Yield Hogs and Bird Brains

Dividend investing has several derogatory labels attached to it.

Like being called yield hog (its a pig if you don't speak american), or being sneered as an investment style more suitable for widows and orphans...

What?

Why you all looking at me?

Ar ber then?



How much money we need to live off dividends is quite simple to calculate.

If one just need $4,000 per month for retirement, then at 5% yield, we need minimum $2 million to sleep soundly at night.

What's with that "extra" $1 million?

Those who drive a car or ride a motorcycle would know why. Wink.


Now compare the "not greedy" dividend investor above to yield hogs who for the same $4,000 per month dividend income:

1.  Employ a 100% vested strategy of $1 million capital at 5% yield.

2.  Employ a 100% vested strategy of $500K capital at 10% yield.

3.  Employ margin so they can raise enough capital for point 1 or 2...



I've been through Nasdaq 2000 and Lehman 2007 as a retail investor.

I've also experienced the Asian Financial Crisis of 1997 - though not as an investor - but I believe this one caused a lot more damage to the real economy and actual jobs lost.

What more to say if we're already retired and living off dividends that were cut or reduced? And seeing our networth got decimated in parallel?

Without a buffer, you confident you won't lose your head like a headless chicken and sell in panic?

No, I don't believe a word of Janet Yellen when she said we won't see another crisis. Well, that's what Ben Bernake said in 2007 on sub-prime not affecting the US economy too...



Climbing down the mountain

If you already have the required capital (with buffer), you don't need to shoot for the moon when it comes to yield. Boring 4-5% is good enough. 

You understand high yield bonds that pay north of 8% are also known as "junk bonds". So high yielding equities that pay north of 8% meant there's no free lunch!

And if your dividend gets halved or cancelled completely, you won't starve. You still have some cash rotting around somewhere.

I remember my motocycle instructor sharing with us he not so fond of Honda cubs as they lack the "spare engine power" to get us out of trouble in an emergency...



Climbing up the mountain

If your personal expenses at retirement is $8,000 per month, or you want to provide for your significant other ($4K plus $4K), then how much capital you need may depend whether you like cruising with your tachometer straining at the red zone...

The focus is to grow and earn more capital.

The math is simple:

$1 million at 2% yield is more than $100,000 at 10% yield.


Of course taking on bigger risks is par for course when we are climbing up the mountain.

And that's the normal path.

When young, can take more risks. Our bones and skins recover faster. Time is on our side.

But when we use a strategy that's more suitable for climbing down the mountain to climb to the summit...

Perfectly OK if you love what you do and never have a need to use financial freedom to "escape" from work!




P.S.  Context and perspective is important.

$1 million at 2% yield is more than $100,000 at 10% yield.

The story changes if the person with $1 million is 100% vested at 2% yield in equities, while the person with $100K at 10% yield in equities is only 10% vested - he has the balance $900K in short term AAA rated bonds yielding practically nothing.

Additionally, the risk/reward changes depending whether one is climbing up or down the mountain.


That's the biggest blindspot "bei kambings" miss when they think all they need to do is blindly follow their favourite shepherd...