As many of you know, my goal is to eventually be able to cover my expenses with dividend income from my portfolio. In order to get there, I save money each month and allocate them in dividend growth stocks. I reinvest dividends selectively along with new cash I have to invest.
As I discussed earlier, my forward annual dividend income was approximately $15,000 a few months ago. After a dividend cut by Kinder Morgan, my forward dividend income for 2016 is a little over $14,000. If I get dividend cuts from other pipeline companies such as EEP, WMB and OKE, my dividend income will further dip to a little over $13,000. As many of you know, I sell immediately after a dividend cut. When I replace dividend stocks sold however, I will be able to regain some of that lost dividend income back up to something like $14,000. Still, this is lower than the $15,000 for 2016 that I was projecting.
As you can see, I expect some turbulence in dividend income numbers in 2016 due to the weakness in the energy sector. I am also starting to get second thoughts about committing new money to pass through entities. As an investor, my goal is to buy companies that will pay me a dividend under most adverse conditions. It seems like companies that constantly rely on capital markets for new capital, and have high payout ratios are in greater danger if something goes wrong. The positive thing however is that if we see some turbulence, this might translate into the opportunity to acquire shares in quality dividend payers like Hershey at more attractive valuations and more attractive entry yields than before.
Many investors endlessly debate on whether they should sell after a dividend cut. I do not engage in those conversations any more. As an investor, my goal is to buy a stock that will keep growing dividends. I will live on those growing dividends. If that company cuts dividends, then it makes no sense to keep holding on to it – the initial reason of purchasing (regular dividend growth) is no longer valid. If my thesis is wrong, and it is proven wrong by a dividend cut, it makes no sense for me to stick to this company “hoping” that things turn around. I don’t specialize in turnarounds, I specialize in companies that regularly grow dividends, and can be counted on to provide those dividends no matter what point in the economic cycle we are in.
As an investor, my money is made in companies where things are working out in my favor. I try to buy companies where I intend to never sell – for which the dividend has to be at least maintained. A business model that can withstand the ability to provide enough cashflow to maintain and grow a dividend for years is rare enough. I will know instantly if things are not working out in my favor, when the company’s management admits defeat and cuts or eliminates the dividend. I immediately sell, because this company no longer fits the requirement I have – to provide me with sustainable dividend income in retirement. A business that cuts dividends could end up delivering amazing total returns for you, but it is just not right for my situation. I have found that as long as I stick to my limited circle of competence, I do well. If I start hoping for the best, rather than face the situation, I make mistakes.
Either way, as I mentioned in a previous post, I am continuing with the plan that I modified in 2013. Back in 2013 I had realized that I need to save money on taxes, which was and still is my largest household expense. As a result, I ended up maxing up all sorts of retirement accounts, including 401 (k), Roth IRA, Health Savings Account (HSA), SEP IRA etc. The difference is that the accounts with the highest contribution limits tend to limit my investment choices to low cost index funds. As a result, I have been buying up index funds, which have traditionally been characterized by low dividend yields and inconsistent dividend payments. For SEP IRA and Roth IRA accounts, I bought individual dividend growth stocks. I expect that in 2016, I will keep buying index funds in my 401 (k) and (H S A) accounts, and then individual dividend stocks in my Roth IRA. Depending on how much I generate from side activities, I may or may not be eligible to contribute to a SEP IRA account.
The rest of my money usually went into my taxable accounts, where I kept buying individual dividend growth stocks. The main change I am introducing in 2015, is that I will be largely putting my dividend growth portfolio on autopilot. This means that I won’t be adding new capital to this portfolio. However, I will be accumulating any dividends I receive, and using them to buy individual dividend growth stocks in the form of new positions or in the form of additions to existing positions. In addition, for any company that experiences a dividend cut, I will use the proceeds from the sale to purchase more individual dividend growth stocks. I expect that this will be the case for my taxable dividend portfolios on a going forward basis.
Starting in late 2015, I am working on building out a CD ladder with individual CD’s that will mature anywhere between 2020 and 2025. My goal is to have approximately $1,000 in CD’s maturing every single month for approximately 60 months within the time period I specified. I am doing this in an effort to add another safety feature to my portfolio, in an effort to diversify some risk in the event of a deflation. I would not be surprised if the increased automation in production, the increased level of competition in trade on a global basis and the increased level of disruption in the marketplaces around the world, and the leveling of the global labor market, result in higher risk of a deflation. To hedge against stagflation, which is a situation where prices are rising but the economy is not growing fast enough, I plan on allocating a portion of my portfolio to individual TIPs – Treasury Inflation Protection Securities. Those individual bonds will have to be held in a tax-deferred account.
I expect that my dividend income will have an organic growth rate of 6%/year. I also expect that this dividend income will be reinvested at average yields of about 3%. This means that I expect my forward dividend income to grow by about 9%/year. From a starting point of $14,000 in forward dividend income as of December 2015, and using a total growth rate of 9%/year ( from dividend growth and dividend reinvestment), I would expect that my forward dividend income exceeds $18,100 by 2018.
I am on track to cover 78% - 80% of expenses with dividends at the lower end of my expenses range of $1,500 - $2,000/month. This is in line with my target for 2016, per my original goal for income replacement percentages that I posted two years ago.
This exercise of course ignores the fact that I will be able to save aggressively and invest through my tax-deferred accounts for the next few years. This activity will likely further increase the level of dividend income for me. The extra dividend income that is generated, will be safely kept within the confines of tax-deferred accounts. As a result, any taxes on investment gains and income will be postponed in some cases by 30 – 40 years ( 401 (k)), and completely eliminated in others ( Roth IRA). Either way, I expect that these savings will generate approximately $3,000 in forward dividend income around 2018. Additional interest income will likely reach $2,000 by the end of 2019.
Given my monthly spending of $1,500 - $2,000/month, I believe that I will be in a good shape to still reach financial independence some time around in 2018.
Your financial independence is dependent on a few factors within your control such as:
-How you Invest your Money
-Keeping investment costs and taxes low
-How long can you afford to invest before reaching your goal
In this article, I discussed my investment goals for 2016. I have talked about my annual investment goals on this site since 2008. Those annual targets are part of my overall plan of reaching financial independence. While it is very likely that I will continue working in some capacity even after reaching financial independence, I am confident that I am on the right path. If you create an income machine that meets your living expenses, you may have much more flexibility in life.
What are your goals for 2016 and after?
- My Dividend Goals for 2015 and after
- My Dividend Goals for 2014 and after
- Dividend Investing Goals for 2013
- My dividend crossover point
- Margin of Safety in Financial Independence
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