Monthly Archive: April 2014

I’ve been playing a lot of Diablo 3: Reaper of Souls lately. One feature that helps you collect better items for your character is being able to change the difficulty. The game boils down to killing monsters so that they’ll drop items for you to use to better kill more monsters. By increasing the difficulty from “normal” to “hard” (and ultimately “Torment”), the monsters become much more difficult to kill, but they also are more likely to drop high quality items.

I can’t help but see the parallels to investing part of your income. “How?” you ask? Let me explain.

Sadly, your day job probably doesn’t involve killing demons (or luckily, depending on how you see it). However, you do have monthly challenges to overcome: bills. Every month, you need to use your hard earned cash to pay for life’s comforts: food, shelter, transportation, and fun. On the easiest difficulty setting, you spend all of your extra money on fun after the other 3 more important categories. This doesn’t get you any closer to financial independence or retirement, but it’s a lot easier to enjoy that instant gratification. If you instead save some of that extra money and invest, life in the short-term is more difficult to enjoy, but you’ll reap long-term rewards.

The best items in Diablo 3 are called “Legendary” items. As you increase the difficulty, these are more likely to drop. However, it can still take a fair amount of playtime in that harsher difficulty before you see your reward.

Your difficulty setting is basically how much of your income you choose to save. If you can save 5% of your paychecks each month, life shouldn’t be too much more difficult, and you’ll be investing toward a stronger financial future. However, if you can save 50% of your paycheck, things get a lot harder, but you’re going to be working toward that “Epic Win” at a much faster rate.

Let me create a scale based on Diablo 3 difficulties to give you an idea.

Normal – 5% saved
Hard – 15% saved
Expert – 20% saved
Master – 30% saved
Torment 1 – 40% saved
Torment 2 – 50% saved
Torment 3 – 55% saved
Torment 4 – 60% saved
Torment 5 – 65% saved
Torment 6 – 70%+ saved

Just like in Diablo 3, it’s about finding the difficulty setting that is the most rewarding while still being comfortable. If you’re dying too much in Torment 3, then maybe it’s best drop it down to Torment 2. Similarly, if you’re getting too unhappy saving 40% of your income and wish you could spend some of that money on movie tickets or video games, maybe you’d be better off aiming to save 30% and treating yourself to some fun right now. Just remember, by reaching for that long-term gratification, you’ll be thanking yourself later in life.

The good news is that it gets easier the longer you play. As you get better items in Diablo 3, you may find that you’re capable of taking on the next difficulty level. When it comes to investing, each dividend stock you buy increases your income, so after a few months of saving 30% of your income, you might start making enough to keep the same standard of living while saving 40% of your income.

Right now, I’m probably closer to Master difficulty than Torment 1, but by the end of the year, I’m hoping to be able to reach that 40% savings rate.

How about you, what difficulty setting are you taking on in investing?

I have some good news and some bad news. First, the good news. I recently got a new job! it represents a significant pay raise, so in the future I will be able to buy more and more quality dividend stocks. However, this job is also going to require me to learn a good deal of new technology and focus most of my extra time towards growing into the caliber of developer I’ll need to be to succeed in this position. This, combined with some tax drama with my wife’s former employer, means that this month be a little short on Buy Smart Never Sell insights. (This is the bad news)

I believe in a week or two I should be able to find the time to get back into a rhythm of posting regularly. For now, I am focusing on finding my new routine and bettering myself as a programmer.

In other good news, March represented a new high in my joint dividend portfolio that we follow on this blog. We made over $30 in dividends in March! This is a huge win after such a short time of investing. There was a time when I’d be lucky to make that much in an entire year in interest. $30 hardly covers all of our bills, but it certainly covers 3 months of Netflix.

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.

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.

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.

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?