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

Is DGI the Perfect Answer to Inflation? - 24 Jan 2015 14:48

Tags: i-bonds inflation planning reit

Finding an investment product that can provide an income and at the same time continually rise to exceed the inflation rate is a primary goal for many retirees or soon to be retirees.

Finding such a vehicle is a daunting task. Fixed Income (bonds, preferred stock & fixed annuities) while low risk, operates just as it names describes. They provide a fixed income over time with no increases. It is predictable but cannot combat inflation.

Investing in stocks on the other hand does have the potential to grow and beat inflation. In the world of stocks, the dividend growth investing (DGI) strategy claims that a stock that continually grows their dividend is a sound hedge against inflation. But is this really the case? To prove this theory I analyzed a small basket of DG stocks that have been paying dividends for 25 or more years:

  • Aflac (AFL)
  • AT&T (T)
  • Coca-Cola (KO)
  • Emerson Electric (EMR)
  • ExxonMobil (XOM)
  • Johnson & Johnson (JNJ)
  • Leggett & Platt (LEG)
  • McDonalds (MCD)
  • Procter & Gamble (PG)
  • Wal-Mart (WMT)

Note: Considered posting graphs for all stocks but that would have made this post pretty busy so instead contrasting graphs of PG & WMT will be used. If anyone would like the data for the other stocks leave a post and it will be provided.

Of all the stocks, only WMT has consistently increased annual dividends at a rate that beat inflation. This is rather surprising as they are so closely tied to the economy. Other than WMT, each position failed to increase their dividend that exceeded the inflation for at least one year. The primary data points discovered were:

Average Inflation non-beat; once every 8 years (7.88 yrs to be exact)
Average dividend growth to inflation rate growth during the non-beat; -5%

PGinflat.png
WMTinflat.png

While not perfect, DGI is pretty darn effective! Though one could argue that the years that they did beat inflation, the dividend growth exceeded the inflation rate by such a large amount that it compensates for any one-time loses giving your long term growth rate a positive factor and this is a sound statement.

But, what if your income did not meet or was just meeting your expenses at the start of retirement? You may have been planning on that growth from the start and the years you do not beat inflation could hurt. With people living longer it is not unreasonable to assume a 30 year retirement of which there will be 3 times during that period where income growth will fail to beat the inflation rate.

While DGI is extremely effective it is not a 100% solution. Question now is; are their alternatives that can reduce the risk?

Diversify with Real Estate Investment Trusts

REITS tend to be influenced by different factors than the overall market and has growth at different cycles. In theory this should also apply to their dividend growth. To confirm this I analyzed:

  • Realty Income Corp (O)
  • HCP Inc (HCP)

The two REITs dividend growth also failed beat inflation once every 8 years but that 8 year cycle was completely different. When our basket of stocks failed to match the inflation rate REITs beat it and vice-versa.

Another factor discovered is the amount they failed to beat the inflation rate was much lower on average; -1.3% versus -5% for our basket of stocks.

By diversifying with REITs we reduce risk and spread losses out over different years leading to the conclusion that some REIT positions are necessary components for DGI.

Are there other alternatives? Most likely…wish to share? I'm willing to listen & learn. - Comments: 0

2015 Annual Goals - 17 Jan 2015 12:43

Tags:

Physically writing (or typing) out my goals has been extremely successful. I do not know if this works for everyone but it does work for me. That said it is time again to set my annual goals for 2015:

Grow dividend income by 15% - This will be extremely difficult. My oldest child starts college in 2016 and I plan on stashing most of my extra cash for this expense so there will be little to invest with. I will need to constantly keep myself in check to make sure I’m not chasing yield instead of growth.

Reinvest 100% of Dividends – I realize carrying over some dividends is a nice buffer in case the market crashes early in a year but my analysis evolves around individual companies and not markets. I make no claim to understanding markets so this is more of a goal to avoid market timing temptations.

Read 3 Books on Investing - It never hurts to read and expand your knowledge or learn of different perspectives. When you feel smarter than your peers is when you are most likely to fail! Be humble, continue to learn and challenge preconceived notions.

Recognize or admit when I am speculating - This has been an investing weakness of mine during my DGI career. While not technically measurable it is something I need to strive for.

Increase my 401K balance by 10% - This is part of my long term plan. I have laid out exactly what my balance needs to be every year to meet my long term goal. If the market sours or trades sideways it just means I have to invest more to stay on track.

Increase my IRA balance by 5% - Similar to the 401K goal this is part of my long term plan. I no longer contribute to the IRA but if it doesn’t meet the 5% goal I may find myself contributing.

Increase my blog posts to 36 - I realize few (if any) actually visit the site to read my posts. Some of that is the platform I work on is not popular among financial bloggers and some is due the fact I do not advertise that it exists. So why bother? For me it is like an investing diary. It helps me keep track of what I have learned, mistakes I made and at times express my views or opinions.

Take my Son fishing at least 6 times - 2014 taught me one important lesson, when you are executing your goals the stress in your life starts to diminish giving you more free time. I plan to capture that free time by connecting with my family. - Comments: 0

Happy New Year and Summary of 2014 Goals - 01 Jan 2015 14:00

Tags:

Happy New Year to everyone and I wish you the best for 2015.

So 2014 has finally ended and it has been an interesting year filled with ups an downs in the markets and even a surprise with the collapse of oil prices.

Throughout the year I have improved on my DGI skills but more importantly I did hit a point of significant personal satisfaction. Some DG investors believe life begins when they can solely live off their passive income. But what I discovered is you can start enjoying your life before that happens.

In early 2014 I set up a detailed plan of long term goals with targets set for every year up to those goals, as well as immediate year goals, and a set of strategies to achieve those goals over the next 30 years. I spent the first half of 2014 re-aligning my finances, personal life and work schedule to the new strategies (DGI being one) and spent the second half of 2014 executing the strategies.

By early November I realized everything was executing to plan and I no longer had to micro-manage but instead sustain. Sustaining a plan is a lot easier than formulating and putting into play. It was as if a huge burden was lifted and I suddenly find myself with a lot more personal time to enjoy.

Now I cannot wait for 2015 as I plan to go after things I love to do; time with the family, swimming, fishing, hiking, revisiting an old hobby, and even working on my house. These are the type of activities I believed I would have living off of a passive income during retirement but looks like I get to enjoy them much earlier.

While I'm still required to keep a full-time job, it seems much of the anxiety over what tomorrow will bring is not as much of a concern. My best guess is because I now have a way out of the rat race and I can actually see the strategy working, it's removing risk from my life and hence removing stress. Wow! What a feeling, I should have done this years ago.

Well enough waxing poetic, so here is a summary of how I did on my 2014 goals!

1. Contribute $6,000 to new DGI purchases ACHIEVED!
This is not usually a goal but I knew 2014 would be my last year adding significant cash as my children will be starting college soon and extra cash over the next 10 years will be a luxury. This goal was more to make me stretch to find extra savings through better money management & budgeting. I actually beat this and found an additional $700!

2. Re-invest $2,000 into DGI purchases ACHIEVED!
This came down to the wire but I finally completed re-investing with my last purchase of Qualcomm (QCOM) in December.

3. Increase forward DGI yield by 20% ACHIEVED!
I actually beat this by 5% points so I felt really good on this front.

4. Increase 401K balance by a minimum 10% ACHIEVED!
Not tied in with DGI goals but is part of my long term goal (I have specific price targets set that the 401K must meet every year). I actually beat this by 5%

5. Increase IRA balance by 5% ACHIEVED!
Not tied in with DGI goals but is part of my long term goal (I have specific price targets set that the IRA must meet every year). I actually beat this goal by 7%

6. Have 10% cash reserves in IRA/401K ACHIEVED!
This takes a load off my shoulders from a risk perspective.

Well that was 2014 in a nutshell for me and I'll follow-up this post with my 2015 goals.

Happy New Year! - Comments: 0


Unless otherwise stated, the content of this page is licensed under Creative Commons Attribution-ShareAlike 3.0 License