January Update

January started my year off strong. Strong and busy! Between work and planning for my upcoming wedding (and honeymoon!), I have barely had any time to work on my blog. It has been a heck of a ride though and I can’t wait for the big day (and honeymoon! ). January saw my first purchase of the year (TGT) and my first dividend increase of the year. It also marked my biggest month yet of dividend income as I surpassed $100 in dividends for the first time. The market finally gave us a bit of a pullback although I didn’t really take full advantage of it as I bought TGT a little too early. That’s ok though as I rectified the situation in February. On to the good stuff…

Track Every Dollar Spent

Perhaps my most important goal this year is to track every dollar coming in and going out. How else can I get a good picture of how much I am saving and how much income I will ultimately need to replace. It is also the most effective way to see where I am wasting my money.

I am extremely happy with this start to the year. Please note the negative values for Savings and Other Savings are money I ‘spent’ to add to savings so those amounts increased my savings. The distinction between the two categories is that Savings is what I am putting towards my investments and/or my house down-payment fund. Other Savings is adding to accounts that will likely be spent down over time rather than invested. However, as these accounts do well, it allows me to add more to my regular Savings in future months. My savings rate is based only on the ‘Savings’ Category and does not include Other Savings. A 34.1% savings rate is very strong for me and starts my year on track for my 30%+ savings rate goal for 2014.

Looking forward the next several months, I will likely have a decent amount of wedding expenses coming my way. Other Expenses included annual jewelry insurance and a dry cleaning bill for my comforter which someone got sick on. Entertainment was my Netflix account while ‘Eat & Drink’ is eating out and having drinks. This is a category where I bleed money at times but my fiancee and I love to eat and drink. My spending at ‘Work’ is an area where I am really trying to cut back this year. January looked to be a good start but I picked up a $30 parking ticket at work which caused January to spike higher than it otherwise would have. Going forward, I expect Auto and Groceries spending to increase while spending on Health should decrease.

Dividends

As can be seen in the section above, I had $112.34 in dividends for the month of January. This was my first time eclipsing $100 in a month and represented an 86.8% increase vs. the previous (October). A big part of the increase was the timing of my dividends from DLR and PEP which shift their dividend from December to January (1/3/6/9 cycle). Currently, my March dividend should be similar size and I am hoping for a dividend increase to push March to a higher level (DLR?). My forward 12 month dividend income increased to $877.54, thanks to the ARCP dividend increase and the TGT purchase. I am increasing my forward target to $1500 by end of year as I now believe $1200 to be too conservative and I want my goals to be difficult so I have to push myself to attempt to reach them.

Backlog

As I mentioned, things have been hectic with wedding/honeymoon planning and the like. We are also launching a new product at work which has led to longer workweeks. As a result, I have a bit of a backlog in articles I want to write, including the start of what I hope to be a series of articles. There is one article (or small set of articles) I want to get out in February. As a preview, I want to highlight the biggest threat to KO, as I see it (their recent agreement with GMCR changes how I was going to attack this article which was unfortunate timing as I was really excited to go at it from the original direction), and how PEP may respond to KO’s recent GMCR move (hint: it’s not the conventional thinking to pair up with SODA).

Raiding the Piggy Bank

With the recent pullback, I decided to move some money out of my emergency savings/house purchase/home furnishings account. Reviewing my finances, I felt like I could pull some money out of this account without harming my ability to have more than enough for a potential down payment on a house once my condo sells while have money left over for emergencies or furniture or repairs, etc. With the carnage of today, I think the market is likely to have a bit more follow through, at least, to the downside but I went ahead and made 2 purchases today, 2/3/2014, as I am seeing more value in the DGI space than I have seen since I started last summer. I do not consider myself a market timer and am not worried about trying to catch the bottom. I figure if I keep buying, some purchases will be near market bottoms and some near tops with many in between but my progress will be steady. Having decided that I could afford to release some savings reserves left me with only one difficulty? Deciding what to buy with my limited funds.

To add new positions or take advantage of a chance to average down? That was my first question. I decided I had enough for a normal size buy ($1500-$1600) and a smaller buy so I decided to average down with the small purchase and add a new position.

When looking at current positions, there were 3 positions I felt offered compelling opportunities to average down. These were MCD, PEP and PM. While I think all three are good values, it was an easy call. I added 15 shares of PM at $77.20 this (2/3/2014) morning. Really wished I had waited until the afternoon but who knew PM would fall nearly $2 more and approach a 5% yield. My previous purchase was at $83.50 so this was just over a 7.5% discount to my original purchase price and I was very happy with the first purchase. I am now overweight PM with 34 shares which is approximately 11% of my DGI portfolio. The purchase adds $56.40 to my forward annual dividend income.

With my PM purchase complete, I now turned towards making a new purchase for my DGI portfolio. I had quite a few positions that I was really liking and even looked closer at F as I think it is a downright steal at $14.50 but it isn’t DGI material, at least not yet. As they day went on, I focused on 4 companies and then 2. They were CVX, GIS, JNJ and KO. I want all of these in my portfolio and I am not sure which is the best deal at current prices. It seemed like I could not make a right or wrong decision and I hope all of these continue to remain at the same or better prices for as long as possible. Ultimately, I felt KO and JNJ were the most ‘must have’ positions and I set out to get the best possible price. I wanted KO at $37.30 but pulled the trigger on JNJ at $86.85 mere minutes before KO hit my price. I purchased 18 shares of JNJ at $86.85 this afternoon (2/3/2014) which adds $47.52 to my forward annual dividend income. JNJ has a 3.04% yield at $86.85 and I expect a dividend increase next quarter (June payout). Getting KO or JNJ at 3%+ yield is something I consider an attractive opportunity.

What do you like better here, JNJ or KO? Are you buying now or waiting for further downside?

Dividend Increase

My first dividend increase of 2014 is here! Nothing excites me more than getting these increases as each one brings me just a little bit closer to my goals. Plus, it is extra money coming in without me having to do any extra work! What is better than that?

American Realty Capital Properties (ARCP) increased its annual dividend 6.4% from $0.94 to $1.00 on Friday, 1/24/14, as a result of its pending merger with Cole Real Estate Investments. This increases the monthly dividend from $0.07833 to $0.08333 per share. Since I own 89 shares of ARCP, my monthly dividend increases by $0.45 and my forward annual dividend income increases by $5.40. While $5.40 is not much money, it is an extra $5.40 that I don’t have to work for and ARCP is currently the smallest position in my DGI portfolio. It may not be much but these increases will continue to compound and will eventually work out to serious money, helping me one day reach financial independence. Plus, ARCP just gave me a bigger % raise than I expect to receive at work this year which is typically in the range of 2%. This is probably the most excited I have ever been over $5.40 in my whole life! Well, at least my adult life…

Recent Buy

I did not originally plan on making any purchases in my DGI account in January but I decided to move the cash from my non-DGI account over and added a bit of fresh funds to allow me to purchase 25 shares of Target Corp. (TGT) for $58.88 on Wednesday, 1/22/14. I have previously mentioned Target in my 2014 Top Stocks post and the post on Ignoring and Embracing the Noise. This purchase adds $43 to my forward annual dividend projection, assuming a stable dividend. TGT has a 19.8% 10 year dividend growth rate and their smallest percentage increase since 2003 was a 13.3% increase in 2009. This is extremely impressive growth and really shows a commitment by TGT to return capital to shareholders. The last increase in 3Q 2013 marked TGT’s 46th straight year with a dividend increase! While I expect to see the rate of dividend growth to decelerate towards their earnings growth (payout ratio as increased from 13% in FY2004 to 29% in FY2013), I see no reason they cannot continue increasing dividends.

Why I like TGT here

First and foremost, I think TGT is an extremely well run retailer with strong management and a commitment to returning capital to shareholders. This commitment can be seen in both the rising dividend discussed above and the share buybacks the company has been executing. I typically prefer dividends as many share repurchase plans only offset the issuance of new shares to executives, etc. but TGT has reduced the average diluted shares outstanding form 754.8 million shares in 2010 to 663.3 million shares in 2013. In addition, I believe the combination of the weaker than expected Canadian expansion, combined with the recent negative headlines around the credit card hack they experienced, has provided a reasonably decent value. As a result of these items (primarily the Canadian expansion), earnings for FY2014 are going to be significantly below that of FY2013. S&P is currently projecting an increase of 34% in 2015 as losses in Canada diminish. As the negative headlines around the credit card fraud fall off the front page and from the minds of consumers, I expect sales in the US to return to normal (after a short term impact) and investors to begin to look forward towards FY2015 and FY2016 where TGT looks to bounce back strong. Once this happens, I expect current prices to look quite attractive in the big scheme of things, even if they drift a bit lower from here (I think $55-$57 is quite possible but I am no market timer).

Risks

The biggest risks I see for TGT are similar for retail in general. Namely, a slowdown in the US economy effecting consumers and the changing dynamics of consumers buying online. Long-term, I think TGT must work on improving their web operations so as to compete with Amazon, Walmart (WMT seems to be ahead in focusing online) and other online retailers. As with any investment, I will need to continue to monitor TGT to ensure it continues to be worthy of my portfolio. There is also the potential that the fallout from the recent credit card hack could be greater than what I, or the market, is currently predicting.

What Next?

There were multiple stocks that have recently come down to levels that I find more attractive. I’ve been watching GIS closely but it just doesn’t seem to want to fall under $48 just yet. Had I waited a couple of days, CVX would have this choice much more difficult as it trades under $117 as I write this. PG was beginning to look interesting around $79 but a pop on earnings now brings it slightly above the range I would want it. JNJ and KO are also moving up my list as they fall in price and I will hope and pray they can fall more (and not bounce back up) until I build up capital for another purchase. I am also beginning to look at SJM but need to do more research on it still. Currently, I am mostly interested in new positions but PM, PEP and MCD look attractive right now, as does DE from my non-DGI portfolio (it qualifies for my DGI portfolio but is currently held in the other account). Lastly, I would love to add WMT to my portfolio to balance this TGT purchase. WMT sounds like they are appropriately focused on the challenge of competing with Amazon online and I think they will reward investors for a long time to come. I likely will not make another buy until late February, or more likely, March. Hopefully the market provides me with lots of compelling opportunities come then :)

What do you think of my TGT purchase? What are you currently watching?

Why Dividend Growth Investing

As I have become more focused on my future, I have come to find that Dividend Growth Investing (DGI) makes perfect sense for me. There are countless other strategies out there and DGI may not be the best strategy for everyone but I do consider it a logical strategy that is potentially suitable for most long term investors. Here I will look at the reasons why I will primarily focus on the strategy for my own portfolio.

Additional Income

I have 2 main purposes for my portfolio. One is to throw off income that can be used to help support my family. I am getting married in May and will look to start a family within the next few years or so and having extra income coming in well be extremely helpful. Given my fiancée’s relatively low income, it is likely she would be a stay at home mom when the time comes. The idea of supporting a family of 3 (or gasp! 4) on my income alone is daunting. Hopefully we will not need this additional income and it can be re-invested but it is nice piece-of-mind to know that it is available if needed.

Investing in companies that regularly grow their dividends on an annual basis is a great way to get additional income from your portfolio. Obviously there are other income producing strategies but DGI specifically allows your income to grow each year so your purchasing power can keep up with (and often outpace) inflation. Many of the companies which have strong track records of dividend growth are companies that have strong pricing power. This allows them to increase prices and/or manage costs allowing them to increase dividends faster than inflation. Maintaining and increasing purchasing power is a strong benefit to DGI investing. While there is no guarantee that a DGI portfolio will outpace inflation, there is a reasonable good chance it will keep up with inflation as you are investing in strong companies with strong competitive advantages and pricing power. In addition, dividends have been more stable, historically, than market returns which makes this a fairly reliable income source. As can be seen in the current minimum wage debates, wages often do not keep up with inflation which can be damaging to a household’s financial well-being so I find this a particularly attractive component to Dividend Growth Investing.

Financial Independence

The second purpose of my portfolio is to help me reach financial independence. Like many, I long for the day when I no longer need to work to support me and my family. This has become especially important to me as the possibility of becoming a father becomes more real. Working 40+ hours a week (not counting time spent commuting to and from work) is a significant amount of time I will miss with my family. It could cause me to miss my child’s first steps or first words or a million other moments. When I reach financial independence it doesn’t mean I would necessarily retire but I would at least have the freedom to decide when and how much I work. It would also provide complete protection against a job loss since I would no longer need to rely on job income. This security would be invaluable.

Dividend Growth Investing is especially effective for this goal in my mind. Most people attempt to calculate a number to determine how much they need to become financially independent or to retire. There are various different ways to calculate it from a simple 25 times your annual spending to much more complicated formulas and calculators. Dividend Growth Investing attacks this problem from a bit of a different angle. Instead of focusing on accumulating assets to hit your number (which is difficult to correctly determine given all the variables around return, etc), it focuses on increasing the income produced by your portfolio. It is a lot easier for me to determine the amount of income I need to have to live my current lifestyle by tracking my spending. Historically, dividends have been much more stable than market returns and, as previously mentioned, dividend growth investing allows your portfolio and solid likelihood of maintaining or increasing your purchasing power. As such, once your portfolio begins to generate enough income to cover your spending, you have essentially become financially independent. To me, it is so much more logical to achieve financial independence by replacing my job income with a new reliable income source. It doesn’t matter to me if the market drops 40% when I am in “retirement” if my portfolio’s income continues to pay out ever-growing dividends. If I have only focused on obtaining a certain $ number, however, a 40% market drop would be devastating. While there will always be certain things that can ruin any strategy (unknown risks such as major medical problems, etc), generating income to become financial independent through Dividend Growth Investing is the strategy that makes the most sense for me. Now to generate that income so I can spend more time with my family!

My Portfolio and Dividend Income Update

As previously mentioned, I have my investments (not including my 401k) split between two taxable accounts. Prior to June 2013, I had all my investments in one account. My focus in that account would shift from time to time but I had begun to focus on dividend paying stocks, especially after an ill-fated investment in a Chinese solar company a couple years ago. After doing more research into Dividend Growth Investing (DGI), I decided to split my investments into two accounts with my main account focusing on a DGI strategy. I’ll go into more depth on DGI strategy in future posts but it is essentially focusing on companies that have a track record of increasing their dividends every year and appear to have the capability to continue increasing their dividends going forward. This seems an especially attractive strategy to me as I am looking for additional income sources. Since I am getting married in a few months, I have begun to think about the possibility of raising a child and the prospect of having to support a family on just my income for some period of time. Having investments that can provide reliable additional income will give me piece of mind during this time. In addition, as I look forward towards financial independence, it makes sense to me to try and create a passive income stream that can support my family rather than accumulating assets which will be sold off over time to cover living expenses.

Why split my investments into two accounts? My original account was set to reinvest dividends into the companies paying them (dividend reinvestment plan or DRIP). One of the goals of my DGI account was to throw off additional income to help supplement my income to help raise a family. Until then, I will use the dividends to help pay down my fiancee’s student loan debt. As such, I do not want to DRIP the dividends. Instead, I will actively purchase the stock(s) that I feel provide the best value as I have sufficient funds for new purchases. My original account will continue to auto re-invest dividends. It will be the smaller account and will rarely (if ever) have additional funds added as new money will be focused on the DGI account.

DGI Account

Symbol Shares Current Value Yield
AFL 25 $1,653.50 2.24%
ARCP 89 $1,148.99 7.28%
BAX 24 $1,663.44 2.83%
COP 25 $1,749.00 3.95%
CSCO 80 $1,758.40 3.09%
DLR 34 $1,694.56 6.26%
DRI 31 $1,643.00 4.15%
GE 73 $2,005.31 3.20%
LEG 51 $1,566.21 3.91%
MCD 16 $1,544.64 3.36%
O 35 $1,320.90 5.79%
PEP 17 $1,398.08 2.76%
PM 19 $1,625.26 4.40%
TOTAL  $20,771.29 3.99%

Non DGI Account

Symbol Shares Current Value
AFL 25 $2,054.51
BAM 40 $1,611.37
DE 10 $912.32
Jan 2015 $15 F Call 1 $178.00
Jan 2015 $17 F Calls 4 $384.00
Cash  $1092.36
TOTAL  $6,232.56

2013 Dividends

Jul-13 $12.65
Aug-13 $31.40
Sep-13 $69.82
Oct-13 $60.14
Nov-13 $30.16
Dec-13 $52.79
Total $256.96

As you can see, my dividend income decreased 12.2% from October. There were a couple factors that caused this decrease. One was a sell of 25 shares of AFL during the 4th quarter. I reduced my stake in AFL as I had an overweight position. At this point, I am trying to avoid having too much of an overweight position in any company and selling 25 shares of AFL allowed me to also increase the overall yield of my portfolio. The other reason for the quarter over quarter decrease was PEP and DLR pay in October but push the 4th quarter dividend to January. DLR was a new purchase during the 4th quarter. Due to the timing anomaly, January looks to be my biggest month yet. As can be seen below, the forward 12 month income has steadily moved higher. The increases are attributable to moving fund from my other account, adding additional funds and a couple of swaps such as the AFL sell to move to a higher yielding security. AFL is the only position in the account which I held prior to starting the DGI strategy.

Forward 12 Month Dividend Income as of 1st of the month

Jul-13 $455.19 
Aug-13 $519.07 
Sep-13 $568.98 
Oct-13 $643.13 
Nov-13 $716.21 
Dec-13 $718.87 
Jan-14 $829.20 

I am very excited about my DGI account going into 2014. So far it has grown much faster than I anticipated. While I expect the growth to slow in 2014, I expect it to continue moving in the right direction.

2014 Goals

2014 is going to be an exciting year. Obviously my marriage will be the biggest and most exciting event but I also look to sell my condo and purchase a house with my new wife in 2014. These events also make some of my goals for the year a bit challenging. I have never managed finances with another person so that will be an interesting change as we figure out the best way to handle our combined finances.

Forward 12 Month Dividend Income (DGI Account only) of $1200 by end of year. I ended 2013 with $829 in forward dividend income. I started the DGI account in June of this year and am very happy with my progress so far. $1200 will give me an average of $100 per month which is a nice psychological threshold. It’s not clear how much I will be able to add to this account in 2013 given wedding/honeymoon expenses and purchasing a house but I will be very happy to hit $1200 by year end.

Track every dollar spent for the entire year. This one will be interesting as I will be tracking only my spending until the marriage and then our combined spending afterwards (including my personal account but not her’s). I’ve tracked spending in the past for months at a time but never an entire year.

(Soon to be) Wife’s Student Loan Debt paid down to $35k. This is currently just over $40k.

Savings rate of 30% - I will be excluding the honeymoon, condo sale and home purchase from this calculation so it will be a bit fuzzy for 2014. This will be my first year truly calculating my savings rate (the horror!) but I estimate I have been around 26-27% for the bulk of 2013. Given my fiancée’s low income, a new home purchase likely leading to some new furniture, and the challenges in merging our finances, I expect this to be an extremely difficult challenge for us.

401(k) balance of $140k. Obviously this one is dependent on the markets so it is not as significant to me as the rest of my goals. I expect my balance to grow slower in 2014 than 2013 as my contributions will likely be relatively flat (and potentially decreasing – post to come) while the market is unlikely to have as strong of a year. I ended 2013 with a balance of $116,593.71

Happy New Year! May all your goals be reached in 2014