Tuesday, 1 August 2017

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...


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...


  1. Janet Yellen actually said we won't see another crisis THIS YEAR ... but mike kena cut off towards the end...

    Sounds good. Kekekeke!!

    Politicians & investors like to hear what they want to hear...

    1. Spur,

      Janet Yellen did say she don't see a financial crisis in our "lifetimes".

      Typical snake-oil speak - lifetime can mean anything; depending on how old we are ;)

      Do stick around a bit longer leh! I haven't got chance to get to know you...

      You planning to go sell salted duck eggs next year?


    2. Oh that reminds me .... gotta remember to pay insurance premium ... hopefully won't huat so soon...

      hmmm, but am wondering why still need life insurance when jobless & no dependents ... maybe bonus for spouse... hoho!!

      yeah, Janet was a bit too hard sell, or perhaps too eager to please when Trumpy keeps twitting he wants to replace her...

      Now Greenspan says got bond bubble ... wait for it to burst ... maybe stagflation ... That 70's Show anyone??

      Although people keep on saying it for past few years liao...

      Anyway looking forward to it ... should be interesting times ... Kekekeke!!!

    3. Or!!! You die!

      You don't consider wife as "dependent"! (She must earn more than you)

      You better pray she don't read my blog ;)

      Hah! So you double-income no kids. That's the life!

      Buy life insurance for her lah. This way, when you not around, she can use the "windfall" to "rent" a 小鲜肉 to keep her company ;)

      You read China or not?

      If not I can switch to proper England when talking to you.

      You write proper ;)

      Your "kekeke" laugh reminds me of Sesame Street's Ernie ;)

  2. Yield hog with bird brain is jialiat

    1. CW,

      Like using Dividend Yield % alone as comparison metric ;)

      Anyone who has worked in management will know never to use a single KPI as evaluation tool...

      To get the proper context and perspective, we need to pair the Dividend Yield against:

      1. Dividend Payout Ratio, and/or

      2. Dividend Growth Rate

      There is a reason why Shipping Trusts have a higher dividend yield than REITs when they were launched.

      Yield hogs just go for dividend yield; dividend investors go for dividend growth stocks ;)

      Same same but different!

  3. Hi SMOL,

    In the past, I stupidly think that once I have amassed 240k, I can invest @ 5% to get $1k/month. When I have 240k, I realised that I have to have more than 240k as a buffer, so that I'm not 100% in the market. Naive.

    It takes a while to know my own risk profile and I am absolutely not comfortable putting 100% into the market. I doubt even when everything goes into fire sale, I'll put 100%. It's just not in my character.

    As our oily friend likes to say, know yourself. Ticking a few checkbox in a risk profile form just doesn't cut it.

    1. LP,

      I can empathise when someone does not believe in an emergency fund.

      That meant his portfolio is not big; going full throttle to squeeze every extra cent to reach escape velocity sooner...

      That's the usefulness of "crash got sound", "learn by doing", or any other phrases we prefer ;)

      I rather live in a brick house than a house made of straw where any "wind blow grass move" will knock me off my tipping point.

      In a brick house, it'll need an earthquake or tsunami to put me in the streets...

      When one has enough, the seduction of risking everything to double my networth is no longer as appealling as when I had nothing ;)

      In sports, they call it the "hunger".

      That's the strenght of youth!

      But youth without hunger? Hmm...

      Well, we can't have everyone as shepherd, can we?


  4. Smol,

    At some point of time, I believe it might be realistic to be 100% vested?

    If STI fall 50% from point and you are still 70% cash. Then something also....

    养兵千日 用兵一时

    Dun use, then not call war chest. Call emergency fund

    1. With sTI at multiple years high, I still see some counters offering value and I still buying.

      But once I hit 50% I still to get uncomfortable.

      That means I no longer young. I no longer have balls with me. Can't wait to offload and eagerly waiting for that catalyst I am waiting for to happen

    2. Sillyinvestor,

      If I had 70% cash when STI is down 50%, I would be so happy and proud of myself!

      Well, its not as good as 100% cash, but its a lot better than having 30% cash ;)

      Good for you!

      I can't see value; don't know how to deduce value either.

      All I see is price.

      Technically I maybe trading stocks or currencies, but the reality is I am trading convictions over different time frames.

      2 men enter the thunderdome; one comes out.

    3. Ah huh!

      You are right about 50% down (STI at 1800) at 70% cash if u are climbing down mountain.

      If you are climbing up mountain....

      Think you can go Pinic at the lake instead. Lol

  5. Hi SMOL,

    After seeing your exchange with LP above, I emo liao. I'm starting to share the same sentiments as well.

    I handicap myself psychologically as well. All along, I told myself to assume 0% increment, 0 bonus, 0 performance bonus. Basically, 0 everything. That way, I don't optimistically project my earnings off the chart.

    Couple those 2 concerns together, I ownself emo ownself.

    1. Unintelligent Nerd,

      All of us have our phases.

      LP went through a "dark" phase once.

      I went through a "I'll show them" hole-in-heart phase to prove that I am equal (if not better) than most graduates.

      I was hungry once; not anymore.

      Now I have a thirst for ... LOL!

      With your discipline, I believe you can pscho-analyse yourself.

      Eh. I thought I'm the few confident dudes who dare to openly share I'm in touch with my feminine side.

      You strong and power too!

      Not everyday a guy will share openly he is emo...


      Focus on our strengths ;)

    2. Hi SMOL,

      No lah. 蝴蝶 and 华文老师 intrapersonal awareness is the most up-there one

    3. Unintelligent Nerd,

      That's right!

      By surrounding myself with people stronger than me, I can't help but grow in their presence too...

      Pygmalion effect is better than golem effect ;)


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