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Tuesday, 21 April 2015

Size does matter for income plays


When you buy computer software, especially games, there's a minimum PC requirements and recommended requirements. 

We quickly learn that it' best to ignore the minimum PC requirements...


If a person wishes to have a dividend income of $50,000 per year starting this year (notice I omitted the word passive), I guess the recommended capital would be $2 million dollars at 5% yield.

Wait!? My math don't add up you may say.    



Let's park this question for now and explore other alternatives:


1) $1 million at 5% yield

This will get you the $50,000 per year you so desired. But the price to pay is you are 100% all-in. No opportunity fund or dry gunpowder. No ballast.

That means you have lived through the May 2013 taper tantrum where have experienced how income stocks all got whacked in the head - some more than others. And you totally OK with the temporary capital loss. You are confident that your income stocks will recover eventually - like it did currently now. You speak with conviction as you have lived through that experience. You know what you are doing.

I would rate this strategy as minimum requirement to get $50,000 dividend income per year. 


2) $500K at 10% yield

That's obvious isn't it? And that's what newbie income "investors" normally chooses.

This stock is yielding 4% but this one one is yielding 8%... Buy the 8% one! Easy!

If only they stop and reflect for a while why they are the only "smart" ones who can spot it. I mean why other investors are bidding the price up for that 4% dividend stock and not biting on the one which is yielding at 8%??? Don't other investors (especially the institutional ones) know math?

These newbies have probably not gone through May 2013 taper tantrum, never mind to have experience what it means that hell hath no fury like an income investor scorned - like during 2008/09.

How to spot these newbie income investors?

Just ask 2 questions and you'll know:

a) What's the dividend payout ratio?

b) What's the dividend growth rate for the past 5 and/or 10 years?

You'll soon realise they are not income investors but yield hogs from the blank stares you've got...

It's the equivalent of a newbie trader who jumps into the market using 10:1 leverage and have no clue what is risk management!!!???

No, $500K at 10% yield is not a strategy; its a train wreck waiting to happen... 


$2 million at 5% yield for $50K 

I guess some of you have figured what it means and why it's recommended - starting this year.

For those who haven't figure it out, no worries. You will in due time. It will just cost you some money but trust me, that's how we remember what not to do in the future!



29 comments:

  1. Hi SMOL

    Why no scenario for $2M with 10% yield ah?? :D

    ReplyDelete
  2. Truthfully speaking, 50% invested yielding 5% is probably the most feasible method though as you mention, other methods can lead to the same outcome.

    Sigh, going back to work and working harder...

    ReplyDelete
    Replies
    1. B,

      Because I'm not a "wah kali gong" blogger; I'm interactive ;)


      Greek 3 year treasuries are now yielding 28%!!! Any takers?

      Indonesia's benchmark interest rate is now 7.5%

      I wonder why no financial bloggers are recommending opening foreign fixed deposits at our local banks in IDR?

      Yield comes at a price. No free lunch.

      Delete
    2. Why you open up old wound of NZ FDs? High yield didn't mean much at the end of maturity?

      YA.

      For those who haven't figure it out, no worries. You will in due time. It will just cost you some money but trust me, that's how we remember what not to do in the future!

      Delete
    3. CW,

      Scars and scabs are there to remind us, "Hello? Don''t do it again OK?"


      The lessons of the Asian 97 crisis are quickly forgotten.

      Why do I want to borrow in RMB with higher bank interests rates when I can borrow in USD at near zero interest rate? Some S-chip CFOs must be thinking.

      I am so smart until the exchange rate reversed on you and you discover you now have to cough up lots more RMB to pay off your USD loans... Add salt to wound now the Fed threatens to increase the interest rate... Now you start regretting not hedging against your interest rates and exchange rates exposure.

      How many retail "investors" will invest in CDS for their bond holdings or hedge their foreign currency fixed deposits?

      Delete
  3. SMOL,

    Written like a true survivor of the stock market. At the lows of 2008, I was staring at a paper loss of $500,000, half the value of my holdings. Fortunately, I gritted my teeth and switch horses. This was a big risk in itself as at that moment, everything had dropped in price. You cannot be certain whether you have switched from a lame horse to a terminal one. Nevertheless, my best buy was MLT, 150 lots at 30.5c, the lowest price reached for the stock. Unfortunately, I also have real big losses like FSL, more than $80k. It had one of the highest dividend yields in those days.

    Overall, I am way ahead today. Losses were recovered and all my holdings are in the black and earning regular dividends. $2mil can yield quite a tidy sum. So even if it drops by half, it should still be sufficient to fund a comfortable life.

    ReplyDelete
    Replies
    1. Matt,

      Thanks for weighing in with your experience too!

      CW would have hugged you - you don't have to win back the same way you have lost ;)

      Glad you brought up shipping trusts like FSL. Before 2008 shipping trusts generally yield 2-3% more than REITs. With STI around 3500, most REITs have recovered but as for shipping trusts.... Hope springs eternal... if they had switched horses like you ;)

      That's the hard way to find out how expensive 2-3% extra yield really COSTS....


      I also like your reading of $2 million at 5% differently from B's ;)

      That's why I don't put it down in words as there are more than 1 way to skin a cat :)

      Delete
  4. Hi SMOL,

    Good post! You must have seen what I've seen regarding that person's desire to get 50k. Sigh.. Is working so distasteful? The easiest way to get 50k? Just work lah!

    ReplyDelete
    Replies
    1. Lucky week for me. Won two consecutive multi-baggers ToTo tickets. One at $70 for 4 numbers and second one for System 7 for 3 numbers.

      Delete
    2. CW,

      Good for you!

      I like the new Toto and Big Sweep changes. Gives us "multi-baggers" while we wait for the Big One ;)

      Primary school math - I rather make 1% off $1 million than to have a 10 bagger on $1....

      LOL!

      Percentages are like bald guys with comb overs. Who are you trying to kid?

      Delete
    3. LP,

      That's why I don't like to use the word PASSIVE income.

      Most of us know primary school math. So why ask the obvious?

      1) By asking, what we really meant is we don't want to WORK for that $50K per year income. Passive remember?

      2) We are not interested in a strategy that takes 20 years to fruition. We want that instant $50K per year right here; right now.


      I hope Singapore Pools will buy me a drink for my plug:

      Buy $3 Big Sweep or $1 Toto quick-pick if you prefer "instant" drop from sky mana ;)

      Delete
  5. LOL,

    SMOL and LP, is working so distasteful? Is "choice" really so valuable? I don't know, but there are times which I think of quitting but stop due to money...

    Ya...

    Talking about these big numbers always make me feel very small. so I shall pass.

    I go live big life ... with small numbers ... since I cannot turn back the clock and live differently. May I have big numbers in my lifetime, I wonder would I really mind or be happy when the big numbers is finally achieved in my 60s? perhaps.

    The best asset one can ever hope for. (Not that I have it LOL)
    Wife that will eat grass with you.
    Children that hankers your company... LOL not that listed company
    Friends that shit with you.
    Money that can be spent on indulgences.

    Whatever...

    ReplyDelete
    Replies
    1. Sillyinvestor,

      So you are one of those idiot fellows who shit near our tents during field camps!?

      You have a strange fetish you expect of "friends".

      Please hor! Want to shit get as far from us as possible!

      Sheesh!

      Delete
  6. How often do read people asking hard and real question on "How and where did you accumulate that $1m to generate $50K income?

    ReplyDelete
    Replies
    1. CW,

      US Army rule: Don't ask; don't tell.


      Ai yeah! You don't like that lah...

      Just because you did it the mancho man way everyone has to do the same ;)

      I personally would have much preferred I found my first pot of silver through:

      1) Marry rich

      2) Family inheritance

      3) Struck Toto or Big Sweep

      I see nothing wrong leh? I never cheat or steal what!?

      Like I've said. Anyone got primary school math can tell by the age and working experience of a person whether he has "earned it" by employment or he/she got "outside" help ;)

      So difficult to deduce meh?

      Delete
    2. i totally agree with CW, thats the first thing i will ask from a trader!

      Delete
    3. coconut,

      英雄莫问出身


      1) How a person accumulates his starting capital - that's his fund raising skill. Can be earned, can be saved, can be snake-oil (convince others to invest in him), can be gifted to him due to his EQ, or plain dumb luck to be born with golden spoon, etc.

      2) The investing or trading performance AFTER he got his capital is totally another skill-set ;)


      If I want to benchmark my trading performance with another trader, why on earth do I want to compare it with his fund raising skills?

      Unless we are sour grapes.


      Delete
    4. yes, cos i hear many story about many "good" traders with planty of capital only to end up leaving the game empty handed.

      Delete
    5. one of the most difficult thing i learn as a trader is capital preservation, not making money, thats the easier part.

      when you start making money trading, your world start to change drastically and thats where capital preservation becomes almost impossible, at least for me.

      Delete
    6. coconut,

      Hence the trading joke on how to end up with $1 million trading - start with $10 million!

      LOL!


      A bigger capital base is always helpful for the no. 1 cause of traders failing is undercaptalisation.... (Which is also the same for entrepreneurs and start-ups. Duh!)

      Having said that, no amount of capital can help us if we don't have what it takes to be a good trader - the 3 Ms.

      No one is bigger than the market - Barings, MF Global, Lehman, Long Term Capital, etc.


      You would understand when I say I've made money with "bad" trades; and lost money on "good" trades.

      And that's because we are focusing on the trading process of entries and exits - not how I got my capital in the first place ;)

      Delete
    7. The end result is what matters. How one get your capital are mere details. Experience would be a much better gauge of the chances of how successful that person can generate returns. A person who has that $1mil from savings alone would a babe in the woods in the stock market.
      Sometimes, it is not the size alone but how you use it that is more pertinent.

      Delete
    8. Matt,

      Aye, matey!

      We play the hand we are dealt the best we can.

      Just because a person has pocket aces and won the pot eventually, we won't deem him a lesser poker player, do we?

      Same for playing with a 2-7 offsuit hand - we can check, bet, raise, or fold. This is what we can control; anything else is up to Lady Luck.

      If 3 deuces or sevens turn up at the flop, please don't tell everyone its due to our "superior" poker skills OK!?


      Everyone wants to compete to be the Top Dog. That''s OK. I rather be the fat cat.

      Meow.

      Delete
  7. I do not like the word passive. I still think your math don't add up.

    ReplyDelete
    Replies
    1. Kyith,

      Yup, like the word "passion", some words are so overused and twisted that it has lost it's original meaning...

      LOL! I never say my math good wor!

      But it does require some imagination to square the circle ;)



      !!! Tip 101 !!!

      For readers who are interested to learn more criteria - other than the dividend yield - for choosing income stocks , do take a look at Kyith's tool below:

      Singapore Dividend Stock Tracker


      No, don't ask me why no dividend growth rate.... There's such a thing called calculator....

      Delete
  8. Thumbs up on post and comments

    ReplyDelete
    Replies
    1. SMK,

      Thanks! I needed that!

      There's a Chinese saying that if go up the mountain too often, sooner or later will meet tiger...

      I'll take all the compliments I can get for once in a while, I'll get slapped hard hard.... LOL!

      Serve me right for writing satires!

      Delete
  9. Hi SMOL,

    I see u focus more on stocks. Just wonder If property is easier?

    Regarding how to build up the initial portfolio, I think it's extremely impt too! It show the true capabilities of the person. Of course end result in figs is what it matters, and u can "shout" loud loud how good u r! But deep down, (at least for me) we know it's different!

    The feeling of earning my own 50k is different from someone give me 1-2mil funds to my bank to invest to earn 50k! Even u r fund manager u also only earn the commission! Not the actual amount.

    Hmm.. Maybe I can say I earn my own portfolio and ask daddy mummy sponsor my house / car / marriage / babies.. That is another feasible way.

    Two same houses in exterior, but with different piling foundations!

    ReplyDelete
    Replies
    1. Rolf,

      In today's market, where to find rental yield for private property that yields net 5%? Ironically, its the HDB market that still can yield above 5% - who still not convinced HDB is subsidised?

      That's why I peppered my post with "this year".

      Someone who bought property or shares during 2009, of course can yield more than 10% at cost of purchase. That's the secret sauce, no?

      Anyone buying property for rental yield now knows that market has come off its peak; as for income stocks... Using my little hammer to ring my little bell. At the very least, we must know whether we are early or late to the party ;)


      If daddy mommy can help pay deposit for the house and car; subsidise marriage and honeymoon costs, most young executives would have no problem with their 6 figure initial capital for investing or trading ;)

      Hanging on to their investing capital is another thing...

      LOL!

      Delete
  10. Size matters as you can make not even 1% gain but in absolute $ it's gain is big enough that you can sell the counter off without a second look.

    ReplyDelete

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