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

Game of Life - 19 Oct 2014 17:30

Tags: income life risk

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My oldest child is now 16 and just a few years away from being an adult. This got me thinking as to how she should be prepared for life which further led me to see how life in some ways is similar to a game. Their are always pieces in play and you need goals and strategies to succeed.

Odds are Against You

If you talk to a financial planner, the pieces you should have on on the board are really simple; you get a full-time job, max out retirement savings and build-up an emergency cash fund equivalent to 6 to 12 months of income. It is their belief that these are all the pieces you need to succeed in the game of life. We can call these pieces “Team Income & Assets”. Below is a summary of the pieces you are expected to place onto the game of life:

Team Income & Assets

  1. Full-time Job
  2. Emergency Savings
  3. 401K
  4. Roth IRA
  5. Social Security

But life is not as simple as financial planners lead you to believe. The opposing team we will call “Team Liabilities & Risk” and they have a heck of a lot more pieces to play with:

Team Liabilities & Risks

  1. Student Loans
  2. Rent
  3. Utilities
  4. Internet/Cable
  5. Food & Living Expenses
  6. Healthcare
  7. Maintenance (auto, home, etc…)
  8. Credit Cards & Loans
  9. Taxes
  10. Misc Insurance (auto, renters, etc…)
  11. Wedding Expense
  12. House down payment
  13. Kids
  14. Mortgage
  15. Unemployment
  16. Disability
  17. Kids College
  18. Caring for Elderly Parents
  19. Retirement

Now this is completely lopsided, 5 versus 19! How can you win with such a diverse team constantly attacking your 5 pieces?

Leveling the Playing Field

When I started off life no one told me that the opposing team would have so many pieces on the board and to make matters worse the longer you were in the game the greater the risks became. Unlike my introduction to life, I can now bestow unto my child the wisdom of my life experiences. First lesson is explaining the enemy pieces on the board. Second is to change how many pieces we have on the board.

It makes sense if you are being attacked by a diverse set of pieces that you also get a diverse set of pieces to effectively combat that onslaught. Three of your five pieces are focused on long term retirement so they sit on the game board and do nothing until the end of the game. That leaves just two pieces to carry the burden for most of your life! To change the odds in our favor we we can add some more pieces by diversifying your income. Here are the additional pieces we can possibly add:

Team Income & Assets Additions
6. Dividend Growth Investing
7. Real Estate Investing
8. Money Lending
9. Part-time Job
10. Part-time Business
11. Royalty or Residual Income
12. Annuities

Dividend Growth Investing – I personally love this one because it is available to everyone regardless of your social class, race, or ethnicity. You can start with just $50 and grow from there. Dividend growth allows for a passive income stream that can be used to help during times of unemployment, help pay some of your child’s college expenses, or fund your retirement. What is even better, the longer you employ DGI the more powerful piece you have to use in the game.

Real Estate Investing – This is another great source of income and there are two approaches to achieving. The first is physically buying and maintaining property while collecting rental income. Though this approach does require effort and may not be for everyone so the second approach for people that do not want to be bothered with property maintenance or collecting past due rents is to buy shares in Real Estate Investment Trusts (REITS). REITs provide the benefit (via dividends) of income but the REIT firm is burdened with the hassles of property maintenance and rent collection.

Money Lending – Sites like “Lending Tree” have opened up a new investment trend where you can lend money directly to another person at a set interest rate. Downside is you bear the risk of loan defaults. An alternative to directly lending money is buying shares in companies that do this for a living. Types of companies you can invest into are Business Development Companies (BDCs) and Mortgage REITS (mREITS).

Part-Time Job or Business – This used to be an old go to but for some reason has become an overlooked alternative. My belief is you can approach this in two ways. The first is short term that is aligned to a specific goal where all the money earned from a part-time job goes towards paying off debt or creating savings to invest in other income producing assets. The second approach is long term where you find a part-time job that you personally enjoy that not just adds additional income but could provide personal satisfaction.

Royalty or Residual Income – It is amazing the sources of royalty income available. If you are talented you can get royalties from music, art or video. You can write a book or e-book, publish photos, or even start a website with advertising. I’m sure there are other sources but these are the few I am aware of.

Annuities – These get a bad rap for their high expenses and loss of assets after you (or your spouse) passes away. But a small annuity can fit into your retirement planning as they offer a simple lifetime payment. The problem with stock, bond or even real estate investments is that you have to always monitor and adjust in order to keep your portfolio relevant. Though what would happen if you lost the capabilities to manage investments (think Alzheimer’s) or worst yet you died and your spouse has to figure it out. A small annuity income stream would help lessen the burden during these times.

Adding these 7 additional pieces to the board it is now 12 versus 19, a much fairer fight by any means.

Summary

Unfortunately I figured out the rules for the game of life pretty late and I am currently working to get some of these pieces on the board. On a more serious note, life is not a game but a true struggle of ups and downs where people really can get hurt. Financially speaking, I truly believe growing multiple sources of income and having the right insurance packages (home, life, etc…) is the key to reducing the risk in one’s life. While I am a big proponent of dividend growth investing it is not the only strategy I employ for achieving goals. Lastly, do not let fear and saving rule your life. Remember to take some time out and enjoy life. - Comments: 0

Risk Part 2 – Equity Diversity - 20 Sep 2013 21:20

Tags: diverse diversity risk

A fact with Dividend Growth Investing is that it is 100% invested in stock equities. Though historical stock performance can provide some patterns it cannot accurately predict the future on how stock markets perform. The lack of uncertainty exposes you to some level of risk if stocks perform poorly.

Some might argue that while investment cost is a concern it is not the top priority for DGI. As long as a portfolio continues to receive income and income growth through dividends the downward stock prices are not a major impact. Or more simply…”Why do I care if equity prices rise or fall as long as I keep getting my dividend checks?” While this may be a valid statement it does not address unforeseen risks.

No one has a crystal ball and there are too many external factors that can influence the stock market. For example, what if a drastically higher corporate tax is applied by the I.R.S? The increased tax expense may require companies to decrease dividend payments and invest the capital back into the company to sustain growth and compensate for the excessive taxation. Of course this is not a real scenario but only one of many what-if topics that could derail your investments and DGI strategy.

As much as I enjoy, support, and strongly believe in the benefits of DGI I would be wrong to say that it should be your only investment. Much like stocks, you should diversify your equity investments to reduce risk and preserve equity. Of course if you are a young investor starting out this probably is not feasible as you have limited financial savings but equity preservation should be a part of your long term investing plan.

Examples of some investments you can use to diversify your equity:

Cash

  • Bank Savings Account
  • Bank Certificate of Deposit
  • Money Market Account

Bonds

  • U.S. Government Debt
  • Foreign Government Debt
  • U.S. Corporate Debt
  • Foreign Corporate Debt
  • Municipal Bonds

Hard Investments

  • Real Estate / Rental Property
  • Precious Metals

Other Investments

  • Annuities
  • Preferred Stocks

I do not recommend investing in all the items above but simply listed potential alternatives. Never invest blindly, if you wish to diversify then investigate each one and become well versed on the good & bad or talk to a financial analyst if you do not have the time.

The next question is if you diversify how much? I do not believe there is one single answer to this question. It depends on your personal situation. The best I can share is my situation where I have 7% in cash, 78% in stocks and 15% in bonds. Since I am in my mid-forties I believe I can withstand a decent level of exposure to risk and still have enough time to recover. My current house has 90% equity and should be paid off in 3 years so I see no reason to add rental property. Additionally, I am one of the lucky few who will receive a small pension which provides further security in later years so I feel extremely comfortable maintaining my 78% stock exposure up to retirement. - Comments: 0

Risk Part 1 – Stock Diversity - 19 Sep 2013 21:08

Tags: diversification diversity risk

(This post is the first of a 2 part blog to identify potential risks in your portfolio.)

As a DGI investor it is easy to get caught up in the wrong numbers. In a constant pursuit to find the best combination of dividend yield and growth it is not hard falling into the trap of continually buying the same stock or set of stocks in the same sector placing a large percentage of your investment into one basket.

Exposing most of your portfolio to a single stock, sector or industry is one of the most risky items you can financially take on. All of the modern stock market crashes had specific sectors or industries at their core.

  • 1987 – Banking Industry
  • 2001 – Technology Sector
  • 2008 – Financial Sector

If your portfolio was heavily weighted during any of the crashes your portfolio would have been in ruins. Of course some would argue that the overall markets dropped like a rock in each of these incidents but it was worse for these specific stocks as you not only lost equity value but also income as they slashed or eliminated dividend payments during that time.

Need another example? You do not need a stock market crash to be exposed to loss. In 2012 the S&P 500 gained 13.4%, a good year by any means. But, there was one sector that was suffering…basic materials. As China went through its massive growth cycle basic material stocks were booming, especially those involved with coal, iron, steel, and other base metals. These stocks were sporting high yields & fantastic dividend & earnings growth rates. Once China growth had slowed the basic materials sector was hit hard in late 2012 and most of 2013. Companies such as Cliff’s Natural Resources dropped their dividend 76% and all the while their stock price dropped like a rock.

As a DGI investor you need to be diligent in balancing of your portfolio weighting in relation to individual stocks, industries, or sectors. I have yet to figure out if there is a magic weighting but for now I have the following plan but as my portfolio grows in size I’m sure these numbers will decrease:

  1. No more than 15% of my portfolio weighted to an individual sector
  2. No more than 10% of my portfolio to one industry
  3. No more than 7% of my portfolio to one stock

Of course if you are a new investor just starting out this is most likely not feasible but you should have a plan that with each investment you build the diversification. That is why in my watch list I always use a target weighting to determine how much I want to spend and to place me on track for a diversified portfolio. - Comments: 0


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