In a previous article I mentioned that my current dividend income stream is close to covering anywhere between 60% - 80% of my total monthly expenses. My strategy for reaching the dividend crossover point includes saving and investing every month in dividend growth stocks with attractive valuations and long term earnings and dividend growth potential, while patiently reinvesting distributions. At this rate, It would take me several years before I reach my dividend crossover point, which is equivalent to financial independence or retirement.
This means that if I could theoretically double the size of my investment portfolio, and have it yield close to what my portfolio yields today, I could achieve financial independence right away. In other words, if I were to borrow an amount that is equivalent to the value of my portfolio at low interest rates, and have it yield more than my cost of capital, I could achieve my dividend crossover point much faster. I researched the margin rates for online brokers in the US and found out that Interactive Brokers has the lowest rates for using margin.
Currently, an account with a margin balance between $100,000 and $1,000,000 can borrow at 1.38%/year. The rate on the first $100,000 in margin is 1.88%. Let’s assume that an Interactive Brokers customer invests $500,000 in dividend paying stocks yielding 4%. This portfolio would be expected to generate $20,000 in annual dividend income/year. If this investor borrows an additional $250,000 from their broker, they will pay an annual interest of 1.58%/year. If they invest the rest in dividend paying stocks yielding 4%, they would theoretically increase their dividend income to $30,000, or a cool 50% increase. The investor will incur an interest charge of $3,950/year, which brings the net dividend income to a little over $26,000, which is still 30% more than before. Given the fact that many dividend growth stocks typically increase distributions every year, this investor would be able to reach the desired level of dividend income much faster.
Monday, February 29, 2016
Thursday, February 25, 2016
Time is an ally of the dividend investor
The power of compounding is seen as of the eight wonders of the world.
Time is an ally to the quality business. Most of the companies we discuss on this site are some of the best business brands in the world. Those are the types of companies which have many things going for them, such as instant customer recognition, growth prospects, pricing power and other solid competitive advantages, which ultimately lead to more profits, more dividends and higher intrinsic values. When you have a compounding machine that grows shareholder wealth by 7 – 10%/year on average, your only input after investing in that company is to let power of compounding do the heavy lifting for you.
I will repeat that again: If you are able to invest money each month in a diversified portfolio consisting quality dividend paying companies available at attractive valuations, your next job is to sit tight and hold on to your investments. Over time, assuming you had done your proper homework, those companies should be able to earn more and pay more in dividends. Those dividends could then be used to buy more shares of the same company that produced them in the first place, or buy shares in other companies, which pay more dividends on their own.
Time is an ally to the quality business. Most of the companies we discuss on this site are some of the best business brands in the world. Those are the types of companies which have many things going for them, such as instant customer recognition, growth prospects, pricing power and other solid competitive advantages, which ultimately lead to more profits, more dividends and higher intrinsic values. When you have a compounding machine that grows shareholder wealth by 7 – 10%/year on average, your only input after investing in that company is to let power of compounding do the heavy lifting for you.
I will repeat that again: If you are able to invest money each month in a diversified portfolio consisting quality dividend paying companies available at attractive valuations, your next job is to sit tight and hold on to your investments. Over time, assuming you had done your proper homework, those companies should be able to earn more and pay more in dividends. Those dividends could then be used to buy more shares of the same company that produced them in the first place, or buy shares in other companies, which pay more dividends on their own.
Monday, February 22, 2016
Ten Dividend Growth Stocks Rewarding Long Term Investors With a Raise
I invest in dividend growth stocks for the regular and growing stream of cash dividends. I monitor the list of dividend increases every week. There were several companies that raised dividends last week. I included only those that raised dividends last week and have raised dividends for at least a decade below:
Genuine Parts Company (GPC) distributes automotive replacement parts, industrial replacement parts, office products, and electrical/electronic materials in the United States, Canada, Mexico, Australia, New Zealand, Puerto Rico, the Dominican Republic, and the Caribbean region. The company raised its quarterly dividend by 6.90% to 65.75 cents/share. This marked the 60nd consecutive annual dividend increase for the dividend king Genuine Parts Company. In the past decade, Genuine Parts Company has managed to increase its annual dividend by 6.90%/year. The stock is selling at 19.20 times forward earnings and yields 2.90%. I find the company to be an attractive opportunity for long-term investors at the moment. Check my analysis of Genuine Parts Company for more information.
The Coca-Cola Company (KO), a beverage company, manufactures and distributes various nonalcoholic beverages worldwide. The company raised its quarterly dividend by 6.10% to 35 cents/share. This marked the 54th consecutive annual dividend increase for the dividend king Coca-Cola. In the past decade, Coca-Cola has managed to increase its annual dividend by 9%/year. The stock is selling at 22.60 times forward earnings and yields 3.20%. While raising dividends for 5 decades is an impressive track record, I do not like the fact that earnings per share have not increased since 2012. Without further growth in earnings per share, dividend growth will be limited. Therefore, at this time I would not be interested in adding to Coca-Cola. I would continue holding the stock however, but allocate dividends elsewhere ( in my case, I am spending taxable dividends in 2016).
Genuine Parts Company (GPC) distributes automotive replacement parts, industrial replacement parts, office products, and electrical/electronic materials in the United States, Canada, Mexico, Australia, New Zealand, Puerto Rico, the Dominican Republic, and the Caribbean region. The company raised its quarterly dividend by 6.90% to 65.75 cents/share. This marked the 60nd consecutive annual dividend increase for the dividend king Genuine Parts Company. In the past decade, Genuine Parts Company has managed to increase its annual dividend by 6.90%/year. The stock is selling at 19.20 times forward earnings and yields 2.90%. I find the company to be an attractive opportunity for long-term investors at the moment. Check my analysis of Genuine Parts Company for more information.
The Coca-Cola Company (KO), a beverage company, manufactures and distributes various nonalcoholic beverages worldwide. The company raised its quarterly dividend by 6.10% to 35 cents/share. This marked the 54th consecutive annual dividend increase for the dividend king Coca-Cola. In the past decade, Coca-Cola has managed to increase its annual dividend by 9%/year. The stock is selling at 22.60 times forward earnings and yields 3.20%. While raising dividends for 5 decades is an impressive track record, I do not like the fact that earnings per share have not increased since 2012. Without further growth in earnings per share, dividend growth will be limited. Therefore, at this time I would not be interested in adding to Coca-Cola. I would continue holding the stock however, but allocate dividends elsewhere ( in my case, I am spending taxable dividends in 2016).
Thursday, February 18, 2016
Business Change is bad for dividend investors
Experience, however, indicates that the best business returns are usually achieved by companies that are doing something quite similar today to what they were doing five or ten years ago… a business that constantly encounters major change also encounters many chances for major error. Furthermore, economic terrain that is forever shifting violently is ground on which it is difficult to build a fortress-like business franchise. Such a franchise is usually the key to sustained high returns.”
-Warren Buffett, 1992 Shareholder Letter
Recently, I have been fascinated by the concept of intergenerational wealth. That is, wealth in the form of productive assets that is passed along from a generation to generation for at least say 100 years. Thinking of myself, it would have been nice if I didn’t have to start from scratch to build my nest egg, but be born with a trust fund. Since I cannot count on much of an inheritance, I am in the process of building my own dividend trust fund, and live off those dividends for decades (hopefully). In the process of my research on families and entities that have lived off assets for decades however, I uncovered a few interesting observations.
-Warren Buffett, 1992 Shareholder Letter
Recently, I have been fascinated by the concept of intergenerational wealth. That is, wealth in the form of productive assets that is passed along from a generation to generation for at least say 100 years. Thinking of myself, it would have been nice if I didn’t have to start from scratch to build my nest egg, but be born with a trust fund. Since I cannot count on much of an inheritance, I am in the process of building my own dividend trust fund, and live off those dividends for decades (hopefully). In the process of my research on families and entities that have lived off assets for decades however, I uncovered a few interesting observations.
Tuesday, February 16, 2016
Eight Dividend Growth Stocks Rewarding Investors With a Raise
As part of my portfolio management process, I scan the list of dividend increases every week. I use this list in order to monitor dividend increases from companies I own, and also monitor the rate of dividend growth from companies I have on my watchlist.
Dividend payments on US stocks have been much more stable than capital gains over the past 70 years. Dividend payments from a diversified portfolio are more stable and more reliable than prices, which is why I have chosen to live off dividend income in retirement. I cannot tell you whether PepsiCo will sell for $50/share or for $150/share in 2016. However, I am reasonably certain that it will pay four dividends in 2016 for a total of $2.96/share. I want to avoid schemes where I have to dip into principal or slowly liquidate my portfolio in retirement and hope that I don’t outlive my shrinking asset base. Ironically, asset depletion strategies such as the four percent rule were tested using historical data where average dividend yields were around 4%, and dividend payments were either flat or rising 90% of the time. I say ironic, because the four percent rule effectively proved that living off dividends in retirement is a sustainable way to pensionize your nest egg in retirement. This is why my retirement plan focuses on the stable and growing cash dividend payments, and ignores stock price fluctuations.
In the past week, there were three companies in which I have a position, which rewarded their patient shareholders with a dividend raise. Those companies include:
Dividend payments on US stocks have been much more stable than capital gains over the past 70 years. Dividend payments from a diversified portfolio are more stable and more reliable than prices, which is why I have chosen to live off dividend income in retirement. I cannot tell you whether PepsiCo will sell for $50/share or for $150/share in 2016. However, I am reasonably certain that it will pay four dividends in 2016 for a total of $2.96/share. I want to avoid schemes where I have to dip into principal or slowly liquidate my portfolio in retirement and hope that I don’t outlive my shrinking asset base. Ironically, asset depletion strategies such as the four percent rule were tested using historical data where average dividend yields were around 4%, and dividend payments were either flat or rising 90% of the time. I say ironic, because the four percent rule effectively proved that living off dividends in retirement is a sustainable way to pensionize your nest egg in retirement. This is why my retirement plan focuses on the stable and growing cash dividend payments, and ignores stock price fluctuations.
In the past week, there were three companies in which I have a position, which rewarded their patient shareholders with a dividend raise. Those companies include:
Wednesday, February 10, 2016
You need conviction to average down in a stock
"You pay a dear price for cheery consensus. "
Warren Buffett
I like to buy shares when prices go down. This ensures that my capital buys me more shares, and therefore buys me more dividend income. If prices go down further from the point at which I made my investment, I would be inclined to add to this position. As an investor in the accumulation stage, I want lower prices. If/When I get to be living off dividends, I will likely only care about the dividend checks I get deposited magically in my brokerage account. Stock price fluctuations would be irrelevant, unless I have extra money to invest.
The reason why I typically do not panic if the shares I own decrease in price is because I only focus my attention on solid blue chips which have the types of products and services which people use on an everyday basis. While earnings per share could temporarily go down during a recession, chances are that the earnings power of those enterprises will remain intact. If the fair value of a company is the sum of all the earnings from now until eternity, then it doesn’t really matter if in one of those years the business earns $2.30/share rather than the $2.50 it earned the year before, if I believe that earnings can rebound later. As long as that business is expected to continue operation as a going concern, I have no problem adding to my exposure.
Warren Buffett
I like to buy shares when prices go down. This ensures that my capital buys me more shares, and therefore buys me more dividend income. If prices go down further from the point at which I made my investment, I would be inclined to add to this position. As an investor in the accumulation stage, I want lower prices. If/When I get to be living off dividends, I will likely only care about the dividend checks I get deposited magically in my brokerage account. Stock price fluctuations would be irrelevant, unless I have extra money to invest.
The reason why I typically do not panic if the shares I own decrease in price is because I only focus my attention on solid blue chips which have the types of products and services which people use on an everyday basis. While earnings per share could temporarily go down during a recession, chances are that the earnings power of those enterprises will remain intact. If the fair value of a company is the sum of all the earnings from now until eternity, then it doesn’t really matter if in one of those years the business earns $2.30/share rather than the $2.50 it earned the year before, if I believe that earnings can rebound later. As long as that business is expected to continue operation as a going concern, I have no problem adding to my exposure.
Monday, February 8, 2016
Five Dividend Growth Stocks Rewarding Investors With Higher Dividends
Most of my money is invested in a portfolio of companies that have a track record of regular dividend increases. I have found that dividend payments in a diversified portfolio of equities is more stable than capital gains. This is why I have chosen to live off dividends in retirement. A cash dividend is a return on investment that is tangible and provides the investor with the positive reinforcement to keep holding onto that position. When you get paid to hold on to a stock every 90 days, and that payment goes up every year, it is much easier to ignore stock market fluctuations, and instead focus on fundamentals. After all, that cash dividend is a reminder that those quotes on your brokerage statement are real businesses.
One of my favorite things to look at is the list of dividend increases. I use it to check whether any companies I own are boosting dividends. I also use it to check for hidden dividend stars I may want to put on the list for further research. In this article, I have isolated those companies that raised dividneds in the past week by more than a token amount, which yielded at least 1%, and had managed to increase dividends for at least years in a row. The companies include:
3M Company (MMM) operates as a diversified technology company worldwide. The company raised its quarterly dividend by 8.40% to $1.11/share. This dividend king has managed to increase dividends for 58 years in a row. Over the past decade, it has managed to boost dividends by 9.30%/year. It sells for 18.70 times forward earnings and yields 2.90%. I believe that the company is attractively valued at the moment, though if prices fall down further, it could be an even better value. Check my analysis of 3M for more details.
One of my favorite things to look at is the list of dividend increases. I use it to check whether any companies I own are boosting dividends. I also use it to check for hidden dividend stars I may want to put on the list for further research. In this article, I have isolated those companies that raised dividneds in the past week by more than a token amount, which yielded at least 1%, and had managed to increase dividends for at least years in a row. The companies include:
3M Company (MMM) operates as a diversified technology company worldwide. The company raised its quarterly dividend by 8.40% to $1.11/share. This dividend king has managed to increase dividends for 58 years in a row. Over the past decade, it has managed to boost dividends by 9.30%/year. It sells for 18.70 times forward earnings and yields 2.90%. I believe that the company is attractively valued at the moment, though if prices fall down further, it could be an even better value. Check my analysis of 3M for more details.
Thursday, February 4, 2016
ConocoPhillips Cuts Dividends - What Should a Dividend Investor Do?
ConocoPhillips (COP) just announced that it is cutting its quarterly dividend from 74 to 25 cents/share. This comes after management constantly reiterated that the dividend is a priority. Unfortunately, when a company is selling a commodity whose price can fluctuate greatly, and you have very high capital expenditure costs, they cannot really do much other than cut the dividend to conserve resources. This environment is tough on ConocoPhillips, because they are a pure exploration and production play, and have no downstream operations ( refining and marketing) like the big integrated companies such as Exxon Mobil (XOM) and Chevron (CVX). If ConocoPhillips still had Phillips 66 (PSX), it would have been able to weather the storm in oil prices a little easier.
It is also unfortunate that I was right to question the sustainability of the dividend payment from ConocoPhillips in my earlier assessments from 2015.
As I have said before, a dividend cut is an indication that my original thesis is incorrect. When faced with facts that I was wrong, I change my position and I sell. As a dividend growth investor, my goal is to live off the dividends generated from my portfolio in retirement. This is why I favor investing in companies that pay stable and rising dividends throughout the economic cycle. If a company proves me wrong by cutting dividends, this shows that this company is not exhibiting the qualities I look for in an investment.
It is also unfortunate that I was right to question the sustainability of the dividend payment from ConocoPhillips in my earlier assessments from 2015.
As I have said before, a dividend cut is an indication that my original thesis is incorrect. When faced with facts that I was wrong, I change my position and I sell. As a dividend growth investor, my goal is to live off the dividends generated from my portfolio in retirement. This is why I favor investing in companies that pay stable and rising dividends throughout the economic cycle. If a company proves me wrong by cutting dividends, this shows that this company is not exhibiting the qualities I look for in an investment.
Wednesday, February 3, 2016
Concentrated versus Diversified Dividend Investing
Some of the best investors in the world, Charlie Munger and Warren Buffett, have been able to make it by having a concentrated portfolio of securities. Their thinking is that investors who are willing to work hard at investing game should concentrate their bets in their best ideas. It is difficult to argue with the results from those two investing titans. It makes sense that if you really know what you are doing, you should concentrate your portfolio in just a few companies, because the effect on the portfolio will be much more pronounced. For example, if you were smart enough to identify Wal-Mart (WMT) at the time it became a dividend achiever in 1984 - 1985, your portfolio would have done much better if you put a higher weighting to this retailer.
For the know something or know nothing investor however, their advice has been to diversify extensively. Today I am going to discuss why I decided to diversify extensively. This is because I acknowledge that I am not Buffett. I also acknowledge that forecasting the future is difficult, since things can change no matter how much research and conviction behind that research I have.
As I explained in an article a while ago, the number of companies in my portfolio has been increasing rapidly since late 2012 and early 2013. Many readers ask me why I don’t simply sell off a portion of those positions and concentrate my portfolio in my best 15 – 20 ideas. In addition to my response , which is still relevant, I will try to add a more honest twist to it.
For the know something or know nothing investor however, their advice has been to diversify extensively. Today I am going to discuss why I decided to diversify extensively. This is because I acknowledge that I am not Buffett. I also acknowledge that forecasting the future is difficult, since things can change no matter how much research and conviction behind that research I have.
As I explained in an article a while ago, the number of companies in my portfolio has been increasing rapidly since late 2012 and early 2013. Many readers ask me why I don’t simply sell off a portion of those positions and concentrate my portfolio in my best 15 – 20 ideas. In addition to my response , which is still relevant, I will try to add a more honest twist to it.
Monday, February 1, 2016
The importance of multiple income streams
It is nice to have a diversified income stream. While many seem to look for a focused method, I look for a diversified method of generating income. The more diversified, the better.
One of my primary income streams today is my employee salary. This is the main and only income stream for majority of people in the US. The problem is, I generate it from one employer, so if they don’t like me, this stream will end. So I am at the mercy of the employer at some level. The goal is to diversify away from relying 100% on this stream.
The second income stream is the dividends from my income portfolio. I am not dependent on any one company for this income stream. In fact, I believe that if one holds at least 30 – 40 dividend paying companies, they should not be worried if one or two of them simply stopped paying dividends. Of course, the portfolio would likely be built slowly and over time, and should be representative of as many sectors as possible. If you have half of your portfolio in a single sector such as energy, or financials or consumer staples, you are way too concentrated however. You want to avoid risks that will take down a whole sector during a crisis, or a change. An example was the dividend cuts to banks during the financial crisis. Many expect a lot of dividend cuts in the energy sector today. Whether those fears are overblown, or not, remains to be seen.
One of my primary income streams today is my employee salary. This is the main and only income stream for majority of people in the US. The problem is, I generate it from one employer, so if they don’t like me, this stream will end. So I am at the mercy of the employer at some level. The goal is to diversify away from relying 100% on this stream.
The second income stream is the dividends from my income portfolio. I am not dependent on any one company for this income stream. In fact, I believe that if one holds at least 30 – 40 dividend paying companies, they should not be worried if one or two of them simply stopped paying dividends. Of course, the portfolio would likely be built slowly and over time, and should be representative of as many sectors as possible. If you have half of your portfolio in a single sector such as energy, or financials or consumer staples, you are way too concentrated however. You want to avoid risks that will take down a whole sector during a crisis, or a change. An example was the dividend cuts to banks during the financial crisis. Many expect a lot of dividend cuts in the energy sector today. Whether those fears are overblown, or not, remains to be seen.
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