Follow the dividend investment decisions of a person who has no background in financial investment and wishes to take control of their financial future to retire from their full-time job at 60.

Weekly Portfolio Summary - 27 Oct 2018 13:38

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Portfolio Summary

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Portfolio News - (In Case You Missed These Headlines)

AbbVie (ABBV)

Analog Devices (ADI)

Canadian Imperial Bank of Commerce (CM)

Compass Minerals (CMP)

Camden Property Trust (CPT)

First American Financial (FAF)

GATX Corp (GATX)

Hasbro (HAS)

Iron Mountain (IRM)

Leggett and Platt (LEG)

Marine Products (MPX)

Merck (MRK)

Microsoft (MSFT)

Phillips 66 (PSX)

T. Rowe Price (TROW)

AT&T (T)

United Parcel Service (UPS)

VEREIT (VER)

Westwood Holdings Group (WHG)

Waste Management (WM)

Interesting Blog Posts or Articles

How To Retire Early With Real Estate (Free Book Giveaway!) - Retire Before Dad
I Need Your Help – Cheesy Finance
WHAT HAPPENS IF FIRE DOESN’T WORK OUT? – Tawcan
September Dividend Income from YOU the Bloggers! – Dividend Diplomats
How to Save $1 Million By Retirement on a Five-Figure Salary - Comments: 0

This is 3x Worse Than a Market Crash - 20 Oct 2018 12:42

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In a previous post I attempted to determine how much emergency cash I would need to weather a market crash by comparing the annual S&P dividend payout to the great recession market crash of 2009. The results showed if one declared financial independence just prior to the market collapse that income dropped and took 4 years to return to pre-crash levels. To get through 4 years of income loss an income portfolio would need an emergency cash fund of 60% of annual expenses to weather the storm and a dividend growth portfolio would have required a 38% cash fund.

I decided to follow-up that analysis by analyzing what would happen to your portfolio income in a prolonged market with high inflation. The time frame chosen was from 1973 to 1984 and the results were shocking as it showed inflation can be up to 3x greater of a loss than that of a market crash!

The Analysis

The analysis was based on two different people going into financial independence (retirement) in 1973 and that all portfolio income met 100% of annual expenses. The differences between the two is that one portfolio is a traditional income portfolio and the other is a dividend growth strategy.

With the traditional income portfolio scenario, inflation over time devastates the ability to meet rising expenses and ends in 1984 with an income gap of -58%.

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1973 1974 1975 1976 1977 1978 1979 1980 1981 1982 1983 1984
Inflation 6.20% 11.00% 9.10% 5.80% 6.50% 7.60% 11.30% 13.50% 10.30% 6.20% 3.20% 4.30%
Expense Gap -14.59% -25.16% -25.75% -24.69% -30.31% -38.38% -47.40% -52.87% -55.72% -57.33% -58.21%

There are very few steps one can take to avoid this situation. Our investor could have started with a portfolio that provided income that exceeded expenses by 70% or had just over 4 years of expenses in a cash emergency account. Either solution is completely out of the realm of possibility unless one was extremely wealthy to begin with. This explains why so many retirees were struggling in the 1980's and were in desperation mode to reduce expenses, (remember retirees buying canned dog food to save money).

I was born in 1968 and was raised during this time period. I remember well the struggles with unemployment, inflation and the oil crisis. I also remember seniors desperate to get into public senior housing (rent controlled) and the wait lists to get into one of these communities was usually measured in years. This was definitely a tough time period to be living without a job.

In the dividend growth scenario we use the same starting assumption but supplement that with an organic annual 5% dividend growth rate. The results show our investor is slightly more successful but still suffers.

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1973 1974 1975 1976 1977 1978 1979 1980 1981 1982 1983 1984
Inflation 6.20% 11.00% 9.10% 5.80% 6.50% 7.60% 11.30% 13.50% 10.30% 6.20% 3.20% 4.30%
Expense Gap -5.71% -9.84% -10.68% -12.26% -15.04% -21.94% -31.81% -38.47% -40.05% -37.65% -36.73%

By 1984 our investor reaches an income gap of -37%. Considerably much better than our first scenario but that does little to comfort our investor as they still have issues with paying expenses and will be struggling mightily to reduce expenses.

Since the income gap is smaller there are some realistic steps that can be taken at the start of retirement based on a combination of investments and emergency cash to avoid this risk:

Annual Div Payout to Expenses Emergency Cash Needed
Income = Expenses 1.9 x annual expenses
Income 10% > Expenses 1.1x annual expenses
Income 15% > Expenses 70% annual expenses
Income 20% > Expenses 30% annual expenses

All of these solutions require the saving & investing of additional money and hopefully is enough to help us plan how much to invest and save. It also assumes all cash is in a laddered CD portfolio earning interest. As a note, for those who do not like to keep cash you would need to have a starting dividend growth portfolio that provided income greater than 40% of your annual expenses in order to have no income gaps.

Summary

Inflation is just downright scary. One of the obvious things we notice is that long term inflation is similar to dividend growth investing in that the more time in the market the bigger the snowball effect. Essentially INFLATION IS THE ANTI-THESIS TO DIVIDEND GROWTH! It explains why so few companies can beat inflation year in and year out and why we should appreciate companies like McDonalds (MCD), Johnson & Johnson (JNJ), and Automated Data Processing (ADP) whose dividend raises have beat the rate of inflation for more than 30 consecutive years.

As for my personal goals and objectives this analysis does change things. I originally planned to have income that exceeded 10% of expenses and have an emergency fund equal to 40% of annual expenses. I will need to up my targets to now have income exceed expense by 15% and increase the emergency fund to 70% of expenses. With 9 years left to retirement this will be a challenge and I will have to dig deeper to find additional money but luckily I have identified this now and not a couple years before retirement. - Comments: 0

New Buys FAST and NWL - 18 Oct 2018 19:48

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Replaced my Thor Industries (THO) sell from last week by grabbing a new position in Fastenal (FAST) at 52.32/share & 3.09% dividend yield as well as increased my position in Newell Brands (NWL) with shares at $16.97/share & a 5.42% dividend yield. The two purchases together will add $85 annually to my forward dividend.

The FAST decision was actually a tough one as I was also considering Illinois Tool Works (ITW). The two had similar financial ratios and dividend yields. I ended up going with FAST as they had a better book value per share (8.07 vs. 11.29) and current ratio (5.39 vs. 2.16). Do not think I could have gone wrong with either so happy that I finally chose one.

My second purchase I was targeting Pepsico (PEP) and waiting for the price to drop below a $104/share. While waiting for PEP, NWL dropped to less than $17/share and knew I had to take advantage. Understand that NWL never has or ever will be a growth story but they are a value play and this is a company whose individual parts are worth more than the sum. If NWL gets the right manager this could be a great turnaround strategy but until that time comes I am more than willing to take a generous 5% dividend yield. - Comments: 2

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)

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