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.

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.

Discussion: Method amid the madness

I apologize in advance for the length of this post but to properly cover the topic there’s no way around it.  I urge you to stay the course and read the entire post.

If you’ve ever tried to extract money from the stock market, you’ve probably found it to be a maddening endeavor.  The stock market can be a very frustrating place.  It’s often very counter-intuitive where what seems logical doesn’t work and what seems illogical works well.  A company making millions of dollars in profits can miss the analyst’s quarterly earnings expectations by pennies and its stock can be punished beyond reason.  Then the next company can miss the estimate and see it’s stock price soar because analysts find some magic language deep in the company’s quarterly report.  Trying to decipher it is madness on a grand scale.

As a long time investor/trader I have tried most of the approaches out there.  And there have been times when I’ve made money.  The difficulty comes in making money on a consistent basis.  As the saying goes, even a blind hog can find an acorn once in awhile.  But, what works once or twice often stops working and the madness creeps back in.

Eventually, and it took longer than I care to admit, I said to myself, “This is ridiculous.  There has to be a way to consistently make money in the market.”  I put a hold on my accounts and went on a journey to find a simple, consistent, repeatable method to invest in the market.  Investing in dividend paying companies is where I landed.

The first decision I made, and probably the most important, was to stop trading and start investing.  I revisited my legacy of losing trades and found that in practically every case, if I had just held the shares I would have made money.  And if you think about it, that only makes sense.  There has never been a 20 year period where the stock market has delivered a negative total return (dividends plus price appreciation).  Warren Buffett has said his favorite holding period is forever.  He knows what he’s talking about.

Has every company that’s ever been listed on the stock market adhered to this tenet.  Of course not.  If there’s one thing for sure with respect to the market, it’s that’s there is no never and no always.  Lots of companies have gone bankrupt.  But studies have shown that companies that pay steady, rising dividends rarely go out of business.  So if we’re going to adopt a holding period of forever, we should probably look to dividend paying companies as the place where we want to invest.

This led to my second decision which was to focus on companies, not the market, for the long term.  It’s been said that in the short term the market is an emotional voting machine and in the long term a weighing machine.  The short term is often irrational, full of fear and greed.  The long term is more measured, based on business success or failure.  In other words, it’s rational.  I’ll take rational over irrational.  Need confirmation?  Just check the up and down gyrations of daily stock charts versus those of monthly stock charts.  They do exist on monthly charts but are greatly smoothed out.

The final part of this decision was to invest only in large well-established companies producing necessity type products with a history of rising dividends that give every indication of continuing to do so well into the future.  And, because more decisions made generally lead to more mistakes, to do so only at the end of the month.  A nice side effect of this approach is fewer commissions paid to the brokerage company.

So, ultimately the decision was made to invest in dividend companies on a monthly basis, hold for the long term, and collect and reinvest dividends for as long as possible.  The next question was how to go about it.  A much more difficult question to answer.

One of Warren Buffett’s more well known statements is to be fearful when others are greedy and greedy when others are fearful.  The moral of the story is to invest when companies are under pressure and stock prices are low relative to the norm.  There can be all sorts of reasons for this ranging from temporary company problems to total market meltdowns like in 2000 or 2008.  The investment considered to be Warren Buffett’s most successful came about from a self-inflicted company problem due to Coca-Cola changing the recipe of its iconic drink.  These “irrational” reactions often turn out to be great investing opportunities and should be taken advantage of.

My method to taking advantage of these opportunities is primarily based on tracking stocks with a long term moving average, 60 month is my preference, and when a stock’s price moves under this moving average it’s considered “on sale” and under consideration for investment.  The farther below the moving average, the more attractive and “on sale” the stock becomes.  Other factors include how far a price has corrected from the highest monthly close in the last 5 years.  Attractiveness and significance increase as the correction grows.  As would be expected, dividend yield and its relation to a 10 year median plays a very prominent role as well.  Because retirement age is growing near for me, I prefer a starting yield of 3% or more that is also above the 10 year median.  The farther above the median the better.  If you have more time, you certainly don’t have to adhere to the 3% hurdle.

So there it is.  My method to combat the madness.  It’s not perfect.  It’s certainly not the only way.  But it is a workable method that I have been able to take advantage of over the past 15 years.

Congratulations for making it down the page.


Discussion: Turbocharge dividends by reinvesting

Dividend reinvesting is simply using the dividends you receive to buy more shares in the issuing company.  In a sense, you’re receiving more shares without adding any new additional capital to the mix.   It’s almost like receiving free shares.  This can be accomplished through a direct reinvestment plan (DRIP) or via your brokerage account.

Reinvesting is a slow, steady process that allows investors to receive many more dividends in the future than they would have otherwise.  For most brokerages, all that’s required is to check the reinvest dividends box when buying shares, and it becomes an ongoing, automatic pilot process that builds and builds and builds.

It is the ultimate long term investing process.  In the beginning, the effects are very small but as the years go by they grow in a geometric-like progression.  In general, it takes around 7-10 years to begin to see significant differences in the amount of dividends received versus not reinvesting.  The example below illustrates the progression of total reinvested dividends (R) versus total collected dividends (C) starting with a one-time $1000 investment in Southern Company (SO), an electric utility in the southeast U.S., in January 2000.

Dec 2000 R $52  C $52 | Dec 2003 R $315  C $288

Dec 2005 R $541 C $470 | Dec 2007 R $809 C $667

Dec 2010 R $1311 C $995 | Dec 2011 R $1510  C $1133

Dec 2012 R $1727 C $1235 | Dec 2013 R $1960 C $1362

Dec 2014 R $2213 C $1493 | Dec 2015 R $2487 C $1629

Dec 2016 R $2784 C $1769

The data show that in 2003 there was only a 9% difference while in 2007 the difference was 21%.  By 2010, the difference was 32%.  And, by 2016 you would have collected over $1000 or 57% more dividends by reinvesting.

The yearly dividends collected for 2016 shows an even larger difference with $296 vs $140, a difference of 111%.  The resultant dividend yield for your reinvested dividends in 2016 would be 29.6% vs 14.0%.  That’s quite a significant difference.  And all that was required was to check a box to set it into motion.  An added plus is that almost all brokerages charge no commission for reinvesting transactions.

So if you want to truly turbocharge your dividend collecting, reinvesting is the way to go.  Just be sure to use companies that have a very high probability of long term viability for those investments.