Thursday, December 31, 2009

Bored old man on a new year's eve

New year's eve, I'm back home at 9 pm already. Let all the hot gals and hunks cheong their heads off while I'm back home, nice and comfy typing an article. Haha, getting old I suppose, but I never really like the crowds and the cacophony that follows in such a countdown event. If you spot me in such events, most likely you've got the wrong person.

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 :)


Createwealth8888 said...

The idea behind All Dividend Income investing may sound low risks and logical; but it may not be so.

Musicwhiz said...

Hi LP,

Saving hard is of utmost importance. If one saves enough and consistently, one may not even need to invest very well to grow that money. Hehe.

Happy New Year!


AK71 said...

There will always be an element of risk in all investments. We can mitigate risks but we cannot elimate them. High yields are and will always be important in helping to generate passive income for me. Go for value. Go for companies with strong balance sheets. Buy at depressed prices. Well, you know, the usual.

Happy new year!

Lau said...

These are the things u think abt while walking home on NYE?!

Happy New Year LP!

Createwealth8888 said...

Next time while walking home, try to think where can you find the like of Noble - 5300% gain since 1999. Phew!

la papillion said...

Hi bro8888,

I agree with your post. It's partly why I wanted to write an article to talk about it too :)

Regarding noble, aiyo...where got so lucky, haha :)

la papillion said...

Hi mw,

Hmm, actually I kind of agree with you. But the velocity of money for saving is not as good as investment. Saving a lot can help you though it's slow. Investment is faster but you can lose your capital. Haha :)

la papillion said...

Hi ak71,

Yea, i know the usual stuff. But I'm just pondering if a dividends from stocks is a good way to earn a passive income, haha :)

la papillion said...

Hi Lau,

Yea, believe if or not, THAT is what I'm thinking when walking home, haha :)

Derek said...

Hi LP,

You spoke my exact thoughts. Problem is I don't have capital to pump in now. Need to prepare for something you know...

Do let us know when you have found the 'magic formula' to your problem.

Have a Happy, Healthy and Prosperous New Year!

la papillion said...

Hi Derek,

Haha, we're at this stage where we should get more capital and liquidity. A lot of things coming up to spend money on :)

Have a happy new year too!

AK71 said...

Hi LP,

I have no doubt that dividends from stocks is a good way of earning passive income. A chunk of my annual income is from dividends. Even during the crisis, dividends streamed in.

We reduce risk by doing our FA as well as we can. If the FA gives us a green light, use TA to find entry points. Having said this, high yield stocks are like any other stocks in that they suffer or benefit from broad market sentiments. There is a time to buy and a time to sell. Nothing lasts forever, whether good or bad. So, yes, we have to watch our investments like a hawk. :)

Createwealth8888 said...

Stock dividends are truly passive income and require very little maintenance effort unlike rental income where the landlords still have fair amount of maintenace effort required to keep the rental income coming.

Alvin said...

I don like countdown too :D

Anonymous said...

Hi LP,

Looking back for the past 10 years, there were a few bull and bear markets. But sound businesses continue to grow, some steadily, some exponentially. The top 10 STI list for the last decade has at least 6 no-brainer investments.

What can I, 30 year old man, with $50,000 to invest do? I will still invest in stocks. I will find a household name, wait for it to sell at a fair P/E, buy it and hold.

10 years later, I’m confident that that I will make 3-4 times my investment. What can I do with $200,000? Perhaps not much, but I have found an investment style that works.

I have also worked hard for the 10 years, and with a nice saving of $400,000. By then, I am no longer a newbie in investing. Doing the same thing, in another 10 years time, I’m confident I will have at least $2,000,000.

Now let’s get carried away, I put in another $1,000,000 and discover another Noble. Wow! I’m Richie Rich!

What I’m trying to say, start small, do it slowly, but do it correctly.

Of course, you may want the $50,000,000 now, not when you are 60 year old. However that’s not the problem of the market, it’s you.

I am enjoying my job, loving my lifestyle, despite not being filthy rich. How about you?

Happy New Year and have a great 2010!

la papillion said...

Hi ak71,

Thanks for commenting :) I've no doubts that stocks is a good source of passive income too. I'm just saying it shouldn't be the only one and be so fixated on it.

I also agree with you that there is a time to sell for any stocks. Even divy stocks :)

la papillion said...

Hi bro8888,

I think so too. Jade's aunt is renting out her whole hdb flat. Her tenants keep complaining about aircon and such, so she has to keep up on the maintenance. Very time wasting and can be financially draining.

I alert them that the contract is to their favour, so I think it works well now, haha

la papillion said...

Hi alvin,

Hate crowds too eh? haha, the best thing to do on such days would be to be alone (or with a few close friends) and reflect on the year that is going to end.

He who do not know history is doomed to repeat it, yes? haha

la papillion said...

Hi anonymous,

Thanks for sharing with me, I find it quite encouraging :)

Unfortunately, the 50k is not my investing capital (not all, at least). It's for something far more impt, a roof above my head and my wedding expenses. My house will jumpstart me to the next level of my work, thereafter the income will be saved for inveting purpose. Till then, I can only do in small positions :)

Well, I wish I have your confidence in investing :) I wish you well in your health and wealth :)

Admin said...

Hi LP, coincidentally, I was thinking about dividend stocks as passive income this morning too.

I agree with you that it is not a stress-free strategy. However, that's the only thing that have given me proven results so far.

Like you say, diversification is still the key. I'd add that not only diversify your stock portfolio but also your sources of income. You mentioned last time you were learning about property?

la papillion said...

Hi dancerene,

Ya, apparently there's a change in plans. Instead of using property to rent or invest, I'll use my property to propel my career to the next level. I think this way is much safer and more satisfying, not to mention I'm in the know of what is happening.

Fits more into my life, so to speak :)

Joseph said...

Thanks for the wonderful post. It helps lot of people to know some ideas or views of another person. The other form of passive income opportunity is royalties. Royalties are measured as passive income opportunities and are considered as a type of frequent income. This is because once the product has been finished there is no further attempt to generate the extra income.