How did I do in January?

To be honest, I didn’t do much investing wise in January. Of course, I didn't panic and I stayed the course. Per my earlier article I shared with you, I proceeded according to plan:

1) I maxed out 401 (k) and HSA
2) I reinvested the dividends in my tax-deferred accounts ( Roth IRA, SEP IRA, Rollover IRA)
3) I bought a CD as part of my CD ladder
4) Transferred all taxable dividends to checking, in order to spend them

So far I am finding that living off dividends and side income is a little challenging, though I expected that to a certain extent. This is because I am not taking advantage of low prices on dividend stocks ( though I am taking advantage of automatic purchases of stock mutual funds and dividend reinvestments). It is also difficult because my cash flows are uneven on a month to month basis. I have come to realize that cash is king indeed.

For example, assume that my portfolio consists of 10,000 shares of Coca-Cola and 1,000 shares of McDonald’s. Under current dividend rates, this portfolio will generate $3,300 in dividends in April, July, October and December, and $890 in dividends every March, June, September and December. This leaves the months of January, February, May, August and November without any cash.  This is where having approximately two months worth of expenses in savings is helpful - to smooth out short term bumps in cashflow.

The advantages of being a long-term dividend investor

Most readers know me as a person that buys a stock in a company I like, and then I keep building a position as long as valuation and allocation to security makes sense. Once I purchase a security, my intent is to hold it forever. I rarely sell, and have only done so when dividends have been cut or valuations have been hard to justify. There are many reasons why I keep holding on to a stock for as long as dividends are at least maintained.

If dividends keep increasing, and earnings keep going up, this means that the intrinsic value is increasing. If dividends are at least maintained, I take the approach of wait and see if fundamentals can improve again. I have seen it time and again with established companies like Hershey (HSY), Kellogg (K) and General Mills (GIS), where dividends are increased for many years, and then frozen for a few more years. After that, the streak of dividend increases continues, and the patient investor keeps reaping the rewards. The advantages of being a long-term dividend investor include:

The Benefits of Automatic Investing

The first three weeks of this month have been terrible for investors worldwide. It could be painful to watch your portfolio value decrease day after day. The funny part is now we have a lot of bargains, relative to what we had just a month ago. However, many investors find it psychologically difficult to add to a position, which then gets even cheaper.

This is why I am happy that I set myself up to buy stocks automatically in 2016, through my bi-weekly 401 (k) contribution.

I am also happy that I set my dividends to automatically reinvest in 2016 for tax-deferred accounts.

Of course, when you have decided that you will live off dividends in 2016, and invest the rest of the contributions through tax-deferred accounts in order to build up the tax efficiency of your portfolio, you get another sort of challenges as well.

Evidence that Buffett likes dividend paying stocks

Warren Buffett is one of the best investors in the world. He is skilled in the art of capital allocation. I have always suspected that the Oracle of Omaha is actually a dividend investor, because he has often invested in businesses which generate more cash than necessary for their operations. As a result, most of these businesses send this excess cash to shareholders in the form of a dividend or share buybacks. He just doesn’t like to pay dividends to shareholders, because he believes he can allocate money better than shareholders. Of course, his record speaks for itself. Berkshire Hathaway is one of the rare group of companies, where shareholders were indeed better off not receiving a dividend. Unfortunately, there is only one Warren Buffett, and almost anyone else that has tried to emulate his style has been unable to do so.

Let's take a look at the holding company Berkshire Hathaway (BRK.B), which Buffett built to a $300 billion conglomerate over the past 50 years. You would notice that sending excess cashflows from a wholly-owned operating subsidiary such as Burlington Northern Santa Fe (BNSF) to Omaha is really easy, and tax-free. If the company sold a subsidiary, or sold some stock for a gain, or just earned money in the ordinary course of business, it would be taxed at 35% on all US profits above $18 million.  With dividends however, Berkshire Hathaway is taxed at a more preferential rate. If a wholly-owned subsidiary sends money to Buffett to allocate, that dividend is not taxed due to a corporate deduction called the dividend received deduction. If the corporation receiving the dividend owns more than 80 percent of the distributing corporation, it is allowed to deduct 100 percent of the dividend it receives.

Eight Years Dividend Growth Investor

Today marks the eight year of Dividend Growth Investor website. I wanted to thank all of you who follow my humble site. I didn’t really expect that I will still be going strong for 8 years in a row. I also never expected that this site will become so popular, with 100,000 – 150,000 monthly views. There is only one other dividend growth site that has been around for as long as I have. The landscape is much different than what we are seeing today – we have over 100 blogs on dividend investing, and probably 100 authors writing on other site aggregators.

When I started the site, I had no grand plans for world domination. I simply used this site as a way to write down my thoughts about investing, formulate my investment goals and objectives, as well as the steps needed to achieve them. Writing the articles and the stock analyses has been helpful in my stock selection process and in building out my portfolio. This site also helped me to focus on my investing, as I obtained instant feedback either way. It was also helpful to earn some side income from this site, for efforts I would have done anyways for my investing.

This site also shows my evolution as an investor. Back in late 2007 and early 2008, I had most of my assets in Certificates of Deposit. In hindsight, the best position to be in was to be mostly in cash and equivalents right before the global financial crisis hit and stock prices cratered. However, this was mostly due to sheer luck.

Your most important asset

In the first two weeks of this year, the stock market has been down a lot. For someone who invests for dividends, I am relatively agnostic about stock price fluctuations. As long as the dividend is paid, I can afford to hold on to my portfolio. I can also afford to take advantage of lower prices when I have fresh new money coming in, which are ready to be invested.

The money I have invested in my portfolio are a result of my ability to earn income. It was reassuring that during a turbulent week for most investors, I was able to receive some fresh cash deposited in my checking accounts, in addition to any cash dividends I obtained as well. This got me thinking that my ability to earn income is an important asset in itself. In the accumulation phase, this ability to earn income and to save money is very important.

If you had asked me a few years ago what my most important asset was, I would have told you that the most important asset was my dividend portfolio. Upon further reflecting, I have come to the conclusion that my dividend portfolio is very important to me. However, it is not my most important asset.

Dividend Investors: Stay The Course

The first week of this year has been brutal for many investors. It is during times like these that you see who really is a long-term investor, and who is just a pretender. When you are a long-term buy and hold investor, you stand the best chances to take maximum advantage of the power of compounding, and end up with the probability for the highest dividend income and capital gains. These are the times where having a disciplined approach to investing pays off. These are the times when the ability to allocate capital to use in quality dividend stocks would seem stupid in the short-term, but potentially really brilliant 10 – 20 years down the road. When stock prices fall, there is an urge in the investor to protect their nest eggs from further price impairment.

This is a dangerous situation to be in because:

Living off dividends in 2016 – My New Goal

I posted my goals for 2016 a few weeks ago. After some changes that I became aware of subsequent to posting the article, I have some changes.  I have had some change in plans about my goals for 2016. I have decided to essentially live off dividends in 2016. I will be spending my dividend income that comes from my taxable accounts. My annual expenses are close to $18,000 – 24,000/year. My taxable dividends are approximately $10,000 - $11,000/year ( out of $14,000 - $15,000 in total dividend income). The shortfall could be covered by any side income activities I engage in.

I have decided to try and save my entire paycheck in 2016, after taxes of course. I will manage to do that by taking the maximum contributions to my 401 (k) and Health Savings Account (H S A) plans. After speaking with several reps at my 401 (k) administrator, I learned that I can make after-tax contributions, which can be converted to Roth. I already plan to max-out my 401 (k) with pre-tax money, which provides me with an instant tax break. I also receive an even larger tax break in my investment through my Health Savings Account. Any after-tax money I manage to put away will be converted to Roth on a few occasions throughout the year. This means that under current legislation, any earnings derived from that money will never be taxable. I would not be opposed if a larger portion of my net worth is held through tax-deferred assets, and therefore any dividends and capital gains would be deferred.

A Change of heart on REITs and MLPs

My goal as an investor is to generate a sustainable stream of dividends, which will pay for my expenses in retirement. I need this income stream to be as secure as it can be, in order to pay my expenses during recessions, depression, bull markets or bear markets.

My recent experiences with Kinder Morgan got me thinking a little bit about pass through entities in general. I am starting to question whether those dividends are indeed as bulletproof as I once thought they were. It is tough to have a change of heart, especially after enjoying a rising stream of dividends with Kinder Morgan (KMI) and REITs like Realty Income (O) between 2008 and 2015.

After some thoughts, I have come to believe that pass through entities are less reliable than regular corporations during times of distress. And during times of distress you need to have the comfort in knowing that your distribution is secure so that you can hold on to your stocks. If we are in a recession, and a company decides to cut dividends, we are in for a double whammy – lower dividend income along with lower value of the investment. I want durable dividends, no matter what happens stock market or economy. I want to receive dividends throughout the stock market or economic cycle.

My Five Largest Dividend Portfolio Holdings for the Long Term

My goal as a dividend investor is to build a diversified portfolio of income producing investments, which grow earnings and reward shareholders with higher dividends every year. I only purchase dividend growth stocks that are attractively valued, and will grow distributions over time, after a rigorous screening and stock analysis process. My holding period is forever, and I will only sell if one of these three events happens. I have sold recently shares in companies whose past and expected earnings and dividends growth was very unsatisfactory however.

I have built my dividend cash machine around the same time I started this site in 2008.  As my portfolios has started to generate a decent amount of distributions, I have started maxing out any tax-deferred accounts that I might be eligible for, in order to reduce tax bills. In general, I view each dollar I allocate to dividend growth stocks today as the seed behind a money tree that will generate a dollar of income in 25 - 30 years. By shielding a portion of my wealth, I would minimize some expenses related to taxes.

Below I have summarized the largest five holdings in my investment portfolios as of December 2015. The reason why they represent a high allocation to my portfolio is due to addition of new funds and significant capital appreciation. Some of those stocks have been purchased many years ago at much better valuations. I would not think anyone in their right mind would purchase them today.

Best Dividend Articles for 2015

Each year I try to look at what content was enjoyed by readers. I tried to compile the list of most read articles on Dividend Growth Investor website from 2015. The list of articles includes:

Dividend Kings List for 2015

A dividend king is a company that has increased dividends for at least 50 years in a row. I first compiled this list in 2010, when it only consisted of ten companies. My last article from the past week showed how the list has expanded in the past six years. I find this list helpful as a way of studying the reasons behind those successful companies - after all only a select few have managed to raise dividends for over half a century, which is a very rare outcome.

Robinhood Brokerage Review

Robinhood is an investing app, which burst into the investing scenes in 2014. This broker is only available on smartphones, but allows for commission free investing. When the investor pays nothing in commissions, they get more money to keep for themselves. Unfortunately, this broker is still relatively new and untested, which is why I only have a token amount invested there. I am excited to potentially move a larger portion of my business there.

A Dividend Portfolio for Early Retirees

Back in August, I provided a model dividend portfolio consisting of 30 individual stocks for early retirees. This model portfolio of course was not a recommendation to buy, but more of a list of companies that I would consider purchasing if I had a lump sum that I wanted to invest for income today. Using a service like Motif Investing, someone can initiate a position in as many as 30 individual companies all at once for a low commission of $9.95/trade.