Monthly Archive: December 2013

In Grand Theft Auto 5, one of the new features of the game is the ability to trade in game stocks. As an actual investor, this seemed like a fun little side quest for me. To tell the truth, the GTA stock market is not a very accurate representation of the real world (big surprise, right?), however, there are some real world lessons a novice investor can take from the game.

The most substantial way to make money in the GTA stock market is through the assassination missions. The idea here is that you sabotage one company so that their stock goes down in value and their competitor’s goes up. While I certainly don’t condone corporate sabotage in the real world, the lesson to take from this is that big news will dramatically affect a stock’s price in a short period of time. For dividend investors like me, if an otherwise solid company with a decent dividend ends up getting some bad press and having their price swing down, it’s a great opportunity to pick up their stock on discount. In the game, these price swings were 50-100% in a matter of minutes. The biggest swings I’ve seen based on news have been around 10% for an entire day. Making substantial gains on price change can usually take months.

There was a rumor going around that you could buy shares of one company and then destroy the trucks/planes/assets of their competitor to see your shares gain value. This rumor turned out not to be true. There are a couple lessons here. First, rumors don’t always tend out to be true. Second, as much as you wish you did, you have almost no control over what the stock market does. The only thing you can count on is that the market doesn’t care what you think.

Here is the main part that Grand Theft Auto got wrong: Valuation. Valuation, and the statistics used in valuation, are the most important tools any investor has. Without P/E ratio, dividend yield and history, EPS, and Payout Ratio I would be flying blind and gambling. That’s the most important thing to learn as a novice investor, the difference between investing and gambling. Gambling is when you spend your money in the hopes that luck is in your favor and you make more than you spent. Investing is when you do your homework on a company, and you know that even if the price goes down, you’ll end up ahead on a long enough timeline.

How about you, did you like the stock market in Grand Theft Auto 5?

I decided a fun little Christmas present to myself and my wife would be an income generating asset. We by no means are living a glamorous life for middle class Americans, but at the same time, more “stuff” does not seem all that appealing. So, what better gift than a dividend paying position.

I added 14 shares of Realty Income Corp. (O) to our joint portfolio.

This investment will payout $2.52 every month. Most dividend stocks pay their dividends quarterly. However, it’s not uncommon for Real Estate Investment Trusts (or REITs) to distribute dividends monthly.

REITs can be difficult to value since you can’t follow the usual stats for a good picture of their business. A REIT essentially owns several┬árental properties, and is required to pay out over 90% of the net profit to investors. As such, it would look like the payout ratio and EPS are outrageous in terms of standard valuation. Instead you need to find the Funds From Operation (or FFO) and compare that to the price to get a more accurate representation of EPS. In the case of Realty Income Corp. It is currently at about 15.8 Price/FFO, which is an attractive entry price.

Additionally, it has a dividend yield of over 5.8% with a history of 19 years of dividend increases averaging over 4% per year. Most analysts are predicting that the growth may slow down with changes to interest rates and the FFO to dividend ratio is getting tighter. However, I am optimistic, and having shares of a REIT is like owning a tiny far more liquid rental property.

Anyways, money is going to be tight in January, so this may be the last investment I get to make for the next several weeks.

It’s that time of year again. When we make promises to ourselves to be better. It’s time to make some New Years Resolutions. I believe far more people fail their New Years Resolutions than succeed. The idea seems so good and so easy going into January, but once February rolls around, everyone loses steam. However, I still think it’s far more important to try and fail, than to give up from the start. So here we go, these are my goals for 2014.

At the end of 2013, we’ve had to face some major extra costs. We decided to get a used ’98 Jeep Grand Cherokee so we would have 2 cars for the Winter months. This set us back a few thousand dollars between getting it, registering it, and getting some small repairs. It’s still too soon to say if this purchase is going to be something we regret later, but the quality of life increase of having 2 vehicles will pay off pretty soon when my office moves to a new location (no more walking home for lunch).

So, the first thing that will need to happen in 2014, is we will need to get our finances back in order. In January, we plan on minimizing our food bill at the cost of temporary health. My wife and I try to eat pretty healthy, which means a lot of meat and veggies. We tend to break the rules on Saturday to maintain sanity, which usually consists of eating out and sometimes drinking with friends. Since we are currently healthier than we are financially stable, we’ll be eating as cheaply as possible, and cutting out the expensive weekend restaurant visits for at least the next month. After january, we should be financially stabilized and able to resume our healthy eating habits. Additionally, if we can get out of the habit of spending a lot on the weekends, we’ll be able to save more in the future as well.

I’ll try to share any good low budget recipes we find along the way. Hopefully, we can find ways to still make healthy food.

That first goal is important, because the second goal for 2014 is aggressive saving. We are aiming to invest at least $20,000 into our taxable account by the end of 2014. Our stretch goal here is 40% of our income (just under $26,000), but that may be out of reach as there are 2 weddings and 1 bachelor party (where I am the Best Man) that are happening this year.

You may be asking why we are investing in a taxable account. There are a few reasons. First, we are planning on buying a house within the next 2-3 years, which means we will need a decent load of cash for the down payment. Second, our long term goal is to retire early, and that is impossible if our savings are inaccessible until age 60+. Finally, liquidity is the essence of freedom. One reason, many investors hate real estate is that it’s so much work to turn your asset into cash. If we needed to access money in a Roth or traditional IRA, there would be hoops to jump through, and fees to pay on top of the taxes. Our economy is not in a state where a person can assume they won’t need to access their savings for 30+ years.

The final goal for 2014, is to achieve an average monthly dividend income of $50 per month going forward. Obviously our average monthly dividend income is going to be quite low while accumulating assets, so this is more of a goal for results we’ll see in 2015. I just want to be clear up front so I don’t get to December next year and have to say we failed this just because the goal was poorly worded.

How about you, what are your goals for 2014, Let me know in the comments!

I’d like to extend a wish of a very happy holiday season to all of you. Chances are, your holidays will be pretty happy. You’ll get presents, have some time off from work, maybe even get to see some family. The greater challenge by far is to have a happy first week back at work. The culture we live in has created an environment where we are most happy when we are getting new products and presents. Some buddhists say one of the biggest causes of suffering is longing for something we do not have.

As a game enthusiast, I often find myself day-dreaming of the next sequel to one of my favorite games. I spend a lot of time just wanting games that don’t come out for weeks or even months. This time is not enjoyable, and then when the game finally comes out, I am happy for a week or two, and then there’s a new game on the horizon and the cycle begins again. It’s a bad habit that I’d like to get out of, as it causes me to spend more time unhappy than happy. This is OBVIOUSLY a first-world problem, and I’m not looking for sympathy. I’m using myself as an example to show you how material goods are more likely to make you unhappy than happy.

Our consumer christmas is going to make us very happy in the short term, but once we go back to work in January, we crash. You’ve heard the phrase “Don’t try to have the things you want, rather want the things you have.” I’d like to urge you to exercise that sentiment this holiday season. One new holiday tradition I started last year is for New Years Day. I try to go back and play every video game I bought from the previous year. While I play those games, I try to remember how much I anticipated their launches. I try to imagine how much the me from the past would love to be where I am now. This helps me remember that life is actually pretty good. I have an income, I have a roof, I am well fed, and my stocks are pumping out dividends while I sleep.

So when I say “Happy Holidays,” I don’t mean that I hope you get what you want, I hope that you want what you have.

The most common problem for novice investors is they have no idea how to interpret all of the stats they can see for a particular stock. Imagine trying to play your Diablo 3 Barbarian and not knowing how Strength and Vitality affected your character. In Diablo 3, there are well over 50 different stat bonuses you can find on items, but really, there’s about 5 you should care about. The same is true for stocks. The most important valuation stats for dividend stocks are Growth History, Annual Yield, P/E Ratio, and Payout Ratio. These are the most important statistics to dividend investors like myself. Here is how I used them.

Growth History: Quality companies that distribute dividends regularly tend to raise their dividends consistently. I try to find stocks that have at least 10 years of dividend growth history. Meaning they have raised their dividend payment each year for the past 10 years or more. More than 10 years is an added bonus as I explained in the Hierarchy of Dividend Growth.

Annual Yield: The annual dividend yield is a percentage of the current price that is paid out each year in dividends. Really, the dividend payment is set, so the yield varies based on price. In the end, you’re always looking for a high yield when investing. I look for stocks with an annual dividend yield over 2% and below 7%. Stocks with yields over 7% are most likely failing one of the following guidelines, or are the result of a very strong downward trend and may continue to lose value.

P/E Ratio: This is the ratio of Price to Earnings Per Share (or EPS). Many people use the EPS to determine what a fair price is for a stock. I consider stocks with a P/E Ratio below 20 to be a good enough value to invest in. Stocks with high P/E Ratios are most likely overvalued.

Payout Ratio: This is the ratio of Dividends paid per share and Earnings Per Share (EPS). If a company earns 5 million dollars and pays out 2 million dollars in dividends each year, their payout ratio is 2/5 or 40%. I aim for stocks that have a payout ratio under 65%. Stocks with too high of a payout ratio, may not be able to afford raising their dividends each year, and may even need to cut their dividend payment. A dividend cut is like the mark of death for a dividend stock. Despite the name of this blog, you should absolutely sell a dividend stock that reduces its dividend payment.

I hope this helps shed some light on the way I value stocks and the important statistics for you to keep track of. How about you, how do you evaluate good stocks?

Today we’re going to examine 2 fantasy characters and how they get by in the world. The rich mage, and the poor warrior approach life in very different ways and see different results.

Both the Warrior and the Mage started with nothing but the clothes on their back. They both had to get started by taking any quest they could that a trained monkey could probably do: Simple Delivery Quests, Killing Boars, etc. With the money and experience they gained from these quests they took different paths.

The Warrior bought gear, because to his peers, he was only as good as the gear he had. The Mage ignored his peers, and focused on boosting his intelligence by studying and learning new skills. The Warrior, using his new weapons and armor, accepted more challenging quests. The Mage used his intelligence and skills to complete quests that the quest givers could not just assign to any character. As the Warrior and Mage advanced, they earned even more money and experience.

The Warrior had a reputation to keep up, and thus spent all of his extra money on gear and prestigious mounts. The Mage bought a basic horse to get around town, and kept the money. The Warrior, had all the gear he needed and then some, but every time he completed a quest, he would spend the money he earned on more gear that was slightly better than what he had before. The Mage used his money to buy undervalued items and sell them for a profit.

A raid was being organized to take on a mighty dragon. The Mage was recruited first because his skills and intelligence proved he was a valuable team member to have on the raid. The Warrior faced much competition for his spot, and was one of the last raid members to be recruited. After the raid, as usual, the Warrior bought new gear to show off his accomplishments. The Mage had now amassed so much wealth that he could hire parties that already had established themselves to clear dungeons and return a portion of the loot back to him.

Today the Warrior is still taking an quest he can get to try to keep up his reputation as one of the best geared warriors in the realm. Meanwhile the Mage is enjoying his free time while his wise choices from before pay for his lifestyle.

Can you see how the choices made by these 2 characters could be applicable to the real world? Which class have you been in your professional life? The Warrior has all of the cool stuff, but will have to work until the day he dies. The Mage saved the money he otherwise would have spent on the same stuff, and invested in his future. Do you value things or time more? Are you just doing work that anyone could do, or are you learning skills that few other people have?

Debt comes in many flavors: student loans, mortgages, credit card debt, car loans, etc. I talk a lot about how to invest when you’re debt free like me, but the reality is that I’m extremely lucky and a minority in modern day financial culture. I like to think of money like water; it can allow you to float, but you can also drown in it. When you are overloaded by debt, it can be easy to feel like you’re drowning and completely out of control. I’d like to provide whatever advice I can to help you start treading water, and someday even build a boat to float on.

First of all, debt is not a magical entity. It’s money you owe so you can have something you haven’t earned yet financially. That may sound condescending, and when it comes to a college education or a reasonable car (Camry = reasonable, Bentley = unreasonable), it’s not meant to be, you need those things to survive in our modern culture. The reason why I say it’s not magical is because there are very logical and real ways to make your way out of debt. So, here we go.

Don’t be too proud

Before you can get to work on your debt, you need to understand if your current lifestyle is sustainable. To do this, you’ll need to do a cash flow analysis on your monthly income and expenses. If you’re making more money than you’re spending, jump to the next step. If you’re losing money, it’s time to find some help. If you were drowning, would you be too proud to grab the hand of someone sitting in their cozy boat? You need to accept that your lifestyle is more lavish than you financially deserve. Stop eating out as much and learn to cook. Consider moving in with roommates or even your parents. The first step is to get your cash flow into positive territory.

Build a cushion

Before you start paying anything off, you’ll want to save about $1000 so that you have a cushion for your expenses each month. You can also do this as part of your budgeting exercise in the previous step. This step will help remove some of the paycheck to paycheck stress that might cloud your judgement.

The Debt Snowball

Credit for this technique belongs to Dave Ramsey. How this works is you find out which of your debts has the lowest balance. You will make the minimum payment on all of your debts except for that one. All of your extra cash each month should go towards paying off the debt with the lowest balance. Once you have that first one paid off, you can use the money that would have gone towards that account to pay off the next lowest balance. With each debt you pay off, you build momentum like a snowball falling down a hill.

Interest Rate Balancing

If you’re most interested in just getting out of debt, you can stick with the snowball method until you’re debt free. However, I believe there are some cases where debt is ok. I spend a lot of time building javascript calculators to answer my own financial questions of what the best strategies will be. I’ve found that if your investments are capable of yielding a greater return than the interest percentage on your debt, then you’re better off investing instead of paying off your debt early. For credit card debt, your interest rate is probably in the double digits, and that is going to be hard to beat, so definitely pay those off. For mortgages or student loans (most of the time) the interest rates on those debts are so low, that you can easily outperform them in quality dividend stocks.

Here’s an example. You owe $200,000 for a mortgage with a 4% APR on a 30 year term. You have $1000 each month with which you pay your mortgage minimum payment, and with the remainder you can either invest at an average yearly return of 7%, or use to pay off your mortgage faster. After 30 years, either way you will have your mortgage paid off, however, if you paid it off more quickly, and then invested all of the extra money afterwards, you’d have an investment balance of $31,681. If instead, you invested the extra money, making only the minimum payments, you’d end up with $55,426. So by investing early, you end up with $23,745 more than by paying off your mortgage faster.

Additionally, money you invest is more liquid than money that goes towards debt. Even though this strategy may seem controversial, it may be in your best interest. If you’re new to investing and aren’t confident that you can get a good enough return, don’t risk it. You should always consider your personal situation before adopting a financial plan from someone else.

How about you, are you underwater or floating? What’s your take on paying off debt early or investing extra capital?

Anyone who’s played an MMO knows how important titles are. Having a specific title for a character’s achievement shows what you’ve accomplished, and other players will recognize that as a sign of your quality as a player. Dividend stocks have titles of their own. There is a hierarchy of 3 levels to show the achievements of a dividend stock.

A “Dividend Achiever” has raised its dividend for 10 consecutive years. A “Dividend Aristocrat” has raised its dividend each year for 25 years. Finally, the most prestigious of dividend titles, a “Dividend King” has risen its dividend for 50 consecutive years. This title is as epic as it sounds, fifty years is a really long time and crosses through a couple of recessions. A company that has maintained this kind of record is going to try pretty hard not to break the streak.

Now, just because a dividend stock has earned one of these titles, it does not mean that it is a must buy. There are still factors to take into consideration regarding its valuation. For instance, stocks of this caliber may be overvalued in the current market, and you should wait to make your purchase. Usually, checking the P/E Ratio can help you determine this. A P/E ratio over 20 means the stock may be overvalued. Another risk factor to consider is the payout ratio. A payout ratio higher than 60% means the company may not be able to afford to keep raising its dividend.

Think of it this way, if you were to pay a player with a nice title to join your party for a dungeon. The dungeon might go easier, but if the the cost is too high, you might end up worse off after the dungeon than before you started. Personally, I try to buy stocks on these lists because it’s a good sign that the dividend will continue to increase. However, if a dividend achiever has a more attractive yield, P/E ratio, and payout ratio than a dividend king, I will buy the achiever.

How about you, do these titles impress you?

If you’ve read some of my other articles about where I am personally in terms of finances, you know I’m not exactly “just starting out” or in a relatable position for a beginner investor. Put I want to be able to guide you through my financial journey from start to finish. However, I did just recently open a joint retirement account with my wife which will be our primary retirement savings. So, I intend to share with you every stock purchase we make, the reasoning behind it, and our dividend income that comes from those investments each month.

Our initial investment in this account is a pretty standard starting amount, so if you’re just starting on your journey as well it will be fun to follow along. We’re starting out with an initial investment of $2,500. We bought 5 shares of Exxon Mobil Corporation (XOM), 16 shares of Target Corporation (TGT), and 11 shares of PepsiCo, Inc. (PEP).

Exxon has an entry yield of 2.67% and has consistently raised its dividend distribution for 31 years in a row. Over the past 10 years it has managed to raise the dividend by over 10% each year on average. It’s P/E ratio is 12.21, and payout ratio is about 32%. XOM seems like a pretty safe bet for the foreseeable future.

Target has an entry yield of 2.74% and has consistently raised its dividend distribution for 46 years in a row. Over the past 10 years it has managed to raise the dividend by over 20% each year on average. It’s P/E ratio is 16.79, and payout ratio is about 42%. Target is also actively expanding into Canada, which is lowering the price now due to the decreased earnings, but I believe this reinvestment in the company is going to pay off big time in a few years.

Pepsi’s entry yield is 2.71% and has raised their dividend for the past 39 years. Over the past 10 years, those increases have averaged 15% with a raise of only 5% last year. Their P/E ratio is 19.65 and payout ratio is 51%. Those last 2 statistics are little more risky, but ultimately I see Pepsi’s softdrinks and snacks doing well. I have shares of Coca Cola (KO) in my individual account, so this was kind of a diversification play, but I’m still confident in this purchase.

The important thing to remember is that I’m not buying these stocks because I hope their values will go up (even though they probably will). I’m buying them because their dividend payments are poised to raise each year until I retire. While my 16 shares of TGT will only pay me $6.88 on the next dividend pay date, I can safely expect that payment to go up in the future. I wouldn’t be surprised if my current investment of roughly $1000 is paying out $144 each year by the time I retire.

I’m Kevin Drongowski. I’m not a self-help guru, or a financial expert. I’m not even especially well paid. I’m just a dude who likes video games and doesn’t want to work forever. I’m always trying to find a new way to get ahead in life, but the more I try, the more I just break even or worse. I’ve been pretty steadily employed full-time since 2008, and while there are certainly worse fates, I’d like to be free and financially independant some day. I don’t want to wow you with my hopes and dreams of traveling the world or owning a successful business, because I honestly don’t care that much about those things. My ideal day would go something like this, I wake up at 10:00 AM, take a shower, cook some food and play video games until I go to sleep again. I care about money to afford laziness.

To me, money is survival. In the way that a cat has claws to kill its prey for food, we have money to buy the food and shelter we need to survive. So wealth for us is like the cat having a pile of meat to eat at it’s leisure. Which means passive income is like a robot that automatically kills prey for the cat while the cat plays Super Mario Bros. That is my goal, to create a passive income robot that allows me to afford my preferred lazy lifestyle. The most successful strategy I’ve found for this is dividend growth stocks, but before I get into that I’ll catch you up on the other strategies I’ve tried.

First, there was a webcomic. I wrote a webcomic for a short period with the intention of merchandising and collecting ad revenue. Here’s the truth, no matter what ad provider you use, you’re not going to make more than $30/month from ad revenue unless you have substantial traffic. Needless to say, my inside jokes, that only my close friends got, were not generating a lot of traffic. When you consider the time I spent working on it, and the cost of website hosting, it’s safe to say I lost money on the project overall.

Next was the facebook game. After the dive into web development with the webcomic, I learned php and mysql. Using these newly developed skills I built a browser game with some cool flash elements. The game was fun, but ultimately did not build a good enough following to bring in any income from microtransactions or advertising. Again, given the amount of time I put into it, this one was another loss.

During that time I was able to save up some money by living relatively frugally. I decided to start trying to play the stock market with that money. I bought some books on investing and tried my hand at day trading. Some days I’d make $200, other days I’d lose $600, this ultimately turned into another losing strategy. Over time I tried to lengthen the term of those investments and only invest in companies I believed were going to go up in value. While holding one such company (Discover), I saw that I had earned a dividend on one of my statements. I had no idea what a dividend was at the time. So after doing some research and learning about dividends, I started buying up high dividend yielding stocks. However, I still ended up losing money more often than not.

After a lot more research and experimentation, I’ve finally started seeing reliable gains. I’d had no clue how to properly value a stock up until then. All of the numbers made no sense and it seemed like it was impossible to really apply. After all, even if you evaluate what price you would like to buy a stock at, that doesn’t mean it will ever trade at that price. The key is to focus on a reliable and rising dividend, and do your best to ignore market noise. Embracing this strategy was how I finally started to profit off of the stock market.

Right now, I have 401ks and Roth IRAs from employers and a rental property in Florida, but my true focus is on my taxable individual stock account and the dividends it produces. When my dividends can cover my living expenses, I will be free to remove the shackles of employment, and live the lifestyle I want. It’s not glamorous, and dividend stocks aren’t sexy, but this is my journey, and I encourage you to join me.

I wasn’t born a natural investor, and I’m not going to “get rich quick.” However, I am going to be a millionaire some day, and I hope you can learn from my mistakes and become rich yourself some day as well. Even then, 1 million dollars isn’t my goal. My goal is to have enough passive dividend income to pay bills and allow me to sleep in and play video games. Just don’t tell my wife that.

Kevin on Google+