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.
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