Thursday, December 17, 2015

My Goals for 2016

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then it makes no sense to keep holding on to it – the initial reason of purchasing (regular dividend growth) is no longer valid.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:

-Savings Rate
-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?

Relevant Articles:

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


  1. Good plan and congrats on sticking with the principle of removing dividend cutters. I feel the same and even though you might take a loss, it's an opportunity to do tax loss harvesting. Good luck with the great dividend December.

  2. I believe there are some ETFs out there that offer 5-yr and 10-yr CD ladders for a small fee. Might be an option if you don't want the excitement of managing the ladder yourself.

    1. Your belief is incorrect. The ETF product you described doesn't exist

  3. Another well written piece, DGI. The impressive thing is that you have your plan and stick to it regardless of the occasional setback. what level do you feel you have too much invested in an individual stock? I know you have some MO as do I. It has been a great performer. I bought some in December 2008 at 15.09 / share and it's at 59. Including the ex dividend this month, I've received 12.39 / share in dividends. I've added some occasionally but don't want to get too heavy into 1 stock (it's at 5.25% of total portfolio now).

    Also, you might want to take a look at CHY. Not a dividend grower but it pays every month with a current yield of 11.5%.

    Thanks for your work!


    1. I don’t know you so I can’t tell you what to do.

      For individual stocks, I myself try not hold more than 4% - 5% in one company.

      I am skeptical of anything that yields double digits

  4. Your expenses are crazy low - which is great DGI.

    Are you renting or have a mortgage?

    We figure we need at least $30,000 in dividend income for living expenses, after the mortgage is paid off. We're 39% towards our goal (we're approaching $12k per year in dividend income).

    By 2018, like you, we should be close to $18k per year in income.

    I look forward to your progress!

    1. I am starting to believe that my competitive advantage is keeping expenses low and saving a lot, not that I am a good investor.

      Of course, the numbers you see are for one person.

      Please follow the links within the article, for an answer to your question.

      Best of luck to you!

  5. You did not mention any health goals.

    No point in making 14k extra if you are not healthy.

    1. When I mentioned health in an earlier article, everyone assumed I was fat and unhealthy.

      When I don't mentioned health, now people think I am fat and unhealthy.

      This is precisely why I don't care what people on the internet think about me - you will never make all of them happy no matter what.

  6. Interesting article. Do you go to and research each company's 10-Q or 10-k to see if they can afford to pay for dividends out of their earnings?
    I've read those "Dummies" books about investing in dividend stocks and how to read financial reports. Also, I read other sources, e.g. Wall Street Journal, Bloomberg, Reuters, Financial Times, etc.
    Investing in a company that pays no more than 50% of their earnings in dividends seems to be prudent. For example, if a company had earnings of $1 per share during the past quarter, then their dividend should be no more than 50 cents.
    Of course, there are many other variables to consider. That is just one suggestion.

    1. The funny part is that the “dummy” writing this site has read the annual reports on KMP, KMI and believed the management’s story that the dividend is safe.

      The dividend was really safe based on distributable cash flows. At least in the past 20 years it was. However, what really messed things up is the fact that CAPEX to grow was financed using stock and debt. When stock and debt turned expensive, management decided to scrap the dividend. They went from promising double digit dividend growth to cutting the dividend in the span of 1 month.

      Perhaps this is why other bloggers don't talk about their mistakes - everyone takes one error, extrapolates it onto everything, and assumes they are a dummy ( though in my case I actually/probably was a dummy or holding so much KMI)

    2. I actually appreciate more that you talk about your mistakes, it makes me feel that you genuinely interested in growing and sharing your experiences. Especially for a totally newbie like me. I've appreciated your writings. Thank you so much.

  7. Too bad about the drop in dividend, we understand your considerations as to your portfolio and allocations. However, that being said, it would be great if you could live off your investments by 2018, would mean you pulled off financial independence in about 10 years. We sincerely hope you succeed!
    We are a few more years away from financial independence, so the goal for next year is to keep going! We still have a fairly large cash pile to reinvest in dividend stocks next year and are looking for another rental property to add to the portfolio. Furthermore we will continue to add to our index funds as well in 2016.
    Good luck!

    1. Thanks for stopping by. Good luck in your goals for 2016!

  8. Like you I have been hit hard by the oil glut. I own the 3 american oils and 3 pipelines (OKS, KMI, and BPL). Whoever thought that the need for oil would disintegrate at this time. However, I have done well with a heavy reliance on utilities. During the 1980's their dividends were considered "return of capital" and not taxed. I forget why. So, I put most of my investment money in them. The only stock I have ever had that doubled in a year was an electric utility, and, we put our daughter through college on them and some "safe" mutual funds. During the last 10 years, such utilities as NextEra, Sempra, and WEC Energy Group (ne: Wisconsin Energy & Integrys) have handily beaten Johnson & Johnson, Proctor & Gamble and IBM. My Aqua America continues to grow and give me a 5% discount on reinvested dividends. So, don't you think these steady-eddies are worth a good portion of one's portfolio?

    1. My analysis of Utilities showed that they are prone to dividend cuts.

      I own only shares in D. Used to own ED, but sold it.

      I would advise against being overly concentrated in a single sector.

  9. DGI, do you include REITs in your list of pass through companies? I have been getting less comfortable with REITs in general lately, due in large part to the continuing issuance of debt/stock/bonds to pay for additional properties. Looks similar to KMI in that respect. I have been reducing our exposure to REITs, but haven't completely eliminated them.

    1. Perhaps you missed the article from yesterday? ;-)

      I have about 6% in REITs and about 8% of income derived.

      "Now I would also not be surprised if we see bear raids on other pass-through entities such as Real Estate Investment trusts. For example, Realty Income (O) looks overvalued today. There was a bear raid on the stock in 2010, when a famous hedge fund investor had a long presentation against the stock. There was a bear raid on Digital Realty (DLR) in 2013 as well, which was unsuccessful. As we all know, Barron’s and certain hedge funds were bearish on Kinder Morgan since late 2013. They were wrong for two years, but ultimately Richard Kinder proved them right by admitting defeat and cutting the dividend."

    2. This comment has been removed by the author.

    3. I read all of your articles. Then I forget what I read. That's what happens when you get older. ;)

      [Note that I tried to edit the comment above by adding the text below, which is why the early one was removed. Should have left well enough alone, apparently.]

      I sold all of our REITs that didn't have an S&P credit rating of BBB+ or higher. We only have O and VTR now, and this comprises 3.1% of our portfolio, but 7.4% or our dividends. I didn't want to have another KMI type event with one of the BBB- REITs having problems in the credit market resulting in the stock getting decimated. At least with a BBB+ rating there is room for a downgrade or two before junk status.

      In the interest of full disclosure, I have sold virtually all stocks of companies with less than a BBB+ rating. The exceptions are KHC, KMI, and KSS. KHC was bought when the yield was over 4%, and I sold enough shares to cover the original cost while retaining the other 30%. Now playing with house money if you will. KMI is being held because I think the risk-reward ratio is acceptable, but I will get out completely if I can break even around $27. If the stock stalls around $20 in the next 12 months I will probably get out anyway and take the loss, but a loss in a 401k doesn't help reduce taxes. KSS is my wife and daughters favorite place to shop and the shares are in Mrs. X's Roth IRA. We will take a look after the Christmas season is over and decide whether we should hold, sell, or sell a portion. Our cost basis is less than $48 per share, and I think we could see $60 next year. This might be a candidate for keeping the free shares like we did with KHC.

    4. No worries, I get a lot of questions so I try to streamline things by referring readers to things, rather than recreating the wheel.

      It looks like you are spending a lot of time on your investments in retirement. I have thought that I would want to do that as well, but now I am thinking that I may just end up being much less involved ( unless I chose to). We'll see.

      I certainly hope for you that KMI goes back up above $27 some time in 2016.

      I have shopped at KSS, but I never thought to look at the stock. It doesn't have a ten year streak and EPS has been flat since 2012.

      Happy Holidays to you and your family!

  10. Admire your resolve to stick to rules based outcomes. Let's hope the rest of the pipeline sector doesn't cut. VNR just whacked me with a cut from 70c/q to 14c/q distribution. Shares are down over 50% on the news. Ouch.

    1. Sorry for VNR. We are still in a bull market, and some types of weak companies are already being flushed out - KMI, VNR, VER/ARCP etc.. I wonder if we get an actual recession in 2016 - 2017 how bad it would. Hope this weakness we are seeing doesn't spread out to the whole economy.

    2. It was good while it lasted right? :-0 Good goals DGI.!

  11. DGI, regarding a CD ladder; I have been thinking about doing the same for some time now. With yesterday's Fed interest increase, I am considering 3 month and six month duration CD's. Overtime, as interest rates increase, I will change to longer durations.

  12. I need to start a GIC, like your CD, ladder but interest rates are so low that I keep put money in some Vanguard dividend paying ETFs instead. So far Canada is not raising interest rates so I may wait on the GICs.

    Beth from Canada

    Home of the very low dollar

  13. You make good points about the risk of pass through levered entities. I was fortunate enough to sell KMI months ago before most of carnage but I was duped about dividend security to a degree. I think Reits are a bit safer, like O, because they have more liquidity in the form of properties. If bears raided O down to 30 so issuing equity became so expensive, and they were tapped out on debt they can always sell some properties for cash. It is harder for pipeline companies to sell assets for cash.

    Good skill in 2016!.

  14. DGI - Thanks for the article man, I wish you much success.

    I too am in the situation of only having low cost index funds to choose from in my 401k. Have you ever written an article about what type of funds you recommend for someone my/our age (28). I am investing in 60% S&P 500 and 40% Mid-cap.

    Thanks a lot.

  15. I havent even posted my November expenses...your way ahead of me DGI. Happy Holidays.

  16. Good luck on breaking your goals for 2016.

    Happy holidays!



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