Asked by Anonymous
Asked on 30 Oct 2019
I want to go on sabbatical leave for a year and hope to have some recurring income just to pay some bills. I currently have around S$150,000 cash in hand, but I don't want to use that sum of money to pay the bills. I was hoping to only spend the balance earned from dividends and leave the capital untouched.
Top Contributor (Jan)
Realistically, you'll need around 8% yield to achieve $1k/mth on your investments. This only leave high yield bonds, and REITs that can achieve such a payout (unless you leverage, but that's another topic entirely, unless you want to explore it). Your capital will also be subject to market movements.
You might find that deploying $145K @ 5% will yield you $7.25K and the remaining $5K that you didn't invest can be spread over 12 months to make up the difference to $1k/mth, and that might be a better way of managing it, since you'll (hopefully) go back to work after a year and saving $5K back up shouldn't take too long. Better to play safe than worry about your leveraged investments moving against you due to market movements.
Top Contributor (Jan)
You'll need an 8% yield from your 150k portfolio to receive 12k/yr.
This is a difficult yield to achieve. If you are willing to take the risk, one of the only ways to achieve this would be to leverage on income products like bonds, annuities, property funds.
This comes with fluctuating interest rates and possibly fluctuating yields based on the product you choose.
Hi Anonymous, it's advisable to only use money you don't need in the next five years to invest in the stock market. If you need the money in the next five years or so, it might be better to leave them in the bank or in safe instruments such as Singapore Savings Bonds, even though they have low yields.
Once you have that sorted out, you can look into investing the money into the stock market. Like Gabriel mentioned, you would need to invest S$240,000 if you like to receive S$12,000 per year, assuming the portfolio dividend yield is 5%. More info here. Hope this helps.
The second row of the table in the linked article below.
$150k would need something yielding 8% which sounds a bit challenging in this day and age.
Not realistic... I may not be perfect but I can share my experiment. I was getting 1k/mth with 400k capital i.e. 3% p.a. this was based on the allocation of 50% cash in hurdle accounts, SSB, FD fetching avg 2%, and 50% stocks (of which 25% REITs, 50% blue chips) fetching avg 4%. Even then my stock paper value fluctuates + - 10% = + - 20k.
31 Oct 2019
To achieve that,
you may have to achieve an investment yield of at least S$12,000 / S$150,000 = 8%
The required yield is high, but ain't achievable. Click the link to find out how
Top Contributor (Jan)
Assuming a conservative 5% per annum, you need $240k
Let's say you can achieve 7% per annum, you need about $172k
And let's say you are a super good investor achieving 10% yield a year! You need $120k
Is $1k a month income sufficient to go on sabbatical?
There are many routes for you to do it, and there are basically 3 main angles to approach.
1) Portfolio risk
2) Portfolio leverage
Just from the numbers, to get $12k annual income, you need to achieve 8% per annum from a $150k portfolio..
Portfolio risk means you need to see the asset class to invest in, in order to get the monthly income. Example, if you were to look simply at equity dividends, very likely you are going to get somewhere between 3% to 6% per annum. If you were to look at good bonds, it would be around 1 to 3% per annum. However, you could look at high yield corporate bonds. For example, some Indonesian bonds may offer up to 8 to 10% per annum. But should you be investing 150k there? I don't think so. Likewise, if you were to do options writing, it's possible to get a premium payout of 2 to 4% per month. But this means you may not get back the capital that you put in since the risk is conversion into equity at a lower price. But it will give you the monthly income paid out.
Portfolio leverage is another factor. For example, if you were able to get $100k in a personal loan through balance transfers, it is possible to put this to work at a higher rate than the interest you are paying for it. Example, I recently got offered 6 months balance transfer from Citibank at 1.1% per annum, and no processing fee. It's possible to get a 12 months one too. Hypothetically, if you are even able to get a 4% dividend payout, you are positive in ROI. The risk is that your capital is not guaranteed, and at the end of 12 months when you have to repay the loan, you might have to use up your cash capital to cover any losses in investment.
Example, let's say you buy into a basket of assets, which pay a blended 5%. You use $150k cash, and $150k loan (at 2% per annum interest to make it simple).
So you buy $300k of assets, which will pay $15,000 of dividends. You need to pay interest of $3,000. This means you have a cash flow of $12,000. At the end of the 12 months, your $300k of assets drop to $280k for example. You still need to return $150k of loan, thus your capital left is $130k. Of course, it's possible for your investments to be invested in something safer, but please note that in almost any investment that does more than 4% dividend payout, it is unlikely to be guaranteed in the short term.
Thirdly, your option is to do a capital drawdown. For example, if your blended portfolio is 6% dividend yield. This gives 9000 in dividends. You are still short of $3k, or around 250 a month. You will then sell off assets progressively to cover the shortfall, but it means at the end of 12 months, you are likely to have less than $150k. That's again taking into account that your investments are volatile and you won't get back the $150k anyway.
PS: Need more specific advice on your situation? Feel free to reach out to me on Instagram https://rplg.co/fergusig
Or you can find me on facebook in the Seedly Facebook group!