Should I Become An Income Investor?
There are several blogs out there devoted to passive income: Living off dividends, the dividend guy, dividend growth investor, and dividends4life just to name a few, all dedicated to the idea of freeing oneself from the bonds of regular employment by creating a diversified income source not dependent on your direct involvement. Passive income is income that comes in regardless of what you spend your time doing. Stock dividends, bond interest, real estate income, and maybe even business income are all forms of passive income. The key is that the checks arrive month after month even if you do nothing to earn it.
It’s easy to see the allure of a passive income strategy. After you’ve achieved a certain level of passive income, you no longer have to fear losing your job or falling on hard times because barring a complete economic collapse, your dividend and interest payments will keep rolling in. The results are sometimes dramatic. ND at Living Off Dividends, for example, brought in $2,667 in passive income in March, 2008. While admittedly not all of that income is completely passive (I hesitate to call blogging income “passive”), it’s impressive nonetheless. If you live in Manhattan that may be nothing special, but where I live $2,667 would completely take care of my living expenses with a bit left over at the end of the month. With that kind of cash, I could travel the world at will. Perhaps I would take on contract work every once in a while if I needed to save up for a large purchase, but for the most part my working days would be over.
So why haven’t I been an income investor in the past? The main reason is I didn’t have the capital necessary to build a portfolio large enough to provide a reasonable income, but after a few years working and saving that’s beginning to change. While I couldn’t come close to completely replacing my income passively, I could probably generate around $500-600 per month by shifting my emphasis from total return to income generation. While not great, $500 per month is a pretty solid start and I feel confident I could break $2000 within a few years.
And yet, I’ve decided not to go that route for the time being. For starters, income-focused strategies by necessity tend to sacrifice long-term return for current income, especially after taxes are taken into account. That’s perfectly fine if you’re generating $10,000 per month; at that level of income, you probably already have a portfolio large and diversified enough to handle whatever the market throws at you with ease. But at my stage in my investing career (I’m only 26), I feel my energy would be better spent maximizing my income elsewhere and building my own business. To be sure, I will make every effort to grow my passive income, but it will come from web projects, real estate, and other business ventures for now, not from portfolio income. My stock portfolio will continue to be invested for maximum growth of capital. Besides, it’s simple enough to sell my index funds and redeploy my capital into income-focused investments if and when I ever choose to go down that path. It’s also possible I may choose to use a hybrid strategy in the future, where I invest say 25% of my portfolio for current income and the rest for long-term growth of capital.
What is your strategy for quitting your day job, if you have one?
Yeah - we would all become income investors if we had the capital! But I think it is something to strive for… breaking the $1,000 and $2,000 per month mark would be hard and takea time, but it’s do-able.
Also, wanted to thank you for this post because I’m a novice investor and didn’t quite know the difference between investing for income and investing for long-term. To me they sound very similar - but you pointed out a few subtleties.
Thanks for the mention!
you’re right, blogging isn’t exactly passive, but it’s not a full-time job either.
Thanks for the mention! I am greedy, I want the passive income and still beat my benchmark (S&P 500).
Best Wishes,
D4L
Thanks for the mention as well. I do not think that investing in dividend paying stocks detracts from your long-term performance. My research has definitely shown that certain dividend paying companies tend to outperform the S&P 500 over time:
http://dividendgrowth.blogspot.com/2008/02/why-do-i-like-dividend-aristocrats.html
Anyways, even if you invested in index funds, don’t forget that these also pay dividends as well. If you simply invested $1000 in VFINX in 1976, your investment would currently be producing over $600 in annual dividend income and would be worth over $30k.
My research also shows that it takes about 35 years on average for $1 invested in stocks(S&P 500) to begin producing $1 in dividend income.
http://dividendgrowth.blogspot.com/2008/04/back-test-results-of-one-rule-of-thumb.html
Sorry for posting the external links. But I don’t think that you are sacrificing your capital gains potential by looking at most dividend income stocks.
Dividend focused investing is one approach for long term capital growth. It is not a contradictory to growth. I have done some research and sharing few examples below.
Stock (year start, initial capital, end year, value of equity, annual cash flow)
JNJ (1975, $10, 2007, $1895, $45.23)
PFE (1982, $25, 2007, $872, $42.92)
BUD (1982, $25, 2007, 1414, $33.13)
GE (1975, $10, 2007, $6523, $197.98)
BAC (1975, $25, 2007, $1072, $56.14)
ING (1996, $50, 2007, $307, $6.19)
IIA (2003, $100, 2007, $288, $34.2)
A $10 investment in 1975, gives cash flow of $45.23 and value of equity has become $1895. Considering some of later years, initial investment of $50 in 1996, gives me $6.10 cash flow and value of equity is $307.
These are just few examples, which for sure show dividend based approach is one way for long term growth (and cash flow).
Dividend focused investing is one approach for long term capital growth. It is not a contradictory to growth. I have done some research and sharing few examples below.
Stock (year start, initial capital, end year, value of equity, annual cash flow)
JNJ (1975, $10, 2007, $1895, $45.23)
PFE (1982, $25, 2007, $872, $42.92)
BUD (1982, $25, 2007, 1414, $33.13)
GE (1975, $10, 2007, $6523, $197.98)
BAC (1975, $25, 2007, $1072, $56.14)
ING (1996, $50, 2007, $307, $6.19)
IIA (2003, $100, 2007, $288, $34.2)
A $10 investment in JNJ in 1975, gives cash flow of $45.23 and value of equity has become $1895. Considering some of later years, initial investment of $50 in ING in 1996, gives me $6.10 cash flow and value of equity is $307.
These are just few examples, which for sure show dividend based approach is one way for long term growth (and cash flow).