Charlie Munger taught me that in order to reach a certain goal, I need to invert. In other words, once I identify my end goal, I would have to work backwards in order to get the right parameters in action, and reach it.
“It is remarkable how much long-term advantage people like us have gotten by trying to be consistently not stupid, instead of trying to be very intelligent.”
“Invert, always invert: Turn a situation or problem upside down. Look at it backward. What happens if all our plans go wrong? Where don’t we want to go, and how do you get there? Instead of looking for success, make a list of how to fail instead–through sloth, envy, resentment, self-pity, entitlement, all the mental habits of self-defeat. Avoid these qualities and you will succeed. Tell me where I’m going to die so I don’t go there.”
One such goal I have had over the years was to become a millionaire. Now you may say that a million is not what is used to be. Naysayers may also state that $1 million will have a lower purchasing power in 20 – 30 years. And they may be right. Or they may just be looking for excuses as to why they are no millionaires, which is why they pretend like it is not a big deal.
Actually, becoming a millionaire is a big deal in the United States. That’s because there seem to be only 12 million millionaires in the country. That’s compared to a population of 330 million. It means that roughly 4% of the population are millionaires.
For example, if you started 40 years ago, and saved and invested $160/month in the S&P 500, you would be a millionaire today. I believe that $160/month was within reach for a large portion of the population of the United States. Yet, less than 4% of the US population is comprised by millionaires.
And to make it even more interesting, a large portion of the millionaires reached this status by starting or owning a business, rather than investing in stocks. By starting a business, you can capitalize your earnings stream. However, a large portion of businesses fail within the first five years.
The second way to get rich is through wise investing. This is really the way I focus on my site, because I believe that you don’t need special skills to become a millionaire. You need time, patience, dedication and ability to soak up money in stocks for years. I believe that becoming a millionaire through regular savings and long-term stock market investing is easier for the large majority of people in the US than starting a business, striking it rich with real estate or through any other way possible. It is within reach for most folks that put this goal to mind, and act accordingly.
If you listen to naysayers however, it sounds as if becoming a millionaire is out of reach for a large portion of the population. But I am not sure why that is the case.
Becoming a millionaire is a function of your savings, your investments and your holding period. The result for your individual situation will vary, because the inputs for every unique individual will vary. We all live in different environments as well. If you graduated from college in 1980, you would have had different job prospects and investing returns than the person who graduated from college in 1930 or 2020.
That’s why I will present you with a simple formula, and a range of options for ponder through.
If you save $1,000/month, and you invest it at 7%/year, you will be able to reach $1 million in 28 years.
If you double that savings rate to $2,000/month, and invest at a 7% annualized returns, you will be able to become a millionaire in 20 years.
If you are able to save and invest $4,000/month at 7% annualized returns, you will be able to become a millionaire in 12 years.
If you are the next Warren Buffett and you generate 17%/year, and saving $4,000/month, you will become a millionaire in 9 years ( versus 12 years at $4,000/month at 7%/year)
A high savings rate brings you closer to the goal than a high return in the accumulation phase.
I used a 7% annualized return in my assumptions, in order to be conservative. Historically, US stocks have returned 10%/year, annualized over long periods of time. While year over year returns fluctuate, they have held through for longer periods of time. If you subtract the 3% annualized inflation rate, you end up with a real return of 7%/year, which is very good. While it doesn't account for taxes and investment fees, I am going to assume that the person who invests for their future is smart enough that they would minimize investment fees to the bone and that they would also invest their money in a tax efficient way ( Roth IRA's are a good start).
It is possible that future returns are much lower than the historical average. Or it is possible that they get closer to the average. You cannot control future returns, but you can control your savings rate, your investment costs, your holding period and what you invest in. If you give yourself every edge possible, you are setting yourself up for success, even if returns disappoint in the future.
I am not sure why more people in the US are not millionaires through investing. The past 40 – 50 years have witnessed a few major bull markets, which have delivered amazing returns to shareholders. anyone who started investing $160/month in US Stocks over the past 40 years could have become a millionaire today. This is a small amount, within reach for most investors. Yet, so many missed out on the great bull run since 1980.
Of course, this million dollar exercise is just a guideline. Instead of looking at dollars and cents, it is better to look at it as a percentage of income. If you spend everything that you earn, you will never have the savings to invest for your retirement. A high savings rate is more important than a higher absolute dollars savings amount.
For example, a person who earns $50,000/year and spends $25,000/year is better off than someone who earns $200,000/year and only saves $40,000/year. That’s because the first person saves 50% of their income, while the second person saves 20% of their income. In addition to that, it is easier to survive on a lower income, in case life throws unexpected surprises your way, such as a job loss and having to accept a position that pays much less. In this case, having a low cost of living is an edge.
Early retirement is easier to achieve through a high savings rate, not by generating high investment returns. That’s the truth in the accumulation phase.
For example, by saving 20% of your income, you can retire in 34 years
If you manage to save 50% of your income, you can retire in 17 years
By becoming a super saver and saving 70% of income, you can retire in a decade
Today, Investing has never been easier, and cheaper and more accessible to the masses. You can choose from thousands of securities from the comfort of your home, You can choose low cost funds holding thousands of securities. Yet, the share of the US population that holds stock is down from its peak in 2000. You just need to take the first step to start your journey towards financial independence.
There are multiple ways to invest money. Some do it through dividend paying stocks, others do index funds, a third group invests in real estate and a fourth group starts businesses. While a large portion of businesses fail, plenty of small business owners can build their net worth over time. One of the best ways to get rich in America is by starting a business. This is how most of the self-made billionaires on Forbes made their fortunes. A business capitalizes your earnings stream and creates wealth that way.
The second best way is to sell your time for money, and invest the difference in businesses. This is what a highly skilled professional, such as a doctor, lawyer, engineer, IT specialist, accountant would do. You have to pay a multiple for that earnings stream however, but you are also a passive owner, with less worries about day-to-day business operations.
- How to retire in 10 years with dividend stocks
- Use these tools within your control to get rich
- The Dividend Crossover Point
- Simple Investing Principles to Follow
- What drives future investment returns?
Friday, January 24, 2025
Thursday, January 23, 2025
Your Savings Rate Matters
One of the biggest misconceptions is that you need a high income alone to achieve financial independence. This is a one-sided view however, because a high income won't save you from poor financial habits and an expensive lavish lifestyle.
The reality is that you need to manage BOTH Income AND Expenses AND invest the surplus intelligently.
Your savings rate is much more important than absolute dollars earned.
Your savings rate is determined by dividing the amount you saved over the amount you earned.
For example, if you earn $250,000/year as a doctor or lawyer, but spend $240,000, you can become financially independent after a long but productive 55 years on the job. Hope you enjoy your occupation, because you would be working well into your 70s or 80s.
On the other hand, if you make $60,000, but live on half of it, you can retire in 15 years.
While it may look "easier" to save a higher percentage with a higher income, you may also have to keep up with the expensive tastes of peers (expensive houses, cars, clothes, vacations etc). Hedonic adaptation, keeping up with the Joneses mentality, can lead to a gradual inflation of your lifestyle. Living in a high cost of living area that is associated with high salaries could be another obstacle to saving money.
Managing your savings rate effectively is an exercise in playing effective offense and effective defense.
Effective offense is the ability to grow income over time, which can increase the savings rate over time. This could mean getting promotions, starting a side hustle or a second job. Growing dividend income is an effective side hustle, where you generate extra income.
If you earn $50,000/year, and save $10,000, your savings rate is 20%. If you manage to grow earnings by 10% while keeping expenses constant, your savings increases by 50%. That’s a $5,000 salary increase. Your savings rate rises to 27%.
Growing income is not easy of course. In my experience, I ended up working much harder for each raise beyond a typical inflation adjustment. Switching jobs can help too, but you also need to take into consideration if there are other costs to do that job in terms of work attire, longer commute, working longer hours etc. This difficult work environment does provide motivation to pursue financial independence however.
Effective defense is the ability to contain expenses, stick to a budget and look for ways to eliminate waste from the system.
Again, as we saw above, if you earn $50,000/year, and save $10,000, your savings rate is 20%. If you manage to decrease expenses by 12.50%, or $5,000, your savings rate increases by 50%. Your savings rate rises to 30%. As a result, it would take you less time to reach financial independence for each dollars of cost you take out.
The nice thing about being frugal, is that it gives you a double benefit.
For example, if you spend $30,000/year, you would need a $1,000,000 portfolio of dividend stocks yielding 3% to reach the dividend crossover point. If you earned $50,000/year, it would take you 19 years to get to the dividend crossover point. This example assumes investing $20,000/year in dividend growth stocks yielding 3% and growing dividends at a rate of 6%/year. The math behind early retirement is shockingly simple.
Let’s look at an example where your salary increased by $3,000, to $53,000. Let’s assume that your spending remained at $30,000/year. You still need to accumulate $1 million in dividend growth stocks yielding 3% in order to retire. But now you can save $23,000/year. It would take you 18 years to reach the dividend crossover point at this rate.
If you cut expenses by 10%, to $27,000/year, you would only need $900,000 invested in dividend growth stocks to reach retirement. You would be able to save $23,000/year., and reach the dividend crossover point in 17 years. In a way your needs are smaller, which means you need a smaller nest egg. But your savings rate also increases from 40% to 46%, which speeds up time to retirement significantly.
Today we discussed the importance of the savings rate in achieving financial independence.
Each dollar that you reduce your expenses by has a higher impact on your savings rate than each dollar that you increase income by.
The issue of course is that you can only cut out so many expenses. That’s why you need a good offense (grow income) and a good defense (keep or lower expenses).
Relevant Articles:
- The Simple Math Behind Early Retirement
- What are your dividend investing goals?
- Use these tools within your control to get rich
Monday, January 20, 2025
Three Dividend Growth Companies Increasing Dividends Last Week
I review the dividend increases weekly, as part of my monitoring process. I haven't done this review so far in 2025, as there were too few individual increases from companies that have at least a ten year track record of annual dividend increases.
Why do I keep doing this review?
It is mostly to stay in fighting shape. It is also to monitor existing holdings and identify companies for potential review and acquisition.
But best of all, to show you the types of quick overview I use before determining if I want to put a company on my list for research or not.
In general, I look for companies that have managed to increase dividends for at least ten years in a row. This really narrows things down only to companies that have managed to raise dividends during a typical full economic cycle or two. A long history of annual dividend increases does not happen by accident. It is the end result of a company that typically has some sort of a competitive advantage, which allows it to grow the business, while also showering shareholders with more cash year after year.
But I don't stop at that.
I try to review trends in earnings per share over the past decade, in order to determine if that dividend growth is grounded in good fundamentals. Without growth in earnings per share over time, future dividend growth will be hard to come by.
Next, I also want to review the dividend payout ratio. In general, I want a payout ratio that is not too high, and not trending upwards above a certain range (say 60%). I want relative consistency between earnings growth and dividend growth (annualized).
I also look at the trend in dividends over the past decade. It's helpful to watch dividend growth rates over the past 5 or 10 years, and compare them to the most recent dividend increase or two. Dividends provide signaling mechanism, which distills management's near term sentiment regarding the economy and the business conditions affecting their enterprise.
Last but not least, I look at valuations. Valuations are part art, part science. I get to look at the P/E ratios, historical dividend growth rates, as well as near term EPS forecasts, and determine the trade-off of dividend yield and dividend growth that would make it into my portfolio.
Over the past week, there were three companies that managed to increase dividends AND also have a ten year track record of annual dividend increases under their belts. Those companies include:
Consolidated Edison, Inc. (ED) engages in the regulated electric, gas, and steam delivery businesses in the United States.
Consolidated Edison raised quarterly dividends by 2.40% to $0.85/share. This is the 51st consecutive annual dividend increase for this dividend king.
Over the past decade, the company has managed to grow dividends at an annualized rate of 2.80%.
Between 2014 and 2023, the company managed to grow earnings from $3.73/share to $7.24/share.
The company is expected to earn $5.35/share in 2024.
The stock sells for 17.50 times forward earnings and yields 3.55%
Fastenal Company (FAST) engages in the wholesale distribution of industrial and construction supplies in the United States, Canada, Mexico, North America, and internationally.
The company raised quarterly dividends by 10.30% to $0.43/share. This is the 26th consecutive annual dividend increase for this dividend aristocrat. Over the past decade, the company managed to grow dividends at an annualized rate of 13.35%.
Between 2014 and 2023, the company managed to grow earnings from $0.89/share to $2.01/share.
The company is expected to earn $2.17/share in 2024.
The stock sells for 35 times forward earnings and yields 2.05%
Lakeland Financial Corporation (LKFN) operates as the bank holding company for Lake City Bank that provides various banking products and services in the United States.
The company raised quarterly dividends by 4% to $0.50/share. This is the 13th consecutive annual dividend increase for this dividend achiever. Over the past decade, the company managed to grow dividends at an annualized rate of 14.10%.
Between 2014 and 2023, the company managed to grow earnings from $1.77/share to $3.66/share.
The company is expected to earn $3.42/share in 2024.
The stock sells for 20 times forward earnings and yields 2.92%
Monday, January 13, 2025
2024 was a record year for US Dividends
The year 2024 was a record one for US Dividends. This was fueled by continued increase in earnings and by the initiation of dividends for the first time from some big heavy-weights like Meta, Alphabet etc.
S&P 500 paid a record dividend of $74.83 in 2024, which is a 6.40% increase over the dividend of $70.30 for 2023.
This was the 15th year of consecutive annual dividend increases for S&P 500.
Basically the entire US Stock Market is just one large Dividend Growth Stock.
This chart below shows the S&P 500 annual dividend per share since 1977.
You can see that annual dividends on the S&P 500 increased from $.86 in 1977 to $74.83 in 2024.
This was fueled by growth in earnings on US companies. Earnings for the S&P 500 increased from $10.87 in 1977 to $192.42 in 2023. The 2024 data is not available yet, but earnings are on track to grow in 2024.
You can view the changes in dividend policy per company in S&P 500 over the past 20 years below.
You can see that the number of companies that announce dividend increases always tends to exceed the number of companies that announce dividend cuts and suspensions. That's visible during periods of economic expansion. It's also visible during otherwise difficult times such as 2008, 2009 and 2020.
All of that is driven by the fact that on average and over time, US Businesses tend to grow profits. They also end up generating more cashflows than they can intelligently deploy at a high rate of return in the business. Hence there is a growing pile of cashflows, which increases over time, which gets distributed to shareholders in the form of rising dividends.
There has been a shift in the past 25 - 30 years however (if not longer), where companies set a certain dividend payment that they increase over time BUT then they also use any remainder cashflows to pursue share buybacks. Share buybacks are basically treated like special dividends by corporate boards, on average, as they are lumpier than dividend payments. At least that's what the data from the past 26 years show us:
The Dividend Yield on S&P 500 Index is however close to its lowest in over 20 years. In previous markets, a Dividend Yield on S&P 500 at around 1% indicated a major high in share prices. Today, it is not as easy to define that, given that US companies distribute almost one and a half to two times as much on share buybacks than dividends on the aggregate.
The Dividend Yield on S&P 500 on Dec 31, 2024 was 1.27%. For example, on December 31, 2021, the dividend yield on S&P 500 was also 1.27%. This was followed by a difficult 2022, that witnessed a rare bear market for US Equities.
During the heights of the Dot-Com bubble, the dividend yield on S&P 500 dropped to as low as 1.14% in the year 2000.
Prior to 1995 however, dividend yields on S&P 500 at or below 3% typically indicated a major top in equities. This indicator had forecasted the 1907 crash, the 1929 crash and the the 1987 crash. Albeit, since 1995 however, it would have been wrong to avoid equities. I am providing this narrative to share that you should not be blindly following rules, even if they had worked successfully for many decades before that.
Of course, not all dividends are created equal. I prefer to invest in companies that regularly increase dividends. Requiring a consistent track record of regular dividend increases over at least 10 years narrows down my investment universe to a little over 300 companies. This helps me to focus on quality companies, with solid competitive advantages, which grow and distribute excess cashflows to shareholders.
Companies that grow dividends are best-of-breed. By paying a dividend, they focus on best projects with highest expected returns. Most companies cannot reinvest everything back at a high rate of return, hence they send dividends our way. In other words, paying a dividend actually ends up unlocking value, because otherwise that money would have sat on the balance sheet without earning much return or worse, it would have been wasted on some management pet project ( or corporate jets). But because managements of dividend growth companies focus on highest return projects when they reinvest money, they also have discipline, and ultimately end up growing earnings. Those growing earnings tend to help in growing dividends per share and intrinsic values over time. Reinvesting those growing dividends further turbo-charges income and shows the miracle of compounding.
Saturday, January 4, 2025
Dividend Champions List for 2025
A dividend champion is a company which has a 25 year record of annual dividend increases. There are only 146 such companies in the US today. I believe that becoming a dividend champion is no accident, and it is a result of a strong business that has generated earnings growth for a long period of time. These are the types of businesses I like to study, and potentially consider at the right time for my dividend portfolio. I believe that the dividend champions list offers a more complete picture than the dividend aristocrats.
The creator of the Dividend Champions list was David Fish, who unfortunately died in 2018. I decided to do annual updates based on his work.This year, I decided to keep it simple, and kept the data per each company to a minimum.
As a starting point, there were 145 companies on the dividend champions list at the end of 2023.
There were six companies that ended up leaving the Dividend Champions list in 2024. These companies left for various reasons. The companies that left include:
- Cambridge Bancorp (CATC) was acquired
- First of Long Island Corp (FLIC) failed to raise dividends in 2024
- The following four companies cut dividends in 2024 - Leggett & Platt (LEG), 3M Company (MMM), Telephone & Data Sys (TDS), Walgreen Boots Alliance (WBA)
There were seven companies added to the list in 2024. These companies achieved dividend champion status by raising dividends to shareholders for 25 years in a row. The companies include:
Bank of Utica BKUTK
Eagle Bancorp Montana EBMT
Eversource Energy ES
Fastenal Company FAST
FactSet Research Systems FDS
First Farmers Financial Corp. FFMR
Graco Inc. GGG
All of this brings the list of dividend champions to 146 companies by the end of 2024. You can download the list from here.
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