Follow the dividend investment decisions of a person who has no background in financial investment and wishes to take control of their financial future.

My Cash Strategy During Retirement - 14 Oct 2018 16:36

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With early retirement less than 10 years away one strategy I need to consider as part of my investing strategy is how much to keep in cash. Too much and inflation erodes the value and too little could allow an unplanned risk to negatively impact finances so what is the right amount?

The rule of thumb is to have three to six months of expenses in cash. Personally I don’t see this as risk reduction but more as a schedule of when to receive dividend income. My plan is to let dividends build in my brokerage account and then sweep the funds into my checking account to live on every 3-6 months. So how much additional cash should one have in case of emergencies?

During retirement or financial independence, financial experts are quoted in many articles as stating two to three years of expenses in cash and to use a CD ladder to reduce the effects of inflation. Three years of expenses seems like an awfully large amount to keep in cash and it might make sense if I was drawing down on my investments but I intend to live on the passive income and not sell assets. Even in a bear market or a significant down turn, not all stocks stop paying dividends and to plan that they all will is ludicrous.

To get a better handle on this I analyzed the S&P 500 dividend payout for the last 100 years and some interesting points were quick to materialize:

  • In the last 50 years the annual YoY dividend payout declined in 21 out of 50 years
  • In the last 100 years the annual YoY dividend payout declined in 35 out of 100 years
  • In the last 100 years the annual YoY dividend payout declined 10% or greater in 7 out of 100 years
  • The average annual YoY dividend payout decline was only -7.6%
  • Not once did the S&P ever payout $0 in annual dividends
  • The worst year for a dividend decline was 1938 at -34.28%

Another way to look at this is through the recent 2008 market crash and to analyze what would have happened to someone retiring at the start of 2007:

2007 2008 2009 2010 2011 2012 2013
S&P Div Payout $33.33 $34.09 $26.19 $26.18 $29.56 $34.36 $37.90
YoY % change 2.28% -23.17% -0.04% 12.91% 16.24% 10.30%

Source: http://www.multpl.com/s-p-500-dividend/table

At the start of 2007 our new retiree assumed they were all set as their dividend income met all expenses, until the end of 2008 when the market began its historical crash.

By 2009 our poor retiree’s holdings started to reduce or eliminate their dividend payouts and luckily the portfolio was well diversified across sectors and his income decline was in line with the S&P at -23%, unlike some poor souls who were too heavy into financials and had their income drop by 50% or more. Even with a diversified portfolio a 23% annual income loss is tough and it would take 4 years before income levels would recover to 2008 levels. To reduce the risk in this scenario our retiree would have benefited from having an emergency fund of cash on hand to fill the gap until income returned in 2013.

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If we add up the annual expense gaps for our sample retiree from 2009 thru 2012 it comes to a total of -60%. So logic would dictate the retiree would have benefited by keeping an additional 60% of expenses in an emergency fund to keep their income stable. 60% is a lot different than the 3 years recommended in many financial articles.

Our sample retiree sets a nice upper limit for my cash goals but for my own planning I am targeting to have passive income that exceeds my expenses by 10%. Factoring in the excess passive income and placing myself in the 2008 scenario I would have had an income gap for all 4 years of -33% of expenses. This now gives me an emergency cash target with a minimum of 33% expenses to a maximum of 60% expenses.

Analyzing the history of the S&P payout history since 1938 shows that significant multi-year declines occur every 25-30 years which places the next one in the late 2030’s and 10 years into my financial independence. With a high probability of another major event occurring I will definitely need an emergency fund. Considering I use a CD ladder, inflation will still erode some of the value as the typical short term CD is 1% below the rate of inflation. Over a 10 year period inflation would increase my minimum gap from 33% to 38% of expenses. With a 38% target defined I can now set up an emergency CD cash ladder for a 4 year period:

  • 6 month CD - 7% of expenses
  • 12 month CD – 7% of expenses
  • 18 month CD – 8% of expenses
  • 24 month CD – 8% of expenses
  • 36 month CD – 5% of expenses
  • 48 month CD – 3% of expenses

The challenge to funding this while trying to invest is the easy part. 1 year prior to retiring I will stop all auto-investing of all dividends and then roll 6 months of dividends into the CD ladder and 6 months into my checking account. Looks like I’ll have to update my retirement goals to include this CD ladder :)

Have you thought about a cash investment strategy as part of your financial independence plan? - Comments: 0

Weekly Portfolio Summary - 13 Oct 2018 14:46

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Portfolio Activity

New Positions none
Increased Position Buys IRM and SBRA
Positions Sold THO
Increase in Fwd Annual Dividend $128
Dividends Received this Week $268
Dividends Reinvested (DRIP) $126

Portfolio News - (In Case You Missed These Headlines)

AbbVie (ABBV)

Air Products (APD)

Preferred Apartment Communities (APTS)

BP PLC (BP)

Chatham Lodging (CLDT)

Compass Minerals (CMP)

Cummins (CMI

EPR Properties (EPR)

Garmin (GRMN)

Hospitality Properties Trust (HPT)

Iron Mountain (IRM)

Keurig Dr Pepper (KDP)

Leggett & Platt (LEG)

Marine Products (MPX)

Newtek Business Services (NEWT)

PPL Corp (PPL)

Procter & Gamble (PG)

Thor Industries (THO)

T. Rowe Price

United Parcel Service (UPS)

Waste Management (WM)

Interesting Blog Posts or Articles

Why Dividend Stocks Are Great For Beginning Investors - Comments: 0

New Buy SBRA and Sell THO - 12 Oct 2018 15:22

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Bought a second lot of Sabra Healthcare (SBRA) today but this time for my Roth IRA (the only account I had cash left to spend). It was a small purchase but grabbed some shares at a price of $21.63 and a dividend yield of 8.32%. This new purchase will add $84 to my forward annual dividend.

In a follow-up to my previous post, I sold out of Thor Industries (THO) today and this reduces my forward annual dividend by $30. This trade is in my regular brokerage account so I'll have some funds to reinvest next week. If market weakness persists there are a few interesting buys out there. Stocks I am considering to replace with are Air Products (APD), Fastenal (FAST), Illinois Tool Works (ITW), and Pepsico (PEP). There is a chance I can double my dividend over what THO was paying out and can't wait to see what goes on sale next week. - Comments: 2

Thor Industries (THO) Disappointing Dividend Increase - 11 Oct 2018 23:25

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Last April I posted a blog post “Expect More from Thor” and a lot has changed since that time. Tariffs and declining orders weighed on stock price and just when debt is eliminated they announce a major acquisition of the Erwin Hymer Group.

During this time period THO’s fiscal year ended in July and September reported full year EPS at $8.14 and at that point the dividend payout ratio was a humble 18%. The run-up in earnings over the last two years and the move to payoff long term debt created a high expectation by this shareholder that THO would reward shareholders with a significant dividend raise. Instead today THO announced just a 5.4% dividend increase from an annual dividend of $1.48 to $1.56 which moved their payout ratio up to 19.16%.

In my opinion this was either an outright insult to shareholders or there are more issues to the Erwin Hymer Group that management is not sharing. Either way management is not demonstrating a shareholder friendly team that they claim to be. I have held THO in my account since 2014 but this patient investor is patient no more, time to sell.

Finally as a follow-up to my April post, their 2018 inventory turn rate dropped to a factor of 12.77. A mild improvement that confirmed their backlog reduction was not from improving operations but declining sales. Guess that $110M investment in capital expenditures was a questionable decision. - Comments: 0

Recent Buy IRM - 11 Oct 2018 21:18

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IRM dipped below $32/share and I took advantage of the price retreat by adding some shares into my Roth IRA at $31.93/share and a 7.39% yield. This pickup will add $75 annually to my forward dividend. - Comments: 0

Weekly Portfolio Summary - 06 Oct 2018 14:32

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Portfolio Activity

New Positions: Chatham Lodging (CDLT) and Sabra Healthcare (SBRA)
Increased Position Buys: Leggett & Platt (LEG)
Increase in Fwd Annual Dividend: $589
Dividends Received this Week: $1043
Dividends Reinvested (DRIP): $909

Portfolio News - (In Case You Missed These Headlines)

Abbvie (ABBV)

Preferred Apartment Communities (APTS)

Ares Capital Corporation (ARCC)

Brookfield Renewable Partners (BEP)

Chatham Lodging (CLDT)

Cummins (CMI)

Chevron CVX

First American Financial (FAF)

GATX Corp (GATX)

General Mills (GIS)

Garmin (GRMN)

Hasbro (HAS)

Iron Mountain (IRM)

Johnson & Johnson (JNJ)

Marine Products (MPX)

Merck (MRK)

Omega Healthcare (OHI)

Pepsico (PEP)

Pfizer (PFE)

Prudential Financial (PRU)

Phillips 66 (PSX)

Qualcomm (QCOM)

AT&T (T)

United Parcel Service (UPS)

VEREIT (VER)

Westwood Holdings Group (WHG)

Wal-Mart (WMT)

W.P. Carey (WPC)

New Buy LEG - 05 Oct 2018 14:46

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Friday I added to my Leggett & Platt (LEG) position by picking up some shares at $42.18 and a yield of 3.6% which will add another $35 annually to my dividend income. This addition to my current LEG holdings now brings me into a full position (approximately $3K). - Comments: 0

New Buys CLDT and SBRA - 04 Oct 2018 21:15

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Finally a little market volatility shook up some REIT share prices that let me reinvest my proceeds from selling Lexington Realty Trust (LXP) back in early September.

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Today I reinvested those proceeds into Chatham Lodging Trust (CLDT) at $20.06/share and a 6.58% yield which will add $194 annually to my forward dividend income and to boot it is a monthly payer which is always nice.

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And the buys did not stop there as I invested the remaining funds into Sabra Healtchcare (SBRA) at $21.91/share and a 8.22% dividend yield which will add $360 annually to my forward dividend income. SBRA properties are primarily in skilled nursing facilities which in of itself carries risk and it also overlaps with my Omega Healthcare (OHI) position. With the risk and OHI overlap this will be my only position and do not foresee any additional purchases in SBRA. - Comments: 0

September Dividend Income - 28 Sep 2018 23:06

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After 31 years of clocking in and out of work and religiously saving 10% annually every year, in good times and bad, I have decided to share my monthly dividend income to show what regular saving and investing can accomplish.

This Month I made $2252 with 83% coming from my IRA and 17% coming from my traditional brokerage account.

Most of the income is currently coming from a retirement account as the bulk of my savings were generated through workplace retirement savings that I recently rolled into an IRA and went full throttle income investing. When I first started saving in 1987 there was no mass concept of F.I.R.E. (financial independence retire early). I never had a big salary or did the proverbial “balls to the wall” extreme savings and investing. The only thing I knew was that I wanted to retire at 60 and the initial advice I got was to sock away 10% and retirement would take care of itself so that is what I did and here are the results.

I am still working today and have started to contribute to a new workplace 401K plan and will continue to do so for the next 9 ½ years so this adventure is still continuing and I hope you follow me on my journey to when I retire at 60.

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- Comments: 3

New Buy LEG - 27 Sep 2018 21:51

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The markets contracted just enough to provide a buying opportunity as I added to my position in Legget & Platt (LEG) at $43.80/share and a dividend yield of 3.47%. This pickup will add $33 annually to my dividend income and inch me ever so closer to my long term goals.

This purchase was a pleasant surprise as I did not expect to make another buy this month with valuations where they were. REIT prices also retreated a bit after the fed rate increase announcement and I will admit I was tempted to pull the trigger on a few buys but resisted the temptation until prices come down further. - Comments: 0

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