Altria Delivers Dependable Dividend Growth and High Total Returns

Altria Group, Inc.(MO), through its subsidiaries, manufactures and sells cigarettes, smokeless products, and wine in the United States.

The company recently raised its quarterly dividend by 7.80% to 61 cents/share. Altria has delivered dependable dividend increases for 47 years in a row. In the past decade, this dividend champion has managed to boost distributions at a rate of 8.40%/year.

This dividend growth stock has delivered dependable dividend growth, and exceptional total returns to shareholders for decades. In fact, the company managed to become the best performing stock in the S&P 500 between 1957 and 2003.

Since then, the company spun-off Kraft foods in 2007 and Phillip Morris International in 2008. Kraft foods was further split into two companies in 2013 – Mondelez and Kraft. The latter merged with Heinz to form Kraft Heinz (KHC). An investor who bought Altria in 2003, and held on to all spin-offs, while reinvesting dividends, still managed to do much better than the S&P 500.

How to set up your own perpetual income machine

Every dollar that you have in your possession can be traced back to you exchanging your labor for money. The labor you provided was essentially a time commitment on your part to an employer or clients. Therefore, every dollar you own, is essentially a unit of time you spent to acquire it. The problem with this type of exchange is that in order for you to earn more dollars, you need to either spend more time doing work. Therefore, your ability to earn income is limited by the amount of time you have. This is where you may decide you may need to create a perpetual income machine. This perpetual income machine would produce earnings, without much labor effort and without requiring you to show up to a specific location for a scheduled period of time every day. With the passive income generated from this income machine, you are essentially buying time.

This perpetual income machine would produce income to you, which would likely grow above the rate of inflation, and therefore would maintain your standard of living. This of course is much more than what the average American has been receiving in raises over the past six years. All of the corporations I have worked over the past six - eight years have been characterized by increase in responsibilities for employees, increase in hours they have to exchange for the same pay, meager or non-existent pay raises, and higher levels of stress. It is no wonder that so many are dissatisfied with their jobs, and want to retire early to pursue their passions. In this article, I would discuss how I am planning to earn income without having to exchange labor for money, by setting up my perpetual income machine.

How Dividend Growth Investors can prosper even if interest rates increase

Last week, I wrote a groundbreaking article, which outlined the basic premise that interest rate levels affect P/E ratios that investors are willing to pay for stocks. I also made the call that even at a P/E of 20, stocks are cheaper relative to bonds, and could withstand doubling or tripling of the interest rates, while still remaining more attractive, relative to bonds. So there is some margin of safety in common stocks today, relative to bonds.

The only way that bonds do better than stocks over the next ten or twenty years is if we get deflation, and we experience a situation that is similar to Japan between 1990 - 2016 or US between 1929 - 1933. Just to be on the safe side, when I discuss bonds or fixed income, I want you to know that I mean long-term US Treasuries.

The interesting part is that a lot of pundits have been expecting higher interest rates in the US for the past 8 years. Their train of thought has always been that these rising interest rates will potentially reduce the demand and prices for stocks, and dividend stocks in particular. A lot of investors have been deceived by this train of thought.

These pundits have been wrong for 8 – 9 years in a row. Interest rates have been declining, and stocks have been rising. Unfortunately, many companies are selling above 20 times earnings these days.

Holding Through the Good Times

This guest post was written by Joe Ferris, who is a long-time reader of the site. The author now manages money professionally and creates individualized dividend portfolios for individuals, families, and institutions. He charges less than most mutual funds and more than most indexes. He has over 60 happy clients and is based in California. Californian readers may contact him at admin@summerfieldsinvestments.com if they are interested in inquiring about his portfolio management business

I am a long time reader of this blog. DGI has helped me solidify a solid investment strategy over the many years of my reading his blog, and I have enjoyed our personal correspondence over the last 6-7 years or so. Recently, in the course of our correspondence DGI asked me if I would want to write a guest blog, and I happily agreed. His posts on university endowments primarily using their interest and dividends, and not dipping into their principal, changed my way of thinking about investing and the capital markets

One day in 2010, I read this particular article, which analyzed V.F Corporation (VFC) . It made a lot of sense to me, and after further research, I decided it would be appropriate to initiate a position. I did so, buying VF Corporation at a split adjusted cost of $20.85 per share in January of 2011.

Well-known value investor Li Lu described during a presentation how he sometimes scrutinizes a company's management, even investigating the owner of an apparel company at his synagogue and asking around about his character. This was in reference to Timberland, then run by Jeffrey Swartz, a descendant of the founder. Lu was impressed with both management and the company. Apparently, VF Corporation was too, because in June of 2011 they acquired Timberland. After this acquisition, the market saw good potential in VF Corporation future earnings, and the share price went up.

Interest Rates Affect Stock Valuations

Interest Rates affect the multiples on stocks. We all know that companies can grow earnings and dividends over time, while bonds offer a fixed coupon. In general, bonds and equities are parts of the opportunity set for investors. In other words, the typical investor allocates their portfolio between bonds and stocks, and possibly overweights the assets that may appear attractively valued relative to the other. Of course, interest rates are just one of the inputs in valuing businesses.

In the early 1980s, the P/E multiples on stocks were in the mid to high single digits - as low as 7. This represents an earnings yield of roughly 14%. At this time however, long-term bonds yielded  as much as 15%/year. There were several well-known investors such as Warren Buffett and Peter Lynch, who have said that at a 15% bond coupon issued by US treasury, it makes more sense to invest in bonds rather than stocks.

This chart shows the yield on the 10 year US Treasury Bond since 1962

My own unique approach to investing for retirement

Last month, I discussed with you reasons to have your own unique investment strategy. I reached the following conclusion:

If you follow someone into a security, you are giving up control over the selection process. You may know when the other person purchased the security, but you do not know when they will sell it. You have no visibility as to why they bought the stock. This is dangerous, because you may be the last person to be notified when the stock is to be sold. You are also not learning anything, because chances are that the other person has not shared all of the relevant points with you. When you make investment decisions without any input on your own, you are like a blind person driving on a highway. The problem is that noone has your best interests at heart, than yourself. Actually, many people have an incentive to deceive you and sell you on to a product or service that will enrich them at your expense.

When you focus on others, you may be able to get lucky from time to time. But this is not a good foundation for your retirement investing.

The Simple Math Behind Early Retirement

It is important to understand the simple math behind early retirement. Your savings rate, and asset returns will determine how long it takes for you to retire. Minimizing taxes and investment costs results in more money compounding for you.

If you save 70% of your income, invest in dividend paying companies yielding 3% and growing earnings, dividends and share prices by 4% per year, you will be able to retire in approximately 10 – 11 years. If you only save 50% of income, you will be able to retire in 17 - 18 years. At a 40% savings rate, it takes 21 - 22 years to reach the dividend crossover point. If you only manage to save 30% per year, you will be able to retire in 27 - 28 years.

This chart shows how long it would take for the investment income to exceed the amount of savings, given the return, the dividend growth, dividend reinvestment and savings assumptions. You can view the spreadsheet behind the calculations from this link. You can download it, and play with your own assumptions.

How Much Money Do You Need to Retire

A common question I receive deals with the amount of money needed for retirement.

This amount varies depending to personal situations.

1) Traditional retirement experts focus on income, as opposed to expenses. A common rule of thumb sold by financial professionals is that retirees need to cover roughly 80% of their pre-retirement income. I personally believe that the thing that really matters is expenses. If you save 50% of income throughout your working years, you need to find a way to replace 50% of your salary in retirement. Therefore, if you make $80,000/year after taxes, but you spend $40,000/year, you only need to find a way to cover $40,000/year in expenses. It is nice to see that a higher savings rate results in a lower amount of expenses. Once you figure out what your expenses will be in retirement, then you can proceed to step two.

Seven Dividend Achievers Rewarding Shareholders with a Raise

I invest in dividend growth stocks in order to generate a rising stream of dependable dividend income. Dividend income is more stable than capital gains. The amount and timing of dividend payments is more predicable than capital gains.

I review each holding at least once an year. As part of my monitoring process, I also review the latest dividend increases for companies I own and companies I am interested in.

I went through the list of dividend increases, and isolated instances where a company has managed to grow dividends for at least a decade. The companies include:

Kellogg Company (K) manufactures and markets ready-to-eat cereal and convenience foods. It operates through U.S. Morning Foods, U.S. Snacks, U.S. Specialty, North America Other, Europe, Latin America, and Asia Pacific segments. The company raised its quarterly dividend by 4% to 52 cents/share. This dividend achiever has raised distributions for 13 years in a row. The ten year average dividend growth rate is 6.40%/year. The stock is overvalued at 22.70 times expected earnings and yields 2.50%. I would be interested in the company on dips below $73/share. Check my analysis of Kellogg for more information.

How much time does it take to manage my dividend portfolio

The most common question or variation of a question I get concerns the amount of time to monitor my portfolio. This includes monitoring existing positions, and researching companies to invest in. As some readers found out at my post on 2015 goals, I strive to optimize my life as much as possible. I believe that synergies are possible between activities I do.

Actually, the best kind of synergy I wish upon my readers is to find someone they are willing to share their lives with and move in with them. That would surely cut your housing expenses if you have to rent one place, rather than two separate ones. Moving in together might also be good for the housing market and for the economy, when you buy a house.

Before I say what I am going to say, I want to reiterate that we all have the same 168 hours in a week. If you break it down further, you have 24 hours in a given day. How you spend your time depends on your personal values and your objectives. I value family time, health, my investments and my job in that particular order. If I have to spend 50 hours at a job, and if I need to spend 60 hours/week on sleep and health, I am only left with 58 hours. I am very lucky that throughout my career I have never had to spend more than 10 – 15 minutes commuting to work. That provides me with a lot of time to spend on family, and some time to spend on investments. I would say it takes me no more than 10 – 15 hours/week to monitor investments in my free time when I am not at work.

Should You Applaud Vanguard's Move To Close Its Active Dividend Growth Fund?

I recently read the following announcement from Vanguard:

"Vanguard Dividend Growth Fund (VDIGX) is closed to new investors as of July 28, 2016. The fund will remain open to existing investors for additional purchases

"Vanguard is proactively taking steps to slow strong cash flows to help ensure that the advisor's ability to produce competitive long-term results for investors is not compromised," said Vanguard CEO Bill McNabb. "We have long been committed to protecting the interests of our funds' shareholders, and demonstrate this conviction by closing or restricting funds to stem further growth.""

I do not envy those of you who are starting your journey in 2016, because I agree with the basic premise that many dividend stocks are expensive.  The ones that appear cheap may have some potential issues with them (e.g. – being cyclical or being in an industry where fundamentals are expected to crumble). It is a decent idea to hold equities if you have a 10 – 20 – 30 year investment horizon and nerves of steel, but probably not a good idea to buy at current valuations. I would have applauded Vanguard if the closing of that active fund was all to it, as I somewhat agree with their basic premise.

Four Dividend Achievers Rewarding Shareholders with a Raise

I invest in dividend growth stocks in order to generate a rising stream of dependable dividend income. Dividend income is more stable, and the amount and timing of those dividend payments is more predicable than capital gains. One way I monitor companies I own, and companies I am interested in, includes checking the rates of dividend growth every week. This lets me see if my investment thesis is working out or not. This exercise is helpful, in conjunction with my regular review of each individual stock holding.

I went through the list of dividend increases, and isolated instances where a company has managed to grow dividends for at least a decade. The companies include:

Realty Income Corporation (O) is a real estate investment trust that invests in US commercial real estate. The company raised its monthly dividend to 20.15 cents/share. This new rate represents a 6% increase over the monthly dividend rate set at the same time last year. This dividend growth stock has raised dividends for 23 years in a row. The ten year dividend growth rate is 5%/year. This REITis is overvalued and it is selling for 25.10 times forward the expected FFO of $2.85/share for 2016. This REIT yields 3.40%. I would be interested in buying some shares at a 4% yield, which is equivalent to a price of $60 or below. If I require an entry yield of 5%, I would require an entry price below $49/share.