Monday, November 23, 2015

Three Dividend Seeds I Planted Last Week

I view each investment I make as a seed that I plant for the long-term. Some seeds could turn into a tree that would provide fruit (dividend income) for decades to come. My goal as an investor is to ensure that I plant those seeds in a systematic way that increases the odds of success. My definition of success is the ability to live off dividends when I decide to stop working.

In the past week, I managed to add to my positions in the following three companies:

Target Corporation (TGT) operates as a general merchandise retailer in the United States. Target is a dividend champion which has raised dividends for 48 years in a row. Over the past decade, the company has raised dividends by 20.30%/year.

The stock is selling at 15.20 times expected earnings for 2015 and yields 3.20%. Check my analysis of Target at Seeking Alpha.

The most interesting thing is that I sold two-thirds of my Target position in early 2015. Now I am able to get back in at lower prices. This happens very rarely, and is more of an exception rather than the norm.

Friday, November 20, 2015

Are you patient enough to become a successful dividend investor?

One of my largest holdings is McDonald’s (MCD). The company recently raised its quarterly dividend by 4.7% to 89 cents/share. McDonald's is a dividend champion which has raised its dividend each and every year since paying its first dividend in 1976. Given the yield of 3.20% and the dividend growth of 5% (and my estimated earnings growth of 5%/year), this sounds like a decent investment for slow and steady income and wealth accumulation. You might enjoy my latest analysis of McDonald's here.

Yet, a few months ago everyone had written McDonald’s off. Noone was supposedly eating there. Many investors sold out after earnings per share and the stock price went nowhere for 3 years. I didn’t sell however, because I know that most profits are made by patiently sitting on a holding, and doing as little as possible.

Replacing a dividend company sold is a very difficult endeavor. It requires that:

1) You correctly identify a company you own that is not going to do well, and will not provide good returns
2) You correctly identify a company that is going to do well and will return more than the company sold
3) The new company has to provide better results than the old company, and that is after accounting for taxes, commissions etc

There are several reasons below why I didn’t sell:

Wednesday, November 18, 2015

Relative Performance Comparisons are Useless for Dividend Investors

I started my site dedicated to dividend investing in January 2008. I had been able to accumulate some money for the first time in 2007, and had spent hundreds of hours teaching myself how to properly allocate it. The purpose for this site was to make myself do the work to form an opinion, and to share what I have learned and share my thoughts on investing.

Since the very beginning of the site, my goal has been to accumulate enough income producing assets. Once the income from those assets exceeds my expenses by a comfortable margin of safety, I would consider myself retired or financially independent ( you pick the correct word).

One of the lessons I have learned is that investing is part art, part science. A certain lesson can be very useful in some scenarios, but also very dangerous in others.

For example, if you have a winning investment strategy, you need to stick to it through thick and thin. An investor should not let temporary periods of bad performance influence you to jump ship. In my book, a strategy should only be evaluated based on whether it can help in reaching my goal of attaining financial independence.

On the other hand, you should also know when your strategy is no longer working or doesn’t make sense due to certain factors. If you stick to a strategy for too long, you will be unable to reach financial independence on time.

Is your head spinning yet?

Monday, November 16, 2015

Life after Financial Independence

In a previous article, I discussed that I will reach Financial Independence some time in 2018. After I reach the dividend crossover point, my dividend income will pay for expenses. Many assumed that I will just call it quits and live off the $1,500 - $2,000 in monthly dividend income that the portfolio will generate.

These assumptions are further away from the truth however.

Last year, I shared with you that I was running low on motivation on my quest towards financial independence. I was working at a job that was really nice to work at initially. After about an year or so however, I was put on a terrible project with impossible deadlines and management. After burning out quickly, I found a new opportunity.

I once worked at an organization just like that where I kept track of my time in 6 minute increments and worked 60 - 80 hours/week. Not a lot of fun, and a lot of backstabbing too. Though if you stayed for 10+ years, you could have made a lot of money and earned a decent pension too.

Then I moved to an organization where I worked 30 - 40 hours/week, and earned more income. The first organization taught me how valuable my time was. This lesson I never forget - allocating time is as important factor in success as allocating capital.

I enjoy my current position. I have ebbs and flows in the amount of work throughout the month, but I actually enjoy it. I could see myself doing that for several years after reaching financial independence.

Friday, November 13, 2015

Time in the market is your greatest ally in investing

The more I learn and experience about investing, the more convinced I become that doing nothing is the best strategy for long-term success in a portfolio.  I believe that time in the market is more important than timing the market. This is the conclusion I reach in an earlier article on the topic:

"The lesson to long-term investors is clear; it doesn't matter whether we are in a bull market or bear market. The goal is to dollar cost average each month in quality dividend growth stocks selling at attractive valuations, reinvest dividends, and hold patiently for the next 20 – 30 years. I cannot emphasize quality factor, since the quality companies are more likely to survive a deep recession unscathed, and continue paying and growing dividends, even during the hardest of times. "

When I was much less knowledgeable and experienced, I operated under the assumption that it is easy to just switch in and out of stocks, and thus outguess the markets. In reality, this was a foolish approach, since nobody can consistently go in and out of stocks. This is because it costs a lot in terms of taxes, commissions and time to sell a company and buy another one. The biggest cost of course is opportunity cost, since in the majority of scenarios I would have been better off, had I simply stayed put, and allocated my dividends in the best ideas at the time. Hence, the only time I have considered selling is if a dividend is cut, or a position becomes so overpriced or take such a weight in my portfolio, that it would be prudent to trim or eliminate it.

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