Passive Income – Dividend Investing


Investing, Strategy / Tuesday, May 12th, 2020

April 2019 was the month when our first dividend income trickled in. So as we hit April 2020, 1 year since that first milestone, we thought it was a good time to review how much dividend income we had netted in over this period. A disclaimer, at this stage we are not investing specifically for a dividend income. But, any passive income coming in is more than welcome. None more than dividend income which some say is truly passive income!

We have detailed our portfolio management principles here.

So, Is There a False Passive Income?

Passive income is defined as income that is earned with little to no effort. Some examples other than dividend income include, rental income, royalties from intellectual property such as books, music or other creations. Many experts, however, don’t completely agree with all the examples listed above. Their argument is that some of these income sources actually  require considerably more effort than others. For example:

  • Rental income requires a lot of effort on the part of the landlord in terms of maintenance of the property and managing the flow of tenants.
  • Books, music and other works of art require a life’s worth of effort just to create them. And then some more to actively market the product. And so on.

Dividend income, on the other hand, is earned by someone else working for you. You just have to invest in their ‘profitable’ enterprise. Oh, the sweet sweet fruit of being a capitalist…

Are There Any Other Sources of Passive Income?

As we were becoming familiar with the principles of FIRE and formulating our investment strategy, we were only thinking of traditional investing themes. Such as low cost investing in ETFs,  real-estate investing, etc. However, some other FIRE enthusiasts and practitioners we have been interacting with have been thinking out of the box. There are several other ways in which they have been supplementing their income. Are those passive or not? Well to each their own. 

Passive income ideas range from: 

Some of these ideas have been captured in this Forbes article, although the first few involve a lot of creation or marketing to be honest. And we did not know Print on Demand was a thing until we came across it on our fellow blogger thedollarblogger’s blog on Passive Income ideas. You may call these passive income or a side hustle. But if it speeds up the time to Financial Independence, why not!

Our First Year’s Passive Income

When we started investing, dividend or distribution income was probably the last thing on our minds. We are in it for the long term appreciation and hitting our target Financial Independence magic number. So it was quite a pleasant surprise when we looked back and saw the total dividend number to be in 4 digits! Do note that we didn’t really see any of these dividends hit our bank account as we’ve opted for Dividend Reinvestment Plans (DRIP), wherever we had the option. Notable exception is Vanguard US Total Market Shares ETF (VTS) since it does not offer DRIP, being domiciled in the US and not Australia.

Aside – Dividends relate to stocks owned in a Company, while Distributions relate to units owned in a Trust or Fund. For simplicity we use the word Dividend to represent both in this blog.

Our Roboadvisor portfolio has brought in 31% of the total dividends, even though it contributes only 23% to our present investment value.

One of the reasons is that we started investing with Stockspot much before we started with our Self-directed investments. We started the former in Jan 2019 while the latter was in June 2019.

The second reason is that the Aussie share ETF in Roboadvisor portfolio Vanguard Australian Shares (VAS) has paid out a much higher dividend as a percentage of the portfolio. In comparison the Aussie share ETFs, SPDR 200 Fund (STW) and Ishares Australia 200 (IOZ), in the Self-directed portfolio have paid lower. We’ve observed that the Aussie share market is more dividend focused in comparison to the global markets, which are more capital appreciation focused. 

Distribution % Contribution from Respective ETFs

Dividend as a % of Investment Value as of 30 Apr 2020

Dividend Distribution vs Capital Appreciation – Which Do We Prefer?

So what is the take-away from this exercise? Firstly, we take this as a motivator to continue investing that is for sure. This is a positive sign. 

The follow up question is should we change our investment strategy to make it more dividend focused? An investment strategy focused on dividend distributions is great for FIRE’d or retired investors who are looking to use the dividends that they receive to cover their monthly expenses. However, at our current stage of investment we are looking at our goal to achieve FIRE. Therefore we are looking to build a balanced portfolio based on our risk profile and are currently reinvesting whatever dividend income we receive. That is so as to make the most of the magic called compounding.

Mr. Fireball

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