The Power of Cash-Flow

Conservative investors or people who believe that stocks are too risky often prefer to put their hard earned money in real estate. The usual arguments are always the same and go something along those lines:

  • It’s a “real” asset, meaning that you can touch it, you can see it, you can visit it or live in it
  • It’s a safe investment because real estate rarely loses value
  • It’s generating regular and re-occurring income on a predictable basis

I will get on all three points but the focus will be on the last one: Generating regular and re-occurring income on a predictable basis. This is what we call cash-flow, and I will tell you why it’s such a powerful tool.

A “real” asset

This is a very true point and among the main reasons why people like real estate. Probably most of us have this little dream, of having our own place that we call home. Where we don’t need to pay rent, where we can do what we want and how we want it. Where the only limitation to our creativity and our wish on how to shape it is only our own imagination and the available budget to follow through on it.

So let me tell you first that this is, and probably will remain a dream. The sheer amount of regulations imposed on house construction, building permits, safety requirements, and local rules & regulations will restrict how your house has to be shaped, what building material you are allowed to use, where the doors and windows need to be placed and much more. So, there will be many things to restrict you, and you won’t be able to decide on your own every single part of your dream. You still got to follow some rules.

Second, while it is a so-called “hard” or “physical” asset, it comes with a few flaws that are worth mentioning and required to think about. While you might save money on rent, there are tons of other considerable costs that will strongly diminish your return on investment and may even put you in financial trouble if you are not well prepared for them.

Broken toilets, pipes, roofs, and floors are just one part of it. But new legislation or state laws might come in at very unfortunate moments and force you to spend much more than you bargained for. For example, imagine that the government decided that all houses require to become more energy efficient and thus you will have to upgrade the entire house insulation. A toilet or a pipe might set you back only a few hundred Euros, but a broken roof or house insulation will quickly go to the thousands.

Ever-increasing value

This one doesn’t require too much explanation, I mean the last housing crisis is not that far back. So yes, there is a real risk that real estate also may lose value. But while this point might still be debatable, the more interesting challenge for real estate is about the trading of the asset itself.

Buying and selling real estate is just hard work. It’s not easy at all. It’s not easy to initiate the sales, not easy to find buyers, not easy to negotiate the price and certainly not easy to process the whole thing with banks and all involved parties. Because while for some areas it might be easy to find a place to buy, when it comes to selling the property things can turn really challenging. Finding a buyer takes time, negotiating the price takes time. And the result is everything but certain.

Therefore, and to sum it up, the promised or expected value increase might turn out very different once you deduct all the cost you had to cover over the years holding it, and on top of that, if your few potential buyers won’t be willing to pay your expected price.

It’s generating a steady cash-flow

Whether you save money on rent or cash in rent from your tenants, real estate generates solid and predictable cash-flows every single month. And depending on the size, location and attractiveness of the property, it may be some quite serious money.

Cash-flow is great for a few reasons. For one, it makes you feel to be in control over your asset, it feels safe and very predictable, and you see the result of your investment immediately on your bank account.

Furthermore, due to those regular payments, you are able to manage your cash more actively and spent or re-invest on a frequent and dependable basis. The greatest advantage of solid cash-flows is your control over the money and many real estate investors consider it therefore superior to owning stocks.

There is another way

I got to admit that cash-flow is probably one of THE arguments to bring to the table on any investment discussion. It simply represents everything we expect from an investment: Receiving cash back straight to your account.

However, I argue that you can reach this with stocks in a much better, smarter, faster and easier way, and you are still able to choose whether you invest in companies or real estate.

Dividends also generate cash-flow

To start off, most company stocks that I invest in pay dividends. That’s my cash-flow and it’s also very important to me. Not only does it feel good to receive cash regularly, but even more it allows me to re-invest my earnings. This means that I can take advantage of upcoming opportunities to either reduce my investment costs (cost-average-effect) or furthermore increase my earnings by adding more shares of the same or another company. No matter which of these 2 options I choose, the result will be the same: The number of my shares will increase and so will the amount of my next dividend payment(s). Albert Einstein called it the 8th world-wonder and we all know it from our school-days as the 2 magic words: Compound interest.

Dividend-paying companies have all different policies and they tend to be also very diverse, depending on the country and company profile. But even the very average investor can manage to buy stocks to receive dividends every single month. Hell, just take a look at one of my previous articles where I show you how to get paid dividends every 2nd week!

Mix the best of both worlds – with REITs

If you think that real estates are still the more secure option then you can do even a much smarter thing that will combine the benefits of regular shares with the advantage of the benefits of real-estate by investing in so-called REITs (Real Estate Investment Trusts). Not only do they distribute a large chunk of their profits in the form of dividends, but also you won’t need to bother with all the physical and hard work that always comes with any physical property that you own. Broken roofs or new regulations won’t be your headache and on top of that, your risk will be spread across a significant amount of properties, as most REITs tend to manage not just one or two, but hundreds of different objects.

Investing in REITs won’t give you the feeling of owning a “real” asset, but it will take away all the hard work, balance your risk, and finally also remove all the trading obstacles. Because REITs can be traded on the stock exchange, finding a buyer or seller is as easy as it possibly can be. Just place the order and watch it being processed in a blink of your eye. It’s so easy.

Last but not least and a very, very, VERY important point to me: You can invest with as little as your wallet lets you. There is no need to talk to banks, take on hefty loans and keep paying back for the next 20-30 years. Borrowing money is called leverage, and it’s a serious thing. As our mastermind Warren Buffett famously said, leverage is the single thing that can crush any investor and you got to be really smart how to use it.

I don’t consider myself smart enough for that, so I prefer to stay away from leverage and instead invest only the money that I have available at the time of my choice.

It’s all about passive income

My personal aim is FIRE – and it means to generate sufficient passive income at some point so I really don’t need to do ANYTHING – unless I want to. That’s what the word “passive” stands for.

Buying and managing hard assets is not matching my definition of passive income. Buying a house or condo requires a lot of work, dedication, and responsibility. All the things that I want to get rid off. Therefore, stocks and REITs are for me a much more desirable solution.

This is, by the way, the reason why financial advisors need to evaluate your character, risk factor and expectations before helping you on making an investing decision. So you might want to ask yourself now: What kind of investor are you?

Get paid dividends every 2 weeks – with only 2 stocks in your portfolio

Today, a post with some information for those who appreciate regular and more frequent dividend payment. With “frequent” I am talking about getting paid twice a month and achieving this by investing in only two companies.

How is this possible? Well, it turns out that there are a few selected companies out there which reward their shareholders by paying dividends every single month. You are reading right. Month in, month out, profits are being shared 12 times a year and sometimes even more often.

I would like to share with you some insight into two of those companies, which pay dividends every single month. One of them rewards its shareholders by the middle, and the other one, at the end of each calendar month. So if you have both of them in your portfolio, you get paid roughly every 2 weeks.

The first company is Realty Income (O)

O is a REIT which is an abbreviation for a Real Estate Investment Trust. And it’s not just any REIT, it’s THE most popular, reliable and trusted REIT out there with monthly dividend distributions. In fact, the company calls itself and trademarked the term “The monthly dividend company”.

It has not only paid reliably dividends every single month for decades, but it also raised the dividend every single year. Markets up- or down, O pays like clockwork in the middle of every month.

The second company is Gladstone Investment Corporation (GAIN).

GAIN is a BDC. Business Development companies are a common choice for high-yield chasing investors and while they have the reputation of being riskier compared to REITs, the expected reward is also higher. GAIN has an excellent reputation and one specific benefit: It not only pays a monthly dividend by the end of every month but it also regularly distributes up to 2 additional participation dividends per year, bringing it occasionally to a total of up to 14 dividend payments a year!

About timing

Receiving regular payments every 2 weeks can greatly simplify your life, due to the benefit of receiving cash around the same time when some of your regular, re-occurring payments are due. It can be therefore easily used to cover some of your monthly expenses, such as insurance, utilities, groceries, your kid’s pocket money or whatever comes up.

O and GAIN are obviously not the only monthly-dividend paying companies out there and if you do some research you will quickly find some alternatives. However, no matter which company will catch your interest, please make sure to research it thoroughly and to ensure it matches your risk tolerance.

DISCLOSURE: I am invested in both stocks mentioned in this article.

What happened to banks?

My vacation is coming to an end, and I had the opportunity to meet friends, old colleagues, new potential colleagues (in case I decide to return to Berlin someday) and re-visit all my favorite places. I admit, it might be a cheesy thing to do but there is this kind of nostalgia coming up every time I am here which is hard to resist.

Since I am investing in German stocks (among others) I was also wondering to see some signs for any economic changes, and I found 2 interesting points that I would like to point out here.

  1. Shopping centers are more popular than ever. It seems the global trend of setting up large shopping centers and design them to become the place to spend your free time at, is also a thing in Germany. It seems that new shopping centers are popping up everywhere and they are constantly full. I also got to say that they are set up in a pretty creative manner, with interesting areas for adults, children, regular events like mini-concerts or dancing competitions, singing performance, etc.

    So what is my takeaway from this? Real Estate Market is booming, hence investing in mall REITs (Real Estate Investment Trusts) doesn’t seem like a wrong idea.

  2. Banks are disappearing – everywhere. I had my first bank account in my life at a local government-run bank which operates under the name “Sparkasse”. I would say, that this was always the least modern and least preferred choice among banks that I could choose from when I was a student and while it had branches all over town, so did its private competitors. Not so this time. In fact, in the street where I used to live, all private banks disappeared. The only bank branch in a radius of 4 km is, you guessed it, a Sparkasse.

    And not only this, even the few ATMs of other banks that I found were useless to me, as they were not supporting Union Pay. I am a customer of the Bangkok Bank which doesn’t support VISA or Maestro – it works with Union Pay which is a pretty solid Asian banking standard. So you might have a guess which ATMs turned out to be the best for me. Indeed, again it was the ATMs offered by the Sparkasse.

    My takeaway from this? German banks are in trouble – and are forcing through changes to let people turn towards more online banking.

These are just a few observations that I noted in Berlin and Hamburg, of course, it’s not representative but it gives me some idea on which topics I should dig deeper and see what is going on there.

The same goes for every investor. One should always observe the surrounding, see what is happening in our areas, which products are becoming popular, which trends influence our neighborhood. These small things can often have plenty of questions and even more answers behind them, which can give even small individual investors hints for emerging market moves.

So keep your eyes open, and once you observe something, dig deeper into it and try to understand what is happening there. It doesn’t need to result in an investment, but it’s never wrong to understand market dynamics, and they always start and end in our regular neighborhoods. At the end of the day, it’s people like you and me who are purchasing, consuming and accepting or rejecting products & services – which ultimately decide which ideas, concepts, products & services, and companies will turn out successful and are worth to be in our portfolio.

6 Dividend Ideas for 2018

We are about to pass the main dividend season in Europe and 2018 is poised to be again another record year for investors and shareholders with a massive increase in dividend payouts across the globe. Reason enough to bring the topic up and to discuss a few ideas for dividend-seeking investors.

Dividends

There is an old quote with reference to the stock market which is saying: “Sell in May and go away. But remember, to come back in September.”

Historically there is some correlation to this quote, as markets tend to drop slightly by the end of May or beginning of June and go into correction mode. Then around October, they will usually start to bounce back and get in position for the year-end-rally that produces the largest gains throughout the entire year. Historically speaking.

For dividend investors, the “low season” between May and October is, therefore, the best time to find stocks that have lost some value and to add them to a dividend-income portfolio. Of course, stocks that didn’t drop in value can be still considered if one believes in their long-term success.

One such a stock is Apple (AAPL). I believe there is really no such thing as a wrong time to invest in Apple. The dividend payout seems not very attractive with only 1,56% yield at the moment of writing this article. This means that for every 100 EUR invested, one will receive only 1,56 EUR back each and every year. This does not sound interesting at first. It means that it would take 64 years to receive a return on your investment even before accounting for taxes, hardly any investors dream. But Apple plays both cards well: Stock appreciation and dividend growth. The company is not only one of the most profitable companies in the world, it is also innovating, fostering new technologies and has a huge, wealthy fan-base willing to pay a premium on prices each and every year. This enables Apple to grow its dividend year on year, and one can easily see the dividend double up every few years. In fact, just at the most recent shareholder meeting, it has been declared a new company policy to start prioritizing shareholders and to focus on total returns as the ultimate goal. We might see some influence from Warren Buffet here, who has just recently purchased a large chunk of Apple.

The second stock on my list is Starbucks (SBUX). It seems for now that the market is not convinced about the expansion plans in China and the stock has been trading side-wards for a while now. But you don’t need to be a genius to know that this company will keep paying dividends for a long time to come. I have a hard time finding a “quiet” Starbucks where I could sit down to write on my blog. They are always full of people queuing to pay highly inflated prices. Starbucks has now a yield of 2,09% which is similar to Apple not very high, but Starbucks is growing its dividend almost on a quarterly basis and one can expect it to double up every few years.

No. 3 on my list is Microsoft (MSFT). When I swapped my PC computer to a MacBook back in 2007, I couldn’t be happier and I got to say that at that time I didn’t believe Microsoft would manage to get out of the hole it dug itself. Despite weaker hardware, MacBooks were fast and significantly more stable than any PC I used in the past and there seemed to be no turnaround. And then came the cloud. And everything changed. Microsoft has been truly turned dedicated to improving its product and is now at the forefront of actively developing the cloud business which is successfully being set up as the new computing standard around the globe. The potential gains and growth are tremendous and while the dividend yield of only 1,72% may look also not exciting, I believe that shareholders will be greatly rewarded in the long-run.

What I like about US stocks is that they pay dividends quarterly, so every 3 months there is some movement on the account. But there are also some European stocks that may be worth considering for income-oriented investors with potentially much higher immediate yields.

A little bit speculative but (so far) very rewarding is a German company called Aurelius (AR4.DE). The company is known as a “hospital for companies” due to its business model. It acquires struggling companies which are mismanaged but promise great growth prospect. Then they put their own management team in place, brush the company up and re-sell it at a higher price. It is therefore not a regular BDC (business development company) as it does not only provide loans but actively engages in the acquired business operations in every possible aspect. This has proved extremely successful in the past, not only for the company but also for its shareholders.

If you click on the link above and visit Aurelius profile on Yahoo Finance, you will see a dividend yield of only 2,35%. This information is correct and refers to the base dividend which has been paid out last week in the amount of 1,50 EUR per share. However, every successful sale by Aurelius of one of it’s acquired business generates additional profits. These additional profits are also being distributed on top of the base dividend. Thus, while you may see only the 1,50 EUR per share at first, Aurelius granted this year a bonus dividend of additional 3,50 EUR on top. The final and total dividend of 5 EUR brought up the yield to mouth-watering 8,6%. If you have purchased the stock at lower prices, your yield has easily surpassed the magical 10% margin. Expectations for the next years to come are within similar amounts with a stronger growth of the base dividend and continuous payouts of bonus dividends.

GlaxoSmithKline (GSK) is a UK based health specialist and another idea that one can hardly go wrong with. There are only a handful of companies around the globe that have enough expertise, equipment, and capital to take on the really big challenges that our aging societies are facing and, GlaxoSmithKline is one of them. One of its investors is Bill Gates as he is actively engaged in their work through the Gates Foundation. As he said it during an interview a while back “companies like GlaxoSmithKline can just do things that no one else can do.”. That’s a pretty solid statement and the 6,53% yield in combination with quarterly payments and no withholding tax from UK side make it a very attractive investment.

Last on my list for today is a Dutch REIT (Real Estate Investment Trust) called Wereldhave (WHA.AS). The shopping mall investor went through a rough year and the stock dropped strongly on missing investor expectations and cutting its dividend. However, even after the cut, the yield is more than interesting. For 2017 the quarterly paid dividend summed up to a total annual amount of 3,08 EUR per share. For 2018 the board of directors will propose a dividend of 2,52 EUR per share, so it’s roughly an 18% cut. However, even after the cut at the current share price, the dividend amount will result in 7,58% yield. Shopping malls are not going to disappear and the “Amazon-effect” is in my opinion vastly overstated. If you come to a similar conclusion, then Wereldhave might be the right company for you.

Disclosure: I have a position in all stocks mentioned in this article.

I will give investment ideas every now and then but please note that these are not active recommendations and every investor is encouraged and responsible for his/her own due diligence. Also, when it comes to dividends, please always check about possible tax deductions/withholding tax. For example, I avoid buying Swiss or Swedish stocks due to the high withholding tax and complicated procedures to regain the money, despite the setup of double-tax treaties. Among the 3 discussed European stocks above, Germany has the highest withholding tax of 26,375% which would make any lower yield paying company far less attractive for a dividend income-oriented investor.

The Investor Mindset

In contrary to common belief, investing money is not rocket science. It can become one, but so can everything else if one would decide to dig deep enough into details. So today I would like to debunk this general perception and give advise on a more healthy and valid approach on how to perceive and apply to investments in the stock or bond market.

It’s a common purchase and it’s easy

Let me start by saying this: Anybody can buy shares of a publicly listed company. If you know how to buy a book on eBay or Amazon, then you already have all the qualifications required to perform an investment purchase.

You do it online, from your mobile or laptop and all you need is an app from your bank or the website address.

In fact, the process is so easy that banks are obliged to check your experience levels and limit the available investment products based on your experience only to ensure that you actually not buy something that you wouldn’t want to have bought by pure accident. The procedure is usually a 4-step process:

  1. Login to your trading account
  2. Select the company you like to purchase shares of
  3. Type in the number of shares and click buy
  4. Re-confirm the purchase via a security code

Done. Your order will be submitted to the bank and unless you are the only one active on the computer in the world in a very specific non-liquid market, your order will be usually processed and confirmed before you can even click back to check your account status. Yes, there are some exceptions for certain very specific stocks, but that will be most certainly not a company that the average investor will have on his/her radar.

Risk of losing money

One of the most common arguments I hear about people not wanting to invest is due to the risk of losing money. Let me be clear: Yes, it can happen. But for myself, I have a simple analogy in place that re-assures me that I am in fact doing the right thing by investing.

Every purchase involves a loss of money and most of our regular purchases are actually a total loss.

When you buy a house or a car, it depreciates the moment you step a foot in. When you buy a book it loses value the moment you take it out of the shop and turn the first page. Clothes keep some value for a while but once they are out of trend, condition or worse, out of size, their value is basically down to zero. The worst are food and beverages. They generate a total loss within usually a few minutes. If you are a gourmet, less then an hour. I know, foodies might see it in a different way and if they Instagram it then there might be some value added, but for most cases, the value will disappear rather quickly. A very short time pleasure for a permanent loss of funds.

For someone with an investor mindset, investing is similar to shopping

Yes, investments may lose value even up to 100%. But so does every coffee and every pizza that you would swallow. However, many investments generate profits and in many cases, they do so for many years. Some even may do so for your entire lifetime and beyond. Without giving here a recommendation let me give a specific example:

One stock of Starbucks will pay you a little over 1 EUR a year in 2018 in the form of dividends. One share costs you almost 47 EUR today (27.3.2018). So by buying one share of Starbucks, you will start receiving payments until after 47 years you get the paid amount back. Provided the company still exists (not much of a doubt) and that the company keeps generating profits to pay the dividend (also not much of a doubt).

Now that sounds rather boring, but consider this: Starbucks is increasing its dividend by 10-20% year on year. So considering this, you might rightfully expect to get your 47 EUR back much earlier, maybe just 20-25 years. It takes some time, yes, but if you have another 60 or 70 years to live, then consider how much additional value it starts to create in every single year after that! If you still have 60 years to go and can get a return of your investment after 20 years, already, the remaining 40 years may offer you triple or quadruple your returns – while you still remain the owner of the shares with its individual value.

And Starbucks has in comparison a very low dividend. What if the company pays not 2.1% but 3, 4 or even 5% or more? What if the company doesn’t grow the dividend by 10-20% but by 30-40%? You might find yourself in the situation that the invested 47 EUR will come back to you within only 6 or 7 years and suddenly it starts paying for every cup of coffee that you enjoy daily.

No other purchase offers you this kind of opportunity. The best coffee and the best burger or pizza or avocado salad will be forgotten after a day or two and the money spent will be gone for good. But companies on the stock exchange are built to last and their sole and only purpose is to generate profits for its shareholders.

The “evil” shareholder

We all know the mantra: Big companies are a cohort of evil. They only chase for profits, don’t care about people and have no soul. The only thing that counts is black or dark green numbers. This is not entirely correct. These companies do care about people, but mostly about those who own them. The shareholders. And even more importantly, they hire a bunch of very well paid and smart other people whose sole purpose is to ensure that the company keeps generating more profits for years to come.

The true meaning here is: As a shareholder, those people work for you. You don’t need to start a business or buy a house, hire people, work on business plans, etc. to start generating income. You like a company and would like to benefit from its success, or have a say in the companies direction? Become a shareholder and buy the stock. You would like to start receiving rental income but lack the funds to buy a house and/or don’t want to take large loans? Buy a REIT (Real Estate Investment Trust).

Long-term plan versus short-term gratification

The other main takeaway here is, that investing is (and should be) a long-term plan that doesn’t involve material, instant gratification. When you drink a hot cup of coffee on a cold day, you feel the warmth, the caffeine brings your brain back to function and you get instantly the feeling of having done something good for yourself. When you buy a stock – well you most likely feel nothing. Even worse, your bank account drops and you got to wait long in comparison before you realize the significance and benefit of your purchase. But once recognized, it will serve you well for many years to come and you will start to enjoy and appreciate it in the long run.

Patience is the key.

What is passive income?

Today I would like to clarify a few points regarding the term “passive income”.

There is probably no financially successful person in the world who would not preach the mantra of protecting your financial future by having multiple streams of regular income. Relying on your job alone is a risky endeavor. You are dependent on your boss, on your companies success, your colleagues, your health, and so many other factors that could trigger a chance of losing your job and your income.

Not being prepared and without other sources of income, you might struggle to pay your rent, medical bills or even sending your children to school. Even if you are prepared and have some savings left, being unemployed may eat up these savings before finding a new job and destroy possibly years of diligent saving within just a few months.

Therefore, having several sources of income is very important. Since our daily time capacity is rather limited, these income streams should be set up as passive income streams. Meaning: One should not have to put too much (or even for the better: any) work into it.

Here is where the misconception may already start and where one should never forget the basic rule of any investment: If you don’t put anything into something, chances are you don’t get anything out of it either.

We all dream about it: Receiving money and doing nothing for it. Well, it does sound wishful but not easy. And it is not easy indeed. The thing about passive income is the time and effort you have to invest to start creating it in the first place. There is no magic bullet or “trick” how to get around it: In order to create passive income, you need to invest time, effort or money – or all of it. This is especially true for the type of passive income that I am promoting: Dividends.

Let me be clear about it: Passive income is not a side-gig. I think it’s great if you have a hobby and use it to generate some extra cash which you can use either for investing, to build up more savings or your next vacations. But passive income needs to be an automized source of income that requires no more than an occasional adjustment. That’s it. You should not have to sit in your cubicle for 9 hours daily just to move to the next cubicle after that for another 3-4 hours to ensure you have an extra income. That’s not how it’s supposed to be.

Before I talk about dividends, let me give you some examples of passive income which do not include financial instruments:

  • Referral payments from your online blog
  • Royalties from your e-book
  • Income from registered patents or issued licenses
  • Paybacks from your participation in a lending club

All these examples have the characteristic that you don’t need to actively do anything all the time to receive payments. They may be not all reliable, but they are automated and generate income in as small or as big amounts as they turn out to be successful.

The more money you would like to receive from your e-book, the better you have to write and promote it. Once. You want your patented reading lamp to be a success? Make it awesome and find some distributors. Once – or – a few times but not daily. The lending club shall pay you back monthly with interest: Borrow them your money. Once. Unless you want to get more. I think you get the point.

So the key element is, that you have to put some time, effort or money into your future source of income first before it starts generating anything. And there is no guarantee it will work. This makes it so tricky and is ultimately the reason why it scares off so many people: It requires a lot of time to start, you need to invest (time, effort, money) and it does not offer any immediate gratification. All the things that our brain responses positively to are not given.

This is even more true for dividends. Because to receive dividends, you have to invest it all: Time, effort and money. Money that you earned in your daily job and money that you understand to be your immediate reward for the work you put in during the whole last week or month – depending on where in the world you live. So why should you put your hard earned Euros or Dollars or whatever currency you use into something that seems so complicated, far off and that feels much less rewarding?

I admit, the psychological gap is hard to surpass. Investing in Stocks, REITs or whatever financial instrument you go for is an abstract model. The stock market doesn’t feel real to us, it’s nothing that we associate with our true needs. Having some stocks of a company doesn’t make us feel of being a company owner. Even though this becomes our entitlement to a tiny fraction. It is nothing we can eat, or dress or even put into the garage if we don’t want to use it anymore. And yet, it is possibly one of the strongest and most rewarding instruments to create wealth that almost anybody in the world has access to.

The dividend season in Germany is starting now, and in 2018, the biggest German companies alone, which are grouped in an index under the name DAX, will pay out approx. 34,3 Billion Euros to its shareholders. Let me write this number down in its full beauty:

34,300,000,000,000

That’s quite some zeros. And not only this, but you should know that this number grew by approx. 13% compared with the year 2017. This is cash money that is being transferred in tiny fractions to all shareholders who are invested in the DAX. Money that you can withdraw, without touching your stocks, and spend on whatever you want or need. Why would anyone not want to be a part of it and to get some piece of that cake?

Buying stocks/shares is not a highly sophisticated financial process. It is as easy as buying a piece of cake. Literally. Or figuratively. However, sincerely speaking, the piece you buy in the beginning will probably be very tiny and it will most probably not fill your stomach at all. It takes time for it to grow to a level, that it will be truly fulfilling your needs. But the good news is: Once it’s there, chances are that it will last a lifetime and if constructed in a clever way, it may even support your family for generations to come. The sooner you understand this concept, the sooner you will be able to profit from it.

This is why in a previous post I explained The Time Replacement Model (TTRM). Every stock you purchase that generates dividends replaces a tiny fraction of the time that you spend at work. The more dividends you receive, the more time gets replaced until you reach the point that you don’t need to work at all. Unless you truly want to. And it is truly passive because putting your money in the right stocks will still let you sleep well at night. No matter what happens in the world. I will get back on the SWAN stocks (Sleep Well At Night) at a later point.

Is the crash coming?

The last week was probably not very good for most investors. President Trump started tweeting and everybody went gaga. Now, nobody knows what will happen and nobody really knows how markets will develop from here on.

The year 2018 was not supposed to be the year when everything comes down. It was supposed to be the super-nova of markets before everything comes down in 2019 and for most parts, it made sense to have this assumption. Stock market valuation in the US are hight but in Europe not that much and as long as politicians keep pumping money into markets, there is no reason for the rally to end too soon. I was expecting things to get blown up even more and then to watch this bubble burst after the next year-end rally.

But of course, this was before the President of the United States (POTUS) would start tweeting suggestions about a trade war and imposing tariffs on certain products, specifically steel and aluminum. Markets and politicians around the globe reacted with shock and within just a few hours announced “countermeasures” and “retaliation”.

It is mind-blowing. A real “wow” effect. When countries start a war or aggression in the middle east, Asia, Africa or wherever people die, usually all you get from our “developed” nations is a political statement that actions get “condemned” without any significant action. But when it comes down to money, markets, and trade, you get countermeasures even before anything happened!

But well, that’s the world we live in and for those who plan on retiring early, there might be some great opportunities ahead.

As you may have learned in school, the original idea of markets was based on the assumption of rational decision making. As you may have seen in the real world, markets are more than often anything but rational. Knowing this, every crash and every dip in the stock market offers great opportunities for quality focused investors. Why is that?

Well, even the best stocks like Google or Apple will go down when the whole market goes down. It doesn’t mean that the business of these companies suffers, but it means that they are not detached from market trends. Therefore investors with patience, time and a long term-horizon don’t worry about things getting ugly. They look out for opportunities and prepare to act on them.

How can we prepare for this scenario? First of all, there is no need to sell your stocks and there is no need to panic. The crash could come but it doesn’t have to. It could be that we will simply experience some higher ups and higher downs and after that, things might just get back to normal. Timing the market is almost impossible to even the best professional trader and if you plan on living from your investments later on, I truly wouldn’t sell anything that already offers a decent yield and has a history of surviving more than one market crash. What might make sense though is to stack up some cash.

Even if a market correction should set in next week, chances are that it will be a process the starts and holds on for 2-3 months before things start to turn around. Having some cash available may offer great opportunities during this time to either buy some stocks that you always wanted to have but which seemed too expensive OR to add stocks to your existing positions which would lower your average price of purchase and ignite the famous cost-leverage-effect. Reducing your average price of purchase will also result in increasing yield on your dividends.

As Warren Buffet, the greatest investor alive used to say: Be greedy when others are fearful. Market downturns are the time to be greedy.

Also, you need to remember that when a stock falls 50% in a market downturn, it will need to rise by 100% just to get back on track. Therefore lowering your entry price by adding stocks of the company that suffered during the downturn may significantly reduce the time it will take to recover the losses – and offer even greater profit opportunities later on.

Also, if you have some stocks that have already reached a specific target, you might want to sell them off in order to re-balance your portfolio and consider adjusting your investment strategy. For example, it may make sense to relocate some of your money into a Real Estate Investment Trust (REIT). Industry bonds are probably not recommendable for the moment as governments start to increase interest rates and money already started to shift from industry bonds to government bonds and securities. But REITs receive their cash flow and profits from tenants who pay rents. No matter what happens on the market, for most people, companies, and agencies who possess physical locations, they still need to pay rents. Therefore during market downturns, REITs are usually a pretty safe investment and offer great dividend yields on top.

We had almost a decade of a rising market and a correction must come sooner or later. How strong this correction will come up is to be seen and especially young and inexperienced investors might have a very hard time handling it. Many of them just don’t know and never experienced the feeling of losing a quarter or maybe even half or more of their entire savings over the events of a single night. The psychological and emotional effect can be devastating and make people literally jump in front of trains. Yes, this happened in the past and while I am not that old, I do remember the dot.com crisis back in 2007 and 2008. Being just a student, I lost my entire savings during that time which was a nightmare experience (even though the total amount of 2000 EUR would be rather negligible from today’s point of view) and the news was full of reports about people jumping down buildings.

In every event that involves parties with different interests, there are always winners and losers. Being prepared mentally and financially will reward the patient and rational investor in the long run. So, make sure to work on your strategy now, stack up some cash or re-balance your portfolio (or both) and enjoy a cup of tea while watching the spectacle develop. It will be an interesting one.

Time for Shopping

We have 2 rough weeks behind us and while personally, I am optimistic about the next week, there is no certainty yet that there will be a recovery. Fundamentals didn’t really change much thus some people are very surprised to see what’s happening. While many companies got indeed a little overvalued in the recent months, when the correction set in some other good positions got dragged into the mess and have now again very reasonable valuations that would be a shame not to consider as opportunities.

So yes, I went shopping. Maybe a little early but trying to time the market usually goes wrong. If you see a good company at a fair price which you are willing to pay then there is in most cases no reason not to buy it.

One great buy that I added is a company which I had on my radar for a while now but which seemed a little highly valued: The US company “Gladstone Investment Corp.“. Its a BDC (Business Development Company) which is popular for mainly 2 things: It’s high dividend yield and for providing 14(!) annual dividend payments. Not only does it pay a monthly dividend, but it also adds twice a year a bonus dividend payment on top.

This is my second monthly dividend stock after Realty Income. People argue whether a monthly dividend is a real benefit or not, but it gives you a kind of good feeling knowing that there is something pouring into your account several times a year. If you got more dividend-paying stocks and even more which pay on a monthly basis, then you get something coming in even several times a month.

Furthermore, I added to my position on Wereldhave which is a Dutch REIT (Real Estate Investment Trust). The stock dropped together with the market AND because they also did cut the dividend by almost 20%. However, even after the cut, the yield is still excellent and the dividend payout happens every 3 months. I also believe that they will recover within 2-3 years and get back on track with the business.

Last but not least, I keep expanding my position in E.ON, one of the largest energy producers in Europe. A very solid company which is just about to finish its transition towards renewables, energy-blockchain technology and implementing consulting business to its business components. The shares suffered a lot over the recent years and I believe that now is the time to prepare for the rebound. On top, not only is the dividend stable, it is already confirmed that the dividend will grow by almost 50% next year and another 50% the year after.

There are some great opportunities now out there and some really great companies on sales. A perfect opportunity for new investors to jump on. For everyone else who is already in and now suffers losses – don’t panic! This is also a great opportunity for you to benefit from a cost-leverage-effect and to stock up your depot further. Your dividend yields will only increase and in 20 years you will be happy to have done that.

 

2018 – Is it time for a crash?

Last week was apparently the worst week for the stock market since the BREXIT announcement back in 2016. My portfolio took a hit with some of my favorite stocks crashing down. In particular, one of my REITs (Real Estate Investment Trust) crashed 12% while announcing a dividend cut.

The company is called Wereldhave and is a Dutch Shopping Mall REIT. I don’t have a large position in it and see an opportunity here to add more and to lower my average purchase price, but yes, it hurts. Having said that, the dividend yield is still fine and it will keep creating passive income for more years to come.

About passive income

Now this is just my 2nd article and I didn’t really start describing in detail yet about what I am doing here. If you like to see my introduction, take a look at my previous post. To sum it up: My goal is to reach financial independence and to have the freedom to retire early. Or FIRE.

Passive income is one of the main tools to reach my target. The reason is simple. It is hard to talk about freedom if you are depending on a job, a boss and a paycheck. If you have to worry about food, shelter, medicine and education, then it can hardly be called freedom.

Also, while you might not worry about all these things as long as you have a job, you might start to worry when your company gets in trouble, when your job becomes redundant, when you get older, when the economy goes down… there are countless reasons that may create a situation in which you will have to seriously start to worry about your income.

So getting to the point where this freedom-restriction is not your major concern anymore is pretty vital. True freedom doesn’t work without financial independence. Passive income streams are therefore crucial, and for me, the way to get there is through investing.

What to do when the market goes down

While 2016 and 2017 were great years for investors, 2018 might be a rough one and I actually think that we may see a correction in some sectors. My portfolio may drop as I do have some speculative titles in it, but while some people spend their money on avocados, cappuccinos, and clothes, I prefer to pour it into dividend-paying equities that will hopefully support me in a not too distant future and start to cover my cost of living.

Any crash in the stock market is, therefore, an opportunity to purchase more stocks, lower my average purchase price for equities that I already bought in the past and set up new positions that will bring me closer to my target.

So let’s see what happens. Apple came down in price nicely despite reporting record profits. Starbucks got back to “normal” prices. AT&T is still in a good dividend yield range, Realty Income is back to a 5% dividend yield, IBM seems to turn-around and getting stronger in its cloud business section. In Europe, my all-time favorite BDC (Business Development Company) Aurelius announced a 5 EUR dividend which at the current price is a 9% yield – and 10% at my entry point, Vodafone is speculating about takeovers, and BT Group just announced a very robust business. While some people might get spooked, I am pretty optimistic and all these equities now yield over 5% on average, some up to 10% a year.

Corrections offer buying opportunities

I am looking forward to the correction and some amazing buying opportunities. So is it time for a crash? I don’t think so. Most companies actually are reporting record earnings and the bigger players are swimming in cash. Stock valuations in Europe are very moderate and while in the US they may seem high for some, the tax cuts and improved economic conditions will soon let this numbers go up. Dividend yields are good and might even get better after the correction. There is no reason to panic. Unless something really terrible happens in the world, a crash is not very likely anytime soon.

However, I am not an oracle so just in case the crash happens anyway: You better keep some cash on the side to get in the market right after the crash. Now we know very well that it’s almost impossible to time the market and to generate optimum profits with our limited time, knowledge, access to information and speed of execution. But, it actually doesn’t matter.

As a simple rule, I tend to look at it like this: There are companies which I simply know will be around in 10 years from now like i.e. the titles I mentioned above. It doesn’t matter if the world economy crashes, I KNOW there will still be a Starbucks, people still need to make phone calls and access the internet and premium brands such as Apple are very hard to kill.

These companies are seldom truly over-valued, and no matter how much they crash, as a result, their valuations will only get better. 10 years from now, will be 10 years back in the future, and you will most probably sit on triple-digit earnings and enjoy rising dividends for your passive income stream.

Disclosure: I am invested in all the shares mentioned in this article.