Financial Independence Is Easier to Model with Dividends

The biggest advantage of dividend growth investing is the ability to set a goal, and track progress towards that goal. This is because dividend income is more stable than stock prices, which makes it easier to check how I am doing relative to my goals. Stock values on the other hand are much more volatile, which makes reliance on them for retirement planning much more speculative in nature. If noone can forecast stock prices accurately, then how can someone rely on stock prices for their retirement planning?

Let’s look at two different scenarios. Imagine, that in the first scenario, the goal is to have $500,000 in 20 years. Based on the 4% rule, you will sell 4% of your assets per year and hope that you will not be retiring at the top of a major bull market ( like the one we had in 1999 - 2000). You save some money every year, and the stock market generally rises. By year 19, your portfolio is worth more than half a million dollars. You decide to wait for another year, in order to beef up your portfolio. Unfortunately, this happens to be the first year of a bear market, where stock prices fall by 30% in the first year, and then 20% in the next one. Are you ready to retire, or not? You seemed ready and above target in year 19, but in year 20 you seem to be behind your goal. You decide to keep on working for an unknown amount of time until the stock market rebounds.

In the second scenario, the goal is to generate an annual income of $20,000 in 20 years. You save the same amount of money, reinvest dividends, and could not care less if markets are up or down. You can afford that, because dividends are more stable than capital gains, and go up almost every year. The only time dividends on the S&P 500 fell significantly over the past 90 years was during the Great Depression of 1929- 1932 and during the Great Recession of 2008. Since 1960, the only significant decrease in annual dividend income was in 2008. That is a success ratio of over 98%. I define significant as any decrease in annual dividend income that is larger than 4%.

Dividend Stocks I Purchased In the Past Month

I like to keep my investing simple. I purchase shares in companies I believe to be attractively valued, when I see a track record of raising dividends and having the fundamentals to support further dividend increases. For each dollar that I invest in, I end up earning anywhere between 2 to 4 cents per year in dividend income alone. The initial amount will then grow above the rate of inflation over time. It is that simple – for each dollar I put to work today, I earn an average lifetime income of 3 cents right from the start. To reach financial independence, I need to both cut costs and increase the level of passive dividend income to meet those expenses.

I have been on this journey for eight years now. It is becoming a second nature by now:

1) Earn money,

2) Think of ways to earn more money,

3) Save Money

4) Think of ways to save more/cut expenses

5) Invest those savings wisely

6) Keep thinking how to be a more impactful investor

7) Reinvest dividends during accumulation stage

Two Recent Dividend Increases from my Dividend Machine

Two of the companies I own announced their intentions to hike their dividends. As a dividend growth investor, this is always good news. The companies included:

Philip Morris International Inc. (PM), through its subsidiaries, manufactures and sells cigarettes, other tobacco products, and other nicotine-containing products.

The company raised its quarterly dividend by a paltry 2% to $1.02/share. This was the lowest rate of increase since the spinoff in 2008. It was much lower than the five year dividend growth rate of 12%/year. It was disappointing to many investors. This marked the 7th consecutive annual dividend increases nevertheless. The new yield is close to 5%.

As I mentioned in my analysis of the company however, this should not have been unexpected given the lack of earnings growth in the past few years and the rising dividend payout ratio. While I am bullish on the company for the long-term, I cannot ignore the data that has been showing me that things are not going according to plan. I will keep holding on to this position, because I believe that management will ultimately turn things around. Of course, in the meantime, I will redirect dividends elsewhere.

Survivorship bias in Dividend Investing - Part 2

This is the second part on suvivorship bias in dividend investing. In part 1, I laid the grounds that investors who put their money to work in dividend growth stocks are not suffering by survivorship bias ( despite the efforts of greedy money managers to portray ordinary investors in a negative light)

I wonder if the same type of logical analysis on survivorship bias is performed by investors who are encouraged to invest in US Equity markets, when they are told how an investment in the S&P 500 or Dow Jones Industrials average would have performed over the past 10, 20, or 50 years. If you consider the event of purchasing shares of Johnson & Johnson (JNJ) due to its history as an example of survivorship bias, then you should not be using historical data on S&P 500 or Dow Jones Industrials average over the past 50 years either in order to prove your point about equity investing. Somehow, this point is lost on so many investors. When discussing long-term returns on equities over the past two centuries, you often hear about the US or UK stock performance. However, you never hear about the performance of a Chinese stock investor or a Russian stock investor from the middle of the 19th century till now. My great-grandfather was born and lived in Eastern Europe more than 100 years ago, saved almost his entire salary working in the coal mines and invested his savings in agricultural land. Unfortunately for him, the communists nationalized his land when they came to power. If he were in the US, he would have died a rich man after decades of compounding. Too bad he weren't.

Survivorship bias in Dividend Investing

Survivorship bias is the logical error of concentrating on the people or things that "survived" some process and inadvertently overlooking those that did not because of their lack of visibility. This can lead to false conclusions in several different ways.

In this article I am going to discuss two areas which some investors believe are examples of survivorship bias. I believe one of them is an example, while the other is not.

Basically the danger of survivorship bias is that investors make up their mind on what works or doesn’t, using an isolated example, without even bothering to consider any factual evidence. This is dangerous because those investors would then search only for ideas supporting their conclusions, and reject those that do not do so. Therefore, investors might end up missing out on important information, because they only focused on the facts that supported their original ideas in the first place.

For example, I have been reading statements from many investors about how profitable it is to be buying stocks after dividend cuts. Common examples provided are General Electric and Wells Fargo, which would have returned several hundred percent since cutting dividends in 2009. Furthermore, dividends have increased since those cuts, thus resulting in high yields on cost for investors that were smart enough to buy in 2009 (this writer was not that smart to buy at the bottom, though I have my doubts that those who claim to have bought at the bottom are telling the truth (the sole exception that is verified is Warren Buffett and Charlie Munger)).