Passive Income Update (September 2020)

Welcome to my September 2020 monthly passive income update!

Where you’ll 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.

You’ll also find out about my sales, if any, and the reasons for which I sold and the impact on my forward passive income.

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.

Tallying up the total passive income I receive on a monthly basis and seeing it grow over time is 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 September 2020!

Passive Income received in September 2020

The total passive income received during the month was €492.

Only slightly lower than my €500 per month average goal for the year and definitely a better passive income month for me than August by the looks of it. 

I’m counting on a solid October to bring my average back up and I look forward to seeing whether I’ll reach my passive income goal come end of year.

Now let’s dig a bit deeper into the different investments that together provided these very welcome €492 during the month of September 2020.

Equities and Funds (listed securities)

As always, 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 $351.65 and £124.44.

The biggest dividend payer this month was Legal & General, the second largest UK insurance by market capitalization, sporting a huge yield of 8.9% at the time of writing.

I invested in LGEN before the onset of the pandemic and I’m happy that LGEN did not cut its dividend, despite the crisis and guidance from the Bank of England for banks to cancel their dividends and insurers to strongly reconsider their dividend policies.

Given the still strong dividend coverage ratio of 1.7x and the fact that I don’t see any big risks that could put the dividend into question at the moment, I’ve decided to be contrarian on this position and continue to hold on despite the market pricing in significant risks on this stock.

It’ll be interesting to see whether I’ve made the right decision. Only time will tell.

In addition to LGEN, it looks like September is my month of UK stocks in general because my other two UK-listed positions, Royal Dutch Shell and Unilever also paid their dividends in September.

LGEN pays semi-annually, while RDS and Unilever pay quarterly.

September was also a strong month for my preferred shares with 4 of them, NLY Series I, MNR Series C, DLR Series L and REXR Series C all distributing preferred dividends during the month.

Finally, my monthly paying Closed-End Funds as well as my monthly dividend paying stocks O and MAIN have continued to deliver that monthly cash-flow providing a solid monthly income baseline to my portfolio.

Bonds

I received no interest from my individual bonds this month.

P2P lending

I also received €59.25 of passive income from P2P lending comprised of €51.06 from Mintos and €8.19 from EstateGuru.

It should stabilize at around this level going forward now that I’ve completed by withdrawal phase.

The income from p2p is still at over 10% of my overall passive income and I’m planning to reduce it to around 5% over time as I continue to build my investments in other asset classes.

When I reassess my p2p portfolio at the end of the year, I may also decide to reduce investment levels even further and reallocate the capital elsewhere.

Summary

Let’s end this section with the breakdown summary of the €492 of passive income I received for September 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 (and sales) in September 2020

Since the beginning, I’ve 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.

In this section, I also report and provide some insight on my sales, if any.  After all, selling is harder than buying, even more so when it reduces your forward annual income.

I don’t sell often and didn’t sell any investments during the month.

I still have some consolidation of positions to do in order to reduce my total number of holdings (keeping them under 50) and free-up some space for better opportunities.  I anticipate a bit of selling before the end of the year.

And without further ado, let’s go over the transactions I made in September 2020.

Here are my investment purchases for the month:

My purchases, made in the middle and end of the month will bring in relatively low $48 forward gross annual income.

But more income is more income and I’ll make sure to increase my forward annual income even further between now and the end of the year.

On the sales front, as previously mentioned, I had no investment sales during the month.

Rationale of September 2020 purchases

As always, I include as part of my monthly updates, the rationale for the individual purchases and sales, if any, made during the month.

The aim is to provide even more value to you. Either as an extra source of investment ideas or through providing some glimpses into my thought process when buying, or selling.

And with that said, let’s go over the rationale for my purchases this month.

Purchases

UBS Swiss Gold ETF (USD)

I’ve recently decided to add a gold allocation to my portfolio for diversification purposes.

The precarious economic environment and gold’s reputation as a safe haven in times of crisis were the key motivating factors behind my decision.

I spent quite a bit of time researching the best Gold ETF for my personal situation and eventually settled on the UBS Swiss Gold ETF.

You may recall that I recently published an extensive post on the Best Gold ETF for Europeans, comparing the different Gold ETFs available to Europeans, the key considerations to make when choosing a Gold ETF and the thought process to help you come to the right conclusion, for you.

If you haven’t read it yet and are interested in Gold ETFs, then I strongly encourage you to take a look.  

You can expect more investments in this ETF in the coming months as I dollar cost average my way into the UBS Swiss Gold ETF.

My aim is to bring it up to 5% of my portfolio and then keep it at this percentage for the foreseeable future.

Gold being a commodity that doesn’t produce anything tangible, I’m using extra cash I’ve built up on the side-lines to build my position. So this will be on top of my regular monthly contributions from my salary.

In effect, I will consider my Gold position as part of my overall cash allocation.

It’s just that with the Gold, my thesis is that in times of severe crisis, it will appreciate, allowing me to sell at a profit and reallocate the increased capital into severely undervalued investments.

This would have more impact than simply using extra cash on hand while simultaneously protecting me a bit more from inflation.  

Given the economic situation, I couldn’t justify not having any gold in my portfolio any longer, and I’ve been thinking about it for a while… so I finally pulled the trigger.

Oracle Corp

Oracle Corporation probably needs no introduction.

It is a $180 Billion behemoth known for its Enterprise Resource Planning (ERP) solutions, where it shares a market leading position with the German powerhouse SAP.

Oracle is also known for its databases, where it currently has majority market share (more than all other competitors combined).

While revenue growth has been practically non-existent in the recent past, Oracle has been investing heavily in recent years to transition its ERP software to the cloud and to modernize its database offering (e.g. Oracle Autonomous Database) that so many companies rely on for their mission-critical applications.

Additionally, while late to the game, Oracle has also recently released the Oracle Cloud, competing with the likes of Amazon, Microsoft, Google and IBM.

What excites me most about this “old school” technology company, is that Oracle’s new products are delivering exceptional growth.

For example, their Cloud ERP application solutions have shown year on year growth in the 30% range and Oracle Autonomous Database has recently grown more than 100%.

Oracle Cloud has also grown tremendously since securing Zoom as a customer, while talks are still ongoing regarding TikTok, which Oracle is considering acquiring, not to enter the Social Media industry, but to secure them as an Oracle Cloud customer.  

So across the technology stack (applications, databases and infrastructure), Oracle has built great solutions that can be seamlessly integrated with each other. This makes it very easy for Oracle ERP Cloud customers, which also rely on Oracle Databases to migrate to the Oracle Cloud.

Essentially, the many businesses that are late to the cloud game, especially those that rely heavily on Oracle solutions, will be much more likely to migrate to Oracle’s new solutions and the Oracle Cloud, sticking with Oracle for the long term.

Having researched these new offerings, I’ve found that they are all very well rated by technology analysts such as Gartner.

So in a nutshell, I believe that Oracle is currently at an inflection point where the portion of revenues coming from its high growth businesses will exceed the portion coming from its legacy and declining businesses.

Larry Ellison, their legendary billionaire founder and chairman, believes so too. Well, it’s more that I believe him actually, at least for now.

Because, we’ve seen a similar scenario with IBM that hasn’t really materialized, which is why I’m still cautious.

But I believe that there’s tremendous upside potential if the turnaround takes shape in the coming quarters because Oracle has a relatively low valuation with a P/E ratio of around 18 to 19 and an exceptional forward P/E ratio of 14.

They also have a very strong balance sheet with a low net debt position and a cash pile of around $40 billion providing great optionality in terms of acquisitions.

It’s also been a consistent performer growing earnings and its share price slowly over time.

Now let’s talk about the income!

Oracle is a dividend growth stock, which I identified by applying my methodology on picking dividend growth stocks.

Oracle has consistently grown its dividend since it initiated a dividend for the first time eleven years ago.

The yield is still low at just over 1.5% but given the incredibly low Pay-Out Ratio of around 22%, I expect Oracle to continue growing its dividend at a decent clip of around 10% for the foreseeable future.  

And dividend growth, when underpinned by earnings growth, will mostly likely lead to a commensurate increase in the share price.

More income combined with capital gains, that’s the ideal scenario.

Given Oracle’s low valuation, I believe that the risk-reward is very favorable and I plan to increase my position if I start seeing more signs of the turnaround materializing, even if it means averaging up.