What does it really take to earn $100k PA Passive Income

I'm Thinking 3m of fully paid off shares and ip's, so probably a fair amount to most peolple

I meant that it is not considerably more than having capital that you would otherwise deplete in say a 30 year retirement phase. It works out to be something like 33% more capital for that income to last forever.
 
You need about double the value in IPs compared to shares for the same after tax income, so my retirement strategy is 100% shares.
 
Combination of mostly shares and cash buffer for me. As for fear of GFC type events on shares consider it an amazing opportunity to pick up a future income stream very cheaply. Sure if you need the capital on retirement then these events might seem scary if they come at an inopportune time. But for income investors these are extraordinary buying opportunities. Share income unlike capital value is far less volatile provide you hold a diversified portfolio or LICs etc. But for added security hold a few years living expenses in cash to ride out any potential reduction in dividend income during difficult times.

In retirement I want a truly passive income stream. Even with using property managers etc I still found property anything but passive. Have progressively disposed of all but one investment property now and used the proceeds to top up the share portfolio at opportune times. Only reason we still have the last one is that a family member resides in it:eek:

But as usual one is not necessarily better than the other. It is really just a personal thing. I want to live life to the fullest in retirement without having to mess around with investments hence for my personality and lifestyle LICs, ETFs and a some income stocks require very, very little of my time.
 
But for added security hold a few years living expenses in cash to ride out any potential reduction in dividend income during difficult times.

But if the market takes a dive wouldn't the future dividend income be cut too?
i.e. assuming your yield is static at 5% and your asset base gets cut in half it might take decades before you can rebuild your asset base to get the same dividend income

Not trying to be a downer, just curious to know what risk mitigation strategies should be considered.

I too intend to live off dividend income.
 
But if the market takes a dive wouldn't the future dividend income be cut too?
i.e. assuming your yield is static at 5% and your asset base gets cut in half it might take decades before you can rebuild your asset base to get the same dividend income

Not trying to be a downer, just curious to know what risk mitigation strategies should be considered.

I too intend to live off dividend income.

that's what happened to several people I know in the GFC

Cliff
 
But if the market takes a dive wouldn't the future dividend income be cut too?
i.e. assuming your yield is static at 5% and your asset base gets cut in half it might take decades before you can rebuild your asset base to get the same dividend income

Not trying to be a downer, just curious to know what risk mitigation strategies should be considered.

I too intend to live off dividend income.

If, as I and others have stated in this thread, shares are up to twice as income efficient compared to property, they can endure up to a halving of value before being worse off income-wise than property.
 
But if the market takes a dive wouldn't the future dividend income be cut too?

One can never know what the future holds, historical performance is all we have to go on. Even with property there is no guarantee that it will always go up all of the time. Check out the dividend history of the older major LICs. By using a corporate structure they have a better opportunity of maintaining or smoothing dividends in difficult times. Sure there is the possibility of reduced or cut dividends but historically (over a very, very long time) they have been remarkably consistent. Also spread your risk across a number of them. So in conjunction with a sizable cash buffer that is one risk mitigation strategy.

Another is to buy assets when they are cheap. Share price is generally more volatile than property and people always seem to talk about losses during crashes etcs). But what about the ability to buy in an instant (online broker) magnificent assets that are being priced ridiculously below their true intrinsic value. Just look at the GFC, purchased LICs, banks and the like for crazy low prices. In just a few years you want to talk about income growth based on initial purchase price! So purchasing quality assets cheaply gives one a significant margin of safety when the next crash comes along.

There is also dollar cost averaging over the LONG term. Less risk of purchasing at the top and hence less risk of more loss when the market dives.

And yet another is purchasing high grade bonds which generally do well when shares are on the nose if capital preservation is a concern.

In our case the share portfolio is more than enough to provide a comfortable lifestyle. Hence I do very little buying now when the market is strong. I just let the cash keep accumulating in the highest interest online saving account(s) I can find patiently waiting for the next major market downturn/crash.

Going through events like the GFC and previous negative cyclical events are a magnificent opportunity to stress test such strategies both financially and psychologically. And this is important because we are retired and need to sleep well at night knowing that we have enough income through good times and bad.

I met a very wealthy old guy many years ago who gave me advise I will never forget. Basically he only ever purchased quality dividend paying shares every 5 to 10 years when there was a major market meltdown. Then he just forget about it all and spent his time travelling, with family and friends golfing, boating, fishing and the like until he started noticing on TV or in the papers that yet again the end of the share market is upon us (with those famous words IT IS DIFFERENT THIS TIME). Then that was the time to once again have a look at your shares and start buying with ears pinned back.
 
But if the market takes a dive wouldn't the future dividend income be cut too?
i.e. assuming your yield is static at 5% and your asset base gets cut in half it might take decades before you can rebuild your asset base to get the same dividend income

Not trying to be a downer, just curious to know what risk mitigation strategies should be considered.

I too intend to live off dividend income.

Maybe that was the problem during the "GFC", I know from experience that some equities that I held went down over 55%%,but the yield did not drop that much,only the face day to day trading unit value I never sold down anything but it would have been very different for anyone on a high margin loan set-up,now one can read back in this site during that period and see the way people dealt with that period,i bought into a few banks during that period and they still went down another 12% so one can never pick the very bottom no matter what anyone tells you,even the gold and oil traders would be going through their own "GFC" right now..
 
But if the market takes a dive wouldn't the future dividend income be cut too?
To add to the excellent responses by HomePage & austini some LICs have a progressive dividend policy. This means they do their best not to reduce the dividends. AFI for example is 60+ yrs old and has v. low management fees. They try to ensure progressive dividends payments by

.... have build up some reserves, do have capacity for in the short run to, as it were, subsidize or maintain a dividend.

AFI did not reduce (nor raise) their dividends during the GFC. They currently yield approx 5.25% (including franking credits).

The 4 big banks reduced their dividends by approx 25% when the GFC hit.

The bottom line is that the dollar amount of the dividend is (generally speaking) more stable than the share price for a portfolio of quality cpys.

And as further risk mitigation, a cash buffer of a few months expenses would more than make up for the risks of the significantly better yield.
 
that's what happened to several people I know in the GFC Cliff

But in all fairness this is typical of generalisations. The same could be said about other assets such as property during the GFC. It just depends on the quality of your asset and the investor strategy. For those several people one knows who took a hiding in shares during the GFC there were many others who did extremely well. I know of a few who because they had pumped most of their savings into highly leveraged property trusts fared badly. Or who had not diversified sufficiently. Or because they sold at the worst possible time. Or because they were not psychologically suited to shares. And more importantly did not maintain a sufficient cash buffer. But to generalise that one knows of a few who did badly with shares during the GFC implying that shares are a poor or dangerous investment for everyone is extreme. There are no shortage of very successful long term share and property investors. And there are plenty who hold BOTH.

But this is where the psychology aspect plays such an important part and why some are more suited to shares vs property. For me I have always slept very well with our share investments. But with our properties - legal threats from tenants, renovations, tenant damage, never ending repairs/maintenance, unexpected flood damage (in a supposably flood free area) which insurer didn't pay out on, changing managers, bill after bill.... I could keep going. Now that did cause me some stress! And just the process of buying and selling is hardly passive.

I personally don't get a thrill out of investing, it is purely a means to an end. That is to generate a TRUELY PASSIVE INCOME stream. So again not suggesting that shares are better than property but being a personal thing for me it is shares particularly now we are retired.
 
I have been investing since 1994 ( so 20 years) but we built it up slowly, and only had 1 house for 3 years, then 1 more for another 2 years, then 1 more after 5 years (so three after 10 years) then as the first two became positive geared, we added another one and so on.
...
When i tell people about it, they say " i can't wait that long !"

We could not do the 'quick' solutions as we were busy raising a family and paying down our own mortgage (still paying it off BTW) and had no time or interest in reno's etc that everyone seems to talk about.
It is boring but if you stick at it, it will work. But I agree, most people want the quick fix, the easy way, the instant millionaire formula and waste money doing courses and chasing 'easy' dreams.
But our 9 properties are in a range of great areas, and will make a good deal of money when sold for land value even if the house is old on it, and they pretty much pay for themselves now. We built new in many (but not all ) of them so the houses will not be more than 20-30 years old (which by capital city standards is not old) and we maintain them well and paint and repair them as if they were our own home.
So the rental income may not be the answer, but in 15 years time we can sell four or five to cover costs and pay down the loans, own five outright and then live off the income - approx $80K clear a year indexed to rents. And we can then top it up with our super that we have saved (with the compulsory saving)

Works for me and its just chugged along in the background. Like watching grass grow though...

This is exactly what I have done. I have done it very slowly over the last 30+ years. I have never done a course or read a book on investing. I paid off one property before I moved to the next. I started young. Things slowed down (for years) when we had children, but I didn't mind. I still have two children living at home, but I retired a while ago on more than $100K a year.

Yesterday I met with a friend. She has done it the other way--buying one after another in quick succession with a lot of debt. She and her partner have both worked and had no children. When I asked her how many properties she had in NSW, she replied she couldn't remember she has so many.

Everyone does it according to their priorities and depending on their comfort levels for debt.
 
Sorry guys I think I must have a fundamental misunderstanding...Can I quickly clarify?

Say if you have $1m in equities earning 5% yield ($50K)
Then GFC2 hits and now you only have $500K in equities. Would you still continue to earn ~$50K in dividends or would it be 5% of $500K, i.e. $25K

Post-GFC2, wouldn't you need about 10 years of 8% compounding growth to get you back up to $1m to earn back the 5% yield of $50K?

edit: my gut is telling me it would be somewhere inbetween the two. But the yield would over time revert back to 5% but your total asset base would still be less than $1m
 
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Sorry guys I think I must have a fundamental misunderstanding...Can I quickly clarify?

Say if you have $1m in equities earning 5% yield ($50K)
Then GFC2 hits and now you only have $500K in equities. Would you still continue to earn ~$50K in dividends or would it be 5% of $500K, i.e. $25K

Post-GFC2, wouldn't you need about 10 years of 8% compounding growth to get you back up to $1m to earn back the 5% yield of $50K?

edit: my gut is telling me it would be somewhere inbetween the two. But the yield would over time revert back to 5% but your total asset base would still be less than $1m

Dividends aren't a set percentage of the value. Companies pay out a percentage of their earnings and the rest is retained to fuel future growth . Their earnings are likely to drop in gloom times... depending on the nature of the earnings eg overseas, luxury items, everyday basic items, etc
 
Dividends aren't a set percentage of the value. Companies pay out a percentage of their earnings and the rest is retained to fuel future growth . Their earnings are likely to drop in gloom times... depending on the nature of the earnings eg overseas, luxury items, everyday basic items, etc

Exactly. So the share market can crash and companies can continue paying their same $ value dividends, so long as their earnings aren't hit. Likewise the share price can surge forward without significant enough growth in earnings, resulting in a reduce dividend yield.
 
Very interesting & informative thread

During the GFC I recall purchasing CBA around $25 or so and there was also a SPP for around the same price up to $15k worth of shares.

The thing around that time is that all traditional metrics went out the window, people were over-leveraged, scared with fear and wild market swings being the norm.

I don't think the CBA dividend dropped that much but even if it did it was disproportional to the share price drops. Cash was king and fear ruled the market.

I like the advice that the wealthy old guy gave Austini.

Finally, as humans we have a tendency to round numbers and put things in compartments, why $100,000? We drift towards these types of numbers when other goals may be more relevant to our individual needs. Although it is a very nice number for passive income pa :)

best regards
 
Finally, as humans we have a tendency to round numbers and put things in compartments, why $100,000? We drift towards these types of numbers when other goals may be more relevant to our individual needs. Although it is a very nice number for passive income pa :)

My trigger to quit the rat race is to replace my current expenditure with passive income and a fully paid off PPOR. That figure it currently $60K. Enough to pay all the bills, eat out, hobbies, and some international travel.

Then I might do some online freelance work or side projects for fun and supplemental income. Will figure that part out when the time comes.
 
Dajackal,

Check out the following Youtube link on the "Yield Trap" by Peter Thornhill (author of Motivated Money). Pay attention to the charts.

http://www.youtube.com/watch?v=cpVSmgZRHA8

He is a huge exponent of Shares (industrial) for income with a lifetime of experience in the industry. Check out some of the other chapters by him also on YOutube and you will have a good understanding of the power of dividend paying "Industrial" shares.

I enjoy his view on the cyclical nature of the share market and occasional market mayham as a perfectly RATIONAL Market. I agree with him, GFCs and crashes etc are hardly unexpected events. BUT don't expect to be able to time them perfectly. However it is not really that difficult to conclude if gloom or boom is happening at a particular time. Don't really follow Buffett but I do like his quote of 'Be Fearful When Others Are Greedy and Greedy When Others Are Fearful'.
 
Sorry guys I think I must have a fundamental misunderstanding...Can I quickly clarify?

Say if you have $1m in equities earning 5% yield ($50K)
Then GFC2 hits and now you only have $500K in equities. Would you still continue to earn ~$50K in dividends or would it be 5% of $500K, i.e. $25K

Post-GFC2, wouldn't you need about 10 years of 8% compounding growth to get you back up to $1m to earn back the 5% yield of $50K?

edit: my gut is telling me it would be somewhere inbetween the two. But the yield would over time revert back to 5% but your total asset base would still be less than $1m

No..that is not right. As mentioned by D.T. dividends are paid out of company's profits. If the profits don't go down there is no reason why the dividends should go down. Just because the share price goes down because of xyz external factors not related to the company in any way doesn't mean the company has stopped making money.

To give you couple of examples. Woolworths and BHP has been paying fully franked dividends and this is their history since 2006 (just prior to GFC)

Company: Woolworths
Year_____Fully Franked Per share dividend
2006_____59 cents
2007_____74 cents
2008_____92 cents
2009_____104 cents
2010_____115 cents
2011_____122 cents
2012_____126 cents
2013_____133 cents
2014_____137 cents

Company: BHP
BHP pays dividends in US dollars. Hence, it is important to look at the US cents dividends mentioned in the brackets. The Australian dividends doesn't seem to be progressive due to currency fluctuations. But the US dividend history is progressively going up nicely.
Year_____Fully Franked Per share dividend
2006_____48.7 cents (36 US cents)
2007_____57.1 cents (47 US cents)
2008_____75.5 cents (70 US cents)
2009_____109.7 cents (82 US cents)
2010_____98.9 cents (87 US cents)
2011_____96.5 cents (101 US cents)
2012_____110.1 cents (112 US cents)
2013_____118.5 cents (116 US cents)
2014_____131.8 cents (121 US cents)

In both cases their share prices were hammered in GFC. If you didn't bother to check the share price you would haven't noticed anything different in your dividends paycheck. Actually, that's not completely true. You would have noticed in case of Woolworths your dividend income increase about 132% over past 8 years and in case of BHP 236% increase.

GFC what GFC? The same is the case with stocks around the world aka US in particular. The US stock market peaked around 13000 prior of GFC and today is it around 17400.

IMHO, there is no other investments similar to owing equities via index fund that is more passive and whose returns are very respectable over the long term.

Cheers,
Oracle.
 
In both cases their share prices were hammered in GFC. If you didn't bother to check the share price you would haven't noticed anything different in your dividends paycheck.

Thank you oracle! That hammered it home for me.

I've been dollar cost averaging my purchases of old-style LICs since 2012 and just recently bought into an index ETF during the dip in October. I haven't been that aggressive as I'm still paying down my PPOR.

If I can't use projected asset values to determine dividend returns, how will I forecast how much I need to be buying to be able to get $60K passive income from dividends?
 
If I can't use projected asset values to determine dividend returns, how will I forecast how much I need to be buying to be able to get $60K passive income from dividends?

You can never be 100% accurate. But looking at past 40-50 years it is safe to assume returns from dividends from the sharemarket can be in range of 4-4.5% grossed up.

Taking the lower number of 4% to generate $60K gross returns you need to own approx $1.5million of index fund investments.

During GFC type events you might be able to pick up shares that would normally return 4% returning twice that number of 8%. In that case you just need to buy $750K and you will reach your $60K passive target.

Cheers,
Oracle.
 
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