Where We Are and Where We’re Going

As 2014 is coming to an end, now is an excellent time to take a good look at our current status and our goals for next year. In a recent article, I said I was going to rededicate myself to transparency. So I’m going to take this opportunity to share the current holdings in the account I track on this blog.

This is my joint account with my wife, and we’re hoping to use the dividends from this account to become financially independent. This is what it looks like (Ticker – shares – annual dividends paid):

BP – 50 shares – $120.00 per year
CVX – 9 shares – $38.52 per year
MCD – 11 shares – $37.40 per year

My goal going forward is to share the new stock purchases I make as I make them.

I had some yearly goals for 2014 that I will talk about in another post closer to New Years Eve. However, there are some other goals I want to start tracking here for both short and long term. These are kind of milestones, but could also be though of as achievements in a video game.

Goals:

– Save 50% of our joint income for at least one month (in other words, keeping our expenses below 50%).
– $500 forward annual dividend income
– $1200 forward annual dividend income ($100 per month average)
– Own 10 companies
– Own 20 companies

These goals are obviously not massive in scope, but they are the targets I want to achieve on my way to financial independence. It’s unlikely I will achieve all of them in the coming year, so these goals do not have deadlines. However, it will keep me on track to how how much closer to each goal I am with each purchase that I track here.

Hardcore

I’ve learned new aspects about my risk tolerance by playing perma-death games recently. In most games, when your character dies, it’s only a minor setback. Usually, you lose a little bit of progress and carry on as if nothing happened. In games with permanent death (or perma-death), your character doesn’t respawn, and you have to live with that loss. These mechanics make you play differently since every choice carries much more weight, and as you play, you’ll find you’re much more emotionally invested.

Right now, I am playing a hardcore Diablo 3 character with my wife. This means that each of our characters has the potential to be gone forever if things go south. We had done this once before and got to about level 22 before my wife’s character died in a fight we weren’t expecting. My wife was very sad, and I found myself feeling almost nihilist futility while finishing the fight. Our recent characters are at the maximum level and are tackling much greater challenges.

Because of that previous experience, we’re playing much more conservatively this time. Additionally, I am playing much more defensively to keep her alive, probably more so than I would while playing solo.

The interesting thing is that I can see direct parallels to this in the way I approach our investments. In my personal account, I’m willing to take greater risks and trade on margin in hopes of bigger wins, but in our joint account, I invest very conservatively in blue chip dividend growth stocks.

I’m also currently playing Pokemon on the 3DS with self-imposed rules from the Nuzlocke challenge, which basically applies perma-death rules to Pokemon who faint in battle. One special rule here is that you have to give nicknames to each Pokemon so that if they fall you feel a deeper loss. In this case, I still find myself playing much more defensively and conservatively than I would without those rules.

Instead of getting all “YOLO” here, I’d like you to think about this: At any moment, you could lose all of your money. It sounds pretty unlikely, especially if you’re diversified, but bad decisions can balloon to the point where the consequences are much greater than you planned for. Sure, we can comfort ourselves by saying “you can always make that dollar back,” but it won’t be the same dollar. You can only lose a specific dollar bill once.

The risk tolerance I’ve seen in my perma-death gaming is much lower than has been exhibited in my recent trading. I think everyone should try games like these to learn more about their own psychology and risk tolerance.

Getting Back on the Wagon

I have a confession to make. I have not been practicing what I preach lately. Greed has gotten the better of me and I’ve been doing some short term trading trying to make a quick buck. On top of that, I have been eating unhealthily, and neglecting my home gym. Sometimes you have some extra stress and you break your good habits so you can relax a little, it happens to everyone. The hardest part is not putting your foot down and getting back into good habits. The hardest part is keeping it up 3 days later.

I don’t usually write about fitness on this blog, but it’s entirely relevant. I believe keeping a good diet and exercising regularly are one of the best investments you can make. Not only do you feel better, but you’ll save yourself thousands in healthcare costs throughout your life by maintaining a healthy lifestyle.

When I fall into a rut, I often feel like I don’t have control of my life. I’ve found that the best way for me to take back control of my life has been lifting weights. It reminds me that I am in control of how I spend my time. It also reminds me that I’m not perfect, and it’s better to take a step in the right direction than to lament not meeting your lofty expectations.

However, working out after a long period of laziness has a dark side. Delayed Onset Muscle Soreness (DOMS) often comes 24 to 48 hours after a workout, and it is especially bad after you’ve skipped your workouts for a week or more. This is one of the worst things that happens when you’re trying to get back on track. The pain feels like a punishment for making the right choice. Some people are empowered by this pain, but not me. This creates a major psychological hurdle on your path to getting back on the wagon.

If you’re trying to workout after a break, there are some things you can do to prevent DOMS, as well as reduce it after you’re already afflicted.

Prevention:
– Drink a protein shake before your workout
– Make sure you’re adequately hydrated.
– Stretch before and after your workout.

Recovery:
– Eat lots of protein, most body builders say 1 gram for every pound of body weight.
– Keep stretching.
– Stay hydrated.
– Workout even more (lightly).

The last one sounds like the complete opposite of what you want to do while you’re sore, but it’s true. DOMS is typically the result of built up lactic acid in your muscles, by doing a light workout, you will pump more blood through your muscles and clean out some of that lactic acid. Don’t rush into a heavy workout too soon though, your body needs time to rebuild the muscles you’ve broken down.

Hopefully, this has been helpful for anyone that needs a kick to get back into shape.

Now back to investing. As I have made some poor choices lately in my arrogance, I’m going to rededicate myself to maintaining full transparency so I am accountable for my investing choices. In the coming days, you can expect a full disclosure of the investing account I track on this blog, as well as updates with upcoming purchases.

Dogs of the Dow

At the beginning of 2014, I was looking into other strategies used by investors seeking financial independence. One of the strategies I came across was the “Dogs of the Dow.” In a nutshell, this strategy is to invest in the 10 highest yielding blue chip stocks out of the 30 that make up the Dow Jones Industrial Average. The idea being, that companies of this caliber should only have a high yield if they are significantly under priced. So around January 7th, I decided to make a google portfolio to track how I would do if I invested roughly $1000 into each company.

At the beginning of this year, the Dogs of the Dow list included T, VZ, MRK, INTC, PFE, MCD, GE, CVX, CSCO, and MSFT. In the interest of full disclosure, I’ve owned or still own positions in all but 2 of these companies. So far this year (not much left). Someone who invested in these companies would not have had bad returns. They would have seen capital gains to the tune of 11%, the bulk of which was from MSFT, MRK, INTC, and CSCO. Additionally, someone with an evenly distributed portfolio of $10,000 would have earned over $310 in dividends which works out to net gains of about 14-15%. For reference, the S&P 500 has had a YTD return of around 11% and my personal portfolio has had about 14%.

So, based on the past year, someone who doesn’t enjoy screening stocks and just wants to pick from a small list of quality dividend paying companies would have had some solid returns going with the dogs. I don’t recommend blindly trusting a list of companies that anyone gives you. How someone else evaluates whether a stock is a good buy or not may not properly align with your beliefs. However, considering the 2 companies on the list that I have not owned in the last year were 2 of the bigger winners from the list, I have to admit that the strategy seems legit.

What’s your take on the Dogs of the Dow?

Oil Opportunities

My investing strategy is to take my excess money each month and buy attractive dividend growth stocks. The act of buying stocks every month is usually considered to be “dollar cost averaging” where your returns are going to average out from buying at both high and low prices throughout the year. While this applies to the broader market, it doesn’t account for the fact that each month there is usually a company or sector that is lagging behind the rest of the market and provides a discount. This means that as the market rises and falls, the intelligent investor is still getting a good deal.

For instance, over the past month oil prices have been dropping, and after OPEC made the decision not to cut production (and thus cause prices to rise by reducing supply), the big oil stocks like Chevron (CVX), BP, Exxon Mobil (XOM), and others have seen their prices fall 5% or more. This decrease in price also means an increase in entry yield. At the time of writing this, CVX’s entry yield is 3.76%, BP’s is 5.52%, and XOM’s is 2.91%. Earlier this year, I wrote about ConocoPhillips (COP). At that time (April), the entry yield was 3.9%, now it is up to 4.15%.

If you were thinking about adding oil stocks to your portfolio, now is the time. I’ve personally purchased new positions in CVX and BP. This is not a “once in a lifetime” opportunity, but it’s a strong example of how savvy dividend investors can get great deals throughout the year. Currently, the S&P 500 is at a new high for the year, but you can pick up these individual stocks at a significant discount.

Earlier this year, we also saw Target (TGT) suffering from some bad press after the data breach (Which I wrote about as well). Back then, Target’s entry yield was about 3%, and that wasn’t even the lowest price Target hit this year. In the past few months Target has regained it’s share price level, and even increased their dividend, but the current entry yield today is 2.85%. Hopefully, you readers snagged this one up at a good price like I did. Today, Target seems a bit overpriced with a PE ratio over 30, so I wouldn’t recommend buying it right now, but that’s certainly no reason to sell either (by my standards).

It’s not every day that you get to see a great deal on dividend growth stocks, but there are definitely deals that stand out from time to time. If you’re investing new capital each month, and do your research, you’ll be sure to catch some good ones.

How about you, are you grabbing these oil companies at their current discounted price?

What to Teach an Heir About Investing

I started thinking recently about how I would pass down stock investments to my children when I pass away. It’s one thing to just give them the stocks, but there would be little stopping them from just selling those stocks, cashing out, and blowing all of that money on cars and vacations. The real gift that I would want to pass down is my mindset for saving and investing in quality companies. I also couldn’t expect them to read everything I’ve ever written about stocks either, so I thought it would be a good challenge to try to get everything down to a single article. So this is my attempt to pass down important chunks of knowledge to accompany the portfolio.

“1 dollar every month is better than 50 dollars now”

I believe this concept to be the cornerstone to building wealth and living a secure and enjoyable life. A set amount of money being paid or received is only ever going to be that amount of money, but money moving at a regular rate has the potential to become far more over a long enough timeline. If I receive 1 dollar every month for 5 years, I’ve received a total of 60 dollars, and will keep making more every month. This also means that something that costs me $1 per month will exceed the cost of a $50 one time payment after 4 years and 2 months.

Another way to look at this concept is renting versus owning. If you plan on owning something long enough that the cost of renting exceeds the one time cost of ownership, then it is a better choice to own it. The best thing you can do is own an asset that other people want to rent, so you pay once, and they keep paying you forever.

“The value of stocks is not the price they can be sold for, but the income they produce”

This goes back to concept #1. Owning dividend paying stocks gives you free money for the rest of your life, with no limit. In fact, the amount of money you receive from the stocks you own will probably increase each year. The best companies increase their dividend payments every year. Selling a stock for a one time payout is basically robbing yourself of all the future dividend payments you would otherwise receive. The only time a stock should be sold is if this income is going to be lower this year, than it was last year (disregarding any special 1 time dividends or splits).

“If you can’t explain a company’s business in 2 sentences, you probably don’t understand it and probably shouldn’t buy it”

One of the biggest mistakes an investor can make is buying shares of a company without any knowledge of how that company makes money. This doesn’t mean knowing all of the details of Coca-Cola’s distribution channels. It means knowing the products or services that a company sells and knowing the general demand for that product or service. People everywhere drink Coca-cola soft drinks, and they probably will continue to do so for the foreseeable future.

“Buying a stock in the hopes that its price will increase over any period of time shorter than 2 years is gambling. Don’t gamble your money”

This is pretty self-explanatory. Gambling is not a reliable way to build wealth, and buying a stock with the intention of selling it later is gambling. Instead, focus on buying shares of companies that are going to keep growing their business and profits and share those profits with investors. This is the difference between buying some apples with the intent of selling them tomorrow and buying them to plant trees that will provide you with apples for life.

Without getting into the highly technical concepts with which I use to evaluate my investments, I think these values could help set someone along a path to financial wisdom.

And of course, my favorite phrase: “Buy Smart, Never Sell”

Things I’ve Learned From Yard Work

I have finished moving into my new house. Lately, I’ve been spending a lot of time working on the backyard to make it into something that not only looks beautiful, but provides food for me and my family. My primary project is making a self-sustaining ecosystem in the form of a pond (with freaking sweet waterfall of course!). We also plan on planting apple trees and berry bushes. It’s a lot of work now, but in the future, I’ll be glad I made these sacrifices today. Does this sound familiar? Building a passive income portfolio full of dividend growth stocks is very similar philosophy. Sacrificing today for a better tomorrow.

There is a Chinese proverb I really like: “The best time to plant a tree was 20 years ago. The second best time is now.” Planting a tree that will bare fruit means taking the time and energy to dig a hole, watering it diligently, and pruning where needed. You must work hard on the front end, but after it has had time to grow, you will be able to harvest fruits and berries without any extra effort.

Digging the Hole

Our most precious possession is time, so it is hard to dedicate it to things that we may not enjoy. Maybe it’s digging a hole, maybe it’s meeting new people, or maybe it’s your job. Many times, the things we don’t enjoy doing now are the things that will reward us in the future. Instant gratification benefits us today, but fills us with regret (or nostalgia) every day after, but delayed gratification is regretful today, but benefits us every day after.

As much as you might want to splurge and buy a new TV this weekend, the joy it will bring you is only temporary. In a year or 2 you will want a newer TV with a bigger crisper screen and cool new features. Alternatively, use that money to buy shares of Target (TGT). The great thing about dividend growth stocks, like Target, is that your very first dividend payment will be the lowest one you should ever receive from it. If you’re reinvesting the dividends, the next payment will be a little bit bigger. Then when the dividend distribution is increased next year, it will grow even more. So in 2 years, you’ll want a new TV, just like you would if you had already bought one, but you also now have a passive income stream that will keep growing throughout your life.

Watering Diligently

For most things to grow, you must nurture them to make sure the growth is healthy. Plants need water, relationships need attention, and your portfolio needs fresh investments for diversification. If your portfolio is to heavily weighted in one company or one sector, you run the risk of that company/sector facing hard times where dividends must be cut. By diversifying, you encourage natural growth and mitigate risk. I don’t believe in needlessly diversifying in bad companies just for the sake of diversification, the same way you wouldn’t try to plant an avocado tree in the tundra in case your apple tree doesn’t work out.

Prune Where Needed

It can be difficult to trim the branches you’ve worked so hard to grow, but when it comes to berry bushes, you have to prune the branches that have already produced berries, because the empty branches are the ones that will produce next year. The philosophy here is that when you can identify something that will no longer be benefiting you, it’s time to cut it. In an ideal world, the companies you invest in will never reduce or cut their dividends, but you need to be ready to sell them if they do. I like to say that if you buy smart, you’ll never need to sell, but things can change over several years. The stocks you buy should only be companies you are willing to own for 10+ years. It’s important that you can distinguish between a dividend cut and basic under-performance. If you sell a stock just because it is under-performing, you’ll miss out next year when they get their act together and over-perform. The only time to sell a dividend growth stock is if the dividend payment is going to be less than it was last year.

Homes – Investment or Liability?

I’ve mentioned earlier that I am looking for a home to buy, and have heard some readers share their opinions about how a permanent residence is a bad investment.

Buying a home as an “Investment” brings out a lot of heated argument in the investing world. There are typically two schools of thought. Many people believe that paying rent is wasted money that could potentially be building equity. Why subject yourself to a continuous expense to have nothing to show for it, right? Well, the folks on the other side of the table see it differently. Owning a home means you are liable for all repairs and maintenance, additionally it means you’re tied down to living in the same place.

Personally, I think both views are too rigid which have major flaws in their logic. You do gain value from the money you pay each month in the form of having the service of someone else handling the maintenance issues. So saying that the money is wasted is a little extreme.

In regards to flexibility, it is true that needing to sell your house before you move is more complicated than moving out of an apartment. However, people often forget about the fact that renters typically have a 1 year lease with expensive penalties for leaving early. Additionally, when it comes time to renew that lease, the tenant usually needs to commit to the next term months before the current lease is even up. So if you want to move without penalty, you need to know you’re moving months ahead of time and can only move in that short window as the lease is ending. I really think the flexibility argument is pretty weak on both sides.

I’m curious to hear from the people who say that a residence is a liability instead of an investment and what they think of owning rental properties. With a rental property, you still have all of the problems of a residential home like maintenance but with the added complication that you could have a crappy tenant that doesn’t respect the home. I think people also tend to forget that you need a place to live just the same as you need food and oxygen.

Owning a home is like owning a rental property where you are the tenant. If you rented out a rental property to a tenant, and then rented your residence from someone else, you’re basically breaking even, assuming they rent for the same price. So at that point, you’re really just taking on additional risk by involving a 3rd party as the tenant.

That’s just my 2 cents, what do you think?

P.S. – The home in the photo is one we’re buying next month! We’re very excited.

Fund Vs. Fund – Month 4

Somehow, the time of the month for this exercise always sneaks up on me. We’re now looking at the returns after 4 months.

The purpose of this exercise is to compare a focused approach to investing in quality dividend paying companies to using a fund of cherry picked stocks selected by experts. At the time I started this comparison, Kfund1 was composed of my personal holdings in MCD, MSFT, MRK, WMT, JNJ, and LMT, all of which are also part of the Vanguard Dividend Growth Fund (VDIGX). KFund2 was composed of my personal holdings in PEP, PG, WMT, KO, XOM, CVX, MCD, and MMM, all of which are also part of the Vanguard Dividend Appreciation Index Fund (VDAIX).

Below are the 2 Vanguard dividend funds I have and the change in value they have seen in the past 3 months.

VDIGX
up 6.40% (last month 5.78%)

VDAIX
up 6.75% (last month 6.17%)

Gains seem to have slowed down a tad, but what’s important to note here is that the returns are still up from last month.

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

KFund1
up 6.66% (last month 7.20%)

KFund2
up 7.69% (last month 8.86%)

So my individual holdings actually went down in value compared to last month, which is unfortunate. However, if we’re still just comparing returns, the individual holdings are still ahead. These results do not surprise me as funds are intended to minimize risk. The asset management probably attributed to the continued gains during a down month, but at the cost of overall high-end returns. Like Warren Buffet, I consider myself an optimist when it comes to American business. While we all like to avoid losses, in the long run the market will continue to rise. This is why avoiding risk is not a priority for me while investing in big established businesses with proven performance and a track record of continuously rewarding shareholders.

I Dream of Panic

The dividend growth investor loves to see high quality businesses trading at a discount. The problem is that the “good deals” are hard to find these days. The overall market is up, real estate is recovering, and nobody seems to be flailing their arms and desperately selling their shares. Times are good, but that means opportunity is limited.

If we turn the clock back to 2011 or 2008, great deals on dividend stocks were easy to find because there was panic in the streets. Stock prices were falling, which created more panicked selling which lead to even lower prices. If you weren’t viewing stocks as dividend engines, you’d be freaking out that your portfolio was plummeting. These were huge opportunities for dividend investors to pick up some great deals.

I had not found my strategy yet when those price dips came around. So now, I’m hoping for another chance to get in on the ground floor. I’m hoping, people panic.

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