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.
Wednesday, December 30, 2015
Monday, December 28, 2015
Dividend Kings for 2016
A dividend king is a company that has managed to increase dividends to shareholders for at least fifty years in a row. There are only a handful of these companies worldwide, most of them being US based. A company that has managed to increase dividends each year for over half a century has a stable business model that has endured a lot over a long period of time. As investors who want to live off dividends in retirement, we want to concentrate on quality businesses that operate in industries with significant competitive advantages. This will allow those businesses to grow earnings and pay higher dividends over time. Raising dividends for over half a century is no small accomplishment, and it is testament to the stability of the business model.
The purpose of this list is to learn about those companies, and study how they managed to grow dividends for such a long period of time. The intelligent dividend investor should refrain from purchasing any of those securities, without:
1) Understanding their business model
2) Determining whether they believe the business will be able to earn more over time
3) Determining if the business is available at an attractive valuation
The companies that are members of the dividend king list for 2016 include:
The purpose of this list is to learn about those companies, and study how they managed to grow dividends for such a long period of time. The intelligent dividend investor should refrain from purchasing any of those securities, without:
1) Understanding their business model
2) Determining whether they believe the business will be able to earn more over time
3) Determining if the business is available at an attractive valuation
The companies that are members of the dividend king list for 2016 include:
Monday, December 21, 2015
Dividend Growth Investing At Work
Dividend growth investing is a wonderful strategy. Most of the work in selecting and purchasing an attractive security is done upfront. After that, the dividend investor is paid a growing dividend for work they may have done years ago. Of course, this dividend investor should regularly monitor his portfolio holdings, and dispose of any companies that no longer fit their goals of providing with a dependable dividend income to live off in retirement.
Over the past week, there were several dividend companies which increased their dividends. The companies include:
AT&T Inc. (T) provides telecommunications services in the United States and internationally. The company operates through two segments, Wireless and Wireline. The company increased its quarterly dividend by 2.10% to 48 cents/share. This dividend champion has managed to boost dividends for 32 years in a row. In the past decade, AT&T has managed to increase dividends by 3.90%/year. The stock is selling for 12.40 times forward earnings and yields 5.70%. Check my analysis of AT&T for more information about the company.
Over the past week, there were several dividend companies which increased their dividends. The companies include:
AT&T Inc. (T) provides telecommunications services in the United States and internationally. The company operates through two segments, Wireless and Wireline. The company increased its quarterly dividend by 2.10% to 48 cents/share. This dividend champion has managed to boost dividends for 32 years in a row. In the past decade, AT&T has managed to increase dividends by 3.90%/year. The stock is selling for 12.40 times forward earnings and yields 5.70%. Check my analysis of AT&T for more information about the company.
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.
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.
Monday, December 14, 2015
Where to invest the money from the sale of Kinder Morgan stock?
Last week was particularly busy for me on the investing front. I ended up selling almost my entire position in Kinder Morgan (KMI) at approximately $16/share after the company cut dividends by 75%. The surprising part was that the company went from forecasting 6% - 10% annual dividend growth to a 75% dividend cut within the span of one month. I decided that rather than hope for the best, I should cut my losses and reevaluate the situation with a clear head. This decision would also allow me to claim all losses on my 2015 tax return.
My average cost basis on Kinder Morgan stock that I bought outright was about $30/share. I started buying the shares after the IPO in 2011, and bought more until 2013. The company was one of my best ideas. I didn’t buy new stock outright since late in 2013. I have received several years worth of dividends. From a tax perspective, I get to reduce my income by the amount of the loss (technically I reduce any capital gains first, and then I get to deduct up to $3,000 and roll-forward any losses for future tax returns). The reduction in tax liability is helpful to soften the losses. Since the last time I made an investment in Kinder Morgan in late 2013, I have collected approximately $4/share in dividend income. I did hold a small portion of my Kinder Morgan position ( approximately 7% - 8% of my shares) in tax-deferred accounts such as an IRA, where the tax basis was in the mid-30s. I reinvested of my dividends there, and I won't get any deduction on the loss. A portion of those shares will likely be forever stuck in a tax-deferred account since the position is so small, that it would not be cost effective to sell the shares and then buy something else with the proceeds.
A large portion of Kinder Morgan stock came from my investment in Kinder Morgan Management (KMR) however. I received cash dividends of a little less than $2/share for only 1 year – before that I had received shares in lieu of distributions. This was a tax-free way of receiving distributions in stock at a discount, which made compounding easier and a no brainer decision. Either way, I came up only slightly behind on those investments from this legacy position from Kinder Morgan Management (KMR), despite what it looks like a low tax basis of approximately $20/share.
My average cost basis on Kinder Morgan stock that I bought outright was about $30/share. I started buying the shares after the IPO in 2011, and bought more until 2013. The company was one of my best ideas. I didn’t buy new stock outright since late in 2013. I have received several years worth of dividends. From a tax perspective, I get to reduce my income by the amount of the loss (technically I reduce any capital gains first, and then I get to deduct up to $3,000 and roll-forward any losses for future tax returns). The reduction in tax liability is helpful to soften the losses. Since the last time I made an investment in Kinder Morgan in late 2013, I have collected approximately $4/share in dividend income. I did hold a small portion of my Kinder Morgan position ( approximately 7% - 8% of my shares) in tax-deferred accounts such as an IRA, where the tax basis was in the mid-30s. I reinvested of my dividends there, and I won't get any deduction on the loss. A portion of those shares will likely be forever stuck in a tax-deferred account since the position is so small, that it would not be cost effective to sell the shares and then buy something else with the proceeds.
A large portion of Kinder Morgan stock came from my investment in Kinder Morgan Management (KMR) however. I received cash dividends of a little less than $2/share for only 1 year – before that I had received shares in lieu of distributions. This was a tax-free way of receiving distributions in stock at a discount, which made compounding easier and a no brainer decision. Either way, I came up only slightly behind on those investments from this legacy position from Kinder Morgan Management (KMR), despite what it looks like a low tax basis of approximately $20/share.
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