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Smarty_Pants

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  • Will The Allure Of Dividend Growth Continue? [View article]
    "By the way, start searching around for a little more yield on your cash." - Gratian

    Thanks, but no thanks. My checking account money is used to pay bills mostly. Any excess money beyond my buffer amount gets transferred elsewhere. The buffer amount isn't big enough to bother stretching for yield.

    As for the cash in my mattress, I'm happy to earn nothing on it. The possibility of a bank holiday in the US is a lot higher than people might think (my opinion). Cash in the bank is worth exactly $0 if you can't get to it. Just ask depositors at WaMu back in late September of 2008.

    How long can most people manage to meet their obligations if suddenly the most you can take out of your bank in cash is a few hundred dollars a week and your credit cards stop working? I hope it never happens here, but if it does I'll be prepared. I consider the lost opportunity cost a disaster insurance premium I'm willing to pay.

    Even today it's difficult to get large sums of cash out of a bank, doesn't matter if your account balance has multiples of the amount you are trying to withdrawal. I know a local business man who takes cash out regularly for his operations. Sometimes he winds up taking everything the bank has in tens, fives, and ones for a $10,000 withdrawal. Most of that comes into the bank from local utilities who receive small cash payments from a lot of customers who pay in person.

    Banks don't actually have a lot of money on hand from day to day. I figure it's best to have some of my own IN hand, just in case. But that's me.
    Feb 16 01:16 PM | 2 Likes Like |Link to Comment
  • Will The Allure Of Dividend Growth Continue? [View article]
    "What do you see as the main reason why a 20-40 something who is debating amongst the two consider concentrated DGI as opposed to a non-dividend/growth concentration or total return benchmarking?" - Adam Aloisi

    I'll take a stab at that. Of course this is only my personal opinion and views are likely to vary for others. FWIW when I say DG investing I mean a well thought out, disciplined approach where stocks aren't purchased unless they are priced right (ie. undervalued relative to their historic valuations). I expressly do NOT mean simply buying any high yielding stock, or buying a stalwart dividend payer at any price.

    When I say growth investing I mean buying individual stocks with the intention of harvesting capital gains. Indexing is another story since it requires no decisions other than to start and add savings, though even indexing can present difficult decisions at the depths of a bear market.

    The chief advantage of DGI, as I see it, is that there are fewer decisions necessary than a growth approach. Since the intent is to hold any stock purchased until it stops growing its dividend, there is generally no need to decide when the best time to sell might be provided the dividend keeps growing.

    If you have planned well, and purchased a good DGI stock at a good price, you can let it ride without worrying too much about whether today is a better day to sell than tomorrow might be.

    When I focused on growth investing I was always concerned that I might be holding "too long" and lose out on any gains (or worse incur losses) if I didn't sell at new high prices. I was always second guessing myself because there is always a better way to get more growth than what I was doing. Diversifying only served to add more potential decisions, and more possible sub-optimal results.

    With DGI I can lay out a plan that identifies annual income goals from now to the day I retire (which is based on my goals) and so long as my portfolio is meeting or exceeding those income goals I don't have to do a thing but monitor my stocks for bad news. More stocks means that bad news for any single stock is a minimal impact on the overall portfolio and the investor can replace it with minimal impact on the end goal.

    This one aspect, I feel, makes DGI a good choice for younger folks. It's not terribly difficult to find good DGI stocks at good prices given David Fish's CCC list and DVK's Top 40 book (among other sources). Nor is it difficult to lay out your plan of annual income goals given your current age, desired retirement income, and investing capital.

    Once that plan is laid out it's a straightforward task to construct a DGI portfolio to meet it (if the goals are realistic). Once the portfolio is set up making changes is also straightforward if it begins to under-perform. Finding good higher yielding, or faster growing dividend payers isn't impossible. Further, when Mr. Market goes into bear territory a DGI'er finds better bargains and can improve their portfolio's income performance while prices are low. Since prices are secondary and income is less volatile a bear market isn't the end of the world and often it can present good opportunities.

    A growth portfolio is more challenging I believe. I'll admit you can set up annual goals for valuation until retirement, but what do you do when Mr. Market fails to cooperate and you fall behind? You don't know when a bear market will end or the next bull market will begin. Do you sell or hold? What if you sell at the bottom and miss out on the start of the next bull? What if you don't sell and prices continue to slide? At that point a growth investor has very few good choices to make and that's not a pleasant place to be.

    In summary, I believe that a DGI approach is more robust and achievable for people with basic stock market experience provided they don't mind doing the up front ground work.

    For those just starting out in the market (ie. youngsters) DGI is a means for achieving success with a high probability and low stress. If you have 35 years to go then you don't need to rely on achieving 15% returns every year to fund your retirement if you make steady 8% progress with DGI. However if you take bigger risks via a growth portfolio and suffer a big loss, you are left in a position where those big killer gains are necessary in order to make your end goals. The shorter the time to retirement, the more you are forced to gamble in order to catch up.
    Feb 16 12:36 PM | 9 Likes Like |Link to Comment
  • Will The Allure Of Dividend Growth Continue? [View article]
    "on October 9 2007 ... No one had a clue that in a very short time things would change abruptly." - Gratian

    There were signs to be recognized earlier than that. The day after I heard about Countrywide Mortgage having difficulties packaging and selling its non-conforming loans I sold everything and went to cash (early August 2007).

    When the S&P 500 broke through 1500 in early November I went short and stayed that way until the FED stepped in to rescue Bear Stearns and sell it's carcass off to JPM for a song. At that point I got out (too early it turned out) because I wasn't going to fight the FED if they were willing to print up multi-billions to loan out to big banks every time one had difficulties. I took my profits and ran, leaving a lot more on the table than I got.

    I had a pretty good year in 2008, but I wouldn't expect many others realized what the failure of Countrywide foreshadowed. The signs were there though.

    Today is a slightly different story. The FED is actively engaged in mitigating market meltdowns, so clear and obvious signals will a lot harder to recognize.
    Feb 16 11:33 AM | 2 Likes Like |Link to Comment
  • Will The Allure Of Dividend Growth Continue? [View article]
    Gratian,

    Agreed. Having an emergency fund sitting around close at hand in cash is a good idea. I keep a couple month's expenses stuffed in my mattress, earning nothing, melting away with inflation. That money isn't meant to earn anything. It's meant to keep me out of hot water, and one day that cash might be worth many multiples of the value it lost just sitting there. You never know. I can afford to let it collect dust on the off chance I can't get my hands on any other funds some day in the future.

    The money I contribute to my 401k and the matching funds currently sit in a money market option. I don't like any of the fund choices I have, so I just collect the matching money and let it pile up. When I have the chance to transfer it to a self-directed account I'll put it to use. Until then I won't lose any sleep over a 50% initial gain that collects 1% going forward. I've done worse in the past.

    I also keep several months' expenses in my checking account so there's a cushion for large purchases, should I need it. That also lets me 'borrow' from the future every once in a while, should I find a bargain that needs to be addressed at once.

    Everything else goes into my brokerage / IRA / Roth accounts and gets invested in equities. I might have 0.1% of the total in cash at any given time. I've arranged my money to deal with life elsewhere. The brokerage accounts are put to work in full.

    That's what works for me. It's probably not the way most others would do things, but that's OK. I provide the youngsters my opinion if they ask, but I'll also point out that they have different concerns and obligations than I do so they might be better served by a different approach than mine.
    Feb 15 07:55 PM | 3 Likes Like |Link to Comment
  • Will The Allure Of Dividend Growth Continue? [View article]
    Clipping coupons generally refers to bond payments. Old-Timey bond certificates came with coupons attached, which the owner would 'clip' off and exchange for their interest payment every so often.
    Feb 15 07:31 PM | 3 Likes Like |Link to Comment
  • Will The Allure Of Dividend Growth Continue? [View article]
    "Are you advising these young investors to invest 100% in equities?" - Gratian

    That generally isn't a part of the discussion unless they bring it up. Each person will have different requirements in this regard.

    Putting 'cash' into a money market fund entails its own risks as the September 2008 run on money markets demonstrated when Lehman Bros. went bankrupt. Even cash in your mattress risks the loss of purchasing power due to inflation.

    Asset allocation is fully a different, and important, discussion and not one my spreadsheet is meant to influence.
    Feb 15 02:50 PM | Likes Like |Link to Comment
  • Will The Allure Of Dividend Growth Continue? [View article]
    "When you show that spreadsheet around, is anyone actually interested?" - Be Here Now

    I only show it to those who express an interest first, and generally they are very interested after seeing and discussing what is possible over the span of their working career. Most are amazed to see that there is a way to produce that amount of income at retirement by applying a systematized methodology over a long time frame.

    It remains to be seen whether they adopt DGI and follow through with it, but I am happy to know that they are aware of the DGI choice and the possibilities it presents. The rest is up to them.

    Unfortunately I have had some in the 50+ age bracket express interest who discover that 'tomorrow' has arrived and they now discover that they have not saved enough for a switch to DGI. Many of these will need to work until they cannot in order to afford to 'retire'. That's why I make the effort to show the 20-somethings why saving and investing are important to begin with. Implementing any savings and investment plan today is better than waiting until tomorrow.
    Feb 15 01:05 PM | 3 Likes Like |Link to Comment
  • Will The Allure Of Dividend Growth Continue? [View article]
    Thanks for a level-headed discussion of DGI Adam. It's always nice to see people discuss whether particular approaches are appropriate or not and be willing to acknowledge that different investors just might have different goals. That point is usually presumed away by many others and it generally forms the basis for nay-saying DGI.

    I tend to agree with Chowder philosophically, why is there an urge to have young investors take big risks by the investment industry? In my view, that is no different than asking them to risk their hard earned savings because when they crash and burn they can double down and take even bigger risks later on to 'make up for it'. Might as well buy Power Ball tickets and hope for the best.

    I have created a simple spreadsheet to estimate the income and value of a simplified DGI portfolio over time. The user can specify an annual savings amount, the portfolio yield, and the portfolio dividend growth rate. Each year the sheet calculates the shares purchased, the portfolio income, and the portfolio value. Share prices are assumed to grow at the dividend growth rate every year. The spreadsheet is very conservative, and only invests dividends received and new money at the end of each year.

    I have shown this spreadsheet to young co-workers who have asked me about my investing. Using conservative numbers ($500/month savings, 3.5% yield, 7% DGR) produces an annual dividend income after 40 years (start at 25, retire at 65) exceeding $70,000 per year. Increase the yield to 4% and the DGR to 8% and that future income exceeds $100,000 per year.

    Most of these co-workers can afford to save $500/month, and building a portfolio with 3.5% yield and 7% DGR is not that difficult. With a little bit of work anyone can exceed that result. DVK's public portfolio yields 4.4% and is growing dividends at 13% CAGR over the last 4 years. It's not as hard as picking the next superstar growth stock and putting all your money into it, that's for sure.

    Why is it that in every other facet of life the adage "slow and steady wins the race" is considered good advice, but when discussing investments the same sage advice is considered heresy?

    Start early, save regularly, invest conservatively and the chances of achieving a positive outcome are significant as the time-frame increases. It just so happens that DGI is one reliable means of reaching the finish line. Those with lots of time before reaching retirement would be wise to consider DGI as a possible method of achieving a comfortable retirement with lower risk.
    Feb 15 10:39 AM | 5 Likes Like |Link to Comment
  • My Fourth Quarter Portfolio Review [View article]
    "My own foray into DGI is just beginning ... Who knows, maybe I too will write about it." - diamondjimbob

    Welcome aboard diamondjimbob. I personally hope you do decide to document your journey here on SA, even if you choose to instablog everything instead of writing published articles. The real time recorded success of new DGI-ers helps others to see that it can be done without the aid of professional investment advisers, and that it can work just as well to provide income in retirement.

    I started my DGI portfolio back in late 2011 after seeing the experiences of folks like DVK, Bob, and Chowder's $3 Million portfolio. My experience has been similar to Bob's. It hasn't been perfect, but it's working a lot better than I'd hoped so far. We all learn from each other's efforts, and your experiences would add to that effect.

    One other suggestion, get David Van Knapp's book if you haven't already. It's an excellent starting point for understanding and implementing a DGI approach.

    http://bit.ly/16Chiqi

    Best of luck on your DGI adventure. I hope we will be reading about it in the future.
    Feb 15 09:10 AM | 3 Likes Like |Link to Comment
  • My Fourth Quarter Portfolio Review [View article]
    Welcome back Bob! As always, it's always good to see your portfolio is following your plan and generating growing income. Even the details of how you are dealing with the stocks that stumbled a bit is a chance to learn for us.

    I too have been doing a bit of selective pruning lately, exchanging the overbought, slowing down stocks for underpriced, faster growing stocks. Amazingly, selling the old and buying the new boosted both my current income and the dividend growth rate for the portfolio.

    http://seekingalpha.co...

    Just this week I trimmed HAS and used the proceeds to buy O. I think the HAS price is a bit ahead of itself, so I pulled out my initial investment and established a new position in O, while keeping a 60% position in HAS. Add another increase in current income. I think I'm starting to get the hang of this DGI stuff. ;-)

    This new position in O brings my portfolio up to the 30 stock level. They aren't equally balanced, but reasonably close (largest position is only 5.2% of the total). 30 stocks was my initial goal when I started the DGI portfolio a bit over 3 years ago, and here I am.

    Now I'll have to review the plan and select a new goal. Sometimes things work out the way you want them too (if you plan well and work hard enough).
    Feb 13 07:19 PM | 5 Likes Like |Link to Comment
  • Dividend Challengers: 12 Increases Expected By The End Of April [View article]
    Thanks David. Long LO and TCAP on this list.

    How do you handle special distributions on your spreadsheet? I see TCAP is sending two extra dividend payments of $0.15 per share out this year in addition to their regular dividends.

    Gotta love that. A 13.8+% "bonus" for the shareholders of TCAP. :-)

    http://bit.ly/1lIwVmE
    Feb 13 08:35 AM | 2 Likes Like |Link to Comment
  • Warren Buffett Is Wrong About Dividends [View article]
    "The one strategy that is almost certain NOT to be successful (unless you already have a very large sum of money) is investing in dividend paying stocks for its current income stream and expecting it to have grown significantly by the time you retire." - stvrob_63

    Depends when you start. If you contribute $500 / month starting at age 30 and invest in DG stocks paying a 3.5% dividend which grows at 7% annually, by the time you are age 65 the dividend income will be around $63,000 per year and the portfolio will be worth around $1.8 million.

    If you start at age 25 your annual income would be roughly $100,000 and the value about $3 million at age 65.

    Now it's just my opinion, but I'd say that's DO-able.
    Feb 7 09:04 AM | 1 Like Like |Link to Comment
  • Warren Buffett Is Wrong About Dividends [View article]
    "this is where you have gone astray... Unless you were already quite wealthy, it is doubtful that you would have enough money to simply buy great companies and live off the dividend stream" - stvrob-63

    Not necessarily true. If you can live off 4% of assets by selling that portion, then you can also live off 4% dividend payments. It's not terribly difficult to set up a DG portfolio paying out 4%.

    The DG portfolio I've been assembling over the past 3 years pays me more than 5% and the dividend stream grew by 15% in 2013. Not only could I generate equivalent "income" to selling off 4% of my shares, but I can reinvest the excess dividends above the 4% level and see my dividends increase in the following year.
    Feb 6 07:32 PM | 4 Likes Like |Link to Comment
  • The Warren Buffett Argument Against Paying Dividends [View article]
    "When you recognize that you can generate income by selling shares, you focus on proper money management so that so that you have a more optimized selling schedule" - varan

    Indeed. I won't argue that you can't generate income by selling shares because obviously you can if you want to. It's a personal choice. Either method will work provided you start with a large enough sum of money at Square 1.

    In fact, four years ago I would have been a tough sell for the dividend route. At that time I didn't realize there was a small subset of companies that not only paid, but raised their dividend regularly. Once I saw that the light bulb went on. It didn't take me long to verify that quite a few large companies consistently grew their business over long periods and rewarded their shareholders with CAGRs above 10% for years on end. I wish I had realized that fact a lot earlier in life. I'd be a lot better off than I am now for having chased a rainbow or two trying to beat or time the market.

    In truth, choosing between selling shares and collecting dividends is more an exercise in risk allocation. The person who plans to sell shares must deal with the potential of a severe down market when they 'need' the money and being forced to sell shares at low prices.

    The person who plans to collect dividends must deal with the potential of having to reach for higher yield (with a smaller starting sum) in order to meet necessary expenses. The higher yield is likely to have its own risks (slower DG rates, or higher risk of a dividend cut) that might arise in the future.

    Either way, a retiree must decide how 'best' to handle these potential risks once the paychecks stop showing up regularly. Regardless, choosing either method will likely be problematic at some point if there aren't sufficient retirement savings at the beginning.

    That's the important hurdle to clear if one hopes to enjoy a comfortable retirement. So long as you can live on X% of your savings each year, and you can grow your investments at (X + inflation + 1)% CAGR, whether by DGI or TR, you should be able to get the job done. Beyond that point, it's simply a matter of personal preference for implementing the plan.
    Feb 2 02:04 PM | 2 Likes Like |Link to Comment
  • The Warren Buffett Argument Against Paying Dividends [View article]
    "the results above are for the period 1983-2012" - varan

    OK. We'll concede that the 4% rule with withdrawals works if you retire at the beginning of a bull market. How does it fare for the person who retired in 1998 or 1999 where the CAGR of the S&P 500 through 2012 was only 5.6% instead of 8.9% like it was from 1983?

    I imagine that there will still be money left under those circumstances, but it's probably a lot less than $1.8 million and if there's another significant market correction in the next few years the retiree might be getting a bit concerned.
    Feb 2 12:10 PM | 1 Like Like |Link to Comment
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