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05-07-2014, 08:33 AM
(This post was last modified: 05-07-2014, 08:34 AM by EricL.)
The Chowder Rule is nothing more than attempt to take away the focus on things you can't control (price changes) and invest with a mindset on something that is somewhat predictable (yield + yield growth).
If 30 years from now I want to be earnings $3000 per month in dividend income, I have $10,000 in current cash to invest and $500 per month to invest, I can input whatever dividend yield and growth needed to reach that level.
On the http://dripinvesting.org/Tools/Tools.asp, there is a link to " DCA Model Calculator C" that provides a spreadsheet to do this.
With a $10,000 investment and a 3.5% initial yield, growing share price and dividends at 6.5% annually (Chowder # = 3.5+6.5 = 10) you will have dividend income of $36,000 per year at the end of year 29.
I try to buy stocks with a Chowder Number of at least 12 to give myself a little bit more boost to my annual dividend increases. So far it has been working great in my portfolio. Using a 3% initial yield with 9% dividend/price growth I would have $45K in income at the end of 29 years.
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(05-06-2014, 08:27 PM)Concasto Wrote: Adding dividend growth rate with dividend rate will give you the total return if you assume a constant yield. A constant yield of 3% on stocks like JNJ, KO, CLX isn't out of the question, but the comparison really only applied to matured companies. A stock with a yield of 1%, growing at 20% a year, shouldn't be compared to a KO that pays 3% and grows 6% a year.
KO's 3, 5 and 10 year dividend growth rates are all significantly higher than 6%. Just saying.
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Here's a good article that was posted on Seeking Alpha today talking about the Chowder Rule.
Basically, in a perfect mathematical world, an equal Chowder # provides equal total returns with the reinvestment of dividends.
The trick is finding the high quality companies with good moats and good management that are shareholder friendly who can provide the results over a very long period of time to provide those mathematical returns.
I find it much easier to find stocks in the 1-3% yield, growing at 8-11% than I do finding stocks in the 10-12% yield growing at 0-2% over the long term. Which is why I have many more KO's, CLX's and GIS's than I do LNCO's, SDRL's, or DX's in my portfolio.
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That is a good article -- I had missed it, thanks Eric. I'm still not convinced of the usefulness of the number, but that article does give some interesting support, I think, to the idea that there is some real appeal to higher starting yields.
One big issue with all of these analyses is, of course, assuming that yields and dividend growth rates are going to persist far into the future. The odds of a company raising the dividend by 12 percent per year for the next 30 years seem pretty remote to me. According to Robert Allen Schwartz's site, only one company has managed to do it for the past 13 years (ROST).
Makes me even more inclined to appreciate a high initial yield as a "bird in the hand."
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(06-20-2014, 04:47 PM)Kerim Wrote: That is a good article -- I had missed it, thanks Eric. I'm still not convinced of the usefulness of the number, but that article does give some interesting support, I think, to the idea that there is some real appeal to higher starting yields.
One big issue with all of these analyses is, of course, assuming that yields and dividend growth rates are going to persist far into the future. The odds of a company raising the dividend by 12 percent per year for the next 30 years seem pretty remote to me. According to Robert Allen Schwartz's site, only one company has managed to do it for the past 13 years (ROST).
Makes me even more inclined to appreciate a high initial yield as a "bird in the hand."
According to his site, there have been 71 companies with a dividend CAGR of over 10% over the last 30 years. It may not be 10% every year, but good years even out the bad with many companies. There are plenty of opportunities for 12%+ Chowder numbers when looking at the 2% yield, 10% growth rate type of companies.
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06-20-2014, 09:23 PM
(This post was last modified: 06-20-2014, 10:01 PM by KenBob.)
I agree that this is a very good article.
The key assumption used in the article is that the dividend growth rate equals the earnings growth rate, which also equals the price growth.
Chowder Number = Dividend Yield + Price Growth = Total Return
This article is very revealing, especially to the retiree. I added this comment:
>The 12/0 strategy generates more total income than the 4/8 strategy until year 29. If you are retired, you are unlikely to live more than 29 additional years.
Comparing the 12/0 strategy to the 8/4 strategy yields a revealing result. The 8/4 strategy does not match total income from the 12/0 strategy until year 23.
These are examples of why high current income is much more valuable to a retiree than high future income.< http://seekingalpha.com/article/2279653-...t-35925663
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I recently subscribed to F.A.S.T. Graphs and the results were eye opening. I'm 55 and my window to retirement is 4.5 years minimum and 9.5 years maximum. It was clear that my carefully constructed portfolio of relatively low yielding high DGR stocks would be great if I was 30, but was obviously not going to get me where I would have the flexibility to retire when I wanted (really would like to have 10% return on cost). As a result, I had been branching out to REITs and BDCs to start with yields that are much closer to my desired return on cost. So far I've picked up O, OHI, STAG and DLR in the REIT area, and MAIN and PFLT in the BDC area. This thread, and Be Here Now's post above, really drives home that fact that I need to be looking harder at higher yielding lower DGR equities. I'll keep the positions I already have (UNP, WAG, CMI etc) but will be investing more of my cash stash in equities that get me a head start on my desired return on cost. I have lots of work to do, as I've not spent a lot of time in this end of the market...
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(06-21-2014, 08:11 PM)Ok Red Wrote: I recently subscribed to F.A.S.T. Graphs and the results were eye opening. I'm 55 and my window to retirement is 4.5 years minimum and 9.5 years maximum. It was clear that my carefully constructed portfolio of relatively low yielding high DGR stocks would be great if I was 30, but was obviously not going to get me where I would have the flexibility to retire when I wanted (really would like to have 10% return on cost). As a result, I had been branching out to REITs and BDCs to start with yields that are much closer to my desired return on cost. So far I've picked up O, OHI, STAG and DLR in the REIT area, and MAIN and PFLT in the BDC area. This thread, and Be Here Now's post above, really drives home that fact that I need to be looking harder at higher yielding lower DGR equities. I'll keep the positions I already have (UNP, WAG, CMI etc) but will be investing more of my cash stash in equities that get me a head start on my desired return on cost. I have lots of work to do, as I've not spent a lot of time in this end of the market...
The only thing I would say is to not reach for yield. The BDC's look nice with the high payouts, but neither have a very long track record so its hard to say what will happen to them in another bear market. I do like your REITs though as I own all but STAG myself.
(06-21-2014, 08:11 PM)Ok Red Wrote: I recently subscribed to F.A.S.T. Graphs and the results were eye opening. I'm 55 and my window to retirement is 4.5 years minimum and 9.5 years maximum. It was clear that my carefully constructed portfolio of relatively low yielding high DGR stocks would be great if I was 30, but was obviously not going to get me where I would have the flexibility to retire when I wanted (really would like to have 10% return on cost). As a result, I had been branching out to REITs and BDCs to start with yields that are much closer to my desired return on cost. So far I've picked up O, OHI, STAG and DLR in the REIT area, and MAIN and PFLT in the BDC area. This thread, and Be Here Now's post above, really drives home that fact that I need to be looking harder at higher yielding lower DGR equities. I'll keep the positions I already have (UNP, WAG, CMI etc) but will be investing more of my cash stash in equities that get me a head start on my desired return on cost. I have lots of work to do, as I've not spent a lot of time in this end of the market...
There has been lengthy and heated discussion on Seeking Alpha about the need, or lack thereof, to get some experience under your belt when transitioning from total return investing during the accumulation phase, to dividend investing during the retirement phase. Some think that because the mindsets are so different, that it is not possible to quickly convert your TR portfolio into a well thought out dividend income portfolio. Others think that, with so many publicly published dividend portfolios that all one has to do is pick one and use it as a guide.
I think it can be similarly argued that either a) you need to take time to learn how to convert from a low yield high growth (LYHG) portfolio to a high yield low growth (HYLG) portfolio, or b) you can pick and choose from the many publicly published HYLG portfolios and get up to speed quickly.
I have been feeling (blundering) my way into the HYLG phase for 3+ years, the length of time I have been retired. I am still learning, and I spend more time doing this than anything else. I have found that there are so many high yield alternatives, with so many details to be grasped and owned, that a quick conversion has not been possible. I think your decision to start on your learning curve with plenty of time to get up to speed, make mistakes, and learn from them, is a prudent approach.
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(06-21-2014, 10:25 PM)EricL Wrote: (06-21-2014, 08:11 PM)Ok Red Wrote: I recently subscribed to F.A.S.T. Graphs and the results were eye opening. I'm 55 and my window to retirement is 4.5 years minimum and 9.5 years maximum. It was clear that my carefully constructed portfolio of relatively low yielding high DGR stocks would be great if I was 30, but was obviously not going to get me where I would have the flexibility to retire when I wanted (really would like to have 10% return on cost). As a result, I had been branching out to REITs and BDCs to start with yields that are much closer to my desired return on cost. So far I've picked up O, OHI, STAG and DLR in the REIT area, and MAIN and PFLT in the BDC area. This thread, and Be Here Now's post above, really drives home that fact that I need to be looking harder at higher yielding lower DGR equities. I'll keep the positions I already have (UNP, WAG, CMI etc) but will be investing more of my cash stash in equities that get me a head start on my desired return on cost. I have lots of work to do, as I've not spent a lot of time in this end of the market...
The only thing I would say is to not reach for yield. The BDC's look nice with the high payouts, but neither have a very long track record so its hard to say what will happen to them in another bear market. I do like your REITs though as I own all but STAG myself.
Eric, I'm pretty conservative - I am holding 40% of my portfolio in cash right now, and have another 30% in individual issue investment grade corporate bonds. My two BDC's make up a whopping 3% of my portfolio - I'm simply dabbling my toes in the water. I picked the two that appear to be high quality and will watch them until I feel more comfortable with the businesses and can get a better feel for the DGR of each. However, the current payout for each is extremely close to my 10% yield on cost goal, so I have high hopes.
I have a much better feel for the REITs and those now make up almost 8% of my portfolio. I've tried to get a high quality holding in each sub-sector... except mREITs. I'm not sold on those at present. I'm continuing to do research and would like to get a couple more high quality holdings in that area.
Be Here Now - I can see why this migration is the subject of much debate. My current LYHG holdings are companies that most people have heard of and are fairly easy to understand. Some of these HYLG companies are... different. It's gonna take a while to make the transformation, but in the meantime I'm going to keep my current holdings and let them grow.
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I created a spreadsheet that can model principal and income growth based on the assumptions you enter about DGR and capital appreciation, and is flexible enough to model a high growth stock that slows down over time, year by year. There are actually two calculators in the spreadsheet so you can compare two scenarios side by side. I posted it in the resources forum.
http://dividendgrowthforum.com/showthread.php?tid=600
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