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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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A Financial Literacy Program for Kids, With Corporate Sponsorship

This article was written by in Education. 10 comments.

The best place to learn solid financial behavior is at home. Although a kid’s environment at school and among peers is important in his or her development, the biggest influence on a growing child’s set of values is the behavior of the parents. Parents are role models, so in a perfect world, they are best suited to solve young adults’ lack of preparedness for handing the world from a financial perspective.

Parents, on the other hand, are often ill-equipped for this responsibility, so public school teachers are left to pick up the slack for parents who can’t or won’t be the role models necessary. The lessons aren’t difficult, but financial behavior is so embedded in life at home, poor models there can easily undo any lessons taught in a school environment. Although New Jersey updates its public school curriculum standards a few years ago to require 2.5 credits in financial, economic, business, and entrepreneurial literacy, the typical class is not going to be effective for establishing solid financial behavior.

Eighth gradePrograms that teach financial literacy need to get creative. If there’s ever a chance for the banking industry to get involved with its future customers at an early age, this is it. Capital One sees the benefit in teaching young children how to use its products and is sponsoring the “Finance Park” program, coordinated by the non-profit organization Junior Achievement.

Finance Park is a mobile program for middle school students. After a few preparatory lessons in the classroom, the students visit one of these mobile stations and a Capital One bank branch. Students are assigned a family situation (single, married, with or without children, etc.) and a job, and are faced with simulations requiring financial decisions that have consequences. Due to a lack of preparedness in real life, most people learn how to manage their money “on the job.” But even in real life, the consequences of poor financial decision-making can be somewhat removed from the decisions themselves. The distance between cause (overspending, for example) and effect (not being able to afford a house due to high debt levels, for example) are so separated that learning on the job isn’t always effective as quickly as it would need to be.

Simulations can bring the cause and effect relationship into focus.

Capital One’s presence is significant in this program. The official name of the initiative is the “Capital One Junior Achievement Finance Park” with the necessary trademark symbols. Corporate involvement doesn’t stop with Capital One. There are more co-branded programs which one might expect to see corporations training young consumers to be life-long customers, in New Jersey alone:

Elementary school grades

  • Our Nation® Sponsored by United Technologies
  • JA More than Money™ (After-school Program) Sponsored by HSBC

Middle school grades

  • JA Global Marketplace™ Sponsored by MasterCard Worldwide
  • JA Economics for Success™ Sponsored by the Allstate Foundation
  • JA America Works Sponsored by Pitney Bowes & The Literacy and Education Fund

High school grades

  • JA TITAN (Internet based) Sponsored by Oracle
  • JA Economics™ Sponsored by the MetLife Foundation
  • JA Exploring Economics™ Sponsored by the MetLife Foundation
  • JA Banks in Action™ Sponsored by the Citi Foundation
  • JA Business Ethics™ Sponsored by Deloitte
  • JA Careers with a Purpose™ Sponsored by HCA & John Templeton Foundation

Junior Achievement programs in other states have different partnerships.

Shareholders are often impressed with corporate involvement in positive social initiatives and happy when companies are beneficiaries of tax incentives for charitable spending. I am concerned about the effect of branding in education lessons for eighth-graders. Corporations should not be involved with the education of children, but these corporations have money to devote to programs like Finance Park. If it weren’t for corporate sponsorship, programs like these would likely not exist.

Corporations have been involved with public education since the 1920s, but the trend has increased in recent years. As the United States falls behind other countries in education, citizens look to blame this country’s public school system. We look to corporations that create charter schools as an alternative, with the idea that schools with a better funding source, corporate profits rather than taxpayer money, will help solve the educational crisis. Results show that charter schools have mixed results when compared with public schools.

The lessons in personal finance are important, so it’s a good thing that kids are getting the exposure to real-life simulations. Can it be done without corporate involvement and indelible branding at an impressionable age?

Photo: daveparker
Junior Achievement Finance Park, Stanford CREDO study

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Repair Cafe: Bring Your Broken Doodads and Gadgets

This article was written by in Consumer. 10 comments.

We live in an era of cheap, disposable goods. My closet full of clothing, much of it rarely worn, even though I sort through my wardrobe about once a year to eliminate items I no longer need, is a good indicator of this situation. For a good period when I was a kid, I wore hand-me-down clothes — as the eldest child, I received clothing from a family friend — and when an item became damaged, my mother fixed it with her sewing machine.

Prices for clothes have certainly increased over the last few decades, but clothing is not expected to last. When a piece of clothing becomes damaged, it’s easier and cheap enough to replace.

Broken ToasterBroken kitchen appliances, lamps, and other household devices past their warranty periods can’t be fixed with a sewing machine. Many would need specialized care by a professional, and with today’s disposable consumer culture, many people just opt for replacement rather than finding a repair shop and paying nearly as much money as they would to buy a new item.

Additionally, retailers and manufacturers have embraced the concept of planned obsolescence. To keep manufacturing costs low and to maximize profits, there is little concern for making products that last as long as their owners. This is a primary feature of high technology — a house phone sold fifty years ago may still function properly today, but a cell phone purchased five years ago not only doesn’t keep up with the latest technology, but it likely doesn’t work at all. Furniture built in the eighteenth century was made to last in a family for generations; IKEA furniture might last a few years under regular stress of use.

In Amsterdam, there is a small movement in opposition to this disposable consumer culture. The community has come together to repair its members’ broken items. Volunteers bring their tools and sewing machines to an open building several times a month and offer to fix any broken item brought to the gathering. This Repair Café helps reduce waste by encouraging reuse of broken items, and makes fixing an affordable alternative to replacement.

The government in the Netherlands, private groups, and individual donors have helped the Repair Café Foundation raise $525,000 over the past few years, and these funds have helped the organization create these gatherings at various locations across the country. These Repair Cafés provide a chance for consumers to make better use of their goods and for volunteers, particularly those with repair skills that might no longer be in demand, use those skills for a good cause.

Would Repair Cafés; be welcome in the United States? It’s not exactly a profitable business venture, and as such, is unlikely to draw much attention. The model, however, could easily be recreated, perhaps in low socioeconomic neighborhoods, to provide a money-saving alternative for spending money to replace slightly damaged items. Strong marketing encouraging consumers to exist in a cycle of buying and replacing comes at a price to retailers and manufacturers. If these expenses were redirected towards making better, durable products without planned obsolescence, consumers might lose the desire to constantly have new items, and would be able to hold onto the same products for a longer period of time. There would be less waste. Companies and their shareholders would find they have more loyal, life-long customers. Customers would shop with a focus on the differentiation in quality rather than with their tunnel-vision focused solely on price. Companies that build their products to last would succeed while those focused on the short-term would fail.

Could Repair Cafés be an answer to the consumer culture of disposable products? Would the availability of free repairs in the United States change the way consumers buy goods, and thus force companies to build products that are made to last rather than go obsolete? Is the trend towards disposability reversible at all?

Photo: phozographer
New York Times

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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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The Next Credit Crunch

by Flexo
Captain Credit Crunch

There are signs that the economy might be in more trouble in the near future. One of the symptoms of the recession was the credit crunch. Banks and other lending institutions tightened up their previously loose standards for extending credit, and in order to prop up their own organizations financially, banks held on to the ... Continue reading this article…

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Your B of A Satire Website Targets Bank of America

by Flexo

The Rainforest Action Network is an environmental non-violent activist organization, working to influence corporations to consider the environment during the course of business. They’ve had Bank of America in their sights in the past, bringing attention to the way the bank puts profits ahead of the health of the communities in which it exists. The ... Continue reading this article…

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Aurora Bank’s Deposits to Be Acquired By New York Community Bank

by Flexo

Last year, I opened a money market account with Aurora Bank, a division of Lehman Brothers. If it seemed like an odd thing to do, it probably was. Lehman Brothers had filed for bankruptcy in 2008, yet in 2011, they were promoting their online retail bank and looking for new customers. Not wanting to associate ... Continue reading this article…

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The Best Travel Rewards Credit Cards, May 2012

by Flexo
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It’s time to plan your holiday travel. That may mean cashing in the travel rewards you’ve accumulated on credit cards — or it may mean starting to use a travel rewards credit card. Chances are you spend money on some necessities, and when you do, tailoring the rewards you receive to your travel needs could ... Continue reading this article…

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