Discussions – Creating a Dividend Collection Machine

It’s a diversified list of primarily “no-brainer” companies because it doesn’t have to be complicated to be successful. In fact, it’s better if it’s not. Many of these companies have repeat-use, necessity type products or services that are purchased, used, and purchased again over and over and over. And, have been providing these products and/or services for years and years. Think Coca-Cola beverages, Procter & Gamble personal products, Air Products industrial gases, and Johnson & Johnson consumer health products.

I have no intention of trying to follow the thousands of companies that pay a dividend. And more importantly, there’s really no need to. I just need a manageable list that includes enough companies moving independently of each other that gives me a reasonable chance of finding an attractive investment month after month.

The list is light on financials and retailers because companies in these industries seem to have more difficulty surviving long-term. Many industries aren’t represented at all for the same reason. I’m only interested in companies that I feel like I don’t have to worry about. And, within the list, different companies have different purposes. Some are favored for reinvesting, some for dividend collecting, some for trading, and some for all three.

I’ve developed specific criteria for each of these companies that trigger an investment decision. Some are applied globally throughout the list and some are applied only to specific stocks. I’ve learned through experience that the “one size fits all” approach is not the best approach. Because each company’s stock trades in what is essentially its own “market”, each company has its own “personality” leading to its own set of criteria or hurdles. This approach may require a little more effort but enhanced returns are the reward.

And as always, this list is mine. It doesn’t have to be yours. Do with it what you will. At the very worst it’s a good place to start.

Creating a Dividend Collection Business

Discussion: Creating a watch list

Creating, maintaining, and frequently checking a watch list of companies in which you would like to invest is an essential part of the dividend collecting process. It’s vital to know which companies you’re interested in before they move into an attractive price range for investing so that when they do you can act. I monitor my companies throughout the month and make my investing decisions at the end of each month. This method leads to fewer decisions and less trading, which for me is always a good thing.

Step One is to identify those companies in which you would like to invest. For me, they must pay a dividend; have a dominant position in its industry or a dominant brand; and have all the hallmarks of being in business for many years to come. Your own experience with brands/companies as well as the S&P 500 is a good place to look for ideas. Most of my targets are large, well-established, multi-national companies. Amgen, Boeing, Caterpillar, General Dynamics, Pepsi, and Procter & Gamble are a just few examples. Currently there are around 100 companies on my list which is fairly typical.

Step Two is to set up the watch list so that it is easily available to monitor. I use Seeking Alpha for my watch list. It is a free site and you can register with your email address. Then just follow the prompts to create a portfolio (your watch list), save it, and you’re in business. After logging in to the site, just click on portfolio in the menu bar and your list will appear with current updating prices. If you enable email alerts, Seeking Alpha will notify you of any news about your companies. You can also choose which companies on which to receive alerts in the settings menu. Yahoo Finance is another option for setting up a watch list. Both options also have mobile apps.

Step Three is simply to check on your list frequently so that you stay up-to-date with prices. It’s also prudent to create an abbreviated list of those companies that are at or near investing range. Being prepared to act before hand is much better than trying to make decisions on the fly at the last minute.

So that’s it. Nothing difficult. Just requires a little thought/research, pre-planning, and consistent monitoring. Being well organized before the time to make your decisions is the key.

Here’s my current watch list.

Creating a Dividend Collection Business

Article: Spotting a Dividend Trap

From The Motley Fool

https://www.fool.com/retirement/2018/01/28/what-is-a-dividend-trap.aspx

Creating a Dividend Collection Business

Discussion: 3 Paths

There are three paths I follow with dividend stocks. Reinvesting, collecting, and trading. I have strict guidelines for each. I never ignore those guidelines. And, I have three separate accounts for these paths so that I can easily and accurately judge the progress of each.

Because I’m in my late 50s I have a minimum of a 3% dividend yield for those stocks I choose to invest in for the reinvesting track. The simple reason is I don’t have many years until retirement so I feel like I need to start with a higher dividend yield to compensate for the lack of years going forward. If you’re considerably younger and have time on your side, there’s no reason to set such a high hurdle for the starting yield unless that’s just your preference. I concentrate on those stocks that meet my 3% minimum and that are either at a low monthly close for the last year or more and are less than 30% above the 60 month (5 year) moving average, or meet the 3% minimum and are below the 60 month moving average. I plan to hold these stocks forever.

For the collecting track, I invest in those stocks that have at least a 1% dividend yield, are less than 30% above the 60 month moving average, and are at a low monthly close for the last year or more. In this path I’ll hold a stock and collect the dividends until the stock price doubles at which point I’ll sell half of the position to reclaim the original investment and then hold the remaining half as a permanent value holding. This can be used as a gradual method to create an emergency fund if you collect the dividends and don’t reuse them for investing. This path allows me to invest in attractive companies that don’t meet the 3% minimum of the reinvesting path.

I allocate a small portion of my capital to the occasional purchase of a dividend stock that has had a significant correction from it’s 5 year high close and look to sell for a small profit (15% or more) based on a monthly target scale that increase over time. These opportunities are fairly infrequent, and my goal is to sell these stocks within no more than 1 year. It’s very much a hit-and-run strategy. I only employ a small percentage of my capital per each trade, and I don’t use stops. Going in I’m prepared to hold these trades for as long as it takes to meet the target which has a maximum of 50%, even if takes years. I choose to view each trade in this path individually and not collectively as an averaging process. The basic idea for this path is to continue to reinvest the profits in the next trade as a means of compounding gains over and over again. My ultimate goal here is to create multiple “income” streams so that one or more are ongoing at all times.

I strictly adhere to “the #1 rule is don’t lose money” and “the #2 rule is never forget rule #1” mantra for all my investment paths. And, for most people I recommend the reinvesting and collecting paths over the trading path. They are the most forgiving, the easiest to manage, and make the best use of the “time is on our side” function of investing.

But, I find when discussing investing with people they almost always gravitate to the trading path. And I get it. It’s more exciting. But because trading relies totally on random short term price movements, it’s also very much like gambling. While my trading path is based on very high probability setups, there is absolutely no guarantee that each setup will perform in a timely manner. The market does what the market does, especially in the short term. So you absolutely have to understand that, acknowledge that, and prepared for that when trading. In other words, when trading I expect the worst and accept what happens when it happens. You can’t control the market so it’s useless to get upset if it doesn’t do exactly what you thought it would. You just have to accept what it gives you and move on. Only using dividend stocks in trading is my way of hedging against an uncertain outcome because if I’m forced to hang on to a trade for many months, even years, I’m collecting dividends while I do.

If I were forced to choose only one path, it would be the reinvesting track. It is an autopilot process. It makes the best use of time. And, it’s self-correcting in many ways. It is without a doubt the best way to create a substantial dividend stream over time, which is my primary purpose for this entire process.

Creating a Dividend Collection Business

Discussion: Effect of reinvesting over 10 years or more

The examples of reinvesting found below are based on a monthly $500 investment in companies that have:

Paid dividends for at least 5 years
Have either raised their dividends for 5 consecutive years or have a positive growth rate for the past 7 years
Are less than 30% above the 5 year monthly moving average
Have a dividend yield of 3% or more (4% for utilities and REITs).

All dividends collected were reinvested in the issuing company through December 2016. No outside funds were invested after 2006 so that reinvesting accounted for all shares accumulated after December 2006.

The Excel worksheet below contains 30 examples illustrating the power of reinvesting.

Reinvesting Examples

Worksheet Abbreviations

DFI indicates date of first investment.
TFI indicates total funds invested.
RYDC indicates total dividends collected in 2016 when reinvesting.
YDC indicates total dividends collected in 2016 without reinvesting.
RDY indicates associated dividend yield of 2016 dividends to funds invested when reinvesting.
DY indicates associated dividend yield of 2016 dividends to funds invested without reinvesting.
RSV indicates the total value of all shares held at the end of 2016 when reinvesting.
TRET indicates the total return including all dividends collected without reinvesting.
%RP/L indicates the percentage gain when reinvesting.
%P/L indicates the percentage gain without reinvesting.
APR indicates annualized percentage rate of profit growth when reinvesting.

Notes and discussion

It is important to understand that each one of these examples represents a series of monthly $500 investments when all criteria are met for that month and not one lump sum investment on the date listed under DFI. That date is simply the first month when all criteria were met. As you can see by the differing amounts under TFI there a varying number of months for each where investments could be made.

If you had been able to make all of these investments you would have created a “dividend collecting fund” or “business” with a dividend yield of 19.6% at the end of 2016. Just to be clear, that means you would be receiving almost a 20% return on your investment in 2016 just from dividends alone. And the value of the shares in your “business” would have grown by 578% for an annualized rate of 29%. By comparison, the S & P 500 rose from 3,754 to 19,762 during this period for a total gain of 426%, 19% annualized. That means our “fund” has outgrown the S & P 500 by 47% a year. I can live with that.

The period of 1994 through 2016 had two serious corrections (2000-2003, 2008-2009) as well as several extended periods of growth. In other words, it basically tracks with what occurs in most 20+ year periods. The resulting dividend yields range from 6.4% to 65.5%, so it’s apparent that not all investments are extremely successful. But we can say that all are successful in some measure because even 6.4% is greater than the original yield and the smallest profit gain is 161%.

Because we can’t predict the future and therefore we can’t predict which investments are going to perform the best, I find it’s best to invest in as many companies meeting the criteria as possible each month. In doing so, we will have covered as many bases as possible. And, we will have created a “naturally” occurring diversified set of companies for our “dividend conglomerate” in the process.

That all sounds great but let’s play “devil’s advocate” for a minute. What if the company we choose has issues or goes bankrupt? Well if the company goes bankrupt, you’re mostly likely out of luck. One would hope that these large “necessity product” type companies would never arrive at that point. Or if they did, we would be paying enough attention to our “business” to sell our shares before that day arrives. Or another legacy type company would step in and takeover the ailing company. There are certainly no guarantees. But there is a “very” high probability that we won’t face this problem. What is more likely is that one of the companies will have some issues. Almost every company does at some point. Remember Coca-Cola and its ill-advised decision to change the recipe of its flagship drink. Warren Buffett sure does.

If you look at the list, you will notice that there are several major drug companies listed there. Let’s take Merck (MRK) for instance. From September 2004 through September 2011, the quarterly dividend from Merck remained at 0.38¢. During that period there were a lot of mergers and consolidations throughout the major drug industry so that Merck (and others) chose to use their cash to buy other companies instead of raising the dividend. Pfizer (PFE) actually reduced its dividend twice. But importantly none of these large drug companies totally omitted their dividends. Therefore, as shareholders we continued to receive dividends and reinvest those dividends when stock prices were low. The list shows that for Merck, reinvesting dividends allowed us to create a 11.3% yield by the end of 2016, where just collecting dividends would have resulted in only a 6.5% yield. The moral of this story is as long as the company remains in business and paying a dividend, reinvesting helps overcome issues and problems. It’s just another reason to reinvest dividends if you’re not in a situation where you depend on them for income.

Not to belabor the point, but Conagra Foods (CAG) is another good example of this effect because it has struggled to grow and find profits recently, but yet reinvesting has created a 6.4% yield versus what would be a 4% yield. Is either exciting after years of being invested? Of course not. But it is still higher than the original entry yield and has produced a 173% profit over 17 years. So while it’s not optimum, it is still above water. Reinvesting cures most ills. While there’s no always or never, there most certainly is a “usually.” So, I feel very good about the prospects for a “reinvesting” business going forward.

And I will add one final note. This will seem a bit counter-intuitive (the market often is) but in many ways it is often better for our companies to not experience significant price appreciation during our reinvesting period. If they do, we certainly won’t turn it down. But if the dividend continues to grow but the price remains somewhat level, we will be able to obtain more shares at these lower prices through reinvesting. Which ultimately leads to more dividends produced and an enhanced circular dividend-to-reinvesting-to shares held process going forward. While it’s not included in the list, Intel (INTC) was a very good example of this principle from 2002 through 2013 when its price stagnated while its dividend grew substantially. Selective investing and continual reinvesting during this period would have made it possible to accumulate a significant number of shares so that when Intel eventually began to rise in value, the “dividend collector and reinvestor” would have been well positioned to benefit from this rise.

Buy low, hold, and reinvest is a winning strategy the vast majority of the time.

Dividend Collecting 101: Building a position

The stocks posted in the end of the month stock alerts will all be at a monthly low close of 1 year or more. I use this low monthly closing price as a trigger point to begin to build a position in a company. If the price continues to fall over the following months, which it often does, I’ll continue to buy shares at the end of the month if that price is below my average cost per share whether the close is at a monthly low close for the year or not.

For instance, if I bought 100 shares at yearly low monthly close of $10 and then a second 100 shares at $8 the next month, the average cost per share would be $9. If going forward, the monthly close is $9 or less, then I will add shares regardless of whether the monthly close is a yearly low or not. These purchases will not be posted in the monthly stock alerts.

I continue to purchases shares under this scenario until the close moves above the average and climbs higher. At that point, I begin to look for new monthly close trigger points to begin again.

Discussion: My reasons for collecting dividends

Let me start by saying that I think everyone should be collecting dividends. It’s one of the simplest ways available to create a more secure and stable financial future. Granted, it’s a slow, methodical process that requires some patience and time to fully develop. But with a little persistence and determination, the reward of enhanced financial security down the road is well within reach. I see no reason not to take advantage of the opportunity.

I won’t try talk you into changing your spending habits or finding a way to eliminate debt so that you can have money to invest. That decision is up to you. I’ll just say I had to make the same decision, and while it wasn’t easy to alter course, it can be done. Where I was once spending thousands of dollars to cover debts, interest, and things I really didn’t need, I’m now collecting far more than that in dividends that will provide me a much more secure future. There’s no reason you can’t do the same.

Personally, my goal is to replace as much pre-retirement income with post-retirement dividends as possible. Having started late in life with this plan, it’s doubtful that I’ll be able to fully replace my current income. But, I should be able to replace a significant portion of it. Because I don’t need the dividends at the present, reinvesting them will greatly enhance my chances of achieving this goal.

If you can start the reinvesting process much earlier in life, you will almost certainly be able to replace most if not all of your income in retirement, within reason of course. Replacing an income of the Bill Gates or Warren Buffett level with dividends won’t happen. And if you were in that situation, I don’t think you’d have to worry about it anyway. But, if you’re situation is like most of the rest us, and you’re willing to forego some gratification now for a real reward later, it’s certainly within reach. In other words, if you can save and invest instead of spend, spend, spend, you can set yourself up to be financially self-dependent down the road.

I don’t see the social security system totally collapsing. A complete collapse would just be too politically painful for those in Washington D.C. to bear in that it would directly affect their overriding desire to be re-elected. I can see it being greatly reduced or altered in the future though. I’m certainly not an anti-government adherent, but I do think the government will most likely act in its best interests over mine. As such, I would rather not have to be totally dependent on social security or the machinations of politicians for my retirement security. Maybe I’m wrong, but I don’t think I’m alone in that assessment. My thinking is that the more dependent we can be in ourselves, the better off we will all be collectively. So, I want to collect dividends now and in the future to be able to support myself and my family as much as possible during retirement.

One final note. I have been asked time and again about whether I worry about the stock market collapsing and taking my plan down with it. My answer is always no and I point out that I am investing in companies not “the stock market.” I’m buying shares in companies, not the stock market. I’m receiving dividends from companies not the market.

The stock market makes it easy for me to purchase shares but the fortunes of the companies I invest in are the foundation for collecting dividends. I will gladly accept any stock price appreciation created by the market but my primary pursuit is shares that I hope to hold forever and the dividends associated with those shares. Because I’ve seen first hand how share values can plunge, I’m doing my best to create a situation where my retirement income is based on dividends, not volatile share prices dictated by the market.

Even if the stock market ceased to function, I have a reasonable belief that most if not all of the companies I invest in will continue to be in business, giving me a decent chance of continuing to receive dividends. And quite frankly if conditions are so bad that the market does cease to exist, there will be far greater problems to deal with anyway. So the short answer is no I don’t spend time worrying about something over which I have no control. Going forward, I choose to be cautiously optimistic instead of pessimistic to the point of inaction. I hope you choose to do so as well.