Ann's Simpler Income Investing Strategy

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Includes: BBL, GE, HCP, JNJ, KMI, MCD, MSFT, PEP, SO, VZ, WFC, XOM
by: Canadian Dividend Growth Investor

Summary

Revising Ann's simple income investing strategy from a year ago.

Lesson learned: A huge dividend cut can be recoverable if you have a diversified portfolio.

A simpler way to earn income is to buy shares in dividend-paying leaders from sectors that earn stable earnings.

With $11,000 newly invested in 9 leaders from 9 sectors, Ann expects to earn an income of $411 in 2016 from the new investments.

With a total of $22,000 invested, she expects to earn an income of $810, or a yield on cost of 3.7% in 2016.

A year ago, an icon of simple investing, Ann, was new to investing. She knew she wanted to keep things simple. Heck, even her name is one of the simplest on earth.

She also knew she wanted to receive regular income so that she could pay back debt, pay bills, or reinvest for more income.

So, she created a simple income investing strategy by investing in sector leaders. At the time, she identified 11 sectors.

After one year of experience, Ann identified two sectors that she should never have invested in as a new investor and one who wanted stable income. You guessed it! She should have avoided the Basic Materials and Energy sectors.

The reason is simple. Companies from these 2 sectors earn more volatile earnings because they're mostly heavily reliant on commodity prices. Even if their dividends aren't slashed, they could still face downward pressure, which would be hard to stomach for new investors. For example, in the past year, Exxon Mobil Corporation (NYSE:XOM) hiked its dividend by 5.8%, yet it still fell 18%. At one point, it fell as much as 26%!

So, Ann is revising her income investing strategy to make it even simpler. This year, with her $11,000, instead of investing in 11 leaders from 11 sectors, she'd invest in 9 leaders from 9 sectors for $1,222 each. The sectors include Communication Services, Consumer Cyclical, Consumer Defensive, Financial Services, Healthcare, Industrials, Real Estate, Technology, and Utilities.

Ann decides to stick with her previous picks for the new buys to keep things simple. Her portfolio is not overweight in any company anyway, because she only had $1,000 invested in each stock originally.

Her original buys from last year were:

Click to enlarge

Because of Kinder Morgan Inc.'s (NYSE:KMI) severe dividend cut, even though most other companies increased their dividends, Ann's projected income for 2016 (based on current quarterly dividends) is still expected to be lower than the 2015 projected income.

Sector

Ann's Chosen Leader

Ticker

Investment

2015 Price

2015 Yield

12015 Annual Income

22016 Annual Income

Basic Materials

BHP Billiton

BBL

$1,000

$43.82

5.66%

$56.60

$56.60

Communication Services

Verizon Communications

VZ

$1,000

$47.11

4.67%

$46.70

$47.97

Consumer Cyclical

McDonald's

MCD

$1,000

$89.47

3.8%

$38.00

$39.79

Consumer Defensive

Pepsi

PEP

$1,000

$98.50

2.66%

$26.60

$28.53

Energy

Kinder Morgan

KMI

$1,000

$41.31

4.26%

$42.60

$12.10

Financial Services

Wells Fargo

WFC

$1,000

$53.23

2.63%

$26.30

$28.18

Healthcare

Johnson & Johnson

JNJ

$1,000

$102.19

2.74%

$27.40

$29.36

Industrials

General Electric

GE

$1,000

$24.47

3.76%

$37.60

$37.60

Real Estate

HCP

HCP

$1,000

$48.12

4.53%

$45.30

$46.96

Technology

Microsoft

MSFT

$1,000

$47.15

2.63%

$26.30

$30.54

Utilities

Southern Co.

SO

$1,000

$52.24

4.02%

$40.20

$41.54

Total Invested:

$11,000

Total Income:

$413.60

$399.17

Click to enlarge
  1. Projected 2015 annual income based on January 2015 quarterly dividends per share.
  2. Projected 2016 annual income based on January 2016 quarterly dividends per share.

Ann was glad that she decided to start with an equal-weight portfolio in 2015, in which she put the same amount in each sector leader. This is so that any dramatic dividend cut from a single company, such as what happened with Kinder Morgan, would still be a recoverable mistake.

Essentially, even though Kinder Morgan cut its dividend by 72% from Ann's 2015 projected income in January 2015, the dividend hikes from other companies softened the blow.

Of course, it would have been better if Ann hadn't invested in Kinder Morgan in the first place. However, she doesn't have a time machine.

In 2016, taking out Kinder Morgan's dividend cut, her other holdings, on average, increased dividends by 5.2%. This includes BHP Billiton plc and General Electric, which haven't increased dividends in 2015. If dividends continued to grow at that pace, her dividends in 2017 would be $420, and Ann's dividends would have recovered in 2 years.

Ann's buys this year include Verizon Communications Inc., McDonald's Corporation, PepsiCo, Inc., Wells Fargo & Co., Johnson & Johnson, General Electric Company, HCP, Inc., Microsoft Corporation, and Southern Co.

Yields based on January 12th closing.

Her projected annual income for these new buys is $411. This is a few dollars less than last year's projected income. But Ann remembers the horrific experience with BHP Billiton, which has had a huge price decline, and Kinder Morgan, which not only had a huge price decline, but also slashed its dividend. Ann just feels like she had a double whammy.

She feels much more confident in actually achieving $411 of income in this year's buys. After all, she wants to be able to use her passive income to buy more assets that would generate more income in the future.

Overall, Ann is glad she didn't invest all her savings last year, and that she is giving herself time to learn the ropes. She feels more confident going into 2016 after some real-life, though painful, experiences from 2015.

A part of being a self-directed investor is that you must reflect on your actions and results, and be willing to adapt and change to improve your results for your goals.

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Disclaimer: I am not a certified financial advisor. This article is for educational purposes, so consult a financial advisor and or tax professional if necessary before making any investment decisions.

Disclosure: I am/we are long KMI, PEP, XOM.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.