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I have a large number of readers who have been with me since the launch of my premium advisory, The Daily Paycheck, back in January 2010. They watched as I slowly transformed the $200,000 cash stake from my company into the $291,776 portfolio it is today.

New subscribers are now greeted with a portfolio of more than 50 securities. And the questions I get asked most are 1) How do I get started? and 2) Can I use this strategy if I have less than $200,000 to invest?

The short answers to those questions are: slowly and absolutely. 

But I want to spend a little time today explaining the "science" behind The Daily Paycheck strategy and how you can use this strategy to meet your individual needs.

It was as much a surprise to StreetAuthority co-founder Paul Tracy as it was to me. As an experiment, Paul tried to build a personal portfolio of dividend paying stocks to see if he could get 30 dividend checks in a month. But he achieved far more than the joy of receiving dividends every day. Paul enrolled all his securities in an automatic reinvestment program through his online brokerage account. And before long, Paul's experiment was beating the market.

Both Paul and I were familiar with the power of compounding growth from dividend reinvestment. As you can see from the chart below, if you invested $20,000 in securities paying a 7% yield, after 10 years your portfolio would be worth $39,343 with reinvested dividends. 

And if your holdings happened to boost their dividends by just 5% annually -- something even a giant blue chip like AT&T (NYSE: T) has been able to beat -- your portfolio would be sitting at $46,475. That's an increase of 132.4%. And that's assuming zero capital gains. That isn't bad, especially when you consider the S&P 500 Index lost 26.5% in the ten-year period ended in 2009.

You can see for yourself in the chart below...

If you like the idea of that kind of portfolio growth, the income part of the equation is even better. 

The chart below shows your potential annual income stream assuming a $20,000 initial investment. Thanks to the power of reinvested dividends and dividend growth, after 10 years your portfolio could be generating $5,299 in annual income -- that's 278.5% more income when compared to an investor who doesn't reinvest. In fact, it could be generating an effective yield of 26.5% based on your initial $20,000 investment.

If you have even a little bit more time on your investment horizon (or more money to invest, or additional dollars to invest each year), then the numbers only get better. And keep in mind that these are conservative estimates.

While Paul and I understood the power of compound growth, we just didn't realize that an income portfolio -- even one with dividend reinvestment -- had market-beating potential. Month after month we reviewed the results. Before long, we realized some unique benefits of the portfolio he had built:

-- It was less volatile than the overall market. For investors who were tired of losing sleep over big swings in their portfolio, it offered a less bumpy ride. And after the financial meltdown of 2008, most investors were in need of a good night's sleep.

-- It was a particularly nice transition strategy for Baby Boomers. Boomers are at or nearing retirement. They need a strategy that can turn their growth portfolios into portfolios that generate income. Paul's portfolio beat the overall market, while also continuing to increase income potential over time.

After we launched The Daily Paycheck, we found even more followers than we anticipated. Retirees liked the above-average yields for current income. Recent college graduates, with a long investment horizon, also loved it. With little disposable income, they viewed it as a safer way to start investing.

If you're looking to start using a dividend reinvestment strategy, my advice is to start slowly. It took me many months to create my Daily Paycheck portfolios. Make sure you reduce your market risk by putting your money to work over time.

I absolutely believe in this system. There is nothing like the test of time. I've now spent nearly four years using The Daily Paycheck strategy. I love its simplicity. My dividends get reinvested every month without me having to lift a finger. Overall, the portfolio has been roughly 40% less volatile than the overall market. To me, that represents 40% more sleep-filled nights.

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