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Comment by dbish | Hacker News Reader

The concept makes sense, but the specifics written here seem oversimplified and are going to mislead people. Realistically, it's not easy to turn a single vending machine or a purchased content website into a largely passive source of (significant) income for most people. Likewise, real estate purchasing is speculation in many cases and you can end up on the wrong side of that like many have in the past, losing everything when they can't rent out a place and they lose their job (like what happened in the last real estate downturn to many folks). Absolutely agree that if you are using debt, use it wisely, but I would have loved to see more specific and nuanced discussion of how to evaluate options for doing so.

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I mean, you're right about the little stuff. And that's why it's not beneficial for a poor person to invest in a single large investment (eggs in a single basket, as it were). But, folks with enough money will diversify their investments. Thus, they can tolerate a sunk vending machine or a brief downturn in property value. When the very rich lose because the entire market is crashing, they're still better off than the rest of us, because we experience the same crash (unless it's something stupidly esoteric like tulips, and even then, the upper-middle class tend to get stuck holding the bag)

I feel like the easiest way to accomplish this is just investing into stable dividend stocks. I don't know the first thing about running a vending machine, or upkeeping a condo. But I know people who do - dividend-paying companies. I get ~$20 a month on a $6600 position. Could earn way more if i shifted other investments but it's not the best tax-wise (neither is running a vending machine, compared to buying an index fund).

> I feel like the easiest way to accomplish this is just investing into stable dividend stocks.

Yes, you're generally better off with equities. Though going for total return is better. It's not that dividends are bad (they're an important part of returns), but (a) you're limiting your diversification options by only focusing on dividend-paying companies, and (b) there's little correlation between dividend-paying companies and companies that give you good financial results.

> Dividend investors will tell you that theory does not extend to reality, and that dividend stocks do indeed do better than the market. I am not denying that dividend growth stocks have beat the market on average. But the dividends are not the reason why. Dividend stocks, particularly dividend growth stocks, have excess exposure to the value, profitability, and investment factors. That is what explains performance differences, which means the outperformance still doesn’t justify trying to pick individual stocks.

* https://www.pwlcapital.com/the-irrelevance-of-dividends-stil...

* https://en.wikipedia.org/wiki/Fama–French_three-factor_model

I agree that you're better off with stocks. I know the first thing about running a website, condo, and vending machine, and it's that it's work. I'm not looking for a part-time job.

I disagree about looking for stocks that pay a decent dividend. They're overpriced because boomers are all over that (which actually means the yields aren't great), and dividends are taxed as regular income (32% for our $200k doctors), not 20% like long-term capital gains. Dividends also more or less come out of the stock price (tends to be a bit less), so the draw do dividends is that the feel better than selling shares.

The main takeaway from the article was just "live within your means and invest what's left."

I generally agree on not choosing dividend stocks (a solid ETF can include a reasonable dividend payout, which feels more like a bonus), but just a note that the tax rate on qualified dividends is the same as long term capital gains (0%, 15%, 20%).

Not all dividends can be qualified (payouts from REITs for example are a common exception), but most typical blue chip stocks that pay dividends will become qualified after holding the underlying asset for enough time.

Correct me if I'm wrong, but investing $6600 for a $20/month return is going to take 25 years to break even. How is that worth it? (I'm totally naive about investing. This isn't a dig at you. Genuinely curious)

You're buying an asset, this can always be sold to cover your initial investment. You're also gaining $20 cash that can be put into other investments, so they gains are compounding. Like every thing else in the stock market you're also hoping that the stock value and dividends increase over time. So in reality you get a return much earlier, but even after that you still own a cash generating asset in perpetuity.

If it was purely the cash flow you wanted you would buy a bond, but once the bond period is over that's it, you own nothing except the cash taken out. If you want to accumulate wealth but not necessarily cash flow high growth stocks are probably a better option.

It also benefits from capital appreciation.

As for breaking even, the security is highly liquid and can be sold at any time to recover one’s capital.

Is there a reason to prefer dividend paying stocks when they're less efficient than long term capital gains (ie. buybacks)?

The main reason for me is that it's intuitive/comprehensible (company shares profits with stock owners) and it aligns with my goals (create passive income) in a visible and flexible way. Other options are more abstract and require more specialized finance knowledge.

It might be suboptimal, but when you're planning your financial future understanding what's happening is important and I suspect is one of the reasons more people don't invest. My country also has different rules on how dividends are taxed.

The dividend income is cash flow so which isn’t tied to the future value of the stock. You don’t need to worry so much about timing when you need to sell the stock to get back the best profit.

Sure it’s not the best long term and in aggregate, but if you need an income then it’s a reasonable choice.

But you can just sell stock continuously, as it is more tax efficient. Eg 2% dividend is just 2% of portfolio sold every year.

Dividends are taxed the same as capital gains in the US. There can be value to deferring taxes, but $1 worth of capital gains via say a buyback is worth the same as $1 paid out in dividends, net of taxes.

A buyback does not trigger a taxable event, unlike a dividend. So the tax deferred value of buybacks is compounded over the years, which can be significant.

Right, but with stocks you need a capital of $1m+ to get a significant income, which basically takes an entire career to accumulate.

Depends how much you are putting away each month - If you save $1k per month it will take you about 22 years (with compounding, assuming you take nothing out).

There isn't no "get rich quick" in personal finance though.

There was definitely a disconnect between the title and the content - it seemed to be about reinvesting your cash flow rather than leveraging debt. It would’ve been nice to see a comparison with simpler investments like stocks as well.

As an anecdote of actually using debt to generate future cash, when I purchased a house my mortgage was bundled with a home equity line of credit that was used for the down payment. My plan was to pay this off as soon as possible since it had a higher interest rate than the base mortgage. All the advice I got told me not to - everyone said take the 10 years they offer of paying interest only and reinvest what you would’ve put in. It turned out to be great advice and any time I can make this trade on debt, I will.

That’s good advice in this rate environment — if your income stream is secure.

When it’s not, you’re screwed. I have a relative who was a exec with a credit card bank. Great job, etc. Then the bank moved off to South Dakota, and didn’t pack him.

Sam purchases the beach house using debt.

Most of the time, real wealth is generated when something new is created that did not exist before.

Sure and that’s how you get major independent wealth quickly.

The little by little approach also works but takes discipline and commitment to the future that’s hard to keep when you are poor and don’t know where the next piece of bread is coming from. When I first started making (by my then measure) good money, pretty much all of them were flushed down the drain one way or the other. It took me years to snap out of that.

The examples are pretty weak, but substitute index funds and REITs and you are in a better place. Does it fluctuate? Sure does. Does it also accumulate? Yup it does that too and that’s the key.

Except due to globalization this process has moved out to cheaper countries. Where the wealth is created and then parked in more politically stable West. And we keep wondering why our Average Joe can't afford a house anymore.

Since when can Average Joe not afford a house? That's a combination of pop myth and extrapolating isolated local phenomenon to the national housing & income context.

The home ownership rate in the US is currently on par with where it was in 1995-1996, higher than it was throughout nearly all of the 1980s, and higher than it was throughout all of the 1950s, 1960s and almost all of the 1970s.

If you chop off the particularly artificial five to six years of the housing bubble, the US is presently only about 1 to 1.5 points off from all-time highs on home ownership.

Now, having pointed this fact out, the obvious next response is to claim that today's home ownership is somehow a lesser form. Houses are quite larger today than they were in the 1950s-1970s however, and superior in most every possible way. And home owners have been building equity pretty consistently since the great recession, with US household balance sheets in good condition overall, including with debt service costs at historically low levels (which includes mortgage payments).

Realistically the primary people suffering versus the past re home ownership, are in select few locations like San Francisco, Los Angeles, New York City, Seattle and similar.

Home ownership rate measures the percentage of the homes occupied by their owners (i.e. how many % are not rented out). It would not show the number of young adults who never had a chance to move out. It will also not show a difference between a single family renting a detached house vs. 5 adults sharing a rented apartment.

A much more interesting metric would be the number of shared households, that appears to be rising (although I couldn't easily google up a concrete graph).

>Realistically the primary people suffering versus the past re home ownership, are in select few locations like San Francisco, Los Angeles, New York City, Seattle and similar.

Well, that's where the jobs are. Sure you can afford a home in Salty Creek with a median Seattle salary, but that's not what most people would want to do. These days, unless you are in STEM (big cities) or trades (rural areas), you are pretty outpriced.

What did the founder(s) of Little Caesar's Pizza create?

They created a place where people who value the food can get it at a price less than the value they place on it. So, first, they created consumer surplus. That is real wealth creation. Second, we know that it cost them less to produce the pizza than the price they charge. That is, they created producer surplus. Both are wealth created when none existed before.

This is why free transactions in a market economy make everyone wealthier.

PS: Please spare me a lecture about externalities. Formally, an externality exists when Bob's preferences are decreasing in Alice's consumption. Since economics does not place any restrictions on preferences other than being complete, non-satiated, and convex, they are a possibility. But, a society in which everyone is able to veto anyone's consumption on the basis of some externality is a nightmare (e.g., can't allow other people to eat meat, can't allow other people to have children, can't allow other people to enjoy the sunshine etc).

Unfortunately some externalities are not frivolous. It is kinda nice not to have polluted water, or polluted air, or deserts because of bad land management.

I'm not against your point of wealth creation, but externalities are real and do need to factor in. Individual veto isn't in play, but some sort of societally mandated rules-of-the-game are.

> have polluted water, or polluted air

There is no "pure" water or "pure" air. The "right" amount depends on costs and benefits ... None of that can be looked up anywhere and people end up bargaining over them indirectly.

That may be true but someone has to pay to keep things like that. It’s a difficult position to claim that the people with wealth owe anyone else anything.

Little Caesar's.

Particularly, they discovered an underserved market niche and found a way to satisfy people's desires in a cost efficient way.

That doesn't make sense as far as the point goes. There has to be something more than a tautology.

No, that's pretty much it. In comparison, Pizza Hut and Domino's have slightly better pizza, at a higher cost. Little Caesar's discovered that enough people (college students, in my experience) were willing to eat slightly worse quality pizza - that was larger, but at a slightly cheaper price. From memory, Domino's was $12 for a 14" pie, but Little Caesar's was $10 for two 10" pies, that weren't as tasty, but were "good value for the money"

They originally saved money by using a cardboard tray not a box, that had a paper sleeve over it to keep the pizza sanitary. They could get two pies in there for what it cost the bigger chains to deliver one.

Also their original breadsticks were amazingly good.

They were doing deep dish with crispy edges before anyone else.

Well, if what you ask is a tautology the answer is almost obvious. Almost.

Wealth is created when the value of inputs is less than what is paid for the final good or service. It's really as simple as that.

The fact that one person doesn't see value in a good or have a willingness to pay the asking price doesn't mean nothing is created. There exceptions however, but by and large people are free to pay whatever price for whatever good. Canned fresh air, little caesar's, art etc.

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