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1. 

   Dividend Growth Investor
   

   Novice
   Joined: Jul '10
   Posts: 15

   Hi everyone. Jacob has mentioned how he has been able to save 70-80% of his salary for several years, before being able to afford to retire. One aspect that I think can make or break your early retirement plans is your investment strategy. At the end of the day if you purchase the wrong investments, you could lose a lot of money and you might have to return to work, particuarly since you cannot live on $0.

   What I am doing for myself ( besides saving a lage portion of income) is investing in dividend stocks for income. I find companies with strong fundamentals, that can grow earnings and that are attractively valued. I then check whether they have raised dividends consistently for over a decade and assess whether the current dividend is sustainable and whether the company can afford to grow it in the future.

   I have a sample list of stocks that fit my criteria:
   http://www.dividendgrowthinvestor.com/2010/07/14-dividend-stocks-with-dividend-growth.html

   The goal of dividend investing in retirement is to create a passive income stream, where income rises at least at the pace of inflation.
   http://www.dividendgrowthinvestor.com/2009/12/inflation-proof-your-income-in.html

   I have written a few articles on dividend investing for retirement:

   http://www.dividendgrowthinvestor.com/2010/04/living-off-dividends-in-retirement.html

   http://www.dividendgrowthinvestor.com/2010/03/four-percent-rule-for-dividend.html

   http://www.dividendgrowthinvestor.com/2008/03/case-for-dividend-investing-in.html

   I hope you enjoy these. I would also want to learn how ERE readers are investing their money in order to ensure longevity in retirement.

   Posted 2 years ago #
2. 

   erickonghl
   

   Novice
   Joined: Jul '10
   Posts: 5

   Total Return = Capital Gains + Dividends

   Isn't it better to achieve a higher total return? If one goes for higher dividend paying stocks, it does not neccessarily mean a higher total return. Since stocks are quite liquid, one can always liquidate part of one's portfolio to realize the capital gains.

   Posted 2 years ago #
3. 

   jacob
   

   Expert
   Joined: Jul '10
   Posts: 3,298

   I personally prefer money in the bank to growth. This even means sacrificing dividend growth. If the return is 10% overall, say. I prefer a 10% dividend to 9% capital gains and 1% dividend (total return) or even 4% dividend and 6% gains (dividend growth).

   Of course this means that 6% of my cash must be invested manually back.

   This does not mean I'm religious on the issue. Just that I don't like growth (because I think it is really difficult to price regardless of whether it's earnings growth or dividend growth).

   It may be because I have owned two stocks which were predicted on the latter two models.

   Walgreens had a long long history of increasing their earnings and those enjoyed a great P/E. The first time they didn't meat their expected number, the P/E was hit hard!

   General Electric had a long history with both earnings and dividend increases. Same story. P/E was cut handily.

   Posted 2 years ago #
4. 

   erickonghl
   

   Novice
   Joined: Jul '10
   Posts: 5

   Case 1 : What happens if you buy a stock with increasing earnings and dividends, and suddenly, their earnings did not meet expectations, or worst declined? And they reduced their dividends?

   Case 2: What happens if you buy a stock with a recent past of declining earnings, and reducing dividends, to the point where dividends are cut? What happens if it restores dividends some day?

   Posted 2 years ago #
5. 

   Dividend Growth Investor
   

   Novice
   Joined: Jul '10
   Posts: 15

   Eric,

   Just because a company pays dividends, doesn't mean that it cannot deliver total returns. The stocks I own pay up to 50% of earnings in dividends and reinvest the rest in the business. In addition to that I have found that dividend stocks have managed to outperform non-dividend paying stocks over the past 30 years.

   http://www.dividendgrowthinvestor.com/2010/05/why-dividend-growth-stocks-rock.html

   For example companies I mentioned earlier in my first post have managed to not only grow business for extended periods of time, but also to pay higher dividends ( high dividend payment, not high dividend yields) as well. All the while these stocks have delivered solid total returns as well.

   WalMart ,McDonalds , Coca Cola etc, are all household names and just a small sample of what I am talking about. There are only about 300 companies in the world which have raised dividends for over a decade, which makes it easy to start a manageable list of stocks to watch. Add in a few other criteria ( valuation, minimum yield,) and the list drops to less than 100.

   Jacob,

   I generally think that if a company can reinvest all of its earnings back in the business, and keep its return on equity that should be fine. But realistically, companies that reinvest all the money they have back in the business without paying a dividend do this because they cannot afford to pay a dividend. In other words in most cases, not paying a dividend is because the company has weak fundamentals. Exceptions such as Berkshire Hathaway are just outliers, not the norm.

   Also, if a company cuts dividends I sell it, and reinvest the proceeds in other stocks. If earnings are low, but the company maintains distributions, then management is expecting earnings to improve soon. http://www.dividendgrowthinvestor.com/2009/01/dividend-cuts-worst-nightmare-for.html

   In a diversified portfolio of 40 stocks you could get one or two cuts per year. Below is my portfolio as of April:

   http://www.dividendgrowthinvestor.com/2010/05/dividend-portfolio-for-long-term.html

   Oh yeah, Eric, I mentioned that I purchase stocks that increase earnings, and that increase dividends. Hence your Case 2 is not relevant. If a company does cut the dividend, and reinstates or starts raising it in a few years, I would check to see if its fundamentals can support more dividend increases. Dividend cuts are seen on case by casee basis.

   Last but not least, dividends are better than relying exclusively on total returns, because dividend payment as a component of total return is more stable than price alone. In other words a diversified portfolio of stocks could generate 10% annual total return, but that could be several years of negative total returns followed by one year of spectacular returns. You need to eat during all those years. Dividends are more stable, they don't get cut that often in a diversified portfolio:

   http://www.dividendgrowthinvestor.com/2010/06/benchmarking-dividend-income.html

   So dividends are more reliable and thus are better suited for would be retirees.( or retirees)

   Posted 2 years ago #
6. 

   chemkrafty
   

   Novice
   Joined: Jul '10
   Posts: 15

   While mathematically I agree with the idea of total return, it doesn't really take into account reality. The point was made in a previous post that you may have years of down stock price. By following a theory of growth harvesting you may be forced to sell during a period of non optimal pricing even if you maintain a safe pool of cash. This means that (1) you have reduced your ability to recover as you have fewer shares and (2) you have to maintain a larger pool of cash to account for it.

   If you focus more on supplying your income using dividends, you will have a cash flow that doesn't involve market timing. It also is insulated from price fluctuations and you can ride out periods of low price stress free. Finally, it may not be essential to carry as much of a cash buffer to protect you from selling in low periods.

   All that being said, being young I am definitely looking at dividend stocks that have the capability to provide price appreciation throughout the years, thus providing me the ability to grow my savings. But it also means I can ride out the lows recieving cash and buying low while I wait for things to go back up so companies can continue raising dividends!!!

   Posted 2 years ago #
7. 

   JohnnyH
   

   Expert
   Joined: Jul '10
   Posts: 1,365

   As much as I like the idea of dividend investing, I cannot reconcile myself to buy and hold.

   Over 75% of an individual stock's movement follows that of the broader market. Meaning even the best of companies will mostly follow the market downward.

   But on the other hand there are some great dividends out there... Maybe I'll sell OTM puts on them until they reach a price level I accept.

   Posted 2 years ago #
8. 

   jacob
   

   Expert
   Joined: Jul '10
   Posts: 3,298

   Or you could buy the stock, sell ITM calls on them at the same strike price (a covered call is identical to a naked put with a cash position) and score the dividend in the mean time.

   [Just throwing the option out there for those who don't have access to naked put selling. (I'm looking at you Scottrade!)]

   Posted 2 years ago #
9. 

   Dividend Growth Investor
   

   Novice
   Joined: Jul '10
   Posts: 15

   chemkrafty

   I am with you that selling stock to pay for your expenses is similar to cutting the tree branch you are sitting on ;-)

   JohnnyH

   Entry price does matter to a certain degree. But then if you know a stock is going to $1000 in 5 yearsand trades at $100 today( for example), would it really matter whether you buy it at todays price or wait for lower prices?

   Dividend investing is somehow insulated from the whims of the market. As long as the companies I own are stable financially and generate earnings, then they will keep paying me my dividends. Therefore, it doesn't really matter how much the shares are selling for. Even if stocks are flat for another decade, the dividend is a great reason to hold on.

   Jacob,

   Selling calls and puts theoretically sounds like you are generating excess returns. In reality however, strategies of selling covered calls for example have not led to outperforming the S&P500 for example ( the benchmark buy-write strategies were used against):

   http://www.dividendgrowthinvestor.com/2009/10/selling-options-is-no-free-lunch.html

   Posted 2 years ago #
10. 

    Q
    

    Master
    Joined: Jul '10
    Posts: 346

    Can't wait till January when I have enough cash to finance dividend investing!

    Posted 2 years ago #
11. 

    Maus
    

    Master
    Joined: Jul '10
    Posts: 504

    @Q
    Sadly, just in time for the favorable dividend tax treatment to end with the sunsetting of the Bush tax cuts. Dividends will once again be taxed as ordinary income. Once you are actually ERE (at least at the level practiced by Jacob) that probably won't matter so much; but if you are still in the accumulation phase, as many of us are, it will take just a little bit bigger bite out of our capital.

    Posted 2 years ago #
12. 

    jacob
    

    Expert
    Joined: Jul '10
    Posts: 3,298

    @DGI - I know ... ATM covered calls mainly smooth out volatility by converting capital gains into income. The reason is that options are efficiently priced [with exactly that objective in mind].

    That's why I only use them as a disciplined buy and a selling method only. (Mostly sell).

    [On an interesting side note, volatility is still range bound---strategy: sell options when volatility is high, buy when it's low---although it seems that this opportunity is going away too; with massively bad side-effects, like, for example, the flash crash.]

    Posted 2 years ago #
13. 

    Dividend Growth Investor
    

    Novice
    Joined: Jul '10
    Posts: 15

    Jacob,

    Using options is a good strategy if you know what you are doing ( you seem to know what you are doing). I agree that when you are thinking about selling a stock, you could sell calls against your position for example and earn a premium plus some upside. I have sold covered calls on stocks which have frozen their dividends for over 2 years and where I am trying at least to break even or to squeeze in a higher profit. But using options to smooth out your equity curve is a smart strategy..

    My pet peeve with options is newsletters that tell you that you could sell a cash secured put and generate 3% for example in one month if it is not exercised and then annualize the returns.

    Q and Maus,

    One could avoid paying taxes on dividends if you set up a ROTH IRA. Bad news is you won't be able to access the money until you are in your late 50's. So if you want to have an ERE or just ER a ROTH IRA might not be an option. I would rather pay taxes now, than not being able to retire while I am still young ( relatively speaking of course ;-))

    Posted 2 years ago #
14. 

    Q
    

    Master
    Joined: Jul '10
    Posts: 346

    Maybe we'll get lucky and they'll renew 'em.

    A ROTH IRA is what I was aiming for, as it will kick-in as a double back-up. I intend to use my current 401k as my way out - I posted a whole bunch about me in "My Journal".

    I thought more people would be doing that since like 5 people said they would in the admin section...

    Posted 2 years ago #
15. 

    Steve Austin
    

    Journeyman
    Joined: Jul '10
    Posts: 178

    DGI, I'm not certain that the news about Roth IRAs and access to your money is so bad. I haven't needed to do this yet, but my understanding is that one's (contributions) may be withdrawn before one's late 50s as long as the withdrawn contribution was made 5 years prior to the withdrawal. It's one of the purposes of IRS Form 8606, and such withdrawals are considered Return of IRA Contributions, as if for any other kind of non-deductible contribution return. The good thing about the Roth account is that there is no confusion (accounting disaster) about a mix of deductible and non-deductible contributions.

    So I think the gist here is to fund a Roth IRA early and often, grow the account via dividend investing, and keep the aged-5+ contributions as a deep reserve. It certainly beats any selling from one's taxable accounts. I reserve my standard deduction / personal exemption as offsets of RMDs on my regular IRA; I'm 30 years away from that concern, but I figure I'll have 30 years to practice finessing my regular IRA account for exactly this purpose. Until RMDs kick in, one can use the standard deduction / personal exemption to offset tactical partial conversions of regular to Roth IRA. (I've noticed this approach has become more popular since 2007.)

    Anyone see any holes?

    Posted 2 years ago #
16. 

    erickonghl
    

    Novice
    Joined: Jul '10
    Posts: 5

    For simplicity of discussion, assume the 2 cases:

    Case 1: Total Returns = Capital Gains + Dvd Yield
    = 4% + 4% = 8%

    Case 2: Total Returns = 2% + 0%

    In the 2 cases, everyone would prefer Case 1. Case 1 means dividend paying stocks achieve a higher overall total return. And Case 2, are stocks that don't pay dividends, and at the same time only return 2% capital gains to make overall total returns of 2%

    But would case 3 be preferable?

    Case 3: Total returns = 8% + 2% = 10%

    The 2% spread looks small, but is actually large when compounded over a 20-30 year period for early retirees.

    Posted 2 years ago #
17. 

    Steve Austin
    

    Journeyman
    Joined: Jul '10
    Posts: 178

    erickonghl, I (respectfully) take issue with the presentation of capital gains + dividend yield, for this reason: nothing around investment returns is a sure deal (there's always some kind of risk somewhere), but the dividend yield in my experience is a lot more predictable than is capital gains. In other words, it's much easier to plan -- even on the basis of rough and hazy figures -- for dividends annually than it is for capital gains annually (measured as a mean over some numbers of years).

    Dividend yield is a hard, measurable phenomenon.

    Capital gain is a soft, human behavioral phenomenon, and I never rely upon it (though I thoroughly enjoy exploiting it on the downside, getting excellent value when the behavior is fearful).

    So if you were to, theoretically, change the "capital gains" in your total return equation to "earnings yield", you'd have something more measurable. (Earnings still not as tangible as dividends, but at least the second-order human behavioral aspects are not included in your planning.)

    Posted 2 years ago #
18. 

    pbkennedy
    

    Novice
    Joined: Jul '10
    Posts: 11

    You are not necessarily limited to 59.5 for retirement accounts. For the early but not extremely early retiree, it's 55 from your 401(k), 403(b) or 457 plan if you separate from service on or after age 55. There's also the annuity method for IRAs - you can always annuitize based on your actuarial lifespan. Here's a description: http://www.smartmoney.com/personal-finance/retirement/tapping-your-ira-penalty-free-7958/

    Posted 2 years ago #
19. 

    JohnnyH
    

    Expert
    Joined: Jul '10
    Posts: 1,365

    @DGI: how could this possibly be known? If it could, to hell with the dividends I'd put everything in way OTM calls!

    DGI: "Entry price does matter to a certain degree. But then if you know a stock is going to $1000 in 5 years and trades at $100 today( for example), would it really matter whether you buy it at todays price or wait for lower prices?"

    Posted 2 years ago #
20. 

    Dividend Growth Investor
    

    Novice
    Joined: Jul '10
    Posts: 15

    Johny,

    My idea was derived from Buffett's quote that he would rather own exceptional businesses at a fair price, rather than purchase a crappy business at a huge discount.

    I am certain that companies like WMT, JNJ, PG, MCD will be around for the next several decades. So if you believe they will be successful, then whether you purchase WMT at $50 or $45 doesn't really make much difference in the grand scheme of things.

    Posted 2 years ago #
21. 

    George the original one
    

    Expert
    Joined: Jul '10
    Posts: 1,941

    On the original question/statement: "I would also want to learn how ERE readers are investing their money in order to ensure longevity in retirement."

    I'm buying high yield stocks, MLPs, REITs, & bond funds. My target yield for the portfolio is 6.5% and it is currently yielding 7.4%.

    Ideally all of the securities show consistent dividend/distribution growth of at least 5 years and that growth matches/beats inflation, but in reality only half the portfolio is in that category. About a quarter of the portfolio has a variable dividend history or lack a long enough dividend history. The other quarter of the portfolio are the bond funds.

    Realizing that higher yielding stocks are risky, I set a mental stop loss. It's a mental stop loss because we've seen prior "flash crashes" before and most brokerages are notoriously poor at execution of programmed orders.

    I also trade out of any position when it reaches a significant gain and I "feel" that it is a local maximum. This "feel" isn't very scientific, but, over the years, I've found it's seldom a bad idea to book profits and I shift the money into one of the other positions. Note that the whole position is never closed out; the profits plus 2 years of dividends are not sold, so typically I'm keeping 20-35% of a position and can consider it "free money that will unlikely ever be sold".

    2010 YTD performance:
    + 4.3% dividend gains
    + 9.3% capital gains
    +13.6% total gain

    Posted 2 years ago #
22. 

    JohnnyH
    

    Expert
    Joined: Jul '10
    Posts: 1,365

    @DGI: even WMT lost 25% in the 08/09 crash... That can take over a decade to recoup with dividends. Also, dividends are not written in stone and can vanish. Not that I think WMT's will, but it is always a possibility.

    Stocks take the stairs up and the elevator down. Right now there seems to be a heightened potential for the elevator being used again... Once (or IF) the VIX maintains 03-07 levels I'll be all over dividend producers.

    Just saying...

    Posted 2 years ago #
23. 

    jmsims2
    

    Novice
    Joined: Jul '10
    Posts: 5

    One thing to keep in mind in regards to the portfolio value is that, generally speaking, it doesn't matter all that much. You said yourself that you don't expect WMT to cut their dividend (I don't either). So who cares if the stock loses 25%? All of my stocks went way down over 07 and 08, but my dividends remained the same or increased. If you are living off the income, that is all that matters. If you are sufficiently diversified and sell at the first hint of actual business trouble (rather than when the stock goes down by 10% for no good reason) than you will be all set. I find that people who have not bought into investing for income fully focus too much on the portfolio value. My portfolio value varies, however my dividends only vary in the sense that the income I receive tends to go up from year to year.

    Posted 2 years ago #
24. 

    George the original one
    

    Expert
    Joined: Jul '10
    Posts: 1,941

    @JohnnyH -

    jmsims2 is telling it like it is. If you're an income investor, then even through 2008 you experienced very little drop (if any) in income unless your portfolio was overweight in finance, banking, & mortgages. The income in my own portfolio dropped by 10% due to stupidly hanging on to one financial stock.

    If you relied on capital gains for income in that period, then you suffered.

    Posted 2 years ago #
25. 

    jmsims2
    

    Novice
    Joined: Jul '10
    Posts: 5

    I was bit by hanging on to GE. Although my other stocks made up for it with increases, I still hung on too long. I still hang on because I believe in the company and think they will be back. But yeah, income is a better way to view the market vs. capital gains, IMO.

    Posted 2 years ago #
26. 

    JohnnyH
    

    Expert
    Joined: Jul '10
    Posts: 1,365

    Good point guys, if the income doesn't change who cares what the share price does.

    I think it's the commitment that scares me the most... Woah, investments as relationships.

    Posted 2 years ago #
27. 

    Dividend Growth Investor
    

    Novice
    Joined: Jul '10
    Posts: 15

    Jmsims2,

    I agree with you 100%. Dividend income is important, since this is what pays the bills. Prices can go up or down and if you rely on selling stocks off for living expenses, thsi is akin to cutting off the tree branch you are sitting on. This is also why I noted that whetehr you purchase WMT at $45 or $50 doesn't really matter in the grand scheme of things ( assuming that you believe WMT will do well over the next few decades). Of course long term capital gain potential is important as well. Stressing on whether your stocks are up or down over the past 1-2 years is not a value added activity.

    The issue today is that investors are always bombarded with so much information, that they feel they need to act somehow on it in order to make money. Actually the opposite is true - the less you trade, the more likely you are to make money ( assuming you are diversified of course).

    I did have dividend cuts in a portfolio of about 40 stocks in 2008,2009 and 2010. I had 1 company cut dividends in 2008 (ACAS); 2 companies cut dividends in 2009 (GE and STT) and one in 2010 - BP. Overall I did manage to have my total dividend income increase over the past 3 years (without assuming dividend reinvestment. If you assume dividend reinvestment, then it increased even more ;-)).

    Posted 2 years ago #
28. 

    epoch707
    

    Novice
    Joined: Jun '12
    Posts: 14

    Very interesting discussion. Dividend investing goes hand in hand with value investing, because as a company's earnings grow, their dividends increase too. Since the company is making more and more money, the stock rises as well. So only good companies with a competitive advantage will be able to routinely keep their dividends constant and growing.

    Posted 2 months ago #
29. 

    Wishing4ERE
    

    Apprentice
    Joined: Aug '12
    Posts: 32

    Do you do your dividend investing in a Roth IRA or just in a regular investment account?

    I'm a bit unsure on how to start investing when we have the money next year. If we happen to reach enough money for retirement in our late 40s early 50s then we're better off with a regular investment account, aren't we?

    Maybe I'm thinking of this all wrong and I should just figure that I could take from the Roth IRA principal the same amount that is reinvested from the dividends each year?

    Posted 1 month ago #
30. 

    George the original one
    

    Expert
    Joined: Jul '10
    Posts: 1,941

    @arrrrgon - from a tax efficiency perspective, one would put REITs and royalty trusts in the IRA or Roth IRA since they're taxed like your regular income. Qualified dividends are taxed at a lower rate than income (for most people), so not a big deal if they're in a regular account.

    Posted 1 month ago #
31. 

    spoonman
    

    Journeyman
    Joined: Mar '13
    Posts: 105

    DGI,

    I can’t even begin to tell you how incredibly happy I am to see you in this forum!!! You are one of the reasons why I decided to get into dividend growth investing. I’ve been a DG investor for almost three years now, and it all began with your awesome blog!

    Right now, our passive income from dividend stocks is something around $9500 per year and we’ve been growing it by about $4000 per year. That will put us in an ERE-style retirement in about two years (or sooner, if we move to a cheap state or abroad).

    Anyway, I just wanted to express my thanks to you and this entire community for all the awesome advice.

    P.S. This is my very first post on this forum. I’ve been a lurker for years, and now I think I’m ready to share my journey with the community. I’ll start a journal soon.

    Posted 1 month ago #

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