My Passive Income Strategy and Goals

It is crazy to think that I have not wrote a single article on this blog for five months. Sometimes life gets so busy that it becomes hard to sit down and write for a couple of hours. However I should have a little bit more free time in the coming months so I want to start writing again.

When I started writing, I felt it was a good way to learn but also a way to keep myself honest and stick to my strategy. While my good buddy European DGI does a good job at holding me accountable over at Dividend Talk, I feel like I have gone a little off track.

Don’t worry, I am still a Dividend growth investor but lots have happened since I last posted such as Wars, Inflation and Energy shortages while my portfolio has seen some changes over the last few months. So I have decide to write down my strategy and goals again so I have a clear path on what I’m doing especially when navigating potentially tricky waters in the short term.

My Goal

My goal is a pretty simple one, I want to replace my current income with passive or semi passive income so I can enjoy more free time to do what I enjoy. I take great pride in my work but in my current role as an Automation Engineer, I can’t seem to find button to switch off.

Even when I’m not in work, I am always thinking about something or answering emails. As this is my primary source of Income, it quiet rightly deserves most of my attention. After all it is how I keep a roof over my families head and food in their bellies. But as I get older I realise there is more to life than working all the hours possible. I need to be able to work but I would like to be able to do it on my terms and with a lot less pressure.

I have broke this goal down into 3 separate parts

1. Financial Security-> A monthly figure where all my essential bills are covered. Essential bills are gas, electricity Mortgage and average food shopping.
2. Financial Vitality -> A monthly figure where all my essential and non essential bills are covered. This includes phones, TV, Insurance just to name a few
3. Financial Stability -> My current monthly salary combined with my wife’s monthly salary
4. Financial Independence -> 2 x My current monthly salary combined with my wife’s monthly salary

My Strategy

I have been investing on a consistent basis since the December 2017 and I have seen many changes to both my mindset and how I want to achieve Financial Independence. I have taking influence from many investors along the way such as the Sunday Investor https://thesundayinvestor.ca/ , Charles from https://financialfreedomisajourney.com and of curse a good friend of mine EDGI from https://www.europeandgi.com

My strategy will be broken down into 4 distinct parts

1. Dividends
2. Options
3. Mortgage

The first 2 parts all involve the stock market and my main criteria is to focus on quality companies as much as possible. During the last 2 years I have been stuck with some real humdingers, either by chasing yield or chasing premium. I have learned the hard way ( as I always do) that there are no real shortcuts. If something is too good to be true, than more than likely it will kick you in the ass.

How do I define a Quality Company?

So how do I define a quality company?

The must all have the following characteristics in no particular order

1. Stable and growing top Line
2. Stable and growing bottom line
3. Stable and growing cash flows
4. Ability to manage their current debt
5. Management I can trust and have a strong shareholder focus.
6. Have a competitive advantage and a reason I believe they can continue growth in the next 5 years

Of course, in my dividend portfolio, I will be looking at the companies dividend history along with my best guess on if they can continue to reward me over for as long as I hold them. For my options portfolio, Dividends will not be giving the same weight but the rest of my criteria must be matched. I want to avoid holding companies like WISH and SOLO like I am at the moment.

Dividend Strategy

My Dividend Portfolio will be divided into 2 parts –

1. 70% of my portfolio will be High Dividend Growth companies from Europe and the US. These will be companies that have dividend growth above 5% over the long term. for examples. Companies that would fit the bill are APD, TROW an SWK .
2. 30% of my portfolio will have a High Dividend Yield. These are companies and CEF’s that have a starting yield above 5%. This is designed to help “Accelerate” my passive income and dividends will be reinvested into HDG companies.

For the moment, I am not going to exclude companies based on their starting yield but preference will more than like be giving to those above 2.5%. Of course as long as companies like Microsoft exist I will consider all companies as capital gains can be just as useful.

I have also removed the 32 company barrier and the tier system. If I have enough conviction in a company, I will invest in them regardless of how many companies I own in my portfolio. My only restriction is that I do not want any position to be more than 5% of my portfolio. As my portfolio gets bigger my target will be to have no company with more than 5% of my dividend income.

I have come to realise that valuation is not my strongest attribute. There are a lot of unknowns when coming up with a fair value of a company. I know DCF and DDM models are popular but they all rely on guesses. however I am no longer going to bother with these. I will use a simpler methods based on earnings and cashflow.

Options Strategy

Chasing premium sucks! I can tell you first hand that chasing premium will do nothing but lose you money. At the moment I am stuck with WISH, SOLO and CCL and am trying to wheel them out to a point where I am no longer losing money on them.

My focus will be no selling cash secured puts on companies that fall into my “Quality Company” criteria. However once assigned I will begin to sell covered calls on these companies. This is known as the wheel strategy and is very popular online.

I will be aiming for an Annualised ROR of at least 8% and will close or roll trades when I have reached at least 50% of the total premium.

Mortgage Strategy

Part of my strategy involve paying down my mortgage as fast as I can. The reason I have this in my strategy is because my wife has no interest in getting to know about the stock market. Like most people she feels its too risky and complicated and “Trusts” me to look after that side of it. However, Paying down a mortgage with the goal of buying a couple of rental properties is something that she and and does get excited with.

House prices in Ireland are incredibly high at the moment and the interest rates are historically quiet low but that seems to be changing. Most of us are expecting rates to rise and if they return to the rates seen in the 1980 than I will be changing my strategy to paying off my mortgage more than what i a putting into my investments. But for now we are aiming to pay at least 10% of our mortgage this year. We will try and match the same payments for the over the next 10 years to pay off the mortgage 10 years early and give us enough cash for a deposit on a second home to star renting out.

Purpose of this blog

The purpose of this blog is really to keep pushing myself to learn and to also keep myself accountable and stick to my long term plan. I understand there are a lot of Guru’s out there that will tell you what they think you should do or who you should invest in. Personally I always try to avoid anyone who tells me what try think I should do. I am just a small time investor for a county with a little over 5 million people. I am hardly someone to copy. The blog will contain my thoughts of different companies as I study them. I also hope to use it as a journal for my option trading, detailing my thoughts when I enter a trade.

However I do hope that this blog will show that anyone can become financially independent with a little bit of planning and a lot of patience. I also hope that by being transparent with all the mistake I am sure to make that you will at least learn what not to do. I always encourage everyone to write out their long term goals and make a plan to achieve them. The plan doesn’t have to be perfect but it certainly beats sitting around and waiting for the government to look after you.

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