As I was walking home, I was thinking about the problems related to using dividend yielding stocks as a passive stream of income.
These are the things I think are worth thinking about:
1. Longevity of the passive income stream.
I think this is the most important thing when buying divy stocks like the one I had, CIT. It can give you 10% or 15% per annum, but how long can it last? Don't give me the bull about defensive stocks either because in a bear market, nothing is defensive and in an accounting fraud, nothing is immune. I'm just thinking that if I have to bank my passive income on a bunch of diversified stocks yielding good dividends, I'm not going to sleep soundly at night. I mean really really soundly.
2. Massively, unforeseeable losses
As you can see, I'm a kiasu and kiasee person. The point of having a passive income is that one day I can stop work when I want to. Hence, the security of my capital and the passive income stream is very important to me. Hey, I have to rely on this to offset my expenses, of course I'm worried! I'm just thinking that what if in one bad investment, years of dividend accrued over the years are destroyed in one shot? I mean I can collect 60+ per lot of CIT for years then suddenly CIT is gone ... I might be just lucky enough to recoup my capital and breakeven, but so long for my passive income. Ya, I know diversification can reduce the risk...still..
3. Account size issue
I've an expense of around $2000, which includes all everything from insurance to pocketmoney for parents and the occasional gadget budget. To cover that every month from dividends, I need to have nearly 500k if I get a yield of 5% per annum. I know if I project at 10% per annum, I can just use a capital of 250k, but guess what, I'm no investment guru.
I think that firstly the capital amount is really a lot. Secondly, I think that if you can save 500k to put into stock, perhaps whatever ways you take to get that initial 500k might be a better shot than to buy divy yielding stocks.
4. Short-terminism on a long term goal
It's an irony that while having passive income stream is to have a long term goal of being financially free, being too concentrated on acquiring passive income through divy yielding stocks might actually hinder that goal. Let me explain.
Let us say that I wanted to increase my passive income this coming year by $2400. In the process of streamlining this goal into achievable monthly targets, I set myself to increase my passive income per month by $200. So I buy enough stocks to get that extra $200 dividends per month. What if the economy is not doing well, what if the stock market is toppish? Do I still average up/down?
The goal of having passive income is worthy enough, but I'm worried about being too fixated on that that it defeats the bigger picture.
Talk talk talk, so what's the solution?
Don't stone me, I've no solutions. I want to concentrate on building capital first before talking about building secure passive income streams. You know what, I'll just bloody hell love the job that I'm doing, which I don't mind doing for the rest of my life (but at a different pace, an important distinction here), save hard, invest the proceeds and watch it like a hawk. Most importantly, don't forget to reward yourself here and then because ultimately, you only have one life.
Have yourself a happy new year :)