Building a Perpetual Income Machine is central to the Fiholic Financial Independence Manifesto as I strive towards a future when I can lead a comfortable life and rely on a truly passive income without worrying too much.
What is the Perpetual Income Machine?
The Perpetual Income Machine is basically an investment portfolio consisting of primarily dividend stocks and REITs. There are certain criteria before I include these stocks into my portfolio:
- Track record of stable revenue growth over a long period of time, i.e. past 10 years
- Earnings growth visibility into the future
- Sustainable dividend payout ratio not exceeding 50% (not applicable for REITs)
Why Create A Perpetual Income Machine?
Building a Perpetual Income Machine aligns with my philosophy to gradually stop trading time for money. To be financially independent, you should accumulate assets and make those assets work extra hard for you. Otherwise, we’ll never be free from the cycle of working to make ends meet.
Having a stable way to accumulate wealth and building a goose that lays golden eggs in perpetuity is central to achieving my goal of financial independence. I also sincerely believe accumulating stable dividend-paying stocks as a means to reach financial independence is doable for the vast majority of people.
Here are my reasons for investing in dividend stocks and REITs:
Dividends Put Cash into Your Hands
Buying these dividend stocks puts cold, hard cash into your hands. From the moment you buy a stock, you won’t have to wait long before seeing the income stream start trickling in without you having to do any extra work. All the effort is only during the initial stock selection part. Afterwards, you only need to spend 15 – 30 minutes every month or less to watch your portfolio like a hawk.
Passive Income Stream
After scrutinising different ways to make passive income in Malaysia, I think buying and holding dividend stocks and REITs is one of the most realistic and achievable way to generate a secondary income stream for most people. When your portfolio achieves critical mass, you can potentially live off the dividends alone for the rest of your life.
Compared to other methods of creating passive income, buying and holding dividend stocks require less time and effort. The barrier of entry is lower. You don’t have to be talented in certain things like writing. You don’t have to force yourself to be bubbly to appear in front of camera to make YouTube videos.
All that’s required is willingness to learn how to read financial statements and the diligence to nurture your portfolio over long periods of time.
Dividend Stocks Compound Your Wealth
When you receive dividends, don’t spend it. Use it to buy more dividend stocks. This is central to the principle of compounding your wealth. The rich don’t get rich by earning interest on their capital, they become rich by earning interest on their interest on their capital.
Let’s say you get 5% dividends per annum for a RM10,000 portfolio. Instead of spending it, you use it to accumulate more shares. Your portfolio now becomes RM10,500. Earning 5% on top of RM10,500 gives you RM11,025 over the next period.
This is how you earn interest over interest, because not only is Mr. Market giving you 5% over your initial RM10,000, he’s giving you 5% over the RM500 that you earned the first time round.
Compound this over 30 years, and you’ll have a reliable and realistic way of creating inter-generational wealth.
Entry Rules – Don’t Buy First Before Checking These Important Metrics
The whole philosophy of dividend investing is buying great companies at good price.
I’ve prepared a list of best dividend stocks Malaysia, check it out.
While there are lots of complicated valuation tools and methods, I believe keeping it simple stupid and sticking to simple measures can still result in above average performance for the average investors.
This is how I determine if the stock is a buy:
- Check P/E ratio. If it’s lower than its historical 10-year average, it’s a BUY
- Check P/B ratio. If it’s lower than its historical 10-year average, it’s a BUY
- Check D/Y. If it’s higher than its historical 10-year average, it’s a BUY
If all three criteria above align, you have a rare chance to buy a strong company at a good price and have a reasonable chance to generate above average returns, PROVIDED you buy and hold over a very long period, for e.g. 5 – 10 years.
This aligns with my whole investing philosophy of creating a Perpetual Income Machine.
There are none. My strategy is more suitable for those who like to buy and hold. This is why it’s so important to check the fundamentals of these companies before buying.
Only exit if something extraordinary happens to the company. Earth-shattering moments that kill a company is quite rare. Do you foresee Maybank going bankrupt for the next 10 years? If that happens, I think Malaysia is also doomed as a country and cease to exist.
Creating a Perpetual Income Machine means you only have to keep an eye on a select portfolio of high-quality stocks. It gives you peace of mind, enabling you to sleep well at night.
- Work as hard as you can to increase your active income
- Live beneath your means, and put the rest into your Perpetual Income Machine
- Stick to the plan
I’ve given you a blueprint for how to achieve financial independence. Do what you will with this information. When you’re ready, here’s a list of best dividend stocks Malaysia to get you started.
I hope this article stirs something in you and hopefully, you’ll join me on your own personal journey of building your own Perpetual Income Machine.