Passive Income Update (July 2020)
Welcome to my very first monthly passive income update! Where you find out how much passive income I made, the new investments I purchased (and why) and how much these will contribute to my passive income going forward.
In doing these updates, I hope to inspire you to start investing to generate passive income or, for those of you already on your journey, to help you stay on course.
I am also indirectly benefiting myself as it forces me to review the performance of my holdings and check that I’m staying true to my investment strategy.
I expect that tallying up the total passive income I receive on a monthly basis and seeing it grow over will be a constant reminder of the reason why I invest for income (and not only for growth).
After all, this is a marathon and not a sprint. Patience and discipline are key.
And, with that said, let’s go right into my Passive Income Update for July 2020!
Passive Income received in July 2020
The total passive income received during the month was €716. Wow! Just wow, I really did not expect this.
July must be the highest income month of the year for me. And this is probably my record passive income month, ever.
I wouldn’t know for sure because I’ve never looked at my investment income on a month by month basis, until now that is.
But my average income over the first half of 2020 was €495.95 so July is definitely high. Let’s see how I end up doing for the rest of the year.
Let’s dig a bit deeper into the different investments that together provided these most welcome €716 during the month of July 2020.
Equities and Funds (listed securities)
Let’s start with my listed securities (i.e. those that trade on a stock exchange). These are made up of stocks, preferred shares and funds.
In total this adds up to $487.17 and €172.70. The latter was delivered exclusively by Vonovia, my favorite real estate investment company.
Unfortunately, this German residential real estate behemoth only pays an annual dividend, which also explains the high amount for this month. Bye bye Vonovia, see you next year!
Another huge contributor is the RLJ Lodging Trust Preferred Shares Series A, delivering $171.11 in quarterly income.
This is a hotel REIT that has maintained its preferred shares dividend after cutting its ordinary dividend to 0.01 USD per share quarterly.
This is testament to the higher safety of preferred shares, provided you do your research correctly.
I hope that the worst is over and that the risk on the preferred share dividend will reduce here on out. So far so good because RLJ entered the crisis with a huge amount of cash on hand.
Now let’s move on to my other passive income sources.
In July I received $52.50 in semi-annual interest from one of my bond investments.
I also received €85.95 of passive income from P2P lending comprised of €73.29 from Mintos and €12.66 from EstateGuru.
I expect reduced income from Mintos going forward as I reduce my investment on the platform. Overall, I’m happy that P2P is becoming an increasingly smaller portion of my passive income.
Passive income breakdown
Let’s end this section with the breakdown of the €716 of passive income I received for July 2020:
If you want more details on the different types of income investments that I invest in and why I invest in them, then I encourage you to check out my Ultimate Guide to Building an Income Portfolio.
Investment purchases in July 2020
I have decided to use my Passive Income Updates to also report on my new investment purchases.
After all, it is with new purchases that I build my portfolio and increase my passive income potential.
So without further ado, here are my purchases during the month:
In July I increased my forward gross annual income by $392.10 and £51.77. This is huge!
Particularly when considering that a portion of my purchases are in securities that do not pay a dividend. I use these to minimise my tax impact or to take advantage of unique opportunities.
I can always transition the money into income producing securities whenever I need to. This is an extra source of comfort should I need more income, sooner, for whatever reason.
Now let’s go over the different investments and why I invested in them.
Overview of my July 2020 investment purchases
I’ve decided to include as part of my monthly update, the rationale for making the different purchases and to provide a brief overview of the different securities I invest in.
The aim is to provide even more value to you and hopefully act as an extra source of investment ideas that you could then dig deeper into (always do your own research, you invest at your own risk!).
I had previously already initiated a position in Unilever because I was missing a Fast Moving Consumer Goods company in my portfolio. Of course, I also wanted it to be an excellent dividend growth stock.
I was looking for a while but never seemed to find something that was attractively valued.
Then came along Unilever. It fit the bill because it was relatively undervalued compared to peers. I like their diversified product portfolio comprised of incredibly well known brands, growing e-commerce presence and exposure to emerging markets.
I feel that they could do better in transitioning their portfolio to meet changing consumer demands (health, sustainability, etc.) but do think they’re moving in this direction and will eventually get there.
After all, marketing is the name of the game in this industry and Unilever is a power-house when it comes to understanding consumers and ensuring product-market fit.
From a fundamental perspective, they generate a very good amount of free cash-flow, boast an A-rated credit rating and have a significant chunk of cash on hand to weather any short term issues.
During the month, I decided to increase my position in Unilever by 35 shares. I only had a small position and increased it to bring it more in line with other holdings in my portfolio. I plan to increase it further when the opportunity arises.
Unfortunately the price has run up quite a bit since my purchase so I’ll need to be patient.
In the meantime, I’m happy to collect my approximately 3.5% yield (tax-free for me since the shares are listed in the UK).
I invested in Warren Buffett’s Berkshire Hathaway on two occasions during the month.
In fact, I’ve been systematically investing a portion of my savings in Berkshire Hathaway for almost a year now and have funneled in over $8,000 building up a substantial position.
Unfortunately, I didn’t invest in Berkshire during the depth of the coronavirus crash because I was taking advantage of opportunities elsewhere. Mostly lowering my cost basis on positions that were substantially down.
This means that my average cost on Berkshire is slightly higher than I would have wanted it to be but my purchases in July did contribute to lowering my cost basis and were bought at a level that I consider undervalued.
Basically, if you subtract the cash and the stock portfolio at market value from Berkshire’s market cap, then you essentially get the operating businesses at a ridiculously cheap valuation.
When you consider as well that Apple makes up around 20% of the entire Berkshire market cap and has been on a huge uptrend for a while now.
The fact that Berkshire was not following suit, at least to some degree, gave me more confidence that it could be undervalued.
And it looks like Berkshire has finally started its uptrend having recently breached the $200 dollar mark. I will need to re-evaluate whether I will continue to add more money into Berkshire going forward.
I like the thought of treating Berkshire as an expense free value ETF that is actively managed by incredible value investors. In case of sustained market downturn, the huge cash pile will be put to work without extra effort from my part.
I’m confident that Berkshire provides an added edge to my portfolio. It doesn’t pay a dividend, but I don’t mind leaving all earnings generated by Berkshire Hathaway to be reinvested at their discretion.
RPT Realty Preferred Shares Series D
In July, I initiated a position in the preferred shares of RPT Realty that I then added to. RPT Realty is a company I had never heard about before.
Ramco-Gershenson Properties Trust (RPT) is a Real Estate Investment Trust (REIT) that owns 49 open-air shopping centers across the USA, with a focus on high-income metropolitan areas.
I like the fact that it focuses on open air centres with anchor tenants that are in the supermarket / grocery space, particularly in this coronavirus environment. Below an extract from their website:
I decided to invest in the preferred shares because I felt that they provided an incredible opportunity from the risk-reward perspective.
Let’s start with the reward, at my purchase price of around $33 per share, I get a monster yield of over 10%! And there’s more, these preferred shares have a par value of $50 so if the company wants to call them back, they will need to do so at this price. This would deliver a monstrous capital gain on top.
And in any case, these preferred shares were trading in the $50-60 before the coronavirus hit so there’s also a chance they will move back closer to this range if the situation starts resolving itself.
Now for the risks. The main risk of course is that they cut the preferred share dividend. After all, they’ve already cut their common dividend. Though, as for my RLJ preferred shares, this also shows that preferred dividends are much safer.
Of course, I dug deeper. RPT preferred dividends cost them only $6.7 million a year. They currently have over $200 million in cash and no significant debt maturities until 2023.
Additionally, the preferred shares are cumulative meaning that if RPT cuts the preferred dividends, they will not be able to make a single ordinary dividend payment until preferred shareholders are made whole.
The fact that it is REIT means that it is required by law to distribute at least 90% of its taxable income as ordinary dividends to shareholders (who invest in REITs for the purpose of receiving dividends, and they’re not happy right now).
So they need to make sure that preferred shareholder get paid so that they can fulfil their “raison d’être” and for the measly cost to them of $6.7 million a year.
Of course, if RPT makes a loss over the next few years or ends up going bankrupt, then I will be in bad shape but I think that this possibility looks unlikely at the moment.
So I concluded that it was relatively safe, particularly when compared to the returns I could make.
Only time will tell!
Nuveen Municipal Credit Income Fund
During the month I added to my Nuveen Municipal Credit Income Fund (NZF).
NZF is a Closed-End Fund that invests in municipal bonds. The top 5 States it provides exposure to are Illinois, California, New York, Texas and Florida. The yield is quite decent at nearly 5%.
NZF serves as part of my bond allocation, and as a European investor, I believe that this is one of the best ways for me to gain exposure to the municipal bond space.
Invest in bonds that are financing the biggest US States and get paid almost 5% for it? Yes please!
While it wasn’t really undervalued during July, it was one of the better opportunities I had available to me for investing some of the cash and I try to prioritize existing positions when I can.
Brookfield Asset Management
You may not have heard of Brookfield Asset Management (BAM) though I would argue that every investor should know about them.
I hold BAM almost in the same league as Berkshire Hathaway. BAM is an alternative asset management company, focusing on “real assets” such as real estate, renewable power, infrastructure and private equity.
They also recently acquired Oaktree Capital Management (specialized in debt investments) and with it, the founder and legendary investor Howard Marks.
I love the focus on real assets, especially in this low interest rate world. BAM is not just an investment vehicle either.
It actually operates many of the underlying assets. It owns them through different structures that you can also invest in (e.g. Brookfield Property Partners, Brookfield Infrastructure Partners, Brookfield Renewable Partners and Brookfield Business Partners).
This is an unparalleled capability and takes incredibly specialized knowledge to identify opportunities and operate such a broad set of real assets.
Like Berkshire Hathaway, they are very well diversified and headed by a legendary CEO with a knack for successful value investing.
In fact, CEO Bruce Flatt is often referred to as the Warren Buffett of Canada (where Brookfield Asset Management is headquartered).
I consider BAM to be a core holding in my portfolio that I will continue to build over the long term.
I treat it like an actively managed value ETF (similar in the way I consider Berkshire) that provides me with unique exposure to the much sought after “real assets” space.
The pay a relatively low dividend but they’ve been growing it every systematically for a while now. This is a long-term play for me.
iShares Core MSCI World UCITS ETF (Acc)
iShares Core MSCI World is an EU-listed ETF that provides investment access to the MSCI World Index. It is not the only broad market index ETF that I use because I like to diversify across different ETF providers, just in case.
After all, broad market ETFs are the biggest portion of my portfolio and I systematically add to them every month. I wouldn’t be comfortable having hundreds of thousands in one ETF but that’s just me.
I have recently been using the accumulating version of iShares Core MSCI World UCITS ETF as my vehicle of choice so as not to generate taxable income from dividends. I added to my position during the month of July.
And this concludes my passive income update for July 2020. I hope you’ve enjoyed it and stay tuned for the next update!