My take on Passive Income

Posted by terence_Say > 2013-10-24 23:10 | Report Abuse

Original article from Scg8866t Stockinvesting The first thing that comes to people’s mind has to be, dividend stocks. But I don’t consider dividend stock investment a form of passive income. Why? Because there is a fundamental assumption that the dividend you receive from the stock you invested is something extra, which is actually not the case. A company giving their shareholder dividend, would be trading without a significant portion of its cash, which means theoretically, the company stock should depreciate at the same amount of its dividend payout. The dividend income that you receive from your stock, should theoretically be deducted from your stock capital. There is no net gain. Dividend investors treat the dividend they receive as a passive income on the assumption that the company will return to its pre ex dividend date price. That is a very big assumption and much work has to be done to source out for such counters. I treat dividend stock investment as a portfolio income. You need active participation in your portfolio. Dividend stock investment is not ‘safe’, in this day and age, any low beta stock that gives a stable yield is prone to be affected by interest rates and market irrationality. My definition of passive income is one that is relatively safe and actually gives you a net gain without the need for much assumptions. Passive is a relative term, you can’t make money without any effort, but passive income should not have a big impact on your day job. If there is a room in your house that you do not use, renting it out to tenants can make you money, and you don’t even have to be involved in the process. Of course you have to sacrifice some privacy for this, but there is little to no financial risk there. Create an online blog and express your thoughts with words. Try to find a niche crowd and drive in traffic to earn ad fees. In the mean time, learn something new from this experience. If you like photography or art in general, you can start a stock website which you can upload your photos or art to sell and earn royalties. Of course you would need to do research on the genre that is in demand on line. Do realize that copyright is a big issue online, so professional bloggers and online news agencies have to pay royalties to use photos or artwork for their articles. If you are a good sales man, you can tap into affiliate marketing which is another method of earning commission from selling or promoting other company products which you like(eg amazon). Alternatively, you can find something that is in demand and scalable and sell it on ebay. Investment grade Bonds, fixed income funds with maturity dates(exit strategy) and savings accounts to me are also counted as forms of passive income. As they entail lesser assumptions. If the company/bank is sound, it will return you your capital within a stipulated time at par price. Which means the interest you receive should be counted as net gain. These are a few passive income sources that I can think of at the moment. Feel free to share and discuss. http://www.leinvest.com/en/my-take-on-passive-income.html#.Umk4SvlmiSo

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2 comment(s). Last comment by bsngpg 2013-10-25 07:10

bsngpg

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Posted by bsngpg > 2013-10-25 06:35 | Report Abuse

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The writter said : “Dividend stock” investment is not ‘safe’, in this day and age, any low beta stock that gives a stable yield is prone to be affected by interest rates and market irrationality.

I disagree: I opine that “all stocks” but not limited to dividend stock are not “safe” and prone to be affected by interest rates and market irrationality. In fact, dividend stock is relatively safer than other stocks in this context. When bad things hit the market, dividend stocks are most likely still giving out dividend(passive income) than other stocks.

bsngpg

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Posted by bsngpg > 2013-10-25 07:10 | Report Abuse

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"Writer said: I don’t consider dividend stock investment a form of passive income. Why?"

I disagree, why ? Let say I invest in MBB at RM10. Based the current trend, MBB gives average 55 sen dividend which is 5.5% dividend yield per year.

For the last 5-6 years, it is safe to say that MBB grows in net profit by 12 % per year. Therefore after deducting the 5.5% div payout, the retained net profit is still growing by 6.5%. So, after dividend payout, the share price is not only bouncing back to the pre-ex level but in fact another 6.5% higher than pre-ex. All in all, the dividend you receive from MBB you invested is something extra.

Do you need to do lot of extra effort to get the 5.5% passive income? It depends on you. But you have an option to do minimum thing besides receiving the dividend as a passive income. The reason is that if MBB goes bankrupt, means the country goes bankrupt too as MBB is the barometer of the country.

What do you think ?

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