Wednesday, 7 October 2015

Dividend Income (Passive) is a Fairytale?

Investing in stocks for Passive Income = Misleading?

First of all, I must commend GiraffeValue for applying active critical thinking and his willingness to challenge and verify for himself some of the platitudes out there when it comes to investing. 

The strength of youth is you don't know what cannot be done! 

Normally, I would not poke youths since I would rather do cheerleading - who doesn't?

But how boring life would be without some exceptions!

This post is motivated by the "weak" challenges to what GV has written.

I mean, you don't go "you have not proved that dividends are not passive income" when GV has written a whole bloody long thesis on his views already! Duh!

It is you, the challenger, that have to provide the counter arguments to demolish GV's position! 

Thinking like a land owner 

When you are a business owner, it doesn't matter whether you pay yourself a salary, consulting fee, or dividend, in the books, its considered you have taken capital out from the business.

Now imagine you are a business owner, and your business is self-generating so you don't need to add new capital into it other than that first capital injection of yours.

You "reward" yourself with a 5% dividend yield every year.

After 20 years, we would have gotten our capital back.

Will the business collapse or disappear now that you've got your initial capital back?

What do you call those 5% dividend yields you'll continue to get from 21st year onward? 

Passive my foot! 

If you think I have your back all you yield hogs out there, you have another thing coming!

My only critique of GV's post is he is not twisting the bayonet hard enough... You're too gentle!

What Passive Income? 

And what's with all that apologetic preamble anyway?

Good job GV!

Income passive or active not the most critical; having an active mind is!


  1. Passive income when our capital are not at risk and from time to time goes to cyber world to hao lian. That is passive income. No?

    1. Passive income is when market goes up you not euphoric; market goes down you not depressed.

      I was lucky to have that conversation with the HK man of leisure.

      Although he owns dividend stocks, he is "totally out of the market".

      You can substitute dividend stocks with physical rental properties, bonds, or even businesses - its still the same.

      And its not about travelling the world 9 months out of the year.

      Its' passive when you don't even spend a single second thinking where that money came from ;)

      You're too busy doing what you enjoy!

      Its a bit like those 2nd generation rich kids spending money obscenely - if they cared where the money came from, would they be doing what they were doing?

      And if we enjoy the craft of investing (to achieve as contrast to escape), how is that passive?


  2. Passive income?
    Buy an immediately annuity lol!
    Even then, better do your homework properly before buying.
    See the most passive income also must do some homework.

    In Singapore, now all must join the "compulsory, delayed immediately annuity". If you are a worker.

    1. temperament,

      Yes, most annuities suck big time due to the high fees and low returns :(

      Must definitely shop around!

      But can be good if one sucks at investing, or simply have no clue nor interest in personal finance :)

      You know what? Born into a rich family - now that's passive!

      Marry rich would be 2nd best I guess; that's active but still...


  3. Hey SMOL

    I'm expecting a hate reply, guess not this time.

    Thank you for the compliment, I'm touched by some of your remarks.
    Really, I did not expect that. Thanks!

    Best regards,

    1. Giraffe Value,

      You're welcomed :)

      I've actually made 2 exceptions for you.

      I super hate those blogs or websites that have lots of pop-up ads or try too hard to collect email subscriptions...

      On one side, I can empathise you are trying to build up your internet marketing business (good for you), but on the other hand, you may want to consider your readers' reading experience too ;)

      Well, I try my best to satisfy what you expect. A teeny weeny "hate" comment. There!


  4. Lend to Singapore Govt is passive income?

    1. CW,

      First of all, most retail investors don't realise that when professional bond investors invest in bonds, their focus is capital gains. Duh!

      The last 30 years have been a great super bull run for bond investors - especially those who bought 30 year US treasuries during the 80s ;)

      Let's make it simpler by using the fixed deposit example.

      To lend my money to the banks, I've to exercise some brain cells.

      If I think interest rates will go up , I'll sign up for 1 year fixed deposit - never mind the lower fixed deposit rate than 3 years fixed deposit. This way, I can renew my fixed deposit rate to a higher one annually.

      But if I think interest rates are coming down, I'll pick the 3 years fixed deposit to lock-in the higher fixed interest rate for the next 3 years. I'll smile while others complain as the banks reduce their interest rates down further.

      Why 3 years? Exactly! Must also use up more brain cells to decide whether 2 years, 4, years, or 5 years better...

      Of course, the more savvy ones may stagger their fixed deposits into batches like a bond ladder. Now that's not passive!

      Remember this is just the "simpler" fixed deposit example.

      If lend to big daddy as in bonds, I'll have to factor in capital gains and losses. Much much more headache!

      By the way, Singapore Savings Bond is more a hybrid kind of "fixed deposit" by big daddy - just that if you want make early withdrawal, there's no penalty.

      It's not a true bond as we don't suffer capital losses, ever. Now if that's not charity, I don't know what is!

  5. You have drawn quite a simple and accurate picture of bond or "debt" as a financial product.
    May i add that the Banks know better than us which way the FD rate is heading.
    Didn't they give you the FD rate after all?

    Many people don't know that besides the Forex market, the Bond market dwarfs the equity market.
    And it's usually the Bond market affects the Equity market more than the other way round.
    i think (logically) Bond market existed or established 1st in civilisation.
    Without it, i don't think there is an Equity market.
    Equity market can collapse without Bond market follow suit; though nowadays it likes identical twins.
    Yet most of us believe and invested so much in Equity market and so little about the Bond market.
    Are Reits resemble more to Bond or Equity?

    And also do you know some years in the past, holding cash ----the returns were better than holding equity or Bond?

    i am one of those guilty.
    Know very little about Bond.
    i am not sure, are you?
    Go and goo girl lol.

    1. temperament,

      I can only do simple. Complex ones my eyes glaze over - especially when reading the various modelling tools and Greeks...

      I see you are into Inter-Market analysis too ;)

      That's the advantage of time in the market.

      Those interested in financial history are reading them from books; we have lived through it ;)

      That's another advantage of being a Singaporean. Even when in cash, we don't have to crack our heads to figure out what currencies we should have them in!

    2. Hi uncle temperament

      My lecturer whose background was from options and derivatives trading commented " when the traders say market rally , it's usually meant bond rally "

      Now I know whose the "king"

    3. Small Time Investor,

      Traders who got assigned to the bond or forex trading desks are smiling, while those got consigned to the equity trading desks are probably consoling themselves at least its better to be in than on the outside...

  6. From 55 yrs onward; there is 2.5% Bond-like that the two CPF Jokers in GE2015 dislike. We can decide once a year how much to withdraw or coupon to receive.

    1. CW,

      Perhaps that's why they were not elected?

      People can tell when people are trying to "smoke" them.

    2. Yap!
      i have shared and warned people about closing CPFIS account @ age 55--- 12 years ago which i did.
      A kind of stupid mistake.

      One of my biggest mistake was closing my CPFIS account at the age of 55. But then can anyone see 2008/2009 fiasco at 2003?
      The rest is history, they said.

      i was fortunate that i was given a chance.
      My wife's CPFIS (and all her other CPF's accounts) are intact until now.
      As my wife is not financially incline, i manage almost all family's financial matters lol.
      And i was fortunate again, my wife is quite thrifty.
      Not financial incline does not equate to spendthrift.
      She knows what she needs and what she wants are different.
      Though she had spent on some "wants"
      Sometimes, it is my fault to edge her on the wants.

      My wife is 3 years younger then me.

    3. Boo hoo hoo.

      I think I'll go hug my bolster now....

      When will I be loved? (Linda Ronstadt singing in my head)

  7. Hoho, I read that super duper long article too. I would think that one cannot determine if investment income is really passive by just looking at dividends and the total gain within such a short frame in time eg. point before dividend, ex-div.

    Investing is an ongoing process. So if there is net returns of BOTH capital and dividend gains with time without the need of doing any buy/sell, that I would call a passive investment income.

    1. Rainbow girl,

      I can't comment on his verbosity as I'm the one who writes comments longer than my blog posts... LOL!

      Eh? Without the need for doing any buy/sell?

      The only way that's possible is when we inherited that position or its gifted to us ;)

      That's why the word "passive" is so alluring.

      Many just want the fish; no one wants to put in the hours to learn HOW to fish.

      That's perhaps why those who fall for scams or have bought inappropriate products discover belatedly they have not made any "buy" decision in the first place...

      They were SOLD TO.

    2. Yeah SMOL, sometimes I enjoy reading your post's comments more than the post itself. LOL

      Er, what I meant was 'buy and hold' then sit back and relax. No buy-sell-buy-sell. The crux is how to buy those stocks at the right time.

    3. Rainbow girl,

      Thanks! That's nice to know :)

      Just teasing you.

      Must show the boys I'm an equal opportunity "poker" ;)

  8. Dividend income is definitely not passive. But not so simple on this topic. The sell off of stock during xd and buy during cd is not equal to dividends paid. It is market sentiments. Experienced trader like you eill know. So the equation need enhancement. Dividends xan create or reduce income from "nowhere" other than the investors that affecting the stock market, not the immediate cashflow

    1. Frugal Daddy,

      The same effect can be seen when a company issues bonus shares to "reward" loyal shareholders.

      I remember my first 1 for 1 bonus issue.

      I so happy like bird thinking I had a 2 bagger until ex-bonus, I found out it's just 1 x $1 coin change into 2 x $0.50 coins. Cheh!

      I so "sotong" or what!?

      We all were "young" once mah :(

      You are right.

      There are arbitrage opportunities on ex-div or ex-bonus days as there will be some clueless retail who will enter the "wrong" price...

      More opportunities may appear for rights issues. The bleeding heart has already taken advantaged of it so many times I'm convinced there are investors out there so "passive" they have fallen asleep!

      Efficient Market my foot!


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