Dividend investing remains at the very heart of the Bedokian Portfolio investment methodology; after all, the mantra at the top of the blog read “Passive Income Through Dividend and Index Investing”.
Before I delve into the intricacies, I would like to state that this is not a “this is good, others are not good” type of post. As seasoned readers of this blog had noticed, I am open and go into index, value and growth as well.
Part Of Returns
It is universally understood that returns of an investment are consisted of two parts: capital gain plus income. What could be easily missed by investors is that, unlike the capital gains part where it is obtained with the liquidation of the investment, you can earn the income and hold the investment simultaneously. In other words, capital gains are unrealized gains, whereas income is realized. In this way, you can continually hold the investment and benefit from the payout, which could be put into good use.
Powder For Reinvestment
Speaking of good use, reinvesting the income into the same counter or other counters will amplify the compounding effect which is so exalted in investment circles. Buying into other dividend-generating instruments will create more of the returns = capital gain + income models, and the income parts of these instruments will have more opportunities of reinvesting, and so on.
Another good use is that in the event of retirement (conventional or early), dividends form a major component of passive income (we shall reserve the semantics of “passive” for another day? ), without the need for capital disposal, from an investment portfolio. If managed properly and given your preference, dividends can continually fund your lifestyle and the portfolio can remain intact for your eventual beneficiaries.
There is a general understanding that there is a positive relationship between inflation and dividends from equities. The rationale behind this notion is that during inflationary periods, prices rise and this translates to a rise in company profits, resulting in a rise in dividends. For this, I would say my favourite phrase: it depends. Some sectors/industries and companies are positively correlated to inflation, like those that deal with energy, commodities, etc.
As with all methodologies, there are bound to have caveats and disadvantages of dividend investing. The obvious one is dividends are not guaranteed, in terms of the amount and the payout. Companies can cut down or even suspend dividend payments due to change of dividend policies, economic conditions and/or regulatory requirements. Another disadvantage is dividend counters are deemed to be low growth, i.e., not much capital gains. This is in line with the stable and matured characteristics of dividend-producing companies.
Despite the caveat, I am still all for dividend investing. If you are comfortable, include some growth1 and/or index2 counters to alleviate the low capital gains issue. On top of this investment style and methodology, it is also prudent to keep a diversified portfolio of various asset classes and rebalance accordingly. Do not forget that there are other income-producing instruments such as bonds, treasury bills and bank deposits.
1 – The Bedokian Portfolio (2nd Edition), p149
2 – ibid, p135 – 137
I have been investing for passive income for quite a while now. I only started to track the passive income in 2011. So its been 12 years. It has not been a smooth journey at all.
After experiencing the flow & ebb of passive income over the years, we have put in place "measures" to ensure we get some income every month. And yes, we diversified and have established three main streams of passive income.
The first and easiest stream to start with is dividend from equities. This is a very market dependent stream of income. In 2019, we achieved an all time high (ATH) dividend income of $78,800. Then Covid pandemic struck in 2020, and the income dropped significantly, together with the values of the stocks. With new capital injections, we managed to keep the dividend above $60,000, at $64,000. To minimise the volatility of dividend income, we have padded it with SSBs (we maxed out our $200K quota each) and created a payment ladder such that we will get monthly payout. We padded the next layer with unit trust products. These complemented / supplemented the payout and are also less susceptible to market conditions. The third layer is made up of ETFs. Fourth layer are the REITs and the top layer consists of stocks.
This 2022 year has been a good year for dividend income investors. Our dividends came in at $88,180 creating a new ATH.
Our next passive income stream is from rental. This year saw rental rates surging but we didnt do our homework and locked in a tenancy contract at a very discounted rental of $3,500 pm. A neighbour secured $4,600 pm for a similar size unit with same layout. This source provides a steady regular income month after month as long as you have secured a tenant.
Our third passive income stream is none other than the interests from the humble CPF. Last year our combined interests across all the accounts came in at $93,000. For 2022, we are expecting $99,000. We are not drawing out the interests yet, but letting it compound. The CPF will eventually form two solid income streams for us:
1. Interests from OA & SA : $60,000 pa (the current interest)
2. CPF Life payout at 70 : $62,000 pa
So to summarise, our three passive income streams gave us a total of $227,300 for 2022. It was $196,000 in 2021, and $182,000 in 2020.
Of the three income streams, the most stable and reliable one is the humble CPF. Do not neglect it.
Thank you for sharing your experiences and strategy. I appreciate your layered approach in that you framed and diversified according to asset classes and riskiness/volatility of the financial instruments used.
The inclusion of property rental and the eventual CPF for your case makes it into a holistic income stream machine. I have a similar concept like yours but more on a portfolio approach, which I dubbed as the portfolio multiverse.
Going further, each type of income stream can be used for each type of expenditure, with certain ones e.g., CPF and SSBs for basic/fixed expenditure and returns from higher risk assets for discretionary spending.