A horse of a different color
We've been conditioned all of our financial lives, whether it be through the financial pages of newspapers, magazines, radio commentators, T.V. talking heads, and now internet blogs, that the way to measure success in the investment world is by changes in the price of your investments.
You've been told that once you make an investment, you should focus on the price change of your equity, as well as the change in the broader market indexes, like the Dow Jones Industrials or the S&P 500 Index. After all, these indexes are a reflection of the price changes of all of the component stocks that make up the indexes. We are treated (or bombarded, depending on your perspective) to second by second, blow by blow changes in all of these numbers throughout the trading day, and even in pre-market and post-market sessions.
We are constantly told by financial media that the only way to measure our success is to look at these price changes. We are cautioned by some that if a stock we've bought drops 10%, we should cut our losses short, sell, and move on.
Others tell us to use stop-loss orders in order to preserve our capital in the event of a black swan event that affects the market as a whole, or our individual stock in the case of a negative, company-specific event.
Selling At Just The Wrong Time
These and many other nostrums have led millions of investors to buy in greed, when prices are rising, then sell on fear, when they have dropped 40% to 50% under horrible bear market conditions. You will note that these actions are the opposite of those purveyed by Warren Buffett, arguably the greatest investor of our modern era. He advises investors to buy when others are fearful, and sell when they are greedy.
In other words, Mr. Buffett (and I count myself in this camp) is advising to buy when prices have collapsed due to fear and panic. Buying at such times will not guarantee that you have found the exact bottom of any correction or bear market, but it will guarantee that you will never pay the highest prices. You will pay much lower prices than if you bought the same securities at a super-hyped bull market high. This is, at bottom, what value investing is all about.
What Do Lower Prices Bring Us, Besides Lower Prices?
For one, buying equity at a lower price than recent highs will bring us closer to fair value, or even the ability to buy below fair value. This gives us a greater margin for error. If we are buying closer to the eventual low, then we are necessarily closer to that low and have less to fall, giving us that greater margin of error in that position, protecting and preserving capital further.
But the major benefit that comes with buying low is a higher yield on our investment. And a higher yield means the immediate opportunity to increase our income. Those from the MTV generation who were conditioned to immediate gratification should appreciate this aspect of buying on the dips.
Dividend Growth Investors Focus on Yield and Income, Not Price
My Basic Criteria For An Investment In A Dividend Growth Stock
- A company that has demonstrated a history of paying a growing dividend for 10 years or longer.
- The company has demonstrated growth of earnings over this period to support the increasing dividend payment.
- A comfortable payout ratio of around 60% to 80% of free cash flow, indicating a company has a comfortable margin of cash to keep increasing dividends in the future.
- A current dividend yield that is considerably higher than its 5-year average yield, indicating a potential accidental high yielder.
Once I have made a decision that a particular equity meets my major criteria, including those mentioned above, a purchase is made.
At that point, the price paid for that equity becomes largely irrelevant. This is not to say that monitoring of a position becomes non-existent. To the contrary, since I approach the markets as an opportunistic investor, I will always be on the look-out for company-specific events that might temporarily negatively impact its price. If I can determine that the negative impact is only temporary and that the basic fundamentals of the company have not materially changed, then it becomes an opportunity to buy more shares at lower prices and capture higher yield and income for the portfolio.
I demonstrated this concept in my most recent article, "Retirees Whistle Past The Graveyard As Others Short StoneMor Partners". Because Luma Asset Management questioned StoneMor's (NASDAQ:STON) accounting, referring to its business model as financial engineering and a model that could not sustain its growing distributions, investors became frightened and sold shares in this high quality deathcare provider.
Having had long experience, going back many years of owning this name, and having seen this story play out about once year, I reckoned that this latest smear, as in the past, represented an opportunity to buy on a company specific black swan event and gain accidentally high yield and income for life. We bought more shares, for our subscriber portfolio and personal portfolios and benefited from a 6% pop in stock price the following day and an accidentally high yield of 11.47%. It seems some other investors are beginning to key into this pattern and profiting as well.
Perspective Is The Key - Grab Price Volatility By The Throat
In order to make the successful transition from a total return investor to a dividend growth investor, the investor must begin to change his focus and realize what is most important to him. And that is, dividend income, and the growth of that dividend income.
It is imperative to realize from the start that dividend growth investing can feel like a long, slow, slog in the beginning. The analogy is like the turtle and the hare. The turtle starts out excruciatingly slow, but prevails in the end. In this case, income is built slowly over many years, but the predictability of dividend increases makes the building of an income stream for retirement a reality.
Dividend growth does not take place in a vacuum. Dividends grow because a company is able to grow its earnings over time. It is those increasing earnings that flow into increased dividends. A side benefit of this cycle, of course, is that stock prices rise when earnings rise. So the icing on this finely built cake is the total return in capital appreciation that flows from it. We are actually able to have our cake and eat it too!
A Tool To Focus On Dividend Growth
As a way to keep my focus where it needs to be, and reduce any herd instinct to sell when others are panicking, I use a digital tool I created to monitor dividend income, and growth of that income in my portfolio and the public Fill-The-Gap Portfolio I manage on Seeing Alpha, as well as the portfolio I manage for subscribers. I have constructed a Dividend Growth and Income Spreadsheet that allows me to monitor the accumulation of dividends and the growth of those dividends.
It looks like this:
In order to monitor the FTG Portfolio, I've inserted the ticker for each company in the portfolio, how many shares we've bought, the price per share paid and the quarterly dividend amount.
Since inception on December 24, 2014, we've made multiple purchases at different price points in several of the names. To simplify monitoring, we've combined these multiple purchases by adding the total invested in each, then dividing by the total shares to come to an average price paid per share.
The stage has been set- Now the fun begins
The spreadsheet uses the algorithms I've built into it to do the rest of the heavy lifting for us. It automatically computes the annual dividend amount for me, my starting annual income from each position, and the current yield based on the price we paid.
In addition, it adds up the total amount of our FTG investments made and automatically calculates for me the total annual income and overall portfolio yield on all of our positions.
When I receive an increase in my dividends, I simply enter the new annual dividend amount in the New Annual Dividend column on the right hand side. The spreadsheet, using my formulas, then automatically calculates our new annual income, the increase in annual income and the increased percentage of new annual income and new yield on cost for each position. Finally, at bottom, it shows us the new total portfolio yield on cost. As our dividends increase, we see this most important number march upwards.
Observations and Analysis
In a recent article, "What's Your Excuse For Having No Investment Plan For Retirement?", we discussed how, in the month of February, we had received increases in dividends from fully half of the FTG Portfolio constituents. There were nine increases that month, and we were busying (and happily, whistling while we worked) updating this spreadsheet with all of the new increases.
Like a slot machine spinning its wheels, then spitting out the winnings, our spreadsheet automatically updated the remaining data for us. We were able to discover, for instance, that our income from our AT&T (NYSE:T) position had risen from $1,413 to $1,475. Our yield when we originally purchased it was 5.42%. With this latest dividend increase, our yield on cost had risen to 5.65%. In just 15 months since this portfolio was conceived, we were already enjoying an increase in income from this position of $62 per year, or 4.4% more than when we began.
Further along the spectrum, we could see that Main Street Capital (NYSE:MAIN), a business development company, had increased our income from a starting amount of $1,414 to $1,497 now. The starting yield had increased from 6.77% to a yield on our cost of 7.17%. This $83 increase in annual income represents an increase of 5.87%.
Moving along, we note that Realty Income (NYSE:O) has increased our annual income from $1427 to $1554, or $127 annually. This is an 8.9% increase in income. The yield began at 4.44% and climbed, due to many increases, to a yield on cost of 4.84%.
When we give just a cursory examination, comparing the "Current Yield" to the "Yield On Cost", it is easy to see where the largest growth in income came from in the portfolio.
EPR Properties (NYSE:EPR) indicates a starting yield of 5.85% and today, the yield on cost, due to strong dividend growth, indicates 6.56%. This is confirmed when we compare starting income of $1,412 to $1,586 today, a solid increase in annual income of 12.3%.
And the granddaddy winner of them all sticks out like a sore (but welcome) thumb; Reynolds American (NYSE:RAI) indicates a starting yield of 4.1% which climbed in 15 short months to 5.13%. Initial annual income on this name went from $1,412 to $1,771 or 25.4% more dividend income than when we began this portfolio.
As I buy more stock for my personal portfolios as well as the FTG and subscriber portfolios, my focus is directed to the increased annual income. You'll notice that on this spreadsheet, after the initial buy price is noted (or averaged over several purchases), no further attention is placed on price. All attention goes to dividends, income and yield, and the growth of those components.
As our companies increase their dividends, our focus will again be on our increased annual income, in addition to the upward changes, as the effects of increased yield on cost for each position rise and total portfolio yield on cost are revealed.
Because this spreadsheet totals the entire portfolio income as well as the total annual increase in dollars and percent, I always have an overall view of how the portfolio is performing.
Being able to compare the overall portfolio yield to the newly adjusted yield on cost gives me more data to see how the overall portfolio is pumping out growth of dividends.
How A Change In Perspective Made All The Difference For Me
This tool gives me the ability to stay laser focused on what, for me, is the bottom line of investing for retirement; building and growing income for a comfortable level of spending come retirement.
As you make a habit of focusing on the increases in dollar amounts, and especially in percentage increases in dividends, and yield on cost, you'll be well on your way to changing your perspective and realizing what aspects of your portfolio are the most important for you.
Stop paying so much attention to everyday, minute to minute changes in your stock's price, and focus all your attention where it really matters; those rising dividend streams that'll give you the comfort and security in retirement that you seek.
You Don't Need $1 Million To Retire
I recently wrote a piece entitled, "You Don't Need $1 Million To Retire". This article appealed to nearly 40,000 readers and caused a lively debate entailing almost 400 comments.
In it, while we discussed the "magic" of a million, I advanced the idea that we don't in fact need to achieve $1 million in savings and investments to arrive at retirement nirvana. In fact, as I've been demonstrating right here on Seeking Alpha for 15 months with a live portfolio, achieving a comfortable retirement for many folks can be accomplished with much, much less. The un-magical number this requires is just $411,600.
The Fill-The-Gap Portfolio
I began writing a series of articles on December 24, 2014, to demonstrate a real live construction and management of a portfolio dedicated to growing income to close a yawning gap that so many millions of seniors and near retirees face today.
The beginning article was entitled, "This Is Not Your Father's Retirement Plan." This project began with $411,600 in capital that was deployed in such a way that each of the portfolio constituents yielded approximately equal amounts of yearly income.
The FTG Portfolio Constituents
Constructed beginning on 12/24/14, this portfolio now consists of 18 companies, including AT&T, Inc., Altria Group, Inc. (NYSE:MO), Consolidated Edison, Inc. (NYSE:ED), Verizon Communications, Inc. (NYSE:VZ), CenturyLink, Inc. (NYSE:CTL), Main Street Capital Corporation, Ares Capital Corporation (NASDAQ:ARCC), Reynolds American, Inc., Vector Group Ltd. (NYSE:VGR), EPR Properties, Realty Income Corporation, Sun Communities, Inc. (NYSE:SUI), Omega Healthcare Investors (NYSE:OHI), StoneMor Partners LP, W.P. Carey, Inc. (NYSE:WPC), Government Properties Income Trust (NYSE:GOV), The GEO Group (NYSE:GEO) and The RMR Group (NASDAQ:RMR).
FTG Portfolio Dividends Received, February, 2016
As mentioned earlier, fully half of our portfolio constituents, or nine of them, provided us with more dry powder to fund our latest purchase of STON. In addition, three of them gave us increases in our dividend payments in February. They included T, which raised the quarterly dividend from $.47 to $.48 for a 2.13% raise, OHI, which gave us an increase from $.56 to $.57 per quarter, or a 1.8% raise from last quarter, and EPR, which favored us with a raise from $.3025 per month to the new rate of $.32 for a healthy increase of 5.8% from last quarter's payment.
The recent purchase of STON and the dividend increases we just achieved have together grown the FTG portfolio income to a new record $26,841, giving us a current overall portfolio dividend yield of 5.47%. This is the dividend yield that a new buyer at today's prices would achieve.
Since we bought all of these equities at cheaper prices since inception of the portfolio, the yield on cost that we have achieved is 6.43%. In other words, based on the prices WE paid, we are receiving a dividend yield return of 6.43%.
These portfolio constituents represent an example of where retired investors with excess cash above what they need to pay the bills, near-retired investors and younger investors can constantly source cash to use as dry powder to make new investments. When stocks fall to better timed entry points they can buy shares in order to grow portfolio income.
In order to gain some of those better timed entry prices that enable me to receive higher yield and income I've built some other digital utility tools, the Real Time Portfolio Tracker and the Watch List Real Time Tracker that work in real time to identify them.
We began with $411,600 on December 24, 2014, added a $6500 IRA contribution in 2015 and another $6500 contribution in 2016, totaling $424,600 in invested capital.
The FTG Portfolio has grown to another record high of $490,775, for capital appreciation of $ 66,175, or 15.6%. This compares very favorably to the Dow Jones Industrial Average which is down 3.04% and the S&P 500 Index which is down 1.98% in that same period, from 12/24/14 to date.
Retirement: One Dividend At A Time, Subscriber Portfolio Recap
We are ahead $26,431, or 9.6% year to date, while the Dow is up only .63% and the S&P 500 is down .34% in that same time period, January 1 through March 28, 2016. This confers out-performance, year to date, of exactly 9.94%. From inception of this subscriber portfolio on November 1, 2015, our Real Time Portfolio Tracker for the subscriber portfolio tell us that annual income has now grown to $18,942.
From the inception of this portfolio on November 1, 2015, we have achieved capital appreciation of 12.18%, or $32,754. The current portfolio yield, if mirrored by a new investor at today's prices, comes to 6.28%. Since we've bought all of these equities at lower prices, our yield on cost for the subscriber portfolio is 7.04%. This means, for those subscribers who are our charter members and chose to mirror their investments after this portfolio, the yield they are receiving on their investments to date, is more than 7% now.
Plan of Action-Portfolio Management
Our aim is to get the most bang for our bucks. We will look toward any further weakening in the markets or specific companies we are targeting on our tracker as developing opportunities occur to buy more income for the portfolio at cheaper prices, gaining higher yield along the way.
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As always, I look forward to your comments, discussion and questions.
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Disclaimer: This article is intended to provide information to interested parties. As I have no knowledge of individual investor circumstances, goals, and/or portfolio concentration or diversification, readers are expected to complete their own due diligence before purchasing any stocks mentioned or recommended.
Disclosure: I am/we are long ARCC, CTL, ED, EPR, GEO, GOV, MAIN, MO, O, OHI, RAI, RMR, STON, T, VGR, VZ, SUI, WPC.
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.