The Vanderbilts, The Rockefellers and Generational Wealth

My retirement strategy is focused on living off dividends. Dividends are more stable, predictable and reliable than capital gains. Dividends also tend to increase faster than inflation over time. This is what makes them a better source of retirement income than relying on selling stock to pay for expenses.

This makes sense, because dividends come from cashflows, which tend to be more stable. Asset Prices on the other hand tend to oscillate between being undervalued and a period of being overvalued. Asset prices in the short run are driven by fear, greed, expectations.

If you happen to retire when prices are undervalued, you'd be selling low, and increasing your chances of outliving your money. I do not want to run out of money in retirement. Hence, I do not plan on selling assets to fund expenses in retirement. I plan to use income generated from investments to pay for expenses in retirement. 

I also to think about the topic of Generational Wealth quite a bit as well. I wrote a little bit about the concept of Generational Wealth before. I think about it through the lens of Dividend Growth Investing.

Typically my thought process goes something like this:

If my great-grandparents had invested in equities 100 years ago, everyone in my family would be a multi-millionaire today. We would all be set for life.

But sadly, they didn't.

So, I have to be that great-grandparent now...

As you can see, I often ponder about generational wealth.

There are many obstacles to accumulating it, such as:

- Poor investment returns

- Lack of savings

- Impatience

There are many obstacles to keeping it too such as:

- Poor investment returns

- Taxes

- Overspending

- Fees

- Confiscation

A big obstacle to Generational Wealth is heirs who squander the funds. Families that build and maintain generational wealth take to instill a basic set of values, which are passed down on future generations. Transmitting values through generations is how families manage to maintain wealth, despite anything that happens.

The most important principles in my opinion center around:

1. Working hard 

2. Living within your means

3. Power of compounding

4. Intelligent investing

5. Giving back

Building wealth is one important skill to have. It requires living within your means, and spending less than what you earn. Then you need to invest the difference intelligently.

Maintaining wealth is another important skill to have. It means spending less than what your investments generate, in order to avoid running out of money. We all have to assume that the money is invested intelligently.

It's fascinating to think about Generational Wealth with two families that built their fortunes around the same time in the 19th century. The Rockefellers and The Vanderbilts. 

The Rockefeller family has been able to successfully remain wealthy, and provide for hundreds if not thousands of offspring, through several generations. The person who built the fortune was J.D. Rockefeller, who founded Standard Oil - an energy conglomerate.

The Vanderbilt family has not been able to successfully remain wealthy. The person who built the fortune was Cornelius Vanderbilt, who owned railroads. Around 80 years after the death of Cornelius Vanderbilt, there was not one single family member that was even a millionaire.

Both families spent lavishly. But only the Rockefeller family is wealthy.

I think that lavish spending is just one of the reasons behind running out of money.

The second reason, which is very important actually, centers around investment returns.

My working theory is Vanderbilt's fortune was concentrated in transportation, which didn't do well first half of 20th century and had massive dividend cuts in 1930s

When you spend a lot and income dries up you start eating principal..That's how you run out of money.

Standard Oil did better- but trusts helped too.

This is Exxon Mobil stock performance ( I don't have data for other Standard Oil companies, and other investments)

Their dividends didn't suffer too much in the Great Depression either. See Exxon's dividend history 1911 - 2014.

Ultimately, the Vanderbilts seem to have had most of their money in the transportation sector, like railroads. Their investments had a hard time generating consistent returns during the first half of the 20th century. That Great Depression must have severely cut dividend income, and to maintain standard of living, descendants had to resort to selling stock at low prices. This meant that they could not participate in the eventual recovery in those stock prices later on and subsequent growth in dividends. That because they sold their shares at low prices, in order to maintain a high standard of living.

I am sure there are other reasons as well, but it definitely strikes me as important that you want to have investments that make money when you try to live off them. If they do not generate good returns, that retirement will not be successful.

The Rockefellers seem to have had most of their money in the Energy sector, like Oil and Gas and Pipelines. This sector seems to have been doing well in the first half of the century, and the last half as well. It seems like it was not as  affected by the Great Depression as transports. Dividends largely remained, and weren't cut as drastically as in the transportation sector. Despite their lavish spending, they didn't run out of money, because their investments did well even during the depression.

These are fascinating observations, in light of my obsession with retirement planning and making sure one doesn't run out of money in retirement. I believe the following lessons can be applicable to rest of us as well, even if we do not deal with billions of dollars (at least I am not, yet)

Ultimately, there is a bit of a dose of luck as well as survivorship bias. We could have two families with a similar set of spending. But if the first family picks poor investments it increases its risk of running out of money. If the second family picks good investments, they are less likely to run out of money. 

Focusing on things within your control is definitely a part of a winning strategy. One needs to continue having a certain dose of frugality, and avoid excess, as a way to counteract whatever life will throw at them. This also includes selecting the investments one owns, the holding period, managing the costs and ensuring proper diversification. 

The lesson is to diversify investments, and be prepared to reduce spending if investment returns turn out to be less than expected. One needs to live within their means in the accumulation phase, in order to accumulate their nest egg. They also need to continue living within their means in retirement as well. 

Spending principal is a good way to increase your chances of running out of money in retirement, particularly when share prices are low. Living off dividends in retirement is a more robust way to generate retirement income, which reduces the probability that one runs out of money in retirement. If you focus on the dividend income generated by that portfolio, you know how much you can spend. This removes a lot of the guesswork. It also provides an almost real-time assessment of current conditions that allow the retiree to correct and adjust course. It also provides the retiree with an early warning if things do not go as planned.

It's also important to spend time educating the next generation, in order to reduce the risk of them blowing the nest eggs. Families that successfully manage to maintain generational wealth tend to transmit a set of values across generations. Those values include the importance of hard work, frugality and entrepreneurship. However, they also build controls in place, such as strategic use of trust funds and financial professionals/a family office, to oversee management of financial affairs for the family members. Having restrictions on how much can be withdrawn annually from the nest egg, and also having some professional management could be helpful to future generations, even if it does come at a cost. Navigating the ever increasing complexity of tax and estate laws can be challenging however, which is why a family office could help in this endeavor.

Encouraging family members to also build out their own human capital on top of investments that they own is very important as well. That can help them focus on making a difference in the world, and monetize specific talents that they have, while also serving a purpose in life. Work provides purpose in life to many, and helps keep them grounded.

16 Dividend Growth Companies That Increased Dividends Last Week

I review the list of dividend increases every week, as part of my monitoring process. This exercise helps me monitor existing holdings, but also potentially identify companies for further research. Plus, it helps me get the pulse of corporate boards. One of my favorite exercises in compiling this report is to look at the press releases, and noting down management verbiage related to the dividend increases. That pulse check is a good sentiment check. After all, dividends have a great deal of signaling power, which neatly summarizes corporate board expectations about near term business conditions. The output of that being the dividend increase amounts. 

TL;DR - dividend increase announcements include a lot of information that could be helpful to me as an investor.

Over the past week, there were 53 dividend increases in the US. I went ahead and isolated the 16 companies that increased dividends last week AND have a ten year track record of annual dividend increases. The list can be observed below:

Reviewing the dividend growth universe for dividend increases is part of my monitoring process. For my review, I narrow my focus to the companies with a ten year streak of annual dividend increases. I do this in order to look at companies with a sufficiently long streak of dividend growth.

The next step involves reviewing trends in earnings and dividends. I want to see earnings per share which are growing. Rising EPS can fuel future dividend growth. I also want to see dividend increases which are of decent size, and not done merely to maintain the streak of annual dividend increases.

A steep deceleration in the dividend growth rate relative to the ten year average tells me that management is not very optimistic on their business. If this is coupled with a high payout ratio and stagnant earnings per share, I can tell that the dividend streak is nearing its end.

Last but not least, I also want a decent valuation behind an investment. If I overpay dearly for an investment today, this means that the expectations for the first few years after I make the investment are already baked in the price. As a result, I want to void overpaying for an investment. Unfortunately, this is easier said than done.

Relevant Articles:

- 25 Companies Rewarding Shareholders With Raises

- Eighteen Companies Rewarding Shareholders With a Raise

- 25 Dividend Growth Stocks For Further Research

- 27 Companies Rewarding Shareholders With Raises

Yield on Cost is a fascinating metric

Yield on Cost is a fascinating metric. It calculates the dividend yield based on the original cost at the time of purchase.

Yield on cost is calculated by dividing the dividends received from an investment over the cost paid for the shares.

I view yield on cost as a forward looking metric.

It combines my yield and growth expectations into a certain amount of dividend income at a future point.

It's fascinating to see in action, anytime you buy a security. It get's me thinking about the current yield, growth in earnings per share, dividend safety, valuation.

For example, Home Depot (HD) sold for about $80/share ten years ago and had a trailing annual dividend of $1.56/share.

The dividend yield was paltry at around 2% back then.

Some investors could have ignored Home Depot, because of its "low yield", in favor of other higher yielding companies. Mostly to their own detriment.

However, they missed out on the potential for future dividend growth.

Fast forward to today, Home Depot is on track to pay $9/share in annual dividends. 

This brings the yield on cost at over 11%.

That's a better yield and dividend income that would have been achieved by investing in a company that yields say 5% or 6%, but which never raised dividends by much.

As I said above, I view Yield on Cost as a forward looking metric. 

It looks at current dividend yield and accounts for future estimated dividend growth.

There is a trade-off between dividend growth and dividend yield. 

Taking a look at Yield on Cost definitely puts things in perspective.

What's even more fascinating to me is that even The Oracle of Omaha, Warren Buffett himself, has discussed the concept in his letters to Berkshire Hathaway shareholders. The last mention was just last year, when he discussed his investments in Coca-Cola and American Express. Please see below: (Source)

Thank you for reading!

Relevant Articles:

- The importance of yield on cost

- Yield on Cost Matters

- Estimating future Dividend Growth

- Dividend Investing Misconceptions

- The Tradeoff between Dividend Yield and Dividend Growth

- 

Eighteen Companies Rewarding Shareholders With a Raise

I review the list of dividend increases as part of my monitoring process. This process helps me review how the companies I own are doing. It also helps me identify companies for further research.

For this weekly review, I tend to focus my attention on companies with at least a ten year history of annual dividend increases, which also raised dividends last week. I provide a quick overview of each company that includes the amount of the most recent dividend increase, and compares it to its recent historical record. I also review the streak of annual dividend increases, and review earnings and valuation information.

Over the past week there were eighteen companies that raised dividends, and have a ten year history of annual dividend increases. The companies include:

You can view the company, ticker, and ten year dividend growth. I have also included P/E ratio and dividend yield, as well as dividend payout ratio. 

Each of these companies has managed to grow earnings over the past decade, which means that dividends have been well supported. If these companies can continue growing earnings per share over the next decade or two, I am confident that they would continue their streak of consecutive annual dividend increases.

However, our work here is not done. Just because we have identified a group of companies for further research, which I would love to own forever, that still doesn't mean that these companies are automatic buys today. Some of these companies seem attractively valued to me today, based on a combination of their P/E ratios and dividend growth. 

Others however seem a little pricey. Therefore, they would likely find a place in my portfolio if they become more attractively valued. This can be achieved either by earnings per share growth, by declines in the share price, or a combination of the two.

This my general framework on how I value companies. I take into consideration many inputs, such as P/E, interest rates, stability of earnings, dividend growth, in order to come up with a general idea of what to invest my money in. It is not a formula however. 

It is helpful to be prepared to act when the right opportunities present themselves. This is why I have a watchlist and general ideas on valuation, so I can act when the time is right.

Relevant Articles:

- Dividend Growth Investor Newsletter

- Dividend Aristocrats List for 2024

- How to value dividend stocks

- Rising Earnings – The Source of Future Dividend Growth

- Should Dividend Investors Worry About Rising Interest Rates?

How to Earn a 3% IRA Match with Robinhood

The employer match is one of the best features of workplace retirement accounts such as 401 (k) plans ( Pre-tax and Roth). It’s a contribution from the employer into the employee workplace retirement account. It’s as close to as it gets to “Free Money”, albeit it is all part of total compensation.

Online broker Robinhood is having an interesting promotion, related to retirement accounts. 

They basically offer a match on retirement contributions and asset transfers of up to 3%, with no limits. The IRA match doesn't count toward your annual contribution limit, which means it’s extra money on top of your contributions. You can earn the IRA match on all new IRA contributions, IRA transfers, and 401(k) rollovers. In addition, the bonus is simply added to your retirement account, which does not generate a taxable event.

There are some hoops one needs to jump through however, in order to get that bonus.

1.      Robinhood clients need to sign up for Robinhood Gold, which costs $5/month. The bonus requirement is that the client is an active Robinhood Gold user for at least 12 months.

2.      Robinhood clients need to transfer an old Roth IRA from another broker into Robinhood in order to be eligible for the 3% match on transfers. Examples include transferring assets from a broker like Merrill Edge into Robinhood. This can all be done electronically from the Robinhood interface.

 

This offer also applies to regular contributions, which are subject to the annual contribution limits. For example, contributing $7,000 to a Roth IRA at Robinhood makes the customer eligible for the 3% match on said contribution. Provided of course that the customer has signed up for Robinhood Gold.

 

3.       The offer ends April 30 on the asset transfer bonus from another brokerage.

4.      The catch is that there is a 5 year holding period for asset transfers from another brokerage. In other words, those assets that have been transferred into Robinhood need to stay at Robinhood for 5 years. Otherwise, the client forfeits that bonus.

When the IRA transfer completes, the amount of the match is calculated based on 3% of the total of the transferred cash plus transferred securities and options, using the National Market System closing price of each position transferred into the account on the trading day before when the transfer settles.

Robinhood would also reimburse any transfer fees up to $75, assuming that at least $7,500 are transferred over from another broker.

For IRA transfers it typically takes 5-7 business days for the transfer to be completed in the Robinhood account, after they receive an account transfer request. For 401(k) rollovers, this process can typically take 2-4 weeks for deposits to complete.

A rollover is not always the best choice for old 401 (k) accounts too. In some cases it may be beneficial to keep the money in the 401 (k). Perhaps speaking to a licensed financial professional can help weigh options.

Overall, I believe it sounds like an interesting offer. This is obviously an attempt from Robinhood to get more retirement assets in their brokerage business. Retirement assets are stickier, which can potentially increase customer lifetime value and profits for Robinhood.

It is a very good offer, which may or may not be a sign of desperation on behalf of Robinhood.

The brokerage business is very competitive, and very commoditized as well. There is a risk that a broker may fail. This is why it is important for investors to be aware that they are only protected up to the first $500,000 per account type per broker through the SIPC, should that broker fail. That means it’s probably not smart to keep all assets at one brokerage to begin with as it could take time for assets to be given back to customers for example.

If Robinhood were to fail or be acquired by someone else, it is unclear if they would claw back that bonus money or let the customer keep it.

I do not have a clue if Robinhood would fail or be in business in 5 years. That’s just my opinion of thinking through the risks potentially associated with this return.

These are some of the risks I thought about in an effort to list pros and cons.  

This is not an affiliate or paid post. I am just trying to determine for myself if it makes any sense to move some assets to Robinhood and take advantage of this offer. 

This is their FAQ section on the offer.

These are screenshots from the Robinhood app, which inspired me to review this deal.

 

 It could take some navigating on the app to find this deal however.

 

 

 

25 Dividend Growth Stocks For Further Research

There were 68 dividend increases in the past week. It looks like corporate boards are flush with cash, and consumer confidence is slowly rising. There is a record low unemployment, and the consumer is spending again, which is good for corporate revenues and bottom lines.

When companies raise dividends, they signal their confidence in the near term prospects of the business. A dividend is a sacred cow in the US. This is why business leaders need to evaluate the cashflow estimates over the next couple of years against estimated cash outflows and growth plans for future investment. Only after a reasonable amount of cashflow is left over, which is more than what the business needs, can they decide what the dividend rate should be. If a business expects to grow excess cashflows over time, they will most likely return a growing amount of cashflows to its shareholders.

Our goal is to evaluate each business, its prospects, fundamentals and valuation, before considering it for our portfolios.

Out of the list of 60+ dividend increases, I focused on the companies that have increase dividends for at least ten years in a row. There were 25 companies that raised dividends last week, which also have at least a ten year streak of annual dividend increases. Two of those companies were dividend kings, having increased dividends for over 50 years in a row. Three of these companies are dividend champions, having increased dividends for over 25 years in a row. The rest were either dividend achievers, or newly minted dividend achievers.

I then consolidated the information in a tabular format, for easier review:

This list is not a recommendation to buy or sell stocks. It is simply a list of companies that raised dividends last week. The companies listed have managed to grow dividends for at least ten years in a row.

The next step in the process would be to review trends in earnings per share, in order to determine if the dividend growth is on strong ground. Rising earnings per share provide the fuel behind future dividend increases.

This should be followed by reviewing the trends in dividend payout ratios, in order to check the health of dividend payments. A rising payout ratio over time shows that future dividend growth may be in jeopardy. There is a natural limit to dividends increasing if earnings are stagnant or if dividends grow faster than earnings.

Obtaining an understanding behind the company’s business is helpful, in order to determine how defensible the dividend will be during the next recession. Certain companies are more immune to any downside, while others follow very closely the rise and fall in the economic cycle.

Of course, valuation is important, but it is more art than science. P/E ratios are not created equal. A stock with a P/E of 10 may turn out to be more expensive than a stock with a P/E of 30, if the latter is growing earnings and the former isn’t. Plus, the low P/E stock may be in a cyclical industry whose earnings will decline during the next recession, increasing the odds of a dividend cut. The high P/E company may be in an industry where earnings are somewhat recession resistant, which means that the likelihood of dividend cuts during the next recession is lower.

Relevant Articles:

- Not all P/E ratios are created equal
- My Entry Criteria for Dividend Stocks
- Dividend Growth Investing Gets No Respect
- Why the best investment plans never turn out as expected

The best investors in the world are dead

A few years ago, I read about a study conducted by Fidelity on its client brokerage accounts. The study tried to identify the best performing investors at the brokerage, by reviewing account returns.

They came to a stark discovery – the best investors were either dead or had forgotten to log on to their accounts for a long period of time. Perhaps they forgot their passwords, and got locked out of their accounts, but didn’t bother resetting them.

It makes intuitive sense that accounts where investors do little trading would do better than accounts that are more active.

There are several reasons why that would make sense:

1) When you buy and sell stocks often, you incur costs. 

Back in the day, you had to pay a commission to buy and to sell a stock. If you do that enough times, you can be out of some serious cash. Even if you lose 1% of your portfolio value to commissions and fees each year, that could eat away a sizeable chunk of returns over time. Costs compound over time, but unfortunately not in your favor. Plus, when you buy and sell stock, you end up losing a little bit on the buying and selling, because you buy at the ask price and sell at the bid price. The difference varies from company to company, but it also adds up over time. We are not even going to discuss taxes, which can eat up a portion of returns, especially if you invest in a taxable account.

2) When you buy and sell stocks too, you often pay an opportunity cost as well. 

I have read some academic research that showed how companies that investors have sold tended to do much better than the companies the investor replaced them with. For example, if you sold Johnson & Johnson (JNJ) in the year 2000, you missed out on a stock that returned several times its original cost. 

If you replaced it with a tech flyer like Nokia for example, you ended up losing money, and missing out on Johnson & Johnson. If you had simply sat tight, you would have actually made money. That difference between what you could have achieved by patiently holding on to Johnson & Johnson and the actual result from buying Nokia in 2000 is your opportunity cost. Some may call this behavioral cost as well. Chasing what is hot, which is what following Nokia or other red hot tech darlings were in 1999 – 2000 was a big cost to investors.

3) Behavior costs are costly

I have personally fallen for behavioral costs. I have seen companies that seem to suffer through some issues, and I would sell them. Then these companies would miraculously recover and returns would revert to the mean. The companies I replaced them with either turned out ok, or they didn’t do as well.

I have also ended up selling companies because I thought they were too high, and replaced them with something else. You live and you learn.

At the end of the day, a lot of investors fall for the idea that you won’t go broke taking a profit. The problem is that you won’t get rich either. That’s because if you look at the Paretto principle, 80% of results would be concentrated in the top 20% of companies. In other words, if you sell too early from these 20% of companies that generate most capital gains and dividends, you are shooting yourself in the foot. And if you replace these companies with bad ones, you are compounding your mistakes. 

Peter Lynch describes it as “cutting the flowers and watering the weeds”.

Investors tend to trade a lot in general, chasing what is hot, and selling what is not. At the end of the day, they end up consistently buying high and selling low, which turns out to be costly for long-term returns.

While the study does sound plausible, the reality is that it does not exist. It is just a popular piece of Wall Street Folklore.

However, it does confirm my observations that your portfolio is a like a bar of soap – the more you handle it, the smaller it gets.

You can read more about my observations in the four articles referenced below:

- Corporate Leaders Trust - No new investments since its launch in 1935

- Coffee Can Portfolio

- The performance of the original companies in S&P 500 from 1957

- Stocks that leave the Dow tend to outperform after their exit from the average

25 Companies Rewarding Shareholders With Raises

I review the list of dividend increases every week, as part of my monitoring process. This exercise helps me monitor existing holdings, and review the dividend growth investing universe for potential new ideas.

There were 49 dividend increases in the past week. I reviewed each one. I loved reading through the press releases, in order to gauge what management is saying about their dividend policies. The paragraph below includes a few snippets from companies about their dividend policies.

An increase in regular cash dividends demonstrates the strength of a company's balance sheet and its ongoing commitment to creating value for our shareholders.  It reflects confidence that companies will again deliver on their promises. Companies treasure track record of dividend growth and remain committed to extending it, supported by the strength of capital and cash flows.

We also had Meta (META), whose former name was Facebook, initiating dividends for the first time. I view that as a positive factor. That's because a dividend focuses managements attention to projects with high return on investment. Any cashflow that does not meet minimum hurdle rates should be sent back to shareholders on a consistent basis. Otherwise, that money could be wasted on unprofitable projects or be deployed at sub-par returns, which sap management attention and company resources. 

Of the companies raising dividends, I narrowed it down to those companies that have managed to boost dividends for at least ten years in a row. This leaves us with 25 companies that increased dividends last week and have a ten year track record of annual dividend increases:

This list is not a recommendation to buy or sell anything. Just a listing of companies that raised dividends last week.

I did go ahead and sort through it for companies I own. I was disappointed in the small dividend increase from Church & Dwight (CHD). I typically expect higher dividend growth from lower yielding companies that are also overvalued for example. This means that I would refrain from adding to this position for the time being.

This list also put a few companies on my list for research, or continued monitoring. I would love to invest in MSCI if it is ever available at a more attractive valuation.

When I review companies, in general I look for:

1) Track record annual dividend increases

2) Earnings per share growth over the past decade, as well as forward estimates

3) Dividend growth over the past decade, as well as recent dividend increase

4) A defensible dividend payout ratio

5) Qualitative assessments

6) Attractive valuation

I can get a pretty decent picture of whether I like a company or not, by looking at all of those together.

Relevant Articles:

- Five Dividend Growth Companies Raising Dividends Last Week

- Four Dividend Growth Companies Rewarding Shareholders With a Raise

- 27 Companies Rewarding Shareholders With Raises

- Dividend Increases for the Dividend Aristocrats in 2023