Finance Independence through Dividends: Only works if you have a lot of money?

 While I have a draft blogpost to respond to some other points, they probably need some editing for length and clarity. In the meantime, I will do a quick response to Kyith's response article where he addresses a comment Sinkie made in comments section.

Kyith says in response to the point of there being a number of apparently "successful" local bloggers that appear to focus on dividends: 

But we have to recognize that what may have made the plans work for many is not due just to dividend income but that their capital base is of a size that buffers for income volatility.

He then quote Sinkie's comment:

 I think one bias (or blind spot for readers) in many of the local successful dividend investors is the size of their portfolios, such that it is throwing out 3X of their annual spending needs.

 If the dividends is 3X at the start of one's retirement.... that's basically compensating for the next 30 years of inflation....

In my first response to Kyith's article, I agreed with him that the amount of dividends one receives could vary year-on-year. I also pointed out the income volatility can be managed through:

• Diversification
• A spending plan that allows you to cut discretionary spending in years when dividends drop (eg: COVID-19, not going on overseas holidays)
• Building in a margin of safety (eg: assuming one major bear market every 5 years, you collect extra passive income from your margin of safety for 4 years and that will act as a buffer on year 5 when there is a major bear market).

Kyith, in quoting Sinkie's 3X comment, appears to feel that in order for dividend investing to be successful, you need a very large buffer where I feel that a modest buffer is sufficient. In my view 20% in excess of current spending would be pretty good already. But remember - you DO NOT spend this 20% excess in normal years but save it in anticipation for a major bear market every 5 years.

So again, I have the same observations before:

• Valid comment from Kyith, but I appear to have a different view on how large a buffer you need. 
• The concept of having some sort of  'buffer' before you FIRE doesn't seem to be a solely dividend investing problem? 

There are many local bloggers who carefully chronicle their passive income so they at least have some empirical data about the volatility of their passive income and will be able to build in the appropriate buffer size.

XXX blog's passive income is so high, no relevance to me!

I think that it is a fair point that the thought process, decisions, that face an investor with a larger portfolio may be different in some respects versus an investor with a smaller portfolio. 

However, those who have been blogging a long time would have kept a record of their thoughts and decisions that they needed to make when their portfolio was much smaller. So you might want to look back in time to their earlier posts when their portfolio might be similar to what yours is now. 

I suppose ASSI's blog is different because he always had a large stock portfolio - which was assembled from the sales proceeds of his property investments, so there is no accumulation stage covered in his blog. But there are others who are in the accumulation stage. I achieved Financial Independence in 2021 but I'm still accumulating. 😁

Salary.sg has released a 'what percentile is your income in' and it tells me that my 2022 passive income is higher than 56.6% of all SG households. I feel blessed to have that much, though some may have more ambitious goals like top 10%, top 20%, 2X, 3X, 5X. Ultimately, as Morgan Housell says, it's whether you have enough.

Dividend portfolio will be destroyed by inflation!

It would be useful to briefly mention the issue of inflation here though it is part of other points. Inflation makes things more expensive (though the effect of inflation is uneven).  Obviously inflation affects all types of investors, not just dividend investors, so the question is whether dividend investors are more vulnerable to inflation that other forms of investing. 

This boils down to the stocks you pick. Some stocks will be able to grow earnings that keep pace with inflation, and increased earnings means higher dividends. Some stocks may not. No different from picking 'growth' stocks that fail to grow in price. 

Dividend investors may sleep better because they buy stocks in industries that they can understand and the volume & value of transactions is more transparent than other agencies. Its hard to figure out how some "growth" stocks are making money. 

Banks and the financial industry in general appear able to adapt. If prices of houses/cars go up, this means that banks can grant bigger loans. Insurers will also collect more premiums because the insured amount is larger. Investment bankers collecting a 1% transaction premium will collect more as the nominal value of investments/transactions go up.