It has been a long time since I last mentioned Dividend Growth Investing (DGI) on this blog. But if we retrace the steps to the beginning of the journey, readers will see that when I first started my own path to early FI, DGI was my preferred vehicle of choice.
Since that time, I’ve dabbled in the real estate space, and currently, I’m very much focused with speculating in precious metals and commodities.
Although it may appear that I am a person who likes sudden starts and stops, the truth is I have never lost sight of the big picture. When the magical day finally arrives and I am ready to start the next chapter of my life post-FI, I would like to enter that phase with complete ease of mind. In other words, I would like to be able to set it and forget it.
And when it comes down to it, the best form of income is passive income.
No More Stress!
With Real Estate Investing (REI), it is nowhere near being a passive form of income. Granted, I only own eight properties (and most of my tenants are spectacular), but nevertheless, this is something I must stay on top of each and every single day… even with a property management (PM) team in place.
As is life, problems tend to crop up when we least expect them to…
This is all fine and dandy when you are still working and used to subjecting yourself to stress, but honestly, I have never been able to envision a life of early FI where I am still stressed out and running around in circles trying to get tasks done.
To me, early FI (at least the early stages of it) is all about: traveling the world, playing on beaches, exploring new shops and restaurants, meeting interesting new people, taking on eclectic hobbies, and just NOT caring about anything but having a smashing good time!
This isn’t to say that I plan on liquidating my real estate holdings, but it does give me pause about adding even more units and taking on even more active duties. That is, until I get the wanderlust out of my system and am ready to settle down once again… A return to normalcy, which at some point I will want again (I think)…
Throughout the journey, I’ve come to realize this — When you are first starting out, you want to maximize your cash flow as much as possible (which might explain why I was so focused on chasing yield in 2013)…
But once you’ve eclipsed your goals and have “more than enough”, you must weigh in if the extra cash flow is worth the additional stress, strain, and time commitment.
Right now, my rental units bring in ~$2,000/month (accounting for just my own 5 rentals and no side hustle partnership deals which are already/also cash flow positive) in semi-passive income… Those aren’t outstanding numbers by any means, but please keep in mind that I decided to implement a “one step back” approach this year…
I currently have over $100,000 in cash (which I could always use as a buffer if things get tight on a given month) and another liquid $100,000+ invested in mining stocks (this excludes an additional $100,000 from retirement accounts).
Further, all of my Bay Area rental units are renting below market rate… some units rather substantially below market because I have wonderful tenants and am not desperate for the cash right now… Of course, the need to jack up rents would be a given once I leave behind my W-2 and enter early FI! This should easily contribute an additional $600+/month to the semi-passive income stream.
Anyway, short-term (pretirement), I think a combination of the semi-passive income, cash, and some freelance writing (or other side hustles) would be more than sufficient to hold me over while I relaxed some place cheap (and warm!) overseas sipping on pina colada…
As you can see, I’m very much still a work in progress…
Dividends For Later
A logical question anyone might ask is, “If you love fully passive income so much, why don’t you just convert that $200,000 into dividends NOW and just be done with everything?”
Well, let’s do some math…
$200,000 -> 5% yield -> $10,000/year ->$833/month
Quite frankly, those figures are just not high enough to justify the risks involved… If this was 2009, sure, I might be inclined to take the bait (since I would be able to purchase stocks at substantial discounts) and secure the cash flow NOW… But with the stock market at all-time highs, there is very little appeal in that proposition…
Never ignore the risk vs. reward curve!
I guess my choices come down to this:
- A) $2,000/month in passive income + $100,000 in cash + $100,000 in liquid funds
- B) $2,833/month in passive income
In 2009, I would probably go with Option B…
In late 2015, I will go with Option A everyday of the week…
Quite frankly, Johnson and Johnson (JNJ), 3M (MMM), Pepsi (PEP), etc. at sub 3% yields are NOT cheap.
Why on earth would I invest in those companies right now at such frothy valuations when I could just as easily speculate on commodities which are selling for pennies on the dollar, instead (which is EXACTLY what it is that I’m doing with my capital)?
Up to this point, I have not yet written a post about my “big picture” strategy, but believe me, it involves generating a lot more than $833/month in additional passive income! 😉
The BIG Picture
Without going into too many details, at some point in time, I am hoping to convert that $200,000 into some figure substantially larger.
I strongly believe in market corrections, cycles, and an eventual reversion to the mean (for all assets).
I may have to be extremely patient, but I truly believe that there will be a time and place to get back into Dividend Growth Investing.
Again, DGI is my absolute most favorite idea! Who doesn’t love 100% fully passive income that INCREASES on a yearly basis without you having to do ANYTHING?
But like everything else, there is a time and place for it… Right now, I just don’t believe that dividend growth stocks are undervalued enough to make them attractive… In a world starved for yield, everyone and their grandmother has piled on into DGI… There is just way too much retail interest in this sector right now for it to appeal to me… I’ve also learned that I really only like to buy BIG when hardly anyone else wants to touch an investment. And I’m certainly not the type of guy that is going to waste his time trying to fit a square peg into a round hole…
I don’t fall in love with my investments… or investing methodologies.
I am a Financial Freedom Investor (FFI), first and foremost. As a consequence of that, I feel the need to be forward-looking as I hunt for deep value that will in turn make the path to early FI that much shorter… and more sustainable long-term.
Why else would we do the things that we do?
But let’s say that I am massively successful in my speculations (which might take a few years) and can turn the aforementioned $200,000 into say $600,000.
$600,000 -> 5% yield -> $30,000/year ->$2,500/month
That’s enough to really matter! Especially for an extremely frugal guy like me! 🙂
Combine that with the $2,000/month from rental property and we are talking $4,500/month in cash flow, much of it fully passive.
I don’t think so…
I just need gold to get back to say $1,500/oz, and that ought to do it… 🙂
This type of strategy won’t appeal to everyone, obviously… because it requires a ton of conviction and patience (which I have)…
I look at building up cash flow differently than most investors… We all start off with the analog approach where cash flow increases incrementally and then it compounds when it gets large enough… I’ve got some of that in my portfolio myself… These days, I’m focused on the digital approach where you go from having NOTHING to A LOT instantaneously (almost)!
The digital approach is entirely more speculative and “risky” which is why it doesn’t resonate with most people out there, especially not at first glance. It’s human nature to want your cake NOW and some additional morsels every step along the way (that’s why DGI appeals to so many investors)… It’s psychologically fulfilling… Baby steps feel like progress… and passive income growth is extremely rewarding.
However, on the journey to early FI, I would argue that any incremental approach (although full of merit in its own right) needs to take a backseat to deep value.
Deep value ALWAYS wins out.
So, I’m more than willing to forsake the traditional analog approach right now, go cold turkey, and wait it out until the inevitable commodities bear market finally turns around… because when it does (and yes it is inevitable but by no means immediate), it will be that much more rewarding! When it comes to investing/speculating to get to early FI, I ONLY want to partake in any deals that have a ton of meat still left on the bone…
And if you ask anyone who really understands commodities (particularly precious metals), they will unequivocally tell you that we are in the midst of one of the UGLIEST and MOST BRUTAL bear markets EVER!
That’s music to my ears…
Buying up real estate after the bear market in 2008/2009 helped me get to my first $1MM in net worth; I’m more than convinced the current deep bear market in commodities will someday help me get to $2MM+ and indefinite financial independence.
So, as you can see, I do tend to make a lot of sudden stops and turns while on my quest to early FI… And there are no guarantees that everything will work out the way I intend and envision…
But the plan all along has been to emerge from this chaos to come back full circle. Back where we started from…
Dividend Growth Investing
But let’s face it guys — whether we are investing in real estate, stocks, bonds, currencies, commodities, etc., it’s all NOT THAT EXCITING.
Ultimately, for me, it’s all about being able to play on the beach on a nice sunny day without a care in the world…
That’s what this entire journey to early FI has been all about…