Automating Passive Income

In The Passive-preneure I talk a lot about automation, and you’d know that if you’d picked up your extremely inexpensive copy today. One of the ways I’ve gone about automating my own passive income streams is by using one to fund another, automatically. I’ve discussed ShareBuilder in the past, and how I utilize their automatic investing options to “set and forget” my investing plan. Well, I also utilize their direct deposit option to help this along.

In my Kindle Direct account I have directed all income to my ShareBuilder account VIA direct deposit. This lets me move all my money into investing, and never have to worry about accidentally spending it. Then, once the threshold is reached my automatic investments kick in. Then I’m able to keep track, and get my dividend reinvestments from these. Thus, one passive income stream (my eBooks) funds another passive income stream (my Dividend investing) which I’m also utilizing to build up the capital to purchase yet another passive income stream (my rental properties).

You can see from this that it’s a domino effect, and if you have multiple streams, such as eBooks and membership fees on a website, for instance, you can direct multiple streams into the same account, and build those streams faster. Turning them from a passive stream, to a passive river.

Pictured: Your income

Pictured: Your income

Alternate Forms of Investing

On average my dividend paying stocks return a yield of around 6%. In plain English, that means for every dollar I invest in, I earn $0.06 per year. Sounds like a lot, but there are a few things you don’t think of. First and foremost, stock price changes. So if price goes up, value goes up, if price goes down, value goes down, so I never know exactly what the return is, unless I want to sit down and do the math.

Ain't nobody got time fo dat

Yea…what she said

I’ve started looking out for different ways to invest my hard earned cash. First I swung by the race track, and quickly realized that doesn’t work. The next step was a guy named Tony out behind a bar, but his eyes were just a bit too red and twitchy for me to trust my cash with him.

Then I looked at Kiva, again. Kiva is a great program, and if you’re the altruistic type, like I am, you should sign up and join the Capitalist Cares Kiva Team. Together we can help many, many, people. But the thing is, you won’t be making a return on your investment. So, it’s more of a donation that you end up getting paid back. Which is great, don’t get me wrong, because I can drop some spare cash into the account, send it out into the world, help people out, and get it back to help someone else. That’s fine.

But I want investments. But looking at Kiva, I knew I had Microplace that I could fall back on. Or, so I thought. Turns out Microplace stopped doing new investments in January.

You and me both...

You and me both…

So what was I supposed to do? No interest from Kiva, no Microplace to fall back on…of course I went to Google. You know me too well, digital reader. You little scamp.

So I hit Google with the very narrow search “microlending platforms” and, of course, it returned a gazillion results that meant absolutely nothing to me. So I hit it again with the better term “microlending platforms that will make me a millionare” and Google laughed at me. Audibly. Through the speakers. (This may be an exaggeration.)

I eventually stumbled across LendingClub.com, which, obviously I wouldn’t be allowed to join, because Maine is run by a fucking idiot. But when I stumbled across that, I also found Prosper.com[?], which I did a little research on, and it is a microlending platform that allows you to purchase portions of debt, or notes, from borrowers. They even have a trading platform which lets you trade said notes with other lenders. All this for the minimum investment of $25. Sounds a lot like Kiva to me.

Squirrel-lelujah!

Squirrel-lelujah!

So I’ve got an account all setup now, and I’m waiting to get my account verified so I can deposit some cash and get to investing. I’ll let you know how it works. If it does work, though, the yields are promising. They narrow down each account type by it’s risk, with the lowest risk having lowest reward, highest risking having highest reward. Lowest risk also has the lowest rate of default, with highest risk obviously having the highest rate of default.

I think I’ve found the sweet spot right in the middle, though. Their yield after expenses and defaults for their C rating (ratings are AA, A, B, C, D, E, and HR) was around 11%. Which is much higher than that money would be making in dividend paying stocks. Don’t get me wrong, I’m not replacing my stocks with this, but I might use it as an alternative, possibly take a portion of the money that I would be investing and deposit it to my Prosper account, and see how that works.

For now, though, I’m risking $25, and seeing how the entire process works from start to finish.

Another note, just for some transparency, I’ve also signed up to become a Prosper affiliate. I’ve not yet been approved, but if I do get approved, and I fall in love with the service, you can be sure that there will be a link to click, a link that will let you sign up for them, and give me some money for the trouble. Don’t worry, if I don’t care for the system, or find it too risky to suggest, you will not see that link. That is my promise to you.

Make George Washington Work For You

If you work, you most likely get a tax return. If not, I feel sorry for you, now go stand in the corner and feel shunned.

Kidding.

Anyway, what I’m doing this year with my tax return is this: Making it work for me. I worked my ass off for that tax return, and now I’m going to give it the same treatment it gave me. Hard work, and a bit of flogging.

I’ve taken $1,000 of my return and sent it up to my stock portfolio. That’s about 10 times the amount I invest on a normal basis, but that’s the point. Investing is long term. Which means, if you’re doing it a little at a time, even fucking longer. I love it though. I love to watch the little numbers go from little numbers to big numbers, growing up and spitting out little numbers of their own.

Yes…I did just refer to my dividend paying stocks like they were children. And that’s how I treat them. I watch over them, I make sure they’re growing and doing the things they should, and I guide them as needed, but for the most part I let them do what they do, and live their own lives.

You can expect that this month’s portfolio evaluation will be greatly in the negatives, but don’t let that fool you. Negatives are fine. Negatives below cost-basis are not. And that’s the idea.

What’s cost-basis you ask, oh digital reader who I can apparently hear?

Cost basis is the price that you paid for those stocks. Meaning, if you dropped $1,000 on stocks, your cost basis is $1,000. Now, if you’re smart like me (which you are, because you’re here) you know that you need to also figure in commission. So, for this $1,000 investment I’m losing $4 per trade, on 4 trades that totals $16. But the total amount I’m spending is $1,000 for that cost-basis, meaning only $986 of it is going towards actual shares of stock.

So if you decide to go ahead and use the Capitalist Cares Stock Portfolio as your way of tracking stocks, you’ll need to know a few things. When you look at cell B3, you’ll see it’s labeled Portfolio Profit. You might believe that’s simple cost basis with current value subtracted. That is not the case. That is all expenses subtracted from Current Portfolio Value. By all expenses, I mean I include future expenses into it. The value there is the dollar amount that I would have as profit if I were to sell every share that I owned at the current prices without any change. It sounds hard to calculate, but really all I did was add the sell commission to the cost basis. I did that by subtracting that from the value for each row. You can see that figured in on the F row. The part of the formula that reads “- $E$2” is the defining calculation for removing the sale commission.

This post has gotten a bit long and boring. So here is a picture of a cow. Because, you know…cow.

Moo, bitches...

Moo, bitches…

State of the Stock – January

So I decided to do a run down of my current situation with my stock portfolio, where I have decided to change how I buy my stocks. Since I made that decision, I have purchased no new stocks outside of the automatic dividend reinvestment. I can already see growth, and potential with this method of investing, in a short period of time.

Some of you may wonder how I get my figures, and I have explained this in the past. In short, I do not consider dividends to have a dollar value, simply because they are free to me, and cost no commission to reinvest, thus they are a zero dollar amount stock share. For this reason, the value of the Average Price Per Share can, and will, creep closer to $0. This allows me to build up a portfolio of solid dividend shares, sell off all of the shares that I have purchased to that point, a piece at a time, and eventually leave myself with a dividend of $0 share stocks.

This is akin to a gambler walking into a casino with a $100 bill, winning at roulette for $500, and then depositing that $100 into his account and playing with the $500. Is it really losing money if you lose it all? Of course, it is. But it hurts much less, because you’re not actually at the negatives, you’re at the break even point.

STOCK TOTAL PURCHASED TOTAL SOLD PROFIT
TEU 65.0221 65.0221 $6.84
BAB 4.0772 4.0772 (-$17.40)
INTC 3.0778 3.0778 $13.24
O 4.9486 1.5408 (-$40.69)

The Capitalist Cares Stock Portfolio

So I decided that, since I talk about it so often, I might as well show you my portfolio. The link I’ll post below is a direct link to the Google Doc that I use for my own stocks. I buy / sell through ShareBuilder, but I found that they don’t figure in sale commission into their own profit calculations, and once you sell it removes the stock from all equations entirely. I didn’t like that. So I started putting together my own system. This system keeps track of all profit / loss, portfolio-wide, and as long as you never delete a sheet, you can track the total profit / loss forever, and use one investment to cover the losses of another, and get an idea of total portfolio value.

Currently you’ll see that my value is in the negatives. This may appear bad for someone who’s sitting here with the hubris to talk about finances, but it’s actually just plain math. I spent money to purchase stock, and in those instances you are starting in the negatives, not at 0. The first step to profit is finding your break even point, the next step is finding the point where you can cash out with shares left over. From there, you can get your risk out, and let the rest build up as much as you want.

CHECK OUT THE PORTFOLIO HERE!

One major thing you’ll notice is that I’m heavily invested in only a single stock. That goes against all the advice on diversification, and I’m well aware of that. I have faith in the stock, though. It has a proven track record. I also have a back up plan, which includes BAB and INTC, which you’ll also see in my portfolio. Will I be revisiting TEU? I haven’t decided yet. It’s a very volatile stock, which has quite a bit of risk associated with it, but I can fit it into a 6 months to profit formula fairly cheaply, so I might consider it again.

Frequent Trading VS. Pre-planned Investing

Coming up is my 1 year anniversary with active investing. For the last year I’ve used a trading style of frequent trading. To this point, I have a total profit of (-$47.20). That’s a negative amount, because currently my portfolio is worth less than what I paid for it. This, obviously, is not a good thing. But it was expected. Frequent trading means frequent commissions, and as I’ve posted in the past, commissions kill you.

So today I’ve setup my next type of investment strategy. For the next year I am going to move away from frequent trading to pre-planned investing. I’ve setup my automatic investments, as well as my automatic dividend reinvesting, on Sharebuilder. I’m setting up automatic deposits each paycheck, and once my account has reached the threshold of $522, I will invest in my diversified collection of stocks–all monthly dividend payers. I have used my 3 months to profit calculation to figure out this $522 figure, based on the dividend amounts, and the current price for each share.

To be open, below I will list the results from my last year of trading. Included is a dividend payout which will not close until tomorrow, but will be a difference of pennies.

STOCK TOTAL PURCHASED TOTAL SOLD PROFIT
TEU 65.0221 65.0221 $6.84
BAB 4.0772 4.0772 (-$17.40)
INTC 3.0778 3.0778 $13.24
O 4.9326 1.5408 (-$49.89)

Patience, biding your time

When doing what I like to call “entry level” stock investing, it’s as important to bide your time as it is to know when to jump. By entry level, I mean when you want to do it, but only have a few dollars that you can spare towards it. Why is this? Commissions. Trading fees. I use ShareBuilder, which doesn’t cost anything to have an account, and only costs a low fee when I trade. It’s also run by Capital One, which I’ve had business with in the past and trust.

The thing is, with such a low ability to invest, if I traded whenever I had the money to buy a share, I’d drown under the comission fees. ShareBuilder’s trading accounts are FDIC insured for the cash balances. Meaning the money that’s just sitting there, waiting to be traded. Those balances also earn interest, just like a normal savings account. That said, what I tend to suggest is taking your time, transferring over what you can afford, and setting up their Auto Investment system to auto-invest once your account has reached a good threshold.

Now, this threshold will be different for everyone. I tend to figure in the potential dividend payouts with mine, and shoot for a 3 months-to-profit range.

What does that mean?

Well, it means this:

Say the shares cost me $36.83 each, and the auto investment system costs a $4 flat rate per trade. Now, if I wanted to limit my risk based solely on the desire to get that flat fee down to $0.01 per share, for the trade, I’d need to invest in 400 shares, which would cost $14,732, plus the $4 trading fee. That’s not exactly a small amount of money. But, it would mean if the market sneezed and the price of my stock went up 2 cents, I’d be profitable.

But, I’m looking at 3 months to profit. I’m also looking at dividend payouts.

Now, let’s say this same stock pays out a dividend monthly. Now let’s also assume that dividend is $0.18 per share. Just for the sake of the math we’ll assume that for every share that I own, I’m guaranteed that the price of the stock won’t fluctuate, and that I will always receive that dividend. Obviously this is not true for normal stock purchases, but that’s the risk we take. Like I said, I aim for 3 months to profit, but when the stock starts to decline, sometimes it can’t be avoided.

The first thing I need to do at this point is figure out exactly how many shares I need to purchase so that in 3 months I will be seeing a profit. And by profit here, I literally mean $0.01 or more. The first thing I need to do is figure out how I’ll go about breaking down the commission. Well, that $4 can now be divided by 3, because it’s going to be spread out over 3 months. That drops it to 133 shares. But this still has it at $0.01 per share, and it’s still a relatively high number. Due to the dividend payout of $0.18/share, I could actually drop the number of shares I need to purchase, by allowing the commission to stay higher. So I’ll make the commission break down to the same fee as the dividend, $0.18.

That allows for 22.22 shares, we’ll round up to 23. That’s a total cost of $847.09, which isn’t anywhere near the $14,000 range. But, we’re still looking for 3 months to profit, not 1 month. So, we’ll take the 23 and divide it by 3. That brings us to 7.6, which we’ll round to 8. 8 shares, at $36.83 per share, a total cost of $294.64, with a payout of $0.18/month.

To figure out if this will be our 3 month to profit mark, we can do a little more math. Each share pays out $0.18 each month, so a single month will bring in $1.44 in dividends. After 3 months, that is a total of $4.32 in dividend payouts. As you can see, that is a $0.32 profit.

Now obviously the market won’t stay the same for you like that. This isn’t about “profit” in the classic sense, so much as limiting the risk and damage of the trading fees. Dividend paying stocks are powerful tools that any investor should be using. Including them in your portfolio, especially strong monthly dividend payers, will allow you to trade more carefully, while at the same time reaping the benefits. 

If you have any suggestions or other methods for limiting the trading fees, leave them in the comments!