A Single Mother's Income - Dividend Growth Investing

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Includes: BBL, BHP, CL, CVX, GE, JNJ, KO, MO, O, PG, RYN, SNMCY, T, UL, WBK, WOLZY
by: Dividend Diva

Summary

For the past four years I have known that I would be a single mother - someday.

A 20-year consulting career rewarded me well (salary-wise), but doesn't translate well to part-time work.

It has, however, given me a small asset base.

Dividend Growth Investing is a key strategy in building my post-divorce income.

Background

Two weeks ago, I officially became a single mother. It was a decision four years in the making, so I was not caught off guard. In reality, the biggest change to my life as a single parent is financial. The statistics for single mothers and their children living in poverty are not good.

With an accounting degree behind me and experience building a dividend paying portfolio of stocks in the past, I am determined that my daughter and I will not succumb to that statistic.

My Financial Goals, or Killing Three Birds with One Stone

Fiscally, there are three main goals before me. My over arching plan is to address all three with the same solution: dividend investing. The portfolio I build will comprise a mix of dividend growth and high yield investments. I'm not young. I don't have that many years for compounding to work its magic.

Regardless, I believe through the experience of dividend growth investors on Seeking Alpha such as Dividend Mantra that a regime of regular investment and keeping costs low can address my three financial goals.

Retirement

I am in my mid-40s. My daughter was born when I was 40 years old. With a 20-year career behind me, I also have some assets behind me. Unfortunately, I also have little in the way of retirement savings. I will need income for my retirement. A small 401(k) from my consulting years will be rolled over into an IRA.

Boost Current Income

More pressing than my retirement income is my immediate need for income. For that reason all new investments will be made in a taxable account. The earnings from this account will supplement my meager retirement account earnings when the time comes.

The taxable account will provide two things:

Dividend Income: The quarterly dividends from my portfolio will provide immediate income if required. Ideally, dividends will be reinvested, thereby generating additional income. While it may be a challenge initially, other sources of income should provide for our daily needs.

Emergency Fund: Unlike real estate, stocks are liquid. You can have cash within days. While I do have a small cash emergency fund, it is nice to know I can tap my capital should an emergency arise.

Investing for my Daughter

A big reason for ending my marriage was because of the example I was setting for my daughter. I don't want to see her in this position. Ever.

One of the best ways to build a dividend growth stock portfolio is to start early. My daughter is 6. If I start now, investing on my daughter's behalf, with time, compounding, and bit of luck, she will never find herself financially tied to a man.

Portfolio Strategy and Rules

Below I outline my current investment strategy and the rules that stem from it. I use these rules as a filter to find stocks for further analysis. From there I look at the company's financial statements and consider how current economic trends (commodity prices, interest rate environment, etc.) may impact the company.

Diversification

My current portfolio is heavily weighted in one stock - General Electric (NYSE:GE). I began dripping into General Electric 13 years ago as an experiment in dollar cost averaging and compounding.

GE represents about 73% of my portfolio value. It also generates 73% of my portfolio's income. This large holding is a risk. Another dividend cut like the stock underwent in 2009 would decimate my small dividend income.

Though I currently still drip $100 a month into GE stock, this decision needs to be re-evaluated. The funds are likely better allocated to diversifying my portfolio.

Rule: Going forward, no single holding is to represent more than 5%-10% of my total portfolio value.

Consistent, Reliable, Increasing Income

The overarching goal for this portfolio is to provide income. As a single parent, there is no other income to rely on in our household. This portfolio will be my financial partner. Therefore, I need it to provide a regular stream of reliable income; one that grows over time, but not at the cost of my capital.

One measure of the reliability of a company's dividend is the dividend payout ratio. It is calculated by dividing dividends per share by earnings per share. The lower a payout ratio, the less of a company's current earnings are being used to meet its dividend obligations.

Companies with a long history of increasing their dividends are also considered to be a safe bet for consistently higher dividends. Though as a long-term holder of GE stock, I can confidently say that history is no indicator of future performance. Prior to its 2009 dividend cut, GE was a dividend aristocrat.

As much as when a stock pays its dividend should not be an investing decision, with a need for consistent income, this has played a part in my historical investment choices. The bills come in monthly. I need my dividend income to arrive that way as well.

Rule: Positions will be for the long term and pay dividends.

Rule: Dividend Payout should not exceed 80%. This rule alone, however, should never trigger a sale.

Portfolio Investments

The portfolio consists of two types of dividend paying stocks:

Dividend Growth Stocks

These stocks may not have the most stellar current yields, but they tend to have an impressive history of growing their dividends over time. They also tend to increase in value more than pure yield plays.

Year to date, GE raised the dividend 4.55% and Coca-Cola (NYSE:KO) has raised dividends by 8.2%. This beats the 2% cost of living increases wage earners commonly receive.

Rule: New positions in stocks deemed dividend growth stocks should yield between 2.5% and 4%.

Rule: Investments, at least initially, will come from the Dividend Aristocrat world. These stocks have an impressive history of increasing dividend payments annually for over 25 consecutive years.

Rule: Dividend growth should consistently exceed 5%.

High Yield Stocks

High yield stocks do precisely as the name implies. They pay an impressive dividend. The high current yield comes at a cost, however. Dividend growth is not as impressive and stock prices tend to be more stable.

The stocks I purchase in this category are generally market leaders that are well known and easy to understand. Yield should, however, not be the only investment trigger.

Since these companies rely on their ongoing revenue streams to pay dividends, there should also be some kind of barrier to entry for new competitors. While this is also true for dividend growth stocks it is even more essential for high yield stocks.

Rule: Wide economic moat should support dividend yield.

Rule: Dividend yield should be between 5% and 6.5%.

My Current Portfolio

My current investments are in companies listed on the US stock exchanges or the ASX (Australian Securities Exchange). Some of the stocks below are legacy investments - ones I have held for many years. Others are purchases I have made over the past three years to meet the financial goals I have outlined above.

It is easy to see that my current portfolio does not reflect the model documented. It should, however, get closer with each new purchase.

The forecast income in USD for the combined portfolios stands at about $1500 for the current year.

US-listed stocks

Stock

Type

Yield

YOC

% of Port

Income %

General Electric

DG

3.65%

3.83%

73%

73%

Realty Income (NYSE:O)

Y

4.50%

5.76%

3%

4%

Royal Dutch Shell B (NYSE:RDS.B)

Y

5.82%

5.72%

1%

2%

Rayonier (NYSE:RYN)

Y

3.73%

5.42%

2%

2%

Procter & Gamble (NYSE:PG)

DG

3.10%

3.61%

3%

2%

Altria (NYSE:MO)

Y

4.04%

6.95%

3%

3%

Johnson & Johnson (NYSE:JNJ)

DG

2.82%

3.31%

5%

4%

Chevron (NYSE:CVX)

DG/Y

4.00%

3.91%

2%

2%

AT&T (NYSE:T)

Y

5.64%

5.80%

2%

3%

Unilever (NYSE:UL)

DG

3.44%

2.96%

2%

1%

Colgate-Palmolive (NYSE:CL)

DG

2.17%

2.13%

2%

1%

Coca-Cola

DG

3.21%

3.18%

3%

2%

Total Portfolio

3.68%

3.94%

Key (DG = Dividend Growth, Y = Yield, Yield = Current Yield, YOC = Yield on Cost, % of Port = Percentage of Portfolio Value, % Income = Percentage of Portfolio Income)

ASX Listed Stocks

I am currently based in Australia, which means I can take advantage of franking credits on Australian listed stocks. Franking credits eliminate the double taxation of dividends - once in the company's hands and again in the dividend recipient's.

ASX stock purchases are not necessarily subject to the rules detailed above. While there has been impressive growth in the value of Australian stocks, I consider them much more of a yield investment, especially when you gross up to include the franking credit (which I have below).

It is not unusual to find Australian stocks with a current dividend yield of 5% or more. Add to that the tax credit and you have a before tax starting yield of over 7%. A couple of decades of good dividend growth and you have yield on cost numbers like those in the table below.

To add some perspective, however, the position in BHP Billiton (NYSE:BHP) was purchased in the early 90s, years before the 2001 merger of BHP and Billiton Plc. Similarly, the shares in Westpac (one of Australia's four major banks) were purchased in 2002. The Suncorp yields are inflated by a special dividend issued with the final dividend.

  • BHP is available as ADRs BBL and BHP on the NYSE
  • WBC is available as ADR WBK on the NYSE

Stock

Yield

YOC

% Port

% Income

BHP Billiton (BHP)

6.84%

10.04%

20%

19%

Suncorp [ASX:SUN] (OTCPK:SNMCY)

11.45%

12.32%

14%

22%

Westpac [ASX:WBC] (NYSE:WBK)

6.58%

19.48%

45%

40%

Woolworths [ASX:WOW](OTCPK:WOLZY)

6.84%

6.59%

21%

20%

Total Portfolio

7.37%

11.54%

Key (Yield = Current Yield, YOC = Yield on Cost, % of Port = Percentage of Portfolio Value, % Income = Percentage of Portfolio Income)

Conclusion

The three financial goals I have facing me are significant. I believe, however, that with regular investment in quality dividend growth and high yield stocks I can achieve my goal of not only surviving financially as a single mother, but thriving.

I have received many insights from the Seeking Alpha community. I am by no means an expert, but I believe in learning by doing. My successes, failures and epiphanies along the way will be chronicled here.

Disclosure: The author is long GE, O, RDS.B, RYN, PG, MO, JNJ, CVX, T, CL, KO, AND THE STOCKS MENTIONED LISTED ON THE ASX.

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.

Editor's Note: This article discusses one or more securities that do not trade on a major U.S. exchange. Please be aware of the risks associated with these stocks.