Get income from investments to meet interest payments?

I remember when I paid off my housing loan many years ago, the interest rate that the loan attracted was 5.1%. That was pretty pricey. For a few years now, interest rates have been very low and, so, it has been pretty cheap for people to borrow money to help pay for their homes.

Personally, I am holding back from doing partial or full capital repayment on my current home loan because even with the sharp increase in the 3 months SIBOR in recent months, the effective interest rate on my home loan is still below 1.8%. The cost of having liquidity is not exhorbitant (yet).

Even if my investments are only able to generate a dividend yield of 4.0%, financially, I would still do OK. So, arbitrarily, an interest rate of 4% on my home loan could be the tipping point for me to want to pay it down at a faster clip.

Hi AK

I have been following your blog for about 4 months now and was rather impress with what you have.

I am in my early 40s and had just got a BTO which will be ready in 3 yrs time. When the house comes i will be down in loan by S$350k. Now i am with only S$50k in HDB Bank Loan with DBS Bank serving an interest of 1.6%. What i noticed is that out of my annual contribution to the Loan installment, about 60% will goes to the interest payment and only about 40% is paying up on my actual premium. That is alarming to me.

I had wanted to get a dividend income just like you, but if i were to have S$50k on hand, should i be paying up my loan or putting them into the dividend paying stock that gives about 6% return? Of course dividend stocks comes with value appreciation but no matter how we should not be thinking about stock price appreciation when talking about income generation.

One is for future payment and the other is for near term paying out of the housing loan. It seems that paying up on housing loan is the priority.

The next question for you is given two stock, A and B, A gives dividend yield of 6% and share price appreciation of about 4% and B gives Dividend yield of only 3% but has a share price appreciation of 10%, which would you consider for long term income?

Any advice from you will be most helpful.

Regards

M

Reply from AK:

Hi M,

A housing loan is amortising in nature. As we pay down the loan, the interest portion will shrink and the principal repayment portion will grow even as the monthly installment stays the same. If you would like to pay less interest, one way is to shorten the loan period. Then, you would be paying more of the principal amount monthly. However, your monthly installments would also be bigger, of course.

As for whether you should pay off the housing loan first or invest for higher returns, it depends on what is the interest payment on your housing loan and what you are able to get from your investments.

Imagine that you have a housing loan of $300,000 and that the interest rate is 2%. Let us assume that the loan is non-amortising for the sake of illustration. In a year, you would have to pay $6,000 in interest payment. If you were able to generate a 5% return through investments that year, you would make $15,000 which is more than enough to cover the interest payment.

Of course, there are good things to be said about paying down our housing loans ASAP no matter the interest rates or potential investment returns. Do what gives you peace of mind. That is priceless.

Now, as for stocks A and B, not an easy question because there could be so many different circumstances surrounding them. I would, however, first ask if the dividend is sustainable, if it is sustainable and if we are after passive income, I would go for stock A.

Price is, after all, often a function of Mr. Market's moods while there could be some certainty in dividend payments if they are sustainable. Like I said, bear in mind that this is actually a very simplified approach to a possibly very difficult question.

Best wishes,
AK

Related posts:
1. A car loan is different from a home loan.
2. A new flat on the way and $200K in spare cash?
3. Newly married and planning for a child?
4. Interest rate on home loan jumped 15.84%!
5. POSB HDB Loan: Peace of mind (for 8 years).

Tea with Solace: A review of Dividend Machines.

The following is a voluntary review by a guest blogger, Solace, who signed up for the income investing course, Dividend Machines.

Solace says:

Disclaimer : I am not paid or given free access to the course materials to do this review. Solace has paid $XXX USD like everybody else to take a look at the course content. These are my personal views and readers should make their decision on whether the online course is value for money.

The online course has 4 Modules:

- Personal Finance (Covers the mindset, psychology and own personal financial situation.

- Dividend Machines (Covers 8 checklists/steps in screening for dividends stock)

- REITs (All about REITs, business, valuation, financial, management etc)

- Portfolio Management

In addition, there are also:

1. Video lessons

Where they do in depth case studies and how to screen for stocks based on their methodology.

Video Lessons will commence from 25 March 2015, Wednesday onwards.

2. Q & A session

You can post your question in this segment. The Trainers have been rather prompt in answering your queries. All questions are usually answered within 24 -48 hours from observation.

Website: Dividend Machines.

I leave it readers to read more about it.

Who is the course suitable for?

In short, this course is excellent for all who are looking for insight and a consistent method to screen for dividend stocks.

This is especially so for beginners who are still trying to find their way. Even for seasoned investors, time to time we might need to defrag all knowledge we have in our mind and this course helps to do that. It helps to streamline our thought process.

While many of the fundamental concepts are not new to me, I still look forward to the case studies where I can exercise my brains to practice analyzing. I am also attracted to the Q&A section where there will be interesting discussion with fellow investors and trainers.

In my interactions with many people who are starting out with investment, I would recommend them to read different kinds of investment books. This has worked extremely well for me. However, there are people who have difficulties digesting the content inside the book and find it hard to apply them. Another group might be overloaded with many schools of thought and do not know which methods work best for them.

This particular group will always wonder: 

"What is the essence of investing? Is there an easy method which I can follow?”

What the Fifth Person has done is basically summarize the key points and presented them in a very clear, easy to understand and easy to follow manner. And there we have it, the very “essence” to dividends investing.

If you can follow the method well and are able to identify a good dividend stock that will serve you well for many years, then, paying a course fee of $XXX USD would well turn out to be a “multibagger investment” for you.

There is still slightly more than a day to sign up for the course and have a workshop session thrown in for free. Please go to the related post below for the link to sign up for the course.

Dividend Machines by The Fifth Person

Related post:
Listen to AK and create your own Dividend Machines.