Monthly Archive: February 2014

They say “You can’t see the forest for the trees.” In other words, it can be easy to lose sight of your goals while focusing on the tactics. For us dividend growth investors, and most other investors for that matter, we do what we do as a means to an end. Financial independence (FI) and/or early retirement (ER) are the primary goals for all our research and hard work. It can be easy to forget that while diving into earnings reports and dividend history. This is why it’s important to set a clearly defined goal.

A common goal across the investment blog community is to achieve FI/ER by the age of 40. But what makes 40 so special? I asked some of the people who inspire me to share their thoughts.

Joe at retireby40.org, who is already enjoying early retirement, said “I think 40 feels like the mid point in our lives. If you’re not happy with your life by then, you need to make a change.” Many of us spend the majority of our time working at jobs we don’t love to cover the costs of living. We only have so much time on this planet to enjoy, so if there’s a way to enjoy it more, why not pursue it? Joe saved everything he could to invest in a number of different strategies including dividend investing, Peer-to-Peer (P2P) lending, and real estate. In July 2013, these investments empowered Joe to leave his corporate job and live life on his terms before he even actually turned 40.

Achieving that freedom while you can still enjoy it is important too. Jason Fieber at dividendmantra.com says “I think 40 is a popular age because it’s young enough to still live life to its fullest, while also being old enough to be experienced enough to know exactly what you want out of life.” This is why setting a goal early and working towards it is so important. “… if you start working at 22, and retire at 40 you’ve got 18 years to build a large enough portfolio to live off of.” Jason’s journey began in 2010, 2 months before his 28th birthday. His plan: “to save more than half of my net income for the entire 12-year period and invest in high quality companies that pay rising dividends at attractive valuations.” So far he has built a portfolio valued at almost $150k, which many consider to be “Critical Mass.”

Setting the goal is important, but knowing what you want to do with that freedom is important as well. Tim at theconservativeincomeinvestor.com invests to have the freedom to never be stuck in a job he hates and to give back to society. His goal would be better defined as financial independence rather than early retirement. In Tim’s eyes, “Financial independence lets you become more philosophical and focus relentlessly on personal happiness and benefiting society without getting caught up in the rigmarole of the paycheck-to-paycheck lifestyle.”

40 is such a popular target age because you’re young enough to still enjoy the money. What good would all of your hard work and saving be if you were too old to enjoy it? You always hear retired people say “youth is wasted on the young” but what they really mean is “I wish I knew what I know now when I was younger.” This is why the best time to start saving money and investing is NOW. Set a goal for yourself, and be clear how you want to achieve it. What age do you want to retire by? How much money will you need? How much do you need to save each month to achieve that? Once you have your plan, start acting on it. For me, this means buying dividend paying stocks that raise their distributions each year like MCD and TGT.

The red and yellow titan of fast food, McDonalds is a brand that no American is unaware of. McDonalds (MCD) is also a dividend growth stock that has been increasing its dividend payout every year for over 35 years, making it a Dividend Aristocrat. The reason they are so successful is not the quality of food, but the systems they have in place to run like a well oiled machine. You can get a better hamburger at several places I personally enjoy, but when a manager quits at those establishments, the efficiency of recovery is nowhere near what McDonalds is prepared for. Additionally, their marketing has established not only a loyal customer base, but a brand that is known the world over.

I just bought 10 shares of MCD at $95.90 per share.

Let’s talk numbers. First of all, the dividend yield is great right now at 3.38% yield on cost. Over the past 10 years, the dividend has grown about 4.4% per year. Which isn’t all that impressive, but the price has also grown by an average of 18% per year over the same time frame. This means, that despite the solid yield, they are still making use of the rest of their capital to grow the business. The payout ratio is sitting at 56%, which is under the level I consider to be too high, and given their growth, I would say there is little risk in this regard. According to Google, their PE Ratio is 17.25, which is safely below 20. If you invested $1000 in this stock 10 years ago and reinvested all dividends, you would now have about 62.67 shares worth $6013.81 paying out $195.53 dividends each year.

When you look at these numbers, it begs the question “Why wouldn’t every dividend investor want to own this company?” Well, in my opinion, they should. However, given the unhealthy nature of the majority of their menu, McDonalds can get a lot of bad press. On the moral scale, MCD comes in a little heavy, but honestly not as much as a tobacco stock or oil stock in terms of damage to people and the planet.

So the next time you see a news story float around about how unhealthy McDonalds is, check the stock price. Because you might be able to pick up an outstanding stock at a discount due to some short term price noise.

As I often do on Mondays, I started thinking about what I want to do with my life. Normally in my free time, I either play or try to make video games. The thing about making games is that you pour your heart and soul into something for people that will try their best not to pay you for it and then hate you for it. So, I decided working on a sort of “side gig” might align best with my goals.

I’ve read good things about making a niche site, I can tell you from the analytics of this blog, that this site doesn’t have much traffic and isn’t much of a niche site. Considering the work I put into this site, I would want my niche site to be low maintenance. I came up with some goals for this project:

1. Do as little work as possible. Beyond research and basic wordpress setup, I want to outsource most of the effort. I will primarily be using Fiverr.

2. Budget: $100. Given that I intend to outsource most of the work, I also want to set a budget so that if it fails, it’s not a huge loss.

3. Fail Faster. This is an important lesson in development. No idea starts good, the faster you fail, the faster you make it to your good idea. So this niche site needs to be pushed out quickly so I can determine if it’s worth pursuing more sites.

I’ll keep you updated with my process as I’m doing it.

When you first start researching the investing strategy for you, you’ll see hundreds of advertisements about “penny stocks.” As such, it can seem that penny stocks are the most popular investment strategy. While it’s true that they are the most advertised, that does not mean that they are the best and most successful long term strategy. As I love to do, I’ll compare penny stocks to dividend growth investing by using video game analogies.

Investing in penny stocks is the practice of purchasing stocks that have such low prices, that tiny price movements can mean massive changes in your balance. Dividend investing is all about finding high quality companies that distribute some of their profits to shareholders in the form of dividends. You try to find companies with a good history of dividend distribution increases as well. For more information check out my article on dividend valuation.

The dividend growth investor is patient, and willing to research every move they make to maximize success and minimize risk. I like to think of the dividend investor like Solid Snake. As you work your way through a compound of enemies, you slowly pick your targets and neutralize them without being compromised. Even if you make a mistake and trigger an Alert, you can rely on your past success to provide a safe haven and hide out until it’s safe to make your next move. Dividend investing follows a similar strategy, you pick a target, observe its strengths and weaknesses, and then make a move to buy it at the opportune time.

The penny stock investor is looking for a big payout within a short time with no regard for risk. Trying to win with penny stocks is like playing Ikaruga, it feels great when you’re doing well and working on that high score, but then it can all end in an instant. One thing goes wrong and you have to start all over again, and many times, it’s something you don’t even have control over. Penny stocks are the same, except there’s little skill, mostly speculation and gambling, and you can face immense losses when something doesn’t go right.

Your life isn’t a quick game of Ikaruga, it’s a long long game. On that long of a timeline, taking too many investment risks will not pay off. There’s a reason the smartest and richest investors in the world buy and hold high quality companies, because it works.

I found a fun article the other day about Warren Buffett. Apparently, he made a bet with Protege, a hedge fund management firm in New York, back in 2008 that over 10 years he could outperform their best funds by just investing in a low-cost index fund that follows the S&P 500, the Vanguard 500 Index Fund Admiral Shares (VFIAX). Buffett is wagering $320,000 in Treasury Bonds that they hedge funds are not worth the fees. After 6 years, the VFIAX is up 43.8% and the hedge funds are only up about 12.5% after fees. (Source)

I thought it might be fun to track something similar. I am invested in 2 dividend growth funds with Vanguard. I decided to look at the top holdings for each and noticed that I owned positions in my taxable account for about half of them. So I thought it might be fun to track how the funds perform compared to the underlying securities I am invested in elsewhere.

The first of the funds is the Vanguard Dividend Growth Fund (VDIGX). At the time of writing this, the stocks I own in the top 10 holdings are as follows:
MCD, MSFT, MRK, WMT, JNJ, LMT
Henceforth these will be tracked as KFund1

The second fund is the Vanguard Dividend Appreciation Index Fund (VDAIX). At the time of writing this, the stocks I own in the top 10 holdings are as follows:
PEP, PG, WMT, KO, XOM, CVX, MCD, MMM
Henceforth these will be tracked as KFund2

It got a little complicated since I own KO in both my joint account, which I track on this blog, and my individual account. I decided to just use the position in my Joint Account for tracking. Since the totals for the individual investments and the investments in the funds are completely different, I’m just going to be reporting the percentage changes each month. There’s no point in sharing the actual balances publicly since what matters is the growth, I’ll be tracking the cost basis offline.

I will have an update on the value changes next month. In all cases, dividends will be automatically reinvested.

February has just started, but I already have some news. This morning, I bought 25 shares of KO and 14 shares of MSFT. For the reasons why, see here and here.

This adds $43.68 to our annual dividends. Which doesn’t sound like much, but after compounding over the next 10 years, this small investment will be paying out over $100 a year if the trends of the past 10 years continue.

I’m also starting a new 30 day challenge. I’m going to try to draw something every day. It’s been a long time since I did any sketching, so I’m way out of practice. My wife has also decided to join me with a 30 day challenge of her own. She’s going to try to learn to knit.

As for my last 30 day challenge, I kept up with my competitive pokemon battles pretty well. Unfortunately, by the end of the challenge it really started to lose its luster. Everyone above the average rating was using the same handful of overpowered pokemon, which made fighting them very frustrating and rather uninteresting. It’s really a shame that the developers would allow such unfair advantages in a game that is supposed to provide a competitive experience. It made me appreciate a community known as Smogon, much more. They have rules in place that ban certain overpowered threats from certain tiers of play. This allows more variety and strategy in the gameplay.

There is a lot of hate over Smogon in the community, but from a game design aspect, they’re really just fixing a broken system.

The final stock I’ll be analyzing before making my next stock investment in early February is The Coca-Cola Company (KO). I currently already have a position of KO in my personal portfolio, and it has made little headway outside of dividends since I made my entry. When I consider the history of this stock, I won’t just be talking about the past 2 years I’ve owned it.

The Coca-Cola Company has had an amazing history, with 51 years of dividend increases, it is a Dividend King.

Their dividend distributions have risen over 9% in the past year, and about 9.3% per year for the past 10 years on average. Right now, entry yield is 3.01% and they’re just about due for another dividend raise in the middle of February.

The current EPS is $1.93 putting the PE ratio at 19.26 which is just below my threshold of 20. I think this stock is set to take off over the next year, making now the ideal time to buy.

KO’s payout ratio is currently 53.6% which gives them space to increase distributions and is below my threshold of 65%.

If you invested $1000 in The Coca-Cola Company 10 years ago and reinvested all dividends, you would now have about 71.36 shares worth $2654.59 paying out $79.92 dividends each year.

The Coca-Cola Company also has a significant economic moat as the provider of both the #1 and #2 top soft drinks. Source

This concludes my analysis of stocks for this next purchase. Today Target fell into the $55 range, and it did so a little sooner than I thought it would, so I intend to stand by until after whatever damages result from their quarterly earnings report. Right now, KO is my favorite, so I’ll probably be purchasing 25 shares of KO. MSFT is my second favorite right now, so if I can swing it, I’d like to buy 13 shares of MSFT as well.