Growing Passive Income In 2020
Passive income. It’s the El Dorado of the financial independence world. Everyone wants it, and everyone thinks they know the best way to find it. Some people swear by rental properties, others invest crowd funded real estate projects. A few even manage to find it by investing in stocks and bonds.
Passive income (as you might expect) isn’t easy to find, especially in the low interest rate world in which we live in today. With 10-year treasury yields under 2%, making a good income passively is a challenge. Some people take big risks to jump-start their path to financial independence — Fast income growth and higher passive income yields usually mean taking much larger investing risks (typically).
Adding risk his NOT a move I’m interested in making to grow our passive income. Today I’m going to discuss our plan to grow passive income in 2020, and how we’re going to do that WITHOUT taking on bigger risks in 2020.
Our Passive Income, A Review
Last year (2019) was a very good year for the Tako family passive income. We earned a total of $58,576 in 2019 — primarily from stock dividends and interest income. The year before (2018) we earned $51,230. That’s a growth rate of 14.4% year over year!
We did this via two methods:
- By investing spare cash into income producing assets (external compounding).
- By allowing our existing investments to retain capital and reinvest it (internal compounding).
Both methods are important components of income growth, but only one of those methods really moved the needle in 2019.
In 2019, my income growth plan included investing $108k of new capital. That was the plan at least. What actually happened was I only invested $17k of new capital in 2019. Really! The rest of our income growth came from internal compounding.
In other words, I failed miserably at adding capital to our portfolio like I planned in 2019. Dividend increases from our existing investments actually managed to help us achieve our goal of passive income growth in 2019.
In other words — Existing investments had large distribution growth last year
A Word About High Yield Investing
Unfortunately most people take one look that big dividend income number and then lump me into the high yield investor category. This is entirely untrue.
I try very hard to avoid the stink of high yield. Our taxable portfolio only yields about 2.4% using 2019’s income numbers. While this is higher than the average yield of the S&P 500, I would hardly classify it as a high-yielding portfolio.
High-yielding investments tend to be fairly high risk, and while they do provide a large amount of income this is usually at the cost of lower total return. Sometimes high-yield investments are value traps that need to be avoided as well.
IMHO, the risk of permanent capital loss tends to be higher for high-yield investors. Which is why I don’t consider high-yield investing a recipe for success. If anything, I believe we should be de-risking our portfolio even further in 2020….
Plans For Growth?
When it comes to growing passive income in 2020, I’m far less optimistic than I was in 2019. The bull market has been roaring for over 10 years now… and that’s a very long time. How long can this continue without a blip?
There’s also plenty of geo-political risk, it’s an election year, population growth has slowed considerably, immigration has slowed in the U.S., and productivity gains at last report are minimal.
To quote CNBC, “Tepid productivity suggests the economy is unlikely to achieve the Trump administration’s goal of 3% annual growth.”
Personally I believe these to be very good warning signs for the year to come.
It feels like the exact same thing is going to happen in 2020 that happened in 2019…. I’ll take one look at stocks on my watch list and say, “Gosh that’s really expensive!!” And then I won’t buy any.
My plan is to NOT commit new capital in 2020. When free cash flow yields for the S&P 500 are less than 4%, it seems to me extremely prudent to keep cash on the sidelines… which is exactly why I maintain a big fat cash-pile.
This is not to say that stocks can’t or won’t go higher in 2020 — they totally can! According to Goldman Sachs, last year’s stock returns were primarily fueled by PE expansion, not earnings growth.
This could happen again!
Remember: Stock price increases and PE expansion do not create passive income. Only compounding and earnings growth from economic expansion will create passive income. Just because stocks go up, does not mean passive income goes up!!
At this time, it does not appear that earnings growth will be significant in 2020. This is why my passive income growth plans for 2020 are extremely limited — I’m targeting dividend growth of only 4% in 2020, with no new capital invested… unless some absolutely fabulous investment materializes (unrealistic at this time).
This means a projected dividend income of $61,000 for the Tako family in 2020. My plan is to basically keep up with inflation with only a tiny bit of earnings growth.
Wrap-up
While this might not seem like a very aggressive plan after seeing my incredible portfolio grow last year, it does seem prudent and realistic to me. This year, I’m not looking to add a bunch of risk for a couple extra percentage points of investment income.
Given the expensive state of the stock market, and the likelihood of poor economic growth, I’m going to be de-risking in 2020 and targeting only a very small amount of income growth. 4% seems a fair goal given the fact I don’t intend to commit new capital.
A passive income of $61,000 should be sufficient to meet most of our expenses in 2020, provided I don’t buy another new car. Given the state of the economy, I’ll probably put off other large purchases in 2020.
Am I being too conservative and too cautious? What do you think? Let me know in the comments!
[Image Credit: Flickr]
Now’s not the time to be adding risk, unless you’re super super young and have endless time on your side. I’m fascinated by demographics and what the demographic trends of the U.S. mean going forward. It’s a complex subject.
Indeed it is a complex subject, and only one small piece of the economic puzzle! Thanks for reading Dave!
In the age of FIRE, time is on none of our sides
Mass immigration is unsustainable. This will benefit the younger worker who will see their wage rise and their housing costs fall as there is less competitors entering the country but it does mean pain for investors and older people. At the end of the day the young are our future and if poor stock market returns means young people able to get bigger paychecks, buy houses and start families earlier than the pain is worth it even if it means delaying my FIRE
You probably will be well served by dollar cost average if we run into a dip. Otherwise it’s best to just keep your hands in your pocket and see how the year goes.
Hi Mr Tako!
Looking at the plot with the evolution of passive income encourages me to continue what I’m doing.
We have a similar yield. Mine was around 2.5 % for 2019.
You have strong arguments to support your decision, and your current economic situation gives you credit. I honestly have no idea what is going to happen in 2020. When I look for the bull market that we are facing I have the feeling that it is too good to be true and we should have had a correction time ago. But those are only feelings, I have no strong argument to support it.
Concerning the 4% growth, it looks realistic. I would maybe consider this as a Base Case, being the optimistic case around 5%. I could see from the stocks I hold into my Portfolio that the dividend growth YoY decreases in 2019 and with the lack of growth on earnings mentioned by you I expect to have weaker growths this year as well.
Like you, I’ll not allocate money for stocks on 2020/21. All the new money will be allocated to our House Fund (Bond ETF’s and cash).
All the best.
Cheers
Hi Mr Tako,
Two questions
1- what are your thoughts on VYM? I was thinking of shoveling new capital in there to increase my dividend income.
2 – you said you will be de risking your portfolio this year. Do you mean you will be re allocating more to bonds or just not investing new capital in your current holdings?
Thanks!
1. VYM: I think it’s produced a slightly higher dividend yield at the cost of lagging considerably behind the S&P500. This appears to be factual according to the data available to me.
2. I didn’t say exactly how I would be de-risking. I probably won’t be buying bonds, but instead might sell some of my riskier stock holdings and moving further into cash. Maybe. It’s not completely decided.
Thanks for reading CJ.
Great points mr Tako.
So I’m thinking of investing in SDY. Any thoughts on that ETF?
Unlike you we plan to continue adding cash this year but we are further away on the dividend income path compared to you ($23k last year). Having said that it’s harder and harder finding good evaluation stocks.
What about non US equities like VXUS? Better pe multiples and divi yield, surely there is value outside of your home country?
Mr. Tako –
Nice article and the perspective. We plan on buying stocks, when the metrics make absolute sense (p/e, payout, yield, DGR).
The tough part is – cash sitting idle is/will be learning less and less, as rates continue to decline, as well.
I’m targeting in the 5.50-6.00% dividend growth rate on stocks I own, slightly lower than last year.
Either which way, always about how much you save and living the life you want/within means.
-Lanny
Hey Mr. Tako,
Great read and it’s nice to know your perspective for the year.
Based on my model i’m expecting a dividend growth rate on my ETFs to be around 8% for 2020.
In terms of investing additional capital, I’ll be doing what I’ve done since the beginning, re-balance between my equity ETFs based on the flows of the market. For example, if emerging markets are down for the year, more capital will go to those markets, and so on 🙂
– DGX Capital
In your situation, you don’t need to take a lot of risks – in fact I’d say it’s better for you if you just don’t take too much risk.
Have you looked at index funds that track covered calls? I believe the yield on average is around 10% per year for certain funds.
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