Adjusting to dividend growth investing

[Slowlife]

I’m new to this site, and new to dividend growth investing. I really like the info and strategies posted here so I wanted to introduce myself and see if you all had any advice to help me get started. A little background on myself:

I started investing in March 2009 (lucky timing) when I was 24. I took my tax return of about $1000 and started playing (basically gambling). I guessed at stocks based on “tips” I read online and since that was basically the market bottom, everything I bought went up in value. For a while… The first time I got burned was when I bought etrade (ETFC) based on internet rumors of a buyout. My investment tanked and didn’t sell right away because I let myself get emotional about it. I didn’t want to take a loss so I held it and continued to watch it drop. I eventually sold it for a loss to offset my gains at tax time. That was/is the hardest lesson for me to learn. Don’t get emotional. If you’re wrong, admit it, and move on.

I experimented with day trading, then penny stocks, then swing trading. Day trading wasn’t for me because I’m sure if I divided my time invested by my profit I’d have made about $0.15 an hour… Penny stocks were great for a month. Then I wiped out most of my gains in about a week. I did like swing trading. My strategy was simple. I bought stocks that had dipped on bad news, waited a few days or weeks for it to rebound then sold it. I did that from 2010-2012 and more than doubled my portfolio (without adding much fresh capital).

In 2012 I took a new job that paid better, but I all but stopped monitoring my stocks because I was at work when the market was open and the job took up so much of my time. I kept 3 positions (WEN, SXL, & KMP) and pretty much left it alone. I originally bought these as swing trades, but ended up keeping them for the dividend (and since SXL and WEN pretty much went straight up from when I bought them). In August 2012 I took the rest of the cash out of my account, along with all my savings and bought a 2 family house. I spent the next 10 months fixing it up and sold it a year and a day after I bought it for $91K more than I paid for it. After deducting my expenses, taxes and fees I was left with almost $38K in profit.

I paid off my two cars, leaving me with no debt and began looking for another house to flip. Bargains were hard to find because of how crazy the housing market was here in Massachusetts, but I finally found a great deal and closed on the place in June. During the time I had signed the p&s, but was waiting for the closing I started paying attention to my Scottrade account again.

The big (expensive) projects on the house are mostly done. My savings is all but depleted, but the only big expense I have left is paying off the interest free credit card I put the appliances and kitchen cabinets on (currently has a $5000 balance I have to pay by December when my 0% interest ends). I’m currently adding $100 a week to my Scottrade account and will up that to $200/week after the credit card is paid off.

My hope is to pull equity out of this house to buy an income property, though I may have to flip this one too and then do one more house before I can swing a second. My long term goal is to own my main residence (or a least have a very small mortgage) and start building a portfolio of rental properties and flips. While I’m working toward that goal I’d like to build a dividend growth portfolio. And eventually use the income from stocks and rental properties to live off of and pursue my passions (cars, racing, and writing).

A few months ago I discovered the Dividend Mantra blog (which is what lead me here) and it opened my eyes. I’ve followed his lead by cutting my expenses as much as possible (as reasonably possible for me at least, I’m not as hard core as he is). He recently wrote an article about how life slows down when you have the financial freedom to do what you enjoy. That’s what I want. That is my main goal now. I really enjoy his blog because I feel he and I have a lot of similarities (we both work(ed) in the automotive industry (high stress, long hours), we both enjoy writing, and we both want financial independence).

Link to that post:
http://www.dividendmantra.com/2014/08/slow-down/

My new goal is to slow life down. I’m tired of the rat race and being stressed out about it. I’m only 29, but I started working 2 jobs at 14 (to get around the labor laws) and have been working full time since I was 18. I was able to work my way through college. It took five and a half years, but I have no student loans. And I was able to save up enough to put 5% down on my first house by 27. I currently work 45-55 hours a week at the day job, then work nights and weekends on my house or doing side work. I don’t necessarily have to “retire” early anymore, I just want to work because I want to, not because I have to, and do the things I enjoy.

So on to the portfolio. My strategy/goal is pretty simple:

I want to build a diversified portfolio of stocks that pay a dividend and will continue to grow that dividend.

I want the average yield to be 4%+ (preferably over 5%) so regardless of what the market does I should make a decent return. I’m only 29 so I’m willing to take some riskier investments to raise my overall yield, however I want to build a base of reliable long-term dividend payers.

Capital appreciation. I don’t mind riding out a dip in price as long as there’s a nice dividend coming my way, but I’m greedy! This is where I seem differ from a lot of dividend growth investors. Especially while I’m building my portfolio, I want my stocks to increase in value as well as pay me a dividend. When I’m invested in enough companies, then I will be less concerned about this as I will be able to average down on companies I still like, by adding to existing positions when their price drops.

Based on my current income and amount I’m able to save I’d like to put $1000 into each new position I add until I am comfortable with the level of diversification I have. Then I will consider adding to current holdings. By the end of the year I plan to save at least $1000 a month so I can buy at least one new position each month.

I like to buy good companies that are near their 52 week low with a promising outlook and an attractive entry yield.

I will sell a position if the dividend is cut or I believe there is a better investment to use that capital for.

Currently my portfolio looks like this (sorry the numbers line up so bad, I'm not sure how to post a spreadsheet):


Stock/shares cost current value yield on cost current yield weight
WEN 225 1008 1819.125 4.46 2.47 18.06
SXL 50 853.23 2421 8.56 3.02 24.04
KMP 12 906.6 1186.8 7.36 5.62 11.78
ARR 260 969.8 1092 16.09 14.29 10.84
RGR 20 996.4 1006 3.61 3.58 9.99
CASH 2546.46 25.28

TOTALS 4734.03 10071.385 8.02 5.78


I don’t like holding cash, but I don’t want to rush into an investment either. Part of me is worried about a broad market pullback. I’d like to be able to buy when that happens, but who knows when that will be. I’m always a little gunshy about buying and have missed several great opportunities because of it. This is something I need to work on and what I like about the dividend growth strategy. I don’t need to time the market as long as I’m getting a decent dividend from a good company. Valuation is important, but I can still reach my goals with consistent dividend payments and growth.
I recently read an article about reinvested dividends and timing the market. I can’t find it right now so my horrible summary of that article is 2 people invested in Coke (KO) in the early 90’s. Both reinvested dividends, but one held the stock, while the other sold at the top around 1999 I think, and bought back in at its low years later. The person who timed the market perfectly still made significantly less than the person who held it through the long price drop and continued to receive and reinvest the dividend. While I still don’t want to see a price drop in a stock I own, I feel better knowing that long term I’ll make out because of dividends!
That’s the long way of saying I want to keep buying stocks regardless of what the market is doing. The stocks at the top of my watch list are:

GE currently at $25.64 with a 3.43% yield. I’m looking to buy around $25
MCD currently at $93.79 with a 3.45% yield. I like MCD under $93
T currently at $34.74 with a 5.3% yield. I want in under $34.
TGT currently at $58.20 with a 3.57% yield. I like TGT and I think long term it will come back, but I think there may be a better buy opportunity before things turn around.
FSC currently $9.70 with a 11.34% yield. It’s risky, they have cut their dividend, and their payout ratio is not good, but it seems to trade in a pretty tight range and I think the high yield may be worth the risk as long as I keep a close eye on it. I almost bought in around $9.40 a while back, but missed out. I’m on the fence at its current price. I think I may buy if it dips into the $9.50’s.
PETS currently at $14.01 with a yield of 4.85%. I like PETS at $13.75

I’m thinking about selling $1000 worth of WEN to buy MCD. I’ve had a great run with WEN, but I like MCD better for the long term and it has a higher yield. If I take my original investment out of WEN, then emotionally I can look at it as free money from the profit I made on the stock. That also gets me into MCD and leaves my cash for other purchases.

I’d also like to sell ARR for a less risky REIT. I love the big monthly dividend, but that stock is testing my tolerance for risk.

That was a really long first post. I am really excited to join this forum and to start this dividend growth journey.

[Turvok]

Welcome to the forum!

You are kind of in the same position as myself with the real estate. I don't flip houses, but I do have one investment property and am trying to get the funds to get another one or two. I consider that a good aid to a diverse stock portfolio.

As for the stocks themselves, you are young and there is nothing wrong with a higher yield. You won't find too many dividend champions with a 4-5%. Personally, I have a few REITs and have been contemplating an MLP, but the rest of my portfolio are dividend champs. How many total stocks are you looking to have in your portfolio? MCD and TGT are great stocks. TGT has said they plan to increase their dividend quite a bit over the next few years. T, I own it and I am at a crossroads with it. The initial yield is nice, but their growth is only 3% or so a year. That's pretty terrible. Plus, the actual stock price hasn't moved much lately either. I am hoping the deal with DirecTV helps bring in much needed income.

One thing with DGI is the time held. Like you mentioned with your KO reference, it comes down to time. Now, imagine if you had free cash and added to each position when each stock is low. You won't be able to time the market, just look into dollar-cost averaging.

Good luck to you.

[earthtodan]

Slowlife, welcome to the forum, and great first post. It sounds like you've accomplished quite a bit by age 29. I'm 32, and the idea of buying a house has barely crossed my mind.

On a side note about cars, have you done track days? I've done a bit of racetrack driving (both cars and motorcycles) and let's just say it's the opposite of investing, i.e. the process of turning money into CO2.

If you've read a bit about dividend growth investing you're probably aware that chasing yield is considered a common mistake. I admit it's tempting and I agree with your logic, somewhat. However for long term buy-and-hold, the growth of the dividend is of central importance, rather than the starting yield. A high yield usually means either a) high risk, or b) low growth. I was first drawn in to DGI thinking that dividend growth only referred to reinvestment and compounding. If this was the whole strategy, we'd be buying high yield utilities, telecoms, and REITs, and hoping for low price appreciation so the dividends can compound faster. In fact, price appreciation is a central part of DGI. So, with regard to wanting capital appreciation... this is not greed! Over the long term, if the dividend grows consistently (and is supported by fundamentals), the price will have to catch up, otherwise you'd eventually have a blue chip yielding 20%. So, DGI is a total return strategy, and capital appreciation is part of it. When you're retired and living on investment income, it might make sense to rotate into higher yielding stocks. In the meantime, lower yield/higher growth stocks will give you less of a tax burden while you're saving and accumulating.

Everyone has their own goals and take on DGI, so I'm sure they will chime in.

[Slowlife]

I don't really have a specific number of stocks I want to hold. I'd like to have as many stocks as I can reasonably monitor and I'm not sure what that number is yet. As I add positions, learn more and adjust my strategy I think that number will become more clear.

I like TGT because they plan to raise the dividend and I think eventually they will figure out a way to build the earnings to support that. It's just in the near term I think market sentiment toward the stock may continue to drive the price down. I agree with you on T. I like the entry yield and I don't expect AT&T to fall apart, but unless they find a way to keep up with changes in their industry I don't expect huge growth there. I look at T as a safe 5% return without a lot of risk to my capital.

Earthtodan, I have done track days and I hope to do more. Racing blows through more capital than any bad investment you can make, but it's addicting and so much fun. I co-own a track car, though it's been sitting for two years since I bought my first house and the co owner had his second child... There were several years in my mid twenties where almost all my disposable income went to the race car and the track. I'm trying to find a balance between planning for a future and enjoying the present. I think for me that means building a portfolio that will eventually start producing income so I have more free time to do the things I enjoy. I do hope to get back on the track next year once my savings is back on its track.
You make a good point about lower yield/high growth while I'm starting out. My average yield right now is over 5%, but I expect that to drop as I add to my portfolio. I'm still working out my strategy and reading all I can about dgi. I've always been a "learn the hard way" kind of person, but I'm hoping this forum will help me learn from other peoples experience.

[daat99]

I'm a new DGI investor myself and my savings is about $1000 every 2 months so you are far ahead of me.
I'm also starting positions with $1000 per company just like you.

I made some bad choices when I started (a bit over a month ago, you can read more about it in my IRA portfolio post) but I'm learning.

The most important thing I learned so far is to consider "Yield on Cost" (YOC) over "current yield".

Lets consider two dividend champions (data is taken from David Fish's CCC list):
T (high yield low growth) pays 5.17% and has 5 year DGR of 2.4% (and declining...).
TGT (low yield high growth) pays 3.49% and has 5 year DGR of 18.3%.

Let's open positions with both companies for exactly $1000.

Assuming DGR is steady at the 5 DGR rate specified above we'll have the following YOC:
1 year: T=5.29%, TGT=4.13%
2 years: T=5.42%, TGT=4.77%
3 years: T=5.54%, TGT=5.41% <== WOW they are close!!!
4 years: T=5.67%, TGT=6.04% <== Ok, TGT is a bit better, but does it worth it?
5 years: T=5.79%, TGT=6.68%
...fast forward...
10 years: T=6.41%, TGT=9.88% <== I'm starting to like this!
15 years: T=7.03%, TGT=13.07% <== Almost double YOC!
18 years: T=7.4%, TGT=14.99% <== Ok, I'm definitely going to buy TGT now...

I plugged the data to excel sheet I just created (and probably delete in a minute).

Considering you are just 29 and have more than 10 years of savings to do than I think you should focus on dividend growth rate (DGR) rather than dividend yield.
That approach might change if you were closer to retirement and don't have enough dividends to live on but I don't think that will happen considering how young you are and how much YOC you can generate.

Another thing to remember is what is your exit strategy.
My exit strategy is very simple, if the company reduced the dividends than I'm selling everything ASAP.
I'm not allowing myself any other exit so the price of the stock doesn't play any role in my considerations.

If you want to sell the stocks on some later date than that's fine, but you'll be sacrificing the YOC because it's unlikely that you can replace the 15% you get from TGT in 18 years with a fresh investment.

[Slowlife]

I'm glad you brought that up because I am very torn on YOC vs current yield. I like looking at yield on cost because it makes me feel good knowing that I’m now making a much higher percentage on my original investment. However, I tend to look at it like it doesn’t matter what my yield on cost is because my investment is now worth whatever the current price is and it pays me whatever the current yield is.
For example, I own WEN, 225 shares for which I paid $1008. It’s now worth $1819. The current yield is 2.47 and my yoc is 4.46. It pays me $45 per year. I’m thinking about selling approximately $1000 worth of WEN to buy MCD. If I do that I’ll have 100 shares of WEN worth about $818, still yielding 2.47% and paying me $20 a year in dividends. And I could buy 11 shares of MCD for about $1036.75 with a current yield of 3.44% and paying me $35.64 per year. If I do that, my average YOC will drop, but my current yield (and income) will increase. Instead of $45 per year, I’d be making $55.64 per year in dividend income.

I think I understand the long term argument, but assuming the price increases with the yield (leaving current yield roughly the same, but increasing my YOC), am I really losing anything by selling one position for a potentially better investment based on current price and yield? I know the dividend growth rate will make the biggest difference in how successful my investment is, but going back to the example above: WEN has a 5 year DGR of 30% (awesome), but a 10 year DGR of -13% (very bad). MCD has a DGR of 24% over the past 10 years.

I know strategy comes into play too. I think what makes me different is I don’t have a target retirement age. My goal is simply to be able to build wealth and transition from working because I have to, to working because I want to. I want to cut my hours at my day job and increase my hours doing things I enjoy (which includes flipping house for extra income). My exit strategy is basically to only sell if one of the core reasons I invested in the company changes or if I see a better investment and need the capital to buy it. Based on that, I agree that I should look more closely at dividend growth rate than current yield. Over the long term, I would expect a company that is consistently raising its dividend at a decent rate to both pay me more through dividends and increase in overall value.

So to me, I think I’d be better off selling half of WEN to buy MCD. I’d still have some exposure to the potential higher growth rate of WEN, but I’d also have what appears to be a safer investment in MCD with a higher current yield and a more consistent DGR.

Probably a bit of a newbie question, but how does YOC effect your investment decisions?

[earthtodan]

You're exactly right, you sell a stock at its current yield, not your yield on cost. Another way to think of it is, if you buy a stock at 3% and it eventually climbs to 10% YOC but 3% current yield, and you sell it to buy another stock with a 3% current yield, your yield on original cost for the new stock is 10% (minus taxes and fees). YOC isn't an important metric for making decisions in my opinion, and I don't include it in my spreadsheets.

[Slowlife]

So for my purposes it seems like yield on cost is a nice way to see the compound growth of my investment, but not really something I should be concerned about for buy and sell decisions.

[EricL]

(08-19-2014, 10:40 AM)Slowlife Wrote: So for my purposes it seems like yield on cost is a nice way to see the compound growth of my investment, but not really something I should be concerned about for buy and sell decisions.

That's how I see it. Its a great way to see how your investment is doing, but doesn't tell me whether I should buy or sell. I also like using it as a forecasting tool based on a potential investment's track record of dividend increases and current yield. I like to shoot for at least a 10% YOC within 10 years.

[hendi_alex]

Ten percent YOC in then years? From what initial yield? Given what level of inflation expectation? that would be a pretty lofty goal starting from 2% for example. Probably would take an average growth rate of about 18%.

[EricL]

(08-19-2014, 07:32 PM)hendi_alex Wrote: Ten percent YOC in then years? From what initial yield? Given what level of inflation expectation? that would be a pretty lofty goal starting from 2% for example. Probably would take an average growth rate of about 18%.

Here are a few articles from David Van Knapp, this is where I got the idea from.

10 By 15: What Happens With Low-Yield High-DGR Stocks

10 by 10: The Interaction of Dividend Yield and Growth

10 by 10: A New Way to Look at Dividend Yield and Growth

I reinvest all of my dividends as they are received, so 10% YOC is achievable on some stocks with as low as 2% initial yields. Obviously, the higher the initial yield, the easier it is to achieve, but with a fast growing lower yielder, its still possible.

[daat99]

Have you considered your taxes when you sell the stock?
If you are trading in an account that has tax benefits where you won't ever need to pay the taxes on capital appreciation than sure, current yield is what important more.

In a taxable account where you need to pay taxes you need to do a lot more calculations and figure out how much your are getting on a "yield after capital appreciation taxes" before you sell a stock that pays 3% today to buy another that pays 3% (or even 4%) today.

Don't forget commissions for the buy/sell as well.

Let's work with the numbers:
Consider buying stock XYZ for $1000 getting payed $30 which is 3% yield.
After X years the stock is worth $2000 and you are getting payed $60 which is 3% yield (or 6% YOC).
Now lets calculate what is the yield that we are getting on actual capital.

***NOTE: I'm going to assume 25% capital appreciation tax (because that's what I'm paying)

If I sell the stocks for $2000.
I pay sell commission for 1$ (multiply this by whatever your broker is stealing from you).
I pay taxes for 1000*0.25=$250
In total I got 2000-250-1=$1749 for the sale.

My purchase commission is going to be $1 as well so I have 1749-1=$1748 to work with.

Now I need to find a stock that pays $60 for $1748 - this is 3.432% yield instead of the "3%" yield I'm getting now for XYZ.

So in order to break-even (dividend wise) I need to get a company which:
1. Pays more dividends today.
2. Has at least the same if not better future dividend growth.
3. Has at least the same if not better future growth and stability.

Is that impossible? No.
Is that hard? Maybe.
Is that worth the effort? In my humble opinion it usually doesn't

PS
If you don't pay capital appreciation taxes or commissions than you only need to compare the companies themselves and my entire post is non-sense.