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Long-term horizon, dividend investing, long only
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Setting your own hours, making the rules, calling the shots and reaping the benefits of uncapped profits; what do these things have in common? They're exclusive to owners. Certainly, it's possible that your employer might allow for some flexibility in your schedule. Perhaps you enjoy a tidy bonus based on how the firm performs. Maybe you're even high up enough to make the day-to-day decisions. But by-and-large, the privileges associated with owning companies are limited to the purposeful proprietors. And this is usually with good reason; many times the owner of a business also took the risk to establish their passion. Thus the over-sized benefits, some may argue, are merely a consequence of the corresponding risk/reward trade-off that the owners originally embarked upon. In any event, it's advantageous to own a profitable business.

The incredible thing about this scenario is that you yourself have the opportunity to become an owner. There's this thing out there called the stock market, whereby people are perpetually willing to exchange pieces of ownership for pieces of paper. It's taken for granted sometimes, but when you consider the implications, it truly is an extraordinary marvel. When you think about Wynn Resorts (WYNN), Microsoft (MSFT) or Berkshire Hathaway (BRK.A), you think of Steve Wynn, Bill Gates and Warren Buffett as the owners. Yet there are literally thousands upon thousands of other people out there that can claim that exact same thing. Granted it's nowhere near to the same scale, but one shouldn't lose sight of the fact that in buying a stock, you are agreeing to partner with a company by means of ownership. You are an owner.

However, in a world of consistent consumption, the line between owner and consumer quickly blurs. That is, whether you are the owner in the form of owning a single share of stock or Bill Gates and his 460 million shares of Microsoft, you still go out to buy more stuff. In this way, it might be difficult to balance the role of owner whilst simultaneously being a consumer; one directly cancels out the other. In fact, for the average person, the consumer side likely far outweighs the ownership side. My suggestion is to treat one's consumable habit as an ownership opportunity. Let's run through some examples to better illustrate this point.

Electric Bill

Now I don't know how much you spend on your electric bill. But let's say that you spend $100 a month on electricity. Each month you send in a check or log in online and prudently pay your hard earned C-note. It's a largely consumable purchase that we all are probably using right now: $100 a month, $1,200 a year to the owners of your local electricity company. Perhaps you use American Electric Power (AEP) in the Midwest, or maybe TECO Energy (TE) down in Florida. Whoever your provider happens to be, the revenue and thus the corresponding income is claimed by the company's owners. But what happens if you an owner?

Let's say that you invest $24,000 in TECO Energy. TE currently yields just over 5%, which brings your yearly payout to around $1,200. Phrased differently, the amount that you pay for electricity each year is directly offset by the amount that you earn by owning a portion of your electric company. Logistically, it would be great to just call this 'free electricity'. While this realistically is not the case, the math dictates that the outflow is compensated by a like process inflow. It's similar to a butcher shop owner being able to eat roost beef sandwiches from the counter, without hassling with the cash register. Of course, there might be an opportunity cost to not having your money invested elsewhere, but I believe this ideology is useful in realizing what it means to have an ownership stake. If in 10 years time you move, perhaps you sell your ownership claim and advance to being an owner with the next provider. For that matter, perhaps you stick with TE and let them pay your next provider's electric bill. The great thing about owning a profitable business is that as long as the business makes more money, there's an increasing propensity that your ownership stake will increase in value over time.

Gasoline

Are you sick of high gas prices? Let's say that you average 30 miles of travel, 5 days a week, with a tank that gets 25 miles per gallon. At $3.50 a gallon, that works out to about $21 a week, or $1,092 for the year. Buy equal portions of ConocoPhillips (COP), Chevron (CVX) and Exxon Mobil (XOM) for an average yield of 3.6%, and it would take a $30,300 investment to cancel out your yearly gas expenditure. If gas prices go up over the long-term, you're covered as your ownership claims are likely going to be more valuable. Furthermore, these companies have storied track records of increasing their dividend by a rate that far outpaces inflation. For example, instead of spending $1,092 on gas next year perhaps you spend $1,150. Once again, you're covered. It is overwhelmingly likely that COP, CVX and XOM will increase their payouts quicker than this moving forward.

Food

We all try to stay away from the junk food, but sometimes you just get that hankering. Maybe you visit McDonald's (MCD) twice a week, spending an average of $5 each time or $520 a year. Given McDonald's 3.1% current yield, that translates to an investment of about $16,800 to make your yearly Mickey D stops effectively gratis. Suddenly that guilty pleasure doesn't seem so guilty anyone. Also to be fair McDonald's does offer a variety of health conscious choices. Using McDonald's past dividend growth history as a guide, it's only a matter of time (as little as a year even) that you are making more money as a McDonald's owner than you are spending as a McDonald's consumer.

But of course we need to eat more than twice a week, so most of us frequent this place called a grocery store. Perhaps you shop at Wal-Mart (WMT) or Target (TGT). And while paying for a year's worth of groceries through an ownership claim is likely to be a daunting $100k+ proposition, we can take baby-steps. Maybe we look at it in the frame of 1-month's worth of groceries at Target. Call it $300 at today's 2.2% yield, which would require an investment of around $13,600. We add to this as we are able, perhaps shooting for 2-months' worth of groceries next year. Additionally, the dividend growth of these companies tacks on a couple of extra days to our goal. Sooner or later, we're literally paying ourselves.

Tooth Paste Budget

Personally, I don't have a tooth paste budget, but it isn't unimaginable that someone out there budgets strictly down to the penny. I don't know, perhaps you spend $15 a year on the stuff. This one is easy, take Procter & Gamble's (PG) 3.4% current yield and you only need a $500 investment to feel 'toothpaste secure'. Of course, we don't have to limit it to just toothpaste. Maybe we expand to tissues and toilet paper, on which you spend say $60 a year. Make a $1,700 investment in Kimberly-Clark (KMB) and you can be satisfied thinking "OK, now I have a lifetime supply of Kleenex tissues and Cottonelle toilet paper through my ownership in a wonderful company." Lifetime in that is highly probable that Kimberly-Clark will raise their payouts faster than they will increase the price of tissues and toilet paper. Even if this isn't the case, one could simply increase their KMB investment.

Beer Money

Saw the actual Blue Moon last Friday and now you feel inspired to grab a couple Blue Moon beers? No worries, a $27,000 investment in Molson Coors (TAP) gives you the freedom to rack up a $15 beer tab each and every week.

Housing

I suppose you could go with some REITs here or perhaps the bank through which you have your mortgage. Then again if you have sufficient funds to invest enough to make your mortgage payments, then you probably shouldn't have a mortgage in the first place. This is one where you don't have to partner with anyone. You can go ahead and own the entire "business" by yourself.

The overarching point is twofold. First, when I talk about investing $24,000 in TECO or $30,300 in big oil, you should be instantly skeptical. Sure, investing these sums of money would work out to effectively cancel out your specified expenditures via dividend payouts. The problem is having these sums of money to invest in the first place. To this point, I would suggest that the process is neither easy nor quick. Instead, for the majority of us, it is a slow and trying process. But that doesn't mean that it isn't a worthwhile endeavor. Even if we can set aside $500 here or $1,000 there, our continuous efforts will be rewarded.

The second point that is derived from this ideology is that you are effectively "backing out" reasonable investment ideas. You are a consumer with an abundance of options. If a certain product is good enough to buy, it might be good enough to become a partner in the company. Think of the places that you shop and buy things. There are alternatives out there, yet there is a reason you make certain purchases. Sure you're a unique individual, but it's not inconsistent to believe that others may be buying Coca-Cola (KO) for the refreshment, PepsiCo's (PEP) Lay's potato chips for the taste, and Kleenex tissues for the brand.

If you come into the dividend investing universe knowing that it is a slow yet valuable process, you can follow suit in your thought process. Maybe you will make $1,200 in annual dividend income this year and you can think, "My electric company ownership claim is paying for my electric, so I don't have to worry about that." Maybe in a couple of years you're making $2,000 in dividend income and you can think "OK, now my electric bill is taken care and so are 3-months worth of groceries." It can be rewarding to put things in perspective; if you make $1,095 in yearly dividend income that translates to $3 a day or $21 a week. If you then go out for a $20 dinner, your wealth increased by $1 based solely on you being an owner. Better yet, if you make that same dinner yourself for $6 then you add $15 to your wealth.

For many income focused investors, their ultimate goal is to live off of dividends. But if you are currently making $1,000 or even $100 in annual dividend income, it can be daunting to think about having to generate $50,000 in annual payout income. Keep in mind that there are likely a variety of things working in your favor: time, effort, dividend growth. Jumping from $1,000 to $50,000 is not an easy proposition. But thinking about your ownership claims in the form of moving from covering 3-months' worth of groceries to 4-months' worth of groceries seems much more manageable. Small steps, large effort and meaningful investment choices, and eventually your ownership inflows will outweigh your consumer outflows.

Source: You Can't Beat Them, Join Them