80-20 Your Career

Now that I’ve shared how to 80-20 your finances, I wanted to offer my 20% of the actions we all can take to get 80% of the results needed to grow our careers.

Your career is your most valuable financial asset and by working to maximize it you will make MILLIONS in extra income over the course of a working career (not to mention, you’ll likely enjoy your work more.)

But what are the key steps you should take to make the most of your career?

Here’s my list:

1. Over-perform. If you want to get ahead in your career, you have to over-perform. This means you need to establish what the required output is for your position and give your employer more than that. Those that consistently over-perform are the ones that get promotions, greater responsibility, and higher wages.

2. Be likeable. Some career experts rate likeability above performance on the list of how to grow your career. Why? Because people are more likely to help those they like, give the benefit of the doubt to those they like, promote those they like, and so on. So strive to be likeable — even if it kills you. 😉

3. Network. We’ve all heard the phrase, “It’s not what you know, but who you know.” Knowing the right people isn’t the one end-all pathway to career success, but it’s a major part of it. You need to build and develop a broad network of people who can help you with your current assignments, point you to a new job if need be, serve as references during your job search, and be a resource for all sorts of career-related situations you may face. Of course, you need to reciprocate. One key to having a great network is to be a helpful resource for others, so look for ways you can assist those in your network.  And be sure to develop a networking plan centered around things like volunteering, attending local events, going to industry conferences, joining professional organizations, and the like to make sure your network is strong and healthy.

4. Be attractive. You don’t have to go over-the-top and have plastic surgery to enhance your beauty, but you can take a few steps that will make you more attractive. Simply dressing nicely, having proper hygiene, wearing makeup (women), being in shape, and so on are steps we can all take to improve our appearances (and thus help to grow our incomes.)

5. Continue learning and developing skills. If you want to continue showing value in your field, continued learning and skills development is important. Pursue certifications, degrees (especially those the company pays for), seminars, classes, training, and other opportunities that increase your expertise and ability to do a better job. Employers value these extras and you’ll eventually be able to cash in your hard work in one way or another to grow your career.

That’s my list for the most important steps in growing your career. Did I miss any?

Source: http://wealthlion.com/80-20-your-career/

My Retirement Plan

I am not going to settle for a barely-getting-by retirement. I haven’t worked all my life to sit and just make ends meet for my golden years — simply surviving until I die.

I am not going to settle for a retirement where my money may or may not run out when (and if) I’m 85, 90, or 95. That would feel like living with impending doom and a lifestyle I would hate.

No, the traditional retirement isn’t for me.

What is the “traditional” retirement you may ask? Something like this:

• You work a 40+ year career, saving for retirement as you go along.
• When you get to 65 (or older), you retire and live on a combination of Social Security and your savings.
• If you’ve done it “right”, the savings portion allows you to withdraw 4% (the old rule) of your savings every year with a fairly high confidence that your money will last longer than you will (something like a 95% chance your money will last until 85.)

And this is the retirement plan for those Americans who are pretty advanced in their saving and retirement plans. Most Americans simply have “work longer” as their plan.

Anyway, the above plan is at least decent. That is until something happens:

• What if you live past 85?
• What happens if some large, unexpected expense comes along?
• What if inflation rears its head and your money only lasts until you are 75?

No, this sort of “a lot of things could go wrong” retirement isn’t for me. Instead, here’s what I’m planning on the following:

Accumulating a substantial amount of assets that I can then turn into income generators, churning out enough income that more than covers my annual expenses.

What’s that look like? Something like this:

• $3 million in assets
• Assets generate a minimum of $100k in income per year
• I live on $70k per year

The benefits of this plan are probably clear, but let me spell them out just in case they aren’t:

• I can retire and completely support my lifestyle on income generated from my assets.
• The assets themselves are never touched. I live only on the income they provide.
• There’s a safety net of $30k per year in case something bad happens.
• Any Social Security money added to this is gravy.
• Any income from a job I may have is gravy.
• Any income from a job my wife may have is gravy.
• Any income from a side business we may have is gravy.

In other words, we have more than enough income generated to cover our needs (and we’re not skimping — we have a $70k budget!) plus HUGE margins of safety.

Yes, this is the sort of retirement I want to have.

But there are a few challenges to this plan:

• I have to get $3 million.
• I have to get it to earn $100k per year.
• I have to account for inflation.

Let’s tackle those one by one:

• $3 Million – I hate to get specific because it seems like bragging, but let’s just say at my current rate of savings, depending on the market’s performance, I should hit $3 million in the next two to five years.
• $100k income – I will detail how I am planning to invest my money so it earns at least $100k in another post, but for now just consider this: I’m planning on having $1 million invested in rental real estate earning 10% after all expenses. That amount alone gets me to my goal — and I still have $2 million to invest for income.
• Inflation – My plan for inflation is to so vastly over-deliver on income, that inflation is never a threat. As you can see from the bulletpoint above as well as all the income “gravy” I have as potentials, that shouldn’t be too hard.

Of course, there are many more details that need to be worked out. In my next post, I’ll get a bit more specific and give you the numbers I’m looking at in order to make this plan a reality.

Source: http://wealthlion.com/my-retirement-plan/

Dividend Investing Basics

I recently commented that dividend investing may be a key part of my retirement plan, but also admitted that I didn’t know much about it.

I’m in the midst of studying the strategy, seeing if it has legs, and deciding if I can (and want to) make it a solid part of my retirement plan. To do this, I recently went to my local library and ordered a few books on dividend investing.

Today I’ll share what I’ve learned so far on my journey.

The Concept

From what I understand, proponents of dividend investing tout it as working as follows:

• Buy stocks of good quality companies that pay decent dividends (which would be 3% to 5% these days.)
• Earn income generated from the dividend payments.
• Get some growth on the value of the stocks paying the dividends.

So to make this a bit more tangible, let’s take the following example:

• You buy a portfolio of stocks for $500k.
• These stocks pay you a 4% dividend of $20,000.
• The stocks appreciate 4% over the course of the year and are worth $520,000 at the end of year one.

In this example, your stocks have had a total return of 8% (which is completely reasonable) through the combination of dividends and growth.

Most dividend investors would look for their investments to beat the major market indices. I don’t need to go that far. All I need is some income and enough growth to make up for rising inflation (I’m figuring on 3% income and 3% growth). If I get extra return, that’s great, but I don’t need it.

Five Reasons Why Dividend Investing Works

But that’s my take on why dividend investing works (and how it works). What do the “experts” say? In All About Dividend Investing, Second Edition (All About Series), the authors offer the five reasons why dividend investing works as follows:

1. Dividends provide a steady stream of income.

2. Dividend stock prices increase over time.

3. Dividend reinvestment allows investment to grow at a compounded rate.

4. Dividend reinvestment promotes dollar cost averaging.

5. Dividend-paying stocks generally have lower price volatility.

I especially like the first two since they will be the main reasons I pursue this strategy (if I ultimately decide it does work for me).

Success of Dividend Investing

Continuing on the learning path, I’ve found that there are a seemingly myriad number of ways that dividend stocks can be picked (and even if you use stocks at all — some people suggest mutual funds). But no matter what you use, the advocates for dividend investing seem pretty confident of its success.

Consider this quote from The Motley Fool Million Dollar Portfolio LP: How to Build and Grow a Panic-Proof Investment Portfolio:

And so here’s one key takeaway: Dividend-paying companies are surer bets as investments since, on average, they operate in mature industries and enjoy steady flows of earnings. There is a reason why we have launched our book’s examination of investment strategies by focusing first on dividends — this is the safest way to invest in equities.

And later they say:

A truckload of academic studies has shown that investing in companies that pay dividends is just about the best way to earn huge returns over time.

Again, they are looking at dividend investing compared to all the other investing strategies and saying it’s one of the best. I don’t need it to be one of the best — I have a much lower hurdle to jump. This gives me a margin of safety which I like.

Similar sentiments are given in Beating the S&P with Dividends: How to Build a Superior Portfolio of Dividend Yielding Stocks. They sing the praises of dividend investing as follows:

It is a common misconception that most of the returns to investors who invest in stocks have come from capital growth. However, since 1926 nearly half of the 10.3% annual stock market return has come from dividends and dividend reinvestment. As an example, over the past 70 years, ending December 31, 2002, dividends contributed almost 40% of the average annual return of stocks on the S&P 500 Composite Index.

There are a number of formal studies that have found dividend stocks provide higher returns. For example, one study of monthly returns by S&P 500 companies over 31 years found that dividend-paying companies significantly outperformed non-dividend-paying firms by 0.37% per month.

Of course these books have a certain point of view they are trying to sell, so such statements aren’t surprising. That said, the fact that there are studies showing that dividend stocks do well is at least a partial boost for the strategy.

That’s about as far as I’ve gotten into my investigation of the topic. Obviously I still have a long way to go and there’s still a HUGE question out there (how do I find the right stocks that deliver the results I want?) If you have any thoughts on what I should consider as I proceed, I’d love to hear them. Or if you’re a dividend investor yourself, perhaps there are some words of wisdom you can share.

Dividend Growth Investing Is A Perfect Strategy For Young Investors

Imagine your perfect day. You wake up when you are rested, without the need of any alarm clocks. You then do some working out , followed by having a nice healthy breakfast. You then read at your leisure, have a lunch later in the day to beat the 11:30 – 1 pm crowds, and then review your brokerage accounts. You notice dividends from several companies are deposited today, and you decide to transfer them to your checking account. You check for any major items concerning your portfolio holdings, and spend a few hours researching a new dividend stock.

After that you get more time to concentrate on your activities, be it volunteering at the local homeless shelter, mentoring high school students, learning a new language or simply catching up on some good books. Later that day, you might decide to enjoy a few with your mates/gals. This dream is brought to you by dividend investing.

This is my retirement dream in a nutshell. The reason I started Dividend Growth Investor blog in 2008, is to write down ideas on how to make it happen. I believe that dividend growth investing works for all investors, regardless of their age. However, I do realize that older investors might have a preference for higher yielding stocks, while youngsters like myself can afford to build portfolios across the yield spectrum.

One of the most common misconceptions about dividend investing, however, is that it is not a good strategy for building your nest egg, and therefore it is not suitable for younger investors. Being a youngster myself, I (not surprisingly) disagree.

Younger investors are typically told to take a lot of risks early on, because they have time to recuperate those losses. I find this saying to be very dangerous for young investors. The problem is that taking risk is important, but it should not mean gambling. Investors should only be taking on large risks when they have a strategy with positive expectancy of a positive return, while risk is minimized. If you invest in penny stocks, social media stocks, or if you bought dot-coms during the tech boom of the late 1990s, you took huge risks but you were likely making concentrated gambles. There is a cost to gambling, because losing your entire nest egg of $10,000 at the age of 24 means you will be poorer by $800,000 by age 70. This calculation assumes a 10% annual return for 46 years.

In contrast, with a typical dividend growth strategy, you get a slow and steady approach that will lead to a monthly passive income that will pay your expenses in retirement. Starting out early will be beneficial, because you would gain the necessary experience through trial and error, and find out the nuances that work out for you. This would make you successful, and ensure that you maintain your success in investing. A big part of investment success is not losing too much in your investment career.

With this dividend strategy, we are focusing not on net worth per se, but on target annual dividend income. If your goal is to have a net worth of $1 million dollars, but you end up investing it in a relatively illiquid asset such as a personal residence, you might not be able to retire entirely on it. In some parts of the U.S., you might have to pay $20 – $30 thousand in annual property taxes plus paying for upkeep, maintenance etc. If, instead, you had a rental property generating $4,000 in monthly income or a portfolio of dividend stocks generating a similar amount, you might be set for life.

I believe that a new investor who does not have a lot of money today but who plans on accumulating their “financial nut” over the next years will be perfectly able to utilize dividend growth investing. With this strategy investors turbocharge the dividend income growth of their portfolios by putting money to work every month in stocks that regularly boost dividends, and then reinvesting those dividends selectively.

Since 2008, I have been on a mission to build up my portfolio income. Every month, I save an amount of money that I deposit in my brokerage account. I scan the market for investment opportunities all the time, followed by analyzing prospective investments. I identify dividend stocks for further analysis either by running my screening criteria against the dividend champions or contenders lists, by looking at weekly list of dividend increases as well as through interactions with other investors and the general method of my inquiry into business.

I do a complete stock analysis of each company I find interesting, in order to gauge whether the company in focus has any competitive advantages, pricing power and whether there are any catalysts for further expansion in revenues and profitability going forward. I focus on companies that can grow earnings over time, which will provide the fuel for future dividend increases. A rising earnings stream is also positively correlated with an increase in stock prices. You can have your cake and eat it too with dividend growth stocks.

My goal is to acquire the quality companies identified for purchase at attractive valuations. Entry price does matter to an extent, because a lower price provides a higher margin of safety in the investment and is equivalent to a higher dividend income. Of course, if you plan on holding stocks for 20 – 30 years however, it would not really matter whether you purchased Johnson & Johnson (JNJ) at $70/share or $75/share. If you overpay today however, it might mean that your returns in the first five years might be below average, until the growing earnings result in a valuation compression that would make the stock attractively valued today.

For my personal portfolio, I try to generate annual dividend growth in the 6-7% range on aggregate. My portfolios also yield approximately 3.50% – 4%. I achieve these aggregate figures by stacking three different types of dividend growth stocks, for maximum results. So far, I am able to cover approximately 50% of my expenses from my dividend income.

A few good picks include:

Coca-Cola (KO) engages in the manufacture, marketing, and sale of nonalcoholic beverages worldwide. This dividend champion has increased distributions for 51 years in a row. Over the past five years, Coca-Cola grew distributions at a rate of 8.40%/year. Currently, the stock is trading above the 20 times earnings limit I have set for myself, but yields a very respectable 2.80%.

Phillip Morris International (PM) manufactures and sells cigarettes and other tobacco products. The company has managed to grow distributions by 13.10%/year since the spin-off from parent Altria Group (MO) in 2008. I like the economics of the tobacco business, without the liability stemming from doing business in one country. PMI’s revenues are generated outside the U.S., and therefore are not dependent on a single country’s onerous laws on smoking. Currently, the stock is trading at 16.60 times earnings and yields 3.90%.

Kinder Morgan Inc (KMI) is the general partner of Kinder Morgan Partners (KMP) and El Paso Pipeline Partners (EPB). It also owns limited partnership interests in KMP and EPB. The most important asset is the incentive distribution rights structure, which provide for a 50% share of any future distributions growth over a certain threshold for KMP and EPB. Given the growth projections for energy assets in the U.S., and Kinder Morgan in particular, this stock can achieve high single digit dividend growth for at least the next five years. Currently it is yielding a very attractive 4.20%.

Procter & Gamble (PG) engages in the manufacture and sale of a range of branded consumer packaged goods. This dividend king has increased distributions for 57 years in a row. Over the past five years, Procter & Gamble has managed to boost distributions at a rate of 12.20%/year. Currently, the stock is trading at 17.20 times earnings and yields a very respectable 3.10%.

Let’s see how a portfolio stacks, where a young dividend investor puts $3000/month in 4% yielders that grow at 6%/year.

After five years with this approach, you would be earning $750 in monthly dividend income. Ten years after starting this strategy you will be earnings $2,000 in monthly dividend income. Fifteen years after beginning your dividend investment journey, you will be making almost $4,000 in monthly dividend income. This slow and steady approach is very boring, and it is not as exciting as tripling your money in Tesla (TSLA) in less than a month. However, more investors who focus on long-term wealth accumulation potential of dividend growth stocks will be better off than investors who gamble on the next big growth stock.

An investor with a vision will look beyond the 3%- 4% current yields today, but look at the potential for higher distributions over time. An investor that starts small at a young age, builds a diversified portfolio of income producing securities with growing distributions when valuations are right, reinvests these rising distributions into more stock and continuously adds to his portfolio, will achieve wealth at a relatively young age.

Source: http://seekingalpha.com/article/1530802-dividend-growth-investing-is-a-perfect-strategy-for-young-investors

Dividend Growth Investing Is A Perfect Strategy For Young Investors

Imagine your perfect day. You wake up when you are rested, without the need of any alarm clocks. You then do some working out , followed by having a nice healthy breakfast. You then read at your leisure, have a lunch later in the day to beat the 11:30 – 1 pm crowds, and then review your brokerage accounts. You notice dividends from several companies are deposited today, and you decide to transfer them to your checking account. You check for any major items concerning your portfolio holdings, and spend a few hours researching a new dividend stock.

After that you get more time to concentrate on your activities, be it volunteering at the local homeless shelter, mentoring high school students, learning a new language or simply catching up on some good books. Later that day, you might decide to enjoy a few with your mates/gals. This dream is brought to you by dividend investing.

This is my retirement dream in a nutshell. The reason I started Dividend Growth Investor blog in 2008, is to write down ideas on how to make it happen. I believe that dividend growth investingworks for all investors, regardless of their age. However, I do realize that older investors might have a preference for higher yielding stocks, while youngsters like myself can afford to build portfolios across the yield spectrum.

One of the most common misconceptions about dividend investing however is that it is not a good strategy for building your nest egg, and therefore it is not suitable for younger investors. Being a youngster myself, I (not surprisingly) disagree.

Younger investors are typically told to take a lot of risks early on, because they have time to recuperate those losses. I find this saying to be very dangerous for young investors. The problem is that taking risk is important, but it should not be mean gambling. Investors should only be taking on large risks when they have a strategy with positive expectancy of a positive return, while risk is minimized. If you invest in penny stocks, social media stocks, or if you bought dot-coms during the tech boom of the late 1990s, you took huge risks but you were likely making concentrated gambles. There is a cost to gambling, because losing your entire nest egg of $10,000 at the age of 24 means you will be poorer by $800,000 by age 70. This calculation assumes a 10% annual return for 46 years.

In contrast, with a typical dividend growth strategy, you get a slow and steady approach that will lead to a monthly passive income that will pay your expenses in retirement. Starting out early will be beneficial, because you would gain the necessary experience through trial and error, and find out the nuances that work out for you. This would make you successful, and ensure you maintain your success in investing. A big part of investment success is not losing too much in your investment career.

With this dividend strategy, we are focusing not on net worth per se, but on target annual dividend income. If your goal is to have a net worth of $1 million dollars, but you end up investing it in a relatively illiquid asset such as a personal residence, you might not be able to retire entirely on it. In some parts of the US, you might have to pay $20 – $30 thousand in annual property taxes plus paying for upkeep, maintenance etc. If instead you had a rental property generating $4,000 in monthly income or a portfolio of dividend stocks generating a similar amount, you might be set for life.

I believe that a new investor who does not have a lot of money today but who plans on accumulating their “financial nut” over the next years will be perfectly able to utilize dividend growth investing. With this strategy investors turbocharge the dividend income growth of their portfolios by putting money to work every month in stocks that regularly boost dividends, and then reinvesting those dividendsselectively.

Since 2008, I have been on a mission to build up my portfolio income. Every month, I save an amount of money that I deposit in my brokerage account. I scan the market for investment opportunities all the time, followed by analyzing prospective investments. I identify dividend stocks for further analysis either by running my screening criteria against the dividend champions or contenders lists, by looking at weekly list of dividend increases as well as through interactions with other investors and the general method of my inquiry into business.

I do a complete stock analysis of each company I find interesting, in order to gauge whether the company in focus has any competitive advantages, pricing power and whether there are any catalysts for further expansion in revenues and profitability going forward. I focus on companies that can grow earnings over time, which will provide the fuel for future dividend increases. A rising earnings stream is also positively correlated with an increase in stock prices. You can have your cake and eat it too with dividend growth stocks.

My goal is to acquire the quality companies identified for purchase at attractive valuations. Entry price does matter to an extent, because a lower price provides a higher margin of safety in the investment and is equivalent to a higher dividend income. Of course, if you plan on holding stocks for 20 – 30 years however, it would not really matter whether you purchased Johnson & Johnson (JNJ) at $70/share or $75/share. If you overpay today however, it might mean that your returns in the first five years might be below average, until the growing earnings result in a valuation compression that would make the stock attractively valued today.

For my personal portfolio, I try to generate annual dividend growth in the 6-7% range on aggregate. My portfolios also yield approximately 3.50% – 4%. I achieve these aggregate figures by stacking three different types of dividend growth stocks, for maximum results. So far, I am able to cover approximately 50% of my expenses from my dividend income.

A few good picks include:

Coca-Cola (KO) engages in the manufacture, marketing, and sale of nonalcoholic beverages worldwide. This dividend champion has increased distributions for 51 years in a row. Over the past five years, Coca-Cola grew distributions at a rate of 8.40%/year. Currently, the stock is trading above the 20 times earnings limit I have set for myself, but yields a very respectable 2.80%. Check my analysis of Coca-Cola.

Phillip Morris International (PM) manufactures and sells cigarettes and other tobacco products. The company has managed to grow distributions by 13.10%/year since the spin-off from parent Altria Group (MO) in 2008. I like the economics of the tobacco business, without the liability stemming from doing business in one country. PMI’s revenues are generated outside the US, and therefore are not dependent on a single country’s onerous laws on smoking. Currently, the stock is trading at 16.60 times earnings and yields 3.90%. Check my analysis of PMI.

Kinder Morgan Inc (KMI) is the general partner of Kinder Morgan Partners (KMP) and El Paso Pipeline Partners (EPB). It also owns limited partnership interests in KMP and EPB.  The most important asset is the incentive distribution rights structure, which provide for a 50% share of any future distirbutions growth over a certain threshold for KMP and EPB. Given the growth projections for energy assets in the US, and Kinder Morgan in particular, this stock can achieve high single digit dividend growth for at least the next five years. Currently it is yielding a very attractive 4.20%.

Procter & Gamble (PG) engages in the manufacture and sale of a range of branded consumer packaged goods. This dividend king has increased distributions for 57 years in a row. Over the past five years, Procter & Gamble has managed to boost distributions at a rate of 12.20%/year. Currently, the stock is trading at 17.20 times earnings and yields a very respectable 3.10%. Check my analysis of Procter & Gamble.

Let’s see how a portfolio stacks, where a young dividend investor puts $3000/month in 4% yielders that grow at 6%/year.

After five years with this approach, you would be earning $750 in monthly dividend income. Ten years after starting this strategy you will be earnings $2,000 in monthly dividend income. Fifteen years after beginning your dividend investment journey, you will be making almost $4,000 in monthly dividend income. This slow and steady approach is very boring, and it is not as exciting as tripling your money in Tesla (TSLA) in less than a month. However, more investors who focus on long-term wealth accumulation potential of dividend growth stocks will be better off than investors who gamble on the next big growth stock.

An investor with a vision will look beyond the 3%- 4% current yields today, but look at the potential for higher distributions over time. An investor that starts small at a young age, builds a diversified portfolio of income producing securities with growing distributions when valuations are right, reinvests these rising distributions into more stock and continuously adds to his portfolio, will achieve wealth at a relatively young age.

http://www.istockanalyst.com/finance/story/6478940/dividend-growth-investing-is-a-perfect-strategy-for-young-investors

Delaying Gratification? What's Gratifying To You?

My strategy is simple. I live on less than most – saving over 50% of my net income, year in and year out. This year I’m on pace to save over 60% of my net income. I use the savings from intense budgeting to invest in high quality companies that pay rising dividends. I’ll then one day live off the dividend income my portfolio provides. This is all part of my plan to retire by my 40th birthday.

Sounds great, right? Not so fast.

Some people seem to think the delayed gratification of living on so little now isn’t worth it because tomorrow isn’t promised. They say you should live like today’s your last day because it’s all about YOLO, yo.

Well, what is delayed gratification? Per Wikipedia, delayed gratification is the ability to resist the temptation for an immediate reward and wait for a later reward. Generally, the later reward is larger than the immediate reward would have been. That’s the benefit of delaying gratification. You get less now for more later.

But I’m not quite so sure I’m delaying gratification by living on little, and I’m actually going to make the argument that I’m doing the opposite. I would call what I’m doing hastening gratification.

I know what’s gratifying to me. Time. Time is everything, because without it we’re nothing. Therefore, the ultimate gratification for myself is to have as much of it as possible. And that’s precisely why I’m on the path to reach financial independence at such an early age. I can think of nothing more gratifying than having all my time to myself. Need six months off to travel? Being financially independent means you don’t have to ask your boss for six months off. You do whatever you want. What could possibly be more gratifying than that; doing whatever you want whenever you want?

Living on relatively little is easy for me because I don’t find a great deal of gratification in spending my money on things that I know won’t bring lasting joy. Who wants to own a bunch of stuff when I could one day own all my time? What possibly could you want to own more in life than your own time? I’m not really delaying gratification by budgeting, saving and investing. Every single day is gratification because I know all of these steps are bringing me one step closer to what’s truly gratifying and rewarding: complete and utter freedom! The totality of the rest of my life all to myself, free to spend how I please.

If you enjoy spending money on 6-8 restaurant visits per month, 2-3 cars in the driveway, a large home, cable TV subscription, 2-week international travel jaunts, and a closet full of designer clothing, then living like I do would probably be quite a struggle for you. And if you truly find great joy from this lifestyle then perhaps delaying gratification today for even more of this lifestyle in the future might not be worth it for you. But I do beg of you to take a look deep inside yourself and make sure you’re happy. If you’re happy making lots of money and spending most of it, then I say more power to you. Living on less to have more time isn’t for everyone, and neither should it be.

However, for the rest of us there is only so much consumption that can possibly be fulfilling.

Courtesy: Your Money or Your Life

This concept, from one of my favorite books, Your Money or Your Life, is The Fulfillment Curve. It basically tries to graphically demonstrate that there is a level of spending and consumption that leads to optimal fulfillment. This concept is a derivative of marginal utility. Too much of anything is a bad thing, and moderation in life is important. Living in your car is probably going to be very cheap, but also lead to a very unfulfilled, and potentially dangerously depressing life. On the other hand living in a castle that you can’t afford even with three jobs is only going to lead to a very stressful and unhappy life, and probably land you back to living in your car.

You could probably argue I live somewhere between “Survival” and “Comforts” currently. But the greater I allow myself to scale off to the right the longer I’ll have to truly delay the one thing that I find gratifying: freedom. And that’s exactly it. By living like I do I’m not delaying gratification, because I find gratification in freedom. By not having my freedom right now, everything I do is delaying the day when I’ll own my own time and have my life all to myself. By living on less and forgoing many things that don’t really bring me happiness I’m hastening gratification.

Thanks for reading.

Photo Credit: Naypong/FreeDigitalPhotos.net

Source: http://www.dividendmantra.com/2013/06/delaying-gratification-whats-gratifying.html

5 Mistakes To Avoid With Your ETF Portfolio

As more and more investors adopt exchange-traded funds in their portfolios, it is becoming increasingly important to understand the opportunities and risks in these unique investment vehicles. The first step to success with trading ETFs is to avoid potential pitfalls, which is why I wanted to point out some of the common mistakes that I see made whenever I am reviewing investors’ portfolios.

1. Don’t Fall In Love With Your ETFs

Fall in love with your wife, your kids, even your pets. But do not make the cardinal sin of falling in love with your investments. I have often seen investors get so enamored with a specific theme, stock, or ETF in their portfolio that they throw out the rules of risk management and end up riding it from a big gain to a big loss. The damage to both your portfolio value and your confidence is one of the reasons that I always use a stop loss or other risk management discipline on every position in my portfolio.

One example of a theme that has fallen out of favor this year is precious metals. The MarketVectors Gold Miners ETF (GDX) as well as the iShares Silver Trust (SLV) have seen their value fall 49% and 38% respectively over the last 9 months. While these ETFs have had fantastic returns in prior years, they have been slowed by a rash of institutional selling and unfavorable economic conditions. Remember that a 50% decline requires a 100% gain to get back to break even. Don’t let these types of declines weigh on your performance like a boat anchor.

2. Be Mindful of Trading Volume and Liquidity

If you are buying or selling the SPDR S&P 500 ETF (SPY) which regularly trades over 150 million shares per day on average, then you don’t have to worry about trade execution. A simple market order will fill your order instantaneously within a penny of the current price. However, a more thinly traded ETF may have disastrous execution prices that can be a huge cost to your performance. An ETF with lower volume will usually have a larger spread between the bid and ask price, which will leave the door open for a market maker to take advantage of you.

As a general rule, I recommend that you look for ETFs that have average daily trading volume of at least 100,000 shares and that you use a limit order for larger positions so that you control your execution price. In addition, you should be cognizant of how liquid the underlying holdings of the ETF are, which may play a factor in the execution and daily pricing of your order as well.

3. Know What You Own and Why You Own It

Just because an investment has a 3 or 4 digit ticker symbol (and isn’t a stock) does not mean that it is an ETF. Remember that there are closed-end funds and exchange-traded notes that often times get mistaken for ETFs.

A closed-end fund has a defined number of shares and can trade at a large premium or discount to the net asset value of the underlying holdings based on investor demand. In addition, a closed-end fund manager may have the ability to use leverage, adjust holdings, and distribute capital at his discretion.

An exchange-traded note is an unsubordinated debt instrument that tracks the return of a specified index. They are backed by the credit worthiness of the bank that issues them instead of the underlying holdings of the fund. These ETNs often times replicate a sophisticated trading strategy or commodity index that is easier to access though this structure.

Be sure to closely research the structure of the fund that you are buying as well as the underlying holdings, expenses, track record, and tax ramifications. This early research can pay huge dividends in your portfolio down the road.

4. Not All ETFs are Created Equal

One of the hidden pitfalls of investing in certain commodity related ETFs is the tax ramifications of their legal structure. What I am referring to is the difference between an ETF that is structured as a trust that generates a 1099 vs. being structured as a partnership that generates a K-1. One of the largest ETFs in the commodity space that is structured as a partnership is the PowerShares DB Commodity Index Tracking Fund (DBC). This ETF tracks a diversified basket of commodities that include precious metals, oil, agriculture, and base metals.

First time investors in DBC, who haven’t done their homework, will be surprised when they receive a K-1 for partnership income that does not correlate to their dividends or capital gains. The reason for this is that the fund must be structured as a partnership in order to participate in buying commodity futures contracts. When you purchase DBC you are considered to be participating in the gains or losses of the partnership and thus receive a K-1 statement that must be dealt with on your tax return.

This additional tax burden may be a headache that individual investors can avoid by simply finding an alternative such as the iPath S&P GSCI Total Return ETN (GSP). The underlying index that GSP tracks is similar to DBC and you won’t receive a K-1 because it is structured as an exchange-traded note.

5. Don’t get Too Overweight In One Area

ETFs by nature are diversified investment vehicles, but often times I review portfolios that are very much overweight in one area such as precious metals, technology, or even cash. I always recommend that you consider using core positions such as the iShares MSCI Minimum Volatility ETF (USMV) or the Vanguard Total Stock Market ETF (VTI) as the building blocks for your asset allocation. Then layer in sectors such as the Healthcare Select Sector SPDR (XLV) or First Trust NASDAQ Technology Dividend Index (TDIV) to enhance your returns.

In addition, it’s important to balance your asset allocation across bonds, commodities, and international stocks by expanding and collapsing those sleeves when conditions are most favorable. This will ensure that you are staying diversified and taking a proactive approach to managing your portfolio.

Additional disclosure: David Fabian, Fabian Capital Management, and/or its clients may hold positions in the ETFs and mutual funds mentioned above. The commentary does not constitute individualized investment advice. The opinions offered herein are not personalized recommendations to buy, sell or hold securities.

By David Fabian

Source: http://seekingalpha.com/article/1509912-5-mistakes-to-avoid-with-your-etf-portfolio?source=email_etf_daily&ifp=0

An Even Easier Dividend Growth Portfolio

Nine letters that’s all it takes. No watching of companies. No need to concern yourself with what companies are missing on earnings, cutting their dividend, eliminating their dividend or freezing their dividend. Just punch in three numbers and rebalance with the income that the portfolio generates. Adding new monies on a regular basis is also the greatest favour you can do for yourself as well, of course.

Here’s an income producing portfolio that you can hold until and through retirement. Here are those nine letters.

(CVY) (VYM) (KXI)

Those nine letters will give you broad exposure to U.S. and international dividend payers and sectors such as REITs and MLPs with a sprinkling of some Canadian energy companies. It simplifies the multiple dividend growth ETF I put together that added REITs and MLPs in this articlehere.

At the core of the dividend growth ETF portfolios that I’ve been suggesting readers consider is Vanguard’s VYM. It’s a broad based “higher yielding” dividend growth ETF. It holds many or most of the U.S. based stalwarts that we see in the portfolios of dividend growth investors who write or comment on Seeking Alpha.

VYM – Top Holdings

Exxon Mobil (XOM), Microsoft (MSFT), General Electric (GE), Chevron (CVX), AT&T (T), Procter & Gamble (PG), Johnson & Johnson (JNJ), Wal-Mart (WMT), Pfizer (PFE), Coca-Cola (KO), Philip Morris (PM), Merck (MRK), Verizon Communications (VZ), PepsiCo (PEP), Intel (INTC), Abbott Laboratories (ABT), Home Depot (HD), McDonald’s (MCD), United Technologies (UTX), ConocoPhillips (COP), 3M (MMM), Altria Group (MO), Eli Lilly (LLY) Colgate-Palmolive (CL), Emerson Electric (EMR), Illinois Tool Works (ITW).

From there I would suggest that dividend growth investors add some international exposure with KXI, an ETF from iShares – a Global Consumer Staples ETF. This sector is prime breeding ground for dividend companies. There is certainly some overlap between the U.S. VYM and International holdings, but it does offer some broader international exposure. Investors can sometimes forget that the U.S. markets can underperform at times. Here’s how a combination of Canada (EWC) and the international index EAFE (EFA) outperformed the U.S. markets from January of 2003 through to the end of 2007. Adding some international exposure can pay off.

Here’s a list of some of the top holdings and their percentage of the global ETF KXI.

From there I would suggest some yield chasing with a multi asset class ETF from Guggenheim – CVY.

This from Guggenheim … The Fund, using a low cost “passive” or “indexing” investment approach, seeks to replicate, before fees and expenses, the performance of the Zacks Multi Asset Income Index. The Zacks Multi Asset Income Index is comprised of approximately 125 to 150 securities selected, based on investment and other criteria, from a universe of domestic and international companies. The universe of securities within the Index includes:

• U.S.-listed common stocks
• American depositary receipts (“ADRs”) paying dividends
• Real estate investment trusts (“REITs”)
• Master limited partnerships (“MLPs”)
• Closed-end funds
• Canadian royalty trusts
• Traditional preferred stocks

Here is the sector breakdown and the top ten holdings.

The fund offers a 12-month yield of 5.15%. While the yield took a hit in the financial crisis, the ETF has delivered some nice income growth from June of 2009. The dividends have increased from .22 cents a quarter to .32 cents a quarter representing a 9.82% dividend growth rate over that 4 year period. Though the income has now only returned to its 2006 levels.

I was enticed to look for a U.S. multi-asset class ETF as I use a similar product up here in the great white north. My multi-asset class ETF now offers a current yield of just under 7.4%. Interest rate worries have certainly hammered the interest rate sensitive high yield bonds, utilities and REITs that it holds. I am looking to add to this position within normal reinvestment of investment income. One of my main Canadian dividend growth ETFs also offers a yield of 5%. There is some decent value up here in Canada as our markets have lagged.

Of course CVY will also present its own risks in relation to interest rates and sector exposure.

So what happens when you put those nine letters together in a portfolio? Let’s have a look at some historical (but brief) returns. The portfolio is limited to November of 2006 – VYM’s inception date. The ETFs each get equal weighting of 33.3% each.

The Nine-Letter ETF portfolio total return was 49% from November 2006 to present, outperforming the S&P 500’s total return of 33.4%. That’s a significant outperform by 47%.

And what would have happened with this portfolio mix on the income front? As stated above CVY has some decent income growth over a 4-year period – a 9% compound average growth rate to go with that 5% plus yield. VYM offers an SEC yield listed at 3.15% and a dividend growth rate of 8.5%. KXI offers a current yield of 2.4% and a dividend growth rate of 11% over five years.

Put them together and here’s an estimate of dividend growth history. Calculating or estimating dividend growth rates of ETFs is not an exact science to be sure. I will take averages of a year or 2-3 quarterly dividend payment of an ETF to smooth out ETF dividend payments that can fluctuate with regularity.

ETF	Yield	Dividend Growth Rate
VYM	3.15%	8.5%
KXI	2.4%	11%
CVY	5.15%	9.8%
Portfolio Total	3.5%	9.8%

And yes, I have blended some time frames to make this projection. Again, the CVY growth rate is shorter term coming out of the recession and is calculated from the bottom of its income history. As the ETFs themselves do not offer 10 and 15 year histories, we are limited. That said, one can look at the underlying holdings of these ETFs and see long term histories of dividends and dividend growth.

This may be a simple three ETF portfolio, but it offers broad sector and international exposure. It has some nice numbers on total return and income generation.

For those who want to temper price volatility (that’s most everyone), they can balance the holdings with a bond ETF or two. If one wants the classic balanced portfolio they may consider holding 60% of the above ETFs combined with 40% from a broad based bond ETF such as (AGG). For those concerned with rising interest rates and that effect on bond ETF prices, they may select a bond ETF with a shorter average maturity. Of course, there’s no guarantee that equities and bonds will continue to offer low or negative correlation.

And there you have it. Three ETFs, nine letters, one very simple but likely effective portfolio over the longer term.

Source: http://seekingalpha.com/article/1505922-an-even-easier-dividend-growth-portfolio?source=email_investing_income&ifp=0

Why Dividend Investing Will Always Be Better Than Buying The Entire Stock Market

By Mike

I’ve read a lot of comments about the potential dividend bubble for the past 12 months. Some investors are afraid to see so much money leaving bonds and money market funds to be piled into dividend-paying stocks. Most investors are craving for revenue and dividend stocks are pretty much the answer to this desire… unless they continue to starve with their bonds and CDs paying less interest than I pay my kids!

But the fact remains: dividend investing is far more solid than a simple bubble created by a few retirees looking to receive a big fat check every month. While this investing strategy might look like flavor of the year since 2009, I can tell you it will continue to work out for decades to come.

Dividend Investing has Outperformed the S&P 500 Since The Very Beginning

You can do some research on the Internet, the conclusion will always include the same fact: dividend growth stocks generate a better return than pure capital appreciation. In fact roughly 50% of the total stock market return comes from dividend payouts. Trying to select pure growth stocks without dividends is like claiming you can ignore 50% of the stock market return in your portfolio.

(click to enlarge)

But following a few case studies and buying dividend stocks for that sole reason would be a bit simplistic… even borderline stupid. It’s your money after all. Are you here to make money or to gamble it on some geek studies?

Let’s dig deeper to see if there is a reason why dividend stocks are better than any others…

Dividend Payouts Require Cash Flow

By definition, a dividend is paid from a company’s after-tax money. Therefore, the company must first generate sales, then earn sustainable profits, pay its taxes, save/invest for the future… and then pay dividends to its investors. There is no point of bleeding the company’s cash flow into dividends simply to please investors. Most companies are paying a dividend because they make money and believe they will continue to do so in the upcoming years. Isn’t this the first reason why you would buy shares of a business in the first place: because your investment will generate positive future cash flow? A company paying dividends strongly believes in its ability to do so.

Dividend Growth Requires Profit Growth

Thinking that any stock paying a distribution is a good fit for your portfolio would be, here again, kind of ridiculous. There are multiple reasons to pay dividends besides having a sound balance sheet:

• It may want to attract more investors, pushing the stock value higher.
• It may be done to please a major investor who wants money back.
• The management might have overestimated its capacity to growth the business in the future.
• The management might have underestimated competition.

Since picking just any stock with a dividend yield is not sound investing practice, the second step would be to pick a stock with a positive dividend growth for at least five years. You can become quite picky and require stocks with up to 25 consecutive years of dividend growth. They are called the Dividend Aristocrats.

A constant dividend growth requires, by definition, a constantly growing profit. Therefore, if you pick a company that increases its dividend payouts by 5% for the past 10, 15 or 25 years, chances are its profits are following the same trend. I’m asking you once again: wouldn’t you like to buy a company that believes whole-heartedly in its ability to generate future positive cash flows PLUS showing a strong history of profit growth? We are getting closer to what any investor would call a “perfect investment”, right?

Profit Growth Requires Sales Growth

It is true that a company could cut its costs for a few years and generate profit growth this way. This is a good solution to cut fat but management must make sure it doesn’t cut too much and jeopardize future growth.

This is why I like to combine both sales and earnings per share on the same graph. I want to make sure that both are on an uptrend. A company making more profit but showing a slowdown in sales or, worse, a decline will lift a red flag. On the other hand, a company with both sales and profits going up will definitely lead to more dividend growth in the future. This is how you can beat the market.

Here’s McDonald’s (MCD) example where sales, profits and dividends are growing while the payout ratio is decreasing (due to a bad year in 2008 where the payout ratio was much higher than previous years).

(click to enlarge)

Sales Growth Requires Competitive Advantage

What’s the best reason a company’s sales grow? The company has a competitive advantage. It can be total leadership in its market, new innovative products, better locations, better process, strong branding, etc, etc, etc.

A company without a competitive advantage can’t really push its sales higher over several years. It will rapidly hit the ceiling and will have to cut on its costs to increase its profit. It will eventually hit them as you can’t continue to grow simply by cutting costs.

By selecting a dividend growth stock, you select a company with strong cash flows coming from increasing profits generated from more sales. Sales growth is often linked to a competitive advantage. Aren’t we drawing the picture of a perfect company for any investor by now?

Investing in Companies with Competitive Advantage is the Key in Becoming a Successful Investor

Regardless of your investment strategy, you will be investing for several years. Most investors have money allocated to investments for more than 10 years. If you don’t want your face pressed up against your trading screen for the next 10 years, you might want to select a more passive investing approach than day trading.

The best way to become a successful investor for the next decade is to find companies with competitive advantage. It is sometimes hard to define what kind of advantage is sustainable or not. This is why I focus on dividend-growth stocks to make sure I pick businesses with all the qualities mentioned in this article.

With simple filters like dividend growth, dividend payouts, earnings per share and sales growth, you can easily find strong companies with a competitive advantage.

No need to do extensive research to know if a company is coming with “the next big thing.”

No need to hope for a homerun with your next pick; most of your stocks will be singles or doubles with dividends.

No need to track your portfolio on a daily basis, dividend investing is meant for the long term.

When you think about it, dividend stocks beat the overall market in general simply because they are rewarded by investors for their sustainable business model. A model allowing them to pay dividends for years.

A Word of Caution – Not All Dividend Stocks Were Created Equal

It’s not because a company shows strong dividend metrics that it is automatically a buy. For example, Radio Shack (RSH) was showing strong dividend metrics not so long ago and everything collapsed rapidly since its business model wasn’t a great match for today’s economy.

It is important to design a strong dividend growth model approach before picking anything from your filtered list. Don’t forget there are Dividend Traps to avoid!

Source: http://seekingalpha.com/article/1505102-why-dividend-investing-will-always-be-better-than-buying-the-entire-stock-market?source=email_investing_income&ifp=0

The Role Of Slow Growing Cash Cows In Your Portfolio

Here is an important description about Charlie Munger taken from page 133 of Janet Lowe’s biography of the Berkshire Vice Chairman:

Munger told Berkshire shareholders that there are a large number of businesses in America that throw off lots of cash, but which cannot be expanded very much. To try to expand would be throwing money down a rat hole, he said. Such businesses don’t stir acquisition desires in most corporations, but they are welcome at Berkshire because he and Buffett can take that capital and invest it profitably elsewhere.

Read that last clause again. But they are welcome at Berkshire because he and Buffett can take that capital and invest it profitably elsewhere.To me, that is what can make Altria (MO), Lorillard (LO), Reynolds American (RAI), BP (BP), and Royal Dutch Shell (RDS.B) useful elements of a portfolio.

We all know about the long-term headwinds facing the tobacco industry, as volumes have been declining steadily at a 3% rate annually since the 1980s in the domestic tobacco market. If that trend persists, it will likely catch up with tobacco shareholders eventually unless the big three tobacco companies run successful buyback programs that can offset the lower smoking rates.

Because of its current asset structure, it’s expected that Royal Dutch Shell may only be growing 3-6% annually over the next couple of years. And because BP is still working its way through its litigation and dealing with the effects of its asset shedding program, it may be looking at low growth for a couple years before reigniting the 8-12% annual growth that has historically been characteristic for the firm.

A lot of times, we get in this habit of thinking about “growth, growth, growth.” It makes sense, because that is what drives future performance. But at the same time, there can be a place in your portfolio for that stock that churns out income for you to deploy elsewhere. The value of See’s Candies to the Berkshire empire over the past 30-40 years isn’t the fact that the company has been a fast grower, but rather, it is because Buffett has been able to extract reliable profits from See’s Candies that he can deploy elsewhere to fund other opportunities.

In today’s market, a 5% yield is nothing to sneeze at. If you have a reliable 5% yielder tucked away somewhere in your portfolio, it could be quite nice to simply take that money and deploy the funds into more attractive opportunities.

Picture someone with 200 shares of Royal Dutch Shell sitting in a tax-deferred account, churning out $720 per year in cash dividends. When it comes time for you to contribute that extra $5,500 to your Roth IRA, you can buy $6,220 worth of a new stock thanks to the intermingling of your Shell profits with your fresh cash contributions. You can wish, rinse, repeat this cycle for years.

Of course, in the case of the tobacco companies and the oil companies I have mentioned, one of the historically fun facts is that they have consistently delivered long-term earnings growth in excess of the modest expectations that other investors and analysts had for the firm.

Strategically, you can blend the slow growing cash cows with the fast growing opportunities in your portfolio to execute a blended income strategy that takes into account both current income and future growth.

Imagine someone that has diligently acquired 100 shares of BP for the past four years, turning a $16,000+ investment into 400 shares of the British oil giant. Right now, that would generate $864 in dividend income per year. All you’d have to do is set up a bank account where you have your investment income deposited, and from there, you could run automatic DRIP programs. You could visit www.computershare.com, enroll in the Becton Dickinson (BDX) DRIP program, and allow $72 to be put into shares of the fast growing healthcare company each month.

Here is the appeal of doing something like that. It is all automatic. You already own the BP shares. The cash dividends it generates run on autopilot. It does not require any active effort exertion on your part. Those reliable oil dividends would then be used to automatically build up a Becton Dickinson position. At that point, you’re not doing anything. Every month you stay alive, you are seeing your share ownership in Becton Dickinson construct itself automatically thanks to the intelligent investment you made in BP over the years.

There is nothing wrong with milking the profits from a steady cash cow and diverting the money elsewhere to fund higher growth opportunities. There is value in stagnant, or slow growing businesses, because they give you reliable cash income that you can use to fund higher growth opportunities. There may be a place for a reliable 5% yielder somewhere in your portfolio that you can use to funnel interesting opportunities elsewhere.

Source: http://seekingalpha.com/article/1506952-the-role-of-slow-growing-cash-cows-in-your-portfolio?source=email_investing_income&ifp=0
by Tim McAleenan Jr.