LIVING OFF DIVIDENDS & PASSIVE INCOME

Regular readers know I’ve been pretty pessimistic on the outlook of the US economy and bearish on the US dollar as well. However, since it seems like everyone is echoing the same sentiment, could it be that we’re due for a short (or medium) term spike in the US Dollar?

According to Lou Basenese, editor of the The Alpha Intelligence Alert, think it’s time to go long the USD.
Here are some of the reasons he cites:

1. Bernanke & Paulson Rediscover “Verbal Intervention.” Treasury Secretary Henry Paulson and Fed Chairman Ben Bernanke finally got off their duffs to defend the dollar. Paulson got things started in Qatar on Sunday. Speaking to the leaders of the Gulf oil states, he urged the countries to think twice about abandoning their dollar peg, as “ending the peg is not the solution to the inflation problem.” And Bernanke stepped up today. Speaking, via satellite, to an international monetary conference in Spain he insisted Fed policy will be a key factor, “ensuring that the dollar remains a strong, stable currency.” After such a long silence, this week’s tag team approach is nothing but a positive development.

As I mentioned 5 weeks ago when oil breached $115/barrel, demand for the black gold will cause the price to keep on rising. On Wednesday, I drove to USC where I had an interview at the Marshall School of Business for the full-time MBA program. While driving there, I heard that Oil had exceeded $133 per barrel. I had a great interview (where I spoke about my background, my interests, the state of the economy, what a moron George W. Bush is, and the current elections) and then proceeded to a friends’ place to spend the night.

I later heard that oil prices hit $135/barrel. That news was broadcast incessantly on all the news channels and I kind of felt that it was being overdone. Whenever everyones saying that the price of something is breaking all records, it usually pulls back. I think thats why the US Dollar had shown some strength this year. I woke up on Thursday and bought the ULTRASHORT OIL & GAS ETF (AMEX: DUG), it went up a dollar and I exited my position, happy to have made enough money to pay for my gasoline bill for this month.

Oil just broke through $115 per barrel today. While this may come as a shock to many , I’ve been preparing for it for the past 2 years. All the signs of an oil shortage have been visible in the media, but most people have either been ignoring it, been in denial or been too focused on what Paris Hilton or Brittany Spears have been up to!

China and India together have  a third of the world’s 6.66 billion people. If 10% of these 2.2 Billion people start buying cars, that’s 220 million new cars on the planet ready to start guzzling more gasoline. I think thats the current number of cars in the US, so effectively the demand on oil is set to double over the next few years. And along with Tata Motors new $2,500 car, you can be sure that eventually atleast 20% or more of India’s and China’s population will be driving cars instead of cycles or mopeds that give 247 miles/gallon. That 247 number is  not an exaggeration. Owners of Suburbans should refrain from crying right now.

Finally I’m getting some traction with my passive income! After all, that’s what this blog is all about. The total for March 2008 is $2, 667.18, and I’m ecstatic to have broken the $2,500 per month barrier. If I can sustain it at $2,500 per month, thats $30,000 per year. While I’m not living in luxury, it’s definitely a great safety net to have. This represents a 11.9% jump from February’s passive income and it has been growing at a steady clip for quite a while now. Hopefully, I shouldn’t have a problem maintaining it.

Here’s the breakdown:

• Online Income: $1645.30
  • Adsense: $339.28
  • Linkworth: $456.70
  • TLA: $103.61
  • Kontera: $62.07
  • Direct Ads: $330
  • Prosper Referrals: $175
  • Amazon: $117.82
  • Domain Embarking: $60.82
• Savings Accounts: $133.10
• Real Estate Trust Deed: $0
• Direct Oil Drilling Investment: $270
• Dividends from Canroys: $517.71

Based on continuing weakness in the dollar, gold briefly breeched the $1000 level yesterday along with oil hitting an all time high of $111 per barrel. I had a really strong suspicion that we’d see $1000 gold by mid-March.

Despite what Bernanke and Paulson said last summer, the housing bubble has spread to other parts of the economy and subprime mess has not been contained. In a last ditch effort to prevent banks from collapsing, the Federal Reserve announced a bailout of Fannie Mae, Freddie Mac and other banks, promising to exchange bogus mortgages for Treasuries during a 28 day window. They named this Term Securities Lending Facility (TSLF) but it’s just a good old bail-out.

I’m a big fan of Canadian Royalty Trusts, also called Canadian Income Trusts or Canroys. But lately, they have been under a lot of selling pressure. Coupled with the sell-off in global equities is the overhanging tax change that the Canadian government implemented last year. According to the change, canroys will lose their tax-exempt status and from 2011 there will be the usual double taxation that affects most companies (except for US REITs).

Accordingly, the share prices of most canroys have dropped considerably from their peaks and their valuations have become quite attractive at these levels. But there’s some good news for canroys.

Growing discontent with the ruling Conservative party has created a situation where the Labor party might come into power. The Labor party has promising to either extend that conversion deadline to 2017 or to significantly decrease the trusts’ post-2011 tax rate. Either of these would represent huge positives for the trusts. This strange situation of the liberals becoming energy trust saviors has even encouraged many life-long conservatives from the Albertan energy patch to help bring down the current Conservative government.

While I’ve been screaming about Australian Dollar parity, the Canadian Loonie has launched a stealth attack against the Almighty Dollar. After achieving parity on the 20th September, it’s rallied almost 10% since then. Today it hit $1.09 in after-hours trading.

But I’m not complaining. Last month I received over $440 from Canadian Royalty Trusts. As the US Dollar keeps dropping, my income from the Trusts keeping increasing! (Although in theory, since they sell oil and gas which are priced in US dollars, a strengthening of the Loonie squeezes their profit margins. But lets ignore that fact since oil is near $100/barrel and I expect gas prices to start creeping up too).

But before you start buying up CurrencyShares Canadian Dollar Trust (FXC) in excitement, you should consider that a strong Loonie is bad for the Canadian economy. Their exports are more expensive to foreigners which is a problem since they export a lot. And the strength of their currency is causing Canadians to drive south across the border in US and spend their money here! (Which funnily enough, is great for us).

Penn West Energy Trust (PWE) announced that it would be buying Canetic Energy Trust (CNE). They’re both Canadian Income Trusts that payout a decent yield. However, there’s almost no premium offered to CNE holders. Well okay, there is a 7% premium offered to CNE holders but  compared to the 30% premium that was offered to PrimeWest Energy Trust (PWI) by the state run utility company of Abu Dhabi, its pretty sad.

I can understand, why Abu Dhabhi is keen to get its hands on $5 Billion dollars worth of Gas. They simply want to get rid of their US Dollars! And afters today’s rate cut and the subsequent drop in the Dollar Index, I want to bail too!

Since I decided to kick the old job (which was a hard habit to break), I’m going to be more reliant on my passive income. Part of my passive income comes from Canadian Income Funds, some of which pay out over 16% in annual yields. They pay out the dividends on a monthly basis and after tax (which the Canadian Government takes out at source) it still works out to over 1% per month. This is about 3 times what I get in my savings account!

Also, being enrolled in the dividend-reinvest program (also called DRIP) my dividends are used to buy more stock every month without paying a commission. Any best of all, some stocks offer a discount to the prevailing market price.

I bought some Harvest Energy Trust (HTE) today. Not a lot only 50 shares worth. The market is pretty volatile and historically the month of August is bearish for stocks 72% of the time (or something like that), but the recent 226 point drop in the market created a really good buying opportunity that I found hard to resist.

HTE is a canadian income fund that is taxed like a REIT is in the US. If it distributes a certain amount of its earnings, it doesn’t pay taxes at the corporate level. After trading as low as $27, it bounced back up. I was able to pick up the stock at $29.48. With a monthly distribution of CAN $0.38, that works out to an annual yield of 14.85%! (considering an exchange rate of $0.96 = CAN $1).

Yesterday, I bought some more Canadian Income Funds, also called Royalty Trusts or Canroys. As I mentioned before, I recently refinanced a property and I managed to pull some money out (totally tax-free!).

Rather than spend the money on an SUV or a big-screen TV, I opted to divide the money into 3 parts. The first 1/3rd went towards replenishing my emergency fund which was drawn down by vacancies in my rental properties. The second 1/3rd went towards future investments in summer just in case there’s a pullback in the stock market and the last 1/3rd went to building up my passive cash-flow.

Long time readers will realize that I haven’t made any effort display my net worth or any goals of net worth. That’s because I feel its a meaningless number. If I had a $1 million dollar net worth and it only generated $25,000 a year in income (like Cd’s did a few years ago) that’s pretty sad. On the other hand, if I owned a $1,000,000 car-wash that generated $125,000 that’s pretty significant.

A few weeks ago, I cursed the Canadian Finance Minister for causing my CanRoys to drop significantly overnight. I may have been premature in cursing him.

I originally bought them for the dividends that they were paying out, mostly in the 8-12% range, with the occasional one paying out 13-14%. However, the severe drop in prices caused their yields to jump proportionately to 12-17%. One of the companies I bought became a 19% yield! Even if Flaherty’s taxation of dividends became true, it would still be 4 years away and by then you would’ve gotten nearly 80% of your money back. Last week money started flowing back in Canroys. I picked up a little more on margin. The one I picked up, AAV currently gives a 17% yield. So even if I have to pay 9-10% margin interest I’m still ahead by 7%. Plus if Oil & Gas prices continue to rise which I think they will I’ll see some capital appreciation.