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Investing for Dividend Income: Not All That Passive

This article was written by in Investing. 10 comments.


Passive income is the Holy Grail of financial independence. Although modern Western society and capitalism relies on the Puritan work ethic, the idea that labor is a value to society and hard work is the path to a spiritual and successful life, most people would prefer not to trade their time and effort for an opportunity to survive financially.

There are good reasons. The work ethic is designed to benefit employers, not employees. Even though the labor movement worked hard to ensure humane conditions for employees, in the business world, the idea of spending countless hours at the office is rewarded in some working environments. Employees are made to feel guilty about desiring work/life balance, as excellence in an organization is a goal that requires a measure of imbalance. Unwavering dedication to the job above all other priorities is rewarded.

MoneyThis approach might make sense if a job is also a passion, but for the vast majority of people, passions exist outside the office. Families, hobbies, and personal missions all have higher importance on the scale of values, but they often don’t have the ability to provide the financial incentive necessary to make life easier for families, hobbies, and personal missions. When eight or more hours of the day are lacking passion, the results are the tired memes of the ordinary workplace:

  • Is it Friday yet?
  • I can’t wait to get out of here.
  • She’s retiring this year; she’s lucky.
  • My coworkers are so annoying.
  • The boss expects too much and then raises the bar when I exceed expectations.
  • I can’t get anywhere in this job.

The list goes on.

It’s no wonder at all people view the idea of passive income as salvation. Rather than trading in effort and time for a paycheck, your assets generate income while you sit back and relax, spend time with your family, and pursue your less lucrative passions.

Passive income exists, at least from a tax standpoint. Income from a rental property or from a partnership where you aren’t actively involved is considered passive income. The IRS treats this type of passive income differently than other income, even if that income comes in the form of dividends from an investment portfolio, what some might also call “passive income.” The truth is that all income requires active involvement, but perhaps it’s a matter of degree.

The IRS considers income from real estate investments passive income, but managing real estate can be a full-time job. Don’t expect to sit back and your investments to thrive, even if you have a management company handling the day-to-day work. In fact, unless you’re able to amass a significant volume of real estate, or if you do most of the work yourself, it’s unlikely the time and effort you spend will be as profitable as you expect.

Expect the same disappointment if you’re looking to dividend income as your path to wealth. If you calculate that you would like to replace $50,000 of your toil-based income, you would need to have $1 million invested in investments paying a 5 percent dividend. (I’m ignoring the difference in income tax just to keep the example simple.) $1 million is a large bank balance, but it is achievable. You can’t, however, just put $1 million in an investment paying a 5 percent dividend and forget about it.

Any investment requires active involvement, starting from the beginning. You need to choose the right investments to start, and you need to monitor your investments over time. Sure, you’re not toiling in the field or wiping sweat off your brow at a construction site, but you are spending time researching your investments. You also need to pay attention to ensure your investments continue to perform. Companies decide to cancel their dividends without so much of a warning, so you should follow the company’s financials to be aware of any signs of trouble before the executives decide to reinvest profits, if any, rather than continue the distribution to shareholders.

When it comes to letting your money earn your income, nothing beats bonds. Suze Orman and financial planners offer advice to the general public, extolling the virtues of investing in a portfolio made almost entirely of stocks, but if you look at Suze’s own portfolio, which is designed not to increase value over time in exchange for risk but to generate income year after year, she invests primarily in bonds. (Her investment was in bonds as of a few years ago according to her own admission in a news story. I don’t know whether this is still the case, but it’s likely.)

Taking a step back, while Suze — and many other investors, but she is a good example — invests her portfolio for passive income, she’s not sitting back and relaxing with her life. While she may have money managers who handle her investments for her, she still trades her time and effort for an income.

Are you seeking the Holy Grail of passive income?

Photo: Raido Kaldma
Wealthy Turtle

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Young Americans Likely to Be Unbanked Regardless of Income Level

This article was written by in Banking. 13 comments.

In discussing unbanked and underbanked American consumers, we tend to focus on low socioeconomic status communities. The mainstream opinion is that building wealth and long-term financial stability relies on the use of traditional banking and investing products and the knowledge to use these products effectively. The financial industry tends to avoid low socioeconomic status communities for a variety of reasons, but the bottom line is that these customers have not been proven to be profitable. Taking the place of these mainstream institutions are check-cashing facilities and payday loan outfits, designed to be very profitable while providing the immediate services required in these communities.

These “low-class” financial product purveyors are part of a growing industry. As with any burgeoning industry, there is beginning to be more research into its consumers. The unbanked and underbanked consumer is becoming better defined, and traditional banks see this as an opportunity to create products that directly compete with the successful check-cashing and payday loan market.

Check CashingWith this new research comes some interesting findings. Prepaid debit cards are products designed for consumers with low or no credit scores, a condition that is more common among low-income households, though there are many reasons anyone in any income bracket could have damaged or undefined credit. Think Finance has determined that the use of prepaid debit cards is the same regardless of income level. Among the consumers surveyed, a representative sample of the Millennial generation, someone earning up to $74,999 a year is just as likely to use a prepaid debit card as someone earning less than $25,000 a year.

The statistics pertaining the check-cashing services show a similar trend. For a fee of usually 1 to 4 percent, a check-cashing storefront can immediately give you cash. So can any bank branch, but you often need to open an account first, and that requires patience, the willingness to share your personal information and submit to a ChexSystems verification, and the openness to endless marketing. In many cases, it’s just easier to just pay the fee. 34 percent of Millennials with the lowest income make use of check-cashing services outside of traditional banks, only 5 percentage points higher than those with the highest income.

An article in USA Today addresses what might representative of the fact that the status of unbanked or underbanked is pervasive in this age group regardless of income:

Ammy Orozco, 30, who works as an executive assistant at a Check Cashing USA branch in Miami, has a checking and savings account with Bank of America but often chooses to cash checks at work instead. She says she’d rather pay to cash a check immediately than pay for gas to drive to the bank. She has also taken out payday loans in emergencies. She’s tried to get a loan from the bank, but it was “stressful.”

“They wouldn’t confirm right away… You’re there sitting and you need the money, and you’re like, is this going to happen or not?”

Millennials expect instant gratification and are willing to look past fees and unnecessary expenses in order to feed this desire, regardless of income. For a generation whose defining economic moment has been the Great Recession, the credit crunch, and high unemployment, as well as the media environment dominated by stories about bank executives behaving badly, poor use of taxpayers’ money, and class-action lawsuits pertaining to anti-consumer practices, it’s understandable that a mistrust of the mainstream financial industry keeps people away from banks regardless of income. Half of Americans are not saving for retirement, and while unemployment certainly plays a role, lack of trust in the industry and in markets in general is an important factor.

With the proliferation of services targeted to the unbanked and underbanked reaching a wider set of customers — that is, popularity and use has moved beyond low socioeconomic status communities — regulators have begun to take notice. (In other words, these products and their negative effects were acceptable when they took advantage of only the poor and whoever you might assume is more likely to live in poor neighborhoods, but now that the middle class is targeted, it’s an issue worthy of consideration.) The Consumer Financial Protection Bureau is looking into designing regulations for these products. Meanwhile, traditional financial institutions are taking advantage of this regulatory grey area to create products that compete with check-cashing storefronts and payday loan issuers, and to use these products as profit centers with the intent of eventually mainstreaming these customers into other profitable services.

Are you a Millennial who prefers immediate services like check cashing, payday loans, and prepaid debit cards instead of checking accounts, bank loans, and credit cards? This is not the primary audience of this website, but I’d love to hear some feedback from the millions of Americans who fit this description.

Photo: Daquella manera
USA Today

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Half of All Americans Are Not Saving for Retirement

This article was written by in Investing. 18 comments.

In April, LIMRA, a think-tank for the financial industry, completed a survey intended to focus on the savings and investment preferences of those living and working in the United States. After receiving responses from 2,697 Americans, a representative sample of the country, LIMRA was able to determine that 49 percent of the country is not saving for retirement. Additionally, more than half of Americans between the ages of 18 and 34, at 56 percent, are not saving for retirement.

Saving for retirement — and receiving the associated tax benefits through typical investment types like 401(k) plans and IRAs — requires a public trust in the financial industry. On one side, financial planners, investment salespeople and brokers, columnists, and bloggers are encouraging the use of financial products that, through both apparent and hidden fees, enriches the industry, while on the other side, investment firms are the beneficiaries of massive taxpayer bailouts and frequently in the news for using taxpayer money for paying their executives bonuses that defy the laws of gravity.

Wall StreetIt may be true that the reason many Americans do not save for retirement is ignorance. There are typical excuses for not saving for retirement, such as the lack of good, seemingly trustworthy information about the options that are available, the lack of knowledge about the benefits of investing in 401(k) plans and IRAs, or the belief that during tight personal economic times, not a cent is available to save for the future. After the recession, however, many people just see the financial industry as unworthy of trust. Organizations like LIMRA, working for the industry and promoting financial products, are unlikely to bring this attitude to the public attention.

The industry is more interested in shaming people unwilling to get on the boats rather than analyzing the leadership capabilities and trustworthiness of the boats’ captains.

I’m saving for retirement with 401(k) plans and IRAs. When possible, I choose plans that have low fees, but the choice is not always up to me. Employees may be able to choose from a selection of investments inside their 401(k) plan, employees can’t choose their company’s 401(k) administrator and broker without a coordinated effort among a large portion of employees. That would be nearly impossible in a large company. Unions are intended to solve some of these issues, but it can often reach the point where being a member of a large union is much like working for a large employer. The power of any individual is limited.

The 401(k) is ingenious for the financial industry, particularly now that it’s automatic. In a perfect world, every single employee is enrolled in a 401(k) plan on their first day on their first job. The investments may not perform well over time, but that’s not particularly relevant for the financial industry. As long as every American is investing a portion of their paycheck every week, two weeks, month, or other period, 401(k) administrators and brokers will continue to thrive. The employee probably benefits when retirement approaches, but that is by no means guaranteed. All you need to do is look at the portion of Americans who planned to retire in recent years but saw their nest eggs trampled on during the recession.

Investors bear the responsibility for changing their risk profile as they near their planned retirement, but there is a mixed message. The financial industry says you need to stay invested in stocks (highly volatile, highly risky) as you approach retirement because most people need their funds to last several decades throughout retirement while at the same time warning people to risk only what they can afford to lose. When people receive conflicting information, making decisions becomes more difficult. And when the conflicting information is coming from the same source — that is, the financial industry — the default reaction is the lack of trust.

Does the financial industry wants to do American citizens a favor by providing options for saving for retirement? No. The financial industry wants its companies to not only stay in business but to profit as much as possible. And to that end, it sells products — investment opportunities — designed to enrich the companies and their shareholders. There’s nothing wrong with this, because consumers will only buy products they need or desire enough. Companies will sell towards that need. And when only half of Americans have discovered retirement savings vehicles like 401(k) plans and IRAs, the industry will resign itself to doing a better job in explaining to the country why their products are needs, not wants.

Saving for retirement is important. For most people, stocks are the only investment type that can grow wealth quickly enough to provide the dream retirement so impressed upon Americans through media. It’s risky, as recent would-be retirees have seen. Thanks to the cognitive dissonance resulting in the understanding that the promotion of retirement is a result of the financial industry trying to increase profits on a large scale rather than corporate concern for the well-being of a nation and the knowledge that Americans must do something drastic to save money in order to fulfill the dream of quitting work, some Americans choose to invest while others would sooner give away their firstborn rather than drink the financial industry’s Kool-Aid.

LIMRA may be right — that most people who do not invest for retirement with 401(k) plans and IRAs have not done so because the industry’s message hasn’t successfully penetrated their consciousness. That may be due in part to a lack of education, but for others, it’s a lack of faith and trust in the industry.

Photo: zoonabar
LIMRA

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British Airways Visa Signature Card from Chase Review

This article was written by in Credit. Add a comment.

If you’ve ever flown British Airways long-haul from the U.S. to London, you’ve probably lingered when walking past those sleeper seats in the “Club World” section. They don’t just recline, they lay fully flat. You won’t run the risk of a small child kicking the back of your chair for hours before you endure the endless escalator rides at Heathrow. Thanks to this spring’s special offer from Chase’s British Airways Visa Signature Card, you can treat yourself to this luxury for about the same price as a standard coach class ticket.

Right now, Chase offers a staggered signup bonus for new British Airways Visa Signature cardholders. British Airways calls their frequent flyer miles “Avios,” and you’ll earn 50,000 of them as soon as you use your new Visa card. Make $10,000 in purchases, and BA credits your Executive Club account with 25,000 more Avios.

Land your final bonus of 25,000 more Avios once you’ve cleared $20,000 in purchases during your first year. After that, you can spend 80,000 Avios and about $1,100 in upgrade fees to book yourself that luxury flight.

Saving Avios and flying on the cheap

You don’t always have to splurge on a sleeper chair, though. Your 100,000 bonus Avios are plenty to cover the cost of two “World Traveller” round trip base fares between London and any of BA’s stateside hubs in New York, Philadelphia, Chicago, and Washington, D.C. This isn’t a discount airline you’re flying, either. British Airways’ coach seats on these flights resemble other airlines’ business classes. You get a private entertainment system, hot meals, and impeccable service from a flight crew that only gets testy if you don’t give them the chance to serve you.

The special smart chip you won’t see on other travel credit cards

Only a handful of American credit cards include the embedded smart chip that you’ll need to make routine purchases in Europe. Chase puts that “EMV chip” front and center on the British Airways Visa, and you’ll appreciate it when your travels take you off the beaten track. To combat fraud, many European merchants won’t accept American magnetic stripe credit cards outside of common tourist areas. The EMV chip saves you time and hassle, especially if you want to use any automated parking meters or vending machines during your visit.

No foreign transaction fee

Your $95 annual fee buys you another important perk that you’ll find on few travel rewards cards: no foreign transaction fee. Chase makes the process easy for frequent U.K. visitors: charge your card in pounds sterling at no extra fee, while enjoying Chase’s best currency conversion rate for the day of your purchase.

Rewards and risks of airline credit cards

Of course, British Airways is still a traditional airline, with a typical frequent flyer system. Regular BA travelers say that the 2012 Olympics and London’s business boom have made reward seats scarce, unless you plan your free trip far in advance. You’ll also have to pay redemption fees, airport service fees, and other taxes on each reward ticket.

If you value flexibility in a travel credit card, consider the Capital One Venture Rewards Credit Card instead. You’ll earn as much as 2 percent back on your everyday purchases, in the form of statement credits that you can redeem against any of your travel expenses. Still, given the high price of transatlantic airfare, the British Airways Visa Signature offers tremendous value, if you’re willing to jump through a few hoops.

To take advantage of the 10,000 Avios offer, apply for the British Airways Visa Signature Card from Chase today. You will need excellent credit in order to be approved, and be aware of the $95 annual fee.

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Get to Work If You Want to Be Rich

by Flexo
Movie marquee

How much time do you spend in front of the television, socializing with friends, or watching movies? I freely admit that I spend too much time watching television. There are certain television programs that entertain me, and particularly during stressful times in my life, I need some type of outlet that makes me laugh, raising ... Continue reading this article…

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Citizens Bank Settles Overdraft Fee Class Action Lawsuit

by Flexo

Banks are still struggling with the decisions executives made to maximize profit from overdrafts by rearranging the order of withdrawals to customers’ detriment. By December last year, Bank of America settled a class-action lawsuit related to overdrafts and was expected to pay $410 million. That decision is being appealed by a plaintiff, so it will ... Continue reading this article…

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Podcast 157: Credit Card Application Fees

by Flexo

Today on the Consumerism Commentary Podcast, Jay Frosting and Flexo talk with Matt Schulz, Vice President of Content for InvestingAnswers.com. They discuss the implications of a recent legal ruling that excludes credit card application fees from the limit on fees that credit card issuers can charge within the first year. Consumerism Commentary Podcast Credit Card ... Continue reading this article…

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Sprint in $300 Million Tax Fraud Lawsuit

by Flexo

In order to offer better prices to customers, Sprint has allegedly under-collected and underpaid New York State sales taxes by $100 million. If the Attorney General’s allegations are true, Sprint could end up owing the state government as much as $300 million or more due to underpayment penalties. Sprint is denying the charges, claiming they’ve ... Continue reading this article…

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