Passive income is a beautiful thing!

Posted by Mike S | April 3, 2008 9:06 PM

I'm guessing that you are in your late 20s - early 30s. I see how you're slicing and dicing but I would suggest a different way of looking at your asset base and earnings potential.

1. Since you are far from retirement, passive income is not what you should be maximizing. You have a good-paying job. You can do without passive income now.

2. You should be maximizing return on equity. This is what most firms do. They improve the earnings efficiency of their asset base.

3. In order to do this you need to set up the right capital structure with the right balance of leverage and risk.

4. I am assuming that you are maximixing revenue and minimizing expense already by the trepidation you show in nagging your wife. I'm cheap too and I have this tension as well with my wife.

5. You have to take taxes into account. If you maximize dividends through passive income, you are paying taxes today instead of deferring as long as possible and growing your money faster. This is why tax efficient low cost index funds are a good idea. These can shield you from a lot of taxes for decades. Note the div distribution on your VTI investment. It is probably small but you get the idea. Don't forgo any tax deferral.

6. I think you mentioned that you do this already, but you need to separate your returns from your contributions. When you have these mixed together, I cannot really see the performance of your assets.

7. You do a tremendous amount of work to see daily progress. I would like to see some benchmarking of goals in 1yr, 3yrs, 5yrs, 10 yrs and 30 yrs. I think certain versions of quicken have this capability.

8. You can't go through life with blinders on. 2008 seems to be a challenging year for the markets and the economy. I'd like to see what your plans/thoughts are in hedging/immunizing/diversifying (each of these is a different thing) your assets in order to come out of these difficult times stronger.

9. Think about an allocation of TIPS and I Bonds to hedge inflation. You cannot count on your real estate holdings to continue to appreciate to provide that inflation hedge. See if your real estate is really paying you an adequate return after all expenses including depreciation on the improvements.

Congratulations on making it through an up and down year in 2007, and all the best in the coming one.

ETFnerd

Posted by ETFnerd | April 4, 2008 10:35 AM

Passive income is something I really want to increase. Thanks for article - it gave me some ideas on what to do in order to increase mine. Good luck with increasing yours in the future.

Posted by Rachel @ Master Your Card | April 4, 2008 11:29 AM

Why do you have small positions in more than 25 individual securities? If you are going to "buy the market" why not just buy a low cost index fund and save the time and aggravation of tracking so many small transactions. If you really think you can outperform a broad index, pick 5 or 6 stocks and try it.

Posted by joyboy | April 4, 2008 5:42 PM

Dude, 2 million. Why don't have you have any Canroys?

Some of them have a mad fat yield. Check out AAV and PVX, also PWI. If you want passive income you might consider one of these three stocks.

Posted by James | April 4, 2008 6:20 PM

Assuming tax rates go up in the next few years, will you still be investing in dividend paying stocks? Also, if a stock doesn't raise a dividend each year, would you sell it?

Posted by Kevin | April 4, 2008 8:42 PM

2mil,

I'm curious about the passive income on your rental properties. Is that your income after all expenses (repairs, maintenance, taxes, insurance, depreciation)? I just finished up my taxes for the year, but on paper I'm showing losses for my properties --- mainly because of depreciation. How do you factor that into your numbers? (just curious)

Thanks,
NetWorth

Posted by NetWorth | April 5, 2008 1:31 AM

There is one ominous mistake in the calculation of your overall net worth. That is, the market value of your 3 houses do not reflect current market prices. Indeed, equity in your 3 houses make up over half your net worth. If you factor in the fact that house values have declined 10% and will most likely fall at least another 10-20%, you are looking at an actual net worth that is at least 15% or more below your current stated value of $476,583. If you think that your 3 houses have not "really" fallen in value, then you may not be dealing in full reality. You are a doing a great job saving, no doubt. Just wanted to bring that point up.

Posted by Bill | April 5, 2008 9:20 AM

There are lots of options for yield; closed-end bank loan funds, stocks of shippers, business development corporations, covered call funds, plus of course CANROYs.

Try tickers ALD, ACAS, EFR, JRO, JPS, BPT, PGH, BEP, etc.

It takes an INCREDIBLE amount of wealth to generate meaningful income from stocks yielding 2%, like the S&P does.

I still am not sure what the beauty is in rental residential real estate; making ~ $750 a year does not seem worth the troubles. How much equity is locked in the properties to generate this income?

Posted by Requisite | April 5, 2008 11:54 AM

500/month passive is a decent amount.

Posted by pj | April 7, 2008 7:05 AM

ETF,
I think your comments are sound advice. I should be posting shortly of my efforts to track my investment performance against a benchmark so I can see if my investment allocation is making sense.

As for taxes, I believe tax rates are pretty low right now so I am ok paying taxes on my dividends. The sooner I can start bringing in $30k of passive income the better - I don't want to wait until I am 60 - I am looking for financial freedom in 10 years, maybe less.

That being said you will see I am putting larger and larger amounts of investmentable money into low cost index ETFs rather than individual stocks until I can prove a value investing strategy makes sense.

Posted by 2million | April 9, 2008 3:13 AM

You site is all messed up with the most recent post.

Posted by Ken | April 9, 2008 2:08 PM

You don't seem to have comments enabled for your latest post. I wonder why you are making your principal payments throughout the month instead of paying with your regular payment. You aren't getting credit for those payments from an interest perspective until the next due date. You should hold onto the cash in an interest bearing account until your payment is due.

Posted by Bob | April 10, 2008 5:12 PM

I really wish you would address Joyboy's question above about owning a bunch of different stocks as opposed to just owning an index fund. What is your strategy here?

Posted by MoMoney | April 11, 2008 8:19 AM

Passive income is a great thing, but you can always get passive income by trading stocks. Dividends never seemed worth it to me.

http://www.stocks-simplified.com

Posted by Shaun Rosenberg | April 29, 2008 12:02 PM

Good luck in your passive income journey. I would advice you to look into dividend achievers or dividend aristocrats if you are looking into buying stocks which will increase their payments over time.
Personally, i don't like canadian income trusts, because their payments fluctuate a lot. It also seems to me that these stocks yield a lot, because they are returning your capital, not because they are earning a lot.

Posted by Dividend Growth Investor | May 7, 2008 4:31 PM