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Building Sustainable Dividend Machines: 3 Key Ingredients for Success and How to acquire them concisely

When I was asked by friends who would choose to build wealth with dividend stocks, I often cite the types of readers and friends that I came across who are motivated to take this path.

Lynette just crossed 35 years old and her husband is 2 years older than her. She currently works as an IT manager in one of my good friend’s company. The couple just paid off their HDB flat, contributing the excess cash flow that they have because they think it is prudent to do so.

They wanted to build a nest egg and the idea of an income stream appeals to them, but they are rather risk-averse about taking on more debt by buying another property, especially considering in the previous company she saw how easily in the industry they can lay off her friends who were rather dedicated in their work.

The idea of building a portfolio of stocks from scratch without taking on debt by using their excess cash flow to build up another stream of cash flow from the stock’s distribution appeals to the couple. They could do it gradually, purchasing more when they have more excess cash flow and stop purchasing in the event one of them get laid off without worrying about having to pay for a mortgage.

The goal is that the nest egg grows large enough to provide for their current standard of living to retire upon.

An equal part of the readers is like Su Tai, who is the typical 24-year-old millennial who came across the idea of getting fit with his personal finance and like the idea of building up a portfolio of business that provides a cash flow.

Retirement is the furthest thing on his mind, but he does like the optionality it brings because, at this stage, when he starts out his career, he has no idea how sturdy and fruitful this career path is but he knows it is better to self insure by doing the safe thing by paying himself first, putting a portion of his disposable income into stocks that generate a different income stream from his work.

The last group would be the readers and friends that is a generation older than Lynette, such as Eng Tah who at 48 years old have done well in a fruitful career to have managed to pay off his primary residence and have purchase another private non-landed property that he is currently paying off. With the alternate stream of cash flow from renting out the HDB and his job, he wants to build up a different stream of cash flow that is not property-based. His main question to me is whether he could successfully do it with blue-chip stocks.

The common trait amongst the wealth builders

While their generation may be different, career background is different and main beliefs and value differ, why they are interested in building wealth in a certain way is dictated by similar parameters:

  1. They live in a fluid world where the employment situation is becoming more fluid, and that job security is a thing that is less and less common unless you choose a career in civil service or the Temasek linked companies
  2. Their goals and aspirations do not stay constant, and because of that how they want to leverage their wealth assets also needs to be fluid to be able to adapt to a change in their goals
  3. They are very responsible people, who are able to source out information, knowledge and reflect upon them to form their view on why they need to build wealth, roughly how they can achieve that and be willing to put in some effort for it
  4. Their wealth assets are not their entire plan but part of a huge life plan for themselves
  5. Due to their overall plan, or their nature, they have an adverse nature of taking more personal debt in their wealth building endeavours

Their circumstances make active investing in dividend income stocks very appealing.

An advantage is that they can systematically track whether they will have built enough wealth to achieve the goals that they set out for themselves.

As the dividend stocks distribute dividend income, folks start off as Su Tai to slowly build up his stocks to provide an annual dividend cash flow that aims to equal his annual basic survival expenses, be it $700/mth. That will give Su Tai optionality in his career and aspirations to take greater risks.

If that doesn’t happen the annual dividend cash flow might eventually be built up to a time like Eng Tah’s time when the annual dividend cash flow allows him to early retirement or be financially independent.

What you need to know about sustainable dividend investing

There are many ways to achieve your financial goals but on a high level, they look like what I mentioned before, just high-level concepts.

There is some real work involved, and you cannot rely just on these high-level concepts to build wealth. They are pipe dreams if things remain as a high-level concept.

To successfully build wealth requires you to look at dividend investing as a second job. If you are unwilling to put in the effort, you do not even have a chance of success.

That is why I do not agree with the word passive income. It downplays the level of effort required.

Here is what you need to do to have any chance of succeeding.

You need to acquire knowledge to build wisdom

  1. How do you go about selecting the stocks that distribute dividends?
  2. Should you purchase the highest-yielding REITs?
  3. How many stocks should I build up to or should I be concentrated on?
  4. Every investment have their pitfalls, what about dividend stocks? How do I avoid them?
  5. How do I even know it will work?
  6. How do I manoeuvre if I make a mistake?

You will have these questions popping in your head, or in the worse case, this is the first time you are seeing them, which in that case you can thank me later for highlighting real things that you need to think about.

All these are important, and you will need to acquire this knowledge to have a chance to do it successfully.

Without the information and knowledge, you would just be blindly executing based on gut feel. You have a high probability of making a lot of money in some stocks and also having a lot of stocks that was throwing out good dividends but end up substantially below the price you pay for them.

In all investing there are the nuances of what to do when this scenario happens, and you need to acquire the knowledge so that you know the rule of thumb of what to do when that happens.

You need a game plan

The knowledge you gain along the way has to be funnel into your game plan, or system as what I normally called it.

What are your goals?

Do you aim to build up to $500/mth, $1000/mth, $4000/mth?

What is a conservative longer-term dividend yield for your overall portfolio? 4% to 6%?

In that case how much dividend stocks do you need?

How do you go about sourcing out these prospects, and how do you systematically weed out the bad ones from the good ones?

How do you keep up with your stock businesses to ensure you know what your business managers and CEOs are doing to your company?

You can’t expect to take a passive stance on this. As I said this is a second job that you need to systematically allocate time to do.

You need good partners in this long journey

Most investors choosing this path are likely to have some form of full-time employment or are entrepreneurs.

While you may start off liking the idea of passive income, there are systems that you will have to build up to constantly manage your wealth machine. That will involve ensuring you have the opportunity and keeping track of the financial health of the stock business.

Work and family will ensure that you have limited time to continue to acquire knowledge, reflect and improve so having partners that share your goals, motivate each other and be willing to call each other out is important.

I have my group of 3 that keeps me in check. It also helps immensely consider we lead unique lives and we ensure each of us constantly levels up.

Here is how you can kick start your journey to sustainable dividend investing.

I started off learning everything myself through reading books. Back then I was 24 years old and along the way I faced many bumps along the way because of my poor understanding, flawed mentality, unable to comprehend what are the important things, bigging up the unimportant things.

I have to thank Mr market and the many mentors I met along that taught me better.

You may not have the luxury of time as I did to go through so many hard knocks and need to cover those three areas I mentioned.

My friend Rusmin and Victor over at Fifth Person shares the same idea about dividend investing.

And while I can write good pieces on the subject I may not be as good of a teacher as they are.

Rusmin and Victor were involved with 8I investment in the early days being part of their private fund management. They have since struck it out on their own.

Their brainchild is Dividend Machines, a course focusing on dividend investing. I still am unapologetic that I named my wealth-building vehicles Wealth Machines even though it was coincidental!

Dividend Machines covers a lot of what is required for dividend investing. The syllabus also includes a module on Real Estate Investment Trust (REITs) and various checklists for you to use as the building blocks to create your own system for successful dividend investing.

As a primer, it is valuable to have someone teaching you the concepts and sharing their experience and then further your education by acquiring the knowledge yourself.

At least with what is learnt in Dividend Machines, you will know what knowledge to supplement what you already learnt in the course in the future along the journey.

The knowledge is imparted in 31 videos that you can view online, so you can view it wherever you are, whenever you can, how many times you want. There are advantages here because hectic investors would not have to be jammed up by last-minute work assignments and missed attending certain days a module. If you felt you catch no-ball in a certain area, you can rewatch it a few times.

If you still do not feel connected to what was taught, you have access to your lead trainers via question and answers sessions.

If you want to find like-minded friends that share common investing traits to make the journey more interesting and more efficient, such a course will increase your chances of finding 1 or 2 friends to create your own team.

The fifth person would want you to share with them the result along the way, and feedback sessions enable you to clarify some of the nuances of dividend investing that if you do not clarify would make the whole investing understanding unclear.

Dividend Machines is open for a limited window which ends 14th March 2021

Dividend Machines comes with a special price tag of US$368 or S$488.

I thought that is a very affordable price to pay considering what is provided and how it can bridge the gap of time required to self educate to gain competency, avoid common mistakes, set up efficient systems in dividend investing.

When you signed up today, you will gain access to a free workshop conducted by Rusmin and Victor.

On an $8000 worth of stock, SG$488 could be a potential 6.1% loss. Gaining knowledge might help you avoid the mistake. It could also help you better choose between an unsustainable 9% yielding stock and a sustainable 8% yielding stock.

If you would like to take action and build a secondary stream of cash flow today, check out and signed up for Dividend Machines today here while stock last!

Just a heads up to readers that this is a Sponsored Post. I believe you will gain value out of Dividend Machines if that is what you are leaning towards in terms of wealth building at a good price range. I do not gain any commission if you click through the links. Let me know the feedback for the course so that I can improve the recommendations.

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Joseph

Thursday 3rd of March 2016

Dear Writer, I would like to learn more about managing finances and what type of debt is bad. I purchase a EC for $1million. Paid 20%as downpayment. Have a car bought at $58k. 2 new born however i do not wish to suffer any loan stress. Can you guide me? My savings are getting lesser each day.

Regsrds, Joseph

Sillyinvestor

Friday 4th of March 2016

Joseph,

I am not a writer, just Kay Poh, since I was in your shoes.

The debts are already taken, there is nothing u can do. But u can:

1) work hard at work and get the progression so that you pay increase and the buffer increase. 2) show your family you expenses. Sometime they don't understand how stretch we are. There might be some discomfort or mistrust on why such info is shared, but sooner or later, it will boil over. Rather than quarreling over it when one is pissed.

In the short run, cut expenses: 1) I manage to cut $100 off monthly. Although insignificant, but still better. I took Coporate plan for telecom, change to cheapest plan, cut mobile data plan

2) Give tuition

3) reduce dine out sessions

Dun be too stressed. Don't missed the forest for the tree, enjoyed your new-borns. Once u have done the above, smile and spend quality time with family.

I survive on bonuses, saved not a single cent in my initial years of my new/born

Alan Lok

Friday 4th of March 2016

Hi Joseph,

I am not the writer of this blog but is both a personal friend and fan of Kyith. He always write good articles and give me quite insightful perspectives of looking at value investing.

Wealth generation, preservation and management are never exact sciences.

And I am saying this from a position of an equity research analyst, private equity due diligence person and now a capital market policy analyst cum self-blooger ( talk about trading and crisis investing). No one can be sure whether the stock you are buying would have a biz model that is so bullet-proof that the yield can be consistent.

But when you find some stocks that are appealing, cheap, biz model make sense; yield is decent; buy it; and don't just lump all money in one stock; diversify across different sectors, so that each buy is less than 5% of your total portfolio. Hold them till the yield is no longer attractive and don't go for short term gain for that will only make your remisier a happy man if you are not of trader's material.

This might sounds very grand mother ruling, so I am going to give you some numbers:

1. Price to book below 1.0 times 2. ROE above 15% and must be sustainable 3. Dividend yield of at least 6% 4. Business model logical and simple. 5. Financial leverage (Total assets over Equity) market capitalization above USD 2 billion.

There are many reasons why these numbers are like that; I can't explain one by one in details. In the past, my students used to attend my lessons at SGX for 16 hours x 4; but I stopped lecturing after having being posted to HK.

But these are numbers for me; might not be suitable for you. So do use them with caution.

And if you can't understand at all what these 6 pointers mean; I think you really should go and do some read up or get yourself educated.

One of the most formal way of doing it would be to dig out CFA Level 1 notes and read it; fully digest it. As you are not taking the exam; level 1's stuff is quite sufficient for a retail investor. In it, you should be able to know what can and cannot be expected from equity and bond investing.

I am not against you taking up any courses; but at the end of the day; regardless of how many lessons you took; to gain a complete full picture, you will still need to do a lot of self read up.

I have taught people many years on value investing, day trading and so I roughly know what works and what doesn't. And for those of you who have no time to do serious read-up to understand how finance and biz model works; don't expect to be enlightened by any courses overnight; it just does not work that way. Good courses are just like appetizer, setting you on the right path but only the real journey thereafter will lead you to the main course and finally dessert!

Henceforth, I fully agree with Kyith - passive investing does not exist.

All the best to you in life!

Alan Lok, CFA, FRM, MBA

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