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Passive Income

The goal for my investing methodology is to create in income stream that could in the future be used to replace my current income.

There are many perfectly viable ways this can be achieved - rental properties, fixed income investments, trading options etc. But these methods involve quite a bit of work in order to be successful at them. I have instead chosen to develop a portfolio that generates a growing income stream, and the aim is that this growing income stream will be sufficient to replace my income by the time I am 50 (this is a timeframe of 17 years).

Whether I choose to retire at that point, or continue working will depend entirely on my life circumstances at the time - who knows what can happen to me on a personal level in a 17 year timeframe - given that 17 years equates to more that 50% of my life so far, it is a long term timeframe.

I have adopted a dividend growth and re-investment strategy, supplementing my investments with fresh capital whenever circumstances permit. This isn't always easy, given that I have young family, mortgage, wife, bills and these all require hard earned money to make sure they get paid and looked after - honestly my wife doesn't need paid to remain here with me!

The beauty of a dividend growth strategy is that, if you purchase investment grade companies the level of monitoring required is minimised. I personally use the dividend as a barometer, if the dividend is rising I view that as a sign that the company is doing well and has sufficient cash flow. Its very difficult for clever accountants to manipulate the cold hard cash that is a dividend payment. The key here is to choose investment grade companies with a strong history of dividend payments. It is also extremely beneficial if the company has a guiding policy on dividends (i.e they demonstrate a commitment to return profits to shareholders).

I am certainly not proclaiming this method as the golden bullet of investing. far from it, if you can identify the next Apple or google early enough then you will undoubtedly have superior returns. However, I certainly don't have the skill required to identify these companies early enough - I wouldn't even know where to look.

The major thing for me is that this income will be passive. If at 50, me and my wife decide we want a well earned cruise in the Mediterranean for 6 weeks those dividend payments will keep on rolling in.

If I am unfortunate enough that one of my "companies" freezes or eliminates the dividend that for me is a signal to sell. I view it as a paycut, and a threat to my future income prospects. If the management team are unable to adequately manage the free cash flow in a way that promotes consistent dividend growth, then they are not a company that I want to be reliant on for a passive income. This by no means indicates that they are not a good investment, but it does not meet my personal goal of achieving a lifelong passive income.

People get concerned about Total return, and I agree, there is a lot of satisfaction to be had from seeing a company you have invested in have their valuation trend upwards. It creates a feeling of wealth. But my philosophy is simple. Unless companies such as KO, JNJ, PG are going to trade with excessively high yields, then the price appreciation is going to happen naturally anyway, simply because the institutional investors will not allow the yields on these companies to reach elevated levels.

In Conclusion, the ultimate goal for me is to have a passive income stream, which enables ME to choose what I do with my time, and when I do it. If I choose to continue working (I am very passionate about my current job) then that is my choice. If I find in 17 years that I have different priorities, or I want a different pace of life I will have the choice to do so. Passive income allows me to become the owner of my time.

Disclosure: I am/we are long KO, JNJ, PG.