Can Albert Einstein's Math Get You To The Finish Line? Retirement Portfolio Quarterly Review

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Includes: BBEPQ, BMY, CAG, CBRL, DRI, ED, EPR, FUN, HCP, JNJ, LNGG, MMLP, O, OHI, PFE, S, STON, SUI, T, VZ
by: George Schneider

Summary

Albert Einstein issued the biggest endorsement of Dividend Growth Investing when he pronounced compound interest equivalent to the 8th wonder of the world.

I like being on the right side of history. That's why I'm a dividend growth investor.

With Einstein and math on your side, why fight the truth?

It's time to take the full measure of the Targeted Expenditure Investment Portfolio, one full quarter in, all seven sectors considered.

Albert Einstein endorsed it 70 years ago. Should you?

When presented with the concept of compound interest, the man responsible for the Theory of Relativity and so many other important discoveries, this great intellect pronounced this simple mathematical concept equivalent in its enormous importance to the 8th wonder of the world. (This picture suggests it was the ninth wonder).

Sometimes, simple is just plain good.

Most of us are familiar with the example of asking someone, given the choice, would you choose one million dollars at the end of 30 days, or the sum that results from a penny on the first day, then doubling it every day for 30 days?

A lot of bar bets were won with this one.

How many of us know the actual answer and appreciate the enormity of what compounding returns can accomplish?

Here's what the math looks like:

Day 1: $.01
Day 2: $.02
Day 3: $.04
Day 4: $.08
Day 5: $.16
Day 6: $.32
Day 7: $.64
Day 8: $1.28
Day 9: $2.56
Day 10: $5.12
Day 11: $10.24
Day 12: $20.48
Day 13: $40.96
Day 14: $81.92
Day 15: $163.84
Day 16: $327.68
Day 17: $655.36
Day 18: $1,310.72
Day 19: $2,621.44
Day 20: $5,242.88
Day 21: $10,485.76
Day 22: $20,971.52
Day 23: $41,943.04
Day 24: $83,886.08
Day 25: $167,772.16
Day 26: $335,544.32
Day 27: $671,088.64
Day 28: $1,342,177.28
Day 29: $2,684,354.56
Day 30: $5,368,709.12

That's right. If you chose to be patient and wait the thirty days for the payoff, you'd receive more than 5 times that million bucks, or $5,368,709.12 to be exact.

The first twenty days (years) doesn't seem very impressive. But take a look at day (year) 21. Then glance at day (year) 27 through 30. Truly astounding returns become crystal clear.

This is what dividend growth investing looks like. In the beginning, things move slowly, depending on how much you start with and whether you add new funds to your investments during your working years. But as the years progress and your dividends gather steam through increased dividends paid by your companies, and secondly through reinvestment of those dividends, it takes on the visage of just the opposite of Sisyphus, struggling to push the boulder up the hill.

It becomes a big ball of snow gathering speed and heft as it rolls down the hill, growing exponentially bigger with every passing month and year. Of course, you won't be doubling your capital every year (unless the market gods are smiling on you for 30 consecutive years). But the end result will be almost as astounding.

Do you have what it takes to stay the course?

Are you the impulsive sort who instinctively grabs for the brass ring, or are you the patient type, willing to invest in a strategy of growing your dividend income over time and willing to stay the course till fruition? In this case, we're talking more on the order of 30 years rather than 30 days. Why, it's just a factor of 360 times longer!

Which would you choose for your retirement, the $1 million or the $5 million? Can you wait?

Let's measure our progress for a full quarter

Beginning on September 4 of this year I published a series of seven articles to date. I proposed choosing investments that targeted specific expenditures particular to retirement by choosing strong, solid companies that have demonstrated long periods of earnings and dividend growth, calculated to pay our retirement bills and cope adequately with ever-present inflation.

Sectors Covered

Over the course of 7 articles, I covered in detail a total of 21 stocks, 3 in each of the following sectors, chosen to gradually develop a broad and diversified portfolio:

1. Utilities

2. Energy

3. Healthcare

4. Food

5. Housing

6. Entertainment

7. Pharmaceuticals

This table illuminates a full quarter's return on this portfolio, detailing company name, sector, ticker, price paid, shares purchased, current price, investment made, capital gain (loss), dividend amount and total return for each security and the overall portfolio.

Table #1

Dividends on Parade

During just this one full quarter of ownership, 5 of the 21 equities bought during the quarter gave us dividend increases per share on the order of 2% to 4% from the previous quarter:

  • Verizon (NYSE:VZ) increased from $.53 to $.55
  • Martin Midstream Partners (NASDAQ:MMLP) increased from $.793 to $.813
  • Omega Healthcare Investors (NYSE:OHI) increased from $.51 to $.52
  • Realty Income (NYSE:O) increased from $.1828 to $1831
  • StoneMor Partners (NYSE:STON) increased from $.61 to $.62

Analysis

As can be seen from the above table #1, the energy sector, including Linn Energy, LLC (LINE), Martin Midstream Partners L.P., and Breitburn Energy Partners L.P. (BBEP) had the poorest quarterly percentage total return of the seven sectors covered. This performance was tied directly to the global price of oil plummeting more than 40% to date and the Saudis' stated willingness to accept $70 per barrel.

A few days ago, the Saudis prevailed at the OPEC meeting and it was announced that OPEC would stand pat and not reduce production to try to lift oil prices. The oil market promptly swooned again, and for 2 days, on Friday and the following Monday, many names that had any involvement in the oil patch simply dived, giving up another 15% to 25% over a 2-day period. Linn Energy and Breitburn Energy Partners were prominently left behind among the ashes of the oil wells.

This collapse occurred in the face of increased supply coming on board from the leading technology in the oil patch, fracking. In addition, Japan has entered another recession, China has slowed down from its torrid growth pace of recent years, and Europe is still stuck in very low growth mode. These slowing demand factors have also placed a great deal of downward pressure on the price of oil.

At the same time, since the price of gasoline has dropped to an average of $2.70 per gallon in most of the country, less than $2.50 in 17 states, and $1.99 in Oklahoma, and heating oil's price has declined in tandem, at least one hundred billion dollars, perhaps more, has been freed up for consumers to spend on the products and services provided by the other companies chosen for this portfolio. Over the past two days, it has slowly dawned on marketplace participants that this collapse in oil is a net positive for the rest of our economy and new records in the Dow and S&P are again being forged. There's always a silver lining, and this is certainly it.

It should be kept in mind that since our main focus here is to grow the dividend stream, these 3 energy names continued to deliver on the dividend front by paying out $2006.50 in promised dividends. Linn Energy announced their continuing monthly distribution just yesterday and gave it a pop in price as investors were infused again with some confidence. Again the silver lining of course, is that since gasoline has fallen from over $4 a gallon to less than an average of $2.70 a gallon today, our dividends are buying us many more gallons of gasoline than just 4 short months ago. Auto and truck sales are going gangbusters as consumers are snapping up SUVs once more with cheap energy prices on tap. Viewed from another angle, our gas and heating oil savings can buy more of those holiday gifts coming up.

Temporary paper losses are immaterial. As long as these names are held, no capital loss has taken place.

In fact, over the last several days oil has bounced, and oil stocks dramatically so. It would seem that the bottom may in fact be in as several names have risen convincingly by 10% to 12% in just days.

Old Man Winter has begun to show his face as temperatures have dropped across the nation and Buffalo was buried recently in six feet of snow. How much longer till draw-downs on supplies commence (a 4 million drawdown in inventories was announced just yesterday) and supply and demand comes back into balance, pushing oil above $100 per barrel? Either way you look at it, the dividends on these names are keeping us way ahead of inflation and paying the bills, which is the goal in retirement.

The next sector produced a mixed showing. The utilities, including Consolidated Edison (NYSE:ED), AT&T (NYSE:T), and Verizon. Individually, they delivered a -.86% to 12.52% total return for the quarter. As a group, they provided a 3.95% quarterly return and an annualized, 15.8% total return. With the impact of the recent ad campaign from Sprint (NYSE: S) offering to cut competitor's bills in half for anyone who switched service to them, the stock prices of AT&T and Verizon compressed lately. Even with those price compressions, these returns kept us ahead in electricity, phone and internet service bills.

On personal note, my triple bundle provider, Verizon, discontinued $20 of our original monthly discounts after the original two year agreement ended. I readily agreed to the new contract price when I realized that VZ's latest dividend increase of 3.78% more than covered the higher cost with plenty to spare. That's targeted dividend growth investing at work!

Health related REIT's including Omega Healthcare Investors, Inc., Realty Income Corporation and HCP, Inc. (NYSE:HCP) turned in a solid quarterly performance, from 11.56% to 15.52%.

Food sector companies such as ConAgra Foods, Inc. (NYSE:CAG), Cracker Barrel Old Country Store, Inc. (NASDAQ:CBRL) and Darden Restaurants, Inc. (NYSE:DRI) put up excellent total quarterly returns ranging from 12.34% to 26.42%.

The real estate sector companies also sported very strong returns. Sun Communities Inc. (NYSE:SUI) returned 16.67% for the quarter, StoneMor Partners LP, up 8.6% and again, Realty Income Corporation, returning a very strong 15.34% from the date of this recommendation.

The entertainment-related sector, consisting of such recommendations of, again, Realty Income Corporation, Cedar Fair, L.P. (NYSE:FUN) and EPR Properties, Inc. (NYSE: EPR) came on solid with total returns of 9.28% to 10.91% for the quarter.

The last sector covered in my article of October 30, 2014 was the pharmaceutical giants, including Johnson & Johnson (NYSE:JNJ), Bristol-Myers Squibb Company (NYSE:BMY) and Pfizer Inc. (NYSE: PFE). With Bristol-Myers recent FDA drug approval giving it a 14% lift one day this quarter, this sector put on a fine showing with total returns ranging from 3.90% to 9.15% for the full quarter.

The Sum of it All

Even with very large impairments from two out of three of the energy names, the overall portfolio of 21 names put in capital gains for this past quarter of $55,578 and garnered $12,005 in dividends, for a total quarterly return of $67,583, or 6.66%. On an annualized basis, if the portfolio were to continue to perform at this rate, the annual total return would be 26.64%.

The market corrected almost 10% during this period, then recovered and went on to make new highs. Also, during this same period, the Saudis threw a wrench into the oil markets and caused upheaval and a bear market collapse in almost any name associated with the oil patch, including the three names in this portfolio. Diversification into 7 sectors and 21 names kept this portfolio churning out strong gains, both in capital appreciation and dividends, and even saw five dividend increases, to boot.

Conclusion

If retirees and near-retirees keep their eye on the ball and focus not on the everyday vicissitudes of the ups and downs of the markets, but on the ever-increasing stream that their portfolios produce for them through dividend growth and reinvestment of those dividends, we can buttress ourselves against any corrections, and even bear markets that come our way (like the bear market that recently took oil from $107 to $67 per barrel). It has been demonstrated that in fact, the most recent downdraft in the markets that culminated on October 15, 2014 was a 9.6% correction that offered a wonderful entry point for investors to take new positions, or build larger positions in names they desired to balance their portfolios.

Even better, we can view these irrational panics as opportunities to go shopping and finally buy those names on our shopping lists that have now become ridiculously cheap and present wonderfully high, accidental yields we thought we'd never be able to attain. This author continued to buy all the way down through that recent correction and was handsomely rewarded by a big boost in annual income and yield. As discussed above, when the pain becomes the hardest to bear is just the time when the biggest money is made. Purchases of LINE and BBEP last Thursday would have yielded excellent capital gains and current yields just below 18%.

If we successfully build portfolios that pay the bills and keep us ahead of inflation, we've accomplished our mission.

Once the retiree couple knows where their bill paying ability is coming from for the rest of their lives, they can sleep well at night. They can rest easy knowing they'll always have the wherewithal to pay for all of their retirement wants and needs. The exposition above clearly demonstrates the ongoing growth of dividends. This is true SWAN investing.

In the first installment of this series, I addressed ways to target investments to pay for utility, electric, cable and phone bills in retirement. In the second installment, I offered suggestions to help pay the various energy bills in retirement, including heating oil, natural gas to heat our homes and gasoline to fill the tank. The third installment dealt with the costs of healthcare that we all face. The fourth article in this series addressed food insecurity and how to deal with that in retirement. The fifth article dealt with housing expenses and maintenance. The sixth article in the series addressed ways to invest to cover entertainment expenses in retirement. The most recent seventh article suggested investments that could cover drug and medical expenses in retirement.

If you found this article, the concept and investment results interesting and intriguing, I invite you to read the other articles in this series. Stay tuned for further articles that will introduce additional sectors and names to further diversify this portfolio for continued ballast and mitigation of risks to any one sector.

Should you be interested in reading any of my other articles detailing various strategies to enhance your returns on a dividend growth portfolio, please feel free to find them here.

As always, your comments, discussion and questions are eagerly awaited.

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: The author is long BBEP, O, STON, BMY, ED, SUI, EPR, LINE, T, MMLP, VZ.

The author wrote this article themselves, and it expresses their own opinions. The author is not receiving compensation for it (other than from Seeking Alpha). The author has no business relationship with any company whose stock is mentioned in this article.