Passive Income
This is my current passive income portfolio:
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This is my current passive income portfolio:
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Wow those are extensive holdings for a “younger” guy. Are you DRIPing the dividends?
I’m DRIPping them for now since I’m still in the capital accumulation phase of my life. Once I retire, I’ll likely stop the DRIP and use it as my source of regular income. I’ll set it up so that dividends are only paying as much as I need to support myself and my family (to avoid excess taxes). The rest I’ll DRIP or put in capital growth stocks.
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Hi,
That is very impressive DRIP programme. Do you do it directly with the company or go thru a broker?
I do it all through my eTrade account. There was a time where brokerages didn’t offer this, but now they do. And there are no fees for the reinvestment – which was the primary benefit to investing directly with the company.
Brave New Life recently posted..Free Entertainment For Familes
I thought i was doing good for 30 year old…man you are my idol..keep up the good work. My plan is to have net worth of 1.5 Mil by 40.
Do you mind, if i asked what your current net worth is (approx) ?
BTW,i am an engineer as well.
Welcome, it’s always good to have engineers around.
I have just under million in net worth (taxable and non-taxable accounts). I don’t include my house in that number, because it’s not an investment and not very liquid (I’ll always need shelter).
1.5M is a good goal for a 40 year old engineer. What type of engineering do you do?
Brave New Life recently posted..Free Entertainment For Familes
I do Electrical engineering…was any of your money from inheritance?
I’m also an EE. If you’re serious about hitting 1.5M by 40 years old, that should be no problem as a EE.
Most of my peers are 40+ and have to work just to stay afloat because of their lifestyle choices. It amazes me that they can be making the same money as me, and yet be living paycheck to paycheck – or worse: in debt.
Brave New Life recently posted..Free Entertainment For Familes
Nice distribution. It would be nice to see what the estimated % rate of return was in an additional column for each stock.
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BNL – I have a lot of questions…bear with me.
First, since you are retiring soon, I assume that these holdings are in a normal brokerage account and not any kind of retirement fund that would penalize you for taking money out early. Is this correct?
2. From your previous posts, it seems like you have been working in the corporate sector, where 401K’s are a common perk. How did you manage to save so much money in an individual fund while also funding the employer-matching accounts? Are those separate, or did you roll your employer’s account into this one?
3. How long did it take you to build this account? Did you start buying dividend stocks immediately upon entering the work force, or was your DRIP strategy a transition from holding indexes, mutual funds, etc.?
4. Did/do you invest in any more speculative stocks for faster growth? Most of the advice that I have received suggests that I (as a youngish guy) should concentrate on growth, and transition towards a more conservative portfolio as I age. Do you agree with this strategy?
5. How did you go about building these holdings? For example, how often did you buy a stock and how did you decide how much to put towards it? For example, you own 208 shares of MO, but I assume you did not buy them all at once, and you probably did not focus on this stock over some of the others on the list. What made you decide that 24 stocks was the right amount of companies to invest in, and then continously buying more shares in them as opposed to buying shares in other companies? Was this perhaps based on a target amount of diversification that you were looking for?
I would be very interested in hearing more about your investment strategies and the process you went through to get where you are today. If it would require too long of a response, perhaps it would make for a good blog post sometime. Thanks in advance and congratulations on a very impressive portfolio.
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Hey ammyhour,
I’ll attempt to answer your questions, although I just want to add that I’m not a professional by any means and none of my email should be taken as financial advice. Not only because I don’t want to be sued
but also because I’ve made quite a few investment mistakes along my way. As I try to describe in my blog, I’m simply a guy on a journey and I want to share my experiences along the way in the case this path fits others’.
Q: Since you are retiring soon, I assume that these holdings are in a normal brokerage account and not any kind of retirement fund that would penalize you for taking money out early. Is this correct?
A: The majority is in a taxable brokerage account (I use eTrade and Fidelity) but not all of it. About 35% is in IRA accounts which I plan to access as necessary using a little known tax trick of rolling over money into a Roth IRA after I retire and I’m in a low income bracket, holding it for 5 years, then cashing it out penalty free (see strategy 2 here). I did, however, reduce my 401K contribution to the employer matching amount once I decided to retire extremely early. This may or may not be wise, but it made me feel more comfortable building up my taxable account.
Q: From your previous posts, it seems like you have been working in the corporate sector, where 401K’s are a common perk. How did you manage to save so much money in an individual fund while also funding the employer-matching accounts? Are those separate, or did you roll your employer’s account into this one?
A: I’m assuming you are referring to my “taxable portfolio” that I mention in my monthly report. For that, I achieved this amount through a combination of sacrifice, hard work, and luck. For “hard work” I was working 80-90 hours/week for the first several years of my career (before kids). This allowed me to increase my salary from $50K to $120K within 8 years. I won’t argue that anyone can do this because that’s not true, I also don’t consider myself unordinarily smart, so it’s not out of reach for most people. Regardless, that type of income is not required for this path of early retirement… For “sacrifice” I mean that my wife and I didn’t go to fancy dinners and fancy vacations that our peers were doing. Instead, we made do with each other (not so bad) and continued to save as much as possible. We didn’t always agree on the sacrifices, but as we began our family we quickly realized we were making the right decision. Finally for “luck,” I mean to say that I was lucky to pursue a career I happen to be very good at and that pays pretty well. I think that the majority of poeple that read this blog are in a similar situation, or could be if they are willing to explore change. They just need to consider their options.
Q: How long did it take you to build this account? Did you start buying dividend stocks immediately upon entering the work force, or was your DRIP strategy a transition from holding indexes, mutual funds, etc.?
A: I invested like an idiot for years. I thought reading the Berkshire Hathaway annual report and a couple of value investing books made me an investing genius. Then I started picking stocks. Unfortunately for me, I got lucky on a few early on which allowed me to continue this ignorant path. Eventually, after losing $150K in 2008, I wised up. This is why I recommend that people start saving first, and only begin investing once they have the capital to make it worth their time. For example, if you make 50K/year, spending 30K and saving $20K, after 3 years you have 60K saved. You could spend tons of time figuring out how to make an extra 3% in the market, but that only equals $1800/year. You’d be better off spending that time working to increase skills that result in an increase to your salary. Let’s say you do that for 5 years and get to 100K while keeping your expenses down. If you do, then you can easily have $500K saved up after 10 years. Now at this point if you find a way to get an extra 3% return that is $15K/year (extra). If your expenses are still low, this could be enough to retire! I was a terrible investor for the first 8 years of my savings career because I didn’t have a good strategy and didn’t understand the modern portfolio theory. — By the way, my next post I’m working on discusses some of the things to consider when investing (risk tolerance, passivity, etc)
Q: Did/do you invest in any more speculative stocks for faster growth in your early investment days? Most of the advice that I have received suggests that I (as a youngish guy) should concentrate on growth, and transition towards a more conservative portfolio as I age. Do you agree with this strategy?
A: I can’t say, because I think it’s highly dependent on situation and personality. For me specifically, if I could go back a decade to when I was first starting my investments I would spend my time and money investing in income paying investments with reasonable stability such as real estate rentals and a balanced approach of dividend stocks and dividend paying treasury bonds. However, to be fair, this could be biased by what I realize now would have made me signifiantly wealthier and, as you know, previous results do not predict future results… My only non-prfoessional advice would be that you should invest in what you understand (as Warren Buffet says) and not follow the advice of others.
Q: How did you go about building these holdings? For example, how often did you buy a stock and how did you decide how much to put towards it? For example, you own 208 shares of MO, but I assume you did not buy them all at once, and you probably did not focus on this stock over some of the others on the list. What made you decide that 24 stocks was the right amount of companies to invest in, and then continously buying more shares in them as opposed to buying shares in other companies? Was this perhaps based on a target amount of diversification that you were looking for?
A: The specifics of my holdings are not reflective of my long-term strategy. For example, the 208 shares of MO are not shares I want to continue to own. However, I’m sitting on significant capital gains and have already exhausted any capital losses for this tax year. My long-term plan is to only own about 10 different stocks, mainly high-paying dividend DOW stocks. I completely revamped my investments about a year ago to focus on 4 things: cash (for stability), gold (for inflation protection), dividend stocks (for income) and to capitalize if/when our economy recovers, and US T-bonds (for income and deflation protection). My strategy is to implement the modern portfolio theory using these four asset classes. If you aren’t familiar with this “theory”, I recommend reading The Intelligent Asset Allocator.
Q: I would be very interested in hearing more about your investment strategies and the process you went through to get where you are today.
A: As I mentioned above, my “investment strategies” have been chaotic until the past year. I was lucky not to lose it all, but I certainly haven’t done well or even beat the market. Instead, I saved like hell until I reached a point where it became worth my time to research investment strategies. Financial independence can be reached through saving early and aggresively, lowering expenses, and after some savings… learning to make your money work for you. I believe that if I had followed that advice in that order when I was 22, I’d be closer to $2M and several years into retirement.
Thanks again visiting the blog. I started the blog to document my personal journey, but to be honest I think I’ve worked out all the kinks in my individual plan. The only reason I still write on it at this point is because of emails like yours where people find a connection to me – and I think I might help them reach the same destination. I hope this helps, and if you have questions, let me know.
Brave New Life recently posted..The Non-Retirement Generation
Are you sure you can do a backdoor Roth after 401k rollover and withdraw everything penalty free after 5 years? Also, are you sure the rules for a backdoor roth will always be in place? My understanding was only contributions are penalty free, not earnings.
Do you feel you can continually beat the market for the rest of your life and not be subject to mean reversion?
Yes, I’m sure that current laws allow you to backdoor money from 401K to Roth, then pull out initial contributions penalty free. As you said, earnings would be charged a penalty, but I can live without those for the next 25 years.
Laws could change, and I would then need to adapt. But I believe that’s true for everyone.
As for beating the market – I have no idea whether I can do that, but I know I’ve never claimed that I would. I probably won’t, since I’m following a very conservative approach using the Permanent Portfolio strategy (slightly modified). I also don’t know whether I need to beat the market since I don’t know how the market will do over the next 60 years.
I figure, worst case is I go back to work. But if I have to do that, at least it will be when my kids are all grown up and I won’t have missed the most exciting years of my life sitting in an office.
Brave New Life recently posted..Mrs. BNL’s Perspective On The Brave New Life
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Big time portfolio there. Good stuff! I see a few up there that I have yet to own, but am interested.
I’m curious, you have substantial holdings in CINF and T. They are both companies I’ve looked at, but I’m concerned about the payout ratios. Any thoughts? Obviously, there’s a bit of “bird in the hand” going on with those two stocks, and there is certainly nothing wrong with that.
Best wishes!
I’m in the process of simplifying my portfolio. I’m switching over to a modified version of the permanent portfolio to keep it simple and reduce volatility. Part of the modification is that my 25% in stocks will be following the Dogs of the Dow strategy. This has it’s flaws, but I liked the dividend income which PP does not provide for natively.
CINF doesn’t fit into this, and to be honest I wouldn’t own it anymore except that I’m sitting on some short term gains and exhausted my losses for this year. I’ll get rid of it when the time is right for taxes.
My guess is that you know a lot more about dividend investing than me. I’m more interested in focusing on a portfolio strategy. Perhaps once I’ve mastered that bigger picture, I’ll take the time to learn each asset class better.
Brave New Life recently posted..The Non-Retirement Generation
Very impressive porfolio. It’s inspiring to see somebody so much closer to my goal being so open about their portfolio.
Will you keep this up to date when you reshuffle?
Would be much appreciated
TheLuckyWizard recently posted..Not Everyone Learns The Same Way
I keep it up to date after any major changes, but that’s a rare occurrence.
Brave New Life recently posted..The Possibilities Are Endless
BNL…I feel like I’ve found my long lost twin brother:-)…~same age, I’m also a EE (from GaTech)…been investing since I was very young….have a few rentals (only cashflowing recently due to many mistakes;-))…and working towards the crossover myself. Kudos to you for all you accomplishments. I’ve only been reading your blog since I found it this week through MMM. If you don’t mind…I’d like to pass along a discovery that I’m thinking you may not have found yet, only because of the investment strategies you mentioned above. I believe Dogs of Dow requires you to purchase while cheap (high yield) and sale when expensive (low yield)…wash repeat, etc. However…I challenge you to research the dividend aristacrats and champions. You’re invested in some of these, no doubt…but pay attention to the dividend increase rather than the capital growth. These guys have increased their dividends for more than 25 consecutive years…and not 3-8% like your EE salary either. Try 15 – 25% annual average for decades…compounding income that kills inflation. Trust me…you dont want to sale unless one cuts their dividend or the payout ratio becomes out of control…but that’s what diversification is for. For example, average annual dividend increases over the last 10 years: MCD-27.4%, AFL-20.4%, WMT-17.9%, JNJ-12.4%, PEP-13.3% just to name a few. http://www.dripinvesting.org has a spreadsheet you can download from the tools tab to see the others. What’s great, is it doesn’t matter if the market is going up or down, the income keeps compounding. With your capital, you could easily get up to 300k year in dividends in no time….build a spreadsheet and model the dividend growth…even if you assume zero capital appreciation over say ten years has little impact on dividend growth income. I apologize if you have discovered this…and I also welcome any constructive criticism you may have to offer with this strategy.
cheers
Jason
I forgot to highlight the best benefit…you don’t have to use the 4% sale rule…just live off the dividends forever (currently @ 15% tax rate for qualified divs) and build a dynasty/legacy for your kids, grandkids, and their kids…etc. With your new found time, and confessed love of learning…I aslo recommend to study up on creating a holding company with this portfolio so the kids can become shareholders and not worry about inheritance tax…Joshua kennon has a great blog and writes about how the waltons (Sam) do this and bill gates with his “cascade holdings”…brave new world indeed:-)
Jason
Hey Jason,
Welcome! We can always use more EE’s around here.
Regarding the Aristocrat strategy, that is actually how I first got in to dividend investing. I was originally planing to diversify across ~20 Aristocrat and/or Contender stocks and just let it ride. This is why I own companies such as MO and CINF.
The reason I moved to DOTD was because I felt I was not knowledgeable yet in understanding so many different industries and how to analyze the quality of the dividend. For example, in some industries a payout ratio of 80% is perfectly reasonable, where as in others it’s a warning sign that perhaps they are raising their dividends to stay in the Aristocrat list, rather than because it makes good long-term sense. I realize the same is true with DOTD, but it seemed like a lot less to analyze. Plus, many of these companies are in the Aristocrat and Challenger lists, so it’s not entirely different.
Once I retire, I want to become an investing expert. I want to pick a few industries and really learn how to analyze stocks and dividend health. Once I do that, I foresee myself following your advice.
As for the family holding company – thank you! I am just starting to read about it this morning, but it looks fascinating. I would love to not only set this up for my kids, but also my less finance-savvy siblings and perhaps their kids. I basically run their etrade accounts for them anyways…
Hello to all,
I just wanted to take a few moments of time to express how great it is to read the blogs, comments and advice offered. As my email suggest that I am not a young man and O two be young again would be wonderful after learning all I have taken in over the past month. I am inspired by the Blogs from MMM and A Brave New Life. I enjoy the links offered. My main objective here is to achieve financial independents before it is too late for my wife. I want her to have freedom and happiness without financial worry. So I read, re-read and research all the information I find. I am trying to learn as much as I can about DRIP process at the same time being wise in the choices I make. I must say I am doing okay. I have made a few mistakes, which will never recover in value. I do feel I am on the right road to having financial independents for my family. My only hope is that I live long enough to reach the ultimate goal and teach my family the importance of living within their means. I thank you all for all you offer. It is so great to be able to read about investment without the writer having some alternative financial objective of buying something to make them rich. Thanks so much for your blog and I hope you never stop posting. I am just a simple guy looking for the truth in investments to enjoy the happiness of being able to retire financial independent. I do believe that financial independence is the ultimate goal, and being able to retire because of it is a derivative of it.
Frank –
Thanks for this thoughtful comment. There are two benefits I get out of writing this blog (and it’s certainly not the financial reward).
First, it forces me to think about things so much more deeply. At this point, everything I write is eventually read by thousands – which means it will be analyzed, judged, criticized, and used. That puts a lot of pressure on me! But it also allows me to make better choices, not just with finances but with life.
The second benefit is that I get the satisfaction that I might be helping out a nice guy like you, and perhaps even assisting a family in reaching financial security. This is a wonderful feeling.
Good luck with your goals, and keep in touch.
This blog is fantastic; I wish I would have stumbled upon it a few months ago before I switched jobs.
Quick question – Have you thought about using the 72T Rule vs. converting to a Roth? I was wondering what your thoughts are on this subject, pros vs. cons, etc?
Thanks.
Yep, I’ve been thinking a lot about it, actually. I still haven’t made up my mind.
Currently, my forecasted dividend payout in my taxable savings will not be enough to pay 100% of my family’s expenses assuming a 3% to 3.5% average yield. Since my investments are mostly in dividend growth stocks, after about 5-7 years I expect to cover it, and then some. So during those 5-7 years, unless I have other sources of income then I’ll actually be drawing down my savings. It won’t be by much, and logically it’s no big deal, but I know that mentally it’ll bother me and I may convince myself to go do some contract engineering work to offset the drawdown. I don’t want it to come to that.
This makes the 72(t) attractive, because I could pull out about 2% of my total savings in tax-sheltered accounts and then I’d no longer be drawing down in my more liquid taxable account. What I don’t like about this is that once I start the 72(t) trickle, I can’t turn it off. In 5-7 years, I’ll have to continue pulling from my IRA even though I won’t necessarily need it. It’s not the worst problem to have, but it’s a permanent decision I need to consider.
With converting to a Roth, I wouldn’t want to do that until after I retire and have very low income taxes. But then I have to sit on it for 5 years, which is the same amount of time I’m predicting for the crossover point to where my dividends can pay all of my expenses. So then what’s the point? It would be more of a buffer than anything else.
One final option I’m considering is a little more risky, but I do enjoy risk.
For the higher risk possibility, I may take about 10% of my total savings and invest in some significantly higher yielding investments that bring my average yield from ~3.5% up to to 4%, then cut back on the high yielder each year as my primary dividend growth increases such that I would be bringing in an income no more and no less than my annual expenses. For example, if I take out $100K and invest in a 10% yielding REIT, I could get $10K in in income instead of $3.5K in income, so it’s a $6.5K booster. If the following year I only needed an extra $5K booster, I could sell off a fraction of the REIT and move it to the lower yielding stock.
This concept is fraught with risk and potentially poor market timing, but it’s still an option on the table.
Thanks for the feedback. I was thinking the 72T was the way to go, but I’m going to be older, closer to 50 when/if I do it.
But this new company offers a nonqualified excess plan, which allows you to put tax free money in and take it out without penalty when you leave the company. You have to pay taxes on the money when it’s distributed, but no penalty.
So I’m strongly considering shifting my focus to this rather my 401K, but I’m just questioning this strategy.
If you do the 72T you could always re-invest the money and stop when you turn 59.5, correct?
Yeah, you can reinvest it, but not back into a tax-sheltered account. So if I no longer need the 72t money at the ange of 40, that’s 20 years I don’t get the benefit of sheltering money.
I’m not sure how it works if I implement 72t on my own IRA and not my wife’s, if we could then funnel it back into her account. I’m planning on talking to a financial adviser at some point about that. I think 72t is complicated enough that it’s worthy of consulting a professional.
One other thing I also consider, if I control my income to only what I need and no more by tweaking my dividend income, then by the time I take my standard deduction, dependents deduction, and all my fancy business deductions then I should be able to keep my tax rate extremely low (and potentially 0, depending on future tax laws).
Nice work man. That’s some killer dividend income.
I’ve got about $6,100 per year coming in, but you blow me out of the water!!
I hope to continue following you, just found your site
I hope you make some time to check out my site.
Cheers from the Great White North, Ottawa, Canada.
Mark
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Thats a great achievement!, keep up the good work, atm im doing something similar but in the uk, i’ve got 31 stocks there all defensive stocks that pay dividends, companies that sell food, fuel, electricity etc basically i’ve got investments in things that people need instead of want so no matter how bad of a recession people still gotta eat an keep the heating on an buy fuel to drive to work, also got an account on ratesetter i love their provision fund, although im just turning 20 and trying to get into the British army, i was still alittle afraid that something bad might happen to my investment (i guess we all have fears) my total capital is still small but you’ve just gave me a boost of confidence and i thank you for that.
Are you planning on putting some of those earnings in other investments when you get closer to retirement? That seems to be a very good idea.
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I’m already split between P2P lending, blue chip dividends, and real estate. More diversification is possible, but no plans now.
That’s smart. It would be my luck that I would invest in something and then it would go south on me. So I just wondered.
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