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

Monday, April 25, 2016

How to have enough

I have shared with you early in the year, that I am essentially living off dividends and side income in 2016. I am saving my other income in tax-deferred accounts. I sleep like a baby*. I am happy with what I have achieved. However, I keep learning. I have a goal of generating a certain dollar amount from my portfolio within a certain timeframe. I also have figured out how to achieve that through regular screening, analyzing, and investing in quality dividend growth stocks.

Some people are never happy with what they have however. They never have enough. Their level of happiness is not dependent on what they have, but rather on what they don’t have. This is a slippery slope, which would put you in the rat race of its own. If you have a nice house, but your neighbor has a nicer and bigger house, you will succumb to a syndrome called ‘Keeping up with the Joneses”. If your portfolio generates enough dividends for you to live off, you should be happy. Many are not happy however, because their neighbor tells them they are doubling their money by investing in hot tech stocks. If you benchmark your success relative to the success of others, you will never be happy or accomplished. This is because there is always someone that is better than you at something else.

As an investor you need to have goals, and then create a strategy to achieve those goals.

For investors like you and me, the goal is to live off our nest eggs, and to never outlive them.

Wednesday, April 13, 2016

Why relative performance comparisons provide no value to me

As a dividend growth investor, my goal is to generate a certain amount of money that would pay for my expenses in retirement. I work to achieve this goal by creating a portfolio of companies that include certain characteristics such as a track record of dividend growth exceeding a decade, good valuation, decent growth prospects, strong brands and strong competitive advantages etc. I evaluate my progress by comparing the amount of dividend income that covers my expenses. Right now, my dividend income is expected to cover 83% of expenses on the low end of annual expenses and 63% at the high end of my expenses. However, I do not track my total returns, which irritates many out there. But I couldn't care less.

I believe that tracking my total return is a waste of time. This is because based on the studies I have read, and the data I have seen, a diversified portfolio of stocks will likely get a similar total return to what the so called market would get. Plus, if I “underperform” some benchmark over a short period of time, I would feel the pressure “to do something”, which goes against the tenet of reducing portfolio turnover. And believe me, the pressure to switch to some other strategy will be highest after a stock has gone nowhere for a while, causing you and everyone else to doubt your abilities.

Monday, April 4, 2016

How many individual stocks do I need to consider myself diversified?

As an investor, I have always believed in diversification. I would rather err on the side of caution, rather than swing for the fences. It makes no sense to take excessive risks on a concentrated portfolio of stocks, particularly once you are financially independent or very close to it. In my case, diversification means not only owning a lot of individual dividend paying stocks, but also holding some fixed income such as government bonds and certificates of deposit that are insured.

As I have been talking about my plan, I often hear someone who tells me that I am not diversified. This statement is surprising, because my dividend portfolio includes something like 100 individual names. The 60 largest components account for most of the portfolio however. Someone always comes and tells me that I need to own thousands of individual stocks, in order to consider myself diversified. I disagree with that statement. I do not really have to look far, in order to refute this statement with actual data.

For example, I looked at the total performance of three stock market indexes over the past few decades from Morningstar.

Wednesday, March 30, 2016

Focused Dividend Investing: Pros and Cons

I believe that diversification is the only free lunch in investing. However, different investors have different takes on the topic of diversification. Some claim that it makes sense to only invest in their best ideas. I will try to discuss the pros and cons on the focused approach. At the end, I will talk to you about my take on the situation.

Focused Investing Pros:

1) If you purchase a great company, which is a successful investment, it will help your portfolio a lot if you are overweight in it. For example, if you invested everything in Wal-Mart when it became a dividend achiever in 1984, you would have done much better than the average investor out there.

2) It helps the investor really focus on a select number of companies and learn everything there is to those companies. If you have a substantial amount of money in a few stocks, you will monitor them very closely, and you will be intimately more familiar with them.

3) It is easier to track 20 companies, than track 50 or more. In addition, the investors could learn more information per investment when they focus on about twenty companies, than when they focus on 50 companies.

4) If you have great ideas, you should put most money there. If you have a few great ideas over your lifetime, and you put a large portion of networth to them, the wealth building effect to your bottom line would be tremendous.

5) Some of the best investors such as Warren Buffett, Charlie Munger have made a majority of their money from just a small number of concentrated bets throughout their career. We have all heard about the time when Warren Buffett put 40% of his partnership in American Express (AXP) in 1964, and made millions of dollars.

Monday, March 21, 2016

Focus on Dividend Growth In conjunction with Dividend Yield

Dividend Growth Investing is a strategy where an investor acquires shares in a company that has a track record of regular annual dividend increases. Only companies that have a certain type of business model can afford to grow dividends every single year for at least a decade. A track record of so many years of dividend hikes serves as a mechanism that narrows down the list of candidates for further research. In a large portion of cases I study, I am finding that companies have managed to boost dividends for at least a decade, because they also grew their earnings.

In my strategy, I look for companies that have raised dividends for at least ten years in a row. I also add things like P/E, yield requirements and growth requirements. If you have read my stock analyses before, you would note that I also look in trends in earnings per share, dividends per share, dividend payout ratios, as I gauge stability of the business, the dividend and try to make an educated guess whether the good times can continue on.

Friday, March 18, 2016

How can companies increase annual dividends by hiking them every two years?

One of the best things to come out of writing this site for the past 8 years is the ability to connect with others who may share similar goals and interests with me. The best part is questions I receive from readers. Many times, those questions provide fuel for future blog posts or turn into blog posts themselves. My biggest problem is that if everyone of my readers were to ask me a question per day, I would end up with enough blog content to last for the next 20 – 30 years.

A reader asked me the following question, after reading my post on slowing dividend growth:

"I was wondering how a company could have 53 consecutive annual dividend increase and yet go close to 30 months between raises? ( as is the case with CL between 83 and 84, among other dates as well)"

This is a good question. The best way to answer it, is to look at actual data. Actually, breaking down the data could be helpful. Most companies in the US pay dividends every quarter, with some exceptions. Therefore, the typical dividend growth company such as Colgate-Palmolive (CL) would pay dividends four times per year.

Wednesday, March 9, 2016

Give your investments time to compound

The most important ingredients for success in investment is initial capital outlay at a favorable valuation, annual return and time. Many times investors are able to identify a good company, which has the potential to grow earnings and dividends over time, and reward them handsomely in the process. For example, a business like Diageo (DEO) is a quality one, which is attractively valued today. I believe that it would still be selling premium alcoholic beverages throughout the world twenty years from now. I also believe that this business will be able to earn more over time, and pay a higher dividend twenty years from now. It is quite possible that the higher earnings per share will make the business itself more valuable as well.

The problem is that the investor bails out because either the stock price goes down, it stays flat, or they sell because of the fallacy that nobody goes broke taking a profit. The other silly reason why people sell is because they get scared by rumors and speculation, that makes them get irrational and emotional, and thus they bail out. If you believe that people will be willing to exchange their hard earned money for a good beverage in 2036, then chances are that Diageo (DEO) might be of interest for further analysis.

Monday, March 7, 2016

Five Dividend Growth Investing Lessons I Have Learned Over the Years

The analysis of my past investments from 2008 to now has shown a few interesting lessons. The first is that I do not know which companies will be the best ones to own in the future, in advance. I can look at earnings per share and dividends per share trends, but in reality, noone can predict the future perfectly. Based on past experience, I can only deduce that a diversified portfolio of quality dividend growth stocks should do fine over a long period of time.

The second lesson is that I should not sell stocks merely because they have risen in price. I know I talked a lot about this before. The main reason is that I made this mistake by identifying and purchasing small stakes in companies like Sherwin-Williams (SHW), W.W. Grainger (GWW) and RPM International (RPM) in late 2008 and early 2009, yet I never added to those positions later on. The reason was because they were always slightly overvalued per my yield requirements. In addition, I also ended up selling those stakes a few years later, which in hindsight was not a great move. I ended up buying companies high higher current yields, which still did great, but not as great as the original companies.

Wednesday, March 2, 2016

What dividend cuts? What market correction?

The beginning of this year was characterized with a correction in stock markets around the world. The big problem has been the energy sector, which has dragged down returns for investors. Some like myself have experienced dividend cuts in the likes of Kinder Morgan (KMI) and ConocoPhillips (COP). Others, have experienced dividend cuts in the likes of BHP Billiton (BBL). It is obvious that the energy sector is having a tough time, which by default translates into companies that do business in the energy field, their suppliers, their bankers and certain economies will experience turbulence as a result of this downturn.

As a somewhat visible private investor, I receive a lot of hate mail where the sender of the message secretly gloats at what they perceive to be my current misfortune. Unfortunately, their gloating cannot be further away from the truth. The sender ignores the following important facts when sending me hate mail:

Thursday, February 25, 2016

Time is an ally of the dividend investor

The power of compounding is seen as of the eight wonders of the world.

Time is an ally to the quality business. Most of the companies we discuss on this site are some of the best business brands in the world. Those are the types of companies which have many things going for them, such as instant customer recognition, growth prospects, pricing power and other solid competitive advantages, which ultimately lead to more profits, more dividends and higher intrinsic values. When you have a compounding machine that grows shareholder wealth by 7 – 10%/year on average, your only input after investing in that company is to let power of compounding do the heavy lifting for you.

I will repeat that again: If you are able to invest money each month in a diversified portfolio consisting quality dividend paying companies available at attractive valuations, your next job is to sit tight and hold on to your investments. Over time, assuming you had done your proper homework, those companies should be able to earn more and pay more in dividends. Those dividends could then be used to buy more shares of the same company that produced them in the first place, or buy shares in other companies, which pay more dividends on their own.

Thursday, February 18, 2016

Business Change is bad for dividend investors

Experience, however, indicates that the best business returns are usually achieved by companies that are doing something quite similar today to what they were doing five or ten years ago… a business that constantly encounters major change also encounters many chances for major error. Furthermore, economic terrain that is forever shifting violently is ground on which it is difficult to build a fortress-like business franchise. Such a franchise is usually the key to sustained high returns.”  

-Warren Buffett, 1992 Shareholder Letter

Recently, I have been fascinated by the concept of intergenerational wealth. That is, wealth in the form of productive assets that is passed along from a generation to generation for at least say 100 years. Thinking of myself, it would have been nice if I didn’t have to start from scratch to build my nest egg, but be born with a trust fund. Since I cannot count on much of an inheritance, I am in the process of building my own dividend trust fund, and live off those dividends for decades (hopefully). In the process of my research on families and entities that have lived off assets for decades however, I uncovered a few interesting observations.

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:

"No"

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.

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