Dividend growth investing is about as exciting as watching paint dry on a hot summer day...
You'd think that as we age and mature, we wouldn't require immediate satisfaction with everything we do. Sure, as infants we didn't know any better. When we ached from hunger or needed our thirst to be slaked, we cried in anguish till mom or dad came running with the bottle. Once sated, we fell back into a blissful state of sleep and peacefulness.
Many investors find themselves in similar states of distress all the time and hunger for satisfaction from their investing decisions in similar fashion. They'll choose this stock or that and derive excitement from the ebb and flow of prices. But only if theirs rises fast and furiously within hours, or at most days, from original purchase, are they satisfied.
For them, this is the essence of the excitement they seek in the challenge to "beat the market". If their stock selection does not deliver, and deliver fast in the way of price increase, they're quick to abandon ship and move on to the next adventure.
Before you cut and run, just consider this. How many overnight successes have you experienced in your life so far? How many of your stock selections doubled or tripled in a matter of days or months? Even if they did, did you know when to sell and take your prodigious profits? Or did you miss that chance, only to sit idly by as those profits evaporated and turned into a loss?
That's happened to me. In the dot.com era, not so long ago, I was "smart" enough to buy AOL when eyeballs counted for everything. It didn't matter if a company made any money. Companies were valued then not on revenues and earnings, but on how many clicks they were receiving. Visits to an Internet site were the coin of the realm.
As the price of AOL, Time Warner (NYSE:TWX), and assorted tech darlings of the new Internet age soared ever higher, prescient investors clicked their way to double-baggers, triple-baggers, even 10-baggers in a matter of months, at most a year.
All Good Things Come To an End
Alas, all good things come to an end, but precious few see it coming. Very few act, even when the freight train is bearing down on them. Very few have the ability to see what's coming around the bend and get out of the way. And so, we mostly get run over by them.
Like every other overhyped craze in history, there is the manic phase when everyone and his mother just have to get on board the latest trend. Analysis and valuation be damned. Gotta have that stock, no matter the price. Who cares that it has already doubled? It'll triple and quadruple once I buy it, and I'll sell it to the next sucker. This is known as the "Greater Fool" theory.
When Your Barber Starts Talking Stocks, Sell!
Before the Great Depression, in the 1920s, you could get into a taxi (those were the vehicles that took you places before Uber and Lyft existed), and every cabby would talk stocks with you and give you stock tips. He and the baker and the candle stick maker all had their opinions, and everyone was buying stock. Margin requirements then were ridiculously low. Barbers and kindergarten teachers were required to put up just 10% of the purchase price of any stock (today, the margin requirement is 50%). When investing becomes so easy and cheap, why wouldn't you invest? Remember, not long ago, when buyers could buy homes with NO money down? You know how that ended.
When things turned sour and stock prices went south, margin calls went out to everyone. Holders of even good-quality stock were forced to sell out because they had no money to bring their margin accounts back to the 10% level. The stock market crash of 1929 ensued.
Hope Is Not A Plan
The manic phase turned to the depressive phase as stocks crashed for years. Today, we refer to this as bipolar. Most investors couldn't see this coming. Most investors didn't believe it would continue. They kept rationalizing, simply hoping it was just a temporary dip. Hope is never a good plan when it comes to investing.
Most of these investors lost all of their profits and some lost all of their life savings, hoping prices would stop falling.
Investor Psychology 101
The investor reckons that if he himself was so reckless and spent no time doing due diligence, while excitement is still evident he can unload it to the next buyer for much more than he himself paid. All of this goes well, until it doesn't. At some point, the music stops and investors find there is no one left to sell their stock to. The bubble has popped, the air is leaking out of the balloon and there is no demand left to hold the price of the stock up. There are no greater fools left to sell to. The theory fails, along with the investors' hopes and dreams.
Most investors living through such a scenario are so enveloped in the hype that they allow themselves to believe that any price reversal is temporary. Perhaps a bit of profit-taking by the guys who got in at $1.00 and are now taking huge profits at $10.00 is causing the price to retreat.
Getting back to the Internet craze, investors believed that perhaps a temporary setback in clicks had caused the price weakness. Maybe it was a seasonal factor, less people surfing the web and visiting their favorite site while on vacation over the Christmas school break.
All manner of rationalization will be employed to keep the bogeyman away. One excuse after another is offered as the stock price continues its descent. Once prodigious profits, profits that make every investor feel like a genius, begin to dry up and, eventually, given enough time, turn into losses.
I experienced this in many dot.com stocks. This came to be known as the dot.com implosion or bust of 2000. Millions of us got caught up in the fervor. None of us knew when to sell. Fantastic profits turned to spectacular losses, and we scratched our heads, wondering, "What happened?"
Boring Is More Beautiful Than the Most Beautiful Tulip
The same occurred in the tulip craze in Holland in the 1600s. Botanists came up with the most fantastic tulip variations, using various methods of cross-pollination. One guy had to buy the latest variation for his wife, this one for his girlfriend. Before you knew it, people were buying the latest, most beautiful tulip for investment. They'd buy it one day, then flip it a few hours or days later and double or triple their money.
Like any fad or craze, investors in flowers lost their huge profits and life savings when this bubble burst - as all bubbles eventually do.
Is This Exciting Enough For Ya?
For some reason, it seems most investors have to go through this phase of trying to hit every stock pick out of the park. They need to get it out of their system.
Most investors think they're smarter than the average investor, I wrote about this, not long ago in "Why Average Investors Get Average Results In Retirement".
As retirement begins to come more into focus, when the investor can see the end phase bearing down on him, he starts to see that his focus needs to change. Rather than fight it out every day in the market place over price, adapting to an income focus seems to make more and more sense.
Retirement, viewed more as a goal to achieve, to be built upon over many years, one dividend at a time, becomes more manageable and imaginable by the investor. Breaking the task down into small, achievable goals gives the saver/investor positive feedback at frequent intervals.
These bits of positive reinforcement all along the way serve to reinforce the original end goal and keep the investor focused on the plan, one dividend at a time. If the investor can see that each new dividend added to his portfolio is steadily increasing his investment income, he can view his success in stages.
Viewing Success In Stages
In an effort to stay connected to our portfolio dividend income and the successful stages of growth of that income, I'll enter our positions in both the public Fill-The-Gap Portfolio and subscriber portfolio into the Dividend Growth and Income Spreadsheet. It keeps me focused on my bottom line of producing income. When dividends are raised, I'll enter that into the assigned column. My algorithms then compute for me my new income on each portfolio constituent, the new income when a raise occurs, the yields, the increased percent of income and total portfolio income. This focus helps keep me on track toward my goal of building and growing income.
Dividend Growth And Income Spreadsheet
Is This Boring?
Regardless of price, notice the steady increase in the dividend of AT&T (NYSE:T) over the years. The orange line tells the story of a steady upward march as the stock price zigs and zags. In the last several years, this increase has slowed down to about a 2% rate of growth each year. In a tax-deferred account, allowing these dividends to DRIP and buy additional shares still allows for impressive compounding of share count and additional income.
Based on the current share price, the $1.92 dividend computes to a 4.78% yield. Its five-year average dividend yield is 5.29%, indicating the possibility of further price gain from here is minimal. In addition, their payout ratio is on the high side, at 80%; however, it is not that high that any threat to the dividend is indicated. The company can still comfortably pay that dividend.
Price-wise, probably boring, but income-wise, not boring at all, and one that can be counted on as a core position to continue paying us near 5% at today's prices. Where else can investors find a 5% income return on such a safe investment?
We own T in the FTG Portfolio for 17 months. I've owned it personally for many years, and have regarded the growing income stream from this name to be quite reliable, predictable and, dare I say, exciting!
Note the steady rise in dividend payments of Verizon (NYSE:VZ) throughout the years. Wouldn't you be excited to get a raise of 3-4% or so each year in your paycheck? This is what the orange line indicates. Slow but steady increases in income for the investor who holds this stock as another core position in his portfolio. Very few employees get anywhere near that, if at all. That's why the average employee is receiving no more income that he did twenty years ago, adjusted for inflation. In comparison, this is not so boring, after all.
Verizon's current dividend of $2.26 gives it a current yield of 4.33%. The company's five-year average dividend yield is 4.57%, indicating we're probably not going to see much stock price appreciation from here. But its payout ratio is just 51%, meaning there's plenty of room for increases in the dividend going forward, and that's not boring. In fact, that's pretty exciting for income investors.
If you're hankering for a little more excitement in your life, you might consider adding CenturyLink, Inc. (NYSE:CTL) to the mix. The company is currently paying a dividend of $2.16, which translates to a yield of 8.0%. Its five-year average dividend yield is just 7.1%, indicating the stock price may rise from here (it's already ahead 7% this year) to get back to its average yield. This would afford us some margin of error.
Though it maintained, and even raised, the dividend after the financial crisis, CTL cut it back near 30% in 2013, and for three years, has held it steady, where it remains today, giving us that 8% current yield.
Boring Can Be Very Rewarding
If you can see yourself getting excited by the prospect of seeing your income grow on a regular basis, this will not be boring for you. If you have already experienced the joy of seeing an increased dividend paycheck hitting your brokerage account, then you know what I mean. If you can envision the salutary effect that compounding has on your income, whether through dividend increases, reinvesting dividends or adding funds to your account, then "boring" is not in your vocabulary. For more color on this topic, you may wish to read a recent article I wrote about compounding, "Truly Life-Changing Financial Returns Require Patience And Time".
Reducing Risk By Weighting Positions To Equal Income Production
In keeping with my foundational principle of reducing risk to portfolio income, we could examine all three telecommunication companies with the Watch List Real Time Tracker and discover how many shares of each to buy to produce equal amounts of income, which is our continuing goal.
The closer we hew to this principle, the more we de-risk the portfolio for any possible dividend cut in the future. The diversity of sectors and the number of constituents imparts some level of risk mitigation. Should one or two components reduce their dividend at any point in the future, our income would temporarily decline by perhaps 5% or so, depending upon the severity of the cut.
When stocks fall to better-timed entry points, we buy shares in order to grow portfolio income. In order to gain some of these better-timed entry prices that enable me to receive higher yield and income, I use the Watch List Real Time Tracker to alert me. As a stock comes within 3% of my target price, the alert turns green (this alert distance is customizable). The order can then be placed and executed.
If we wished to buy all three of these telecoms at the indicated target prices which are within 2% of current prices, our total purchase would cost us $10,780. I was able to easily manipulate share counts in column D to discover a mix that would give us approximately equal income - around 33% from each equity at the price I wished to pay and for the total amount I was willing to spend to acquire them - giving me a yield I have targeted at 5.37% for the group as a whole.
Column M confirms approximate amounts of about $192 in income from each and a total of $578.50 annually if all targets are hit.
If we wish to do further research, we can scroll to the right to examine the P/E ratios to compare each of these telecoms to each of their peers, discover their daily highs and lows, 52-week highs and lows and find out their ex-dividend dates and dividend payment dates if we wish to try to capture the upcoming dividends.
Scrolling to the right, our tickers are locked in place. We can see from the daily and 52-week high and low price ranges that T and VZ are currently trading, as of Monday, close to their 52-week highs. CTL, however, is trading 18.22% down from its 52-week high. The weak sister is showing her colors, as investors are less comfortable paying up for this name.
When comparing P/E ratios amongst these peers, VZ pops out as the bargain hiding in plain sight at just 11.97, significantly below the 16 and 17 P/Es of the others in the group. This may give investors the idea to more heavily weight VZ if they are more interested in stock price appreciation. Investors focused on equal weighting of income would stick to the original share counts for balanced income from the three.
If we're interested in capturing the next upcoming dividends from these companies, we're able to discover from columns U and V on the extreme right that we have about three weeks left to buy, before 7/5/16, in order to be entitled to that next dividend payment. If we're contemplating buying for a tax-deferred account, buying that dividend now - without any taxation concerns - makes sense.
Watch List Real Time Tracker
I used the other digital utility tool I built, the Real Time Portfolio Tracker, to help highlight that all of our current positions were producing very close to equal amounts of income. I could either add more shares to existing positions to build them out further, or I could start a position in a new name.
When and if the next bear market is finally upon us, I feel fairly certain that all three of these telecom purchases will add yet another layer of risk reduction because of the stellar record of dividend increases paid by all of them during the financial crisis. Column O, on the extreme right of the sheet, clearly indicates what percent of portfolio income each component contributes, so a quick glance delineates the positions that may benefit from fattening.
Real Time Portfolio Tracker
The Fill-The-Gap Portfolio At A Glance
I began writing a series of articles on December 24, 2014, to demonstrate the real-life 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 between their Social Security benefit and retirement expenses.
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 19 companies, including AT&T, Inc., Altria Group, Inc. (NYSE:MO), Consolidated Edison, Inc. (NYSE:ED), Verizon Communications, CenturyLink, Inc., Main Street Capital (NYSE:MAIN), Ares Capital (NASDAQ:ARCC), Reynolds American, Inc. (NYSE:RAI), Vector Group Ltd. (NYSE:VGR), EPR Properties (NYSE:EPR), Realty Income Corporation (NYSE:O), Sun Communities Inc. (NYSE:SUI), Omega Healthcare Investors, StoneMor Partners L.P. (NYSE:STON), W.P. Carey, Inc. (NYSE:WPC), Government Properties Income Trust (NYSE:GOV), The GEO Group (NYSE:GEO), The RMR Group (NASDAQ:RMR), and Southern Company (NYSE:SO).
Because we bought all of these equities at cheaper prices since the inception of the portfolio, the yield on cost that we have achieved is 6.63%.
FTG Portfolio Mid-morning June 13, 2016
Currently, the FTG is throwing off $27,305 in annual income, which is $165.00 greater than last month. When added to the average couple's Social Security benefit of $28,800, we have, in only 17 months' time, significantly exceeded our goal of filling the gap between SS income and a comfortable $50,000 retirement. In fact, our total income between these two sources is now $56,105, which, again, is $165.00 more than last month's income. This is due to the dividend increases we received this month and our reinvestment of dividends into our new position in Southern Company shares and the new dividend income attendant to this purchase. We are now in hailing distance of our dividend income exceeding Social Security benefit income.
We have experienced no cuts, no freezes and no elimination of dividends in 16 months of portfolio management. On the contrary, we have enjoyed a regular stream of dividend increases, more than enough to keep us comfortably ahead of inflation.
With its beginning value of $411,600 and the addition of a $6,500 IRA contribution for 2015 and a $6,500 IRA contribution for 2016, total asset contributions come to $424,600. The portfolio has grown to a value of $506,915. This represents capital appreciation of 19.39% in just 17 months.
$506,915 - $424,600 = $ 82,315 capital appreciation
$ 82,315 / $424,600 = 19.39% percentage gain
This year alone, the FTG has grown $53,237 in value, or 11.74%, while the Dow is up only 2.33% and the S&P 500 is up just 2.32%. Accordingly, the Fill-The-Gap Portfolio has effectively more than quintupled the return on both the Dow Jones Industrial Average and the S&P 500 Index.
MY FTG Mirror Calculator
After doing their own due diligence, readers wishing to proportionately emulate FTG Portfolio trades for their own portfolios use the "My FTG Mirror Calculator" or the "My RODAT Mirror Calculator" to simplify their task.
With the touch of a button, readers know exactly how many shares to buy if they wish to mirror the FTG Portfolio. In real time, it indicates the current price of the stock, the current dividend and yield, how much the purchase will cost, and how much dividend income the new purchase will produce annually. All of these metrics are updated on a real-time basis all day long.
My FTG Mirror Calculator
Author's note: Should you be interested in reading any of my other articles detailing various strategies to enhance your returns on a dividend growth portfolio, you will find them here.
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 ALL FTG PORTFOLIO NAMES.
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.