What time is it?
Creating monthly passive income that is greater than mandatory monthly expenses is the key to Financial Freedom.
While there are plenty of things you can easily do to reduce discretionary spending and improve your cashflow from the expense side of the ledger, at some point you have done all you can and have to address the income side.
In contrast to the regular "sell time for money" income we are all familiar with, passive income is different in 4 key areas:
It is truly passive
in that it continues to accrue no matter what you do with your time. While you are asleep, while you are on the beach, or doing whatever other fun things you like, even if you are no longer actively building income streams, or even alive.
It is scalable
becuase it does not depend on your time or effort, and the more cash you apply to it the more the income stream grows - without any additional effort.
- It is repeatible, in that the income stream keeps coming month after month once the initial work is done to create the passive income stream, again, without any additional input other than possibly re-investing surplus earnings.
It can be compounded
by re-investing passive income rather than spending it. If this can be done immeditely then there is what I call a "super-compounding" effect that can significantly increase yield.
Although there are multiple different ways you can create passive income such as patent licensing fees, royalties on music or photos, buying a fixed annuity, writing a book or an online educational course, the most flexible and easiest to manage idea I have discovered is a portfolio of dividend-paying equities.
This system is an optimal way to generate passive income from dividend paying equities, creating synthetic triplets that turn quarterly payers into monthly payers, compounding using these monthly dividend payers, and super-compounding by writing calls on the long equity positions
The system is split into 5 main parts:
- Buying monthly dividend paying equities and re-investing the dividends every month to get super-componding
- Buying triplets of 3 quarterly dividend paying equities in diffrerent industries that each have pay dates in each month of the quarter. Dividends are reinvested.
- Buying dividend paying equities on the day before ex-date and then selling them again once the price recovers.
- Buying quarterly dividend paying equities that cannot be combined in to a triplet but that do have high yield and listed options.
- Writing calls on cany equity that has listed options and reinvesting the call premiums received.
The Test Positions
US Equity Triplets:
June 2019 TUP SUP SIG
June 2019 TLRD BNS UL
July 2019 KIM IP OXY
August 2019 DCP TRTN HTA
US Equity Monthlies:
CLNC DX ECC GAIN GLAD GOOD MAIN ORC OXLC PSEC PVL ROYT SBR SUNS WSR
US Equity Quarterly:
AHT AINV CCR DCP DKL GLOP HRZN IP KIM MRCC NGL NYMT OXY SALM SIG SPH SUP TLRD TRTN TUP USDP
CAD Equity Monthly:
CHR DIR.UN DIV EIF RNW
Including super-coomponding of dividends and writing calls and using margin when margin interest rates are "low" compared to yield, we should be able to acheive an annual yield between 15% and 20%.
A Note on Margin Usage
Thought a lot about this and came up with an answer for how much margin to use....
Avoid margin violation at all costs
Assume conservative (i.e. REG-T) margin
Estimate likely worse-case drawdown (at correlation of 1)
Use 50%-max DD as esitmate for max margin
Calculate current weighted-average correlation of the portfolio
Modify maximum recommended margin usage using correlation (i.e. decrease margin usage if correlation is higher)
How correlated is everything with each other and the overall market? Would help to see if DD estimates are agressive, realistic, or conservative and adjust accordingly
Monhtly USD Correlation=0.107 with 15 positions
Quarterly USD Correlation=0.266 with 21 positions
Monthly CAD Correlation=0.055 with 5 positions
Weighted average correlation=0.182
with 41 positions
Market correlation using SPY for US Equities:
Monhtly USD Correlation with SPY=0.191 with 15 positions
Quarterly USD Correlation with SPY=0.092 with 21 positions
Monhtly CAD Correlation with VCN=0.277 with 5 positions