I Love This Dividend Investing Thingie

[CritMass]

5o, it may be easy to get discouraged, but you received divies from 4 holdings just this month. Like he said above, it's a marathon, not a sprint. I don't look at my accounts too often, but when I look to see what's come in, it always brings a smile. Hang in there.

[Dividend Watcher]

fiveoh, sorry you're a little discouraged about now. I understand being a little concerned about the total value of your portfolio versus where it "could" be.

I don't know your situation nor your goals and I certainly don't want to try to convince you of something you don't believe will meet your goals. That's asking for defeat. I'll just share my feeble thought process that seems to be working for me.

Trailing the S&P wouldn't be a big issue for me. I'm working on the DGI theory and the thing I plan for most is the rising income stream. If the value of my portfolio goes up, yeah for me because I have a higher asset base. If it goes down, I get to buy more shares to boost the income stream. I reinvest all dividends in both our accounts for several reasons: 1.) it's easy and cheap -- no commissions, 2.) at my wife's dividend rate, it would take a year to collect enough to make it worthwhile right now, 3.) compounding does some amazing things if you can hold on long enough, and 4.) nothing in our portfolios is so overvalued that I wouldn't buy it if I was starting over right now.

Just for the heck of it, I went to Vanguard's site and checked out one of their S&P500 index funds. This is their stats on the fund's home page:

   

The results show they've stayed pretty even with the S&P500 and the lag about corresponds with the 0.17% expense ratio. Not bad.

The part that bugged me was the yield. The current yield is only 1.85%. That's about even or lower than some of the faster growing dividend growth stocks such as CHD, WAG, DPS, UNP, VFC, FDO or TEVA. There's also up-and-coming dividend growth stocks AAPL and AMGN (which I'm keeping an eye on).

I'll share some charts I created in a spreadsheet I made for my wife. I constantly need to have something to show to convince her that saving & investing are going to help in retirement. She's never been a saver -- not that I'm Mr. Thrifty myself. I'm ignoring my own portfolio for now since hers is smaller and has less moving parts. Plus, there were a couple times I went significantly to cash in the last 8 years because I thought there might be an emergency I may have to use it for. That really messed up my returns and wouldn't be instructive. Thank goodness I didn't need it and was able to put it back to work.

First, some background. She worked for a company for a few years when we first married that opened a Simple IRA with an insurance company for her. Before that, she didn't have a penny to her name since she was a single parent when I met her. They managed to get the balance up to around $5K before we decided she should go into a business she's wanted to do since she was in high school. As time went on, I noticed that the account wasn't making much progress with the mutual funds the insurance company offered (their own) and expenses conveniently ate up most of the gains. I waited until the 7 year penalty period was over and transferred it into an IRA at TDA.

This was around 2008 and I was just getting an inkling about dividend growth investing about that time. You know what the market did for the next few years. So, of course, I didn't make the best choices at the time including a mutual fund that seemed to only go down.

Through 2009, I became more knowledgeable about DGI and rearranged her and my portfolios to reflect my newfound "wisdom". I've been able to add small chunks at a time which, as time progressed, was able to do a little more regularly. Now, you have to remember, we're poor folk living in the middle of a corn field and we've never been able to reach the contribution limits for the IRAs. We do what we can do.

This first chart shows the total value of her account with reinvested dividends (blue line) and the cumulative total cash I've been able to sock away in her account (red line).

   

You'll notice, up until Dec 2010, we were under water and the market was kaput. Then, very slowly, things began to build. As enough was accumulated, I was able to add more stocks, more dividends were reinvested and the market, volatile as it was, began to move up. Now, we've got enough of a margin that if the market were to take a 20% drop and the portfolio followed, we'd still be in the black. I'm not so sure the portfolio would follow in lock step since we do have some low beta companies but also some more volatile issues but, either way, I feel comfortable I'll be able to avoid any panic. Did I beat the S&P? I don't know. Haven't bothered to calculate it because I'm just trying to find companies that are solid and able to increase the dividend stream.

Now the more interesting part, to me, is the income stream. The next chart shows the dividends. Each data point is the sum of the 3 prior months so I can compare the same period one year to the next. If I did it monthly, the data points would bounce all over the place since dividend payments are not equal month-to-month. Also, we held VOD for a couple years that paid a smaller dividend in February and the big dividend in August. So the 2 months following the dividend payment includes those semi-annual dividends. That partially explains those 2 bumps in the fall of 2012 and 2013. I also included the trend line (light blue) just to make me look smarter than I really am.

   

As you can see, the compounding plus the gradual addition of more positions is just starting to show up. We've got about 10 years until we have to start thinking about giving the rocking chairs a workout so hopefully it keeps getting better.

I think we're on track. I'm working on a budget now with the bills we have to pay. I've got our estimated SS amounts and I'm using conservative dividend growth rates. I'm underestimating the SS COLAs (1%) and hopefully, using 4.5%, overestimating what inflation rate we'll see. So far it's looking good. Not going to Tahiti for vacation but planning a small trip every year to see the kids and including a car payment in perpetuity. That should add a cushion if we don't spend on either of those. If not, red beans & rice is not such a bad meal a few times a week.

Lastly, (I know, shut up with the damn charts) I just wanted to share something that amazes me whenever I look at my brokerage account. It keeps me focused.

This is from my Gain/Loss page that shows investments and dividend reinvestment for each of my holdings. It's just a list of what CVX has paid me every quarter since I bought the position in the summer of 2010.

   

I know the amounts are small but it's grown from $46 a quarter to $72 in the 3.5 years I've owned it. Of course, it includes the reinvested dividends but still that's quite a jump for me.

If you've read this far, you're a better man than me. I hope I cheered you up, if anything, and maybe help you think your way through this discouragement.

Whatever you decide to do, I think you'll do what's best for you and you'll sleep well without any consternation.

Best!

[Kerim]

Great post, DW! Really shows the value of sticking with it.

[hendi_alex]

Performance over a small slice of time can be quite misleading, though I would expect the increasing dividend stream of a portfolio of DG stocks to continue over time.

I've not tracked long term performance of our modest stock portfolio but do have the following info. Spring of 2009 the NAV was $100k. 0ver the past three years we have taken $36,400in distributions and currently the NAV sits at $180k Those numbers look pretty impressive to me, yet what do they not show. Prior to the melt down in 2007 our portfolio hit a high NAV of just under $180k. So the portfolio has generated a modest 20% in the 2009-2014 period, certainly nothing to write home about. We were fully invested during the 2008/2009 meltdown and the portfolio dropped 44% of its value. It took until sometime in 2011 just to get back to the previous high. I'll try my best not to get caught fully deployed in a collapsing market again! That is why I've incorporated so many shorter term strategies and is why I shun DG types of stocks except when their yields are in the historically high range.

Note: dollar values changed to only represent ratios involved, so as not to provide too much personal data on line.

[fiveoh]

Dividendwatcher: Great charts and I'm glad your strategy is working out for you, with an increasing income stream! I don't doubt that DGI works. I've seen it in the 2.5 years I've been following the strategy. My doubt is whether it will beat(or at least meet) an index fund. As you've shown above, owning an index fund has returned an average of ~7% over the last 10 years. If my DGI portfolio doesn't match or exceed that, I will have lost money AND potential income.

Lets say I need 40,000 in income to retire(not my actual number but its around there). My goal is to get there as soon as possible to retire early. If I follow a DGI strategy and only get 5% total returns, were as the index fund returns 7%, it will take me longer to get there. Some might argue that the DGI strategy will have a higher income stream, so it will get me to my goal faster. Not true. While in the accumulation phase, ALL that matters is TOTAL RETURN. If my DGI portfolio yields 4% and has grown to 800,000 from its 5% total return, now I have 32,000 in income. For my index fund its grown to 1,000,000 from the higher 7% return... now I go sell my index fund and invest in the SAME companies my DGI portfolio has, therefore achieving the SAME yield. Now I have 40,000 of income. The index fund got me there faster. I just made up my numbers to prove a point, but if you do the math you will see it makes sense. I see all kinds of people in SA that don't comprehend this and argue about the rising income stream, creating greater income in the end.

Now what I am unsure of is WILL DGI beat or at least achieve the same TR as the index. If it does and has less volatility, great! If not, I am leaving returns(and income!) on the table. I've seen lots of people/studies that show that the normal person(or hedgefund manager) does not consistently beat the index.... which worries me.

I'm going to give it 5 years and see what happens. I'm halfway into that, and currently trailing the market.

[EricL]

(03-06-2014, 09:11 AM)fiveoh Wrote: I'm going to give it 5 years and see what happens. I'm halfway into that, and currently trailing the market.

I just checked out your portfolio again and in looking at the holdings it makes sense that you've trailed the market the last couple of years because you are concentrated more on low growth/higher yield type of companies.

Just at first glance AFL, DLR, WMT, INTC, LEG, PM and MO have all had recent struggles for one reason or another and have lagged the market.

I think this is a good defensive portfolio that will outperform in a down market and is also a good type of portfolio for someone who is ready to retire off the dividends or someone who is looking to play it safe, reinvest dividends, and expect an 8-10% annual total return.

However, if you are searching more for capital gains than dividend income you are going to need to mix in more higher growth stocks like CMI, PII, SBUX, QCOM, BLK, CHD, ROST, ABC, TJX, UNP, etc. and give up a bit on current yield.

[cannew]

I've said this before, but having more investors switch to Growth Investing, buying ETF's, Trading regularly (buying & selling), buying Preferred shares and/or investing in Mutual Funds or Index funds is great. It allows DG investors to take advantage of the price dips resulting from all the other traders.

I love buying my stocks at lower prices and higher yields. Fully agree with DW; reinvest all dividends and take advantage of compounding.

ps: don't listen to the advice provided, by me and other DG investors!

[fiveoh]

(03-06-2014, 09:31 AM)EricL Wrote:

(03-06-2014, 09:11 AM)fiveoh Wrote: I'm going to give it 5 years and see what happens. I'm halfway into that, and currently trailing the market.

I just checked out your portfolio again and in looking at the holdings it makes sense that you've trailed the market the last couple of years because you are concentrated more on low growth/higher yield type of companies.

Just at first glance AFL, DLR, WMT, INTC, LEG, PM and MO have all had recent struggles for one reason or another and have lagged the market.

I think this is a good defensive portfolio that will outperform in a down market and is also a good type of portfolio for someone who is ready to retire off the dividends or someone who is looking to play it safe, reinvest dividends, and expect an 8-10% annual total return.

However, if you are searching more for capital gains than dividend income you are going to need to mix in more higher growth stocks like CMI, PII, SBUX, QCOM, BLK, CHD, ROST, ABC, TJX, UNP, etc. and give up a bit on current yield.

I need to update that probably but yes you are right. It's full of blue chips, some of which haven't performed as well in the bull market. I'm not really searching for capital gains over dividends... I don't care how the gains come, just that they are there and meet or beat the market(otherwise I'm wasting my time, energy and money here).

Does more risk and volatility = higher returns? Maybe.

I see what you and the rest of the posters are saying about holding up better on a downturn. The market hasn't had a significant one in a while so I just keep watching my portfolio underperform, and wonder if it actually will hold up better in a downturn. I see now that I'm just being impatient.

---

I've updated my portfolio page and also included numbers for my returns vs the S&P. If anyone has any comments/suggestions on it, I'd appreciate it!

http://dividendgrowthforum.com/showthread.php?tid=229

[Dividend Watcher]

(03-06-2014, 08:23 AM)hendi_alex Wrote: Performance over a small slice of time can be quite misleading, though I would expect the increasing dividend stream of a portfolio of DG stocks to continue over time.

Yeah, forgot to mention that in my haste to get to all the other information. A bull market covers a lot of sins in portfolio value. Screw the portfolio value. Look at the dividend stream. My portfolio is doing something similar but I just haven't sat down and compiled all that info like I did with the wife's portfolio.

Just as an experiment, I went to Yahoo and created a comparison chart of the S&P500 and a few of the stocks I mentioned when talking about the Vanguard fund. They all yield around or a little above the S&P right now yet they are all on the CCC list. I did it over about 10 years because that's what fiveoh thought he had left before he wanted to retire. Looks like FDO was the clinker in the bunch.

   

(03-06-2014, 09:11 AM)fiveoh Wrote: If my DGI portfolio doesn't match or exceed that, I will have lost money AND potential income.

Good point. I'm not sure the best way to argue that or even if there is a way. For me, I just need to look at the graph above and see there are several ways to beat the S&P and also include growing dividends. The chart doesn't even show anything about the income stream of any of them. To those I listed earlier I'll add TJX, ROST, GWW, maybe FAST and LECO off the top of my head. Would not investing the majority of your portfolio in lower yielding and higher growth and DGR stocks be the thoroughbreds you need to win the race?

I see your point. You have to do what makes sense to you. For me, I know myself. I don't think I can time myself into or out of the market at the appropriate times, I don't like depending on someone else to determine whether I can make the car payment, and I don't have the skill or knowledge to trade around those high yielders like Alex can. He seems to have found a strategy that works for him.

So, after all my hot air, all I can add is I hope you find something that works for you, meets your goals (especially retiring early) and eases your mind.

[rnsmth]

I am walloping the S&P on the metric that make the most sense to my style, namely dividend yield. Yield without dividend growth can lead one into the error of yield chasing. I do not know what the dividend growth is among the over 400 S&P 500 companies that are currently paying a dividend, but I am sure I am competitive with it - the estimate from

http://www.factset.com/websitefiles/PDFs...d_12.16.13

is for an 8.5% dividend growth rate in 2014. I think I will be around or a little above, with a portfolio current yield of 3.9%

I am satisfied with that performance. I am pleased to be getting close to half of my annual total return goal from dividends

[Robandcindy2]

(03-05-2014, 05:42 PM)hendi_alex Wrote: I don't trust any single investing philosophy, so only would trust DGI strategies for a max of perhaps 25% of the portfolio value. And as a current retiree, would not buy a single DGI stock for long term hold unless it was yielding north of 4%. If younger would probably consider up the the 25% figure, but would only be buying/accumulating when shares were selling at a steep discount to current values.

Alex,
Excellent points. I am interpreting this as having a portfolio of many "types" of assets. I do have to disagree with the buy and hold 4% or greater comment. Here is a decade look at the S&P vs PG, JNJ, KO, and T. All but T are below 4%:

---

Trying To Beat The Market Is A Fool's Errand

This is a wonderful perspective for those concerned with returns.

http://seekingalpha.com/article/1752582-...ols-errand

Chuck is a Rock Star! OK, can't see him on stage with Bruce Springsteen...but he deserves to be on the Rushmore of Investors next to Graham, Buffett, etc.

The best advice I heard recently was to turn off the Talking Heads on TV, turn off your computer, put the newspaper down and go play with the Grandkids. If you have chosen reliable companies with a good track record they will go up and down with Mr. Market but in the end they will most assuredly be UP.

Contemplate this on your Saturday jog:...if you only purchased stocks that were Dividend Champions (25+ years of dividend increases) or Contenders (10 to 24 years of dividend increases) how would you have faired during the Great Recession of 2007-2009? Hint: Many of those companies ARE STILL Champions or Contenders.

http://dripinvesting.org/tools/tools.asp

[WRXodus]

5o, how have you been the last couple months? I've been having the same concerns myself, and trying to find a balance between dividend and index investing while "getting my feet wet".