1st Carnvial of Dividends & Passive Income

Welcome to the very first edition of carnival of dividends and passive income.

I’m going to kick it it off with my own submission on How I Made $2,667 in Passive Income In March. Of course, if you’ve already read it, you can read about the Tax Benefits of Passive Income or about Earning Passive Income from Domains.

Dobromir presents Emerson Electric (EMR) Dividend Analysis posted at Create Rising Passive Income From Dividend Paying Stocks.

Geoff presents How did I make 5-figure Passive Income in 2007? posted at Wealth Monkeys.

Writers Coin presents Why I Quit One Source of Passive Income posted at The Writer’s Coin, saying, “Moral issues far outweighed the desire to make money by deleting emails”

Will presents Why I Still Love Real Estate Investing: Being A Landlord posted at Your Finish Rich Plan, saying, “I’m a sucker for passive income. My idea of financial freedom is that of rental and dividend income totaling roughly twice my expenses, leaving me free to pursue other interests (which may very well be other money-making ventures). That’s why despite everything that happened in the real estate market the past couple of years (or maybe because of it), I want to be a real estate investor, and more specifically, a landlord.”

The Dividend Guy presents Considering REITs In a Dividend Portfolio posted at The Dividend Guy Blog.

Tyler McKinna presents Dividend Growth Fund Stratgies Revealed posted at Dividend Money, saying, “An article outlining dividend growth investing strategies and how major mutual fund managers approach stock selection.”

KCLau presents How to Identify and Invest in the Hot Stocks of Tomorrow posted at KCLau’s Money Tips, saying, “A review of the book “Finding the Next Starbucks by Michael Moe””

Mark @ TheLocoMono presents Tracking Your Prosper Portfolio with Money Plus posted at Just Personal Finance, saying, “Using Money Plus to track your Prosper income can help you simplify your knowledge of how much money you are making and project your cash flow/growth.”

FIRE Getters presents Etrade’s Quickplan – Personalized & Easy Retirement Planning! posted at FIRE Finance.

Lulu presents Got My Repayments from Lending Club posted at How I Save Money.net.

We end with an article about music and money, which not quite relevant, is still pretty good nonetheless. Jeremy Zongker presents All I Really Needed to Know About Managing Money I Learned From Music posted at Destroy Debt.

That concludes this edition. Submit your blog article to the next edition of Carnival of Dividends and Passive Income using the carnival submission form. The next edition of this carnival will be on the 7th of May, 2008.

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What About LOR-Lazard World Dividend & Income Fund?

When I first heard about LOR, I thought it meant Lord of the Rings, but no, the topic was on Lazard World Dividend & Income Fund(LOR).

I got this email from a reader:

I love your blogs. Please tell me what to think about an odd stock – LOR. They make money from high dividend stocks AND from some sort of forward contracts involving emerging market currencies.They had a 25% yield last year but are extremely volatile ( and I don’t know why!). They have a lot of institutional investors and it looks like a good dividend pick but I don’t understand how reliable the currency contracts are. Could you do an analysis of LOR?

I’m not exactly a stock picking expert, but I’ll give it a shot. First of all I looked for LOR on Yahoo! Finance to see what it meant. I got the name of the company, the stock price graph but not much other info. That’s because it’s not a stock, but rather an ETF. Ah ha! That explains the high dividend, since I don’t know of any company that is so generous with their dividends.

Accordingly, I headed over to ETFconnect, which is a great site for finding information on ETFs. I see that its in the category of “global equity” which means it invests in world-wide stocks, just the kind of thing you’d expect from its name!

It states their investment objective:

The Fund seeks total return through a combination of dividends income and capital appreciation. The Fund may pursue this objective through a world equity strategy and a short-term emerging markets and debt strategy. The Fund may invest substantially all of its net assets in between 60 to 90 world equity securities that are financially productive and high dividend yielding. It seeks to enhance income through exposure to short-term emerging market forward currency contracts and other emerging markets debt instruments, limited to 33.3 percent or less of the total leveraged assets of the Fund, which will provide exposure to emerging market currencies.

The first part seems pretty straight-forward, but I’m not too sure what the last part entails. But at least they’re not leveraged 10 to 1 on some Subprime Real-estate Mortgage Backed Securities (RMBS) & Collateralized Debt Obligations (CDOs)! Being overleveraged is what caused Bear Stearns’ Hedge funds to collapse last July.

I also see that it’s currently trading at an 8.5% discount to its Net Asset Value (NAV). This means you can buy the basket of its shares for less than what the shares currently trade for! The current dividend yield is reported to be 8.43%. That’s strange because Yahoo! finance reported it to be 25%, a fact that I verified on Google Finance by looking at the distribution in the stock chart. It seems that in addition to the dividends, there were  long and short term capital gains distributions in December 2007, which boosted the yield.

While this isn’t a bad thing in any way, one shouldn’t buy LOR expecting to see a similar 25% yield in the future. If you’re buying it for the dividend, you should expect to receive 8.5% and be happy with it. The only concern I have is whether or not that  dividend is safe.

The ETFconnect site informs us that the fund is diversified by invested in the US (35%), th UK(23%) and other countries (42%). While it doesn’t say which other countries, looking at its top holdings we see companies like Taiwan Semiconductor, ENI and Tesltra, so we know its investing in South East Asia, Brazil and Australia. I like that global diversity.

It also seems to be diversified across various industries like finance, telecom, energy, materials, consumer staples, and so on. However, from the mix of industries it’s invested in, 32% is in the Financial Sector. That I don’t like at all. Considering that Bank of America, HSBC and Citigroup are also featured in its top holdings, I’d say thats a little to much for me. While the stocks in finance sector are currently rising on the backs of the Fed’s rate cut, I expect this joy to be short lived. And I still haven’t seen any information on its’ currency trading, debt-instrument contract or whatever it was.

So I guess it’s time to look at the company’s website, Lazard Asset Management. Here we get a little more insight to the investment objective:

*The Fund will invest substantially all of its net assets in between 60 to 90 world equity securities that are financially productive and high dividend yielding.
*It seeks to enhance income through exposure to short-term, emerging market forward currency contracts and other emerging markets debt instruments (limited to 33.3% or less of the Fund’s total leveraged assets), which will provide exposure to emerging market currencies.
These two strategies are complementary, with historically low correlation to one another, which may reduce volatility.

They may have a low correlation, but as we saw with LTCM and the recent global stock market correction, all markets are correlated to the downside. I’m highly skeptical of these statistical models that tout low correlation since they always seem to fail at inopportune moments. But at least their leverage doesn’t seem excessive. At least they’re honest and inform us that

There can be no assurance that the Fund will meet its investment objective.

But the rest of their site is actually quite informative. We already know that the stock portion of the fund is diversified across various countries, industries and capitalizations so I’ll skip over that part. But we haven’t seen much info on the currency & debt portion.

The Fund’s emerging market currency and debt strategy will also be broadly diversified across countries and regions, offering the potential for portfolio diversification- with the possibility of credit and duration protection and limited interest-rate sensitivity.

Not really sure how they’re implementing this strategy, but if it works, it would be pretty useful in current economic conditions!

They also have an interesting snippet about their dividend strategy too.

While the Fund’s equity investments are not chosen for yield alone, they will generally include the highest dividend-yielding stocks on Lazard’s equity platform, as well as a selection of stocks that may potentially have significant dividend growth. This is important because:

*Typically, dividends are real earnings, not hoped-for earnings based on the potential, future growth of a stock. They also offer the potential for stable income.
*The 2003 tax bill significantly lowered the U.S, tax rate on qualified dividend income of U.S. taxpayers.

Investing in companies with a track record of long term dividend growth is a sure fire way to beat the index averages [source: The Future for Investors by Prof. Siegal]. Investing for tax savings is not something I generally consider. First the investment has to make sense. Then you look at the taxes. If you’re so rich that you’re really worried about taxes, then maybe tax-free munies are the best route for you.

Finally, there seems to be some information on the currency trading aspects.

The Fund’s unique leveraging strategy allows greater flexibility, risk management, and economic efficiency. To enhance the income potential for investors, the Fund intends to employ financial leverage, initially up to approximately 33 1/3% of total assets, by investing in forward currency contracts and/or borrowings. Leveraged assets will be used for investing in emerging market currency or debt instruments.

It should be noted though, that the Lazard World Dividend & Income Fund, does not seek to profit from utilizing a leveraged spread-play. That is to say, the Fund is not borrowing at the short-end of the yield curve in order to invest at the longer-end of the yield curve (and profit from the spread). On the contrary, the leveraged portion of the Lazard World Dividend & Income Fund invests in very short duration instruments (typically, less than 12-months), and instead seeks to profit from accessing the high yields available in emerging market local currency debt.

Using leverage is a speculative investment technique and involves certain risks.

While its commendable that they aren’t borrowing short-term and lending long-term (remember the RMBS & CDOs I mentioned?), I get the feeling that they’re trying to profit from the carry-trade. Of course, I’m not 100% certain that’s what they’re doing, but it definitely sounds like that to me. With the Swiss franc nearly at parity with the US Dollar and the Yen up 26% in the past year, it strongly looks like the carry-trade is unwinding. In fact, they could start losing money on these kinds of trades.

To conclude, I think this is a very interesting fund. I would be amazed if they could continue to deliver 25% annual dividend yields, but 8-9% definitely seems achievable.

However, I’d look at ALPINE DYNAMIC DIVIDEND FUND (ADVDX) and even American Capital Strategies (ACAS) before I allocated any funds to LOR. Note, I’m not recommending either of the 2, I’m just saying I’d take a look at them before I made any decision.

January’s Dividend Income & How The Subprime Mess Has Affected Me.

I’ve been traveling for the past month so this post is a little late. I had already posted my online income which was $778. I finally got a chance to add up my monthly dividend income from my stocks, Canroys, CDs and savings accounts.

The grand total for January was $764.10 from a dozen different stocks. Its lower than it was for December because some of my stocks pay out quarterly dividends. But overall, the amount of dividends is trending up due to the Dividend Reinvestment Program (DRIP).

A DRIP allows you to re-invest your dividends back into the stock. You don’t have to pay a brokerage fee for this, so if you don’t need the income its a good way to put your make back to work. Not only that, but many companies will actually give a discounted share price on stock purchases made through DRIPs.

If the company doesn’t have a DRIP, your brokerage company should be able to set up automatic dividend re-investment for you. Unless you’re getting a few thousand dollars a month in dividends, this is a cheap way to reinvest your money. According to Prof. Jeremy Seigel’s excellent book The Future for Investors, you should avoid trendy growth stocks in favor of stable companies with sustainable cashflows which is returned in the form of dividends. Using historic data, he also proves that the reinvestment of such dividends is the true source of superior stock returns.

Added in this $764.10 is the $31 in interest payments that I received from my Prosper loans. In addition to the $31, I also received another $158 in principle repayments.

I was also receiving about $300/month from investments in various commercial real estate projects that were diversified by being in different projects in various states. Unfortunately, I’ve been informed that the funding for commercial lending has taken a severe hit and the developers are unable to refinance to cash me out. This means, that my money is going to be tied up for a while. I’ll get more info when I get back, but I caution everyone against lending money for any sort of real estate projects. This also includes borrowers on Prosper who are lending for real estate investments or related projects. I was hoping to put this money to good use to buy more Canroys, some of which are yielding 15% right now. Thats not likely to happen soon. 🙁

I had stayed away from investing in trust deeds on residential properties thinking that they would have a higher likely of default. But in the past few months we’ve seen that subprime mess has caused the market to lose faith in the credit rating system. This has caused lending for everything to dry up, including municipal bonds, which has prompted Buffett to offer to buy these AAA rated bonds at a discount and thus “rescue” the borrowers. Unfortunately, its also negatively impacted commercial developers.

Hopefully I can get my principle back from the developers. If not, my loan will convert to an equity stake in the project and it’ll probably be a long time until I get cashed out. Let’s see how this pans out.

November 2007 Passive Income Update

I’m busy getting ready for my upcoming trip and also my business school applications so I’ll have to keep this short.

My passive income for November was $1,679.88. As expected it was slightly lower than last month. But some of the shortfall was made up by the purchase of some dividend generating stock in AAV and HTE in October. I also received a special 30% payout from the Korea fund, but I’m not counting that. I’m just counting the regular $13.00 dividend that it paid out.

Here’s a basic break down:

    Dividends/Interest: $611.01
  1. 2nd Trust Deeds/Direct Oil programs: $424.62
  2. Online income: $646.25

My online income also includes the $50 I received from Prosper.com referrals (sign up and get $25 free with a $50 deposit). It doesn’t include the interest I get from my Prosper loans but thats over $50 a month.

Adsense earning were up this month 36% to $262.50. I’m sure if I tweak the ad placement a little bit I can boost these earnings.

How was your passive income?

October 2007 Passive Income Update

It time for an update on October’s passive income and online earnings. Last month’s total was nice $1,736.80. Plus I got another $100 for referring a friend to TDAmeritrade, so counting that its $1836.80. I’m not counting the income from Prosper since its rather difficult to manually go through ~50 loans and find out how much I got. Besides it keeps getting re-invested in more loans anyway.

Here’s the break-down (not exactly JohnChow.com style, but informative nonetheless)

1. Online Income : $704.96

2. ING Savings: $98.44

3. Real Estate Trust Deed: $300

4. Direct Oil Drilling Investment: $115.63

5. Dividends from Canroys: $ 447.67

6. Other Dividends : $102.7

Total: $1,736.80

I just moved this site over from the Living Off Dividends site last month, and I expect the online revenue to drop quite a bit in November. This site doesn’t have any page-ranking yet and so isn’t attracting any advertisers. (I think its being penalized by Google for having 500 duplicate posts from the old site). Since the old site isn’t being updated, some advertisers have already dropped off from there. But it’s still getting decent organic traffic from Google, so its still pulling in decent adsense revenue (it’s eCPM is twice that of this site!) so I won’t be talking that site down any time soon!

The Canadian Dollar is also getting stronger than the US Dollar and with the dividend-reinvestment program, my Canroy dividends should increase slightly next month. The Federal Reserve cut the interest rates, so I expect my savings at ING to yield a quarter point less next month.

Adsense revenue was up 39% from the month before, so hopefully that trend will continue (who says social media marketing doesn’t work!). Otherwise I expect November’s revenue to be atleast 15% lower than this months. Eventually though this site should gain some more traction and the revenue should come back up again. Another one of my oil investments should start paying out in 2 months, so that should boost the income as well.

Canadian Royalties Revisited

A few weeks ago, I cursed the Canadian Finance Minister for causing my CanRoys to drop significantly overnight. I may have been premature in cursing him.

I originally bought them for the dividends that they were paying out, mostly in the 8-12% range, with the occasional one paying out 13-14%. However, the severe drop in prices caused their yields to jump proportionately to 12-17%. One of the companies I bought became a 19% yield! Even if Flaherty’s taxation of dividends became true, it would still be 4 years away and by then you would’ve gotten nearly 80% of your money back. Last week money started flowing back in Canroys. I picked up a little more on margin. The one I picked up, AAV currently gives a 17% yield. So even if I have to pay 9-10% margin interest I’m still ahead by 7%. Plus if Oil & Gas prices continue to rise which I think they will I’ll see some capital appreciation.

There are a few Master Lease Partnerships in the US that are like Mutual Funds of Energy Stocks. They only pay 6% dividends however the divis are considered return of principle and thus are not taxed!!! Pretty sweet deal if you ask me.

Living off dividends [or how to invest in Real Estate for cashflow]

While surfing onlne, I came across this blog post: Real Estate as an asset class.

Basically this guy wants to be able to live off his dividends at some point and his blog is devoted to that. He’s wondering how real estate fits in. He invests in REITS but isn’t too sure about actual investing in Real Estate.

Well here’s the skinny on investing in Real Estate for cashflow.

You definitely want to buy in an area thats reasonably priced.

  1. How do you define reasonable? As a rule of thumb, the monthly rents are 1% or higher of the purchase price. for example, if you’re buying a $90,000 house and the rent is $900 per month or more, thats a reasonable price.
  2. You want to make sure that after paying for property management, utilities, taxes, insurance and maintenance the rent still covers the mortgage. You may need to learn how to do this. I strongly recommend reading What every Investor Needs to Know About Cashflow.
  3. Make sure you figure out the return on investment, or as I like to call it, the Cash on Cash return. for example, if you put down $5,000 and cashflow $125/mo, thats an annualized return of 30%. These are actual figures.I’ve also done better. It sure beats the stock market!
  4. Make sure your know how to get the best mortgage for your goals. I recommend this excellent book: How to Save Thousands of Dollars on Your Home Mortgage

Make sure you’re making atleast $125 over your expenses or you’ll be negative on the cashflow. I usually want atleast 16% cash on cash return for properties that are in appreciating states like Utah. If there in states which dont experience much appreciation I shoot for atleast 30% Cash on Cash, which isn’t difficult to get at all.

here’s an example:
I invested 4.5k to purchase a 90k 3/2/2 house in a city in the midwest.(4.5k is 5%. i added in closing costs to price which the seller paid)

monthly rent = $945 (1050 less a 10% vacancy)
mortgage payment = $517.5(1st at 6.5% interest only and second at 8.5% interest only)
taxes = $120
maintence = $50
property mgmt = $110 (i’m generous)
insurance = $40

cashflow = $147.5
annual cashflow = $1,770
Cash on cash return = 44% (thats 1.770/4,500*100)

Note, this is a theoretical cash on cash scenario. Often times, significant vacancies or repairs will trash these numbers. Make sure you don’t over-leverage and have sufficient reserve funds.

A lot of people think dealing with tenants is stressful. It is. Thats why you don’t want to be cheap. Always hire competent property management. You should still cashflow after including this expense.