Opinion – From Grain to Grain: You shouldn’t build an income portfolio if you want to reach equity to live on income

When you cross your arms, which arm is on top, the right or the left?

Try crossing your arms and watch.

Now, cross your arms again, but reversing their position. Agree, that doesn’t seem to make sense or is uncomfortable? The same effect can occur when building your portfolio when looking to live on income in the future.

Most of the time we hear that in order to live on income, we need to build a dividend portfolio. That may be true, but for those who are already there.

Those who live on income usually have a portfolio that pays a lot of dividends.

However, they didn’t have the dividend portfolio to get there.

You’ve probably heard of Luiz Barsi. In Brazil, he is perhaps the most famous stock market investor. Several of his positions today are in dividend-paying companies. But his equity was not built with that, but with appreciation or capital gain.

For those just starting out, assets that pay dividends can bring a false sense of gain, but difficulties soon appear. Reinvesting small dividends is difficult, and the discipline of control is equally demanding.

Added to this is the arduous task of enduring the anxiety of price volatility. Everyone supports volatility when they look at it in Excel. But, seeing your portfolio falling 30% brings other feelings. Also, it may not provide the expected return.

See this simple example.

B3’s dividend-paying stock index, the IDIV, was created on 12/31/2005. The index considers the perfect reinvestment of dividends. Something that no investor could achieve due to operational difficulties that I will explain in the future when I talk about this topic.

The graph above shows the evolution of the IDIV and the IPCA-linked fixed income government securities index with less than 5 years maturity, the IMAB-5.

Note that the two have practically the same return. However, the IDIV showed extremely higher volatility.

I wonder how an investor withstood the falls that occurred.

Perhaps someone will argue: the declines were good for the IDIV investor, because if you were buying monthly, you captured good opportunities.

Well then. The graph above shows the evolution of the equity of an investor who has invested BRL 1,000 per month since 2005 in IDIV and IMAB-5.

Reinforcement, IDIV already considers the reinvestment of dividends.

Investors who have invested BRL 1,000 in IDIV since 2005 would have BRL 2.42 million on 01/27/2023.

However, if you invested BRL 1,000 in IMAB-5 in the same period, you would have BRL 2.57 million.

Therefore, the question that volatility brings you opportunities seems illusory. Volatility represents dispersion of returns, but it goes both ways. Remember, there will also be times when you pay more.

In addition to greater assets, those who invested in fixed income would not have gone through the hardships that investors in the dividend portfolio would have.

But there is a similar fixed-income alternative that was even better. That investor who invested in medium-sized bank CDBs, which remunerate up to 120% of the government bond rate, gained much more.

In the same graph above, I simulated the return with CDBs that remunerate only 110% of the average rate of securities referenced to the IPCA. The investor who opted for these securities today would have R$ 2.91 million.

On the journey to financial independence, return is more important than dividends.

In the next few chapters, I’ll cover the various assets you can invest for your journey to independence. I only ask that you be open to crossing your arms in all ways.

Michael Viriato is an investment advisor and founding partner of Investor House.

Talk directly to me via email.

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Book: The Journey to Financial Independence

summary

Introduction
Understand how you will achieve your financial independence
Living on an income is the last step on the journey to financial independence
These are the biggest questions about the journey to independence

Part 1 Construction of the plan

Chapter 1 The first step in building the blueprint for financial independence
Chapter 2 How do you define the rate of return in your plan for independence?
Chapter 3 Find out what equity you need to achieve your financial independence
Chapter 4 On your journey to independence, don’t overlook the importance of this factor
Chapter 5 Understand the two ways I applied to increase my saving capacity
Chapter 6 If You Double This Factor, Your Equity Can Multiply Much More
Chapter 7 Connecting the dots to build your plan

Part 2 Assembling the portfolio to lead you to financial independence

Chapter 8 Before making any investment, define these two factors
Chapter 9 You should not build an income portfolio if you want to reach equity to live on income