Passive income: Handelsblatt calculator for stock market strategies

From the Handelsblatt archive: Country ETFs, real estate ETFs or even individual stocks? The Handelsblatt calculator allows you to find your strategy for passive income.

Living off the return on your assets: That is the dream of many Germans. Photo: Phil Ninh

Dusseldorf. Letting your money work for you on the stock market and living off the investment income – that is the dream of many people. “From a psychological point of view, the idea of ​​passive income brings together three main wishes,” says self-employed psychologist Valentin Haas. “Security, freedom and relief.”

Handelsblatt has developed a calculator that investors can use to calculate individually how realistic this dream is. Are the assets you have saved enough to live on? Or can it just serve as additional income?

There are various ways to generate traditional income on the stock market. Five are taken into account in the Handelsblatt calculator:

Dividend stocks: These are shares of companies that distribute a large portion of their profits to their shareholders.

Dividend equity ETFs: These are exchange-traded funds that consist of a bundle of stocks that pay dividends.

Bond ETFs: Bonds are fixed-interest securities that governments or companies use to raise capital from investors and pay interest in return. Many bonds are bundled together in bond ETFs.

Money market ETFs: These funds typically invest in very short-term bonds and thus reflect the deposit rate of the respective central bank.

Reits ETFs: Reits are a detour to investing in real estate - they are special, listed real estate companies that enjoy tax advantages when they distribute the majority of their profits. Several Reits are bundled together in ETFs.

This calculator now shows in detail what passive income is possible depending on your individual situation. Detailed instructions are provided below.

Investors first choose the amount they can and want to invest. This can be an asset that you already have or a target value for the future. The maximum investment horizon is 20 years.

Investors then choose their strategy. You can choose between three variants, two preset and one individual.

The preset variants are a comparatively safe investment strategy in which the risk of price losses and missed interest payments and dividends is low. The amounts distributed are also lower. With the risky strategy these are higher, but the risk of failure is greater.

Different strategies to choose from

With an individual strategy, investors can put together their own portfolio. You can choose between various individual stocks, dividend ETFs, bond ETFs and money market ETFs.

The calculator now shows how high the passive income is in each year for the selected period. It also shows how the prices of the individual portfolio components are developing, i.e. how the value of the invested assets is developing.

Methodology

For the calculation, rolling time series are created for each asset. This means, for example, that to calculate a 10-year period for an ETF, all historical time series with a duration of 20 years are created for this asset, from 1955 to 1965, from 1956 to 1966 and so on. The dividends distributed are reinvested. Maximum, minimum and median are then generated from these time series and extrapolated to future developments.

To calculate the final dividend, the historical payout rates of the selected assets are weighted and then applied to the assets available for savings. This is not a general quota, but rather dividend quotas that have actually accrued historically and can also realistically be assumed in the future. Applicable taxes are not included here.

The annual returns on government bonds and ETFs were collected at the turn of each year. Return and inflation data come from the World Bank and LSEG.

The passive income and the price development are calculated from the historical data of the individual portfolio components. They make it possible to estimate realistic returns and payout ratios for the future. An average value was calculated for the distributions; the portfolio value is differentiated between weak, average and strong market situations.

Also note: All data are adjusted for historical inflation rates. The passive income predicted by the calculator corresponds to today's purchasing power. It is also a gross value - any taxes or duties have not been deducted.

A concrete example with three dividend ETFs

To explain this using a concrete example: An investor invests 200,000 euros in three dividend ETFs. The VanEck Developed Markets (35 percent), the Vanguard High Dividend (35 percent) and the iShares Global Dividend (30 percent). The three funds are currently the largest dividend ETFs.

The iShares and VanEck products each consist of 100 shares, while the Vanguard ETF has more than 2,000 shares. With the weighting mentioned above, with the current composition of the ETFs, investors would have almost 26 percent invested in US stocks, around 20 percent in countries from the euro zone, a good eight percent in Great Britain and seven percent in Japan.

With this combination, investors would receive an estimated distribution of 7,700 euros in the first year. Subject to fluctuations, this value would move upwards in the coming years and ultimately rise above the 10,000 euro mark annually in 20 years.

At the same time, the portfolio value is likely to increase if one takes historical developments as a benchmark: in the worst case, the 200,000 euros would become almost 213,000 euros after 20 years, and in the best case, 305,000 euros.

Anyone who plans to retire at 50 at the age of 25 simply by saving and investing wisely will have to make an enormous effort. Michael Huber, Germany head of the VZ Vermögenszentrum

The example shows how difficult it is to live solely on capital gains. According to retirement planner Michael Huber, living exclusively from your own assets is usually only possible for people who have inherited a lot of money, founded a company or made an invention and were able to sell their work at a good price. As an employee, however, it will be difficult.

“Anyone who plans to retire at 50 at the age of 25 solely through iron-clad savings and smart investing will have to make an enormous effort,” says the German head of the VZ Vermögenszentrum. This also applies to people with above-average salaries. Even with a starting capital of one million euros, the passive income for the portfolio combination chosen above would only be 38,500 euros in the first year.

With the right combination, higher payouts are also possible, as the Handelsblatt calculator shows. We hope you enjoy trying it out – there are 3.7 trillion portfolio combinations.

If investors want to find out how long they have to save for the assets they want and what the shortest route is, we recommend another Handelsblatt calculator. He shows the path to financial independence.