From Retirement Planning To Succession Planning. Investing In Dividend Champions

Summary

• Start thinking of your stock investing as creating an asset management business; you own businesses.
• Invest only in Dividend Champions (DCs). Those are the businesses that have paid their owners increasing dividends for each of at least the last 25 years.
• Justin Law maintains a list of DCs on Seeking Alpha.
• Don't buy the stock; sell out of the money cash-backed puts for more value and income.  Never sell a DC unless it stops increasing its dividend.
• Engage your family in managing your asset management business.  You never need to retire.

It sometimes seems that all personal financial advice is about retirement planning. If that is your objective then that defines and limits your choices. We all know the drill and the arithmetic. It’s all about accumulating wealth when you are young and preserving wealth as you age to avoid the greatest catastrophe of old age; “running out of money” in the words of Ken Fisher. Various financial advisors will change the formula a bit but the “rule of 100” summarizes things pretty well. That is, subtract your age from 100 and that’s what you should have in equities. The balance is to be held in fixed income. For example, at age 60 you should have no more than 40% in stocks.

Why the move to fixed income? Because, we are told, equities are too volatile. The stock market can decline by 30-40%! We think fixating on the value of your portfolio is misguided. We believe you need to focus on the income generated by your asset management business. Dividend champions are about 137 companies that have increased their dividends for each of the last 25 years or more. These are companies that during the Great Recession and the Tech Bubble did not eliminate or reduce their dividends; they actually increased their dividend! With very few exceptions all businesses we own are dividend champions.

Think of your asset management business in terms of owning a big Italian restaurant. Let’s say you own both the business and the real estate. The restaurant earns your family a nice income and every year sales increase and your income goes up. But business brokers are constantly stopping by to tell you the value of restaurants are declining under the pressure from increasing competition in the area; “this is a great time to sell”. Real estate brokers are pressuring you to sell the real estate because the market may drop. But if your family’s income continues to increase where is your incentive to sell? Your asset management business owning only dividend champions is like that. Values go up and values go down. Value will eventually come back but in the mean time your income is constantly increasing. Keep score of your income not the value of your assets. You can control your income. You can’t control whether the market goes up or down.

Think of the stock market in terms of the following chart which depicts the recurring business cycle which causes ups and downs in the market. Values increase during economic expansions and contract during recessions as depicted in the sine curve. But over time both peaks and valleys tend to be higher. The positively sloping line represents income from the portfolio. Focus on the income! Keep score by your income.

How do you buy dividend champions? Well, technically you don’t; you sell puts. That approach will get you better pricing and some supplemental income. We will expand on that feature in a subsequent article. For now it is sufficient to understand our investment program is solely based on buying high quality businesses by investing in dividend champions. When do you sell the dividend champions? You never do unless they stop being dividend champions.

With the changes to the tax code I was a little late in filing my 2018 tax return. Once completed copies went with my current Personal Financial Statement (PFS) to a couple of banks I have adjustable rate commercial real estate loans with. They require the data annually as a condition of my loans. Copies also went to my two adult children who work with me managing our asset management business. And I hope they use that data to keep my three grandchildren informed on the state of the family asset management business. Why do I do that? Lots of reasons but a couple of main ones. I am old enough now to have experienced the passing of several family members. It has always surprised me how little the heirs knew about what the deceased owned and owed. Why let that happen? Why not keep your family engaged and informed during your life? Even more importantly, I have made every mistake possible in investing over my life time. Sometimes I made the same mistake three or four times. But for the last twenty-five years or so I think I finally have it right. Why have your family repeat your mistakes?

When other family members passed and their estates were distributed there always seemed a rush to liquidate the assets and make distributions. Once I came to believe I “have it right” I decided my children and grandchildren might best be served by simply continuing to manage our asset management business. For them to do that they would need to be informed on why they should consider maintaining the business. Don’t change anything just continue to do what the old man has been doing. That’s when we moved to thinking about succession planning. To succeed to operating our asset management business the children would need to understand how it works and how it should continue to be managed.

Think about Warren Buffet and Berkshire Hathaway (BRK.A). Berkshire is a conglomerate of many businesses Mr. Buffet has accumulated over the years. Presumably, most of his net worth is in BRK.A. It’s Berkshire’s succession plan that is of concern to BRK.A owners. In our case my children receive my PFS monthly and there are regular conference calls to discuss tactics and results. They receive a small monthly stipend much like a director’s fee. I hope our succession plan is clear; they succeed me.

There are many benefits in moving from a retirement planning perspective to a succession plan approach. My investment time frame limit of retirement planning is eliminated. Now the time frame can be forever. No longer are you preoccupied by a current down draft in the market or a recession. Because you know your plan is forever you also know the values will return over time and over all that time the asset management’s business value and income will constantly be increasing.

So if all this makes sense to you please understand no financial professional will ever recommend this approach. They might even agree with the strategy but they can never recommend it to you. Why? Their lawyers would never allow them to recommend a portfolio of 100% stocks over the long term. As a financial advisor friend told me if he ever recommended a 100% stock portfolio, dividend champions notwithstanding, half of his clients would be in their lawyer’s office on the first 30% decline. So don’t plan to see this kind of thinking and strategy any place other than Seeking Alpha.

Patrick J. Keogh is the author of the recently released “Make Your Family Rich; Why to Replace Retirement Planning With Succession Planning” (www.makeyourfamilyrich.com). Pat is summarizing his book in a series of Seeking Alpha articles of which this is the second.