Showing posts with label dividend strategy. Show all posts
Showing posts with label dividend strategy. Show all posts

Wednesday, February 10, 2016

You need conviction to average down in a stock

"You pay a dear price for cheery consensus. "

Warren Buffett

I like to buy shares when prices go down. This ensures that my capital buys me more shares, and therefore buys me more dividend income. If prices go down further from the point at which I made my investment, I would be inclined to add to this position. As an investor in the accumulation stage, I want lower prices. If/When I get to be living off dividends, I will likely only care about the dividend checks I get deposited magically in my brokerage account. Stock price fluctuations would be irrelevant, unless I have extra money to invest.

The reason why I typically do not panic if the shares I own decrease in price is because I only focus my attention on solid blue chips which have the types of products and services which people use on an everyday basis. While earnings per share could temporarily go down during a recession, chances are that the earnings power of those enterprises will remain intact. If the fair value of a company is the sum of all the earnings from now until eternity, then it doesn’t really matter if in one of those years the business earns $2.30/share rather than the $2.50 it earned the year before, if I believe that earnings can rebound later. As long as that business is expected to continue operation as a going concern, I have no problem adding to my exposure.

Monday, February 1, 2016

The importance of multiple income streams

It is nice to have a diversified income stream. While many seem to look for a focused method, I look for a diversified method of generating income. The more diversified, the better.

One of my primary income streams today is my employee salary. This is the main and only income stream for majority of people in the US. The problem is, I generate it from one employer, so if they don’t like me, this stream will end. So I am at the mercy of the employer at some level. The goal is to diversify away from relying 100% on this stream.

The second income stream is the dividends from my income portfolio. I am not dependent on any one company for this income stream. In fact, I believe that if one holds at least 30 – 40 dividend paying companies, they should not be worried if one or two of them simply stopped paying dividends. Of course, the portfolio would likely be built slowly and over time, and should be representative of as many sectors as possible. If you have half of your portfolio in a single sector such as energy, or financials or consumer staples, you are way too concentrated however. You want to avoid risks that will take down a whole sector during a crisis, or a change. An example was the dividend cuts to banks during the financial crisis. Many expect a lot of dividend cuts in the energy sector today. Whether those fears are overblown, or not, remains to be seen.

Friday, January 29, 2016

How did I do in January?

To be honest, I didn’t do much investing wise in January. Of course, I didn't panic and I stayed the course. Per my earlier article I shared with you, I proceeded according to plan:

1) I maxed out 401 (k) and HSA
2) I reinvested the dividends in my tax-deferred accounts ( Roth IRA, SEP IRA, Rollover IRA)
3) I bought a CD as part of my CD ladder
4) Transferred all taxable dividends to checking, in order to spend them

So far I am finding that living off dividends and side income is a little challenging, though I expected that to a certain extent. This is because I am not taking advantage of low prices on dividend stocks ( though I am taking advantage of automatic purchases of stock mutual funds and dividend reinvestments). It is also difficult because my cash flows are uneven on a month to month basis. I have come to realize that cash is king indeed.

For example, assume that my portfolio consists of 10,000 shares of Coca-Cola and 1,000 shares of McDonald’s. Under current dividend rates, this portfolio will generate $3,300 in dividends in April, July, October and December, and $890 in dividends every March, June, September and December. This leaves the months of January, February, May, August and November without any cash.  This is where having approximately two months worth of expenses in savings is helpful - to smooth out short term bumps in cashflow.

Wednesday, January 27, 2016

The advantages of being a long-term dividend investor

Most readers know me as a person that buys a stock in a company I like, and then I keep building a position as long as valuation and allocation to security makes sense. Once I purchase a security, my intent is to hold it forever. I rarely sell, and have only done so when dividends have been cut or valuations have been hard to justify. There are many reasons why I keep holding on to a stock for as long as dividends are at least maintained.

If dividends keep increasing, and earnings keep going up, this means that the intrinsic value is increasing. If dividends are at least maintained, I take the approach of wait and see if fundamentals can improve again. I have seen it time and again with established companies like Hershey (HSY), Kellogg (K) and General Mills (GIS), where dividends are increased for many years, and then frozen for a few more years. After that, the streak of dividend increases continues, and the patient investor keeps reaping the rewards. The advantages of being a long-term dividend investor include:

Monday, January 25, 2016

The Benefits of Automatic Investing

The first three weeks of this month have been terrible for investors worldwide. It could be painful to watch your portfolio value decrease day after day. The funny part is now we have a lot of bargains, relative to what we had just a month ago. However, many investors find it psychologically difficult to add to a position, which then gets even cheaper.

This is why I am happy that I set myself up to buy stocks automatically in 2016, through my bi-weekly 401 (k) contribution.

I am also happy that I set my dividends to automatically reinvest in 2016 for tax-deferred accounts.

Of course, when you have decided that you will live off dividends in 2016, and invest the rest of the contributions through tax-deferred accounts in order to build up the tax efficiency of your portfolio, you get another sort of challenges as well.

Friday, January 15, 2016

Your most important asset

In the first two weeks of this year, the stock market has been down a lot. For someone who invests for dividends, I am relatively agnostic about stock price fluctuations. As long as the dividend is paid, I can afford to hold on to my portfolio. I can also afford to take advantage of lower prices when I have fresh new money coming in, which are ready to be invested.

The money I have invested in my portfolio are a result of my ability to earn income. It was reassuring that during a turbulent week for most investors, I was able to receive some fresh cash deposited in my checking accounts, in addition to any cash dividends I obtained as well. This got me thinking that my ability to earn income is an important asset in itself. In the accumulation phase, this ability to earn income and to save money is very important.

If you had asked me a few years ago what my most important asset was, I would have told you that the most important asset was my dividend portfolio. Upon further reflecting, I have come to the conclusion that my dividend portfolio is very important to me. However, it is not my most important asset.

Wednesday, January 13, 2016

Dividend Investors: Stay The Course

The first week of this year has been brutal for many investors. It is during times like these that you see who really is a long-term investor, and who is just a pretender. When you are a long-term buy and hold investor, you stand the best chances to take maximum advantage of the power of compounding, and end up with the probability for the highest dividend income and capital gains. These are the times where having a disciplined approach to investing pays off. These are the times when the ability to allocate capital to use in quality dividend stocks would seem stupid in the short-term, but potentially really brilliant 10 – 20 years down the road. When stock prices fall, there is an urge in the investor to protect their nest eggs from further price impairment.

This is a dangerous situation to be in because:

Friday, January 8, 2016

A Change of heart on REITs and MLPs

My goal as an investor is to generate a sustainable stream of dividends, which will pay for my expenses in retirement. I need this income stream to be as secure as it can be, in order to pay my expenses during recessions, depression, bull markets or bear markets.

My recent experiences with Kinder Morgan got me thinking a little bit about pass through entities in general. I am starting to question whether those dividends are indeed as bulletproof as I once thought they were. It is tough to have a change of heart, especially after enjoying a rising stream of dividends with Kinder Morgan (KMI) and REITs like Realty Income (O) between 2008 and 2015.

After some thoughts, I have come to believe that pass through entities are less reliable than regular corporations during times of distress. And during times of distress you need to have the comfort in knowing that your distribution is secure so that you can hold on to your stocks. If we are in a recession, and a company decides to cut dividends, we are in for a double whammy – lower dividend income along with lower value of the investment. I want durable dividends, no matter what happens stock market or economy. I want to receive dividends throughout the stock market or economic cycle.

Wednesday, December 30, 2015

Should Dividend Growth Investors Dip into Principal?

One of the most popular questions I get asked is whether investors should ever dip into principal. The short answer is almost always:


Anytime someone asks me whether they should ever dip into principal, I ask them the following question back:

"Do you know how long you will live after you retire?"

You are gambling if you want to dip into principal, because you are dealing with large unknowns such as returns over a certain period of time, longevity, inflation etc. If your projections turn out to be wrong, and you turn out to be living off your capital during a time when it is not growing, you are asking for trouble because your risk of running out of assets increases. Instead, I plan to live simply off the income my portfolio generates.

Thursday, December 10, 2015

The Humility Dividend Growth Portfolio

I have been investing in dividend stocks and writing about it on this site for almost eight years. My portfolio has increased several times in value over that period, fueled by my consistent contributions, increases in share prices and the constant reinvestment of growing dividends into more stocks. I am not sitting on my laurels however. On the contrary, I am spending a lot of time every week searching for attractive opportunities to add to my portfolio, monitoring my holdings and learning more about investing in general. I also spend a lot of time thinking about investments in general, my goals as an investor, and the risks that could prevent me from achieving those goals.

The more I learn about investing, the more humble I tend to become. One thing I have learned is that there is a lot out there that I do not know about. As a result, I have become much more humble than before. I accept that a lot of things can happen, but yet I would still like to be financially independent. I often scratch my head when someone argues with me about investing in hot growth stocks, in social media stocks, for not frequently churning my portfolio, for not withdrawing money from my principle, for only focusing on companies in the sweet spot, not investing in high yielding stocks, not concentrating my portfolio etc.

I am scratching my head because the person telling me that is obviously overconfident in their abilities. This is particularly dangerous from individuals who are ignorant of facts, and are not thinking probabilistically.

I realize I might be ignorant as well, which is why I try to keep learning about investments every single day, and keep an open mind. I also try to devise systems to protect me from risks.

Monday, December 7, 2015

Three Investing Lessons I Learned the Hard Way

In my site, I try to stress out the importance of diversification, patience and not chasing yield. The truth is that I have learned the hard way to keep those items in mind, any time I am investing my hard earned money. Many investors will ignore the teachings of this article, because these lessons might sound like a common sense approach to them. Others will ignore them, before they haven’t yet experienced the debilitating loss of capital or future opportunity by failing to adhere to these sound principles. Only a select few investors, who keep an open and inquisitive mind would be able to learn, without having to go through painful losses that typically precede learning in the investment field. I know these principles to be sound, because any time I fail to adhere to them, I always lose money.

The first lesson I have learned is never to chase yield. I have chased yield in the past, and have gotten burned doing it. The first time I chased yield, I was following a high-yield junk bond closed-end-fund, that was yielding 10-12%. The trust kept cutting distributions, but it kept yielding 10%-12%. As a result I thought I would just keep reinvesting distributions, and make up for the losses in income. Unfortunately, yields stayed the same because prices kept decreasing over time. Luckily, I saw the folly of my thinking, since my yield on cost was decreasing. After my issue with Managed High Yield Plus Fund (HYF), I decided to focus on companies that increase distributions. This is when I learned the second lesson the hard way.

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.

Friday, October 30, 2015

How to Increase Dividend Income

I expect that this year, I will be able to cover something like 60 - 80% of my targeted annual expenses from dividends alone. This means that my forward dividend income will cover 60% - 80% of my expenses. My forward dividend income is the amount of dividend income I will receive over the next year from investments I have today. It assumes no reinvestment of dividends and no new capital being added.

I believe that sometime around late 2018, my forward dividend income will be able to exceed my target monthly expenses and also have a neat little margin of safety as well. A margin of safety is important, because I want to have the luxury of never having to work for money again. A retirement where I have to spend time at a low paid part-time position does not seem appealing to me. This is why I believe generating a little more in dividend income than I need to is important, even if that means working an extra year.

As I get closer to the finish line, I am starting to get a lot of ideas on how to increase dividends faster. You might remember this post that I wrote over an year ago. I think it is time to re-visit the ideas, and add some more meat.

Wednesday, October 21, 2015

Are low prices a justification to buy?

Should I use stock prices in my screen?

I read several blogs on investing. I have noticed that several authors have been talking about purchasing a stock that has gone down in price over a certain period of time. It looks like looking at a list of stocks at a 52 week low or looking at biggest losers year-to-date has been a criteria to some investors. I am going to explore this idea in this article, and share my ideas on the topic.

Before I go any further, I want to mention that I am looking for companies that I can purchase at an attractive entry price, which can grow earnings and dividends above the rate of inflation, and can generate a decent yield in the process for me.

At first, it actually seems like a nice idea to look for companies, which have declined in price. This could be one way to identify shares that could be theoretically cheap. We all know that a company’s cheap stock price can always get cheaper in the process. Of course, a stock price that has gone down presents an opportunity to buy more shares for the same amount of capital. In addition, by buying more shares, the investor can end up purchasing more dividend income in the process.

So this sounds like a win-win ( win) at first glance. Why am I writing an article about it?

Well, the problem with just looking at price relative to its high for the year or its close from the previous year is that price itself doesn’t tell you the whole story. What matters is price in relation to fundamentals, as long as those fundamentals are growing.

Monday, October 19, 2015

Excess Cash Flow is essential for successful dividend investments

As I keep learning more about investments, and expand my horizons through continuous reading about companies and by reading books about investing, I get to see recurring themes or certain aspects in a new light. Sometimes, I might read about an aspect about investing and brush it aside, although a small dot is kept within my brain waiting for the right moment to be connected to my overall investment strategy. My “eureka” moment of using tax-deferred accounts for income investing in retirement occurred in 2013. A few years ago, I had another “eureka” moment, which was related to using cash flow for analyzing investments. I started analyzing cash flow along with the income statement and balance sheets as I started reviewing pass through entities such as REITs and MLPs.

As many of you know, I am a big fan of Warren Buffett and his writings. One of the recurring themes in his annual letters to shareholders and interviews is that he look for companies that generate excess cash flow, without requiring much in terms of capital investment to grow or maintain the business. In other words, he looks at businesses from the aspect of a business owner, in order to determine how much cash he can safely extract from them, without jeopardizing the investment success of the enterprise. The maximum amount of cash that could be distributed from a business to its owners is referred to as owner’s earnings. This is roughly equal to cash flow from operations, minus cash flows for investment such as Capex. The fact that Buffett likes to extract cash from businesses he owns through Berkshire Hathaway is one of the reasons why I believe he is in fact a closet dividend investor.

There are generally two types of businesses that generate a lot of free cash flow. While I focus mostly on earnings, I do look at cash flow from operations, and then take out the expenditures needed for investing activities. That way I come out with the cash flow that is available to be distributed. This of course is a very high level view of the situation, and I do encourage everyone to review each situation one company at a time and delver into specifics.

Thursday, October 8, 2015

A Costly Misconception about foreign dividend stocks

There is a misconception about foreign dividend stocks which can cost you thousands of dollars of lost dividend income. I see this misconception so frequently when I interact with dividend investors, that I have decided to note it, and end it once and for all.

Let's look at the dividend payments from a few companies in US dollars and local currency.

The first company is Nestle (NSRGY), a global dividend powerhouse which has managed to boost dividends in Swiss Francs (CHF) for 19 years in a row. You can see that since 2001, the dividend payment in Swiss francs has been up.

If you look at the payment in US Dollars however, you would think that dividends were cut in 2009 and 2015.

Tuesday, October 6, 2015

Quality Dividend Stocks versus Growth Stocks ( Part 2)

This is a continuation of the article I posted yesterday.

I focus on companies that provide essential products and services to their consumers. These customers use those products and services on a regular basis, and are usually loyal to those companies. The companies I focus on tend to be boring and enjoy slow but steady growth over time. These are our well-known dividend growth stocks. My favorite list is the one that David Fish updates every month.

These boring companies generate so much in excess cash flow, that they decide to remove temptation from management, and send that cash to shareholders. These companies do not need to use all of their profits in order to grow and maintain their competitive position. This is because there is little disruption in the way people eat, drink or take care of personal hygiene. Despite all of that, most companies are able to sell more, innovate, and generate more revenues. This all translates into more profits, more dividends and incidentally pretty decent total returns.

In fact, many of these great cash machines tend to get in the habit of continually raising dividends to their loyal shareholders, every year like clockwork. These companies prefer loyal long-term shareholders, and not a bunch of super caffeinated daytraders. The dividend payment is portion of the total return that is always positive, more stable than capital gains, and can never be taken away from you. In my reviews of individual dividend champions, which lists companies that have managed to regularly increase dividends for at least 25 years in a row, I have uncovered quite a few that were able to achieve this no small feat because their businesses were outstanding. There are only 106 companies on the dividend champions list, out of at least 10,000 publicly traded companies in the US, which explains why membership in this elite list is a small miracle.

Monday, October 5, 2015

Quality Dividend Stocks versus Growth Stocks

One of the biggest misconceptions that inexperienced investors make is to chase hot growth companies. The allure behind many of those companies is that they are in new and exciting industries that offer a lot of potential. New and exciting industries move the world forward and make everyone’s life easier. Unfortunately, investors do not always earn a lot of money this way.

When I first became interested in investing about 15 – 20 years ago, I thought that the way to make money is by investing in hot growth tech companies like Amazon (AMZN), AOL, Yahoo (YHOO), Ebay (EBAY) etc. The problem with this statement is that when you have a new and disruptive industry, you also have a high failure rate of companies in that industry due to the speed of change. For example, today we have all witnessed the success of Amazon and Ebay. However, a lot of companies that were selling at insane valuations in 1999 – 2000 are no longer with us – those include companies like CD Now, The, etc. When you have untested growth companies that sell at insane valuations, coupled with a high probability of business failure on those companies, you have a situation where an investor can lose a lot of money, even if they were conceptually right.

Today, we are seeing this with companies like Tesla (TSLA), ShakeShack (SHAK) and Twitter (TWTR). They sell at insane valuations, and will only make money to investors if they do much better than their already rosy projections for the future. Investors seem to have forgotten the importance of pricing and valuation in security selection.

Wednesday, September 30, 2015

How to properly weight dividend portfolio holdings

There are different ways to weight a dividend portfolio. I am going to examine the three most popular methods in this article. Then I am going to reflect on the method I use.

The first method is weighting portfolios based on market capitalization, and then adjusting weights based on free floats. The logic is that as a company becomes more valuable, it should have a higher weight in a portfolio, whereas a company that is less prosperous should have lower weights since its capitalization is lower. This method is preferred by many index funds, as it makes it easier to just buy a basket of several hundred or thousand securities, and then passively hold them. It is viewed as a self-cleansing mechanism, where prosperous companies gain higher weightings, while less prosperous companies are eventually flushed out. The dangers behind this method is that a speculative company with no material profits and elevated valuations could get a higher weighting due to stock price being bid up by speculators. This happened with a lot of indexes such as the S&P 500 during the tech boom in the late 1990s, when they added companies like Yahoo! (YHOO) at several hundred times forward earnings. The results were disastrous, and pulled down the expected returns for all index investors. On one side, it is a good idea to give higher weighting to the companies that are prospering. On the other side however, you could end up in a dangerous situation where the most successful companies will get large and command a large piece of the pie. However, these large companies might end up dominating that portfolio. In fact, the 50 largest components of S&P 500 account for 47% of the portfolio.  Apple (AAPL) accounts for almost 4% of the portfolio. Through July of 2015, just six companies in the S&P 500 accounted for most of the index gains. I wonder if this is a repeat of 1999 - 2000, or not.

Friday, September 25, 2015

Does Market Capitalization Matter in dividend investing?

One criticism of Dividend Growth Investing is that it focuses exclusively on large cap stocks. The common complaint is that if you buy a small cap today, it can grow out to be as big as Johnson & Johnson (JNJ), Coca-Cola (KO), Exxon-Mobil (XOM), or Wal-Mart (WMT) etc.

In theory this sounds like a great idea. The problem of course is that this complaint completely ignores reality and facts. The reality is that when each of the companies I mentioned above became dividend achievers ( meaning that they had regularly increased dividends for at least ten consecutive years in a row), they were big companies already. Yet somehow, they managed to grow earnings and dividends for decades. This is the beauty of a stable company which has a successful business model that showers shareholders with cash each year.

In reality, if you were able to buy each of those companies when they just became dividend achievers, you would have banked a boatload of dividends. Plus, there would have been a pretty sizeable growth in share prices over time.

I looked at each company at the time they became dividend achievers. I calculated the returns as of September 21, 2015, assuming that someone put $100 at the end of the year in which they achieved that status. Check the table below. It is interesting that those companies that were already deemed as large-caps at the time delivered phenomenal  results to investors. For example, a $100 investment in Exxon at the end of 1992, with dividends reinvested, would have turned to $891.73. That investment would be generating $35.48 in annual dividend income. This means that the investor of 2015 will be getting their original investment in cash every three years.

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