Monthly Archive: March 2014

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.

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.

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?

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.

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.

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.

Investing for early retirement is actually more about budgeting than investing. Finding a high growth rate on your investment is nice, but by contributing more each month, the end result is dramatic.

If you were able to save $500 a month and invest it with a 6% rate of return, after 30 years you would have about $500,000
If you saved $500 each month but managed to find a 7% rate of return, after 30 years you’d have over $600,000
But, if you raised your savings to $1000 a month, at 6% return, you’d have just over $1,000,000 after 30 years. A MILLION DOLLARS!

Additionally, by adapting to a cheaper lifestyle, you also reduce the amount of money you’ll need when you retire. This makes good budgeting skills a two pronged attack on early retirement.

One common problem most people have with budgeting is knowing how much to plan for. Most people have trouble looking forward, but hindsight is 20/20. Look at your bills from last month, this is the best way to get an idea of what you spend each month. First, compare the total to your income, and determine if you have any money to save at all. If so, great! If not, then it’s time to make some cuts.

I guarantee that if you haven’t been budgeting in the past, there are some things you could cut down on. I’m a sucker for eating out. The weekend rolls around and I want to celebrate with tacos and margaritas. The thing is, I could make tacos and margaritas at home for a fraction of the cost.

You’ll probably see your weak spots when you go through your credit card bill item by item. Once you identify the areas that you can improve, it’s time to make a plan and stick to it. My plan going forward is to only eat out if we’re invited out with friends, and cook at home the rest of the time. This takes discipline, but the most rewarding things in life usually do.

Good budgeting doesn’t stop there though. You need to look back each month and do this same exercise until you’ve got your spending optimized. Now you can invest more money and hit your target number faster.

The big 3 costs that most people have are housing, food, and transportation. These are not only the biggest costs, they’re also the biggest changes to your lifestyle. However, if you can get them lower and get used to the lifestyle, you’ll see dramatic benefits in your budget.

At the same time, small things can add up fast. Consider “cutting the cord” and switching to streaming services like netflix instead of cable. Do you REALLY need a data plan for your phone? chances are you’re within range of an open wifi network more than you think. Try giving people hand-made gifts during the holidays instead of buying them expensive gadgets.

Also, remember that anyone that judges your frugal lifestyle is probably going to be working 20 years from now when you’re waking up at 11:00 AM while your dividends cover your expenses. Money buys time, and time is more valuable than stuff.

George Santayana once said “Those that who cannot learn from history are doomed to repeat it.” When it comes to dividends and dividend growth, those who DO learn from history are blessed to repeat it.

You can learn a lot from a company’s dividend history. Before I get into why it’s important, you need to know where to find a company’s dividend history. First, you can use this site, Enter the stock ticker into the search bar at the top of the page and it will take you to a page that includes the past 10 years of dividend payments (and lots of other useful info). You can also use Google finance or dividata.com to find the history.

Reviewing the dividend history for a stock will reveal their stance on rewarding shareholders. A company that increases their dividend payment each year is dedicated to providing value to you for owning shares of their business. The history will reveal stagnant dividend growth or any past dividend cuts. Those kinds of companies are the ones you want to avoid.

It’s important to note that a dividend may appear to be reduced if the company had a stock split and the history has not been adjusted. A stock split is when a company believes the price per share is too high and grants extra shares to all shareholders and reduces the price. For instance, Coca Cola (KO) had a 2:1 price split in 2012 where the price went from around $80 to around $40, and all shareholders ended up with twice as many shares.

Looking at the history of a stock will also give you insight on how long the company has been increasing their dividend. This is how we know where they fall in the Dividend Hierarchy.

If you get used to reviewing the dividend history for a stock, you should be far from doomed.

One of the most confusing concepts of dividend investing is understanding how and when you get paid a dividend. If you’re new to dividend investing, you may have no idea of even where to look. You might think you just get paid a dividend for owning the stock right away, like a gunshot in Call of Duty. In reality, it’s more like Angry Birds, there’s a delay before you get your payout.

So first, let’s start with the vocab lesson.

The 4 terms you will see on these sites are the “Declared Date,” “Exdividend Date” (or Ex Date), “Record Date,” and “Pay Date.” The most important ones to know are the Ex dividend Date and the Pay Date. It’s very simple: if you own a stock when the opening bell rings on it’s Exdividend Date, you will be paid the dividends for each share you own on the dividend Pay Date. So if MCD has an Exdividend Date of 2/27/2014, for you to “Capture the dividend,” you must buy shares on 2/26/2014 or earlier. Then, on their Pay Date, 3/17/2014, you will receive dividends for each share you owned on 2/27/2014.

It should be noted, that for a dividend to be “qualified,” and thus taxed at a lower rate, you must own that stock for 60 days before and after the Exdividend Date.

The “Record Date” is usually a day or so after the Exdividend Date, and this is when the company looks at their records from the Exdividend Date and determines who is eligible to receive a dividend payment. The “Declared Date” is the day the company announces its next dividend. For the most part, these dates are not really relevant to the standard dividend investor, and can thus be ignored.

When I need to find out when a specific stock pays a dividend, I look on either dividend.com or dividata.com. These sites also have features that will let you search for stocks that have upcoming Exdividend Dates.

There is an investing strategy called “Capture the Dividend.” Where an investor purchases the stock the day before the Exdividend Date and then sells afterwards. This allows them to receive the dividend payment and potentially reallocate their cash elsewhere, maybe to capture another dividend. The problem is that on the Exdividend Date, the stock price usually “gaps down” by the amount of the dividend payment. For our example of McDonalds, if their dividend payment is $0.81 per share, and the closing price on the night before the Exdividend Date is $95.00, the opening price will be $94.19 the next morning.

This is not considered a safe or reliable strategy because there’s no guarantee that the price will move back up to or above the price you bought it at before receiving the dividend. Additionally, since this dividend is not “qualified,” you will pay taxes on it as capital gains (which is a higher rate). The most tried and true strategy for quality dividend stocks is “Buy and Hold.”

Well, hopefully you have a much better understanding of what you’re looking at when analyzing a stock.

Somedays The life of the dividend investor is smooth sailing. You’re under budget for the month, your dividend checks are coming in, and nothing can get you down. But then there are those other days. The days that nobody gives you any respect at work, or best laid plan didn’t work out. You feel bummed out and your will power is at an all time low. These are the days that can discourage you and make you want to spend any extra cash you have on hand on something to make you feel better.

It can seem really easy to just splurge and buy shiny new toys and expensive dinners to feel better about life. Unfortunately, the easy way out is a step in the wrong direction. A bad day at work should motivate you on your investing journey. Instead of thinking of your portfolio as a collection quality dividend paying stocks, think of it as “F U Money.” In the future, when your dividends are covering your expenses, you can just walk out on that job and never look back. So don’t go to Walmart and buy a new flatscreen TV, login to your broker account and buy some shares of Walmart (WMT). $750 is better spent on 10 shares of a company that’s going to pay you back $4.80 every quarter for doing nothing at all.

In some ways, a dividend stock portfolio is “Crappy Job Insurance.” Having that extra asset that pays you whether you woke up early or late, protects you from needing to work at a job you don’t want to forever.

At the end of a bad day, you probably just want to sit on the couch and “veg out.” It’s going to take whatever will power you have left, but get off the couch and exercise. Getting a good workout can really help improve your mood. Working out causes your brain to release endorphins, adrenaline, serotonin, and dopamine all of which make you feel more positive and happy. Plus, staying healthy is going to save you money later in life.

I wish I could tell you that I have an easy answer for dealing with bad days as a frugal investor. Unfortunately, there are going to be days that suck, but the truth is that the average American bad day is still way better than a good day in other parts of the world. Things could always be worse, but when we walk the difficult path of making the right choices, we can turn our lives around for a better day tomorrow.