How to Use Real Estate to Create Dividend-Like Income

This is a guest post from Chad Carson from CoachCarson.com. Chad started with only $1,000 in the bank and was able to build up a real estate empire that now consists of over 90 units

Thank you to Dividend Growth Investor for letting me share with you today. It's an honor!

Over the last 15 years, I've used real estate investing as a vehicle to achieve financial independence. Everyone has their own idea of life after financial independence, but in my case, it involves my family and travel to other countries.

Currently my wife, two young daughters, and I are living in Ecuador in South America for 14 months. We're having new experiences, my daughters are enrolled in local Spanish speaking schools, and we're all learning and growing together.

And relevant to this article, real estate income pays for it all!

In the rest of this article, I'll share lessons that have helped me get to this point using real estate. I can assure you my journey has been far from perfect, but I hope my successes and failures will help with your own journey.

Dividend Growth Investing vs Rental Properties

Dividend Growth Investing My Way To Financial Freedom

About the Author: FT is the founder, editor, and blogger behind Million Dollar Journey (est. 2006). Through various financial strategies outlined on MillionDollarJourney.com, he grew his net worth from $200,000 in 2006 to $1,000,000 by 2014 - at the age of 35. Since 2014, he has been on a new mission of growing his passive income through dividend growth investing to the point of exceeding his recurring expenses within the next couple of years.

Hello DGI readers, it's an honor to write for a site dedicated to dividend growth investing. When I started my blog in 2006, I was a few years out of school and was getting serious about building wealth. I dabbled in real estate investing, online trading, and even buying and selling online. While those can be some lucrative strategies, what really worked for me was the simple strategy of saving and investing the proceeds, which is what ultimately as grown our net worth the most over the years.

There are many methods of saving money and I have probably tried most of them. However, I have learned to focus on the strategies that have the biggest impact. For us, it was delaying lifestyle inflation as much as possible while banking those raises. The act of keeping life simpler than our peers allowed us to generate healthy monthly cash flow. We initially used the cash flow to pay off debt (student loans and mortgage) but after, we focused on investing. Although we eventually upgraded our housing and even our vehicles when we had kids, we continue to live below our means and build our net worth.

After reaching millionaire status when I was 35, I shifted focus from growing net worth to growing passive income sources. Having the choice to work at something that I'm interested in without having to worry about how much I'm going to be paid resonates with me. Not worry about money? How is this possible you say? Through creating stable and predictable passive income streams that require very little work. For some, it may be a real estate rental business, or some other type of business. I've tried a lot of different strategies and I've discovered that dividend investing works the best for me.

Why Dividend Growth Investing

J.M. Smucker (SJM) Rewards Shareholders With a Raise

The J. M. Smucker Company (SJM) engages in manufacturing and marketing branded food products primarily in the United States, Canada, and internationally. The company is a member of the dividend achievers index. The company’s largest competitors include Conagra (CAG), Kraft Heinz (KHC) and Hershey (HSY).

The Board of Directors approved a 4% dividend increase last week, bringing the quarterly payment to 78 cents/share. This marked the 20th consecutive annual dividend increase for this dividend achiever.

This was the slowest dividend increase since the 4.70% dividend hike in 2015. Over the past decade, this company has managed to boost annual dividends at a rate of 9.80%/year. A small dividend hike shows that management is cautious about near term prospects for the business.

The company has managed to grow earnings per share from $3/share in 2008 to $5.10 in 2017. Analysts expect J. M. Smucker to earn an adjusted EPS of $8.35 per share in 2018. In comparison, the company earned an adjusted $7.72/share in 2017, which was down from the adjusted $7.79/share in 2016.

National Retail Properties (NNN) Dividend Stock Analysis

National Retail Properties, Inc. (NNN) is a publicly owned equity real estate investment trust. The firm acquires, owns, manages, and develops retail properties in the United States.

Last week, National Retail Properties raised its dividend by 4.40% to 47.50 cents/share. This marked the 28th consecutive year of annual dividend increases for this dividend champion. This is an impressive track record that is a testament to the stability and defensibility of the company’s business model. National Retail Properties is one of only four publicly traded REITs and 94 publicly traded companies in America to have increased annual dividends for 28 or more consecutive years.

National Retail Properties has managed to raise dividends at a rate of 3%/year over the past decade. Unlike many other REITs that cut distributions during the Global Financial Crisis however, this blue chip REIT managed to grow the dividend no matter what.

The annual dividend rose from $1.40/share in 2007 to $1.78/share in 2016. I like the slow and steady approach to growing the distribution to shareholders over time. This is one of the guidelines I look for when evaluating real estate investment trusts.

How to earn 5% on your savings

One of my favorite personal finance blogs is written by Jonathan Ping over at My Money Blog. Jonathan writes on a broad topic of finance items of interest to me, and has had great recommendations on products, books and services that I have benefited from. I wanted to share this resource with you, and also share that savings account that can generate 5% yields for readers. (which I learned from him)

Perhaps a couple of years ago, I read about several accounts that offered 5% yields on your cash. I was extremely skeptical at first, because the highest yields I could get on my cash was the 1% I could get at Ally Bank.

I did some research, and figured out that these are legitimate ways to earn a good yield on any spare cash I have. I found the company Insight Visa, in my research. The company Insight Visa offers a prepaid debit card, which comes with an FDIC insured savings account that yields 5% on your first $5,000. The interest is paid out quarterly. I will detail below the steps I took to earn that interest rate.

In order to earn the interest, I signed up for an Insight Visa prepaid debit card online. This step includes the usual things like address, Social Security Number etc.

The next step was to activate my card after receiving it through the mail. I set up an online profile, where I linked my checking account with the debit card. The verification only took a couple of business days.

Four Dividend Paying Companies Raising Dividends. Which ones are worth a closer look?

I review the list of weekly dividend increases as part of my monitoring process. Over the past week, there were several companies that raised dividends to investors. I am going to discuss how I came up with the list of companies that raised dividends this week. I will then also discuss the quick review process I go through.

This is a useful exercise for many reasons, but also as an educational exercise on the process I use to quickly narrow down any list of prospective dividend growth stocks down to a more manageable level.

I focused my attention to companies that have managed to increase annual dividends for at least ten years in a row. We do this in order to focus out companies which have managed to boost distributions throughout at least one or two economic cycles. In addition to that, we focused on companies whose recent dividend increases over the past year was more than a token increase.

The next step I the process involved reviewing valuation. I usually weed out companies where P/E ratios were below 20. Due to the large number of one-time accounting hits to earnings, I use forward earnings as a shortcut way to go through a lot of companies quickly.

We also weed out companies where earnings per share or funds from operations didn’t grow over the past decade.

Should I invest in AT&T and Verizon for high dividend income?

Most readers are probably aware that it has been getting more difficult to find decent values in the current environment. When I ran my screens for valuation, I stumbled upon AT&T (T) and Verizon (VZ), which are telecom behemoths in the US.

AT&T (T) has increased dividends for 33 years in a row. In the past decade, it has managed to increase dividends by 3.70%/year. Between 1984 and 2016, the company has managed to increase dividends by 4.40%/year. The stock trades at 12.70 times forward earnings and yields 5.30%. The dividend is adequately covered with a dividend payout ratio of 67.60%, based on forward earnings. Check my previous analysis of AT&T for more information about the company.

Verizon (VZ) has increased dividends for 12 years in a row. In the past decade, dividends grew by 3.40%/year. Between 1984 and 2017, the company has managed to increase dividends by 3.30%/year. The stock trades at 11.60 times forward earnings and yields 5.30%. The dividend is adequately covered with a dividend payout ratio of 61.70%, based on forward earnings. Check my analysis of Verizon for more information about the company.

The telecom industry in the US is very competitive. Companies like AT&T (T) compete with the likes of Verizon (VZ), Sprint and T-Mobile. In the past, almost all of the profits have been made by Verizon (VZ) and AT&T, at the expense of smaller competitors. An investment in AT&T and Verizon today would presume that the status quo would remain unchallenged, and that Sprint and T-Mobile would be kept weak forever. The service that telecom companies is essentially a commodity. Telecom companies are not utilities, because there is the possibility for switching the provider. Try moving to Saint Louis, Missouri, and then switching your gas, water or electric utility – you can’t. But anywhere in the US, you can switch to another wireless carrier, plus you have other alternatives and very low customer loyalty. There is nothing to stop a customer from switching to another carrier after their contract expires.

Dividends Unlock Value For Shareholders

After observing companies for a decade now, I have come to the conclusion that dividends unlock value for shareholders. Let me start off with an actual example.

A few months ago, Costco (COST) announced that it would be paying a special dividend to shareholders.This event alone unlocked hidden value for shareholders.

On April 26, 2017 Costco announced special dividend of $7/share to shareholders on record from May 10, payable on May 26, 2017. The stock price rallied to 178.05/share at the opening and closed at $176.80/share on April 26, which was up from the close of $172.68/share on April 25. The stock closed at $172.64 on the ex-dividend date of May 8, and it had closed at 180.20 on May 5. In this case, the special dividend unlocked hidden value in the enterprise for shareholders.

That amount of money was locked in the business, and was not put to productive use for shareholders. This is why the company’s rational management decided to distribute the money to shareholders. This is the rational thing to do, when you are showered with cash, and you do not have a lot of high ROI projects to invest into. That $7/share were sitting in cash, but were not fully baked in the stock price, until the announcement unlocked this hidden value for shareholders.

I went back to look at the history of prior special dividends for Costco. I was stunned that every single special dividend ended up unlocking value for the shareholders. What I mean by “unlocking value” is the fact that the share price increased as a result of the special dividend announcement. So shareholders were better off as a result of the special dividend in every single case.

Two Dividend Growth Companies Rewarding Shareholders With a Raise

I like to check the pulse of dividend growth companies by monitoring dividend increases. This is helpful as part of my monitoring process. Two recent increases caught my eye. These are two companies I have owned for many years. These companies seem to have different expectations about the future. The first one is optimistic, and this has been fueled by rising earnings. The second company seems to be running out of space to raise dividends, due to stagnating profits. As dividend investors we are looking for the companies in the first camp. Of course, a long investing career will surely bring in some investments that show initial promise, but ultimately may turn out to be duds. Our goal is to manage our portfolios to reach our goals, despite having the occasional dud, and keep staying the course.

The companies that recently raised their dividend include:

Medtronic plc (MDT) manufactures and sells device-based medical therapies worldwide. The company raised its quarterly dividend by 7% to 46 cents/share. This marked the 40th consecutive year of an increase in the dividend payment for this dividend champion. Medtronic's dividend per share has nearly quadrupled over the past decade and has grown at a 17 percent compounded annual growth rate over the past 40 years.

Happy Financial Independence Day

Before I begin my message, I wanted to wish all my readers a Happy 4th of July. And I wanted to thank all of those military members for keeping us safe and able to enjoy our independence and freedom.

For the past seven and a half years, myself and my readers have been on a quest to achieve financial freedom with dividend growth stocks. So I wanted to take some time and reflect the accomplishments that we have all achieved in the past nine years.

Financial independence is the point at which the passive income exceeds expenses. People who achieve financial independence have the freedom to live their lives true to themselves. Most importantly, financially independent people have options in life. These options could include:

1) Working in a field they are passionate about
2) Caring for a child or a relative
3) Engaging in non-profit work, volunteering or charity
4) Writing a book
5) Traveling the world
6) Fill in the blanks (this is your passion so you have to decide what you want to do)