Growing Passive Income In 2021

Living off passive income is a bit like spotting a snow leopard in the wild.  Snow leopards are (of course) one of the most rare and elusive creatures on the planet.  They live in the Himalayas at significant altitude (9,800 to 14,800 ft), and it’s estimated there’s less than 10,000 of these extremely rare cats alive today.

Seeing a snow leopard in the wild is exceedingly difficult.  Hardly anyone ever sees them.  Naturalists can spend months in the Himalayas looking, and never actually see one.  Despite this fabled difficulty, it is actually possible to see a snow leopard in the wild — if you really want to.

In other words, you REALLY have to work at it.  (Or accidentally stumble upon one, as in the Ben Stiller movie The Secret Life Of Walter Mitty)

Building a lifestyle funded by passive income is a bit like searching for a financial snow leopard — it’s an elusive goal for many, yet still possible.  It just takes a lot of time and effort to build enough passive income to completely fund a normal lifestyle.  Years in fact.

Don’t believe me?  I’m living proof that it is possible, even in this day-and-age of extremely low interest rates!

Our Passive Income, A Review

Last year (the horrid 2020), the Tako family earned $60,737 in passive income.  We spent $41,891 last year, which means we had an extra $18,846 in passive income.  More passive income than we actually needed.

The year before that (2019), our portfolio earned $58,576 in passive income.

This slow and steady passive income growth is achieved through two methods:

1. By investing (or reinvesting) spare cash into income producing assets (external compounding).
2. By allowing our existing income producing investments to retain capital and reinvest it (internal compounding), thereby producing even more passive income in future years.

Really, that’s it.  That’s the secret sauce!  Most of our passive income comes from stock dividends of course, but there’s also interest, preferred dividend income, and some REIT distributions in there too.

The point is — Despite our somewhat diverse income sources, we’ve stuck with those two methods over the past 14 years to get to this point.

Yes, I said 14 years.  It didn’t happen overnight! — Just take a look at this graph of our passive income over the years:

It’s been a slow steady slog up to this point (with that income blip in 2015 being an outlier).

In 2020 we grew passive income by adding more capital to our portfolio — $166k of spare cash into the stock market (at good prices provided by the pandemic).  This was the bulk of our income growth.

Almost none of our holdings raised dividends in 2020, and for good reason too!  2020 was a year of terrible uncertainty, and I don’t blame companies for not raising dividends last year.  Most were just trying to survive.

Originally I predicted that our income would be flat in 2020, but Mr. Market provided some amazing discounts and we still managed to grow our passive income in 2020.  I think it was mostly luck.

It was a bit like pulling a snow leopard out of a hat — A complete surprise, but I’m perfectly happy admitting I was ENTIRELY WRONG about how the year was going to play-out.

A Word Of Warning: Don’t Be A High Yield Investor

Unfortunately, having these big dividend income numbers always gives people the wrong impression.  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 am not a high-yield investor.  I try very hard to avoid the stink of high yield.

Our taxable portfolio only yields about 2.3% using 2020’s income numbers.  While this is higher than the average yield of the S&P 500 (currently 1.55%), I would hardly classify us as a high-yielding portfolio.

High-yielding investments tend to be very high risk, and while they do provide a large income, this is usually at the cost of lower total return.  High yield often means low growth because very little capital is retained for internal compounding.  High-yield investments can also be value traps that suck in yield-seeking investors.  Value traps see declines in revenue and income… and given enough time will have to cut dividends.

IMHO, the risk of permanent capital loss tends to be MUCH higher for high-yield investors.  Which is why I don’t consider high-yield investing a recipe for success.  If anything, I consider myself more of a “total return”-type investor.  I look for investments with a return made-up of capital gains, dividends, growth, and a improving market share.

Dividends happen to be just one small component of that overall picture.

How Will We Grow Our Passive Income in 2021?

So, the next question on everyone’s mind is, “How are you going to grow your passive income in 2021”?

This will be a big major challenge.  I don’t see most dividend paying companies raising dividends in 2021.  Last year, the S&P 500 dividends grew by a mere 0.07%.  That’s basically zero for all intents and purposes.

I expect this trend will continue into 2021.  Most dividend payers are still financially strapped — earnings and cashflow are down, and companies have very little room to raise dividends.

Perhaps small increases will happen at a few major Fortune 500 companies, but I expect stock dividends to largely remain stagnant in 2021.

This leaves my second method of building passive income as our only real option to keep it growing — Adding new capital to the market.

At this time, it seems likely that we will add another $100k to our portfolio in 2021.  Primarily by shifting cash into stocks.  At current S&P 500 yields, this would amount to an additional $1,500 annually.   This means I’m projecting a total passive income of $62,000 for the Tako family in 2021.

Why not add more cash to pump-up our passive income even further?

I view adding new capital into the market in 2021 as strategically a “mediocre” move.  Not because we don’t have spare cash (we do), but plowing all of our spare cash into (potentially) overpriced assets just to increase our dividend income seems like a very bad idea.  Folly in fact.

We need to think about total return in 2021, and unfortunately the world is mostly in a “recovery” phase of the business cycle, not a growth phase.

Questions like, “Who’s going to recover faster and in a better position that before the pandemic?” remain front and center on my mind.

Final Thoughts

With the world still in the midst of a difficult pandemic, it’s difficult to chart a financial path forward for growing passive income.  Most of the world is still struggling under lockdowns of some sort, many are unemployed, and uncertainty in the future remains high.

That’s not to say it’s impossible — It’s just going to be much harder when asset prices are near all-time highs and corporate profitability isn’t yet back to 2019 levels.

Just like spotting a rare snow leopard, sometimes building a stream of passive income can be a real challenge, but don’t give up hope!  It is possible!  Not every year is going to be a positive one, but the forces of compounding will eventually become inevitable (given enough time and capital).

Good luck in 2021 everyone!

[Image Credit: Flickr]