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.

A Different Dividend Streak - 28 Apr 2018 22:30

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As a passive income investor there are two major threats that can hurt your long term passive income. The first is the dreaded dividend freeze or cut. However, most (if not all) investors are constantly monitoring for this threat and resolving the issue before it does any harm. You can see this in action on countless blogs as investors document their investing journeys.

The second major threat is the one less talked about and probably could use a little more attention is inflation, that long term killer that slowly eats away at our gains. In a low inflation period, like we have been in for the last 10 years, it is easy to forget about factoring in inflation to your investing portfolio.

Things can and will change especially if your investing horizon is more than 20 years. Me personally I’d rather have a portfolio prepared and diversified enough to adapt to that change than waiting to react. Unfortunately we do not have crystal balls and cannot predict when and how much inflation will change. Historical performance does not guarantee future performance but it can provide insights as to how a company and its management typically react during high or low inflationary years. Using that as a basis I plan on incorporating historical dividend growth to inflation as part of my analysis for stock selection.

A Different Kind of Dividend Aristocrat

We have all heard of Dividend Aristocrats or Champions where companies have increased their annual dividend payouts consecutively for 25 or more years. But how big would that list be if it was how many companies have increased their dividends more than inflation consecutively for 25 or more years?

The proper way would be to analyze every component year by year but for the purpose of this post I will use the average inflation rate over 1, 3, 5, and 10 years and compare them to the current 118 Dividend Champions compiled by David Fish and available at the DRIP Investing Resource Center. When you over lay the inflation rates 19 companies failed the test and reduced the list to 99 companies.

The chart at the end of this post is a summary of the analysis. The color coding is as follows:

  • Red =Failed to Match or Beat Inflation
  • Yellow = Matched or exceeded inflation up 0.9%
  • White = Beat Inflation from 1 to 3.9%
  • Green = Beat Inflation 4% or higher.

Johnson & Johnson is a True Dividend King

Johnson and Johnson (JNJ) recently announced a 7.1% dividend hike marking 56 years of consecutive growth. JNJ has long been a favorite among dividend growth investors but what few are aware is it has one of the longest streaks for increasing dividends that exceed inflation. The last year JNJ did not perform this feat was 1980! That is a 38 year streak! The most impressive thing is that they did not just beat inflation each year they thoroughly spanked it consistently over all 38 years!

I did an similar analysis in a 2015 blog post on a ½ dozen companies with JNJ as one of the companies and had year by year data available to make this more detailed claim including this follow up JNJ blog post. Back then Walmart held the title with a streak that started in 1974 but that streak came to an end last year when they failed to beat inflation. 42 years was an impressive run but I think JNJ has a much better business model and will eclipse that streak.

If you prefer to view in Google Sheets here is the link

- Comments: 0

Expect More From Thor - 20 Apr 2018 12:45

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Thor is down 37% from its high of $161/share and many investors have been disappointed over the last 6 months on two issues. The first and most recent issue was over a declining backlog of towable orders in their most recent quarterly report that has sent their share price tumbling to $102/share in the last couple of months.

The second disappointment was back in October when THO announced a dividend increase of 12% which at the time brought the dividend yield up to a paltry 1%. Shareholders were growing frustrated as revenue and earnings which have been surging the last couple years has not resulted in more sharing of the wealth and expected a much larger increase. Historically THO has paid a dividend yield in the range of 2 to 2.5% so their frustrations were not without merit.

But before throwing in the towel it is important to understand what this board is doing with their increased cash flow if not sharing with investors. One balance sheet item that THO despises is long term debt. Up until recently their long term debt obligations was always maintained at a value $0 (nada, zip, nothing). They would always fund new investments with cash and grow the business. But, then Jayco came along, it was an opportunity the THO couldn’t pass up to grow business. The problem was Jayco was valued at more than the cash they had on hand so they acquired long term debt ($360M) to fund the acquisition. Jayco instantly added to the top and bottom line numbers and combined with a hot market created a massive increase in free cash flow. THO, who despises debt, has spent the last 2 ½ years using a large portion of this cash flow to aggressively pay down debt. In their latest quarterly filing, long term debt was reduced to $80M and is being projected to be paid off by the end of 2018.

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This was not the only area free cash flow was redirected. THO’s timing of the Jayco acquisition was near perfect. The RV market was on fire and the biggest driver was millennials buying the more affordable towable units. Backlog skyrocketed and which resulted in a capacity issue. In 2017 the company tripled their capital expenditure investments to expand capacity of manufacturing the towables and plan to invest an additional $110M in 2018. In my opinion it is too early to determine if the recent reduction in backlog is due to slowing demand or improved capacity. This will be easier to determine when the next quarterly report comes out and we can re-calculate inventory turn rates (the rate of how many times a year that a company can sell and replace their inventory). If the rate is higher than last year then capacity is the reason for a declining backlog.

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2017 2016 2015
Inventory Turn Rate 13.47 9.54 14.01

What does this mean dividend investors? This October when they traditionally announce a dividend increase there will be a large availability in forward free cash flow! I expect some will be retained for future acquisitions and a large portion will be returned to shareholders in a minimum dividend increase of 50% to bring its dividend yield back to historic levels. At the current price of $102/share that would bump the yield to 2.12%. If THO fails to deliver an increase of this size or greater it may be time to dump the shares and move on. - Comments: 2

New Buy LXP - 14 Apr 2018 13:21

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It has been a few months but I finally built up enough cash in my Roth to make a purchase and grabbed 126 shares of Lexington Realty Trust (LXP) with a dividend yield of 9%. I only buy REITs in my Roth IRA due to the tax advantages and hopefully the strategy pays off 10 years from now when I retire.

LXP’s high yield was hard to pass up and its stock price has been depressed for some time due to a combination of a fear of rising interest rates and slowing of property portfolio growth. The latter portfolio growth concern translates into a very boring but predictable REIT that increases its dividend payout on average 2% a year. There are not too many investments that offer a 9% yield plus 2% growth and a dividend that is well funded as they currently have an AFFO payout ratio of 72.4%.

LXP is a diversified REIT in the office and industrial sectors and have been slowly migrating to single tenet net leases that offer predictable income and long lease contracts. They have 174 properties in 37 states with 48.6 million square feet with 98.9% of that currently leased.

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From an income perspective they are well diversified with the highest tenet representing only 4.2% of rent income.

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The largest concern from a diversification perspective is in its geography where 16% of their portfolio is concentrated in Texas. If the Texan economy becomes negative in the future it could be an issue. - Comments: 0

Cutting Another Expense - 13 Apr 2018 22:29

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Investing and creating a passive income is not the only path I am using to become financial independent. Another tool I use which I believe is just as effective as generating income is cutting living expenses through lifestyle changes.

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Today marks the first day I no longer have cable television. Yes I have joined the cord cutting community but I haven’t gone completely cold turkey. I am far from a minimalist, not anything wrong being a minimalist but that is a lifestyle I just cannot swing and I still enjoy watching television. So I replaced cable with a live streaming service and so far so good. This cuts my annual expenses by 1%.

I ended up choosing DIRECTV Now as my streaming service. It wasn’t the lowest cost solution but for my area I thought video quality and local channel availability were slightly better than Sling TV but the service does buffer on occasion. Buffering is something I can live with but time will tell if the rest of my family can deal with.

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As far as an aerial antenna I also have one to supplement the service. However, my home sits in a valley and access to TV signals is limited. For those not familiar with HD broadcasts, the signal from TV stations travels in a very tight path and is easily blocked by hills mountains or major structures. Before jumping into an antenna solution I recommend starting with a cheap HD antenna first to see what channels are available before buying an expensive antenna. If you live on top of a hill I would definitely recommend giving it a shot. For myself I ended up receiving 12 channels in high quality and 4 of the channels I watch regularly. When you combine the 4 channels with the DirectTV Now solution I have access to the same shows as before at ½ the cost. The best part is that there is no contract so if something better comes along I can switch on a dime.

Until my kid start to leave the house I think this will be my last lifestyle change to cut costs. Once the kids are gone my next change will be selling the house and moving to a smaller place. - Comments: 0

Good Intentions But... - 07 Apr 2018 12:52

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My daughter is finishing up her junior year of college and has landed a summer internship at a local bio-pharmaceutical company for $20/hour. Being a year away from graduation and starting a career she took advantage of a guest speaker appearing at her college to discuss financial planning for college students starting a career.

She thought the timing was good and the speaker started with a scenario of starting salary of $60K/year. She thought this was perfect as she expects a starting salary anywhere from $55K to $65K a year. But this is where the excitement ends. After talking about the burden of student loan debt (not a bad topic to discuss with college students) the speaker moved on to setting goals for emergency savings and retirement. This is when the wheels started to fall off.

The speaker gave the normal diatribe of 6 to 12 months of salary saved for emergencies. Unfortunately he is telling a bunch of kids who do not have two nickels to rub together that they need to have $30K to $60K in cash just sitting there doing nothing except waiting for an emergency. If that huge amount wasn’t enough to send them into shock he then jumped into retirement stating at 67 years old they would need, get ready for this, $6.8 million! At this point my daughter said many of the students in the lecture stopped listening and broke out their smart phones to do something else other than listen to him. If I was 21 and heard these astronomical numbers there is no way I could wrap my head around it. This advice must have blown their minds into shutdown or even denial. Who can blame them?

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It is not that the lecturer was wrong in his numbers but just the way he delivered the message. Needless to say my daughter was depressed and in her words "felt like she was already financially failing before even starting a career" so she asked me for advice.

This was the opportunity I have been waiting years for. I do not like to give my children unsolicited advice because it comes off as parent lecturing and the advice usually gets ignored but when they ask of their own volition I know they are ready.

I used cash flow as the basis of our discussion because it is simpler to understand, the numbers are smaller, and the needs are more current (not 45 years into the future). I explained how throughout one’s life the one risk you are always trying to mitigate is the reduction or loss of income with retirement being the ultimate 100% loss. I also told her loss of income is nothing too be ashamed of. Most people will suffer from a loss of income at some point in their lives through job loss, lower pay, or rising expenses beyond your control. One of the elements to reduce this risk is through passive income.

The other piece of advice I gave was not to be afraid of investing as everyone makes mistakes investing and that they key to overcoming those mistakes was consistent savings year in year out. I cannot count how many of my past bad investing decisions have easily been covered up in thanks to constantly saving.

After all of the talk we moved on to the important part of what she really wanted out of me, help setting up savings goals that ended up like this:

  • At Age 25 – equivalent of one month rent in emergency cash ($900), have passive income that equals 1.5% of expenses with 50% being generated in a retirement account and 50% generated in a taxable account.
  • At Age 32 – equivalent of one month of expenses in emergency cash, have passive income that equals 3% of expenses with the same 50/50 mix.
  • At age 39+ - have passive income as a % of expenses that doubles every 7 years with the same 50/50 mix, so at 39 its 6%, at 46 its 12% and so on until she hits 100% at age 67.

These numbers were so much lower and easier for my daughter to grasp. The one thing she liked about it was that it still left room for her to save for whatever else she wanted in life. I didn’t put the idea of early retirement into her head because she is too young and it’s a goal she needs to figure out. But, I did give her a few books on dividend growth & passive income investing to help her along and offered up helping with investing decisions when she is ready.

At the end of the day this conversation is the same that her guest lecture just delivered ($6.8M) but in a different way and in smaller amounts. Hopefully she takes the advice and with me leading by example she starts life off on the right foot but time will tell. As a parent I cannot help wanting to protect & help her but if I help too much she will not learn. I definitely underestimated what it would feel like being a parent to an adult child. Though I am proud she made a decision to seek advice so early on in her life and that she respected me enough to ask. - Comments: 0


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