How a regular 9-to-5 employee earns passive income for financial independence
Why I Prefer Investing in Individual Stocks Over ETFs for Passive Dividend Income
When it comes to building passive income, a lot of people recommend simply “buying the index” through exchange-traded funds (ETFs). And to be fair, ETFs have plenty of strengths – they’re diversified, convenient, and require minimal effort.
If your main goal is to grow your wealth without spending time analysing companies, an ETF can be a great solution. You get instant diversification and exposure to hundreds (or even thousands) of companies in a single purchase. That’s a strong case for many people.
But my own journey to financial independence has taken a slightly different path. I lean much more toward investing directly in individual dividend-paying stocks. This isn’t because I’m against ETFs; I’m not, but because I enjoy understanding the businesses I own and having control over my portfolio.
My approach is influenced by Peter Lynch, the legendary fund manager who believed that individual investors have a unique advantage: the ability to notice great businesses in their daily lives before Wall Street catches on. That mindset resonated with me deeply. Even though I don’t come from a finance background (I’m an engineer by training), I’ve always enjoyed digging into company fundamentals, figuring out what they do, how they make money, and whether they can continue rewarding shareholders for years to come.
1. I Control What I Own
With an ETF, you’re buying the whole basket of companies, which will inevitably include both strong and weak performers. For example, an S&P 500 ETF will give you exposure to fantastic businesses, but it will also include companies I personally wouldn’t choose to own.
By picking individual stocks, I can be selective and focus on companies that match my investing criteria: durable competitive advantages, healthy balance sheets, strong cash flow, and a consistent history of paying dividends.
In my portfolio, I hold businesses like Procter & Gamble (PG), Coca-Cola (KO), and Abbott Laboratories (ABT) – companies that have demonstrated the ability to weather market downturns while steadily rewarding shareholders. Because I own them directly, I’m not forced to hold other weaker companies just because they happen to be in an index.
Control also allows me to avoid overpaying for growth. If a company in an ETF becomes overvalued, you still own it through the fund. With individual stocks, I can choose to wait for a better entry price or avoid it entirely.
2. More Predictable Dividend Income
ETFs can, and do adjust their holdings over time. This rebalancing means their dividend payouts can fluctuate, sometimes unpredictably.
In contrast, many established dividend-paying companies see maintaining or growing their dividend as a point of pride. They’ll go to great lengths to keep that track record intact, even during economic slowdowns.
Take ExxonMobil (XOM) as an example. Despite the oil price crash during COVID-19 (when prices briefly went negative), XOM maintained its dividend. Similarly, Realty Income (O), often called “The Monthly Dividend Company,” has a long history of increasing its payouts, making it one of the more reliable sources of income in my portfolio.
For someone like me, who’s building a passive income stream to support financial independence, that predictability is invaluable.
3. Opportunities in Every Market Cycle
Even in a bull market, when valuations are generally high, there are still pockets of opportunity. Certain sectors or companies may be temporarily overlooked or misunderstood by the market.
When I invest in individual stocks, I can direct my capital into these situations. During the COVID-19 market crash, for example, I bought more XOM when oil prices collapsed. I also added to my positions in Wells Fargo (WFC) during its scandals and capital restrictions, and to 3M (MMM) despite headlines about lawsuits and challenges.
These buying opportunities often come with short-term pain but long-term potential. ETFs, by design, spread investments across the board and can’t selectively overweight undervalued businesses in the same way.
4. No Ongoing Expense Ratio
Another advantage of owning individual stocks is that there’s no management fee or expense ratio eating into your returns year after year.
ETFs, while generally low-cost, still have expense ratios, sometimes just 0.03% for broad market funds, but higher for specialised ones. It may not sound like much, but over decades, even a small annual fee compounds into a noticeable drag on performance.
When I own individual stocks directly, the only cost is the one-time brokerage fee when buying or selling. After that, all the dividends and capital gains are mine to keep. For a long-term dividend investor, eliminating that ongoing cost means more of the income stays in my pocket, compounding my returns over time.
The Downsides (Yes, They Exist)
I don’t want to paint individual stock investing as a perfect strategy – it’s not. There are real challenges and risks involved.
- Less diversification – A single poor-performing stock can impact your portfolio more than it would in a broad ETF.
- Time commitment – Researching companies, reading annual reports, tracking earnings releases, and keeping up with industry news takes effort.
- Dividend cuts happen – Even great companies can reduce or suspend dividends. I’ve experienced this first-hand with AT&T (T), WFC, and MMM. It’s not pleasant, but it’s part of the reality of dividend investing.
The key is to acknowledge these risks and manage them by holding a portfolio of quality businesses across different sectors, while avoiding overconcentration in any single company.
Why I Still Prefer Individual Stocks
Despite the drawbacks, my preference remains with individual stocks for one simple reason: I like knowing exactly what I own and why I own it.
When markets are volatile, I’m able to hold with confidence because I’ve done the research and believe in the companies’ long-term prospects. That’s harder to do with an ETF, where you may not even know all the underlying holdings.
Currently, my dividend portfolio is about 85% U.S. stocks and 15% Singapore stocks. My U.S. holdings include XOM, WFC, T, MMM, PG, ABT, KO, O, and GOOGL. In Singapore, I hold OCBC (O39.SI) and CapitaLand Integrated Commercial Trust (C38U.SI). Each holding has a place in my portfolio because it meets my criteria for long-term dividend growth or stability.
This hands-on approach might not be right for everyone, but for me, it’s both financially rewarding and intellectually satisfying. I’m not blindly following an index – I’m building a carefully chosen collection of businesses that work for me 24/7, paying me dividends whether I’m working, relaxing, or on holiday.
Disclaimer: This is not financial advice, just my personal investing preference. While my personal journey is focused on selecting individual stocks, it’s important to recognize that many investors find success through other paths. For those who prefer a less hands-on approach, vehicles like mutual funds and ETFs can be other choices, though it’s crucial to be mindful of their ongoing cost factor, often referred to as the expense ratio. These funds are often used with a systematic investment strategy, such as Dollar-Cost Averaging (DCA) or the popular Systematic Investment Plan (SIP) in India, where you invest a fixed amount regularly. Ultimately, the right approach is the one that aligns with your financial goals, time commitment, and personal comfort level with risk.
Discover more from BOSS OF MY TIME (BOMT)
Subscribe to get the latest posts sent to your email.