One of the most popular questions I get asked is whether investors should ever dip into principal. The short answer is almost always:
"No"
Anytime someone asks me whether they should ever dip into principal, I ask them the following question back:
"Do you know how long you will live after you retire?"
You are gambling if you want to dip into principal, because you are dealing with large unknowns such as returns over a certain period of time, longevity, inflation etc. If your projections turn out to be wrong, and you turn out to be living off your capital during a time when it is not growing, you are asking for trouble because your risk of running out of assets increases. Instead, I plan to live simply off the income my portfolio generates.
Wednesday, December 30, 2015
Monday, December 28, 2015
Dividend Kings for 2016
A dividend king is a company that has managed to increase dividends to shareholders for at least fifty years in a row. There are only a handful of these companies worldwide, most of them being US based. A company that has managed to increase dividends each year for over half a century has a stable business model that has endured a lot over a long period of time. As investors who want to live off dividends in retirement, we want to concentrate on quality businesses that operate in industries with significant competitive advantages. This will allow those businesses to grow earnings and pay higher dividends over time. Raising dividends for over half a century is no small accomplishment, and it is testament to the stability of the business model.
The purpose of this list is to learn about those companies, and study how they managed to grow dividends for such a long period of time. The intelligent dividend investor should refrain from purchasing any of those securities, without:
1) Understanding their business model
2) Determining whether they believe the business will be able to earn more over time
3) Determining if the business is available at an attractive valuation
The companies that are members of the dividend king list for 2016 include:
The purpose of this list is to learn about those companies, and study how they managed to grow dividends for such a long period of time. The intelligent dividend investor should refrain from purchasing any of those securities, without:
1) Understanding their business model
2) Determining whether they believe the business will be able to earn more over time
3) Determining if the business is available at an attractive valuation
The companies that are members of the dividend king list for 2016 include:
Monday, December 21, 2015
Dividend Growth Investing At Work
Dividend growth investing is a wonderful strategy. Most of the work in selecting and purchasing an attractive security is done upfront. After that, the dividend investor is paid a growing dividend for work they may have done years ago. Of course, this dividend investor should regularly monitor his portfolio holdings, and dispose of any companies that no longer fit their goals of providing with a dependable dividend income to live off in retirement.
Over the past week, there were several dividend companies which increased their dividends. The companies include:
AT&T Inc. (T) provides telecommunications services in the United States and internationally. The company operates through two segments, Wireless and Wireline. The company increased its quarterly dividend by 2.10% to 48 cents/share. This dividend champion has managed to boost dividends for 32 years in a row. In the past decade, AT&T has managed to increase dividends by 3.90%/year. The stock is selling for 12.40 times forward earnings and yields 5.70%. Check my analysis of AT&T for more information about the company.
Over the past week, there were several dividend companies which increased their dividends. The companies include:
AT&T Inc. (T) provides telecommunications services in the United States and internationally. The company operates through two segments, Wireless and Wireline. The company increased its quarterly dividend by 2.10% to 48 cents/share. This dividend champion has managed to boost dividends for 32 years in a row. In the past decade, AT&T has managed to increase dividends by 3.90%/year. The stock is selling for 12.40 times forward earnings and yields 5.70%. Check my analysis of AT&T for more information about the company.
Thursday, December 17, 2015
My Goals for 2016
As many of you know, my goal is to eventually be able to cover my expenses with dividend income from my portfolio. In order to get there, I save money each month and allocate them in dividend growth stocks. I reinvest dividends selectively along with new cash I have to invest.
As I discussed earlier, my forward annual dividend income was approximately $15,000 a few months ago. After a dividend cut by Kinder Morgan, my forward dividend income for 2016 is a little over $14,000. If I get dividend cuts from other pipeline companies such as EEP, WMB and OKE, my dividend income will further dip to a little over $13,000. As many of you know, I sell immediately after a dividend cut. When I replace dividend stocks sold however, I will be able to regain some of that lost dividend income back up to something like $14,000. Still, this is lower than the $15,000 for 2016 that I was projecting.
As you can see, I expect some turbulence in dividend income numbers in 2016 due to the weakness in the energy sector. I am also starting to get second thoughts about committing new money to pass through entities. As an investor, my goal is to buy companies that will pay me a dividend under most adverse conditions. It seems like companies that constantly rely on capital markets for new capital, and have high payout ratios are in greater danger if something goes wrong. The positive thing however is that if we see some turbulence, this might translate into the opportunity to acquire shares in quality dividend payers like Hershey at more attractive valuations and more attractive entry yields than before.
As I discussed earlier, my forward annual dividend income was approximately $15,000 a few months ago. After a dividend cut by Kinder Morgan, my forward dividend income for 2016 is a little over $14,000. If I get dividend cuts from other pipeline companies such as EEP, WMB and OKE, my dividend income will further dip to a little over $13,000. As many of you know, I sell immediately after a dividend cut. When I replace dividend stocks sold however, I will be able to regain some of that lost dividend income back up to something like $14,000. Still, this is lower than the $15,000 for 2016 that I was projecting.
As you can see, I expect some turbulence in dividend income numbers in 2016 due to the weakness in the energy sector. I am also starting to get second thoughts about committing new money to pass through entities. As an investor, my goal is to buy companies that will pay me a dividend under most adverse conditions. It seems like companies that constantly rely on capital markets for new capital, and have high payout ratios are in greater danger if something goes wrong. The positive thing however is that if we see some turbulence, this might translate into the opportunity to acquire shares in quality dividend payers like Hershey at more attractive valuations and more attractive entry yields than before.
Monday, December 14, 2015
Where to invest the money from the sale of Kinder Morgan stock?
Last week was particularly busy for me on the investing front. I ended up selling almost my entire position in Kinder Morgan (KMI) at approximately $16/share after the company cut dividends by 75%. The surprising part was that the company went from forecasting 6% - 10% annual dividend growth to a 75% dividend cut within the span of one month. I decided that rather than hope for the best, I should cut my losses and reevaluate the situation with a clear head. This decision would also allow me to claim all losses on my 2015 tax return.
My average cost basis on Kinder Morgan stock that I bought outright was about $30/share. I started buying the shares after the IPO in 2011, and bought more until 2013. The company was one of my best ideas. I didn’t buy new stock outright since late in 2013. I have received several years worth of dividends. From a tax perspective, I get to reduce my income by the amount of the loss (technically I reduce any capital gains first, and then I get to deduct up to $3,000 and roll-forward any losses for future tax returns). The reduction in tax liability is helpful to soften the losses. Since the last time I made an investment in Kinder Morgan in late 2013, I have collected approximately $4/share in dividend income. I did hold a small portion of my Kinder Morgan position ( approximately 7% - 8% of my shares) in tax-deferred accounts such as an IRA, where the tax basis was in the mid-30s. I reinvested of my dividends there, and I won't get any deduction on the loss. A portion of those shares will likely be forever stuck in a tax-deferred account since the position is so small, that it would not be cost effective to sell the shares and then buy something else with the proceeds.
A large portion of Kinder Morgan stock came from my investment in Kinder Morgan Management (KMR) however. I received cash dividends of a little less than $2/share for only 1 year – before that I had received shares in lieu of distributions. This was a tax-free way of receiving distributions in stock at a discount, which made compounding easier and a no brainer decision. Either way, I came up only slightly behind on those investments from this legacy position from Kinder Morgan Management (KMR), despite what it looks like a low tax basis of approximately $20/share.
My average cost basis on Kinder Morgan stock that I bought outright was about $30/share. I started buying the shares after the IPO in 2011, and bought more until 2013. The company was one of my best ideas. I didn’t buy new stock outright since late in 2013. I have received several years worth of dividends. From a tax perspective, I get to reduce my income by the amount of the loss (technically I reduce any capital gains first, and then I get to deduct up to $3,000 and roll-forward any losses for future tax returns). The reduction in tax liability is helpful to soften the losses. Since the last time I made an investment in Kinder Morgan in late 2013, I have collected approximately $4/share in dividend income. I did hold a small portion of my Kinder Morgan position ( approximately 7% - 8% of my shares) in tax-deferred accounts such as an IRA, where the tax basis was in the mid-30s. I reinvested of my dividends there, and I won't get any deduction on the loss. A portion of those shares will likely be forever stuck in a tax-deferred account since the position is so small, that it would not be cost effective to sell the shares and then buy something else with the proceeds.
A large portion of Kinder Morgan stock came from my investment in Kinder Morgan Management (KMR) however. I received cash dividends of a little less than $2/share for only 1 year – before that I had received shares in lieu of distributions. This was a tax-free way of receiving distributions in stock at a discount, which made compounding easier and a no brainer decision. Either way, I came up only slightly behind on those investments from this legacy position from Kinder Morgan Management (KMR), despite what it looks like a low tax basis of approximately $20/share.
Thursday, December 10, 2015
The Humility Dividend Growth Portfolio
I have been investing in dividend stocks and writing about it on this site for almost eight years. My portfolio has increased several times in value over that period, fueled by my consistent contributions, increases in share prices and the constant reinvestment of growing dividends into more stocks. I am not sitting on my laurels however. On the contrary, I am spending a lot of time every week searching for attractive opportunities to add to my portfolio, monitoring my holdings and learning more about investing in general. I also spend a lot of time thinking about investments in general, my goals as an investor, and the risks that could prevent me from achieving those goals.
The more I learn about investing, the more humble I tend to become. One thing I have learned is that there is a lot out there that I do not know about. As a result, I have become much more humble than before. I accept that a lot of things can happen, but yet I would still like to be financially independent. I often scratch my head when someone argues with me about investing in hot growth stocks, in social media stocks, for not frequently churning my portfolio, for not withdrawing money from my principle, for only focusing on companies in the sweet spot, not investing in high yielding stocks, not concentrating my portfolio etc.
I am scratching my head because the person telling me that is obviously overconfident in their abilities. This is particularly dangerous from individuals who are ignorant of facts, and are not thinking probabilistically.
I realize I might be ignorant as well, which is why I try to keep learning about investments every single day, and keep an open mind. I also try to devise systems to protect me from risks.
The more I learn about investing, the more humble I tend to become. One thing I have learned is that there is a lot out there that I do not know about. As a result, I have become much more humble than before. I accept that a lot of things can happen, but yet I would still like to be financially independent. I often scratch my head when someone argues with me about investing in hot growth stocks, in social media stocks, for not frequently churning my portfolio, for not withdrawing money from my principle, for only focusing on companies in the sweet spot, not investing in high yielding stocks, not concentrating my portfolio etc.
I am scratching my head because the person telling me that is obviously overconfident in their abilities. This is particularly dangerous from individuals who are ignorant of facts, and are not thinking probabilistically.
I realize I might be ignorant as well, which is why I try to keep learning about investments every single day, and keep an open mind. I also try to devise systems to protect me from risks.
Tuesday, December 8, 2015
Kinder Morgan Cuts Dividends
This just in, Kinder Morgan (KMI) announced it was cutting its quarterly dividend by 75% to 12.50 cents/share ( 50 cents/year). Source: Press Release
I have changed my mind from my article from last week. I believe that Kinder Morgan will be a good long-term holding. However, after the ambivalent announcement on Friday, I concluded that a dividend cut was likely. As a result, I made a decision that is somewhat in line with how I approach dividend cuts.
I sold most of my shares today, and bought an equivalent amount of calls. When I say that I sold shares, I mean that I performed some tax-loss harvesting as described before. For each 100 shares I owned, I sold one call to lock in the sale price and bought one put to protect from further downside. When those contracts expire in a little over 1 month, I will close the call, the put and sell the shares. Instead of buying more shares however to maintain my position, I bought calls.
For example, for every 100 shares that I held originally, I bought 1 call. This was meant as a way to limit risk. I will reconsider holding the stock when the dividend starts growing again. Until then I will hold on to those options.
I have changed my mind from my article from last week. I believe that Kinder Morgan will be a good long-term holding. However, after the ambivalent announcement on Friday, I concluded that a dividend cut was likely. As a result, I made a decision that is somewhat in line with how I approach dividend cuts.
I sold most of my shares today, and bought an equivalent amount of calls. When I say that I sold shares, I mean that I performed some tax-loss harvesting as described before. For each 100 shares I owned, I sold one call to lock in the sale price and bought one put to protect from further downside. When those contracts expire in a little over 1 month, I will close the call, the put and sell the shares. Instead of buying more shares however to maintain my position, I bought calls.
For example, for every 100 shares that I held originally, I bought 1 call. This was meant as a way to limit risk. I will reconsider holding the stock when the dividend starts growing again. Until then I will hold on to those options.
Monday, December 7, 2015
Three Investing Lessons I Learned the Hard Way
In my site, I try to stress out the importance of diversification, patience and not chasing yield. The truth is that I have learned the hard way to keep those items in mind, any time I am investing my hard earned money. Many investors will ignore the teachings of this article, because these lessons might sound like a common sense approach to them. Others will ignore them, before they haven’t yet experienced the debilitating loss of capital or future opportunity by failing to adhere to these sound principles. Only a select few investors, who keep an open and inquisitive mind would be able to learn, without having to go through painful losses that typically precede learning in the investment field. I know these principles to be sound, because any time I fail to adhere to them, I always lose money.
The first lesson I have learned is never to chase yield. I have chased yield in the past, and have gotten burned doing it. The first time I chased yield, I was following a high-yield junk bond closed-end-fund, that was yielding 10-12%. The trust kept cutting distributions, but it kept yielding 10%-12%. As a result I thought I would just keep reinvesting distributions, and make up for the losses in income. Unfortunately, yields stayed the same because prices kept decreasing over time. Luckily, I saw the folly of my thinking, since my yield on cost was decreasing. After my issue with Managed High Yield Plus Fund (HYF), I decided to focus on companies that increase distributions. This is when I learned the second lesson the hard way.
The first lesson I have learned is never to chase yield. I have chased yield in the past, and have gotten burned doing it. The first time I chased yield, I was following a high-yield junk bond closed-end-fund, that was yielding 10-12%. The trust kept cutting distributions, but it kept yielding 10%-12%. As a result I thought I would just keep reinvesting distributions, and make up for the losses in income. Unfortunately, yields stayed the same because prices kept decreasing over time. Luckily, I saw the folly of my thinking, since my yield on cost was decreasing. After my issue with Managed High Yield Plus Fund (HYF), I decided to focus on companies that increase distributions. This is when I learned the second lesson the hard way.
Thursday, December 3, 2015
What should I do about Kinder Morgan?
As most of you know, Kinder Morgan is one of my largest holdings. The position is a result of accumulating the limited partnership units over the past 7 – 8 years through KMR, which were then converted into Kinder Morgan shares in the roll-up last year. I have also had Kinder Morgan as one of my best ideas ever since it went public in 2011. I liked the history of consistent dividend growth, the fact that a large portion of revenues are recurring toll-road like, and the competitive position of pipelines and storage terminal assets. I really liked the fact that Richard Kinder has a large portion of his net worth in Kinder Morgan.
With the stock going down precipitously this year, I have been asked by readers what I am doing. This is not a complete detailed analysis – just a few random thoughts.
Before I start, I have been doing tax-loss harvesting.
But I generally see several outcomes.
The first is that the company stops raising the dividend, but slashes its growth capital expenditures (Capex) budget ( though maintaining the maintenance capex expenditures). Given the low share price, the dividend yield is high, which causes the cost of capital to be high. Given the level of debt, the company will be unable to sell a lot of debt in order to grow. I believe that the company has the ability to fund the dividend from current cash flow from operations or DCF, as well as funding any maintenance capex. When cost of capital is high, the rational decision is to postpone investment. Otherwise, the company is leveraging itself and levering up when it should be staying put. Either way, as long as the dividend is paid, I will hold on to the shares. I will allocate the dividend elsewhere.
With the stock going down precipitously this year, I have been asked by readers what I am doing. This is not a complete detailed analysis – just a few random thoughts.
Before I start, I have been doing tax-loss harvesting.
But I generally see several outcomes.
The first is that the company stops raising the dividend, but slashes its growth capital expenditures (Capex) budget ( though maintaining the maintenance capex expenditures). Given the low share price, the dividend yield is high, which causes the cost of capital to be high. Given the level of debt, the company will be unable to sell a lot of debt in order to grow. I believe that the company has the ability to fund the dividend from current cash flow from operations or DCF, as well as funding any maintenance capex. When cost of capital is high, the rational decision is to postpone investment. Otherwise, the company is leveraging itself and levering up when it should be staying put. Either way, as long as the dividend is paid, I will hold on to the shares. I will allocate the dividend elsewhere.
Wednesday, December 2, 2015
Recent Purchase
Last week I purchased shares of Hershey (HSY). The Hershey Company (HSY), together with its subsidiaries, engages in manufacturing, marketing, selling, and distributing various chocolate and confectionery products, pantry items, and gum and mint refreshment products worldwide.
Compared to the situation from earlier in 2015 when I warned of high prices on Hershey, I believe that the shares are attractively valued around $85 - $86/share. This translates to a little under 20 times expected earnings of $4.42/share for 2016 for the company. The stock yields 2.70%, which is a very good starter yield for the chocolate maker. The company has managed to boost dividends for five years in a row. In 2009, Hershey (HSY) froze dividends, thus ending a 30 year streak of dividend increases. I find Hershey to be a company of high quality, which has a unique product, loyal customer base, low chances of product obsolescence and some pricing power due to branded nature of its products. In other words, this is the type of company that I don't believe will change much to the worse in the next 20 years. This is also a company I think I understand. Check my analysis of Hershey on Seeking Alpha for more information about the company.
A few weeks before that, I also sold some puts on Hershey with a strike price of 85 that expire in May 2016. There are three possible outcomes that could occur by May 2016.
Compared to the situation from earlier in 2015 when I warned of high prices on Hershey, I believe that the shares are attractively valued around $85 - $86/share. This translates to a little under 20 times expected earnings of $4.42/share for 2016 for the company. The stock yields 2.70%, which is a very good starter yield for the chocolate maker. The company has managed to boost dividends for five years in a row. In 2009, Hershey (HSY) froze dividends, thus ending a 30 year streak of dividend increases. I find Hershey to be a company of high quality, which has a unique product, loyal customer base, low chances of product obsolescence and some pricing power due to branded nature of its products. In other words, this is the type of company that I don't believe will change much to the worse in the next 20 years. This is also a company I think I understand. Check my analysis of Hershey on Seeking Alpha for more information about the company.
A few weeks before that, I also sold some puts on Hershey with a strike price of 85 that expire in May 2016. There are three possible outcomes that could occur by May 2016.
Monday, November 30, 2015
Four Notable Dividend Increases From Last Week
As a dividend investor, my goal is build a portfolio that regularly grows dividend income. This ensures that my dividend income maintains its purchasing power, without me having to add new funds. It is little surprise that I regularly monitor the lists of dividend growth stocks for dividend increases every single week. This is a fun and easy way to observe how my investments are doing. Checking up on dividend increases also helps me in uncovering hidden dividend gems that I may have to add to my list for further research.
Over the past week, there were several notable dividend champions that rewarded their shareholders with a dividend increase. I have a stake in the first two, while the latter two are companies I have on my list for monitoring purposes. The companies include:
McCormick & Company (MKC) manufactures, markets, and distributes spices, seasoning mixes, condiments, and other flavorful products to the food industry worldwide. It operates through two segments, Consumer and Industrial. The company raised its quarterly dividend by 7.50% to 43 cents/share. This marked the 30th consecutive annual dividend increase for this dividend champion. The ten year dividend growth rate is 10.20%/year. The company is overvalued at 24.60 times expected earnings and yields 2%. I would be interested in adding to the stock on dips below 20 times earnings. Check my analysis of McCormick.
Over the past week, there were several notable dividend champions that rewarded their shareholders with a dividend increase. I have a stake in the first two, while the latter two are companies I have on my list for monitoring purposes. The companies include:
McCormick & Company (MKC) manufactures, markets, and distributes spices, seasoning mixes, condiments, and other flavorful products to the food industry worldwide. It operates through two segments, Consumer and Industrial. The company raised its quarterly dividend by 7.50% to 43 cents/share. This marked the 30th consecutive annual dividend increase for this dividend champion. The ten year dividend growth rate is 10.20%/year. The company is overvalued at 24.60 times expected earnings and yields 2%. I would be interested in adding to the stock on dips below 20 times earnings. Check my analysis of McCormick.
Monday, November 23, 2015
Three Dividend Seeds I Planted Last Week
I view each investment I make as a seed that I plant for the long-term. Some seeds could turn into a tree that would provide fruit (dividend income) for decades to come. My goal as an investor is to ensure that I plant those seeds in a systematic way that increases the odds of success. My definition of success is the ability to live off dividends when I decide to stop working.
In the past week, I managed to add to my positions in the following three companies:
Target Corporation (TGT) operates as a general merchandise retailer in the United States. Target is a dividend champion which has raised dividends for 48 years in a row. Over the past decade, the company has raised dividends by 20.30%/year.
The stock is selling at 15.20 times expected earnings for 2015 and yields 3.20%. Check my analysis of Target at Seeking Alpha.
The most interesting thing is that I sold two-thirds of my Target position in early 2015. Now I am able to get back in at lower prices. This happens very rarely, and is more of an exception rather than the norm.
In the past week, I managed to add to my positions in the following three companies:
Target Corporation (TGT) operates as a general merchandise retailer in the United States. Target is a dividend champion which has raised dividends for 48 years in a row. Over the past decade, the company has raised dividends by 20.30%/year.
The stock is selling at 15.20 times expected earnings for 2015 and yields 3.20%. Check my analysis of Target at Seeking Alpha.
The most interesting thing is that I sold two-thirds of my Target position in early 2015. Now I am able to get back in at lower prices. This happens very rarely, and is more of an exception rather than the norm.
Friday, November 20, 2015
Are you patient enough to become a successful dividend investor?
One of my largest holdings is McDonald’s (MCD). The company recently raised its quarterly dividend by 4.7% to 89 cents/share. McDonald's is a dividend champion which has raised its dividend each and every year since paying its first dividend in 1976. Given the yield of 3.20% and the dividend growth of 5% (and my estimated earnings growth of 5%/year), this sounds like a decent investment for slow and steady income and wealth accumulation. You might enjoy my latest analysis of McDonald's here.
Yet, a few months ago everyone had written McDonald’s off. Noone was supposedly eating there. Many investors sold out after earnings per share and the stock price went nowhere for 3 years. I didn’t sell however, because I know that most profits are made by patiently sitting on a holding, and doing as little as possible.
Replacing a dividend company sold is a very difficult endeavor. It requires that:
1) You correctly identify a company you own that is not going to do well, and will not provide good returns
2) You correctly identify a company that is going to do well and will return more than the company sold
3) The new company has to provide better results than the old company, and that is after accounting for taxes, commissions etc
There are several reasons below why I didn’t sell:
Yet, a few months ago everyone had written McDonald’s off. Noone was supposedly eating there. Many investors sold out after earnings per share and the stock price went nowhere for 3 years. I didn’t sell however, because I know that most profits are made by patiently sitting on a holding, and doing as little as possible.
Replacing a dividend company sold is a very difficult endeavor. It requires that:
1) You correctly identify a company you own that is not going to do well, and will not provide good returns
2) You correctly identify a company that is going to do well and will return more than the company sold
3) The new company has to provide better results than the old company, and that is after accounting for taxes, commissions etc
There are several reasons below why I didn’t sell:
Wednesday, November 18, 2015
Relative Performance Comparisons are Useless for Dividend Investors
I started my site dedicated to dividend investing in January 2008. I had been able to accumulate some money for the first time in 2007, and had spent hundreds of hours teaching myself how to properly allocate it. The purpose for this site was to make myself do the work to form an opinion, and to share what I have learned and share my thoughts on investing.
Since the very beginning of the site, my goal has been to accumulate enough income producing assets. Once the income from those assets exceeds my expenses by a comfortable margin of safety, I would consider myself retired or financially independent ( you pick the correct word).
One of the lessons I have learned is that investing is part art, part science. A certain lesson can be very useful in some scenarios, but also very dangerous in others.
For example, if you have a winning investment strategy, you need to stick to it through thick and thin. An investor should not let temporary periods of bad performance influence you to jump ship. In my book, a strategy should only be evaluated based on whether it can help in reaching my goal of attaining financial independence.
On the other hand, you should also know when your strategy is no longer working or doesn’t make sense due to certain factors. If you stick to a strategy for too long, you will be unable to reach financial independence on time.
Is your head spinning yet?
Since the very beginning of the site, my goal has been to accumulate enough income producing assets. Once the income from those assets exceeds my expenses by a comfortable margin of safety, I would consider myself retired or financially independent ( you pick the correct word).
One of the lessons I have learned is that investing is part art, part science. A certain lesson can be very useful in some scenarios, but also very dangerous in others.
For example, if you have a winning investment strategy, you need to stick to it through thick and thin. An investor should not let temporary periods of bad performance influence you to jump ship. In my book, a strategy should only be evaluated based on whether it can help in reaching my goal of attaining financial independence.
On the other hand, you should also know when your strategy is no longer working or doesn’t make sense due to certain factors. If you stick to a strategy for too long, you will be unable to reach financial independence on time.
Is your head spinning yet?
Monday, November 16, 2015
Life after Financial Independence
In a previous article, I discussed that I will reach Financial Independence some time in 2018. After I reach the dividend crossover point, my dividend income will pay for expenses. Many assumed that I will just call it quits and live off the $1,500 - $2,000 in monthly dividend income that the portfolio will generate.
These assumptions are further away from the truth however.
Last year, I shared with you that I was running low on motivation on my quest towards financial independence. I was working at a job that was really nice to work at initially. After about an year or so however, I was put on a terrible project with impossible deadlines and management. After burning out quickly, I found a new opportunity.
I once worked at an organization just like that where I kept track of my time in 6 minute increments and worked 60 - 80 hours/week. Not a lot of fun, and a lot of backstabbing too. Though if you stayed for 10+ years, you could have made a lot of money and earned a decent pension too.
Then I moved to an organization where I worked 30 - 40 hours/week, and earned more income. The first organization taught me how valuable my time was. This lesson I never forget - allocating time is as important factor in success as allocating capital.
I enjoy my current position. I have ebbs and flows in the amount of work throughout the month, but I actually enjoy it. I could see myself doing that for several years after reaching financial independence.
These assumptions are further away from the truth however.
Last year, I shared with you that I was running low on motivation on my quest towards financial independence. I was working at a job that was really nice to work at initially. After about an year or so however, I was put on a terrible project with impossible deadlines and management. After burning out quickly, I found a new opportunity.
I once worked at an organization just like that where I kept track of my time in 6 minute increments and worked 60 - 80 hours/week. Not a lot of fun, and a lot of backstabbing too. Though if you stayed for 10+ years, you could have made a lot of money and earned a decent pension too.
Then I moved to an organization where I worked 30 - 40 hours/week, and earned more income. The first organization taught me how valuable my time was. This lesson I never forget - allocating time is as important factor in success as allocating capital.
I enjoy my current position. I have ebbs and flows in the amount of work throughout the month, but I actually enjoy it. I could see myself doing that for several years after reaching financial independence.
Friday, November 13, 2015
Time in the market is your greatest ally in investing
The more I learn and experience about investing, the more convinced I become that doing nothing is the best strategy for long-term success in a portfolio. I believe that time in the market is more important than timing the market. This is the conclusion I reach in an earlier article on the topic:
"The lesson to long-term investors is clear; it doesn't matter whether we are in a bull market or bear market. The goal is to dollar cost average each month in quality dividend growth stocks selling at attractive valuations, reinvest dividends, and hold patiently for the next 20 – 30 years. I cannot emphasize quality factor, since the quality companies are more likely to survive a deep recession unscathed, and continue paying and growing dividends, even during the hardest of times. "
When I was much less knowledgeable and experienced, I operated under the assumption that it is easy to just switch in and out of stocks, and thus outguess the markets. In reality, this was a foolish approach, since nobody can consistently go in and out of stocks. This is because it costs a lot in terms of taxes, commissions and time to sell a company and buy another one. The biggest cost of course is opportunity cost, since in the majority of scenarios I would have been better off, had I simply stayed put, and allocated my dividends in the best ideas at the time. Hence, the only time I have considered selling is if a dividend is cut, or a position becomes so overpriced or take such a weight in my portfolio, that it would be prudent to trim or eliminate it.
This belief has been further reinforced by a few examples that I have come across. I covered the first example a few months ago, when I discussed the performance of the original members of the S&P 500 from 1957. The second example is from a completely passive fund that was set up 78 years ago.
The Corporate Leaders Trust was created in 1935 with an equal number of common stock shares of the 30 leading U.S. companies at the time. The goal was to seek long term capital growth and income through investment generally in an equal number of shares of common stock of a fixed list of American blue chip corporations. After 78 years, it is currently invested in a total of 23 leading U.S. corporations. The trust cannot purchase new companies, so holdings have changed only due to spin-offs, dividend eliminations, or mergers since fund inception. The Fund is a passively managed grantor trust registered with the SEC as a unit investment trust. The fund was expected to be liquidated by 2015, but its life has since been extended through 2100.
The original 30 securities were:
The current 23 holdings are:
Source: Fund Website
There were only a few outright failures in the portfolio of the fund. However, what really helped results was the fact that the trust let winners run for as long as possible. As a dividend investor, I have learned that I should not sell, even if the stock I own is up over 1,000%. This is because it does not make sense to get rid of your winners, that will propel your portfolio forward, both in terms of capital appreciation and dividend growth. In a long-term portfolio that is held for generations, one could reasonably expect to have positions that result in mind-boggling returns over those decades.
The changes are as a result of acquisitions, spin-offs, and dividend eliminations. When a company eliminates dividends or goes bankrupt, it is sold out.
A $10,000 investment in 1941 would be worth $18.40 million by the end of 2014, and generating annual dividend income of almost $400,000/year at a current yield of 2.23%. Source: Prospectus
The interesting fact is that since 1970, it has managed to outperform the S&P 500, while being completely passively managed. Source: Fund Website
This is a testament of the power of selecting the leading dividend paying blue chips of the time, and then patiently holding for generations. Investors in the trust ignored all the fads of the next 78 years, and did really well by investing in businesses that stood the test of time. A diverse portfolio of mature blue chip companies with enduring business models will generate loads of excess cash for their shareholders, which could then be reinvested into more shares at depressed values.
This is also a testament to the fact that the blue chip holdings are not expected to grow as rapidly as companies in hot new sectors, which is why those blue chips are perennially undervalued. As a result, dividends are reinvested into undervalued shares, which further turbocharges returns. When you have low expectations, valuations are low. However, if you manage to generate consistent earnings growth, this can result in very good investor returns. This is a superior strategy to the one where hot growth stocks are chased by unsuspecting investors who pay dearly for the chance to buy future growth, which rarely materialized to the extend expected. When you invest in a stock or a sector with inflated expectations, you pay a premium for it. If things do not go as expected, the valuation compression and the low increase in earnings serve as a double-whammy that prevents investors from realizing a gain.
If you really sit and think about it, long-term investing is the best ally of the individual dividend investor. It allows you to quietly compound your capital by focusing only on quality blue chip dividend paying companies that have enduring business models, while ignoring the everyday noise that tries to make you to do something, when in reality there is no need for you to act.
A 3% yield today might not sound like a lot today, but if you reinvest those dividends that grow at 6% – 7% annually for the next 30 – 40 – 50 years, the level of dividend income would be mind boggling. If you also look at that from the perspective of a company that grows earnings by 6% – 7%/year for that period of time, your wealth would be increasing a lot as well. The small yield today is the seed that will bring fruit to you and your family or charitable cause for decades to come. Do not waste it, but do the smart thing by investing it and watching it turn into a beautiful tree.
So to summarize, this fund proves that a diversified portfolio of blue chip companies that regularly pay dividends, and adapt to the ever changing economy is a great way to build and maintain wealth and income. It is a living proof that passive buy and hold dividend investing works for those who are patient and have a long-term mindset.
Full Disclosure:I have a position in T, BRK/B, CVX, XOM, GE, PG, UNP
Relevant Articles:
- Time in the market is more important than timing the market
- The Perfect Dividend Portfolio
- Where are the original Dividend Aristocrats now?
- Quality Dividend Stocks versus Growth Stocks
- What drives future investment returns?
"The lesson to long-term investors is clear; it doesn't matter whether we are in a bull market or bear market. The goal is to dollar cost average each month in quality dividend growth stocks selling at attractive valuations, reinvest dividends, and hold patiently for the next 20 – 30 years. I cannot emphasize quality factor, since the quality companies are more likely to survive a deep recession unscathed, and continue paying and growing dividends, even during the hardest of times. "
When I was much less knowledgeable and experienced, I operated under the assumption that it is easy to just switch in and out of stocks, and thus outguess the markets. In reality, this was a foolish approach, since nobody can consistently go in and out of stocks. This is because it costs a lot in terms of taxes, commissions and time to sell a company and buy another one. The biggest cost of course is opportunity cost, since in the majority of scenarios I would have been better off, had I simply stayed put, and allocated my dividends in the best ideas at the time. Hence, the only time I have considered selling is if a dividend is cut, or a position becomes so overpriced or take such a weight in my portfolio, that it would be prudent to trim or eliminate it.
This belief has been further reinforced by a few examples that I have come across. I covered the first example a few months ago, when I discussed the performance of the original members of the S&P 500 from 1957. The second example is from a completely passive fund that was set up 78 years ago.
The Corporate Leaders Trust was created in 1935 with an equal number of common stock shares of the 30 leading U.S. companies at the time. The goal was to seek long term capital growth and income through investment generally in an equal number of shares of common stock of a fixed list of American blue chip corporations. After 78 years, it is currently invested in a total of 23 leading U.S. corporations. The trust cannot purchase new companies, so holdings have changed only due to spin-offs, dividend eliminations, or mergers since fund inception. The Fund is a passively managed grantor trust registered with the SEC as a unit investment trust. The fund was expected to be liquidated by 2015, but its life has since been extended through 2100.
The original 30 securities were:
The current 23 holdings are:
Source: Fund Website
There were only a few outright failures in the portfolio of the fund. However, what really helped results was the fact that the trust let winners run for as long as possible. As a dividend investor, I have learned that I should not sell, even if the stock I own is up over 1,000%. This is because it does not make sense to get rid of your winners, that will propel your portfolio forward, both in terms of capital appreciation and dividend growth. In a long-term portfolio that is held for generations, one could reasonably expect to have positions that result in mind-boggling returns over those decades.
You can view the historical changes in the portfolio holdings of the trust between 1935 and 1979 here:
You can view the changes in holdings between 1980 and 2015 below:
The changes are as a result of acquisitions, spin-offs, and dividend eliminations. When a company eliminates dividends or goes bankrupt, it is sold out.
A $10,000 investment in 1941 would be worth $18.40 million by the end of 2014, and generating annual dividend income of almost $400,000/year at a current yield of 2.23%. Source: Prospectus
The interesting fact is that since 1970, it has managed to outperform the S&P 500, while being completely passively managed. Source: Fund Website
This is a testament of the power of selecting the leading dividend paying blue chips of the time, and then patiently holding for generations. Investors in the trust ignored all the fads of the next 78 years, and did really well by investing in businesses that stood the test of time. A diverse portfolio of mature blue chip companies with enduring business models will generate loads of excess cash for their shareholders, which could then be reinvested into more shares at depressed values.
This is also a testament to the fact that the blue chip holdings are not expected to grow as rapidly as companies in hot new sectors, which is why those blue chips are perennially undervalued. As a result, dividends are reinvested into undervalued shares, which further turbocharges returns. When you have low expectations, valuations are low. However, if you manage to generate consistent earnings growth, this can result in very good investor returns. This is a superior strategy to the one where hot growth stocks are chased by unsuspecting investors who pay dearly for the chance to buy future growth, which rarely materialized to the extend expected. When you invest in a stock or a sector with inflated expectations, you pay a premium for it. If things do not go as expected, the valuation compression and the low increase in earnings serve as a double-whammy that prevents investors from realizing a gain.
If you really sit and think about it, long-term investing is the best ally of the individual dividend investor. It allows you to quietly compound your capital by focusing only on quality blue chip dividend paying companies that have enduring business models, while ignoring the everyday noise that tries to make you to do something, when in reality there is no need for you to act.
A 3% yield today might not sound like a lot today, but if you reinvest those dividends that grow at 6% – 7% annually for the next 30 – 40 – 50 years, the level of dividend income would be mind boggling. If you also look at that from the perspective of a company that grows earnings by 6% – 7%/year for that period of time, your wealth would be increasing a lot as well. The small yield today is the seed that will bring fruit to you and your family or charitable cause for decades to come. Do not waste it, but do the smart thing by investing it and watching it turn into a beautiful tree.
So to summarize, this fund proves that a diversified portfolio of blue chip companies that regularly pay dividends, and adapt to the ever changing economy is a great way to build and maintain wealth and income. It is a living proof that passive buy and hold dividend investing works for those who are patient and have a long-term mindset.
Full Disclosure:I have a position in T, BRK/B, CVX, XOM, GE, PG, UNP
Relevant Articles:
- Time in the market is more important than timing the market
- The Perfect Dividend Portfolio
- Where are the original Dividend Aristocrats now?
- Quality Dividend Stocks versus Growth Stocks
- What drives future investment returns?
Wednesday, November 11, 2015
Entering Wealth Preservation Mode
In my previous article, I discussed the concept of the dividend snowball as it applies to my dividend portfolio and dividend income. The powerful concept of the dividend snowball means that a portfolio generating $15,000 in annual dividend income could easily double dividend income to $30,000/year in a decade or less. This calculation assumes that no new capital is allocated to that dividend machine, and dividends were reinvested. Just for the sake of reference, I achieved the first $15,000 in annual dividend income in a little over eight years of savings and investing.
Now that I am getting very close to the dividend crossover point, and financial independence, it is time to make sure my financial house is in order. As the amount of money at stake increases, my desire for risk starts decreasing. This is why I have been thinking lately about including layers of protection around my nest egg that will protect it from future downside. Wealth preservation is as important as building wealth in the first place. If you have won the game ( or will have won it by the end of the decade), it is important to stop playing so hard and to make sure the downside is protected from risks.
Now that I am getting very close to the dividend crossover point, and financial independence, it is time to make sure my financial house is in order. As the amount of money at stake increases, my desire for risk starts decreasing. This is why I have been thinking lately about including layers of protection around my nest egg that will protect it from future downside. Wealth preservation is as important as building wealth in the first place. If you have won the game ( or will have won it by the end of the decade), it is important to stop playing so hard and to make sure the downside is protected from risks.
Monday, November 9, 2015
Margin of Safety in Retirement Income: How to create a fool proof dividend machine for retirement
In a previous article titled, My Dividend Retirement Plan, I outlined the concept of the dividend crossover point. This happens when your dividend income exceeds expenses for the first time. The dream of every dividend investor is to achieve this point of financial independence. However, do not quit your day job yet. It might make more sense for income investors to postpone their retirement by a couple of years, simply to ensure an adequate margin of safety behind their dividend income.
In order to succeed, you need to layer your portfolio in a way that one black swan event is not going to derail your retirement plans. If you really want to fool-proof your plan, you should design your income strategy in a way that would allow you to retire, even if multiple torpedoes hit your portfolio. This is why I focus on building a diversified portfolio of dividend paying stocks, purchased at attractive valuations. I try to own at least 30 - 40 individual quality companies with competitive advantages, which are likely to increase earnings over time. In this article I am making assumptions that these qualitative factors are already accounted for.
In order to have a margin of safety in their dividend income, investors need to consistently generate an annual stream of distributions that exceeds their annual expenses by approximately 33% - 50%. This means that if your annual expenses are $30,000/year, your dividend income should be somewhere in the vicinity of $40,000 - $45,000 in order to have an adequate margin of safety. The factor is not set in stone, and could vary from as little as 1.20 times expenses all the way to two times expenses. This margin of safety is important, in order to protect investors against risks that they might have overlooked during the design stage of their dividend machine.
In order to succeed, you need to layer your portfolio in a way that one black swan event is not going to derail your retirement plans. If you really want to fool-proof your plan, you should design your income strategy in a way that would allow you to retire, even if multiple torpedoes hit your portfolio. This is why I focus on building a diversified portfolio of dividend paying stocks, purchased at attractive valuations. I try to own at least 30 - 40 individual quality companies with competitive advantages, which are likely to increase earnings over time. In this article I am making assumptions that these qualitative factors are already accounted for.
In order to have a margin of safety in their dividend income, investors need to consistently generate an annual stream of distributions that exceeds their annual expenses by approximately 33% - 50%. This means that if your annual expenses are $30,000/year, your dividend income should be somewhere in the vicinity of $40,000 - $45,000 in order to have an adequate margin of safety. The factor is not set in stone, and could vary from as little as 1.20 times expenses all the way to two times expenses. This margin of safety is important, in order to protect investors against risks that they might have overlooked during the design stage of their dividend machine.
Wednesday, November 4, 2015
Building my dividend snowball to $30,000 in annual dividend income by 2024
One of my favorite books on investing is “The Snowball: Warren Buffett and the Business of Life” by Alice Schroeder. The book describes how Warren Buffett accumulated his fortune starting at a young age, up until early 2008 when he became one of the richest people on earth.
I like the concept of a snowball, where you start small, accumulate snowflakes as you start pushing it down the hill, and then you keep rolling the snowball until it turns huge. After that, the snowball grows even larger, without any additional input from you.
With dividend investing, you start small, and immediately get hooked the moment you receive the first dividend paycheck. The realization that you earned passive income without even lifting a finger has had a huge impact on the dividend investing community. The second realization that if you manage to put more money to work, and if you reinvest those dividends, you are going to grow that passive dividend income in the future. Let’s assume that I earn $20/hour from my job. The way I think about it is that for each $20 in dividend income I can receive today, I am essentially buying an hour of freedom from work. The following story from The Snowball, about Charlie Munger ( Warren Buffett's investing partner at Berkshire Hathaway) really resonated with me:
Charlie, as a very young lawyer, was probably getting $20 an hour. He thought to himself, ‘Who’s my most valuable client?’ And he decided it was himself. So he decided to sell himself an hour each day. He did it early in the morning, working on these construction projects and real estate deals. Everybody should do this, be the client, and then work for other people, too, and sell yourself an hour a day.
I like the concept of a snowball, where you start small, accumulate snowflakes as you start pushing it down the hill, and then you keep rolling the snowball until it turns huge. After that, the snowball grows even larger, without any additional input from you.
With dividend investing, you start small, and immediately get hooked the moment you receive the first dividend paycheck. The realization that you earned passive income without even lifting a finger has had a huge impact on the dividend investing community. The second realization that if you manage to put more money to work, and if you reinvest those dividends, you are going to grow that passive dividend income in the future. Let’s assume that I earn $20/hour from my job. The way I think about it is that for each $20 in dividend income I can receive today, I am essentially buying an hour of freedom from work. The following story from The Snowball, about Charlie Munger ( Warren Buffett's investing partner at Berkshire Hathaway) really resonated with me:
Charlie, as a very young lawyer, was probably getting $20 an hour. He thought to himself, ‘Who’s my most valuable client?’ And he decided it was himself. So he decided to sell himself an hour each day. He did it early in the morning, working on these construction projects and real estate deals. Everybody should do this, be the client, and then work for other people, too, and sell yourself an hour a day.
Monday, November 2, 2015
How early retirees can withdraw money from tax-deferred accounts such as 401 (k), IRA & HSA
One of the biggest mistakes I ever made was not maxing out my 401 (k), IRA and HSA accounts between 2007 and 2012. As a result, I ended up paying tens of thousands of dollars in income taxes and taxes on capital gains and dividends. Those are tens of thousands of dollars in taxes that could have built up my networth and passive dividend income. Instead I ended up handing those over to the IRS and my state. The opportunity cost of these money is in the hundreds of thousands if not the millions over the next 30 - 40 - 50 years.
The reason why I never maxed those out is because I didn’t know a lot about them. I also prided myself with my success that I was paying a lot in taxes. When I was doing my 2012 tax return however, I was sick that my total tax liability exceeded the amount I paid on housing and food. In fact, the amount I paid in taxes was equivalent to what I can live on in retirement. I saw that a fellow blogger from the site Budgets Are Sexy had written about maxing out his SEP IRA and Roth IRA’s, thus saving tens of thousands of dollars in taxes just for one year. So I opened a SEP IRA and maxed it out, saving 30 cents in taxes from every dollar I contributed to. Here was I researching companies, competitive advantages, earnings and valuations, yet I had overlooked the simple power of tax-deferral and tax-deferred compounding of capital. As I kept researching, I I found the sites of Mad Fientist and Go Curry Cracker, which opened my eyes on the benefits of tax deferred accounts. These investors had managed to retire early by taking advantage of the tax code, and then were paying zero dollars in taxes during their early retirement. Another one I thoroughly enjoy is Justin from Root of Good, who retired at the tender age of 33 and paid pretty much zero in taxes.
My biggest misconception was the fact that I thought that the money is locked until the age of 59 and a half years, and that I cannot touch the money. This was wrong. I also see this misconception has deep roots in many dividend investors I have talked to. These investors mistakenly believe that you cannot withdraw money from retirement accounts when you are aiming for early retirement in your 30s or 40s or 50s. As a result of this misconception, these dividend investors will end up hundreds of thousands of dollars poorer over their lifetimes. This is the reason why I am writing this article. Ever since I had my awakening moment in 2013, I have tried to educate investors. I have been unsuccessful for some, but I will continue fighting.
The reason why I never maxed those out is because I didn’t know a lot about them. I also prided myself with my success that I was paying a lot in taxes. When I was doing my 2012 tax return however, I was sick that my total tax liability exceeded the amount I paid on housing and food. In fact, the amount I paid in taxes was equivalent to what I can live on in retirement. I saw that a fellow blogger from the site Budgets Are Sexy had written about maxing out his SEP IRA and Roth IRA’s, thus saving tens of thousands of dollars in taxes just for one year. So I opened a SEP IRA and maxed it out, saving 30 cents in taxes from every dollar I contributed to. Here was I researching companies, competitive advantages, earnings and valuations, yet I had overlooked the simple power of tax-deferral and tax-deferred compounding of capital. As I kept researching, I I found the sites of Mad Fientist and Go Curry Cracker, which opened my eyes on the benefits of tax deferred accounts. These investors had managed to retire early by taking advantage of the tax code, and then were paying zero dollars in taxes during their early retirement. Another one I thoroughly enjoy is Justin from Root of Good, who retired at the tender age of 33 and paid pretty much zero in taxes.
My biggest misconception was the fact that I thought that the money is locked until the age of 59 and a half years, and that I cannot touch the money. This was wrong. I also see this misconception has deep roots in many dividend investors I have talked to. These investors mistakenly believe that you cannot withdraw money from retirement accounts when you are aiming for early retirement in your 30s or 40s or 50s. As a result of this misconception, these dividend investors will end up hundreds of thousands of dollars poorer over their lifetimes. This is the reason why I am writing this article. Ever since I had my awakening moment in 2013, I have tried to educate investors. I have been unsuccessful for some, but I will continue fighting.
Friday, October 30, 2015
How to Increase Dividend Income
I expect that this year, I will be able to cover something like 60 - 80% of my targeted annual expenses from dividends alone. This means that my forward dividend income will cover 60% - 80% of my expenses. My forward dividend income is the amount of dividend income I will receive over the next year from investments I have today. It assumes no reinvestment of dividends and no new capital being added.
I believe that sometime around late 2018, my forward dividend income will be able to exceed my target monthly expenses and also have a neat little margin of safety as well. A margin of safety is important, because I want to have the luxury of never having to work for money again. A retirement where I have to spend time at a low paid part-time position does not seem appealing to me. This is why I believe generating a little more in dividend income than I need to is important, even if that means working an extra year.
As I get closer to the finish line, I am starting to get a lot of ideas on how to increase dividends faster. You might remember this post that I wrote over an year ago. I think it is time to re-visit the ideas, and add some more meat.
I believe that sometime around late 2018, my forward dividend income will be able to exceed my target monthly expenses and also have a neat little margin of safety as well. A margin of safety is important, because I want to have the luxury of never having to work for money again. A retirement where I have to spend time at a low paid part-time position does not seem appealing to me. This is why I believe generating a little more in dividend income than I need to is important, even if that means working an extra year.
As I get closer to the finish line, I am starting to get a lot of ideas on how to increase dividends faster. You might remember this post that I wrote over an year ago. I think it is time to re-visit the ideas, and add some more meat.
Wednesday, October 28, 2015
Two Dividend Seeds I Planted For Long Term Income
I am incredibly lucky that I have been able to share my dividend investing journey with you over the past eight years. I am also very lucky that I have always maintained a frugal attitude to costs, which allows me to save money that I invest in dividend growth stocks every single month. Every action I make today helps me get closer to my goal of living off dividends after hitting the dividend crossover point. Each dividend check is used to buy more dividend stocks, that generate more dividend checks for me. This is the power of the dividend snowball in action.
One of my favorite sayings is the following:
“The best time to plant a tree was 20 years ago. The second best time is today”
I view each dividend investment as a small seed, which could snowball through the power of compounding into a mighty tree. When I decide to retire, I expect to live off the fruit from the seed I may have planted years or decades ago. With each $1000 investment, I increase the amount of dividend income I can generate. Every dollar I generate in dividend income is a dollar for which I do not have to spend 40 – 60 hours/week in the office. Every dollar allows me to buy my own time from an employer.
One of my favorite sayings is the following:
“The best time to plant a tree was 20 years ago. The second best time is today”
I view each dividend investment as a small seed, which could snowball through the power of compounding into a mighty tree. When I decide to retire, I expect to live off the fruit from the seed I may have planted years or decades ago. With each $1000 investment, I increase the amount of dividend income I can generate. Every dollar I generate in dividend income is a dollar for which I do not have to spend 40 – 60 hours/week in the office. Every dollar allows me to buy my own time from an employer.
Monday, October 26, 2015
Four Dividend Growth Stocks Rewarding Investors with a Raise
I invest in dividend growth stocks for two reasons; the predictability of dividend income and predictability of dividend increases. I usually have a very good handle on the payment schedule of each dividend payment. I also know when to expect a dividend increase from each company I own. Most companies raise dividends once an year. A few select ones manage to boost dividends to shareholders more often than that. Either way, since I started tracking my organic dividend growth from my portfolio, the raises have been much higher than the raises I receive from my day job ( where I spend 40 – 60 hours/week). It is a very nice feeling to receive a raise for an investment that I may have done several years ago, without really having to do any subsequent work on it.
Monitoring the rate of change in dividend payments is one of the things I look for when I monitor dividend growth stocks. A company that is experiencing short-term turbulence and still manages to deliver a substantial dividend increase signals confidence in the business. A company that tells investors that things are going to turn around quickly, but raises dividends by a token amount usually raises red flags in my monitoring process.
Over the past week, there were several notable dividend increases from companies I own:
Monitoring the rate of change in dividend payments is one of the things I look for when I monitor dividend growth stocks. A company that is experiencing short-term turbulence and still manages to deliver a substantial dividend increase signals confidence in the business. A company that tells investors that things are going to turn around quickly, but raises dividends by a token amount usually raises red flags in my monitoring process.
Over the past week, there were several notable dividend increases from companies I own:
Friday, October 23, 2015
I bought the following dividend stocks in October
In the past month, I bought shares in four dividend paying companies. Those purchases are in addition to the automatic dividend reinvestment I do in my tax-deferred accounts. The first two purchases were to existing positions, while the other two were for new positions. As I have mentioned before, I like to monitor companies by initiating a small position, and then add back when there is a better valuation.
I didn’t add to the dividend stocks that I had on my watchlist, because I saw other opportunities for investment. For example, it made sense to purchase shares in Yum Brands and United Technologies on the dip, rather than buy more shares of Exxon Mobil which bounced back by 20% from its lows in August.
The companies I purchased in October include:
YUM! Brands, Inc. (YUM), together with its subsidiaries, operates quick service restaurants. It operates in five segments: YUM China, YUM India, the KFC Division, the Pizza Hut Division, and the Taco Bell Division. Yum! is a dividend achiever which has managed to boost dividends for 12 years in a row. The ten year dividend growth rate is 22.90%/year. The company recently raised quarterly dividends by 12.20% to 46 cents/share. I would estimate that the annual dividend growth over the past decade will be below 10%/year, which is still a very good growth. The company is selling for a little over 21 times estimates year 2015 earnings and yields 2.60%. When I bought the stock on October 7, the forward earnings had not been revised as low as they are today. My next purchase should be below $64/share in 2015 but below $72 for 2016 assuming 20 times earnings. I last analyzed Yum!Brands a couple years ago. I should probably post a refreshed analysis soon.
I didn’t add to the dividend stocks that I had on my watchlist, because I saw other opportunities for investment. For example, it made sense to purchase shares in Yum Brands and United Technologies on the dip, rather than buy more shares of Exxon Mobil which bounced back by 20% from its lows in August.
The companies I purchased in October include:
YUM! Brands, Inc. (YUM), together with its subsidiaries, operates quick service restaurants. It operates in five segments: YUM China, YUM India, the KFC Division, the Pizza Hut Division, and the Taco Bell Division. Yum! is a dividend achiever which has managed to boost dividends for 12 years in a row. The ten year dividend growth rate is 22.90%/year. The company recently raised quarterly dividends by 12.20% to 46 cents/share. I would estimate that the annual dividend growth over the past decade will be below 10%/year, which is still a very good growth. The company is selling for a little over 21 times estimates year 2015 earnings and yields 2.60%. When I bought the stock on October 7, the forward earnings had not been revised as low as they are today. My next purchase should be below $64/share in 2015 but below $72 for 2016 assuming 20 times earnings. I last analyzed Yum!Brands a couple years ago. I should probably post a refreshed analysis soon.
Wednesday, October 21, 2015
Are low prices a justification to buy?
Should I use stock prices in my screen?
I read several blogs on investing. I have noticed that several authors have been talking about purchasing a stock that has gone down in price over a certain period of time. It looks like looking at a list of stocks at a 52 week low or looking at biggest losers year-to-date has been a criteria to some investors. I am going to explore this idea in this article, and share my ideas on the topic.
Before I go any further, I want to mention that I am looking for companies that I can purchase at an attractive entry price, which can grow earnings and dividends above the rate of inflation, and can generate a decent yield in the process for me.
At first, it actually seems like a nice idea to look for companies, which have declined in price. This could be one way to identify shares that could be theoretically cheap. We all know that a company’s cheap stock price can always get cheaper in the process. Of course, a stock price that has gone down presents an opportunity to buy more shares for the same amount of capital. In addition, by buying more shares, the investor can end up purchasing more dividend income in the process.
So this sounds like a win-win ( win) at first glance. Why am I writing an article about it?
Well, the problem with just looking at price relative to its high for the year or its close from the previous year is that price itself doesn’t tell you the whole story. What matters is price in relation to fundamentals, as long as those fundamentals are growing.
I read several blogs on investing. I have noticed that several authors have been talking about purchasing a stock that has gone down in price over a certain period of time. It looks like looking at a list of stocks at a 52 week low or looking at biggest losers year-to-date has been a criteria to some investors. I am going to explore this idea in this article, and share my ideas on the topic.
Before I go any further, I want to mention that I am looking for companies that I can purchase at an attractive entry price, which can grow earnings and dividends above the rate of inflation, and can generate a decent yield in the process for me.
At first, it actually seems like a nice idea to look for companies, which have declined in price. This could be one way to identify shares that could be theoretically cheap. We all know that a company’s cheap stock price can always get cheaper in the process. Of course, a stock price that has gone down presents an opportunity to buy more shares for the same amount of capital. In addition, by buying more shares, the investor can end up purchasing more dividend income in the process.
So this sounds like a win-win ( win) at first glance. Why am I writing an article about it?
Well, the problem with just looking at price relative to its high for the year or its close from the previous year is that price itself doesn’t tell you the whole story. What matters is price in relation to fundamentals, as long as those fundamentals are growing.
Monday, October 19, 2015
Excess Cash Flow is essential for successful dividend investments
As I keep learning more about investments, and expand my horizons through continuous reading about companies and by reading books about investing, I get to see recurring themes or certain aspects in a new light. Sometimes, I might read about an aspect about investing and brush it aside, although a small dot is kept within my brain waiting for the right moment to be connected to my overall investment strategy. My “eureka” moment of using tax-deferred accounts for income investing in retirement occurred in 2013. A few years ago, I had another “eureka” moment, which was related to using cash flow for analyzing investments. I started analyzing cash flow along with the income statement and balance sheets as I started reviewing pass through entities such as REITs and MLPs.
As many of you know, I am a big fan of Warren Buffett and his writings. One of the recurring themes in his annual letters to shareholders and interviews is that he look for companies that generate excess cash flow, without requiring much in terms of capital investment to grow or maintain the business. In other words, he looks at businesses from the aspect of a business owner, in order to determine how much cash he can safely extract from them, without jeopardizing the investment success of the enterprise. The maximum amount of cash that could be distributed from a business to its owners is referred to as owner’s earnings. This is roughly equal to cash flow from operations, minus cash flows for investment such as Capex. The fact that Buffett likes to extract cash from businesses he owns through Berkshire Hathaway is one of the reasons why I believe he is in fact a closet dividend investor.
There are generally two types of businesses that generate a lot of free cash flow. While I focus mostly on earnings, I do look at cash flow from operations, and then take out the expenditures needed for investing activities. That way I come out with the cash flow that is available to be distributed. This of course is a very high level view of the situation, and I do encourage everyone to review each situation one company at a time and delver into specifics.
As many of you know, I am a big fan of Warren Buffett and his writings. One of the recurring themes in his annual letters to shareholders and interviews is that he look for companies that generate excess cash flow, without requiring much in terms of capital investment to grow or maintain the business. In other words, he looks at businesses from the aspect of a business owner, in order to determine how much cash he can safely extract from them, without jeopardizing the investment success of the enterprise. The maximum amount of cash that could be distributed from a business to its owners is referred to as owner’s earnings. This is roughly equal to cash flow from operations, minus cash flows for investment such as Capex. The fact that Buffett likes to extract cash from businesses he owns through Berkshire Hathaway is one of the reasons why I believe he is in fact a closet dividend investor.
There are generally two types of businesses that generate a lot of free cash flow. While I focus mostly on earnings, I do look at cash flow from operations, and then take out the expenditures needed for investing activities. That way I come out with the cash flow that is available to be distributed. This of course is a very high level view of the situation, and I do encourage everyone to review each situation one company at a time and delver into specifics.
Friday, October 16, 2015
Should I buy Wal-Mart stock at current levels?
On Wednesday, Wal-Mart (WMT) stock fell by 10% in a single day due to lowering its future estimates. This is a large drop from a company with a market capitalization of roughly 200 billion dollars and almost half a trillion in annual sales.
As an investor, I can do two things – I can either buy more or not do anything.
The case for buying more Wal-Mart stock is the fact that the shares are selling at a P/E of 13.10 and an yield of 3.30%. This is certainly the lowest valuation I have seen for Wal-Mart in quite some time. In addition, the company has recently approved a $20 billion dollar share buyback, which at current prices could retire approximately 10% of shares outstanding. While the company is expecting a hit to earnings through FY 2017 ( which is calendar year 2016), it then expects a rebound in earnings per share and slight growth. Furthermore, the company expects 3% - 4% annual growth in revenues over the next three - four years.
On the other hand, there is also the case against buying Wal-Mart for a passive buy and hold dividend portfolio. The first reason is that there has been no growth in earnings per share for the past three years. It looks like there will be no growth in earnings per share in 2015 and 2016 ( equivalent to fiscal years 2016 and 2017). Growth in dividends per share has been anemic for two years in a row as well. As a result, the intrinsic value of the business is not increasing either. This means that the compounding machine is not compounding – it is just treading water.
As an investor, I can do two things – I can either buy more or not do anything.
The case for buying more Wal-Mart stock is the fact that the shares are selling at a P/E of 13.10 and an yield of 3.30%. This is certainly the lowest valuation I have seen for Wal-Mart in quite some time. In addition, the company has recently approved a $20 billion dollar share buyback, which at current prices could retire approximately 10% of shares outstanding. While the company is expecting a hit to earnings through FY 2017 ( which is calendar year 2016), it then expects a rebound in earnings per share and slight growth. Furthermore, the company expects 3% - 4% annual growth in revenues over the next three - four years.
On the other hand, there is also the case against buying Wal-Mart for a passive buy and hold dividend portfolio. The first reason is that there has been no growth in earnings per share for the past three years. It looks like there will be no growth in earnings per share in 2015 and 2016 ( equivalent to fiscal years 2016 and 2017). Growth in dividends per share has been anemic for two years in a row as well. As a result, the intrinsic value of the business is not increasing either. This means that the compounding machine is not compounding – it is just treading water.
Wednesday, October 14, 2015
From zero to $15,000 in dividend income in 8 years
Back in May 2007 I had a net worth of $2,000.
I then promptly exchanged most of that networth for an old vehicle so that I can get to work. I sold that same vehicle less than two years later for a loss of 80%.
Luckily, I had better luck saving a large portion of my income every month, and investing it wisely. My savings rate has consistently been above 50%.
Right now, my expected annual dividend income is scheduled to cross $15,000 for the first time ever. This number is calculated by multiplying the current annual dividend per share on each investment I own, times the number of shares I own. This includes everything I own in taxable and tax-advantages accounts such as my 401 (k). In other words, if I do not add any new cash to my investment accounts, and I do not reinvest dividends, I will be able to generate $15,000 in annual dividend income going forward.
I then promptly exchanged most of that networth for an old vehicle so that I can get to work. I sold that same vehicle less than two years later for a loss of 80%.
Luckily, I had better luck saving a large portion of my income every month, and investing it wisely. My savings rate has consistently been above 50%.
Right now, my expected annual dividend income is scheduled to cross $15,000 for the first time ever. This number is calculated by multiplying the current annual dividend per share on each investment I own, times the number of shares I own. This includes everything I own in taxable and tax-advantages accounts such as my 401 (k). In other words, if I do not add any new cash to my investment accounts, and I do not reinvest dividends, I will be able to generate $15,000 in annual dividend income going forward.
Monday, October 12, 2015
Expense Report - Last Four Months
For the past eight years, I have managed to save money regularly, and put that money to work. I have focused most of my efforts on the process of selecting dividend growth stocks, discussing why I practice the dividend growth strategy, and sharing my progress towards my goal of attaining financial independence through dividend investing sometime around 2018.
One aspect of my journey that I have always taken for granted has been my focus on keeping living costs low. After reading about the stories of others on their way to financial independence, and following personal finance blogs written by people who were in huge debt, I believe that I was wrong to never really stress the importance of frugality in my wealth building process.
I believe that frugality is one of the most important factors behind my success. I define my success as the ability to cover monthly expenses through investment income. Based on my projections, I can cover somewhere between 60% - 80% of my expenses with the dividend income that my portfolio generates. The best part is that when I really started my journey in 2007, I only had $2,000 sitting in my checking account.
I try to keep costs low, and try to be smart about finances. This means that the more I manage to save by keeping my expenses low, the more I will be able to invest for my future. I believe that being smart with my finances in my 20s is important. This is because the money I invested in my 20s will be able to compound for me for the longest period of time. By front-loading my savings and investment early in life, I will be able to enjoy compounding my money for the longest period of time.
One aspect of my journey that I have always taken for granted has been my focus on keeping living costs low. After reading about the stories of others on their way to financial independence, and following personal finance blogs written by people who were in huge debt, I believe that I was wrong to never really stress the importance of frugality in my wealth building process.
I believe that frugality is one of the most important factors behind my success. I define my success as the ability to cover monthly expenses through investment income. Based on my projections, I can cover somewhere between 60% - 80% of my expenses with the dividend income that my portfolio generates. The best part is that when I really started my journey in 2007, I only had $2,000 sitting in my checking account.
I try to keep costs low, and try to be smart about finances. This means that the more I manage to save by keeping my expenses low, the more I will be able to invest for my future. I believe that being smart with my finances in my 20s is important. This is because the money I invested in my 20s will be able to compound for me for the longest period of time. By front-loading my savings and investment early in life, I will be able to enjoy compounding my money for the longest period of time.
Thursday, October 8, 2015
A Costly Misconception about foreign dividend stocks
There is a misconception about foreign dividend stocks which can cost you thousands of dollars of lost dividend income. I see this misconception so frequently when I interact with dividend investors, that I have decided to note it, and end it once and for all.
Let's look at the dividend payments from a few companies in US dollars and local currency.
The first company is Nestle (NSRGY), a global dividend powerhouse which has managed to boost dividends in Swiss Francs (CHF) for 19 years in a row. You can see that since 2001, the dividend payment in Swiss francs has been up.
If you look at the payment in US Dollars however, you would think that dividends were cut in 2009 and 2015.
Let's look at the dividend payments from a few companies in US dollars and local currency.
The first company is Nestle (NSRGY), a global dividend powerhouse which has managed to boost dividends in Swiss Francs (CHF) for 19 years in a row. You can see that since 2001, the dividend payment in Swiss francs has been up.
If you look at the payment in US Dollars however, you would think that dividends were cut in 2009 and 2015.
Tuesday, October 6, 2015
Quality Dividend Stocks versus Growth Stocks ( Part 2)
This is a continuation of the article I posted yesterday.
I focus on companies that provide essential products and services to their consumers. These customers use those products and services on a regular basis, and are usually loyal to those companies. The companies I focus on tend to be boring and enjoy slow but steady growth over time. These are our well-known dividend growth stocks. My favorite list is the one that David Fish updates every month.
These boring companies generate so much in excess cash flow, that they decide to remove temptation from management, and send that cash to shareholders. These companies do not need to use all of their profits in order to grow and maintain their competitive position. This is because there is little disruption in the way people eat, drink or take care of personal hygiene. Despite all of that, most companies are able to sell more, innovate, and generate more revenues. This all translates into more profits, more dividends and incidentally pretty decent total returns.
In fact, many of these great cash machines tend to get in the habit of continually raising dividends to their loyal shareholders, every year like clockwork. These companies prefer loyal long-term shareholders, and not a bunch of super caffeinated daytraders. The dividend payment is portion of the total return that is always positive, more stable than capital gains, and can never be taken away from you. In my reviews of individual dividend champions, which lists companies that have managed to regularly increase dividends for at least 25 years in a row, I have uncovered quite a few that were able to achieve this no small feat because their businesses were outstanding. There are only 106 companies on the dividend champions list, out of at least 10,000 publicly traded companies in the US, which explains why membership in this elite list is a small miracle.
I focus on companies that provide essential products and services to their consumers. These customers use those products and services on a regular basis, and are usually loyal to those companies. The companies I focus on tend to be boring and enjoy slow but steady growth over time. These are our well-known dividend growth stocks. My favorite list is the one that David Fish updates every month.
These boring companies generate so much in excess cash flow, that they decide to remove temptation from management, and send that cash to shareholders. These companies do not need to use all of their profits in order to grow and maintain their competitive position. This is because there is little disruption in the way people eat, drink or take care of personal hygiene. Despite all of that, most companies are able to sell more, innovate, and generate more revenues. This all translates into more profits, more dividends and incidentally pretty decent total returns.
In fact, many of these great cash machines tend to get in the habit of continually raising dividends to their loyal shareholders, every year like clockwork. These companies prefer loyal long-term shareholders, and not a bunch of super caffeinated daytraders. The dividend payment is portion of the total return that is always positive, more stable than capital gains, and can never be taken away from you. In my reviews of individual dividend champions, which lists companies that have managed to regularly increase dividends for at least 25 years in a row, I have uncovered quite a few that were able to achieve this no small feat because their businesses were outstanding. There are only 106 companies on the dividend champions list, out of at least 10,000 publicly traded companies in the US, which explains why membership in this elite list is a small miracle.
Monday, October 5, 2015
Quality Dividend Stocks versus Growth Stocks
One of the biggest misconceptions that inexperienced investors make is to chase hot growth companies. The allure behind many of those companies is that they are in new and exciting industries that offer a lot of potential. New and exciting industries move the world forward and make everyone’s life easier. Unfortunately, investors do not always earn a lot of money this way.
When I first became interested in investing about 15 – 20 years ago, I thought that the way to make money is by investing in hot growth tech companies like Amazon (AMZN), AOL, Yahoo (YHOO), Ebay (EBAY) etc. The problem with this statement is that when you have a new and disruptive industry, you also have a high failure rate of companies in that industry due to the speed of change. For example, today we have all witnessed the success of Amazon and Ebay. However, a lot of companies that were selling at insane valuations in 1999 – 2000 are no longer with us – those include companies like CD Now, The Globe.com, etc. When you have untested growth companies that sell at insane valuations, coupled with a high probability of business failure on those companies, you have a situation where an investor can lose a lot of money, even if they were conceptually right.
Today, we are seeing this with companies like Tesla (TSLA), ShakeShack (SHAK) and Twitter (TWTR). They sell at insane valuations, and will only make money to investors if they do much better than their already rosy projections for the future. Investors seem to have forgotten the importance of pricing and valuation in security selection.
When I first became interested in investing about 15 – 20 years ago, I thought that the way to make money is by investing in hot growth tech companies like Amazon (AMZN), AOL, Yahoo (YHOO), Ebay (EBAY) etc. The problem with this statement is that when you have a new and disruptive industry, you also have a high failure rate of companies in that industry due to the speed of change. For example, today we have all witnessed the success of Amazon and Ebay. However, a lot of companies that were selling at insane valuations in 1999 – 2000 are no longer with us – those include companies like CD Now, The Globe.com, etc. When you have untested growth companies that sell at insane valuations, coupled with a high probability of business failure on those companies, you have a situation where an investor can lose a lot of money, even if they were conceptually right.
Today, we are seeing this with companies like Tesla (TSLA), ShakeShack (SHAK) and Twitter (TWTR). They sell at insane valuations, and will only make money to investors if they do much better than their already rosy projections for the future. Investors seem to have forgotten the importance of pricing and valuation in security selection.
Friday, October 2, 2015
Focus on Dividend Growth for Long Term Results
This is a guest post by Mike, aka The Dividend Guy. He authors The Dividend Guy Blog since 2010 and manages portfolios at DividendStocks Rock. He is a passionate investor.
If you read Dividend Growth Investor’s blog, you already know how dividend investing is a powerful investing strategy. In fact, for the past 85 years, dividend stocks have contributed 43% of the total S&P500 annualized returns.
Source: JPMorgan
Numbers are even more impressive considering the period between 1990 and 2012:
Wednesday, September 30, 2015
How to properly weight dividend portfolio holdings
There are different ways to weight a dividend portfolio. I am going to examine the three most popular methods in this article. Then I am going to reflect on the method I use.
The first method is weighting portfolios based on market capitalization, and then adjusting weights based on free floats. The logic is that as a company becomes more valuable, it should have a higher weight in a portfolio, whereas a company that is less prosperous should have lower weights since its capitalization is lower. This method is preferred by many index funds, as it makes it easier to just buy a basket of several hundred or thousand securities, and then passively hold them. It is viewed as a self-cleansing mechanism, where prosperous companies gain higher weightings, while less prosperous companies are eventually flushed out. The dangers behind this method is that a speculative company with no material profits and elevated valuations could get a higher weighting due to stock price being bid up by speculators. This happened with a lot of indexes such as the S&P 500 during the tech boom in the late 1990s, when they added companies like Yahoo! (YHOO) at several hundred times forward earnings. The results were disastrous, and pulled down the expected returns for all index investors. On one side, it is a good idea to give higher weighting to the companies that are prospering. On the other side however, you could end up in a dangerous situation where the most successful companies will get large and command a large piece of the pie. However, these large companies might end up dominating that portfolio. In fact, the 50 largest components of S&P 500 account for 47% of the portfolio. Apple (AAPL) accounts for almost 4% of the portfolio. Through July of 2015, just six companies in the S&P 500 accounted for most of the index gains. I wonder if this is a repeat of 1999 - 2000, or not.
The first method is weighting portfolios based on market capitalization, and then adjusting weights based on free floats. The logic is that as a company becomes more valuable, it should have a higher weight in a portfolio, whereas a company that is less prosperous should have lower weights since its capitalization is lower. This method is preferred by many index funds, as it makes it easier to just buy a basket of several hundred or thousand securities, and then passively hold them. It is viewed as a self-cleansing mechanism, where prosperous companies gain higher weightings, while less prosperous companies are eventually flushed out. The dangers behind this method is that a speculative company with no material profits and elevated valuations could get a higher weighting due to stock price being bid up by speculators. This happened with a lot of indexes such as the S&P 500 during the tech boom in the late 1990s, when they added companies like Yahoo! (YHOO) at several hundred times forward earnings. The results were disastrous, and pulled down the expected returns for all index investors. On one side, it is a good idea to give higher weighting to the companies that are prospering. On the other side however, you could end up in a dangerous situation where the most successful companies will get large and command a large piece of the pie. However, these large companies might end up dominating that portfolio. In fact, the 50 largest components of S&P 500 account for 47% of the portfolio. Apple (AAPL) accounts for almost 4% of the portfolio. Through July of 2015, just six companies in the S&P 500 accounted for most of the index gains. I wonder if this is a repeat of 1999 - 2000, or not.
Monday, September 28, 2015
Dividend Companies I am Considering in October
The stock market has been showing signs of weakness this quarter. Little did I know that the stock market will go down so quickly after I wrote my article titled " are you ready for the next bear market" back in early August of this year.
For those of us who are in the accumulation stage, this is welcome news, since it means that future dividend income is available at lower cost today. To paraphrase Warren Buffett, whether it comes to socks or stocks, everyone loves a good sale.
For whatever reason, the environment today feels a lot like we are going to see lower prices in the foreseeable future, as long as the S&P 500 stays below 2000 points. After all, the stock market only started going down one or two months ago (though many cyclical companies had been drifting lower before that). It is interesting to note that through July of this year, most of the gains on the S&P 500 came from just six stocks. So we might actually see further weakness in major stock indices from here.
We have all been trained to buy on weakness over the past 6 years. If this doesn’t work for this correction, and it actually does turn into an actual bear market, I wonder how many will abandon stocks altogether
For those of us who are in the accumulation stage, this is welcome news, since it means that future dividend income is available at lower cost today. To paraphrase Warren Buffett, whether it comes to socks or stocks, everyone loves a good sale.
For whatever reason, the environment today feels a lot like we are going to see lower prices in the foreseeable future, as long as the S&P 500 stays below 2000 points. After all, the stock market only started going down one or two months ago (though many cyclical companies had been drifting lower before that). It is interesting to note that through July of this year, most of the gains on the S&P 500 came from just six stocks. So we might actually see further weakness in major stock indices from here.
We have all been trained to buy on weakness over the past 6 years. If this doesn’t work for this correction, and it actually does turn into an actual bear market, I wonder how many will abandon stocks altogether
Friday, September 25, 2015
Does Market Capitalization Matter in dividend investing?
One criticism of Dividend Growth Investing is that it focuses exclusively on large cap stocks. The common complaint is that if you buy a small cap today, it can grow out to be as big as Johnson & Johnson (JNJ), Coca-Cola (KO), Exxon-Mobil (XOM), or Wal-Mart (WMT) etc.
In theory this sounds like a great idea. The problem of course is that this complaint completely ignores reality and facts. The reality is that when each of the companies I mentioned above became dividend achievers ( meaning that they had regularly increased dividends for at least ten consecutive years in a row), they were big companies already. Yet somehow, they managed to grow earnings and dividends for decades. This is the beauty of a stable company which has a successful business model that showers shareholders with cash each year.
In reality, if you were able to buy each of those companies when they just became dividend achievers, you would have banked a boatload of dividends. Plus, there would have been a pretty sizeable growth in share prices over time.
I looked at each company at the time they became dividend achievers. I calculated the returns as of September 21, 2015, assuming that someone put $100 at the end of the year in which they achieved that status. Check the table below. It is interesting that those companies that were already deemed as large-caps at the time delivered phenomenal results to investors. For example, a $100 investment in Exxon at the end of 1992, with dividends reinvested, would have turned to $891.73. That investment would be generating $35.48 in annual dividend income. This means that the investor of 2015 will be getting their original investment in cash every three years.
In theory this sounds like a great idea. The problem of course is that this complaint completely ignores reality and facts. The reality is that when each of the companies I mentioned above became dividend achievers ( meaning that they had regularly increased dividends for at least ten consecutive years in a row), they were big companies already. Yet somehow, they managed to grow earnings and dividends for decades. This is the beauty of a stable company which has a successful business model that showers shareholders with cash each year.
In reality, if you were able to buy each of those companies when they just became dividend achievers, you would have banked a boatload of dividends. Plus, there would have been a pretty sizeable growth in share prices over time.
I looked at each company at the time they became dividend achievers. I calculated the returns as of September 21, 2015, assuming that someone put $100 at the end of the year in which they achieved that status. Check the table below. It is interesting that those companies that were already deemed as large-caps at the time delivered phenomenal results to investors. For example, a $100 investment in Exxon at the end of 1992, with dividends reinvested, would have turned to $891.73. That investment would be generating $35.48 in annual dividend income. This means that the investor of 2015 will be getting their original investment in cash every three years.
Wednesday, September 23, 2015
Financial Independence Is Easier to Model with Dividends
The biggest advantage of dividend growth investing is the ability to set a goal, and track progress towards that goal. This is because dividend income is more stable than stock prices, which makes it easier to check how I am doing relative to my goals. Stock values on the other hand are much more volatile, which makes reliance on them for retirement planning much more speculative in nature. If noone can forecast stock prices accurately, then how can someone rely on stock prices for their retirement planning?
Let’s look at two different scenarios. Imagine, that in the first scenario, the goal is to have $500,000 in 20 years. Based on the 4% rule, you will sell 4% of your assets per year and hope that you will not be retiring at the top of a major bull market ( like the one we had in 1999 - 2000). You save some money every year, and the stock market generally rises. By year 19, your portfolio is worth more than half a million dollars. You decide to wait for another year, in order to beef up your portfolio. Unfortunately, this happens to be the first year of a bear market, where stock prices fall by 30% in the first year, and then 20% in the next one. Are you ready to retire, or not? You seemed ready and above target in year 19, but in year 20 you seem to be behind your goal. You decide to keep on working for an unknown amount of time until the stock market rebounds.
In the second scenario, the goal is to generate an annual income of $20,000 in 20 years. You save the same amount of money, reinvest dividends, and could not care less if markets are up or down. You can afford that, because dividends are more stable than capital gains, and go up almost every year. The only time dividends on the S&P 500 fell significantly over the past 90 years was during the Great Depression of 1929- 1932 and during the Great Recession of 2008. Since 1960, the only significant decrease in annual dividend income was in 2008. That is a success ratio of over 98%. I define significant as any decrease in annual dividend income that is larger than 4%.
Let’s look at two different scenarios. Imagine, that in the first scenario, the goal is to have $500,000 in 20 years. Based on the 4% rule, you will sell 4% of your assets per year and hope that you will not be retiring at the top of a major bull market ( like the one we had in 1999 - 2000). You save some money every year, and the stock market generally rises. By year 19, your portfolio is worth more than half a million dollars. You decide to wait for another year, in order to beef up your portfolio. Unfortunately, this happens to be the first year of a bear market, where stock prices fall by 30% in the first year, and then 20% in the next one. Are you ready to retire, or not? You seemed ready and above target in year 19, but in year 20 you seem to be behind your goal. You decide to keep on working for an unknown amount of time until the stock market rebounds.
In the second scenario, the goal is to generate an annual income of $20,000 in 20 years. You save the same amount of money, reinvest dividends, and could not care less if markets are up or down. You can afford that, because dividends are more stable than capital gains, and go up almost every year. The only time dividends on the S&P 500 fell significantly over the past 90 years was during the Great Depression of 1929- 1932 and during the Great Recession of 2008. Since 1960, the only significant decrease in annual dividend income was in 2008. That is a success ratio of over 98%. I define significant as any decrease in annual dividend income that is larger than 4%.
Monday, September 21, 2015
Dividend Stocks I Purchased In the Past Month
I like to keep my investing simple. I purchase shares in companies I believe to be attractively valued, when I see a track record of raising dividends and having the fundamentals to support further dividend increases. For each dollar that I invest in, I end up earning anywhere between 2 to 4 cents per year in dividend income alone. The initial amount will then grow above the rate of inflation over time. It is that simple – for each dollar I put to work today, I earn an average lifetime income of 3 cents right from the start. To reach financial independence, I need to both cut costs and increase the level of passive dividend income to meet those expenses.
I have been on this journey for eight years now. It is becoming a second nature by now:
1) Earn money,
2) Think of ways to earn more money,
3) Save Money
4) Think of ways to save more/cut expenses
5) Invest those savings wisely
6) Keep thinking how to be a more impactful investor
7) Reinvest dividends during accumulation stage
I have been on this journey for eight years now. It is becoming a second nature by now:
1) Earn money,
2) Think of ways to earn more money,
3) Save Money
4) Think of ways to save more/cut expenses
5) Invest those savings wisely
6) Keep thinking how to be a more impactful investor
7) Reinvest dividends during accumulation stage
Friday, September 18, 2015
Two Recent Dividend Increases from my Dividend Machine
Two of the companies I own announced their intentions to hike their dividends. As a dividend growth investor, this is always good news. The companies included:
Philip Morris International Inc. (PM), through its subsidiaries, manufactures and sells cigarettes, other tobacco products, and other nicotine-containing products.
The company raised its quarterly dividend by a paltry 2% to $1.02/share. This was the lowest rate of increase since the spinoff in 2008. It was much lower than the five year dividend growth rate of 12%/year. It was disappointing to many investors. This marked the 7th consecutive annual dividend increases nevertheless. The new yield is close to 5%.
As I mentioned in my analysis of the company however, this should not have been unexpected given the lack of earnings growth in the past few years and the rising dividend payout ratio. While I am bullish on the company for the long-term, I cannot ignore the data that has been showing me that things are not going according to plan. I will keep holding on to this position, because I believe that management will ultimately turn things around. Of course, in the meantime, I will redirect dividends elsewhere.
Philip Morris International Inc. (PM), through its subsidiaries, manufactures and sells cigarettes, other tobacco products, and other nicotine-containing products.
The company raised its quarterly dividend by a paltry 2% to $1.02/share. This was the lowest rate of increase since the spinoff in 2008. It was much lower than the five year dividend growth rate of 12%/year. It was disappointing to many investors. This marked the 7th consecutive annual dividend increases nevertheless. The new yield is close to 5%.
As I mentioned in my analysis of the company however, this should not have been unexpected given the lack of earnings growth in the past few years and the rising dividend payout ratio. While I am bullish on the company for the long-term, I cannot ignore the data that has been showing me that things are not going according to plan. I will keep holding on to this position, because I believe that management will ultimately turn things around. Of course, in the meantime, I will redirect dividends elsewhere.
Thursday, September 17, 2015
Survivorship bias in Dividend Investing - Part 2
This is the second part on suvivorship bias in dividend investing. In part 1, I laid the grounds that investors who put their money to work in dividend growth stocks are not suffering by survivorship bias ( despite the efforts of greedy money managers to portray ordinary investors in a negative light)
I wonder if the same type of logical analysis on survivorship bias is performed by investors who are encouraged to invest in US Equity markets, when they are told how an investment in the S&P 500 or Dow Jones Industrials average would have performed over the past 10, 20, or 50 years. If you consider the event of purchasing shares of Johnson & Johnson (JNJ) due to its history as an example of survivorship bias, then you should not be using historical data on S&P 500 or Dow Jones Industrials average over the past 50 years either in order to prove your point about equity investing. Somehow, this point is lost on so many investors. When discussing long-term returns on equities over the past two centuries, you often hear about the US or UK stock performance. However, you never hear about the performance of a Chinese stock investor or a Russian stock investor from the middle of the 19th century till now. My great-grandfather was born and lived in Eastern Europe more than 100 years ago, saved almost his entire salary working in the coal mines and invested his savings in agricultural land. Unfortunately for him, the communists nationalized his land when they came to power. If he were in the US, he would have died a rich man after decades of compounding. Too bad he weren't.
I wonder if the same type of logical analysis on survivorship bias is performed by investors who are encouraged to invest in US Equity markets, when they are told how an investment in the S&P 500 or Dow Jones Industrials average would have performed over the past 10, 20, or 50 years. If you consider the event of purchasing shares of Johnson & Johnson (JNJ) due to its history as an example of survivorship bias, then you should not be using historical data on S&P 500 or Dow Jones Industrials average over the past 50 years either in order to prove your point about equity investing. Somehow, this point is lost on so many investors. When discussing long-term returns on equities over the past two centuries, you often hear about the US or UK stock performance. However, you never hear about the performance of a Chinese stock investor or a Russian stock investor from the middle of the 19th century till now. My great-grandfather was born and lived in Eastern Europe more than 100 years ago, saved almost his entire salary working in the coal mines and invested his savings in agricultural land. Unfortunately for him, the communists nationalized his land when they came to power. If he were in the US, he would have died a rich man after decades of compounding. Too bad he weren't.
Wednesday, September 16, 2015
Survivorship bias in Dividend Investing
Survivorship bias is the logical error of concentrating on the people or things that "survived" some process and inadvertently overlooking those that did not because of their lack of visibility. This can lead to false conclusions in several different ways.
In this article I am going to discuss two areas which some investors believe are examples of survivorship bias. I believe one of them is an example, while the other is not.
Basically the danger of survivorship bias is that investors make up their mind on what works or doesn’t, using an isolated example, without even bothering to consider any factual evidence. This is dangerous because those investors would then search only for ideas supporting their conclusions, and reject those that do not do so. Therefore, investors might end up missing out on important information, because they only focused on the facts that supported their original ideas in the first place.
For example, I have been reading statements from many investors about how profitable it is to be buying stocks after dividend cuts. Common examples provided are General Electric and Wells Fargo, which would have returned several hundred percent since cutting dividends in 2009. Furthermore, dividends have increased since those cuts, thus resulting in high yields on cost for investors that were smart enough to buy in 2009 (this writer was not that smart to buy at the bottom, though I have my doubts that those who claim to have bought at the bottom are telling the truth (the sole exception that is verified is Warren Buffett and Charlie Munger)).
In this article I am going to discuss two areas which some investors believe are examples of survivorship bias. I believe one of them is an example, while the other is not.
Basically the danger of survivorship bias is that investors make up their mind on what works or doesn’t, using an isolated example, without even bothering to consider any factual evidence. This is dangerous because those investors would then search only for ideas supporting their conclusions, and reject those that do not do so. Therefore, investors might end up missing out on important information, because they only focused on the facts that supported their original ideas in the first place.
For example, I have been reading statements from many investors about how profitable it is to be buying stocks after dividend cuts. Common examples provided are General Electric and Wells Fargo, which would have returned several hundred percent since cutting dividends in 2009. Furthermore, dividends have increased since those cuts, thus resulting in high yields on cost for investors that were smart enough to buy in 2009 (this writer was not that smart to buy at the bottom, though I have my doubts that those who claim to have bought at the bottom are telling the truth (the sole exception that is verified is Warren Buffett and Charlie Munger)).
Monday, September 14, 2015
How I Manage to Monitor So Many Companies
One of the many questions I receive from readers relates to time spent managing my dividend portfolio. The truth is that I have multiple short-cuts, which I utilize to get the right information for me. The other truth is that I try to be efficient with my time.
There are several resources I utilize for doing research.
- My broker
My broker Interactive Brokers is a very helpful tool I utilize. I receive notifications about upcoming dividend payments, which essentially provides a signal when dividends are raised. In addition, I receive notifications of upcoming dividend payments and upcoming quarterly releases on the companies I own. A very helpful tool is the fact that I receive my paper annual reports mailed to me. The months of March through May are characterized by receiving a lot of paper annual reports.
The most helpful thing I learned about monitoring companies, I learned from studying Warren Buffett. The Oracle of Omaha essentially purchased a few shares in many companies, in order to receive their annual reports and significant shareholder correspondence. When you own a small piece of a company, it is much easier to monitor that business. This knowledge will accumulate over time, and would make you ready to act when the right opportunity presents itself.
There are several resources I utilize for doing research.
- My broker
My broker Interactive Brokers is a very helpful tool I utilize. I receive notifications about upcoming dividend payments, which essentially provides a signal when dividends are raised. In addition, I receive notifications of upcoming dividend payments and upcoming quarterly releases on the companies I own. A very helpful tool is the fact that I receive my paper annual reports mailed to me. The months of March through May are characterized by receiving a lot of paper annual reports.
The most helpful thing I learned about monitoring companies, I learned from studying Warren Buffett. The Oracle of Omaha essentially purchased a few shares in many companies, in order to receive their annual reports and significant shareholder correspondence. When you own a small piece of a company, it is much easier to monitor that business. This knowledge will accumulate over time, and would make you ready to act when the right opportunity presents itself.
Thursday, September 10, 2015
Is time spent learning dividend investing worth it? (Part 2)
This is the second and final part on the article from Tuesday. Please refer to the first part that was posted on Tuesday.
I believe that most of the accumulation of knowledge with dividend investing is upfront. This means that the time spent learning about a company such as Johnson & Johnson (JNJ) is in the initial phases of the research process. Time spent updating the story should not take nearly as much time as the time to learn about the company initially, Dividend investing is appealing, because after spending time accumulating knowledge about a company, and building a portfolio of good ones at cheap prices, I am essentially getting paid a growing amount of dividend for decades afterwards, even if I don’t lift my finger after that.
With a passive portfolio of dividend paying stocks, you are going to save a ton on annual management fees. If you bought mutual funds, even low cost index ones, you can end up paying tens or hundreds of thousands of dollars in fees. Even a 0.10% annual fee could be a lot when you manage say $1 million today or $10 million one day. As discussed above, if you use a financial adviser, you would end up paying at least 1% for the "advise" and the high fee mutual funds that go along ( or maybe even pick up some costly annuity) But if you learn how to invest your own money, and devise a plan to accomplish your goals, you will save a ton in costs. If you stick to your plan through thick or thin, you will be able to accomplish your goals. For the do it yourself dividend investor, there are ways to minimize commissions to the minimum, so theoretically it is possible today to buy blue chip stocks for practically no cost and hold them for decades. This is essentially what an index fund on the S&P 500 index fund does. It holds stakes in well-known companies such as Exxon Mobil (XOM), Apple (AAPL), Johnson & Johnson (JNJ), Coca-Cola (KO), but it charges an annual fee for this service. Since those companies are well-known, I have found it easier for me to just buy them outright and avoid paying the annual management fee. The only place where I actively invest through index funds is in my workplace 401 (k) plan. For the majority of workers out there, who confine their investing to their workplace 401 (k) plan, low cost indexing is possibly the best approach due to tax efficiency and employer match. Even then, learning about types of contributions and plans, minimizing fees, investment options available, and asset rollovers, can be tremendously beneficial.
I believe that most of the accumulation of knowledge with dividend investing is upfront. This means that the time spent learning about a company such as Johnson & Johnson (JNJ) is in the initial phases of the research process. Time spent updating the story should not take nearly as much time as the time to learn about the company initially, Dividend investing is appealing, because after spending time accumulating knowledge about a company, and building a portfolio of good ones at cheap prices, I am essentially getting paid a growing amount of dividend for decades afterwards, even if I don’t lift my finger after that.
With a passive portfolio of dividend paying stocks, you are going to save a ton on annual management fees. If you bought mutual funds, even low cost index ones, you can end up paying tens or hundreds of thousands of dollars in fees. Even a 0.10% annual fee could be a lot when you manage say $1 million today or $10 million one day. As discussed above, if you use a financial adviser, you would end up paying at least 1% for the "advise" and the high fee mutual funds that go along ( or maybe even pick up some costly annuity) But if you learn how to invest your own money, and devise a plan to accomplish your goals, you will save a ton in costs. If you stick to your plan through thick or thin, you will be able to accomplish your goals. For the do it yourself dividend investor, there are ways to minimize commissions to the minimum, so theoretically it is possible today to buy blue chip stocks for practically no cost and hold them for decades. This is essentially what an index fund on the S&P 500 index fund does. It holds stakes in well-known companies such as Exxon Mobil (XOM), Apple (AAPL), Johnson & Johnson (JNJ), Coca-Cola (KO), but it charges an annual fee for this service. Since those companies are well-known, I have found it easier for me to just buy them outright and avoid paying the annual management fee. The only place where I actively invest through index funds is in my workplace 401 (k) plan. For the majority of workers out there, who confine their investing to their workplace 401 (k) plan, low cost indexing is possibly the best approach due to tax efficiency and employer match. Even then, learning about types of contributions and plans, minimizing fees, investment options available, and asset rollovers, can be tremendously beneficial.
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