused solely on short-term gains, my strategy emphasizes long-term commitment to companies I believe in. A successful ethical portfolio requires patience, especially in challenging times.

Chapter 6: Accessibility for All Investors

You might assume that an ethical investment strategy is only feasible for those with substantial disposable income. However, this approach can be accessible to anyone. While my aim was immediate income, you can reinvest dividends to acquire more shares over time, transforming a small initial investment into a significant portfolio.

Even if you can only buy a single share of your top choice, that's a great starting point. Traditional investments like banks and bonds typically offer lower returns than ethical investing, provided you take a long-term view. If you're seeking quick profits, this strategy may not be for you.

As you contemplate your financial future, consider taking that first step today. Brokerage accounts are often free from many providers, making it easy to get started. Research, prepare, and aim for a better financial future.

The first video titled "How to Build a Portfolio Without Clients" offers insights into generating investments without a client base. It covers strategies and practical advice that align with the ethical investment philosophy discussed above.

The second video titled "Build Your Professional Profile for Free Using Open Source Tooling and Hosting" highlights resources for building a professional online presence, which can complement your journey as an ethical investor.

J.P. Prag is a leading voice in the fields of government and finance, and author of "NEW & IMPROVED: THE UNITED STATES OF AMERICA." To explore how we can reshape America for justice and freedom, visit jpprag.com.