Building up our dividend income

I’ve talked about growing our dividend income in my new year resolution last year but I’ve not really reviewed it and discuss my strategies in this area. So, let’s do a quick review of our dividend income in 2013.

Now, before I start, let’s talk the events leading up to our position today. Dear2 and I basically wiped out our savings when we ROM and bought our house (and renovations and furnishing) back in late 2006. So, we essentially started from zero back then. I was freshly graduated and commencing my post-grad. That meant I had a tiny bit of steady income, the stipend back then was $2200 (with scholarship top-up), dropped to $1500 and gradually increased to $2800 by the time I left school in 2010. Around early 2007, Dear2 moved into her current stable employment (stable income) from her previous variable income job. So that’s about when we started building up our tiny pot of gold.

I’ve always had this idea of generating passive income. I forgot which book that I read but it left a lasting impression, that trading time for money will never get us out of the rat race. With my limited knowledge of passive income, only a few things came to mind.

  1. Rent. We just bought a house, unlikely we will be buying another house to rent out any time soon. But in the future, we may. Besides, MOP disallowed us to rent our house out.
  2. Royalties. Publish a book? Not good enough a writer. Publish a mobile app? I’ve thought about it but not enough technical skills. Publish a game? Hmm… Next. What else? No ideas.
  3. Dividend. Not bad, achievable, can be done step by step.

So that’s when I decided to slowly build up our dividend portfolio. Both Dear2 and I have steady income at this point and I manage both our finances so we have a larger pool of money to utilize.

We made some poor investment choices in 2007-2008 leading to some paper losses. That was when I knew that I didn’t have the financial flair to analyse stocks. I decided that I will take the low risk approach. I started looking at blue chips in the Singapore market with a good reputation for dividend. We ended up making some value buys during the Global Financial Crisis, nearly all of the counters we are still holding on to today. To me, capital gain is not important, I want to grow passive income, so I will continue holding on to these counters unless they stop paying dividend. Over the years, I incrementally increased our investment when we had sufficient surplus and when the price looked right.

Fast forward to today, let’s do a review of our stocks dividend income for 2013. For the year 2013, I am holding on to 8 counters and received a total of $3949.70 in dividend at a yield of about 8.5% (I don’t even know if that’s the correct way of calculating yield.) That works out to be a passive income of $329.14 every month. :)

Happy happy. We earn about an additional $330 a month without trading time for money. But of course, the problem with dividend payment is that they don’t pay regularly every month, most of them is actually paid in May when the fiscal calendar of companies end.

Then, some time in late 2012, I met with a Relationship Manager from a bank who introduced to me unit trusts that pay monthly dividend. I was intrigued. Shortly after, I bought into 3 unit trusts that paid monthly dividend. This made our passive income much more regular and predictable.

At the end of year 2013, I received $4003.07 in dividend from unit trusts at a yield of about 5.7%. That works out to be $333.59 every month. So that’s a total passive income of $662.73 every month from stocks and unit trusts.

So what’s my investment strategy? As I’ve mentioned earlier, I do not have very sound financial background. My basic strategy is to look at blue chips that pay a consistent amount of dividend. My buy strategy is to buy when the expected dividend yield based on past records exceed 5%. My sell strategy is to hold until they stop giving out dividend or dividend yield drops below 3%. Also, I prefer to diversify. Although REITs generally provide good dividend, I only have 1 REIT counter in my portfolio. As for unit trusts, I go for dividend yield of above 5% with monthly cash payout.

Over the last 7 years or so, I have witnessed the growth of our passive income. I’ve come to believe that investments do take time to grow. They start slow, but if the profits are reinvested consistently, the rate of growth will accelerate. This is the power of compounding. Also, savings is equally important, because good saving habits will provide the first pot of gold needed to start investing, and will continue to be the cornerstone for future investments.

I do not want to burden my kids with the financial responsibility of providing for us parents when we retire. I believe that with the rising cost of living, life will be tough for the young ones when they step out into the working world. Hence, my goal is to continue to grow our passive income so that in retirement we can spend our time in the way that we want. To be able to spend time with our family and friends, and each other, without having to worry about making ends meet.

It’s never too late to start retirement planning. In fact, it would be better to start yesterday.

-Dear1

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