All Millionaires Are Not Equal !

Having accumulated just at a million dollars just before his retirement has left him feeling very good about his keen foresight of hiring Mr. Fancy Dancy of the “Fancy Dancy Brokerage Firm,

Not all Millionaires are Equal –

Some are Richer than Others !

Here’s Why !

Here’s a fictional story about three individuals. Mr Regular, Mr. Knowledgeable and Mr. Fancy Dancy. The story is entirely fictional yet I believe many will believe it is someone they know, perhaps even about themselves.

Let’s consider two Millionaires – A regular old Millionaire (Let’s call him “Mr Regular”) that has a Fancy Dancy Stock Broker at some Fancy Dancy Brokerage Firm making his Investment decisions for him ( Let’s call him “Mr. Fancy Dancy”) and a another millionaire who is a Dividend Income Investor ( Let’s call  him Mr. Knowledgeable).

Mr. Regular is a busy guy, He has done well in life and has set aside a portion of his income for retirement. Mr. Regular always thought of investing in the stock market a risky venture and decided early on that he best leave that the Mr. Fancy Dancy at the Fancy Dancy Brokerage firm to do that for him. After all, how could Mr. Regular ever expect to find the time to learn about investing, it is a really complicated venture and if done incorrectly he could end up losing all his money and have nothing to retire with.

Having accumulated just at a million dollars just before his retirement has left him feeling very good about his keen foresight of hiring Mr. Fancy Dancy of the “Fancy Dancy Brokerage Firm,  to handle his financial affairs. That is he was feeling very good about his decision until his latest visit with Mr. Fancy Dancy only a month before he officially retires.  The first thing his old buddy Mr. Fancy Dancy tells him is about the “4% rule”. Most studies come to the conclusion you will need to make your money last for at least 30 years and that the maximum you can withdraw each year to last the entire 30 years is 4% of your savings ( adjusted for inflation). So he is told his withdrawal will have to be limited to $40,000 per year in order to last for the expected 30 years of his remaining life. This comes out to $3,300 per month. Added to his $1,500 Social Security this comes out to about $4,800 per month. Not bad considering but Mr. Regular is not happy at all. He was bringing home over  $10,000 per month with his job (his salary was $125,000 per year) and now he finds out that he will have to live on half that amount in retirement. Mr. Fancy Dancy explains to Mr. Regular that this is just the way  it has to be. He has him in bonds and stocks (chances are 60% equities and 40% bonds) and they are returning about 2.5% in his investments.  Mr. Regular is now desperate and is trying to think of ways to reduce his cost of living in order to make ends meet. Possibly selling his beautiful home and moving to a lower cost area, cutting back on expensive hobbies like golf or cutting back on vacations. He is even thinking about working part time then he suddenly finds out that he will lose $1 of his social security for every two dollars he earns over a certain amount so that limits his prospects there also. So Mr. Regular has to make a decision, take a drastic cut in his lifestyle or continue working until he has much more than one Million saved for retirement. By holding off he can better retire and because he will have a shorter life expectancy at that point he can safely withdraw a little more than 4% , maybe as much as 5%.

As it turns out Mr. Regular is friends with Mr. Knowledgeable. Mr. Regular shares his story with Mr. Knowledgeable. Mr. Knowledgeable tells Mr. Regular his thoughts about Mr. Fancy Dancy at the Fancy Dancy Brokerage Firm. He tell Mr. Regular while Mr Fancy Dancy is a nice guy that the reality is that he is there to make money for himself and that is understandably his primary focus. He further explains to Mr. Regular that he is a Dividend Income Investor (DII). As a Dividend Income Investor he controls his own portfolio and only buys individual stocks. In this manner he immediately earns more on his investments because he cuts out the middle man.

Mr. Knowledgeable continues to explain to Mr. Regular that he too has One Million dollars saved for his retirement, but he has no worries what so ever about maintaining his life style while in retirement and does not limit himself to the 4% rule, is not worried about running out of money even if he lives to be 115 years old. Okay, now Me. Regular is fascinated and asks him to please continue explaining more about his investment philosophy and about Dividend Income Investing.

Mr. Knowledgeable gladly offers to explain the Dividend Income Investing philosophy. First he explains that as previously stated he has one million dollars invested for his retirement. His current yield on cost is 9%, meaning that his returns from his dividend income is $90,000 per year. This equates to $7,500 per month. When he adds this to his Social Security of $1,500 per month his total income in retirement is $9,000 per month. This is only around one thousand dollars a month shy of what he was making at his full time job. Or in other words  he is only taking a 10% pay cut by retiring.  In addition some of his stocks will increase their dividends from time to time giving Mr. Knowledgeable a hedge against inflation. In the event of a a company announcing a dividend cut ( believe it or not this is a rare event ) Mr. Knowledgeable simply sells that stock and finds a similar yielding stock to replace it.

So what are the mechanics of the Dividend Income Investing?

  • First buy only Dividend paying stocks.
  • Never buy stocks below 4% dividend yields.
  • Try to buy stocks with yields in the 4-11 % yield range.
  • Identify stocks that are out of favor but are good solid companies that have sound financial fundamentals yet pay higher than usual dividend yields.
  • Don’t follow the “herd” – when everyone else is running to get out of a stock, that’s the time to start planning your purchase. Recent examples are oil stocks, Retail REITS, Coal stocks, Tobacco stocks. Just because they have become out of favor or socially unacceptable to many doesn’t mean the company will not continue to make money. Use logic and ask yourself basic questions – how many more years will this company be around? Is the market just overreacting to some bad news? Are things really that bad? – Quite often the answer is that everyone is just overreacting. This is when the great buying opportunities present themselves.
  • Don’t buy Speculative stocks – you know like the next great tech company that will make you rich. 99% of the time you will only get poorer – not rich.
  • Don’t buy ETFs and Mutual Funds – You are paying dearly for the middlemen.

 

So is really that easy ? The answer is yes. Of course you have to keep a close eye on your investments and it does take a little work to find stocks that will average a yield of greater than 9% but it is far from  impossible. In fact I have managed to do that with my personal portfolios for some time now. I, and many others like me are reaping the rewards of Dividend Income Investing. Follow the advice above, and keep focused on what is important, the Dividend Income!

Your comments are always welcome. Please comment below and also consider following me for more on Dividend Income Investing.

Advertisements

The Difference Between Dividend Growth and Dividend Income Investors

Perhaps the best way to explain the difference In Dividend Income Investing and Dividend Growth Investing is by an example.

 

What is the difference between Dividend Income Investing (DII) and Dividend Growth Investing (DGI)?

Dividend Growth Investing is based on the premise of Investing in good solid companies that steadily increase their dividends each year. Most companies that are preferred are call “Dividend Aristocrats or “Dividend Champions” and would have a reliable history of increasing its dividends each year for the last 25 years but may include more recent companies with streaks as few as 5 years. Historically these companies have what I consider to be Low yields (anything below 5% for my purposes). Whereas Dividend Income Investing looks for High Yields, certainly over 5% and hopefully averaging 9 -11% in their yields.

Perhaps the best way to explain the difference In Dividend Income Investing and Dividend Growth Investing is by an example.

Let’s look at an example of Dividend Income Investing (DII) versus that of Dividend Growth Investing (DGI):

Two Investors – Both have portfolios worth exactly $500,000 dollars. Investor A is a Dividend Growth Investor (DGI) and Investor B is a Dividend Income Investor (DII)  We will assume

Investor A’s portfolio averages 2.5% in Dividend Yields (Compounded Quarterly) and has a Dividend Growth Rate (DGR) of 5% annually ( The Dividend grows 5% each year)

1st Year returns = $12, 617.68

2nd Year returns =$13,589.25

3rd Year returns=$14,652.83

4th Year returns=$15,822.07

5th year returns=$17,108.43

10th Year returns =$25,883.44

20th Year returns= $68,970.59

Impressive by any means. Because the dividends were reinvested the portfolio has grown to $1,066,661.75 and produces a cool $68.970.59 in Income each year. That is $5,747.54 per month. Most of us would love that much of guaranteed income each month for retirement.

Now let’s compare that to the Dividend Income Investors portfolio.

Investor B’s portfolio averages 10% in Dividend Yields (Compounded Quarterly) and has a Dividend Growth Rate of 0% annually ( The Dividend does not Increase).

1st Year Returns = $41,216.08

2nd Year returns =$44,613.61

3rd Year returns = $48,291.21

4th Year returns =$52,295.96

5th Year returns= $56,606.83

10th Year returns = $84,114.77

20th Year returns = $185,728.98

The portfolio has grown to a whopping $2,253,110.24 dollars and produces $185,728.98 per year in income or $15,477.41 per month. More than two and a half times that of the Dividend Growth portfolio.

In the first year alone, actually by the 4th month, The Higher yield of the Dividend Income Investor has provided more income than that of the dividend growth investor. By the end of the first year the Dividend income investor has over $40,000 dollars compared to the over $12,000 for the Growth investor. Now of course we do not let those earnings sit in the account because we want our income to start earning money for us as soon as possible. This would be true for both styles of investing but let’s say we are dripping our dividends back into our investments. Since the higher yield account of the dividend income investor is producing income at 3 times that of the lowering yielding then the account of the dividend income investor is investing more than 3 times faster and therefore incurs more than 3 times more compounding action.

Of course eventually the the lower yield and higher dividend growth rate would catch up and exceed that of the Dividend Income Stocks since they usually have a higher growth rate but it could take as long as another  fifteen  to twenty   years to play out so unless your horizon is longer then you are better off as a Dividend Income Investor.

Yes it is exciting to watch your dividends grow steadily each year but the truth is – Many higher yielding stocks Do Increase their Dividends periodically as well ! And I am a “Bird in the Hand” kind of guy. I like my money up front.

For me, this is why I am a Dividend Income Investor. Many will say that a 8% yield is too risky or not realistic. Well, I am actually earning closer to 10% in two of my portfolios and other one earns 7% on average. So yes it is realistic because I have lived it. As for risk, I would argue that I have not seen any more volatility or risk in the three years that I have been investing in higher yielding stocks, but certainly there is some risk. This is why I always encourage everyone to limit any potential losses by practicing Risk Mitigation in your portfolios.

Dividend Income investing is also a great way to boost your income when you do retire. If you were a Dividend Growth Investor you can switch some of your lower yielding stocks for higher yielding ones (or even keep half and switch the other half of the shares for higher yielding) for an instant boost in income.

Using the example above lets say you have just retired and are earning the $68,970 per year in income. By selling half of the shares and investing in higher yielding stocks you can increase your income. Or for the more conservative folks even just doing a few shares of select stocks could boost your income say – 2% – which would help promote portfolio growth and keep up with inflation. Being conservative is fine but being too conservative can actually harm you financially.

Any thoughts or comments? We would love to hear them !

Mall REITS Get Hammered !

Investors tend to overreact and as a Dividend Income Investor you should always be on the watch for opportunities.

Mall REITS  got hammered today as KeyBanc downgraded the whole mall sector mostly on concerns of Sears Holdings.

But …………. Is this really a concern? From my recent experience with various shopping malls there is certainly no less people out shopping and as for the “Outlet Malls” I have visited they are most certainly thriving. One can argue that for even the malls that may have exposure to Sears that the closing of Sears will, in the long term be a net positive for the operators as it will allow the vacated properties to be re-purposed into a more lucrative holding and will more than likely serve to increase their traffic.

Everyone knows that Sears is dying a slow and painful death so speeding things up a bit will not hurt at all.

But, even if it does hurt some mall operators for the short term Dividend Income Investors need to see this panic for the opportunity that it is. A great Buying Opportunity ! Only a small fraction of Mall properties have exposure to Sears. Investors can now pick up shares of these REITS at discounted Prices and achieve higher Yields from the Dividends than they normally could.

Some of the bargains  with their current yields are :

CBL & Asscociates (CBL) – 12%

Simon Property Group (SPG) – 4.26%

Tanger Factory (SKT) – 4.08%

Taubman (DCO) – 3.91%

Washington Prime Group (WPG) – 12.44%

Investors tend to overreact and as a Dividend Income Investor you should always be on the watch for opportunities. I am officially declaring Mall REITS as an Out of Favor Stock Sector which means this sector is ripe for picking bargains. Choose wisely though.

Of course you should do your own due diligence before investing.

Your Thoughts ? Please comment below below

Market Drops 237 Points – Panic or Buy?

As a Dividend Income Investor you should be taking any cash you have and loading up on bargain stocks.

The Market dropped 237 Points yesterday . Should you panic?

Of course not. As a Dividend Income Investor you should be taking any cash you have and loading up on bargain stocks.

Two stocks to consider are

Vector Group ( VGR) – A discount tobacco company that is also diversified into real estate holdings. Vector Group is currently yielding 7.88% – Down 11% from its 52 week high this company is ripe for the picking.

Vector-Group-Fact-Sheet-March-2017

 

Southside Bancshares Inc. (SBSI) – Is a holding company for Southside Bank based in Tyler, Texas which operates 60 banking facilities in Texas. Southside Bancshares is currently yielding 3.07% and is off almost 16% from its 52 week high.

SBSI Investor Presentation (PDF)

 

Besides being off from their 52 weeks highs both these stocks pay stock holders something that only a select few companies do. Both companies pay shareholders an annual “Stock Dividend” in addition to its regular dividends. A Stock Dividend is a Dividend that is payed in stock. Southside Bancshares usually pays in April of each year while Vector group usually pays its Stock Dividend in September.

As always we love to hear thoughts and comments from our readers. Please comment below.