Rule The Air

In 2010, Verizon started a new advertising campaign that inspired my Starcraft 2 strategy, “Rule The Air.” I decided that if you had enough air units, and anti-air units to destroy the other team’s air units, you had a distinct advantage. By “ruling the air,” I was able to grab a good number of victories. Well, my Starcraft 2 days are over (it’s all about Diablo 3 now), but Verizon still has my interest as dividend stock. With a 31% market share, Verizon (VZ) is the current leader for wireless service (thus ruling the air) with AT&T in close second with 27%. Frugal phone owners will flock to which ever service is the best deal with little care for loyalty, so this could change very quickly, but I still like investing in winners.

Let’s look at the numbers. Verizon has a pretty solid dividend yield at 4.4% and has been paying a dividend for 30 years. In terms of growth, the company has been raising it’s dividend each year for at least 10 years. However, the average dividend growth per year has only been about 4.8%, with the most recent raise being only 2.9%. Based on my family’s current goals, low growth, high yield dividend payers are a decent target. Verizon’s P/E Ratio is currently about 12, but the PEG Ratio looks to be about 2.37, so it may still be slightly overvalued. Again I only take PEG Ratios with a grain of salt since it’s based on speculation.

Their payout ratio is nice and low at 39%, which means there is little threat of a dividend cut, so dividend growth should continue. If you invested $1000 in Verizon 10 years ago and reinvested all dividends, you would now have about 86.93 shares worth $4173.94 paying out $136.91 dividends each year. That’s a solid 13.6% yield on cost.

Verizon is on my list of potential stock to buy in the beginning of April.

Critical Mass

FYI, for anyone wondering, the previous post was an April Fools Day post. Please do not take any of that advise seriously.

Whether it’s Link running through Hyrule fields before he even acquires the Master Sword, or the first few stock purchases in your portfolio, there’s always a slow beginning that precedes the awesome climax. The beginning of some games can be especially hard sometimes. You don’t have any awesome items or skills, so when a challenge comes up, the stakes are high and so is the challenge. I completely believe that dividend growth investing follows the same difficulty curve of RPGs where you start off at a disadvantage.

In 4th edition Dungeons & Dragons, characters are separated into tiers based on level. Below level 10 is the Hero tier, between 10 and 20 is Paragon, and finally at level 20, the Epic tier. At each tier, a character can take on significantly greater challenges. Dividend investing is similar. When you’re first starting out, it can seem difficult to save enough money for your first few positions. However, once you have your first 10 companies paying you dividends, it gets a little easier, because the passive income is making up for some of the fluctuations in your expenses. Then at the $150,000 mark, your portfolio reaches Critical Mass. Sounds epic right?. This threshold is labeled this way because a 3.5% annual dividend will payout almost $5500 which is the current maximum contribution to an IRA for a year. This means if you were putting your investments in an IRA, your dividends would be contributing almost as much as you are.

For the past 5 years, I have been working various jobs developing my skills as a web developer, all the while feeling underappreciated and underpaid. After discovering dividend growth investing a little over a year ago, I’ve been taking what little money I could squeeze out of my budget to invest in high quality companies. This year, my dividend income has reached a level where it can cover my occasional video game purchases. I’m finally starting to feel like I’ve made it into the next tier, which is a great feeling.

I like to imagine that, in all of spacetime, I have already reached Critical Mass level, and it’s just a matter of time and persistence until I reach my goal. You’ve accomplished all of your goals as well, you’re just not at that point on the timeline yet. Think about that next time you get anxious about where you are in your investing journey.

For more dividend investing advice, check out Dan Mac’s recent article compiling advice from many dividend bloggers including myself. You can find the article here.

Black Gold

There are 2 things you can count on, death and taxes. If we had to expand it to a third thing, it would be that Americans and the rest of the world are going to keep using Oil for the foreseeable future. Today, we’ll be looking at ConocoPhillips (COP). When it comes to natural gas and crude oil, ConocoPhillips does it all from searching to production and marketing.

One thing that drew me to COP is the low current P/E Ratio of 10.8, well below the 20 I usually aim for. Before we get too excited though, their PEG Ratio (which is based on projected growth) sits somewhere between 1.72 and 2.23 (depending on your source), which may still point to the stock being overvalued at the current price. I usually won’t raise an eyebrow for the PEG Ratio unless it’s over 2 since it’s being based on speculation.

What’s most important to me is the dividend. The current yield is about 3.9%, which is pretty nice. They have increased dividend distributions for the past 12 years, and dividend growth over the past 10 years has averaged over 17% per year. Last year’s dividend raise was significantly lower at 4.5%. The payout ratio is 48% based on last year’s EPS of 5.7 and the current quarterly dividend of $0.69. With this conservative calculation, there is still plenty of room to increase the dividend payment each year.

If you invested $1000 in this stock 10 years ago and reinvested all dividends, you would now have about 72.82 shares worth $5072.28 paying out $198.80 in dividends each year.

I’ll continue to analyze stocks on my watch list before making my first purchase in April.

In other news, my wife and I are looking to potentially buy a house later this year, which means the stock purchases I report in this blog will probably only be held for a short time. I intend to rebuild the portfolio after the down payment, but this will affect my strategy for this year. As such, a high yield stock like COP may be a good fit for this time frame. I have my individual account as well, so when the time comes, I will probably only sell the companies that are overvalued at the time of selling.

Buy Luxury Never Quit (April Fools!)

I’ve had a revelation: the purpose of life is to die with the most toys. I know I’ve talked a lot about living below your means and saving money so you can one day retire, but what if you die the day after you retire? Wouldn’t it make a lot more sense to just plan to work forever, and buy all the cool stuff you want?

This is why my new motto is “Buy Luxury Never Quit.” Why make a single sacrifice when you can pay for immediate satisfaction? Patience is for old people, so live it up now and take out a lease on a luxury car. People will know you’re employed when they see you drive to and from work in a sweet Mercedes Benz.

If you accept the fact that you’ll be working until the day you die, all kinds of doors open up. You’re suddenly free to buy the latest home entertainment technology, the newest iPhone (with unlimited data because you deserve it!), and every nifty new gadget you see pop up on amazon. With all of this new awesome stuff, you’re going to need a nice place to put it too!

Housing is one of the “big three,” which means it’s one of those 3 things you should spend the most on. Find a house worth at least $500,000, you don’t want other people to think you’re poor, do you? The more space you have, the better, and make sure it has a 2-car garage so you have space for your new Benz (another of the “big three”) and your old lame car from when you were misguidedly saving money.

The final piece of the “big three” is food. I have 4 words for you “Eat Out Every Day,” or EOED which just rolls off the tongue. Cooking at home is what peasants do, so live a little and buy a steak with a nice wine pairing for dinner like the noble, upper class aristocrat you are. People are going to judge you based on what you eat, so show them who’s the boss. After all, you are what you eat.

You may be wondering, “how am I supposed to afford all of these things I deserve one my current paycheck?” Here’s the great thing, you don’t have to! You can take out loans, mortgages, and credit card debt to live well above your means. Once that debt grows beyond what your paycheck can cover in a monthly payment you’ll be dead anyways, and then it’s someone else’s problem. That’s the beauty of debt, you get all of the benefits and can just pass the downsides off to your family.

I hope you’re ready to live a more fulfilling life like me. Let me know in the comments, what are you going to spend all of your money on?

My Call on AT&T

I’ve put off analyzing this stock for a while because the price movement over the last 5 years is choppier than I like to see. However, I’m no longer a “speculator,” I am an investor, and it’s time to do my homework. AT&T (T) is an communications company offering services and products that cover long distance, wireless communication, broadband and internet services. Their original partnership with Apple for the iPhone helped a lot in establishing brand loyalty, which will pay off as smartphones are becoming more commonplace. AT&T’s marketshare is currently second only to Verizon (VZ) for mobile carriers. This could all change very quickly because it’s in a very competitive industry.

AT&T looks fantastic on paper for a dividend investor that is just getting started. The P/E Ratio is currently at right about 10 which is well below my threshold of 20. This low ratio means that the yield can be quite high without sacrificing payout ratio, which is the case in the 5.4% yield and 53% payout ratio. This leaves room for the dividend to grow, which it has been doing for the past 30 years. Unfortunately, like many other high yield dividend stocks, their dividend growth for the past 10 years has not been impressive, averaging a little over 4% per year.

Luckily, a high current yield can mean this investment can provide you with quick cash to invest in dividend payers with a higher growth rate. High yields can also still out perform high growth low yield stocks. If you invested $1000 in this stock 10 years ago and reinvested all dividends, you would now have about 138.29 shares worth $4714.31 paying out $250.30 dividends each year, this is significantly higher than some of the higher growth stocks I am currently invested in.

I think today’s price on AT&T is a pretty decent value. I still have to do my taxes, so I’m not sure if I’m going to have the free cash to invest any time soon. But if I do, AT&T seems like a decent choice.

What are your thoughts on AT&T?

Also, if you’re looking for some good dividend stock ideas, Check out Dividend Growth Stock Investing. Dan has compiled the favorite dividend stocks of many dividend bloggers including myself.

Niche Site Update 3

I am so mad. I reviewed the site that was supposed to be an all in one deal and discovered not only did they hardly put any content into the site, they didn’t even use wordpress as advertised. The pages were all raw html. Now I need to have someone convert the pages into a wordpress theme so I can maybe salvage this terrible site. It’s going to take a lot of work on my part to make it happen, which completely defeats the original purpose. The only decent fiverr gigs I found for this were going to cost multiple gigs. I am reaching out to the vendors for pricing, if it’s over $20, I’ll do it myself.

For the other site, which I personally worked on building, the only problem I’ve had so far is that 2 out of the 3 articles I ordered on fiverr were grammatically terrible. My advice for anyone using fiverr is make sure the seller is either in the U.S. or is highly rated. Read the comments and reviews to determine if they’re legit or not. I’m getting close to completely swearing off the site, but I am giving it a couple more shots first.

I was hoping this side project for passive income would be achievable with minimal effort, so far that does not seem to be the case.

I also have an update on the articles on infobarrel.com. I wrote a 3 articles a few weeks ago, I earned $0.03 in the first week, but then I haven’t earned anything since. I think the problem is that since there are always new articles being added, unless you keep up with it, the income is likely to die off. Thus, it’s not really passive income anymore, and if you’re going to do all of that writing, why not put up a fiverr gig and at least get $5 for each article. Better yet, just start a blog.

So far my quest for other sources of passive income are not showing many results. I will continue to build out the 2 niche sites, and give them some time to gain some search ranking, but I’m not betting my retirement on it.

Is Early Retirement Selfish?

The drive for financial independence and early retirement from the corporate world seems like such a fundamental motivator for me that I am often surprised when I see people bashing it. The argument that I think holds the most merit is that early retirement can be considered selfish.

I think there are absolutely some selfish factors about my goals. I want to have more free time. I want to get away from environments where I need to take orders from others. I want to be able to spend more time with my family. Of course, I would also like to have some time to play video games. For me, one sentence justifies these desires.

We are all going to die.

Despite even the best efforts to stay healthy, you and everyone you know will someday die. It’s a bummer, but it’s true. There are only so many days you are going to walk this earth, how many of them do you want to spend making SOMEONE ELSE RICH? That is what you do by staying in the workforce unless you work for a non-profit. If you enjoy your work every day, then by all means, continue as long as you wish. However, many of us have worked just as hard, but either never got an opportunity to work for the companies we want, or found out our dream job wasn’t all it was cracked up to be.

So, let me pose this question. Which is more selfish? Working 40 years at a marketing company to make as much money as possible and feeling like a “contributing member of society,” or working long enough to reach financial independence so you have the time to do something more fulfilling and meaningful.

Here’s another misconception naysayers have about early retirement. Many of them think that all we want to do is sit on the couch, watch tv, golf, and sleep. Every person that I’ve talked to who is seeking early retirement has said they want to give back to society when they reach their goal. Whether it’s through volunteer work, counseling, or donating to charity, the early retirement pioneers see financial independence as a means to a benevolent end. A person with enough free time (achieved through financial independence), may find they have the inner desire to make the world a better place.

My favorite case study for this concept is Bill Gates. At several points in his career, Bill Gates could have sold his Microsoft shares and donated the cash to charity, but he didn’t. He kept growing that capital and eventually started the Bill and Melinda Gates Foundation, which arguably contributes more to the betterment of society than any charity that he could have donated to earlier.

Early retirement is hardly the most selfless thing in the world. However, in terms of the greater good, there’s a case to be made that achieving financial independence is not an entirely selfish goal. What good would you do if you had the time and money?

Fund Vs. Fund – Month 2

Last month I decided to compare the results of my ROTH IRA Vanguard funds with my individual positions in the top companies that constitute those funds. I now have a full month of info to work from, so I’ll share the results with you now. Below are the 2 Vanguard dividend funds I have and the change in value they have seen in 1 month.

VDIGX
up 3.26%

VDAIX
up 3.36%

Pretty good right? I dare you to find that kind of return on a savings account with a bank for a 1 month period. The expense ratios on these funds are relatively low too. (0.2% and 0.29%)

Now let’s see how the individual companies that I own did in that time.

KFund1
up 2.29%

KFund2
up 2.44%

Still decent, but certainly not as impressive as the funds. Keep in mind that to give the individual holdings a fair shot, we should be analyzing the change over at least a 3 month cycle to account for the varried dividend pay dates.

There was a time when I thought that saving money in your low interest bank account was a retirement strategy, and that was back when banks would give you almost a whole 1% per year. This is why I think it’s so important that people learn the ways their money can be put to work through investments. I didn’t know better, and I’m sure there are hundreds of thousands of young people today that don’t know any better either.

Are You Clueless When Setting Up Your 401k at Work?

Why you need to be financially literate.

The retirement plans offered by employers have evolved from pensions to 401k’s at the end of the last century. What this means is that the responsibility for saving for retirement has shifted from the employer to you. This is great for investing nerds like myself, but not as good for today’s average young professional.

Let’s role play for a second. You’re a level 1 professional with a full time job making $35,000 per year. Your employer offers you a 401k with a match up to 2%. You’ve been told by your parents that the match is free money, so you enroll and put away 2% of your paycheck each month which your employer will match.

The next step is tricky, it’s time to pick out funds. Having never looked at anything like this before, it looks like something out of the Matrix or written on the wall of an ancient pyramid. You’ve got to pick something, so you just randomly pick 10 funds that sound “cool” or “profitable.” As a result, you end up with high expense ratios, low yielding bonds, and shares of companies you know nothing about. Let’s say this works out well enough and your funds manage to produce an average of 5% compound growth per year.

Assuming the average yield, salary, and contributions remain the same for 20 years, you’ll come out with a 401k valued at about $48,000. To a novice, this might sound like a lot, but anyone that’s tried to plan for retirement knows how little of your expenses this would actually cover at a 4% withdrawal rate. Now, you’re in your 40′s and really not even close to retirement.

Because our schools don’t teach students how to create a budget, evaluate funds, or analyze a company’s EPS or payout ratio, The young professionals of the world have no clue how to approach investing for their retirement. Social Security is most likely not going to be a major contributing factor for Millennials in their retirement, and without pensions offering a “hands-off” way to invest, the burden is entirely on the individual to figure it out.

Many are not even aware of this burden. Discussing money has become taboo in the U.S., and if nobody is talking about it, how are young people going to find out?

Unless you want to work until you’re 75, you need to educate yourself on investment. Unless you want your kids to work until they’re 75, teach your kids about money, budgeting, and investing. I’ve been adding posts to a Dividend 101 category for you to get started and learn how to be a dividend growth investor. There’s no shame in starting out, but there is shame in having the ability to act and doing nothing.

Pinnacle Mentality

I can’t see the future. It’s a bummer, I know. If I could see the future, I would have bought Tesla stock back when it was valued around $35. Believe me, I considered it too, but I had no true way to value the company so I decided to avoid the risk. That may sounds stupid now since it took off like a rocket ship and is now up over 500%. However, would you buy Tesla stock now? probably not, because it seems like it’s at the top and all the growing is done, but if it goes up to $1000 per share next year, we’ll all feel dumb again.

The fear of investing in a company like Tesla at a time like now is what I call “Pinnacle Mentality.” This is the belief that prices are too high to grow any more based on past performance. In the case of Tesla, there are other risks that should also be taken into account, but it serves best as an example here. This belief is what propagates all of the market doomsayers that are always telling you that market is just about to crash.

In 2011, I watched a popular documentary-style film called Zeitgeist. After seeing that, when the country was about to hit the Fiscal Cliff (for the millionth time), I was positive that the market was going to plummet and I should sell off my stocks. The Dow did fall that year, but the Dow has also risen ~30% from it’s highest valuation in 2011, does that sound like the “End of the World?”

My point is that even though you may think prices are at their highest, it’s only ever true relative to the past. In World of Warcraft, a long time ago, when I got my Lightning Bolt to deal over 6000 damage in PVP by using a clever combination of talents and buffs, I thought that was going to be the highest damage I would manage to do. Now, after a couple expansions, a shaman’s Lightning Bolt easily can hit for over 12,000. I thought I had peaked when in reality, numbers were just going to go up in the future.

Another reason this mindset is so common is that we’ve been trained to look for “bubbles.” After hearing all of the horror stories of the “tech bubble” or the “real estate bubble,” any time it looks like a price is rising exponentially, fear kicks in. A fun way to realize that it’s all an illusion is to look at chart (preferably on Google Finance) of the S&P 500. First look at the last 10 years, notice the dip for 2008 (which had real underlying infrastructure causes), but otherwise prices look like they’re rising pretty rapidly. Then push it back to going from 1994 to 2004, you’ll see another dip, and more prices rising at a similar rate. Finally push it back to 1984 through 1994, and you’ll notice that prices always look like they’re rising really fast and there’s a minor dip in one year. Unless, you’re at the bottom of a dip, the prices are ALWAYS going to look like they’re at the top or in a bubble. Also note that the best way to protect yourself from those dips is to just not sell and Tough it Out.

Warren Buffet has said that one thing he really believes in is the ability for businesses in the United States to continue growing. Even though when we look at stock charts we see the present date as a cliff, in a couple years, it will just be a bump on the way to new heights. So, don’t let yourself be fooled by a Pinnacle Mentality, buy smart, never sell.

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