Wednesday, December 26, 2012

Dividend Investing Goals for 2013

As outlined in my dividend retirement plan, my ultimate goal is to reach financial independence. This would be achieved at the so called dividend crossover point, which is the point at which dividend income exceeds expenses. Achieving this long-term goal however takes time, patience and persistence in sticking to and executing your plan. It helps to break down the long-term goal into a plan with achievable and actionable steps.

For example, if you goal is to retire in 10 years, the sub-steps could include achieving a 10% coverage of your target income in year 1, 20% in year 2 etc. It is also important to readjust your plan accordingly, and be realistic about the external environment. For example, if hitting your target requires you to invest in dividend paying stocks yielding 4%, when the quality income stocks pay only 3% on average, you need to account for that. On the contrary, if you manage to receive a large lump-sum to invest (bonus or inheritance), and you are now 15% closer to achieving your goal instead of 10%, you need to readjust your goals for next year.

One of the goals for my income portfolio is achieving a 6% annual organic dividend growth. This growth ignores the effect on dividend income of reinvestment and addition of new funds. I usually look at the portfolio composition at the end of the prior year, and calculate the estimated dividend income for the new year. I then compare the estimated income for current year, to the estimated income for new year and check to see if I have achieved my goal. I believe that a 6% goal in average dividend growth is achievable, as it is only about 0.50% more than the long-term average dividend growth in the Dow Jones Industrials Average index. This is an important metric, because once I retire, I would need to have my dividend income safely increase above the rate of inflation, in order to keep its purchasing power over time. In 2012, my dividend income grew by 7.10%. Of course, my total income increased faster than that because I reinvest dividends and also add new funds to my portfolio.

My income goal is to reach a 60% dividend income replacement ratio. This means that my dividend income would cover roughly 60% of my expenses in 2013. In 2012, the percentage was roughly 50%. I do not speak in numbers in order to avoid extra unnecessary confusion. If my target monthly income was $10,000, this would cause discussion that this is too much, and is not realistic. The discussion would go in the direction that I need to spend less. If my target monthly income was $1,000, then the discussion would go in a way that this income is not sufficient for someone to live on. After all, these are my numbers, so the numbers that would work for you are much different.

The interesting thing about dividends is that they are not typically paid evenly every month, which is OK  This is why, when I discussed in an earlier article my dividend crossover point, my income seemed to exceed 60% of expenses in several months of the year. However, these are typically the months of November, August, May and February, when my Master Limited Partnerships pay their generous distributions.

In summary, my goals for 2013 are part of a long-term roadmap that would help me to reach out my long-term goal of retiring using dividend stocks. These goals will be achieved by owning qualirty dividend stocks which grow distributions by at least 6%/annually. The next two steps include reinvesting dividends selectively and adding new funds in attractively priced quality income stocks.

The types of dividend stocks I plan to add in 2013 include:

Becton, Dickinson and Company (BDX), a medical technology company, develops, manufactures, and sells medical devices, instrument systems, and reagents worldwide. The company has raised distributions for 41 years in a row. Over the past decade Becton Dickinson has managed to boost dividends by 15.70%/year. The stock is trading at 14.10 times earnings and yields 2.30%. I plan on initiating a position in this stock somewhere in first quarter of 2013, as long as it trades below $79.20/share. Check my analysis for more details.

McDonald’s Corporation (MCD) franchises and operates McDonald's restaurants in the global restaurant industry. The company has raised distributions for 36 years in a row. Over the past decade McDonald’s has managed to boost dividends by 27.40%/year. The stock is trading at 17 times earnings and yields 3.40%. This is the cheapest valuation for this global blue chip that I have ever seen, and I think that the stock has been beaten up unjustifiably. Check my analysis for more details.

Wal-Mart Stores, Inc. (WMT) operates retail stores in various formats worldwide. The company has raised distributions for 38 years in a row. Over the past decade Wal-Mart Stores has managed to boost dividends by 17.90%/year. The stock is trading at a 14.10 times earnings and yields 2.30%. Check my analysis for more details. The company was attractively valued for a brief period in 2011 – 2012. I plan on adding to my position in the retailer on dips below $64, assuming. If dividends increase by 8% in March 2013 however, the current prices around $69/share would make it attractively priced for me.

YUM! Brands, Inc. (YUM), together with its subsidiaries, operates quick service restaurants in the United States and internationally. The company has raised distributions for 8 years in a row. Over the past five years YUM! Brands has managed to boost dividends by 31.30%/year. The stock is trading at 18.80 times earnings and yields 2.10%. I like the recent weakness in the stock, which I consider to be short-term in nature. If the stock falls further to $54/share, I plan on adding to my position in it. If the company’s stock price remains relatively flat in 2013, but dividends increase by approximately 15%, I might consider adding to my position in the stock.

This of course is just a sample of the types of companies I plan to add to in 2013, as I will probably do somewhere between 24 – 36 purchases.

Full Disclosure: Long MCD, WMT, YUM

Relevant Articles:

My Dividend Retirement Plan
Dow 370,000
Dividend Stocks for Inflation Adjusted Income Stream
- How dividend stocks protect investors from inflation
My dividend crossover point


  1. I think your goal is very much feasable and inspirational. You could either curb your expenses or keep pushing to reach your current level.

    What puzzles me is to how reach relevant level of principal which not only provide living but offset inflation as well?

    I think if some of the companies are raising dividends for so many years in the row we need to look at the inflation adjusted growth. As obviously, it has been around last 36 years.

  2. I like the idea of setting a goal to reach a certain percentage of expenses being able to be covered by dividend income. I'm still a long way off from being able to cover even a tiny percentage but I have the same long term goal as you of financial independence through dividend income.

  3. A question:
    After establishing a emergency fund, do all of you excess cash go into your dividend growth portfolio?
    meaning, would 100% of your investment money be in dividend growth stocks?
    thanks so much for a great blog!

  4. love your blog...
    will the 24 - 36 stock positions you will be purchasing this year be in new positions or will you be adding to already owned positions? what percentage of your investment portfolio is held in dividend growth stocks?

  5. Somewhere between 85% - 90% of my total networth is in dividend growth stocks. The rest is other assets such as company retirement plans like 401(k) plans for example. I also hold some cash on hand ( emergency fund/checking).

    Most of the new cash will come to stocks that make sense at the time of purchase. It could be either new stocks or existing positions.

  6. I have really enjoyed your articles. I am now using the Dividend Growth strategy as part of my long term strategy. I attempted to find a dividend focused ETF that would work. However, it was difficult to locate an ETF that has a dividend yield between 3-4% while simultaneously meeting my other requirements. So, picking the individual stocks is ultimately the path I will take.

  7. I like your plan and the way you look at it. Although I agree on your explanation of looking at it as a percentage of your current income, I think you still could use a real number. Those who knows won't care and those who don't know, and start the discussion about accuracy of that number - well, we can ignore them.
    However for me it is a great idea to measure my goals.

    Merry Christmas and a Happy New Year and good luck in building your stream of income in 2013.

  8. I love reading this blog and this is a strategy that I implement myself. I think you have nailed it that dividend growth is more important than the actual yield. I'm curious to know if you will consider smaller dividend payors and more international companies over 2013? The growth increase of smaller stocks tends to be much larger over time than the bigger companies that may increase 6-7% a year. Nonethless, a great strategy which will continue to pay you dividends over time :)

  9. Fantastic post! I really like your approach. People tend to forget that dividends can be a reliable source of income and tend to focus on technical analysis and short term investments.

    Investing in good performers that pay dividends is the most natural way to hedge against any market condition. As long as the company is doing well and the dividends are paid, there is nothing to worry about.

    Could you share the source of your data?


  10. I know why you don't provide numbers, but I have been reading for what seems like years and would love to know just a little bit about DGI!


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