Wednesday, December 26, 2012

Dividend/Growth Investing

I started reading personal finance blogs in early 2008, when my wife and I were beginning our mortgage payoff project.  At first I followed blogs focused on debt reduction and mortgage elimination, but over time I branched out to general personal finance topics.  I found a subset of blogs discussing "early retirement" and "financial independence" (FI).  I was immediately hooked.  Even though I didn't have a term for it, in my own mind I had been dreaming of financial independence for years.

After finding the "FI" blogs I started following closely-related Dividend Growth investing blogs, especially as we were nearing the end of our mortgage and were looking forward to saving and investing for the future.  The Dividend Growth (DG) strategy appeals to me on a number of levels, including its simplicity (easy to understand and implement) and its focus on income from dividends (sustainability) rather than capital gains (speculation).  This style of investing has become increasingly popular in recent years, especially within the FI crowd.

Although I appreciate a lot of what the DG strategy has to offer, I don't see myself committing to the most strict DG guidelines when building our own portfolio.  I like the idea of buying stocks that pay dividends, but I don't want to arbitrarily limit investments to a certain minimum (or maximum) dividend yield, or to a certain string of uninterrupted historical dividend increases.  Admittedly, my investing strategy is evolving over time, and I've only been investing in individual securities for about six months now, so this is subject to change.  But at the moment I plan to favor a more personalized, hybrid approach.

At the core of our portfolio I hope to have a foundation of traditional DG favorites, which are blue chips with a solid dividend and a history of commitment to dividends.  I'd like to see about 50% of our portfolio fall into this category, across a wide range of market sectors.  Examples would be JNJ, KO, PG, SYY, and MCD.  Our current portfolio is light in this category because valuations have seemed high to me over the past six months.

Within a number of market sectors, I'd like to complement these DG core holdings with a blue chip competitor exhibiting characteristics more closely associated with a "growth" company, but which I expect to develop into a future DG core holding (based on a developing large moat, a short but robust history of increased dividends, and solid brand).  For example, MCD could be paired with SBUX*.  INTC could be paired with QCOM.  PG could be paired with CHD.  I expect these more growth-oriented holdings to make up another 25% of our portfolio.

* In the first example, I fully expect that in another 10-20 years, SBUX will be as ubiquitous worldwide as MCD is today.  After their growth phase ends and the company matures, I anticipate SBUX will use more of their free cash flow to pay a healthy dividend to their shareholders.  At the same time I expect that MCD will remain a solid investment, but if it falters, I could shift some funds from the old guard (MCD) to the new (SBUX) and not lose an investment in that sector of the market.  If I was limiting myself to classic DG investing entry criteria like a minimum yield (for example 2.5%) or a minimum number of years of dividend increases (for example 10) I wouldn't be able to buy SBUX until some point in the future.  And although we have no idea what the market will do from one year to the next, the general idea behind DG investing is that the market will rise over the long run, successful companies included.  So if I expect SBUX to perform for the long run, why not invest in it today, to take advantage of some capital growth to go along with its dividend growth?

With the remainder of our portfolio (the last 25%), I'd like to focus on high current yield.  This will be a mixed bag, but I expect to see some utilities here, along with REITs and BDCs and more speculative, out-of-favor dividend payers.  This is somewhat over-represented in our current portfolio (AGNC, CLF, EXC, PBI, SNH) but I expect it to become a smaller slice as we continue to add capital and make investments in the other categories.  The goal of this high current yield is to help offset the low yields of the growth holdings.  With the dividend payouts from this group, we'll have additional capital available to reinvest in our overall portfolio, wherever the best current opportunities happen to be.  I am willing to sacrifice some opportunity cost from the slow-growers (like utilities) and the occasional capital loss from some of the more speculative deep value names in order to bring up the average yield of our overall portfolio.

This is still a work in progress, and I may decide to make further revisions to this strategy as time goes by.  I'm also open to any input from my wife as she's been taking a greater interest in the nuts and bolts of our finances and investments.  But for now I'll be working under the guidelines of what I'll call "Dividend/Growth" (D/G) investing -- our personalized version of the classic "Dividend Growth" investing strategy.

Saturday, December 22, 2012

2012 Dividends

Although the clock hasn't yet run out on 2012, we've already received all of our dividends for the year.  The total comes to just over $1,200.  This includes a somewhat questionable special dividend payment from PETS*, but even if we exclude that, I'm pleased with the total of $1,000+ we've received over the past five months.  We didn't start investing in our Early Retirement account until July, and didn't receive our first dividend payment until August.

I'm tracking our dividends on the Portfolio page, on the Dividend tabs in the embedded spreadsheet.  Our future projected dividends are shown on the Summary (and Details) tab in the "Annual Div Estimate" column, based on our current holdings and the most recent announced payout from each holding.

Assuming no major cuts in dividends in 2013, we should see a total payout in the neighborhood of $3,000 based on our current holdings.  Of course we plan to continue adding to the account with each paycheck, so I'm cautiously optimistic we can see a dividend total around $5,000 in 2013 when future purchases are added into the mix.

As the saying instructs, it's risky to count chickens before they hatch, especially given the current uncertainty around the future tax treatment of dividends in the US.  I'll also be the first to admit that some of our current higher-yield holdings are more risky/speculative than the usual dividend growth favorites, but I'm still pleased with each of them and would not hesitate to add to any of them (at the right price) given enough available cash on hand.  Here's looking forward to a prosperous 2013!

*The PETS special dividend pay date is December 24, but I already see it posted to our brokerage account this weekend.

Thursday, December 20, 2012


I've often mentioned my wife when writing, whether on this blog or on my earlier one.  Rarely does a week pass without the two of us having a conversation about our current finances, our goals, our mutual dislike of the 40+ hour workweek, or our progress over time.  She's a great ally.

Until recently, she seemed content to focus on the big picture and let me keep track of the details:  tracking our spending, paying the bills, entering the orders for our investment purchases, and so on.  However, within the past few months she decided to take a more active role in the day to day workings of our household finances.  At her request, I recommended two of my favorite personal finance books for her to read (Your Money or Your Life by Dominguez/Robin and The Millionaire Next Door by Stanley/Danko).  She tore through both books in short order and declared herself ready for more.

Since then, we've had more detailed conversations about specific stocks/companies we'd like to invest in.  We're sharing spreadsheets online which help us plan for specific scenarios instead of hypotheticals.  And we're working toward converting our long-term aspirations into actionable goals to work on during the next five to ten years.  From my point of view, it's been a welcome addition to our already healthy dialogue.

I also invited her to participate in this blog.  She's listed as the other contributor now, using her alias "the Spicy Princess".  I leave it up to her to decide if/when to commit her own thoughts to this space.  Meanwhile I'll continue to work on making more frequent entries (my own goal for 2013).

Tuesday, December 18, 2012

A Reminder

I took the past few weeks off from blogging even though I've had a lot of thoughts rolling around in my mind.  One of my goals when I started this blog back in August was to make shorter, more frequent entries, but so far I've failed at that.  I'm going to renew my efforts to achieve this goal.  I hope that by limiting the time spent on each post, I'll find the task of writing less daunting.

Meanwhile, today I was given a fresh reminder of why my wife and I are on the current quest to voluntarily end our employment as soon as possible.  Despite working for one of the most profitable divisions of the company, my employer announced massive cuts in spending next year which caused a number of people on my team to lose their jobs.  Those affected will be unemployed in two weeks.  This shook up the entire group because it was so completely unexpected.  Rumor has it that the executive management team is concerned about the uncertain political situation as we move into the new year.

Although I wasn't one of those who was given notice of termination, it helps to renew my focus on why it's necessary to develop an income stream independent of our employers as soon as we can.  A diverse collection of many income-producing investments should be much less susceptible to failure than the status quo:  our reliance on the willingness of only two companies to continue to provide the majority of our income.  

We're currently still dependent on our employers to maintain our existing lifestyle, but with each paycheck we're taking steps to increase our capital base and provide for our future replacement income.