The Only Passive Income To Focus On and How to Manage a Portfolio

Inflation is here.

I made a post last September about inflation. And how I think that the money printing, borrowing of governments, increasing of taxes etc, will result in inflation. And here we are.

Your purchasing power is now deteriorating, buying less goods from the same amount of cash. I have been seeing properties increasing in value, not because of supply and demand, but more in the lines of raw materials increasing in price. Also, with the disruption of supply chains, it only adds to the burden.

Here is a chart of Oil.

Back in April, I talked about oil’s negative price. And how I talked about that oil is one of the great investment as a result of the COVID crisis. I still think the others are still great investments, just the timing I will leave up to you.

The point of all this is simple… If inflation is here, you should be investing your money so you don’t lose the value of it. And what better way to invest your money but to invest it in things that produce an income for you. And not just an income, but passive income.

Oh! Passive Income

There are hundreds, if not thousands, of articles, books and videos about passive income. Though the idea is simple to grasp, “make money doing nothing”. Some people are still confused in practice because of the number of different kinds of investments that would supposedly give you a passive income.

Let’s take for example owning real estate. A lot of seminars, books and videos, preach the passive income from real estate which is rent. But they are not passive income. If you have rented your own property before, you know that this is not true. You will work for the property just so it continues to give you income. I would say that real estate is 70% passive income and 30% active. Depends on the kind of property. But it will never be 100%.

People get confused because there are a lot of investments out there. But for me, there are only a few investments that would totally give you passive income and freedom that you desire.

Let’s learn about them now.

Focus on These Two

In investing, there are only 2 kinds of passive income that you should be focusing on. They are:

1. Dividend Income
2. Interest Income

I’m sure there are other passive income streams that you could invest in. For example, royalties. I won’t be discussing royalties here as its more complicated for the “tamad investor”. But in general, these two passive income streams does not only provide you passive income, they are also 100% completely hands free if you do your homework.

Not all passive income are created equal. Some passive income source starts out as active income and you work towards into making them into a passive income. For example, our favorite real estate. Real estate is one of those investments that gets marketed as passive income but it starts out as active income and to turn it into a passive income source, you have to work on it or hire someone to maintain that passive income so it continues to become a passive income. Its cost is time or money or both.

In real estate, the only way to make it into a passive income is to hire someone to manage it, a property manager. And it costs you to hire someone and it costs you to hold on to the asset. If you don’t pay the taxman, your investment is gone. You don’t pay the manager, your passive income becomes active as you manage the investment yourself.

You can make passive income in real estate, but it takes work to get to that point. And that point is mostly down the road when you already have a lot of passive income already to cover the cost of holding the asset and hiring the manager.

In the following sections, I will explain each one and how they relate to a portfolio of a totally lazy investor like me.

Dividend Income

The only real, completely passive income that you can invest in is dividend income. In my opinion, by far the best passive income investment that you could make. And you should start it as soon as you can.

What is dividend income?

Dividend income is the real passive income you get by being an owner of a business. Not matter if its a listed company on a stock exchange or a private entity. You will get paid just by holding and waiting. Its completely passive. While real estate will need holding cost (the cost of holding an asset like tax, maintenance, hiring of managers, financing cost), businesses, you can be a passive owner, not knowing what the business is doing and still get paid. I still get surprised and happy when I receive an email that a stock I own just gave me dividends.

There are many kinds of investments that gives dividends. And I think this is why people get confused. There are investments that call the money they give to investors as dividends while in reality its interest income. Something like Pag-Ibig MP 2 is an example. They call it dividends but the nature is interest income from loaning money to other members with interest.

REIT is also an example of an investment that gives out dividends. It is also called Real Estate Investment Trust. Since we know that owning real estate is not entirely passive. Investors can invest in real estate without having to manage it through a REIT. REIT is just short for real estate without the headaches. And the rent income that an investor in REIT will receive will be called dividends.

Start Investing in Dividends as Early as You Can

You all know the people who makes millions in dividends doing nothing. Or billions like Warren Buffett just by doing nothing. That is akin to a tree planted decades ago that is now bearing fruit. Warren’s $1B investment in Coca Cola now gives him $500 million every year, being paid over and over from the investment he made in 1970’s. And this is where people dismiss the idea of building for a strong foundation in investing in dividend. They dismiss this investing strategy because its slow and the dividends they receive, measly at the beginning. And off they go to other hot, speculative stocks because they think its “faster”, while burning the future they could have built while young.

Rome wasn’t built in day.

So if you want a million peso dividend payout doing nothing, you must start now. Build that as you grow, and you will achieve it sooner or later. Measly dividends in the beginning is just the norm. Being rich or financially free is hard. And its suppose to be hard. The question is are you willing to pay the price?

Since most dividend investments also increase in price as they increase their dividend. It becomes a value loop. Increase in dividend will increase its price. So you get capital gains on top of your passive income. This is all passive.

But not entirely passive.

How to invest in dividends?

I lied. Investing in dividends is not passive. You will still have to do the work. But this work is only at the beginning. That work will have to do with knowing which stocks to invest in so you can secure a passive income for life. And I have a whole course on how to do that, just head over to Investing Philippines course.

There are also ETF in the US that will invest in dividends, so you don’t have to do the work of looking for dividend companies to invest it. The work is done for you, you just have to put in the money. To invest in the US, you can read my eToro review.

Interest Income

Interest income is the money you earn by parking your cash somewhere. When you put it in a bank, it earns an interest. You can also think of interest income as a loan to someone and by borrowing your money, they will pay an interest. This is completely passive if you do it right.

I mainly invest in a couple of interest income producing assets. They are: corporate bonds, government bonds, treasury bills, and loans.

Why Invest in Interest Income?

You might be asking why you should invest in interest income if you already have dividend income? Isn’t dividend income the best passive income source you could invest in?

That’s true. But interest income is mainly for protecting what dividend income lacks.

The one weakness of investing in dividends, stocks and businesses in general is that when hard times come, like COVID, financial crisis, their dividends and stock prices will also come down. Since interest income is a loan that is backed and secured by a collateral, it is a safer place for your income if you want to take advantage of the downfall of stocks.

For example, if you have an interest income that is producing 20k per month in interest, then the stock market tanks, COVID hits and the stock price are at an all time low, you can take advantage of it by buying more dividend income stocks while its cheap using the income you get from interest income. Having secure passive income in those times would give you the “dry powder” to rack up your positions and increase the number of shares you have to increase your dividends some more. Interest income is a supplement to the dividend income. It is mainly a safe passive income that its only purpose is to buy more dividend paying stocks. And since interest income are backed by a collateral or secured by something, you know that you will get back the money back and its value intact, meaning its safe.

What Interest Income Investments are good to invest in?

Government Bonds – Lending to the Government

Government bond is the safest of all bonds and is one of the best investment for interest income you could get because the government will guarantee your investment. Meaning, no matter what happens, the government will pay you. They pay quarterly.

Corporate Bonds – Lending to Companies

Corporate bond is the second safest but higher in yield. These are bonds offered by corporations. It means you lend a corporation money for a few years and they will pay you quarterly in interest. Totally passive. They usually have no collateral. But corporations have ratings, in which you can be confident that a company will pay you back if the rating is high. The lower the ratings of a company, the higher the yield. So invest at your own risk.

Business Loans

Loans. This is an investment that I just took seriously just recently while having to pursue investing in private equity. I realized that small businesses have a lot of benefit in our country and a lot of them can not get loans from the bank. The business that I took an investment in private equity is one such business. I wanted to help them and profit at the same time. In short, you lend money to businesses and they will pay you monthly interest for the money they borrowed. And that is usually hard to do on your own, like create a contract and whatnot. But today its easier because of crowdfunding.

Just recently I started investing in SeedIn, because of my personal experience in lending money, I know that its like a gamble to get your money back. But SeedIn, for as long as I have been with them, nobody defaults yet on my loans. Zero defaults. I always get paid interest monthly. I am pleasantly surprised at how good SeedIn at filtering out businesses to access their platform. And I suggest you give them a try. Interest income are paid monthly. You can read my SeedIn review.

So together, government bonds, corporate bonds and business loan, you can have interest income from January to December and you don’t have to do anything.

How this all fits together – Managing Your Portfolio

I am going to share to you my strategy on how to manage a portfolio’s cashflow so pay attention. Its not that complicated, I know you already know it deep inside, you just didn’t have the chance to actually try it out or know if someone is successful with it. I’m telling you, its the simplest way to get to where you want to be financially. And simple is always better. The idea is simple and the keyword here is “focus”.

Phase 1: Spartan (Active Income to Dividends)

We all start out by having 1 main source of income from our job. And this is where most people get stuck for a lifetime. The comfort of having to not worry where you will get your income is assuring and will entice you to be complacent. And also makes you think its ok to splurge. I talked about the value of being a “spartan” when it comes to earning and spending in my investing course.

Once you decided that you don’t want to live the rest of your life in your day job. Its time to put your active income to dividend stocks. Save the most you can from your active income and put it into dividend paying stocks. If you don’t know what stocks to pick, consider joining my investing course.

Some people will save 10% of their income and put it in dividend stocks. But I would suggest that if you are young and you can endure pain than most people, try to save 50% or more from your income. It will speed up the process for you and you will reach your goal sooner.

Phase 2: Financial Freedom (Active Income + Dividends to Dividends)

You do Phase 1 for as long as you can. While you invest the money, dividends will start to come in. And if you do Phase 1 and follow it, you will feel it when you get to Phase 2. Phase 2 is where your dividend income becomes equal if not, more than your active income. At this stage, you are financially free and you may quit your job or not. Totally up to you. But if you’re still young and still want to build wealth, you can continue earning money from your job, while investing it in dividends. Your dividend investment will then contribute to your income and will also be reinvested to buy more dividends. Its like 2 income streams now working on the same goal of buying more dividend stocks.

Keep doing this until you feel that it becomes easier to make money. At a certain amount of dividend investment, you will feel that its getting easier. This is compounding taking effect. Charlie Munger says that its around $100,000 that you will feel it becomes easier. And I somewhat agree based on experience. Once you reach around 4.5 million pesos, everything seems to get easier. So until you get to that number in terms of invested money in dividends, continue saving, and investing. When you reach that amount, you can relax a little bit on the Spartan way of life. And work on protecting what you have built.

Phase 3: Antifragility (Active + Dividend + Interest to Dividends)

Your dividend income will always be reinvested to dividend stocks. Unless market forces you to change investments (more on that later). But more often than not, always reinvest the dividends that you receive. Continuing the compounding. Active income can now start to build another income stream to protect your dividend empire. Interest income from loans and bonds can add to the safety and protect you with the downside of being invested in the stock market. It also gives you more income source that is safe to take advantage of financial crashes.

SeedIn is a good starting point if you want to build interest income early since it has an auto invest feature. With traditional bond investment, you have to be up to date with the latest offering and contacting banks. With SeedIn, investment is done automatically, so you can focus more on other important things. You are still the one in the driver seat, a mix of bonds and SeedIn is good.

The money you earn from interest income can be reinvested to the same interest income, but allot a small portion of your earnings dedicated to buying more dividends. For example, if I receive 10,000 from interest income, I will invest 10% of that into dividends and 90% of that, back into interest income. This way, you contribute to dividends and you increase your interest income.

It will only change when there’s a market turmoil like a crash. If a crash happens, you know I will invest all interest income into dividend earning stocks. Its just that great of a time to be aggressive. You see how important it is to be prepared and plan this things out?

Being prepared makes you calm. And a calm mind is a great asset for an investor. If you have 3 stable sources of income and 2 of them are passive, what harm can a market crash give you? You’re as strong as a rock. You can take advantage of crashes. And crashes becomes a gift to you rather than a misfortune. As a matter of fact, my dividend income increased during this COVID pandemic, proving that if you choose the right stocks and plan the composition of your portfolio, a crash is a blessing.

Nassim Taleb calls this being “Antifragile”, you prosper in disaster. Its a lot better position to be in and a lot of fun too.

Phase 4: Enterprising Investor (Active + Dividend + Interest + Other sources to Dividends)

Not to be confused with the enterprising investor in the book Intelligent Investor, this is the part where all your passive income sources becomes big enough that you are able to do something riskier and more speculative. When all your passive income is big enough, stable enough and antifragile enough to withstand crashes, this is where you become an enterprising investor, willing to take on more risk to get more reward, growth and add to your growing list of income sources. All but for one purpose, to add to your dividend stocks.

This is also the point where you can get into real estate. Since all your passive income sources are predictable, you’ll be able to take on financing and holding costs needed for real estate. Also at this point, failure does not mean the death of your financial life. Since the passive income streams are great enough, you can afford to fail over and over and start again and risk again. You can now invest in startups that will not give you any income for a couple of years or even the probability of failure since it doesn’t matter because you already have your passive income streams. But if it does becomes a success, you will reap big rewards. This is an asymmetric returns, lower risk, higher return.

There’s a lot of things that we can talk about asymmetric returns. But for now, just remember that if you get to this phase, you are basically untouchable and your money is virtually infinite because of decades of preparation and building up of your passive income. Like Buffett’s $500 million a year dividends on a $1B investment decades ago. As long as you don’t spend more than you earn in your passive income on frivolous things, it will never ran out and you can take on risks that would reap big returns in the future.

As an example, I invested in private equity a little while back. And it may not give me dividends for a couple of years or it may even fail. If it does fail, this is fine with me since the money I invested in that company will again arrive through my dividends that I have built up over the years. And if the private equity startup becomes a success and starts to give dividends, it will again be used to buy more dividend stocks. Everything is of one purpose. To increase the number of stocks that will give me dividends.

Likely is the same if I buy real estate, the rent will only be used to buy more dividend stocks. It will most likely be the last investment that I would make if there are other sources available.

And one last thing, when you have multiple streams of passive income, you can afford to invest in stocks that does not give dividends or gives only a small amount of dividends for the growth of the company. You can afford to wait because you have built a strong foundation. And this will give you better returns in the future if the business becomes successful.

What about Pag-Ibig MP 2?

Pag-Ibig MP 2 falls into our interest income investment. But the nature of the investment does not fit the strategy that I suggested. The truth is, Pag-Ibig MP 2 allows you to invest but the payout of the investment is either 1 year or 5 years. This is not a very good interest income for a crash may happen at anytime and you may need the money now. Crashes might not be able to wait for your MP 2 to give interest earnings.

But there is a special spot for Pag-Ibig MP 2 in our portfolio, its just that I won’t make a core strategy around it.

Focus is the Key to Success

As you might imagine, the idea is simple. Devote all your earning power to getting more dividend paying stocks. And build all other passive income sources to contribute to buying more dividend stocks. During this process, you will need fundamental analysis.

Each phase is not determined by a peso or dollar amount. You need to have a feel for what phase you are in. Since each person is different and each person spends and earns differently, you will be the best one to know which phase you are in.

If you follow this guide, I’m sure you’ll be financially free and have virtually unlimited source of money. Just don’t spend more than you earn and you will be fine. Its good to enjoy some of it once in a while. But if you have the discipline, you will build a great foundation of stable, strong, antifragile passive income sources and you must start it as soon as you can to enjoy its effects, the effects of compounding.

And remember to enjoy the process. Building a passive income empire is fun if you have the right attitude. It’s like a video game. Remember that time is most important than money. And having more of passive income will give you more time. Keep your focus and keep building your passive income source.

What phase are you currently into? Write down in the comments section and let me know! Would love to hear your stories.