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Get income from investments to meet interest payments?

Saturday, March 21, 2015

I remember when I paid off my housing loan many years ago, the interest rate that the loan attracted was 5.1%. That was pretty pricey. For a few years now, interest rates have been very low and, so, it has been pretty cheap for people to borrow money to help pay for their homes.

Personally, I am holding back from doing partial or full capital repayment on my current home loan because even with the sharp increase in the 3 months SIBOR in recent months, the effective interest rate on my home loan is still below 1.8%. The cost of having liquidity is not exhorbitant (yet).

Even if my investments are only able to generate a dividend yield of 4.0%, financially, I would still do OK. So, arbitrarily, an interest rate of 4% on my home loan could be the tipping point for me to want to pay it down at a faster clip.




Hi AK

I have been following your blog for about 4 months now and was rather impress with what you have.

I am in my early 40s and had just got a BTO which will be ready in 3 yrs time. When the house comes i will be down in loan by S$350k. Now i am with only S$50k in HDB Bank Loan with DBS Bank serving an interest of 1.6%. What i noticed is that out of my annual contribution to the Loan installment, about 60% will goes to the interest payment and only about 40% is paying up on my actual premium. That is alarming to me.

I had wanted to get a dividend income just like you, but if i were to have S$50k on hand, should i be paying up my loan or putting them into the dividend paying stock that gives about 6% return? Of course dividend stocks comes with value appreciation but no matter how we should not be thinking about stock price appreciation when talking about income generation.

One is for future payment and the other is for near term paying out of the housing loan. It seems that paying up on housing loan is the priority.

The next question for you is given two stock, A and B, A gives dividend yield of 6% and share price appreciation of about 4% and B gives Dividend yield of only 3% but has a share price appreciation of 10%, which would you consider for long term income?

Any advice from you will be most helpful.

Regards
M




Reply from AK:

Hi M,

A housing loan is amortising in nature. As we pay down the loan, the interest portion will shrink and the principal repayment portion will grow even as the monthly installment stays the same. If you would like to pay less interest, one way is to shorten the loan period. Then, you would be paying more of the principal amount monthly. However, your monthly installments would also be bigger, of course.

As for whether you should pay off the housing loan first or invest for higher returns, it depends on what is the interest payment on your housing loan and what you are able to get from your investments.

Imagine that you have a housing loan of $300,000 and that the interest rate is 2%. Let us assume that the loan is non-amortising for the sake of illustration. In a year, you would have to pay $6,000 in interest payment. If you were able to generate a 5% return through investments that year, you would make $15,000 which is more than enough to cover the interest payment.

Of course, there are good things to be said about paying down our housing loans ASAP no matter the interest rates or potential investment returns. Do what gives you peace of mind. That is priceless.

Now, as for stocks A and B, not an easy question because there could be so many different circumstances surrounding them. I would, however, first ask if the dividend is sustainable, if it is sustainable and if we are after passive income, I would go for stock A.

Price is, after all, often a function of Mr. Market's moods while there could be some certainty in dividend payments if they are sustainable. Like I said, bear in mind that this is actually a very simplified approach to a possibly very difficult question.

Best wishes,
AK



Related posts:
1. A car loan is different from a home loan.
2. A new flat on the way and $200K in spare cash?
3. Newly married and planning for a child?
4. Interest rate on home loan jumped 15.84%!
5. POSB HDB Loan: Peace of mind (for 8 years).

Tea with Solace: A review of Dividend Machines.

Friday, March 20, 2015

The following is a voluntary review by a guest blogger, Solace, who signed up for the income investing course, Dividend Machines.

Solace says:

Disclaimer : I am not paid or given free access to the course materials to do this review. Solace has paid $XXX USD like everybody else to take a look at the course content. These are my personal views and readers should make their decision on whether the online course is value for money.

The online course has 4 Modules:

- Personal Finance (Covers the mindset, psychology and own personal financial situation.


- Dividend Machines (Covers 8 checklists/steps in screening for dividends stock)


- REITs (All about REITs, business, valuation, financial, management etc)


- Portfolio Management






In addition, there are also:


1. Video lessons


Where they do in depth case studies and how to screen for stocks based on their methodology.


Video Lessons will commence from 25 March 2015, Wednesday onwards.


2. Q & A session


You can post your question in this segment. The Trainers have been rather prompt in answering your queries. All questions are usually answered within 24 -48 hours from observation.


Website: Dividend Machines.


I leave it readers to read more about it.


Who is the course suitable for?


In short, this course is excellent for all who are looking for insight and a consistent method to screen for dividend stocks.


This is especially so for beginners who are still trying to find their way. Even for seasoned investors, time to time we might need to defrag all knowledge we have in our mind and this course helps to do that. It helps to streamline our thought process.


While many of the fundamental concepts are not new to me, I still look forward to the case studies where I can exercise my brains to practice analyzing. I am also attracted to the Q&A section where there will be interesting discussion with fellow investors and trainers.


In my interactions with many people who are starting out with investment, I would recommend them to read different kinds of investment books. This has worked extremely well for me. However, there are people who have difficulties digesting the content inside the book and find it hard to apply them. Another group might be overloaded with many schools of thought and do not know which methods work best for them.


This particular group will always wonder: 


"What is the essence of investing? Is there an easy method which I can follow?”


What the Fifth Person has done is basically summarize the key points and presented them in a very clear, easy to understand and easy to follow manner. And there we have it, the very “essence” to dividends investing.


If you can follow the method well and are able to identify a good dividend stock that will serve you well for many years, then, paying a course fee of $XXX USD would well turn out to be a “multibagger investment” for you.


There is still slightly more than a day to sign up for the course and have a workshop session thrown in for free. Please go to the related post below for the link to sign up for the course.


Dividend Machines by The Fifth Person


Related post:
Listen to AK and create your own Dividend Machines.

Want that $1m in liquid assets or $120K in passive income?

Thursday, March 19, 2015

I am very happy to receive emails from readers of all ages but I am especially happy to receive emails from young people who are just getting ready to join the workforce. 

Why?

I always say that we should plan for retirement early. 

Don't wait till we are in our 30s or 40s because we think we are still young in our 20s. 

This belief in planning early is clearly seen in many of my blog posts.






I have also shared my own experience, including some very personal financial numbers, as well as what I did to get to where I am today. 

Some readers are amazed by how simple it sounds but, of course, it isn't as easy to execute. 

Definitely, there is also always an element of luck.

Everyone's experience is going to be different and the paths we take very likely will not be the same. 

It is not about having $1 million by a certain age. 

Definitely, it is not about having $120K in passive income by a certain age either. 

It is about having a better life no matter what our age may be.






Be inspired to take action.

Be inspired to have a better life.

This is what my blog tries to do, to inspire.




Hi AK,

I happened to stumble on your blog when I was researching on the topic of financial planning. And i must say that it was a valuable find.

Anyway, I would like to ask you a question and seek your guidance in it.

I am currently studying uni and about to graduate. Hence, I'm starting to think and plan for my finances so that i'm better prepared in the future.





I understand that I have to save up an emergency fund first, before starting to invest the rest.

This is where my question comes in. Given my low initial capital (i'm expecting about $500-$1k a month of free cash flow that i can invest in the near future), how do i go about investing for a start?

Since transaction fees are really expensive (min of $25), do i put my money in those regular share plans that buy into STI ETF where the transaction cost is 1%? 

Or do i buy single shares/REITs/etc to build up a dividend paying portfolio? 

And even if i do buy singly, do i accumulate them for one company first since I'm only investing a small sum at any one time?

Hope my question isn't too confusing, i tend to be a little long winded :p

Thank you.
AT









Hi AT,

Welcome to my blog. :)

You probably read my blog posts on what fresh grads should think of doing first to help towards a financially secure future. 

Must always get the basics right first.

The next step which is what you are thinking of now is to invest and secure a second stream of income. 






Of course, there is another school of thought which is to grow wealth through investing in growth stocks. I am not dogmatic. They are both good ideas. In fact, why not do both? ;)

If your monthly free cash flow is $500 to $1000 and you would like to get into the thick of things right away, then, buying into an ETF is a good idea. 

Look for the guest blogs by Matthew Seah on the offers by POSB and OCBC in my blog. He did good write ups on these.

You could also choose to build up a war chest and buy stocks when Mr. Market goes into a depression. 







Need to be a disciplined saver and need to have patience. 

Of course, you need to have the courage to bite when almost everyone is feeling depressed too.

There is no hurry. Take your time to find out what you are more comfortable with. 

Self-knowledge and peace of mind are priceless. :)

Best wishes,
AK

Related posts:
1. Retirement (funding) adequacy.
2. Dollar cost averaging and expected returns.
3. How to recession proof your life?

Voted for WP but will vote for PAP in the next election. (Changes to the CPF system are reasonable and necessary.)

Wednesday, March 18, 2015

AK is a pragmatist.

AK does not believe in being overly optimistic or pessimistic.

AK is non-partisan.

AK gives credit where credit is due.








AK is not a PAP supporter hor.

AK just thinks that the PAP government is doing mostly the right things when it comes to the CPF.

I know what people say about the shifting of goal posts but if the initial measurements were off the mark (and are no longer effective today), the goal posts must be shifted. 

It is about staying relevant.

I always say if changes are reasonable, I will accept them.

The changes made to the CPF system over the years have been reasonable and also necessary.




















Related posts:
1. A lot of the money in my CPF-SA is...
2. Achieving Level 1 financial security.
3. Proposed changes to the CPF system.

Did AK smoke and drink his way to greater wealth?

Tuesday, March 17, 2015

I must absolutely share this exchange I had with P on Facebook. Remember P, a reader who asked for my bio? We have become fast chatting buddies and this was a revelation:






For those of you who have heard me either in the podcast or in person or both, did I sound like a smoker and a drinker? I didn't know that I sounded like one.

If you have not heard the podcast yet, there is a link to the interview in related post number 1. Let me know what you think.

I am curious as to whether there is a general consensus that I sounded like a smoker and a drinker. Humour me, please.

Finally, always avoid wealth destruction. Smoking and drinking destroy wealth now and in the future. Do you believe this?

Related posts:
1. Listen to AK and create your own Dividend Machines.
2. Who is AK? Really, who is he?

AK was bullied and deprived of his mee pok dry.

Sunday, March 15, 2015

Just now, for dinner, I decided to go get my favourite mee pok dry from a nearby kopitiam. 

There were two car parking lots left when I got there. 

A big BMW was before me and reversed into one of the lots.

So lucky to have one lot left for me, I thought.






When the BMW came to a stop, I saw that it was encroaching on the empty lot. 

As the well-dressed driver got out of the car with his equally well-dressed lady friend, I lowered my window and asked if they could center their car so that I could park in the neighbouring lot.

What happened next stumped me.






The woman looked at my car and said in a voice loud enough for me to hear, 

"His car so small. I am sure can fit. We no need to shift."

Then, they turned their backs on me and walked away.

OMG! 

They didn't even bother to talk to me!






I was speechless. 

I realised I was just bullied and didn't know how to respond.

Anyway, I was upset enough that I lost my appetite and decided to come home without satisfying my craving for mee pok dry.

Just now, I felt hungry and I cooked this for a late dinner:







Should I get a bigger car so that something like this does not happen again?

New material from my FB wall (11AM, 16 March 2015):



Latest update on my FB wall (4.20pm, 16 March 2015):

No problem with parking this time but this?



This is depressing.




Unrelated post:
Forced selling due to financial hardship.
(Why am I sharing this post? I have no idea.)

A letter: One year after following AK's "recommendations".

There are lessons to be learnt in this email to AK. What are they?

Dear Mr. AK,

I am 41 years old and I am new to investing in stocks. I started last year only.

There is a lot to learn but I really want to put my savings to work. The interest from the banks is too little. I am not greedy. I only want more than what the banks give. So, a colleague told me to read your blog. He said you make a lot of money from stocks.

Maybe, I am lucky. I read an article you wrote about investing money for your father. You listed 5 stocks. So, I took some of my savings and just bought those 5 stocks you recommended. 


It is now almost one year and I am very happy I followed you. I have 10 lots of Sabana Reit, 15 lots of Neratel, 10 lots of Croesus, 3 lots of SPH and 30 lots of Hock Lian Seng. I received $3,427 so far in dividends and I know there will be more very soon. I put in about $51K in total and in one year, I got 6.7% back!

Sabana and Neratel prices have dropped. I know you don't like Sabana now. I think I want to buy more Neratel. SPH price no change. Croesus price up. Hock Lian Seng price up a lot! In total, my investments value up 4.1%. I am happy about this too.


Thank you for helping me start. Although you might not know it, you are helping many beginners like me. I will tell more people about your blog. So, please keep blogging.

Sincerely,
AH






Dear AH,

Welcome to my blog. :)

Thank you very much for letting me know. However, I want to say that all the credit is yours and yours alone. You made the decision to buy and in the proportions that you did. More importantly, you made the decision to invest for income and not to leave all your money in a savings account. 

I didn't do anything and I definitely did not recommend anything. I was just talking to myself.

I hope you will learn much more on your journey as an investor and, as you do, please feel free to share with us your findings. I definitely do not know everything there is to know and look forward to hearing from you again in future.


Best wishes,
AK

Related posts:
1. Helping our parents invest their money.
2. Listen to AK and create Dividend Machines.


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