Tuesday, March 4, 2014

Four Practical Dividend Ideas for my SEP IRA

Back in 2013, I opened a SEP IRA account, in an effort to minimize my tax liabilities for 2012. I realized in 2012 that my largest household expense was for taxes. As a result, I have been maxing out all tax deferred accounts I could get my hands on today, in an effort to minimize amount of taxes I am paying today. Once I retire, my goal is to convert those funds into a Roth IRA and pay a minimal if any amount of taxes on the conversion process.

In early February, I made a contribution to my SEP IRA for 2013 income, in order to reduce those taxable liabilities. I purchased shares in the following four companies, and tweeted about it:

General Mills, Inc. (GIS) produces and markets branded consumer foods in the United States and internationally. This dividend achiever has managed to increase dividends for 10 years in a row. Over the past decade it has managed to boost dividends by 9.90%/year. Currently, the stock is attractively valued at 18.50 times earnings and yields a safe 3.10%. Check my analysis of General Mills.

Diageo plc (DEO) produces, distills, brews, bottles, packages, and distributes spirits, beer, wine, and ready to drink beverages. This international dividend achiever has managed to increase dividends since 1998. Over the past decade, Diageo has managed to boost dividends by 6.40%/year in British currency. Currently, the stock  is fairly valued at 19 times earnings and yields 2.30%. Check my analysis of Diageo.

ConocoPhillips (COP) explores for, produces, transports, and markets crude oil, bitumen, natural gas, liquefied natural gas, and natural gas liquids on a worldwide basis. This dividend achiever has managed to increase dividends for 13 years in a row. Over the past decade ConocoPhillips has managed to boost dividends by 15.70%/year. Currently, the stock  is attractively valued at 9 times earnings and yields a safe 4.30%. Check my analysis of ConocoPhillips.

McCormick & Company (MKC), Incorporated manufactures, markets, and distributes spices, seasoning mixes, condiments, and other flavorful products to retail outlets, food manufacturers, and foodservice businesses. This dividend champion has managed to increase dividends for 28 years in a row. Over the past decade McCormick has managed to boost dividends by 11.40%/year. Currently, the stock is overvalued at 22.50 times earnings and yields a safe 2.20%. Check my analysis of McCormick.

Dividend paying stocks are the most practical means to put money to work for individual investors. It is not that difficult to comprehend that if you put your money to work in quality dividend machines that manage to simultaneously grow earnings and send a growing stream of income to shareholders, you have a high chance of achieving your financial goals. It is also not difficult to understand that companies that manage to deploy their cash at high rates of return, send excess cash flows to dividends, and still grow the bottom line, will become more valuable over time to investors. Therefore, those investors who manage to snag those quality dividend growth companies at fair valuations in their diversified portfolios will be able to leverage the power of compounding at its fullest. Therefore, dividend growth stocks are ideal not only for current retirees who desire an inflation proof source of income, but also for those who are in the process of accumulating their nest egg.

In my interactions with ordinary investors, I have come to realize that there are two groups out there. One of them instantly gets the benefits of dividend growth investing, while the other group spends their time debating against this strategy. The second group debates against dividend growth investing largely by focusing on outliers or academic knowledge which works on theory, but is short on providing results in the real world that all of us operate under.

At some point, debating just for the point of debating becomes pointless and actually dangerous, because it prevents investors from starting their investment journey. At the end of the day the most important thing for investors is to actually get started and learn the rules of the game along the way. If someone always keeps looking for the strategy that only produces best case results, and they are not comfortable taking any risk, they would never launch their investing career and possibly never earn enough to retire.

My goal is to make money in the real world, and find the way that would ensure a stream of income that grows above level of inflation, which is stable, and recurring, and would make living off my nest egg easy with the least amount of complications. I have found that the perfect method for monetizing my assets is by living off dividends in retirement.

Full Disclosure: Long COP, DEO, GIS, MKC

Relevant Articles:

Six Dividend Paying Stocks I Purchased for my IRA
My Retirement Strategy for Tax-Free Income
Six Compounding Machines for Long Term Dividend Investors
The Warren Buffett Argument Against Paying Dividends
Why Dividend Growth Stocks Rock?

6 comments:

  1. Have you ever considered a dividend mutual fund such as Vanguard Dividend Appreciation? If you have "admiral shares" ($25,000 or more) you pay only 0.1% fees. All dividends and cap gains re-invested in more shares. Diversified, easy and cheap. What's not to like?

    ReplyDelete
  2. Hi Jim,

    I prefer to select my own companies, and buy them only at attractive valuations. I do not see the reason to buy an index and pay money every year, for essentially the same companies I can hold with a small or minimal commissions.

    Particularly with $25,000, you can create your own dividend ETF with 25 - 30 companies, and pay very little in commissions during setup. You can choose whether to reinvest your dividends or not.



    ReplyDelete
  3. Did COP just freeze their dividend?

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  4. Thanks for your reply. I really enjoy your articles. I have my own discount broker account and consider many of the stocks you review. I put my kids in the vanguard mutual fund because they (hopefully) won't be touching it for a very long time and I don't have to worry about it. Keep up the good work!

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  5. MMI,

    I don't think COP has frozen dividends. They last raised them in July 2013.

    DGI

    Jim,

    Glad you liked response. Now if you were leaving the money to someone that is not interested in investments, then a mutual fund might work out. However, a diversified portfolio of 30 companies would likely do equally well if it is not touched.

    DGI

    ReplyDelete
  6. MMI,

    I don't think COP has frozen dividends. They last raised them in July 2013.

    DGI

    Jim,

    Glad you liked response. Now if you were leaving the money to someone that is not interested in investments, then a mutual fund might work out. However, a diversified portfolio of 30 companies would likely do equally well if it is not touched.

    DGI

    ReplyDelete

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