I believe that time spent learning the ropes behind dividend growth investing is worth it. In this article I will discuss why I believe that to be the case. As usual, I will use my experience as a successful dividend investor for this article. In my case, learning about investing has provided me with tangible benefits of being three years away from achieving financial independence, after starting my journey in the middle of 2007. I also have gained intangible benefits to learning such as using knowledge acquired in investing to advance in my work or to find a better paying job. An even better intangible benefit has been the ability to connect with other investors, through this online community called Dividend Growth Investor.
As a person I enjoy learning. When you learn a skill there is never a guarantee that you will earn anything from that knowledge. But there is never a guarantee for anything in life either.
The time you spend learning is not wasted – knowledge accumulates like compound interest. When I spent four years obtaining a college degree I didn’t know if I would find a job afterwards. I paid money to obtain that degree, spent time acquiring knowledge and worked hard to achieve and maintained a high GPA. At the same time I worked 40 - 60 hours/week at several minimum paying jobs in order to pay for my degree, and in order to avoid getting any debt in the process. Would I have been better off spending 40 - 60 hours/week only working those minimum paying jobs and investing the difference? No way I would have been better of this way – this is the reason I decided to study hard, so that I have the opportunity to earn more than a minimum wage salary. While I had no idea whether anyone would hire me after graduating, I decided to make a calculated bet, and take the plunge. This investment in knowledge paid off for me. I believe that it can help anyone who is willing to invest in themselves.
Wednesday, September 9, 2015
Friday, September 4, 2015
The value of dividend growth in retirement planning
Some regular readers might remember that in my retirement planning, I estimate that I will be able to allocate my capital at yields between 3- 4% and dividend growth between 6 – 7%. If I am lucky, the above numbers will result in roughly doubling of dividend income every seven years or so. This means that if I had a dividend portfolio that generated $1000 in annual dividend income today, I could reasonably expect that through meticulous and opportunistic reinvestment of dividends and through the power of dividend growth, I will be able to double this to $2000/year in seven years.
In order to generate $1000 in annual dividends, one needs anywhere from $40,000 invested at 2.50% to $25,000 invested at an yield of 4%. Of course, in a somewhat efficient marketplace for common stocks, investors who require higher current yields today tend to forego some of the expected dividend growth. On the other hand, some are fine sacrificing some current yield today, in order to capture estimated dividend growth in the future. As discussed previously, there is a trade-off between dividend yield and dividend growth. The balance is determined based on investors reasonable expectations against the realities of opportunities available at the time.
I buy dividend growth stocks, because I want to earn dividend income that grows over time. When this annual rate of dividend growth is above the annual rate of inflation, this means that I have maintained purchasing power of my income. However, I have heard arguments that one could maintain the purchasing power of their dividend income, provided they reinvested the dividend back into securities that pay high dividend yields. Therefore, if you own a stock yielding 4% that never increases dividends, but you reinvest dividends at same or other security yielding 4% at the moment, your income will increase by 4% for the year. If inflation is below 4%, you would have essentially slightly increased purchasing power.
In order to generate $1000 in annual dividends, one needs anywhere from $40,000 invested at 2.50% to $25,000 invested at an yield of 4%. Of course, in a somewhat efficient marketplace for common stocks, investors who require higher current yields today tend to forego some of the expected dividend growth. On the other hand, some are fine sacrificing some current yield today, in order to capture estimated dividend growth in the future. As discussed previously, there is a trade-off between dividend yield and dividend growth. The balance is determined based on investors reasonable expectations against the realities of opportunities available at the time.
I buy dividend growth stocks, because I want to earn dividend income that grows over time. When this annual rate of dividend growth is above the annual rate of inflation, this means that I have maintained purchasing power of my income. However, I have heard arguments that one could maintain the purchasing power of their dividend income, provided they reinvested the dividend back into securities that pay high dividend yields. Therefore, if you own a stock yielding 4% that never increases dividends, but you reinvest dividends at same or other security yielding 4% at the moment, your income will increase by 4% for the year. If inflation is below 4%, you would have essentially slightly increased purchasing power.
Wednesday, September 2, 2015
Preventing Blind Spots in Dividend Investing
In a previous article I described why dividend investors should look beyond typical dividend growth screens. I am basically finding that investors who take the time to study the numbers for every individual business one at a time, are much more likely to uncover hidden gems. I believe that investors who rely on pure quantitative screens, might develop blind spots that would prevent them from identifying hidden opportunities.
For example, investors who blindly followed the S&P Dividend Aristocrats index in 2007, would have sold their shares of Altria (MO), right before it more than tripled in value. The index committee erroneously thought that when a company splits in three, its past record no longer matters, even if original shareholders were earning higher dividend income from the shares of companies they received. For any smart dividend growth investor, this would not have caused them to sell, but to simply hold on and enjoy the growing stream of cash dividends every year.
In another example, I have the list of stocks in my portfolio input into Yahoo! Finance. When I have spare funds to invest in dividend stocks, I might go to Yahoo! and look at valuation metrics of companies I own. As I was reviewing the valuation of my portfolio holdings, I noticed that some of the companies I own seem very overvalued on the surface.
For example, investors who blindly followed the S&P Dividend Aristocrats index in 2007, would have sold their shares of Altria (MO), right before it more than tripled in value. The index committee erroneously thought that when a company splits in three, its past record no longer matters, even if original shareholders were earning higher dividend income from the shares of companies they received. For any smart dividend growth investor, this would not have caused them to sell, but to simply hold on and enjoy the growing stream of cash dividends every year.
In another example, I have the list of stocks in my portfolio input into Yahoo! Finance. When I have spare funds to invest in dividend stocks, I might go to Yahoo! and look at valuation metrics of companies I own. As I was reviewing the valuation of my portfolio holdings, I noticed that some of the companies I own seem very overvalued on the surface.
Monday, August 31, 2015
Altria Delivers Another Strong Dividend Hike
Last week, anywhere I checked on the internet, everyone was focused on stock market volatility. The fear is that we might be entering a new bear market. As a long term dividend investor I don’t really care much about things like that.
I care about selecting quality companies which can deliver results in any environment. I view declines in stock prices as opportunities to buy more shares at a discount.
The sad thing is that few managed to cover the news that Altria (MO) just raised its dividends. The company has been raising dividends for over 4 decades, and is still not done growing earnings and paying larger dividends to its shareholders. I find it impressive when a company can afford to be boring today, and just keep calm and carry on with its proven business model. As an investor, I like boring and predictable, particularly when I am paid in cash to hold on to that investment. Check my analysis of Altria for more details on the company.
Altria raised its quarterly dividend by 8.70% to 56.50 cents/share. This dividend champion has raised dividends for 46 years in a row. The ten year dividend growth rate is 11.60%/year. Given the fact that shares have been consistently undervalued over the past 60 years, the high dividend growth and the consistently high dividend yield, it is no surprise that Altria has been the best performing stock in the S&P 500 since 1957.
I care about selecting quality companies which can deliver results in any environment. I view declines in stock prices as opportunities to buy more shares at a discount.
The sad thing is that few managed to cover the news that Altria (MO) just raised its dividends. The company has been raising dividends for over 4 decades, and is still not done growing earnings and paying larger dividends to its shareholders. I find it impressive when a company can afford to be boring today, and just keep calm and carry on with its proven business model. As an investor, I like boring and predictable, particularly when I am paid in cash to hold on to that investment. Check my analysis of Altria for more details on the company.
Altria raised its quarterly dividend by 8.70% to 56.50 cents/share. This dividend champion has raised dividends for 46 years in a row. The ten year dividend growth rate is 11.60%/year. Given the fact that shares have been consistently undervalued over the past 60 years, the high dividend growth and the consistently high dividend yield, it is no surprise that Altria has been the best performing stock in the S&P 500 since 1957.
Friday, August 28, 2015
A Dividend Portfolio for Early Retirees
I am often asked the following question in some variation: If I were starting a dividend portfolio today, and had a lump sum to put to work, how would I invest it?
The goal of an early retiree is to have the flexibility to do what they want, paid for by their nest eggs.
Dividend growth stocks should be an ideal strategy for these individuals, because they provide a relatively safe stream of income which is always positive and is more stable than relying on total returns. The risk with traditional approaches to retirement such as the 4% rule is that you might have to sell assets when prices are low or stagnant, which could deplete the nest egg that you worked so hard to accumulate.
With dividend investing, you are essentially living off the dividends generated by the portfolio. This is similar to living off the fruit from a tree you have planted twenty years ago. Selling chunks of your portfolio in order to finance expenses in retirement is similar to cutting the tree branch you are sitting on. By cutting off the tree that gives you fruit, you won’t get any more fruit. However, by focusing on the fruit (income), you not only receive more fruit over time, but you also can benefit from long-term appreciation in the companies you have invested in ( the tree grows too). It is a true win-win for long term dividend investors. I also believe that dividend growth investing addresses many risks that retirees face these days.
The goal of an early retiree is to have the flexibility to do what they want, paid for by their nest eggs.
Dividend growth stocks should be an ideal strategy for these individuals, because they provide a relatively safe stream of income which is always positive and is more stable than relying on total returns. The risk with traditional approaches to retirement such as the 4% rule is that you might have to sell assets when prices are low or stagnant, which could deplete the nest egg that you worked so hard to accumulate.
With dividend investing, you are essentially living off the dividends generated by the portfolio. This is similar to living off the fruit from a tree you have planted twenty years ago. Selling chunks of your portfolio in order to finance expenses in retirement is similar to cutting the tree branch you are sitting on. By cutting off the tree that gives you fruit, you won’t get any more fruit. However, by focusing on the fruit (income), you not only receive more fruit over time, but you also can benefit from long-term appreciation in the companies you have invested in ( the tree grows too). It is a true win-win for long term dividend investors. I also believe that dividend growth investing addresses many risks that retirees face these days.
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