Dividend Mantra

Meet Kraig From Young Cheap Living

2013-05-23T07:01:00.001-04:00

A little while back, Kraig from Young Cheap Living reached out to me by email to say hi and strike up a conversation. It seemed that we have a lot in common - we both save over half of our net income, invest regularly in the stock market (he through index investing), we're both young guys (I'm 31, he's 29) and both of us are intently looking forward to a future full of time and free of any recurring obligations that do not bring us great joy.

We've been friends ever since and we fairly regularly talk by telephone to keep each other motivated, talk about the things that are working or not working right now, investing, the future and opportunities to do even better than we already are. Kraig is debt free and enjoys living below his means, but we're both looking to constantly improve ourselves or strike up new ideas.

So, it was obviously fantastic when I found out that Kraig wanted to fly down from Minnesota to vacation here in sunny Sarasota with his girlfriend and carve out a little time to meet up with me. One of the many, many benefits to what I'm doing is that it has put me in a wonderful position to meet new people and develop relationships and friendships that I otherwise never would have had. I think there is a great group of young investors and savers that are looking to change their lives for the better, and hopefully change others' lives as well. It's great to be a part of this wonderful group of like-minded individuals.

Anyway, Kraig came up with the great idea to interview each other while he was down here. He brought down some high quality video/audio equipment and we filmed an impromptu interview session at the hotel Kraig was staying at - The Helmsley Sandcastle. Kraig had some questions already written down, but we decided to just wing it and film what came out. What you see below is just two young, excited investors that are so motivated and charged up about changing our lives for the better that we decided to sit down and try and capture some of that enthusiasm and some of our ideas on video. What you see below is an attempt at such. We're certainly not professionals at this, and it's not easy to start spitting off ideas off the top of your head while you're being filmed, but I think we did a pretty good job.

In the end, we're just hoping to bring a little value to you readers and hopefully you enjoy the content! Our interview as follows:

Kraig also interviewed me, and if you're interested in part 2 you can view that here.

I hope you enjoyed the videos and for more on Kraig please stop by his blog at Young Cheap Living. He is a passionate young man who is doing everything he can to 'live below his means and change his future'.

Enjoy the videos? Do they add value for you?

Thanks for reading.

Photo Credit: YoungCheapLiving

Two Reasonably Appealing Stock Ideas

2013-05-19T22:18:00.000-04:00

I recently wrote about the difficulties that us value/dividend investors face in allocating capital to equities right now. The S&P 500 is up 17% YTD and we're only a little more than five months into the year. Are many companies worth 17% more now than they were five months ago? Were many stocks 17% cheaper than they should have been five months ago? As always, it's not really my focus to answer questions like these as at that point you're trying to value an entire market which is impossible. I simply try to ascertain the intrinsic value of a company on a per-share basis and then see if I can purchase shares for as far under that number as possible. My overarching goal is to retire by 40 years old, and as such my mission is to build my passive income via dividends to the point where they exceed my expenses. I always try to remind myself that even in a broad market that is possibly overextended, it's difficult to build a rising passive income stream if I'm not actively contributing to it.

Although I don't see many companies out there trading with any significant degree of discount to their intrinsic value currently, I do see a few companies that are trading at fair values or slightly better based on fundamental quantitative analysis as well as qualitative feelings about future prospects. I'm going to discuss two potential ideas below, along with a few ancillary ideas that are similarly valued in corresponding sectors.

Exxon Mobil Corporation (XOM)

Exxon is the largest company in the world by market capitalization. It's a massive energy company, and operates in an industry where scale and size matters. The world's energy thirst isn't going anywhere, and is likely only to increase as many of the most populous countries in the world, including China and India, grow their economies and many of their citizens burgeon into middle class consumers. Exxon is well placed to take advantage of these trends. One of the great things about XOM among energy companies is that it's an integrated supermajor, meaning that they are diversified between upstream and downstream operations with exploration & production of oil and gas, as well as refining and transportation operations. This means that no one particular aspect of energy will have an overwhelming effect on the business. They can continue to profit from refining when oil prices are lower, and in contrast can benefit on the E&P side when oil prices are up.

Exxon currently trades for a P/E of 9.36 and shares offer an entry yield of 2.75%. This entry yield, while not spectacular, is solid in this market. The yield is backed by 31 years of dividend growth, with a 10-year dividend growth rate of 9%. The balance sheet is almost flawless, cash flows are very strong and earnings have been crowing at a very attractive clip of 13.31% compounded annually over the last 10 years from 2003-2012.While XOM is a suitable investment at current prices, Chevron Corporation (CVX) would also make a great alternative here. Currently, XOM trades near the low end of its 5-year low P/E ratio. Overall, I find XOM to be reasonably appealing at current prices at just under $92 per share. The payout ratio stands at 25.6%, so there's plenty of room for continued dividend growth.

Some current analyst opinions on the valuation of XOM:

*Morningstar rates XOM as a 4/5 star valuation with a Fair Value estimate of $97.00.
*S&P rates XOM as a 5/5 star Strong Buy with a Fair Value calculation of 93.50.

The Bank of Nova Scotia (BNS)

I wrote about why I was bullish on certain Canadian companies a couple months ago, and why I particularly liked a few of the big Canadian banks. Just after the article went live I purchased equity stakes in two of the larger Canadian banks: BNS and Toronoto-Dominion Bank (TD). I still really like these banks and am almost evenly split between the two. I find them almost equally appealing in different ways, but I simply picked BNS here because of their international exposure. Taking that a step further, I also like Royal Bank of Canada (RY) in this space. Most of the big Canadian banks are very high quality banks that held up very well in the recent financial crisis. Although the share prices of these banks cratered in late 2008 along with the rest of the market, operations continued to hum along fairly normally and dividends weren't cut. Since I initiated positions with TD and BNS the share prices have been fairly static, underperforming the U.S. market by a large margin. This allows for an opportunity to purchase shares at the same levels they were trading at months ago. A further note: I really like Wells Fargo & Company (WFC), and although shares have participated in the S&P 500 rally this is a high quality bank trading at a reasonable valuation based on future growth prospects.

BNS shares are trading hands with a P/E of 11.15. The entry yield is very solid at 4.14%, so shares in this bank offer one of the better opportunities for current income in a stretched market. The dividend growth is solid, just as the growth in earnings are. Although they kept the dividend payout static during the economic crisis, they've raised the dividend twice over the last year for a total of 9.1% growth in the dividend year-over-year. EPS growth has averaged a compound annual growth rate 12.72% over the last 10 years. BNS has an attractive balance sheet and most of its operations are in a very stable Canadian economy. There are some near-term headwinds with a very expensive Canadian housing market, but long-term the big Canadian banks look pretty solid as they function largely as an oligopoly. The payout ratio is at a very healthy 46%, so further dividend growth is highly likely. Overall, BNS appears to be reasonably priced here at just over $57 per share.

Some current analyst opinions on the valuation of BNS:

*Morningstar rates BNS as a 3/5 star valuation with a Fair Valuation estimate of $61.00.
*S&P rates BNS as a 4/5 star Buy with a Fair Value calculation of $63.90.

In summary, while I think the broad market is a bit pricey based on a number of different metrics (Shiller P/E being the most prominent), I remain vigilant on valuing individual companies based on company-specific merits and fundamentals. I view the two companies discussed in this article, along with the four other ancillary ideas mentioned, to be reasonably appealing stocks based on their current price and that relationship to their intrinsic values on a per-share basis. While I'm not crazy about the current market and I'm currently building my cash position, I do have an interest in acquiring equity stakes in the companies mentioned in this article at today's prices. They are all high quality businesses trading for valuations that aren't completely out of line.

Full Disclosure: Long CVX, BNS, TD, WFC

How about you? Find any of the companies mentioned reasonably valued?

Thanks for reading.

Photo Credit: Freelart/FreeDigitalPhotos.net

One Year Older, One Year Closer

2013-05-16T20:46:00.000-04:00

I turned 31 over the past week! Yikes. I'm now closer to 40 than I am 20. Sigh...

I'm getting older. But I'm also getting wiser, and as such I'm getting better in almost all facets of being a human being. I find that with age comes the wisdom and patience necessary to face many of life's problem's rationally and thoughtfully. I find myself more relaxed than ever, shedding much of the angst that I had in my 20's.

But most importantly, I'm one year closer to my dream of retiring by my 40th birthday. And what a year it's been! When I published my post on turning 30 last year, my Freedom Fund was worth about $68,000. It's now worth almost twice that it's current market value of ~$114k. My dividend income has been steadily rising in kind and I am now seeing triple-digit dividend tallies every single month. What a wonderful life I'm living! I'm steadily on pace to become financially independent by 40 years old. It seems the 5-step plan I devised a couple years ago is working.

2013 has gotten off to a bang for me. It's really been amazing, and I still can't believe I was featured in national media like The Today Show and USA Today. It's been an incredible ride. I'm incredibly lucky, and so thankful of all the wonderful gifts I have in my life. Not only am I on track to become financially independent at a young age, but I also have a fantastic support network of friends and family. I live in a tropical climate and have almost no stress in my life as I don't own much (no house, car or many material possessions).

Finally, I wanted to say thank you for all the loyal readers and fans of Dividend Mantra. This blog would be nothing without you readers. My journey would also be significantly less enjoyable and meaningful without the joy I get in inspiring others to reach for their biggest financial dreams. Many of you are aiming to achieve financial independence at a young age like me, but some of you are also just looking to build up a sizable investment portfolio that offers freedom and choices, and that is equally admirable.

Please continue to follow along as we mutually inspire each other to our individual aspirations.

Thanks for reading.

Photo Credit: digitalart/FreeDigitalPhotos.net

Do You Have A Dream?

2013-05-14T22:52:00.001-04:00

What do you want out of life? Have you ever really sat down and thought about this?

I have. And I do, often.

Life, in my eyes, is so precious. You only get one try and it's important to get it right.

Do you have a dream? What is it? Are you doing everything you can to reach it?

I have a dream. I have a dream where my time is my own, and I owe it to no one else. I have a dream where I can wake up when my body is ready, go to sleep when I'm tired and never again live by schedules other than my own. I have a dream where I can be who I really am: an investor, artist, philosopher, friend, brother, son, partner, fitness enthusiast and would-be philanthropist. I want to make the world a better place. I want to read and learn and become a smarter person every single day.

I have a dream where I can travel the world and learn from other cultures. I have a dream where I can help others in need, where I can give a helping hand to people less fortunate than myself. I have a dream where I inspire others to reach for their respective dreams, whatever they may be.

What do you dream of? Is it for more money? I can assure you that it won't buy you happiness. Instead of dreaming of money, dream of the things that excess capital allows you to have: more time and thereby freedom to do as you please. This blog concentrates a great deal on money, but only because of the control over my life that I believe money will allow me. I'm saving as much of my net income as I possibly can by living frugally so that I can leverage this excess capital into equity positions in high quality companies that pay dividends and raise them on a regular basis. One day these dividend payouts will exceed my expenses. I could keep working and investing and eventually become a multimillionaire, but once my passive income exceeds my expenses I'm finished, done, finito, kaput. Capiche?

What do you want to be? What do you do for a living? Do these two match? How can you do more of the former and less of the latter if they don't?

I'm not waiting for tomorrow to reach for my dreams. I'm already indulging in as many of my interests as possible. I consider myself an artist as a writer, and I do my best to inspire others through Dividend Mantra. I spend hours in the gym trying to maintain my physique and push myself to be a better person, physically. I do my best to cultivate the relationships that are important to me by spending my limited time with the people that mean the most to me. I love being an investor and I do everything I can to be the best investor I possibly can. The point is to become aware of what your dreams are, immediately start reaching for them and not wait for tomorrow. Certainly my overarching goal is to realize 100% of my time here on Earth by no longer having to trade away my most valuable commodity to an employer for a paycheck. But while that goal is still a decade off, it doesn't mean that I can't try to make myself and the world better in the meanwhile.

I have a dream. I have a dream where I'm as free as the day I was born. I have a dream where the only thing I want to own in life, my time, is mine free and clear. Our time is given to us the day we're born, yet few of us actually own it. It's a shame. I have a dream where I take my time and life back, and help others to take theirs back too.

Do you have a dream?

Thanks for reading.

Photo Credit: samarttiw/FreeDigitalPhotos.net

Current Difficulties In Allocating Capital

2013-05-12T22:54:00.000-04:00

S&P 500 6-month chart

What is a value investor to do right now?

The S&P 500 is up 14.55% so far in 2013. 14.55%! And we're not even five months into the year yet. Crazy, right? Not really.

We're currently in a low interest rate environment as The Federal Reserve continues to keep interest rates down to spur lending and growth so that the economy can kick into gear again. This means that savings accounts yield almost nothing and even high quality bonds like 10-year Treasuries only yield 1.9%. That 1.9% isn't going to get you very far and likely is going to lag inflation, meaning you're going to lose purchasing power over time leading to a nominal negative return. Loss of real capital is not something many of us investors are keen on, so where else does one invest their money?

I'm obviously bullish on stocks over the long term, as you can see by my unflinching high allocation to dividend growth stocks (currently bordering on about 95%). Let me rephrase that. I'm bullish on high quality businesses over the long haul. I've discussed exhaustively why I'm so bullish on high quality companies, but it comes down to this: a high quality business can typically generate excellent returns over time due to the strength of the underlying business, which usually includes brand name products or services, loyal customers or clientele, economies of scale, diverse geographical operations and a commitment to shareholder returns.

I love the stock market. It provides a guy working a regular, middle class job like me access to equity in some of the best companies in the world. I'm now a part-owner in high quality companies like PepsiCo, Inc. (PEP), Johnson & Johnson (JNJ) and Chevron Corporation (CVX). These are fantastic companies that have global operations and sell products that people all over the world buy every single day (food, medicine, gas & oil). But even the highest quality company can become too expensive, leading to subpar returns over the long haul if purchased at too a high a price. I find that we're near a juncture like that right now with many great companies, much to my dismay.

For instance, Johnson & Johnson (JNJ) trades at 23.34 times earnings using trailing twelve months earnings. Now, I'm a huge fan of this company. It's the largest diversified health care company in the world and it's one of my biggest equity stakes. But I believe that paying over 23 times earnings will likely lead to returns that are unspectacular over the next 2-3 years. EPS will have to catch up to this valuation as I don't see how investors will continue to bid up these shares much beyond current levels. That means the price will likely stay static while the earnings catch up bringing the stock back into a normal valuation in the 15-16 times earnings range. Or, the P/E ratio can compress (price falling) which will also lead to a P/E ratio that is more attractive for this company's stock.

It should be noted that I didn't purchase my JNJ shares to hold for 2-3 years. I bought my JNJ shares to hold theoretically for the rest of my life. To be completely honest, I don't care if P/E compression occurs and the price falls or if the price stays static for the next few years while earnings catch up. This doesn't really concern me because I'm buying JNJ shares to be a part-owner in the business itself and share in the profits the company generates via dividend payouts. I purchased my shares simply to access a portion (typically 40-60%) of profits on a per-share basis. The share price means little to me unless it falls to a level where I'd be interested in increasing my stake in the company, or if it rises so substantially and ridiculously that keeping my equity stake would be an unwise allocation of capital. What I do care about, however, is whether or not JNJ continues to pay out its hefty dividend (currently $0.66 quarterly per share) and whether or not the company continues to raise that dividend on an annual basis.

This brings me to the real crux of the issue right now. I purchased my shares in JNJ to gain access to a portion of profits in one of the highest quality businesses in the world. But access to those future profits in the way of dividends means giving up capital now, and capital doesn't come easy. Succinctly, if I'm going to give up my hard earned capital I want to make sure I'm getting the best deal I can for it. Just like when I'm shopping for food, gas or clothes paying less is always better. This is never truer than when dealing with stocks and right now deals are awfully hard to come by. I plan on retiring by 40 years old by living off the passive income my portfolio generates, so it's in my best interest to build this portfolio up as quickly as I can to let the compounding snowball work its magic. However, the power of a compounding snowball rolling downhill can be slowed dramatically if you're starting up the hill higher than you need to. And right now, I believe that shares in many high quality businesses are higher up the hill than they really should be due to the low interest rate environment we're in, forcing investors to climb ever higher to reach for yield.

And that means us value investors either join 'em because we can't beat 'em, or we stay smart and continue to wisely allocate capital in all market conditions. I'll always prefer the latter.

Right now, I find myself at a point where I find few assets more attractive than stocks, but stocks themselves being unattractive in general as an aggregate. It's almost like comparing a punch in the face to a knee to the groin. I'd prefer the former, but only because the latter is so unattractive and the choice is limited between the two.

Bonds are very unattractive right now with very low yields by almost any historical measure you can throw at them, let alone the threat of inflation dragging on your return. Interest rates will eventually rise and when that happens current bond prices will fall, as new bonds become more valuable with higher yields. Gold? Other than being shiny, it does nothing. It certainly doesn't produce cash flow. Real estate? Physical real estate is attractive right now in my opinion, but the problems are the illiquid nature of it, difficulties in diversifying due to cost, high transaction costs and geographical risk. Purchasing a rental property might be intelligent right now if you're interested in becoming a landlord (not sure I am). REITs are the easy way to go here, but due to their attractive yields they've been bid up like everything else leading to expensive prices and unattractive valuations. Cash? No return over the long-term, but this might be one of the most attractive assets of all right now due to the relatively expensive alternatives. I'm not a fan of cash, however, as it's one of the worst assets over the long haul on a return basis (negative due to inflation) and this is why I have under 5% of my wealth in it. However, capital is obviously quite attractive in a situation where markets are falling and one can pick up cheaper stocks with readily available cash.

While I continue to stay away from valuing the market as a whole, I don't see much value in individual high quality businesses like The Coca-Cola Company (KO) at 22 times earnings, General Mills, Inc. (GIS) at almost 19 times earnings or The Southern Company (SO) at almost 20 times earnings. There's just very little (if any) margin of safety to be had with names like these.

So, I'm doing a few things right now. First, I'm not selling anything. I believe in being a part-owner in high quality companies and collecting a portion of the profits. Fluctuations in prices don't deter my resolve. Second, I'm allocating a higher percentage of my wealth towards cash right now. I typically have 5% or less allocated to cash due to the unattractive nature of it, but I find it a prudent move right now to build cash with little value to really be had in the high quality businesses I want to be a part-owner of. Third, I'm focusing on sectors that haven't performed as well as the aggregate like the energy and technology sectors. I currently like names like Exxon Mobil Corporation (XOM) at 9 times earnings and Cisco Systems, Inc (CSCO) at 12 times earnings.

In summary, I believe us dividend growth investors would be wise to do what we have always done: focus on value and quality. I love both but would never sacrifice one for the other. Certainly the dividend, and growth of it, are very important but it's just one aspect of a company's fundamentals and quantitative aspects. I take great pleasure and pride in building my portfolio and the passive income it generates, but what sense would it make to invest in a company that pays a dividend equating out to a 3% yield based on current market prices, only to watch the share price fall 5%? I'm certainly not advocating market timing in this article, but what I am advocating is to be mindful of valuations and focus on high quality. Don't gravitate towards a stock just because it's cheap in an expensive market, and don't buy high quality whilst being unaware of the valuation.

How about you? Are you having difficulties in allocating capital currently?

Full Disclosure: Long JNJ, PEP, CVX, KO

Thanks for reading.

Photo Credit: Yahoo! Finance

Income/Expenses For April 2013

2013-05-09T20:53:00.001-04:00

Each month I will post my income/expenses for the previous month. I track every dollar in and out, so what you see is exactly what I earned and spent (rounded to the nearest dollar).

Income from April 2013:

$5,067--Regular Paycheck
$233--Dividend Income
$245--Online Income/Bonus

Total Income: $5,545

Expenses from April 2013:

$486--Rent
$208--Health
$189--Student Loans
$174--Restaurants
$138--Groceries
$53--Internet
$43--Public Transportation
$40--Mobile Phone
$35--Pharmacy
$30--Gym
$13--Fast Food/Pizza/Takeout
$11--Fuel
$161--Everything Else

Total Expenses: $1,586

*The Everything Else category includes expenses I don't have a regular budget for. This month, the category primarily consisted of the hotel room I rented ($136) for one night for my girlfriend's birthday. I also spent $10 on a gift for my girlfriend's son. The rest ($14) was for miscellaneous cleaning supplies for the apartment.

Overall, it was a fairly expensive month based on my historical spending level which is closer to about $1,300 or so. Looking forward, this spending level is going to be closer to a new normal for me as I now have health insurance and that will add $130 to my monthly expenditures. You can now see these costs reflected in the new budget category 'Health'. The rest of the costs regarding this budget category this past month was a $78 visit to the dentist to get a check-up, cleaning and x-ray. I have one cavity and three teeth that I need to monitor. The expense to fill the cavity will be realized in May.

Food was a tad expensive, with total food costs coming in at $323. However, this is a tad misleading as I spent $119 in one night at a bar on St. Armand's Circle for my girlfriend's birthday. We had a few appetizers and a couple light meals. She had a few drinks as well and we were there for three hours. So, factoring out this one crazy night my food expenses were pretty light actually. My girlfriend is incredibly supportive of my journey toward financial independence, so I feel wonderful when I get a chance to take her out and show my appreciation.

The rest of my expenses were mostly held in check. My income, however, was wonderful. This was one of my best months in a while in terms of overall income, and my highest yet this year. It was a great month at work, and I had some solid sales which led to a fantastic commission check. I'm very grateful for that as my income thus far has been rather mediocre. I hope this is the beginning of a trend!

I managed to save 71.4% of my net income this month. Fantastic! Although my expenses were a little higher than usual due to some health costs, my higher income more than made up for that. Looking forward, I expect May to be a rather expensive month. I have to fill a cavity as I mentioned above, so my health costs will be high again. I also anticipate purchasing a ticket to fly home to Michigan to attend a reception for one of my sisters who recently got married. I had to purchase a pair of shoes, as the work shoes I've been wearing for the past year or so finally wore a hole through the sole. I'll also have to rent a car because I have some family and friends visiting during the middle of the month.

My goal is to average a 60% savings rate of my net income, monthly. So far, I've hit rates of:

75.7% - January
48.3% - February
57% - March
71.4% - April

I'm now at an average of 63.1% for the year so far. That's above my goal so I'm very happy. I expect a dip in May, but the rest of the summer should be smooth sailing.

How are your budgets doing? Saving as much as you'd like?

Thanks for reading.

Photo Credit: RambergMediaImages

I Just Bought A Time Machine

2013-05-07T20:57:00.002-04:00

Not this time machine!

I just purchased a time machine. It's not my first, but is my nicest. Hopefully I'll keep this one for a while!

According to this source, the average driver here in the U.S. spends $9,641 (and that's using $2.25 per gallon fuel figures) per year for the privilege of driving a vehicle. You can think about this a few different ways.

To afford this type of expense on an on-going basis, one would need $241,000 in capital using the 4% Safe Withdrawal Rate ($9641/0.04). I typically use my average portfolio yield instead for a more accurate picture of how much I'll need in investments to sustain an expense without selling assets and get the larger figure of $275,000 needed based on my portfolio yield of approximately 3.5%.

Do I want to save an extra $275,000 so that I can tote myself around in a big metal box? Not really. There's a lot of things I can do with that kind of capital. Think about that money in terms of years. It took me three years to go from $5,000 to $100,000, and that was with a very aggressive savings and investment plan. Taking even that kind of progress and extrapolating that out it would take me about 8.8 years to save up the kind of capital necessary to simply own a vehicle and then pay for the fuel, maintenance, depreciation, repairs, insurance, taxes and other miscellaneous expenses it would come with at an average rate.

8.8 years? Check this out. I just fast-forwarded my early retirement by about...8.8 years.

I very recently bought a 2009 Honda Metropolitan 49cc scooter. My brand new time machine!

100 mpg baby!

Okay, so this isn't my first scooter. And actually this is an upgrade over my 16 year-old scooter which I recently sold to raise the capital to make room in my stable for the Honda. But that's not the point of this post.

The point is to start thinking about how much your car is really costing you. Maybe you need a time machine too. They come in many flavors. Your feet can be a time machine. Try walking around. A bicycle can be a time machine. Not only do these examples shave years off your journey to financial independence, but it also pays you dividends in the form of better health. Even a cheap car can be a time machine if used correctly. Spend $2k or so for a car, drop the insurance down to the minimum and limit your driving to longer trips you can't accomplish by bike/walking only and you'll be well under the figure that AAA quoted above.

I paid $1,300 for my time machine. Certainly more than the $700 I paid for my last time machine (the 16 year-old one linked to above), but this bad boy gets a true 100 mpg (a lot more than the 55 mpg I was getting with the old 2-stroke) and it's just a dream to own and ride. It's really the scooter I always wanted, but they're hard to find as they don't come up for sale often. I jumped on this one within three days of the post on Craigslist. I found a co-worker who wanted to buy my scoot and in the same day sold my old scooter and bought the Honda.

But let's get back to that $1,300. I saved myself the need to have about $275,000 in capital at a 3.5% yield to fund an average of $9,641 in annual expenses for a car, right? It gets even better from there. By not spending $9,641 over the next 9 years (my target early retirement date) I'll have an extra $141,000 in my pocket (using a 7% compound rate using this calculator). So that means I'll actually be saving myself about $416,000 by staying away from a car at an average expense rate. Huh? That's crazy, right? It is crazy. Math can be pretty crazy and eye-opening when you actually sit down and calculate out big expenses like a car.

Say, you don't spend that much on a car? The average is crazy? Well, I'm not so sure about that. I had a 2006 Pontiac G6 before I started this journey to financial independence. This was no fancy car and I mainly drove it to and from work which was only about 8 miles away and I even got a big break on maintenance and repairs because I work at a car dealership. It had a 4-cylinder engine that sipped gas. I had comprehensive and collision car insurance on it, but because of my excellent driving record and great credit rating I had fairly low rates. How much was this thing costing me? About $450 per month, or $5,400 per year. Don't believe me? Try looking up some of my old budgets when I still owned a car, like this one from March of 2011 where I spent $511 on car expenses. And this is coming from someone who lived very close to work and got great deals on maintenance. Contrast these figures with someone with a big SUV who lives 30 miles or so away from work, and doesn't get a big break on repairs. You can see where the expenses creep up in a hurry!

Finally, I want to just come out and tell all my loyal readers that my plan now is to never own a car again. For real. I mean never. Working in the auto industry I see first-hand just how much of a cash drain they are. But when I actually sit down and do the math even my jaded eyes are bulging out of my skull. I'm going to continue building my life in the future around not owning a car if at all possible. I actually quite like not worrying about parking any more, or filling up a big gas tank at $50 a pop, or sending in a $90 check to the insurance company, or buying a set of tires for $900. Oh and I'll never get a speeding ticket riding around on a little scooter. I'll also never have to worry about sitting in rush hour traffic on the highway either.

So, that's my time machine. I believe it's not only going to save me hundreds of thousands of dollars, but it'll also shave years off my journey to early retirement. Imagine someone came to you at 50 years old and said they could give you a time machine that allowed you to retire 10 years earlier. How much would you pay for a time machine like that?

How about you? Plan on buying a time machine any time soon?

Thanks for reading.

Photo Credit: terabass/Wikipedia

Dividend Income Update - April 2013

2013-05-05T17:11:00.002-04:00

Another month has passed by, and it's time for me to post an article on my favorite subject: dividend income. The reason why I love to post articles on dividend income is because it's pure numbers. It's hard to argue the success of long-term dividend growth investing when you can slowly and surely see dividend income rise over time and get closer to covering one's expenses.

April was just another fantastic month where I received passive income via dividends from some high quality companies that I have equity positions in. Every time I log in to my brokerage account and see new capital that wasn't there yesterday I get really excited. Maybe I'm easily entertained. I don't know. But what I do know is that this capital continues to get reinvested back into high quality companies so that these dividend tallies expand exponentially over time. It's a surefire recipe for success and I am simply glad I found it at a young age.

I hope these monthly dividend income reports provide inspiration for any investors out there that are just starting out. It's easy to see these payments rising month after month and it shows that it's possible to one day pay for monthly expenses with dividends, which would provide an investor opportunities and freedom to pursue other interests than full-time work. Without further ado:

April 2013 Dividends Received

Wal-Mart Stores, Inc. (WMT) - $17.86
PepsiCo, Inc. (PEP) - $41.39
The Coca-Cola Company (KO) - $22.40
Illinois Tool Works Inc. (ITW) - $13.30
Altria Group Inc. (MO) - $22.88
Philip Morris International Inc. (PM) - $85.00
Medtronic, Inc. (MDT) - $9.62
Sysco Corporation (SYY) - $8.12
The Bank of Nova Scotia (BNS) - $12.50

Total dividends received during the month of April: $233.07.

This month was definitely kind to me, and a 44.5% improvement upon the $161.26 in dividends I received in April of 2012. That's definitely progress and I can only hope that I continue progressing forward toward my goal of early retirement in a similar fashion as time goes on.

I was able to cover about 14.7% of my expenses via dividends during the month of April. Fantastic, right? That means I only had to come up with 85% of my expenses on my own, and that's during a month where my dividends were slightly below average and my expenses were above average. Sweet! And although I can't wait for the day I hit that elusive 100% mark, I'm enjoying the sweet taste of progress along the way.

We're now four months deep into 2013 and I've been able to generate $1019.38 in dividends this year, including April's tally. That's 29.1% of my goal of generating $3,500 in dividends during the year of 2013. I'm slightly behind my goal so far, but I'm confident I can still make it. A healthy market correction would certainly help my case so that I could buy more shares with my limited capital resources.

I'll update my dividend income page to reflect April's dividends.

How was April for you? Great month of dividends?

Full Disclosure: Long all aforementioned securities

Thanks for reading.

Photo Credit: sscreation's/FreeDigitalPhotos.net

Weekend Reading - May 3, 2013

2013-05-03T23:58:00.000-04:00

Dow Jones 15,000. S&P 500 1,600. What is going on??

After the DJIA briefly crossed the 15,000 mark today I think it's safe to say the stock market is on fire. I'm a bit surprised we find ourselves with a market this hot, but on the other hand where else do you go with your capital besides equities? Bonds? No, thanks. As interest rates rise (which they will in time) bond values will fall in kind. Gold? Not for me. Futures and derivatives? Get serious. Real estate? Sure, there are some opportunities there with extremely low interest rates, but the barriers to entry (high transaction costs, necessary down payments) are high and it's hard to attain diversification with this asset class. Cash? Probably not a bad idea to have some allocation to this asset class right now, but historically cash has a horrible rate of return as inflation eats away at its value and purchasing power. The Federal Reserve is basically forcing investors into stocks right now through QE, much to the chagrin of us value investors. I currently view the broader stock market as moderately overvalued, but as always I still refrain from placing a large emphasis on the valuation of the entire market.

I've been as active as ever deploying capital over the last few months as the stock market has continued its epic and historic march upward. But value is getting harder to find every single day and high quality investments at prices that make sense are getting more and more difficult to ascertain. I'm going to remain prudent with capital and as diligent as I possibly can with broad market levels as elevated as they are. That's not to say I'll hold off from buying stocks (I am Dividend Mantra after all!), but remaining an intelligent steward of my own capital is extremely important and so I'll be very watchful for value as we move forward.

But enough about the market and lack of value. It's Friday night and I feel alright! I wanted to share some great articles I've been reading and I hope you enjoy them as well as your weekend!

Here are some excellent articles from fellow dividend growth investors, frugalists and personal finance bloggers from the past week.

Oneok Inc. (OKE) Valuation Estimate
Dividend Monk had an excellent write-up on OKE, its business model (as a General Partner), future prospects and the overall valuation of shares. Great stuff and OKE has actually dropped a bit since Matt published his analysis. Could be a great time to jump on shares of this General Partner.

Twenty Dividend Stocks I Recently Purchased for my IRA Rollover
DGI didn't just publish a recent purchase, but instead published a list of 20 stocks he recently bought for his IRA rollover. Fantastic list of stocks that could actually make up an entire portfolio, and although bargains are getting extremely difficult to find right now, DGI did himself a favor by focusing on high quality businesses that will likely be significantly more profitable in the future than they are today.

I Don't Need More Than Four Ratios To Buy A Stock
The Dividend Guy listed the four ratios he looks at before buying a stock. Analyzing companies and stocks for purchase is a very individualistic process, and I personally use a lot more than four ratios. I also think that qualitative analysis (what's the company's story?) is just as important as quantitative fundamental analysis using hard numbers.

Frequently Complained Questions
MMM, as only he can, listed a number of complainypants arguments and how easy it is to smack them down! This is in response to a recent interview he did for The Washington Post. Great stuff, and it's good to see MMM spreading the good word.

Take Control of Your Financial Future Seminar - Slides and Notes
Dividend Ninja was recently a presenter at a seminar sponsored by Canadian MoneySaver. Way to go, Ninja! Awesome stuff, and if you couldn't make it in person Ninja made it easy to get some of the beneifts by releasing his presentation slides and notes. Check it out.

Monthly Update - April
All About Interest recapped his spectacular month. He invested almost $14,00. In one month. That's fantastic. For a couple of other great updates from April, check out Dividend Growth Machine's update and Compounding Income's update.

Recent Transactions
Integrator listed some recent buys and sells from his dividend growth portfolio. I like some of the buys, and I'm currently looking at CSCO in-depth.

What's Up With Conco's Dividend?
Tim McAleenan Jr. over at Seeking Alpha penned a great piece about Conco's dividend and the lack of a raise over the last couple years (unless you count the PSX spin-off like I do). He points out the cyclical nature of commodities and oil companies are certainly exposed to business cycles due to the up and down nature of oil prices. He also discusses a bit about COP's recent restructure regarding the divesting of certain assets to reinvest in higher margin assets going forward. Tim writes some great articles over at SA and I'm always eager to read his latest writings.

How to Handle Living on Another Planet Than Everyone Else
My good friend Kraig put up a great post on how those of us who are aggressively pursuing financial independence/early retirement can sometimes feel a bit lonesome in our pursuit as those closest to us (friends, family, significant others, co-workers) are often not on the same page as us in terms of financial goals or prowess. This can make it difficult at times because there isn't much of a peer audience or support group with which to share your success or thoughts. Kraig came up with some great ideas to keep you on track when you feel like you're on a different planet than everyone else, because I happen to think the planet we (us pursuing FI) live on is pretty sweet! *By the way, Kraig is visiting Florida from May 18-22 and we plan on meeting up at least once on the 19th. If you're in the Sarasota area that weekend it would be great to meet up with readers or others passionate about the pursuit of financial independence and share ideas!

Thanks for reading.

Photo Credit: Benoit Mahe

Freedom Fund Update - May 2013

2013-05-01T21:15:00.000-04:00

Well, the time has come to update the Freedom Fund once again as we start another month. The Freedom Fund is my portfolio, and I think it's aptly named. My portfolio is my way to freedom; freedom from a traditional 40-year career to purchase goods I don't need to impress neighbors I don't care about. This journey is all about freedom and flexibility. One day the dividend income this portfolio generates will fully replace my day job's income and my time will be completely my own. What could you possibly want to own more than your time?

I feel extremely fortunate and thankful that I'm able to post these updates every single month which shows the power of monthly contributions to investments because of the high savings rate I maintain. It shows how a relatively large sum of money can be built through the power of time, patience and perseverance.

It's important to keep in mind that while updating the overall value of my portfolio is important for historical reference and for purposes of keeping track of total return, my main focus is on the rising dividend income stream the Fund provides.

Another fantastic month here for the Freedom Fund. I really believe that the key to building wealth over the long-term is to ignore the noise (consumer confidence reports, the latest political arguments coming out of Washington, pretty much whatever was on the 11 o'clock news) and focus on the things you can control. I can control my ability to limit my expenses, thereby increasing the amount of fresh capital I have to invest in high quality businesses. I can control my ability to stay dedicated to a plan. I can control my ability to reinvest my dividends and I can control where my funds go by fundamentally analyzing companies and focusing on which ones are attractively valued no matter the broader market's valuation.

The past month was a busy one for the Freedom Fund. I initiated a position in Air Products & Chemicals, Inc (APD) and also initiated a position in BHP Billition PLC (BBL). I also added to my position with Wells Fargo & Co (WFC). It was a very active month and I wouldn't have it any other way. Some investors are waiting for a broad market pullback which may or may not occur. I'll simply continue focusing on high quality businesses and building my dividend income stream that will only give me more capital in the future to reinvest if we do get that elusive pullback.

The current market value of the Freedom Fund stands at $110,508.00. This is a nice increase of 7.2% over last month's published value of $103,131.12. The increase was mostly due to the aforementioned equity purchases, with the remainder being capital gains and dividends.

I'm extremely excited for what the next few months bring. Some are trying to predict trends, while I simply try to stick with what's worked over the last century or so. I'll continue building the Fund by investing my hard earned capital into equity positions with the highest quality companies I can find that are trading for attractive valuations. The market can go up by 10% or it can decline by 15%, but my focus remains on the dividend income my investments provide.

I'm currently invested in 32 companies. This is an increase from last month due to the two new positions I initiated as discussed above.

These updates are mainly designed to show the increase in the value of the underlying equities I'm invested in, but the main purpose of investing in dividend growth stocks is for the rising stream of dividends over time. So with that said I don't put too much emphasis on these monthly updates on the value of my portfolio. I think it is a good idea, however, to keep track of the rising (or falling) value of one's securities and be aware of where they are in terms of the marketplace and whether or not certain stocks are attractively priced. It proves to be a useful exercise, for me at least, to update the values monthly. It gives me fresh perspective on which equities are performing well and which aren't, and from there I can make educated decisions (based on further due diligence) on which stocks I'd like to add fresh capital to (while considering portfolio weight as well).

Full Disclosure: Long APD, BBL, WFC

Thanks for reading.

Photo Credit: Vichaya Kiatying-Angsulee/FreeDigitalPhotos.net

Early Retirement Is Impossible Because Of Health Insurance Costs...Not!

2013-04-28T19:44:00.000-04:00

After some recent mainstream media attention on this blog and myself there appears to be a few discussion points that naysayers/doubters point to so as to try and discredit the entire notion that one can truly become financially independent at a young age on a middle class income. It seems that healthcare costs are one of these talking points, and perhaps even the most often discussed of all.

Up until the past week I haven't had health insurance. That has changed now, which I'll be discussing in this article. Of course I didn't buy the insurance just to prove the naysayers wrong ("he can't save 50% or more of his income if he had health insurance!"), but rather a couple of other reasons. However, it is nice to be able to point at an article like this in the future for anyone who doubts that early retirement on a middle class income is impossible because health insurance will somehow magically render one insolvent.

First, it should be noted that I've declined purchasing health insurance for many years now due to my age and overall health. The odds of me needing serious healthcare in my late 20's and early 30's were relatively low and I felt okay shouldering the burden of the scant odds that I would actually need some type of care. The odds are good that if you're living a relatively healthy life by avoiding stress and high-risk activities while staying active that you'll not have to see the inside of a hospital room anytime soon. Of course the scant chance remains that something catastrophic could happen to me, and so I now have insurance against such a catastrophic event.

A catastrophic event (cancer, disease, serious illness) was one of the big reasons I decided to plunk down the cash and pony up for health insurance. I wouldn't want the Freedom Fund I've worked so hard over the past three years building to evaporate overnight because some serious illness that required intensive care and a lengthy hospital stay befell me. Although the odds of this occurring are very acute, the chances are still there. Another reason is my age. I'm turning 31 next month. That means I'm closer to 40 than I am 20 (that sucks to write!), and as I advance in age the necessity to insure oneself against a negative health event increases. But probably the biggest reason of all is the Affordable Care Act which basically forces my hand. If I don't purchase health insurance I'll be fined through a tax as part of the Individual Mandate starting in 2014. I'd rather at least get something for my money, so I now have health insurance.

I purchased a plan through Aetna called the Aetna Health Network Option Value 10000 (see all the details here at ehealthinsurance.com). This is a high-deductible health plan (HDHP) with a $10,000 deductible and maximum out-of-pocket annual costs at $12,500, including deductible. Basically I am self-insuring up to $10,000 (due to my aforementioned young age and overall good health). I'm effectively insuring against financial catastrophic loss and will be shouldering the costs of the occasional cough or tick myself.

This plan comes with a monthly cost of $130.

Are my plans for early retirement now bunked? Not really. I've already paid my first bill for coverage beginning in mid-May and it amounted to about 2% of my net income for April's budget. 2-3% of my net income on a regular basis is, while money I'd rather have to save an invest, not going to dramatically affect my plan to retire by 40 years old. But of course some people say "what if you get cancer?". Well, at that point I'll be more concerned with staying alive than retiring early and besides that...what's your point really? Is someone with hundreds of thousands of dollars set aside more or less prepared for a health disaster than someone living paycheck to paycheck?

Now, there are some caveats here. I'm still relatively young. And I don't really have any pre-existing conditions of any kind. I'm in pretty good health, overall. While some people like to come on here and point and laugh at my diet, I take multivitamins and fiber supplements every morning and I eat a relatively balanced diet that's fairly low on fats and cholesterol. No, I don't eat fancy organic foods. Of course, Standford found that organic food is no healthier for you, but that's another discussion altogether. I eat granola based cereals or oatmeal for breakfast and am currently on a tunafish or other lean meat diet for dinner. I also work out regularly. I'm currently 5'9" and about 187 pounds (getting closer to my goal of 185 pounds by year-end). Most of that 187 pounds is lean muscle and bones, and I definitely lack a belly of a round shape.

For some people with chronic conditions or serious health issues, early retirement may not be completely realistic. I would agree that luck, to some degree, is at play with not only early retirement but life in general. Some of us are dealt shitty hands. Some of us are born with genius intellect. The key is to make the most of what you've got and focus on what you can control. I've discussed before that early retirement isn't for everyone, and neither should it be. It's something that I believe is right for me and am aggressively pursuing. You may not feel the same and should probably use your energy pursuing things that matter to you.

Furthermore, on the matter of healthcare and costs there are a few things to keep in mind. As mentioned earlier, expensive healthcare costs on a recurring basis are not something you're likely to face if you lead a healthy lifestyle. Just 1% of patients account for a full 20% of healthcare spending here in the U.S. Typically, most of the spending for healthcare costs are chronic disease treatment and end-of-life terminal hospital stays as one clings to life.

One way you can really increase your overall health and well-being and simultaneously reduce your chances of health issues and associated costs is to reduce stress. Stroke and disease are among the leading causes of death here in the U.S. and you'll find stress to be one of the common correlating risks that increase your likelihood of facing such health issues. Want to know a great way to reduce stress? Quit your job! Or rather at least figure out who you are and spend more time being that rather than being what an employer wants you to be. Get back more of your time to yourself and cultivate the relationships and ventures that are really important to you. Stress really is a killer. I plan to avoid as much of it as possible by being financially independent at a young age and prioritizing my time and happiness over an employer's whims. How much stress can possibly be involved in waking up at a leisurely 10 a.m., followed by a light breakfast, then a nice 1-hour workout session and a lukewarm shower? Usually by that time I will have already worked for 5 hours, running around to and fro like a madman trying to make sales, meet quotas, keep customers and management alike happy and try and not go crazy. Hmm, which way is less stressful and more likely to lead to a more fulfilling and healthier life?

One other great thing about financial independence is that you're also geographically independent. Most people are tied down to one geographical area because they have a house and a job there. Financial independence means you no longer require a job to pay your bills and therefore can come and go as you please. As such, if healthcare costs are something that you're extremely concerned about, or if you start to develop chronic and expensive issues later in life it might pay to be open minded to moving to a country that has significantly cheaper access to care. The U.S. health care system is the costliest in the world on a per-person basis, despite the overall quality of care being low by some measures. I've discussed before that I'm personally open minded to retiring overseas, at least for part of the year, and cheaper healthcare would definitely be a great motivator for something like that if it were necessary.

In summary, I find it funny that people stay loyal to golden handcuffs keeping them chained to a stressful job just so that they can afford expensive healthcare insurance in an expensive healthcare system, all the while increasing the stress levels that are likely to contribute to health issues of which that expensive and otherwise unnecessary healthcare plan will be needed. It's a catch-22 that feeds into an endless loop of servitude. You need the high paying, stressful job so that you can afford the low-deductible high-premium health plan because you don't have any savings set aside for any alternatives.

This blog is more than just a case study in how to retire/become financially independent at a relatively young age on a middle class income. This is my life. I share it so that other people with similar aspirations can come here and find real-life solutions to real-life problems. Hopefully you find inspiration here as I reach new heights and fight through setbacks like anyone else. I hope that anyone out there with questions on how health care costs can possibly be figured into a plan to retire early found this article useful.

Note: there will now be a healthcare expense line added to my monthly budgets from here on out.

How about you? Did you find this information useful? Are healthcare costs overrated or are they crippling your plan?

Thanks for reading.

Photo Credit: renjith krishnan/FreeDigitalPhotos.net

Recent Dividend Increases

2013-04-26T21:53:00.005-04:00

As a dividend growth investor, one of the primary objectives I seek is passive dividend income from my investments that increases over the rate of inflation, annually. It's always wonderful news when companies decide to reward loyal long-term shareholders with a dividend raise. Some recent dividend increases include:

The Procter & Gamble Company (PG) raised its dividend 7%. The new rate of $0.6015 per share quarterly is a nice increase over the old rate of $0.562 quarterly per share. Overall, I love this company. Some investors have questioned some recent moves, lack of innovation over the last few years and management. But, I consider this one of those core dividend stocks that most dividend growth investors would be wise to hold. PG owns 26 billion-dollar brands. Not particularly cheap right now, but does have a yield just north of 3% after the recent raise. A pullback of 5% or more from here might get me interested in adding to my position. PG now has 57 consecutive years of dividend raises. That's a prime example of rewarding shareholders through all kinds of economic cycles and macroeconomic concerns. Great stuff!

Johnson & Johnson (JNJ) recently increased its quarterly dividend from $0.61 per share to $0.66 per share. This is an increase of 8.2%. Simply fantastic. This is Johnson & Johnson's 51st consecutive year of dividend growth. Amazing, right? Like PG, these shares aren't particularly cheap here but JNJ is one of my biggest investments and for good reason. The biggest, and one of the best diversified healthcare companies in the world. I'm glad that JNJ is one of my biggest positions. I don't have plans to add capital here in the short-term, but I love this company long-term.

Exxon Mobil Corporation (XOM) also reported a nice increase in its dividend, up 10.5% from an old quarterly rate of $0.57 per share to the new rate of $0.63 per share. You know, I'm far from perfect and as an investor I'm learning every day. I do somewhat regret my sale of Exxon Mobil shares as I felt the low yield combined with the (then) low dividend growth rate warranted a sale. Looking back on it I feel justified, but not long after I sold my shares XOM decided to start hiking the dividends at a more attractive pace. I may re-initiate a position with this company in the future, as I like the massive scale in an industry where scale is extremely valuable. XOM now has 31 years of consecutive dividend growth.

Chevron Corporation (CVX), another oil supermajor, recently hiked the dividend by 11.1%. The new rate of $1.00 quarterly per share is a fairly substantial increase over the old rate of $0.90 per share quarterly. I'm currently long CVX and find the company very attractive, even at current prices and energy is likely where capital is going to go next month. This is Chevron's 26th consecutive year of raising the dividend and this streak doesn't appear to be ending anytime soon. Oil is still in high demand worldwide, and as middle class consumers rise up from extreme poverty in many developing nations there will only be increased demand on oil and energy in general.

Kinder Morgan Inc. (KMI) raised the dividend for the 6th quarter in a row, from $0.37 per share quarterly to $0.38 per share quarterly. This is an increase of only 2.7%, but this is the second dividend increase so far this year (the first being 2.8%) for KMI and I anticipate similar raises the rest of the year. I love KMI at these prices, and if I had a smaller position I'd be actively increasing it. Heck, I might do so anyway. This is a great business model (energy pipelines and energy storage) and KMI is one of the biggest and best at what they do.

Excited about these recent dividend raises?

Full Disclosure: Long PG, JNJ, CVX, KMI

Thanks for reading.

Photo Credit: FreeDigitalPhotos.net

Dividend Investing For Beginners

2013-04-24T22:00:00.001-04:00

I realize that there are some people who have found my blog recently for the first time. I've been receiving some emails from readers asking for information on how to start out dividend growth investing and really where to begin. This is important information, and it's a shame I haven't really covered this before.

Sometimes I get into some pretty technical jargon here on Dividend Mantra, even though I purposely try to keep everything pretty simple. I'm a simple guy with a simple job and I believe that simple investments work best. And that's really why I love dividend growth investing: some of the best companies in the world have really simple and easy to understand business models. But, nonetheless if you're just starting out some of this can be pretty overwhelming. So, today I'm going to get back to basics and recommend some fantastic reads to get you fully acquainted with what us dividend investors are trying to accomplish.

I only put my money where my mouth is, and as such I'm going to recommend resources I've personally used.

First, there are a few great books that provide a great education on the basics of dividend investing and why it can be such a superior strategy.

First up is The Dividend Toolkit by Matt Alden (the blogger behind Dividend Monk).

*This book is really fantastic. I did a review a while back, and my review doesn't really fully give this book its due. It's a phenomenal read that covers the basics of businesses, the importance of fresh capital, the impact of dividends on long-term returns and why it's important to seek out high quality businesses that distribute them, how to properly analyze/value businesses and a summary of how different sectors (consumer stocks, industrials, MLPs, REITs, etc.) are valued differently. This book is not only a great resource on dividend growth investing, but also on building wealth in general.

Next is The Ultimate Dividend Playbook by Josh Peters (an editor for Morningstar).

*I've read most of this book and feel very comfortable recommending it. Josh writes in a very easy manner, and this book covers a lot of the basics. He explains why dividends matter, revealing how dividend paying companies tend to deliver superior returns over the long haul. He also talks a little about why shareholders benefit by receiving dividends, and it's not just for the income aspect. His 'Dividend Drill' focuses on valuation in terms of future expected return (gordon growth model), safety of dividend (how well is it covered against earnings and cash), and the likelihood of the dividend continuing to grow over time (can the company continue increasing earnings).

Finally, we have the The Intelligent Investor by Benjamin Graham.

*Although not a dividend-specific book, this is probably the greatest book ever written on investing. I believe the main draw to this book, and really the crux of it, is that it covers the psychological warfare that investing can sometimes bring on a person. It covers emotions to the point where Mr. Graham actually refers to the market as a whole as a bi-polar "Mr. Market" that acts irrationally and emotionally. An intelligent investor takes advantage of these emotional swings. It covers equities as a whole, how and why one should invest, investment theory, achieving a margin of safety, market fluctuations and valuation methods all in great depth. I've read this book and could read it again tomorrow and pick up new things I didn't see before. It's that meaty and deep. To do a true review on this book would require multiple blog posts dedicated to nothing but. If Warren Buffett believes this is the best book on investing ever written, who am I to argue?

After reading these three books I feel confident that you will have a solid foundation of knowledge on why it's important to invest, how investing works, why dividends are such an important component of total return, how businesses operate, how to analyze and value businesses, how to evaluate the safety of a company's dividends, the likelihood of dividend increases and how to intelligently allocate capital without letting your emotions run wild.

Further, there are a set of great blogs out there that provide real-time, ongoing information on dividend investing that can't quite be replicated in a book. One of the reasons I love writing this blog (versus a book) is that it's live and in the now. Businesses and the stock market are almost organic in the way that they're swaying to and fro, and live blogs are a great way to capture that ever-changing motion. Stock purchases or sales can be recorded within hours or days, new analyses can be published and viewed at any given time and business fundamentals can be viewed and discussed as they change over time.

Dividend Growth Investor constantly updates his blog with analysis on dividend growth stocks, general market information, when to buy and sell dividend growth stocks, why valuation matters and specific dividend growth stock ideas.

Dividend Ninja runs a Canadian dividend investing site that gives you a Northern flavor to this investment strategy. He often gives readers great information on Canadian dividend stocks, why it's important to stay diversified between asset classes, what he's buying, why high yielding stock should typically be avoided and also has great interviews.

Dividend Monk is well known for his in-depth stock analysis reports that he releases for free. He also runs a fantastic monthly newsletter that typically focuses on certain macroeconomic trends, broad market valuation and specific stock ideas.

Passive Income Pursuit has a great series on different valuation methods and also frequently does in-depth dividend stock valuations. Like me, he also alerts readers to any recent changes to his portfolio.

The Dividend Guy is another Canadian dividend investing blogger. He has great articles on macroeconomic news and how it can affect your investments, the market and valuation and often runs screens for his readers which can spit out some great stocks for further research.

Dividend Growth Stocks is one of the oldest blogs focusing on dividend growth investing. The author, D4L, often reviews stocks with in-depth analysis, highlights stocks that are trading at attractive valuations and publishes his dividend income monthly. His dividend income is very impressive, as is his portfolio.

Although not a blog, another extremely important resource is the Dividend Champion/Contender/Challenger list compiled and maintained by the great David Fish. This is a spreadsheet that lists companies with dividend growth streaks ranging from 5-9 years (Challengers), 10-24 years (Contenders) and 25+ years (Champions). A really invaluable resource to dividend growth investors with not only the list of companies that have such streaks, but also important metrics like dividend growth rates, payout ratios, PEG (price/earnings growth) ratios, valuation metrics (P/E, P/S, P/B), estimated 5-year growth, debt/equity ratios and return on equity numbers.

I also read Seeking Alpha's Dividends & Income articles often. There are always new articles by a diverse collection of authors discussing earnings calls, specific stock ideas, stock analysis reports, investment theory, the dividend growth strategy and associated ideas. The real highlight and strength of Seeking Alpha is that it's a great community of like-minded investors all discussing ideas and engaging with one another.

I'm now going to include a great video I watched not long ago on the basics of business, including balance sheets, cash flow statements and income statements. Great visual breakdown and the language is very easy to grasp. Thanks Dividend Growth Machine for pointing this video out:

William Ackman: Everything You Need To Know About Finance and Investing in Under an Hour

Finally, I'm going to conclude with not so much a resource but more of a general theme. As I alluded to earlier, keeping it simple is one of the hallmarks of my life. Not only do I live a very simple, easy life where I've cut down on the endless pursuit of the latest and greatest everything, but I've also concluded that the best way to invest is similarly to stay focused on simplicity. You don't need to invest in futures, derivatives or binary options to make money.

If you're just starting out take a look around your house, your work, your family's homes, your friend's homes, your local city and your local businesses. What products do you see? What services do you see people using? Look for recurring brand names, machines, advertisements. Even someone who lives as frugally as I do still has to brush their teeth, and I use Crest (PG) or Colgate (CL) toothpaste. I shave my head and face with Gillette Fusion razor blades (PG). I drink Coca-Cola (KO) or Pepsi (PEP) products on a daily basis. I don't own a car, but my scooter runs on gas and so does the bus I ride. If I have a headache I'm going to take Tylenol (JNJ). I need electricity, running water and other utilities just like everyone else. I go to the grocery store and typically buy products made by General Mills (GIS), Kraft (KRFT), Unilever (UL), Nestle (NSRGY) and other global consumer product juggernauts. There are recurring themes in many products and services, and the key is to identify the highest quality of these companies that provide these products and services.

I hope this article helped any budding dividend growth investors out there just starting out. It wasn't that long ago that I was also just beginning my investment career and there were many before me that helped steer me in the right direction. I hope that in the comments section below further resources can be shared and discussed, as this was really only a starting point rather than a complete list of resources available.

Full Disclosure: Long KO, PEP, JNJ

Thanks for reading.

Photo Credit: Idea go/FreeDigitalPhotos.net

Why I Love Dividend Growth Investing

2013-04-21T21:44:00.002-04:00

Dividend growth investing is an investment strategy whereby an investor primarily focuses on stocks that pay dividends, and have a history of raising those dividends on a consistent basis. Taking this a step further, most dividend growth investors then hone in on businesses that have stable operations, responsible uses of debt with low debt ratios, economies of scale and manufacture and/or sell products or services that people/other businesses want or need on an everyday basis. Typically, a dividend growth investor wants to covert their capital into equity shares with a group of high quality businesses that share profits with shareholders in the form of dividends, thus creating a portfolio of businesses that they are a part owner of.

I consider myself a staunch proponent of this strategy. You can view my portfolio at any time, and you'll see it's mostly filled with high quality businesses that have stable businesses that largely have economic advantages of some type, be it brand names, manufacturing capacity/efficiency, technological advantages, patents, global operations and the like. Some of my largest individual investments are with companies like Phillip Morris International Inc. (PM), Johnson & Johnson (JNJ) and PepsiCo, Inc. (PEP). I have most of my net worth invested in high quality companies that pay out (rising) dividends, and so I thought I would share today why I'm such a fan of this strategy.

It should be noted before I go any further that dividend growth investing is just but one strategy an investor can use, and common stocks are just but one asset class. Although I'm primarily invested in stocks, I do plan to diversify my wealth when interest rates make it prudent to do so. I highly recommend diversifying your individual stock holdings (I'm currently invested in 32 individual companies) and taking that further I strongly recommend diversifying beyond stocks into other asset classes as you feel comfortable. Real estate, bonds, commodities/precious metals and cash (CD's, money market accounts) are the most common asset classes used. I plan to have a portion of my net worth in real estate (either physical ownership or more likely REIT ownership) and bonds by the time I'm financially independent and actually living off the passive income my investments provide.

So, on to some of the wonderful reasons I love dividend growth investing:

1. Stock market volatility mainly provides opportunity, rather than wealth destruction.

For investors that buy an asset with the hopes that they can sell it later for a higher price, market volatility can affect one's emotions quite heavily. This is one of many reasons I don't invest in gold. Buying an asset and then hoping that you're buying it cheap enough that you can sell it later for an amount high enough to factor in transaction costs, taxes, inflation and still come away with a risk-adjusted return that is acceptable is just plain risky and factors in too many unknowns. It also heavily factors in an external market and all the market participants therein, along with all of their emotions. These emotions are what causes wealth destruction. If you buy a stock for $35 because you want to sell it down the road for $40 or more and the stock starts trending down to $30 it's easy to panic, because the rift between what you want to sell it for and what it's currently selling for enlarges. Panic occurs and often an investor looks to get out while they still can. Lack of control over one's emotions is one reason why most investors are probably better off investing in index funds.

Rather, I mostly isolate myself from the stock market's often irrational sways ups and downs by investing in dividend growth stocks. Often, the market's sways are only used for opportunity as I look to buy shares in high quality companies at a value relative to their intrinsic value. If I value a stock by qualitative and quantitative analysis to be worth $50, then I simply look for opportunities when the market is pricing these shares under that price, and the further below that number the better. The lower price means I'm factoring in a margin of safety from errors in my analysis, future fundamental issues with the company I'm investing in and also means that I'm effectively buying more yield for my money as cheaper share prices means I can buy more shares with the same amount of money, and more shares means more dividends.

How did this relative isolation occur? It's because I focus on the growing dividends my equity ownership stakes pay me. The underlying share prices mean little to me other than to offer me an opportunity to average down on my purchases. I don't plan to sell any of my shares to fund my early retirement, so the share prices actually mean very little to me. As long as the companies I'm invested in do not cut dividends or radically alter their business model or fundamentals I'm happy to continue collecting dividends, which I currently reinvest selectively but will later use to pay all my expenses. This means I have little worry over the broad market's emotional reactions to quarterly results, irrationality over major global events that have little to do with the companies I'm invested in and such.

2. It forces me to focus on high quality, proven companies.

Realistically, it's very difficult for a company to pay out dividends for decades on end, all while raising them on an annual basis along the way. There's a lot to go wrong. There are natural disasters, economic cycles, changes in consumer tastes or habits, government regulation, taxes, product recalls, competition, patent expirations and costly infrastructure maintenance among many other things that can hamper a company's ability to pay out, let alone raise, a dividend for 10, 20 or 50 years. Only the best companies with consistently great management, fantastic products, prudent use of capital and leverage and a focus on shareholder return manage lengthy dividend streaks. These are typically very, very high quality companies that stay high quality for very long periods of time. The Coca-Cola Company (KO) has been paying dividends since 1893! That time frame includes two world wars, The Great Depression, Black Monday, Black Tuesday, the end of the gold standard and multiple natural disasters here and abroad. High quality companies overcome setbacks and continue to create value for shareholders over the long-term. High quality companies that continue to pay out, and raise, dividends over very long periods of time have to make prudent use of cash as it's actual cash that's leaving the company and going into the pockets of shareholders. Dividends effectively makes sure that management is doing the right thing, and the cash you receive is "proof in the pudding", because that cash didn't get there from some accounting trick.

Or...I could instead just invest in whatever stock is "hot" at the moment and ignore high quality, proven companies. I could invest in Netflix, Inc. (NFLX) or Facebook Inc. (FB) and hope that they are able to survive major economic changes while increasing the price of my shares, since I have no dividends being paid to me. They don't really have any lengthy history to speak of, but they're hot. So, that must count for something. And, they're relatively cheap. FB currently has a P/E ratio of 1,742. NFLX currently trades for a P/E ratio of 563. Hmm. Why buy into a high quality company like KO, whose shares currently force an investor to pay 22 times earnings when you could just as easily pay almost 1,800 times earnings for an unproven company like FB? Oh, and the former pays you to own it, while the latter pays you zip nada.

3. Typically the dividend growth of high quality dividend growth stocks outpaces inflation, thereby increasing my purchasing power over time.

Not only do the dividends that dividend growth stocks pay out rise over time, they typically do so at a rate that outpaces inflation. According to this source, the inflation rate over the last 10 years has averaged under 4% annually, with a few individual years being far under that number. Many of the companies I'm invested in raise their dividend at a rate that outpaces that number by a large margin. For instance, just recently The Procter & Gamble Company (PG) raised the dividend by 7%, this coming after 56 prior years of dividend increases. High quality, indeed. As these dividend raises continue to increase at rates above inflation, my purchasing power only increases over time as my dividend income will be able to purchase more and more.

Compare this to bonds, for instance, that pay a fixed interest rate to the bondholder. Investing in a 10-year Treasury Note gets you a fixed 1.70% interest rate right now. That means you're likely to receive a negative total return over that 10 years if you were to hold to maturity, because 1.70% is near or under inflation as it stands, and that's before factoring in taxes. Also, that 10-year Note will return your capital back to you as it began, meanwhile the equity issues of high quality companies will likely advance over time as the underlying business becomes more and more valuable. Compare that 10-year Note to the 2.95% yield PG shares currently offer, along with the growth of that yield and the growth of the underlying share prices over the long-term and the choice is obvious.

4. Dividend income is truly passive.

One great thing about dividends is that they are completely passive. People throw around the term passive quite a bit, all the while not actually using it in the correct context. Many people dream of a passive income source that will fund their lifestyle as they see fit, without having to work a 9-5 till' 65 to pay the bills. Passive income means you earn an income with very little or no effort on your part. But, I see passive income being associated with blogging, owning your own business, vending machines and real estate. These are all valid sources for an income of varying degrees, but are they truly passive?

Blogging is definitely not passive, as I typically spend well over 10 hours per week running Dividend Mantra writing new articles and administering the site. Owning your own business is likely not passive at all, as most small businesses require the owner to spend great deals of time to run them, even while 3/4 of start-ups fail. Real estate is very commonly used as a source for passive income, and could come pretty close to completely passive if you use a management company to run your rental properties. However, management companies take a slice of your profits, and still will likely contact you about major decisions like replacing appliances or evictions and the like. Coca-Cola (KO) will never contact me as a shareholder because an assembly line had a minor issue or because one of their thousands of employees had some kind of personal issue. They'll just continue to do business as normal and send me my dividends like clockwork. Dividend income is truly passive, and even better it's an income that is completely location independent. You could even retire abroad, or travel indefinitely if your dividend income was sufficient enough. Dividends are also passive in the sense that they remove you from having to sell shares to receive the income. No action on your part is necessary to receive the money once you're invested in a company that pays out cash dividends.

5. Dividends are reliable and regular, just like bills.

One of the great things about dividends is that you have a pretty good idea of how much you're going to receive, and when you're going to get it. For example, Johnson & Johnson (JNJ) has been paying dividends in March, June, September and December (usually around the 13th of each month) for as long as I can go back. And you know that JNJ is going to send out their $0.61 quarterly dividend as they usually do, only until they raise it (likely to be announced in the next week or so). The regularity of dividends, and raises, is quite attractive as we all exist in the real world where bills are due on a similarly regular schedule. If you're using your dividends to pay all your expenditures, it's quite nice that most high quality businesses pay their shareholders a portion of the profits on a regular and fairly reliable schedule. Contrast that to the earlier used example of real estate, and you can see how irregular things can become with the occasional eviction and the intermittent replacement or repair of something on the property. As a real estate investor you'll likely have a reserve fund for issues like these, but that's money that could be used to earn a return on instead of being used to cushion occasional cash flow issues.

Conclusion

These are just some of the reasons I love dividend growth investing as a viable strategy to not only build solid long-term total returns, but to actually receive a truly passive income source that can fund an early retirement. While there are drawbacks to this strategy (time spent to analyze companies for initial purchase, knowledge/interest required, exposure to a volatile stock market, no guarantee of return), there is no free lunch in life and nothing is perfect. Weighing the benefits against the drawbacks, however, I feel this is a fantastic strategy for generating passive income while investing in high quality assets.

How about you? Love dividend growth investing?

Full Disclosure: Long PM, JNJ, PEP, KO, PG

Thanks for reading.

Photo Credit: jscreatinonzs/FreeDigitalPhotos.net

Weekend Reading - April 19, 2013

2013-04-19T22:11:00.000-04:00

I'm greatly looking forward to this weekend. As I write this it's Friday evening and I'm worn out. Unfortunately, I also have to put in about 5 hours tomorrow morning at work. I've already logged 50 hours, so it's been a long week. And people actually wonder why I'm pursuing financial independence/early retirement?? Anyway, once I'm done with work at about 1 p.m. tomorrow I'm ready to live it up this weekend!

I've actually rented a room at The Helmsley Sandcastle for one night. This is a hotel right on the beach on Lido Key, FL. This hotel is located about 14 miles from our apartment. My girlfriend and I check in Saturday afternoon and check out Sunday morning. It's her birthday and so I wanted to do something different and fun. It'll just be the two of us, so we're both greatly looking forward to staying right on the beach for the night and grabbing some grub at a nice restaurant for dinner.

Have I gone crazy? What about living frugally?!

Well, this is the cheapest beach side hotel in the entire area, and I paid just over $130 for the night all-in. Plus, we can get there by bus so there is no need for a big taxi bill. We're basically doing a little 'staycation' for the weekend. It'll be fun, different and relatively inexpensive. Plus, my girlfriend has been incredibly supportive of my journey to financial independence and I think she deserves a special little treat for her birthday.

But, enough about me. I hope all my readers out there have a wonderful, safe and very enjoyable weekend!

Here are some excellent articles from fellow dividend growth investors, frugalists and personal finance bloggers from the past week.

5 Dividend Stocks Trading at Appealing Valuations
Dividend Monk put a nice list of five dividend stocks that he believes are trading at attractive valuations. Interestingly enough, I recently purchased two on the list: BBL and APD. Good stuff!

Six Dividend Paying Stocks I Purchased for my IRA
Dividend Growth Investor shared some recent moves, as he publicized some recent investments and why he decided to put some capital to work inside a tax sheltered account. I love the list, and all six are large holdings for me.

Recent Buy: Teck Resources and Barrick Gold
Dividend Ninja highlights some recent investments in commodity-based companies. I guess he and I were on the same wavelength as I recently deployed fresh capital into the aforementioned BBL and APD investments. Way to go, Ninja!

Reader Question - What stocks have paid dividends for generations?
My Own Advisor answered a reader question when he listed numerous companies that have paid dividends for many, many decades. Many of these companies have been paying dividends since the 1800's! Simply mind boggling when you really sit down and think about it. WWI, WWII, Vietnam, The Great Depression, the end of the gold standard, the fall of the Berlin Wall have all occurred during this time and yet these companies kept sending dividend checks to their investors. Wonderful!

Proctor & Gamble Dividend Stock Analysis
Passive Income Pursuit analyzed Procter & Gamble (PG) and decided it was currently overvalued. This is a very high quality company, and just recently raised its dividend for the 57th year. But as always, one shouldn't overpay even for high quality. It would probably be prudent to wait for a pullback in PG shares before buying.

How I Lost $1,400 Today and Why That's Okay
Kraig talked about being greedy when others are fearful, as he decided to deploy $5,000 worth of fresh capital into an index fund he is currently long on after the recent broad market drop this past Monday. Great long-term vision and good move. I also deployed capital on the same day in BBL after it dropped over 5%.

An Amazing New Prescription Medication
MMM had a fantastic post on an "amazing new prescription" that is guaranteed to increase your overall health and lead to an almost immediate impact on how you feel. It's called - wait for it - walking. Great stuff, as always.

Why Do People Hate Their Jobs?
Think you really love your job? Think I'm crazy for actually wanting to retire by 40 years old? Read this fantastic and humorous post by James Altucher. Funny, but unfortunately truer than one would like to believe.

Retire by 40: What's wrong with this goal?
Integrator wrote a thought-provoking post on why so many people have so much vitriol for people like me who want to retire at a young age. Is it ignorance? Jealousy? I'm not totally sure what it is, but I think there are a lot of people out there chained to their jobs, mortgages, car loans, credit card bills and the like...and so anyone like me who pursues freedom is like a leper. I'm generally supportive of all kinds of lifestyles. As long as you're not hurting anyone and you're happy I say live and let live. It's unfortunate that there aren't more people out there that are generally supportive of other ideas and lifestyles. Close-mindedness is very unattractive.

Portfolio Update Q1
The Dividend Guy reviews his portfolio for the first quarter and the performance of it thus far. Great list of stocks there. I own many of those myself and I'm generally happy with how the first quarter has gone. I wish there were more attractively valued stocks, but I haven't been afraid to deploy capital as April was one of my biggest months in a long time in regards to new purchases and capital deployment.

Full Disclosure: Long APD, BBL

Thanks for reading.

Photo Credit: Benoit Mahe

Recent Buy

2013-04-16T22:12:00.000-04:00

Enter the fire! I love days like this past Monday, when the S&P 500 fell more than 2%. Although not a noticeable pullback on its own, there were quite a few equities on my watch list, and in my own portfolio, that fell much further than this. Drops of 4-5% or more in one day tend to get my attention, and I love few things more in life than getting a piece of a high quality company when its on a fire sale. Just like I'd love to see chicken or bread 5% cheaper at the grocery store, I love to see stocks I was already likely to buy on sale. Cheaper shares means my capital goes further, because the same amount of capital can effectively buy more passive income via more shares. And cheaper shares also obviously means that you're setting yourself up for a greater total return over the long-term. Win-win!

As part of my Recent Buy series, I try to let my readers know of any equities I purchase soon after the transaction is completed. This is just one way I try to document my progress toward early retirement and financial independence.
I purchased 25 shares of BHP Billiton PLC (BBL) on 4/15/13 for $55.32 per share. I purchased these shares after a dip of over 5% on Monday. I love being greedy when others are fearful.

This purchase adds $57.00 to my annual dividend income total based on the current $1.14 semi-annual dividend. BBL currently pays semi-annual dividends like many European companies, with the interim dividend being paid in March and the final dividend being paid in September. The great thing is that BBL declares and pays the dividend in dollars. Also, because of a tax treaty with the U.K. there are no foreign taxes withheld on the dividends. BBL also usually raises the dividend with the final dividend payout, so the effective yield of 4.12% I received on my purchase is set to rise later this year!

BHP Billiton is the world's largest publicly traded miner and diversified natural resources company. They are engaged in minerals and oil/gas exploration development and production. They are among the world's top producers of commodities like aluminum, copper, energy coal, metallurgical coal, manganese, iron ore, nickel, silver and titanium materials. They also have significant investments in oil and gas.

I'm not naturally a huge fan of investing in commodities directly, other than oil. I've made my case for why I'm not a huge fan of owning gold, and commodities as a whole tend to be very cyclical. Overall, I prefer secular stocks where the underlying company sells products or services that people want or need on an everyday basis. Commodities, while certainly in great demand most of the time due to increasing scarcity among many basic materials, tend to fluctuate greatly in value based on where the overall economic business cycle is at. And right now, BHP Billiton has concerns over slowing Chinese demand for many basic materials, most notably iron ore. BHP scrapped a $80 billion 5-year expansion plan last year due to management's view of a cooling global economy and commodities market.

However, I was drawn to this investment for a number of reasons. First, the company is the largest of its kind and its scale is a great advantage when you're talking about mining vast stretches of land across many countries. They operate in over 100 different locations worldwide. They are also diversified across many different commodities, although iron ore does account for about 37% of profits. Also, as a dividend growth investor I like to see a history of fairly substantial dividend growth. BBL sports a 10-year dividend growth record with a dividend growth rate over the last 5 years of 19%. The entry yield of 4.12% is also very attractive in this low interest rate environment. The balance sheet is also attractive, with a debt/equity ratio of 0.4. They have a S&P credit rating of A+. Also, the aforementioned cancellation of a large 5-year $80 billion expansion shows management is prudent and careful about capital allocation. I'd rather not see management engage on a massive spending spree for expansion if prices on the materials it mines for are falling.

Revenue is up from $39.4 billion in 2007 to $73.1 billion in 2012. That's a CAGR of 13.16% over that 5 year period. EPS is up from $4.58 in 2007 to 5.77 in 2012. That's a CAGR of 4.73% over that same period. The dividend payout ratio currently stands at 39%, which leaves plenty of room for growth in the future.

BBL prides itself on operating large, long-life, low-cost, expendable, upstream assets diversified by commodity, geography, and market.

While I wouldn't want a large portion of my net worth in this company, I feel confident owning a small piece of the world's largest natural resources company as part of my diversified portfolio of high quality dividend growth stocks. While the global economy has been shaky over the last few years, I can't imagine scarce resources not becoming more valuable over time as they continue to become more and more rare and as the global population continues to rise and countries needing more basic materials to build, expand or consume energy.

It should be noted that BHP Billiton is a dual-listed entity with ADR shares trading on the NYSE under the BBL ticker and the BHP ticker. The BBL shares are the British shares (with no tax withholding to U.S. investors) and the BHP shares are Australian listed (which are taxed by the Australian government). Due diligence, as always, is required here.

I used a Dividend Discount Model to value BBL shares. I used a 10% discount rate and a 7% long-term growth rate which gives me a Fair Value on shares of $81.00. I typically use a 10% discount rate, but an argument could be made to use a higher rate to account for the greater beta (volatility) and the exposure to the commodity market. Of course, I also used a very conservative dividend growth rate (well below their average to date). The P/E ratio on my purchase price is 9.5, which is obviously attractive. Overall, I feel BBL shares are undervalued right now, which is a rarity in this market. I think a sufficient margin of safety exists with these shares, even factoring in the cyclic nature of the business.

I now have 32 positions in my portfolio, as this was an investment into a new position. This is my second holding now in the Basic Materials sector, with my purchase of shares in Air Products & Chemicals, Inc. (APD) earlier this month.

Some current analyst opinions on my recent purchase:

*Morningstar rates BBL as a 5/5 star valuation with a FV estimate of $100.
*S&P rates BBL as a 3/5 star Hold with a 12-month target price of $68.00.

I'll update my Freedom Fund in early May to reflect my recent addition.

Full Disclosure: Long APD, BBL

What are you buying?

Thanks for reading.

LBYM

2013-04-14T19:00:00.000-04:00

How big is your piggy bank?

This is now the second time I've written an article about a 4-letter acronym. (See: YOLO). But this one is really what personal finance boils down to. All the fluff and talk aside, if you can't master LBYM you'll likely never achieve financial freedom.

LBYM = Live Below Your Means.

If there was ever an acronym you need to know, and live by, this is it. Most of my success so far can be attributed to this simple, yet powerful concept.

There's a ton of financial "advice" out there in the world. You can go to seminars, buy videos on how to change your life, read all the books in the world and even follow blogs like the one you're currently reading. But, it really boils down to living below your means. Once you have realized that, it's time to master it.

LBYM has two mechanisms. Income and expenses. One should focus first on maximizing the former, and then minimizing the latter. Obvious, right? You would think so, but like losing weight it's much harder to actually put the rubber to the road and and do what's necessary to get the results you really want. If you're looking for some magic nugget of advice to become rich overnight you're going to be sorely disappointed.

Let's talk about income. What have I done to increase this? What can you do?

I talked about an opportunity I had at work to increase my income dramatically and I, of course, jumped on it. This was at the beginning of 2012. Since then, you can see in my income/expense reports that the income side of the equation has been up noticeably. This opportunity didn't just come my way out of thin air. I worked hard for it. I did my best to bring value to my position and tried to make sure my employer and management was aware of exactly how hard I was working. Are you always going to be amply rewarded for hard work? No. But you are sure to never be amply rewarded if you're just looking to skate by and do the least amount of work as much as possible. Financial freedom doesn't come to those who are looking to follow the path of least resistance. Hard work is one of my many mantras.

I also started this blog back in early 2011, after about 1 year into my journey to early retirement. I didn't do it for the money, but there has been a modest income for my time. Lately, I've typically averaged somewhere around $150/month in income from this blog. Modest, right? Sure. But that's about $51,000 less I have to save up at a 3.5% yield ($1,800/.035). That's just the start, however. What this blog also offers, besides a modest income, is a public platform to keep me honest and on track. Any decisions or actions I'd be embarrassed to post about should probably be avoided. Also, this is a wonderful outlet/hobby for me. This blog can continue well after retirement, offering me a venture that keeps me busy, relevant and able to continue inspiring others. But most of all I look forward to using this forum to inspire others to achieve their dreams, and that's exactly why I'm writing this article today.

Let's also not forget about dividend income. This is a real, passive income stream I've built from $0 all the way into March's recent dividends of $413.72. That's progress, folks. Those are dollars that I'm currently reinvesting back into attractive equity positions, but one day I'll use that income to fund my day-to-day expenses. Dividend income is wonderful. While the high quality companies I'm invested in continue to sell products or services that people want/need on an everyday basis, I'll continue to receive my dividend checks. Those checks will be deposited into my brokerage account no matter where in the world I'm at. That's just one wonderful side-effect of living below your means: financial independence technically means you're also geographically independent. The world could be your oyster.

What can you do to increase your income? Are there opportunities you're not taking advantage of?

Those are some of the changes I've made, and it's possible for you to make changes to your income as well. What are you passionate about? Who are you? Is there a way to capitalize on that? Monetize it? What are the opportunities for advancement at your place of work? Come in early and stay late. Make sure that you're a valuable asset and when the opportunity is there, turn that value into real money that you can use to buy time. Once you're making more money, avoid lifestyle inflation. Use that excess money to accumulate appreciable assets, specifically ones that throw off passive income which can be used to reinvest in the interim until you're financially independent. That passive income will eventually pay your living expenses.

More income is wonderful, but you have a lot more control over your expenses. Live frugally, and learn how to value time more than money.

I talk a lot about frugal living on this blog. That's because I believe you have a lot more control over your expenses than you do your income. Sure, many people might say income is limitless and expenses can only be cut so much. That's partially true. I can't force my manager to give me a raise, but I can certainly control my expenses to the point where even on a modest middle class salary I can save more than half my net income.

I've used that control to my advantage. I decided to sell my car in mid-2011 because it was destroying my budget. I moved to a smaller apartment that was closer to the bus line and significantly cheaper. I then started using the bus on a daily basis and use my 16 year-old scooter to get around otherwise. I try to spend less than $1,300 per month on everything. That includes about $190 per month in student loan debt repayments. That means my living expenses are about $1,100 per month. That puts me right about the poverty level, according to the United States Department of Health and Human Services. I certainly don't feel like I'm in poverty. I live in a modest two bedroom apartment in a beautiful city that I share with my girlfriend and her child, I eat at least three times per day (tonight's dinner will be chicken chow mein), I have running hot water, electricity and air conditioning. I have a gym membership and work out three times per week most weeks (I've been bad about this lately). We go out to eat usually at least once per month, sometimes twice. I have access to a world-class hospital in my city. I have the #1 beach in the U.S. (Siesta Key beach) less than 10 miles from my apartment. It's currently 85 degrees and sunny outside. In my life, I have a wonderful network of supportive friends and family. That's poverty?

What are your monthly expenses? Can any fat be trimmed?

I think it's important to keep perspective. Modern-day Americans live better than royalty of yesteryear. It was just 20 years ago that the internet was in its infancy and relatively unknown. Cars are an anomaly of just the past century. Homes here in the U.S. have doubled since the 1950's. There is so much abundance. How much abundance do you have? How much do you really need? What do you want out of life? I recently watched the documentary "Happy" on Netflix streaming, and what it showed is that most people derive much of their happiness from experiences and a close network of family and friends. It doesn't take a lot of money to spend time with family and friends, but it does take a lot of money to keep up with a much bigger home than you really need. And the money that is required to keep up with that home is earned when you're spending vast portions of your time at work, rather than pursuing the relationships that actually mean something. Do you own that home, or does it own you?

What has LBYM meant to me? What does it mean to you?

LBYM, and the concept of it, has completely changed my life. I currently have a year-to-date savings rate of 60%. That means I save well over half of my net income. I've used my robust savings rate to my advantage as I've built my portfolio into a six-figure dividend income generating machine in just three years.

What can LBYM do for you? Well it won't get you rich quick. That's for sure. But, it can bring your financial dreams closer to reality every single day. It can allow you to pay off debt, buy income-generating assets, and slowly increase your net worth. Don't believe me? Think there's a secret I'm not telling you? Check out "The Millionaire Next Door", a book that focuses on how millionaires got to where they are. Guess how the majority built their wealth? You guessed it: they lived below their means by avoiding luxurious lifestyles and debt. They then used their savings to purchase assets and focused on building their net worth.

An excerpt from that book:

"In The Millionaire Next Door, Dr. Stanley shattered the contemporary held beliefs about America's rich - and how they got that way. It is seldom inheritance or advanced degrees or even intelligence that builds fortunes in this country. Wealth in America is more often the result of hard work, diligent savings, and living below your means. The Millionaire Next Door reveals the common denominators that show up again and again among those who have accumulated wealth."

Chasing dreams and freedom.

Live below your means and the you of 10 years from now will be thankful you did. Bring your dreams into reality. Maximize income, minimize unnecessary expenses and use the difference to purchase appreciable, income-producing assets. Financial freedom awaits you.

What about you? Do you live below your means?

Thanks for reading.

Photo Credit: bplanet/FreeDigitalPhotos.net

Recent Buy

2013-04-12T22:36:00.000-04:00

It takes a lot of conviction and belief in an overarching goal to invest fresh capital in the face of a stock market that is breaking new records seemingly daily. But, I have the kind of conviction necessary to do this. I'm simply trying to buy time via passive income that will exceed my expenses and therefore free me from the need to work a full-time job to sustain myself. And passive income doesn't get built by wishing for a market correction. Instead it's built through the power of perseverance and focusing on what you can control.

As I talked about when I published my last stock purchase, there is little value to really be had. And you could even argue that I would be better served by sitting on my capital rather than deploying it on a regular basis as I do now. But, again, a large, and rising, dividend income producing portfolio of high quality companies doesn't get built out of thin air. It requires rolling up your sleeves, and digging deep for high quality at an attractive long-term price. However, this does not mean buying any stock at any price, or even buying a piece of a high quality company at a high price. It rather means to focus on valuation over the long-term, and ignore the market noise. If you focus on high quality companies, buy at a fair price, or even better with a margin of safety, you'll likely do well regardless of the broader market's valuation.

As part of my Recent Buy series, I try to let my readers know of any equities I purchase soon after the transaction is completed. This is just one way I try to document my progress toward early retirement and financial independence.

I purchased 50 shares of Wells Fargo & Company (WFC) on 4/11/13 for $37.71 per share.

This purchase adds $60.00 to my annual dividend income, based on the current quarterly payout of $0.30 per share. This purchase comes with an entry yield of 3.18%.

I initiated a position with Wells Fargo back in February and have been wanting to add to it ever since. I'm not going to go far in depth with the reasons why I like this bank, as I laid out my case in that last post. I think WFC is a high quality bank, as it focuses on old school banking operations like lending, mortgage origination, deposits, customer service and less on the capital markets. Good stuff.

WFC reported a 22% increase in first-quarter profit, but there are concerns about the mortgage origination side of the business as many Americans have already taken advantage of the low rates and refinanced their higher interest mortgages. Even as much as mortgages dominate the WFC business structure, the bank is more than that as lending and deposits have both been strong. Their wealth management division also recorded a 14% rise in profit. I believe this bank will do well over the long-term, although they may have some difficulties in the near future depending on the direction of interest rates.

When I initiated a position with WFC, I calculated a Fair Value on the shares of $54.00. That was before the recent 20% dividend raise! Needless to say, I'm very happy to increase my ownership stake with this bank. I recently opined about the great opportunity regarding this bank in an interview that was conducted by Matt Alden over at Dividend Monk. Well folks, I like to put my money where my mouth is.

The dividend is well covered with a 35% payout ratio. Although revenues were down due to softness in mortgage origination, I still believe that this bank will continue to perform well over the long haul. And the long haul is what I focus on.

I currently have 31 positions in my portfolio, as this was an addition to an existing position.

Some current analyst opinions on my recent purchase:

*Morningstar rates WFC as a 4/5 star valuation with a FV estimate of $43.00
*S&P rates WFC as a 3/5 star Hold with a FV calculation of $38.00

I'll update my Freedom Fund in early May to reflect my recent addition.

Full Disclosure: Long WFC

What are you buying?

Thanks for reading.

Dividend Mantra On The Today Show!

2013-04-10T20:44:00.000-04:00

Well, the secret is already out.

I was featured as part of a story on retiring before 40 years old this morning on Today.

If you haven't already seen the feature, please check it out below:

My story on Today!

Pretty awesome! I'm so excited that the fact that it's quite possible for a middle class earner here in the U.S. to become financially independent/retire at a young age is actually getting attention in the mainstream media. And I'm very grateful that I have the opportunity to spread that wonderful message.

I simply live a normal life, but on a much smaller scale than most in my income bracket. I value time above all else, and so instead of spending my money frivolously and without thought, I actively monitor my expenses so that I can leverage the savings into high quality investments and further leverage the effects of compounding over the long-term. This will, in effect, allow me to buy time one day as I'll no longer have to trade my valuable and dwindling time away to someone else in order to pay my bills. My time will be my own, and what more could you want to own than your time?

Hopefully you enjoyed the feature.

Thanks Today for allowing me to take part in such a wonderful opportunity to spread inspiration to millions of people!

Please continue to follow my journey as we mutually inspire each other to our individual aspirations!

Thanks for reading.

Photo Credit: Today Show

Why I Vastly Prefer Dividend Growth Investing To Index Investing

2013-04-09T21:15:00.002-04:00

I haven't expressly written before about the differences between dividend growth investing and index investing, and why I prefer the former over the latter. But, always better late rather than never and so I find myself compelled to put my thoughts to paper.

Before I delve too deep into this, it should be noted that I find index investing to be a fantastic strategy for a great many people out there, and probably the vast majority of investors would do better to invest in a small group of high quality, low expense index funds and be done with it. It's extremely easy to manage, very passive and usually a yearly or semi-annual portfolio rebalance is all you need to keep a proper asset allocation to stocks, bonds, real estate, etc.

Okay, with that aside let's get into it.

First, let's define exactly what an "index fund" actually is. Per investopedia an index fund is defined as:

A type of mutual fund with a portfolio constructed to match or track the components of a market index, such as the Standard & Poor's 500 Index (S&P 500). An index mutual fund is said to provide broad market exposure, low operating expenses and low portfolio turnover.

There are thousands of index funds available for an inclined investor to research, and invest in. For simple comparisons today, I'm going to use VIG, which is Vanguard Dividend Appreciation, since it's fairly close to an apples-to-apples comparison to dividend growth investing. This fund typically focuses on businesses with at least a 10-year track record of dividend growth.

Okay, let's talk about fees.

I pay $7.00 per transaction with my broker, Scottrade. I typically have about two transactions per month on average. That's $14 per month, for a total of $168.00 per year. We could safely round this up to $200, to make room for months when I have more than two transactions. Based on the last published value of my Freedom Fund, that works out to about .19% of my total assets on a yearly basis.

Index fees are famously heralded for their low fees, and rightly so. Many active mutual funds charge a pretty hefty fee to pay their directors and fund managers for the fund management services they provide, whereas index funds typically are not as actively managed. VIG, for instance, charges an annual management fee of just .13% of total assets under control. So, this must be the better way to go, correct?

Not so fast.

My "management fee" will only decline over time as my portfolio value, and total assets under my control, rises and the transaction fees my broker charges remain fairly static. The discount brokerage market is fairly competitive, so I don't anticipate a large increase in fees any time soon.

Also, and this is a key point, once I'm done accumulating assets and buying stocks I'll no longer be paying any management fees at all! This is a discussion point about fees that I see rarely/never brought up. I plan to retire from full-time work by 40 years old and shift from investing in dividend growth stocks to living off my dividends at that time. That means I'll no longer be paying any fees at all. So, just about the time my portfolio value peaks in terms of market value (and hopefully increases over time), I'll be paying exactly $0 in management fees.

So, let's extrapolate this out in the future.

Let's say it's 2023 and I have $500,000 in dividend growth stocks. My dividend income at this point completely covers my expenses and I now consider myself financially independent. I stop buying stocks, and shift my attention to writing, spending time with family and friends, volunteering my time, reading and casually checking in on my portfolio to make sure everything is humming along. I'll be paying $0 in fees if I stick with a dividend growth investing strategy here. I'll just collect my dividends as they are deposited into my brokerage account. Can't get much better than that!

Let's pretend for a moment that instead I had $500,000 invested in VIG. I'll be paying $650 in annual fees based on the total amount of assets under control. That's $650 that doesn't go in my pocket because I want to buy into an index fund that just so happens to own many of the same companies I do. The top 5 holdings of VIG are currently: Wal-Mart Stores, Inc. (WMT), The Coca-Cola Company (KO), The Procter & Gamble Company (PG) and Chevron Corporation (CVX). Hmm, I already own all five.

Next, let's talk about yield.

Based on the amount of dividends I'm going to receive over the next 12 months (a little over $3,700) and the total value of my portfolio (currently about $105,000) I have an effective total portfolio yield of about 3.5%. This compares extremely favorably to the 2.17% 12-month yield of VIG. I don't really think this area needs further extrapolation or explanation. That 1.3% spread in yield is tremendous over time.

What about dividend growth?

Many of the companies I invest in have lengthy histories of dividend growth, often well above the rate of inflation. For instance, my most recent purchase of Air Products & Chemicals (APD) is a good example. Just recently, APD raised the dividend by 10.9%. Wells Fargo & Company (WFC) raised its dividend twice this year, most recently by 20%. Wal-Mart Stores, Inc. (WMT) raised its dividend by 18% earlier this year. I get 100% of the net effect of these raises in my portfolio, as there is no middle-man index fund to take these dividends and disperse them any differently than the company would to me as a direct shareholder.

What about VIG? The distributions of VIG have remained relatively static over the last few years. For instance, their total 2011 distributions were 11.8% larger than the 2010 distributions. That was after a 6.6% raise for 2010 distributions over 2009's total. While 2012 looked better, at about 20% larger than 2011, this was mainly due to a very large distribution in December of 2012. This was likely due to the large number of companies that decided to pay accelerated dividends in face of the looming fiscal cliff. Looking at current numbers, the distribution of $0.228 in March was not much larger than the distribution of $0.285 back in September of 2011. I'd rather take my chances as a direct shareholder.

The sale of assets!

One of the most convincing arguments, in my opinion, to invest in individual companies over index funds is the sale of assets. With the strategy I'm engaging in, I look at my portfolio as one big dividend tree. Each branch is a company, and each branch provides bountiful fruit on a monthly, quarterly or semi-annual basis. My plan is to simply pluck that dividend fruit and live off of it once the passive income exceeds my expenses. If I were to slowly sell off assets and live off the capital gains I'd be effectively cutting down my tree one branch at a time until it dies.

Most investors in index funds actually rather plan to sell off assets. The plan is to build a comfortable asset base well into the hundreds of thousands of dollars, or millions of dollars, and sell off 4% of those assets based on the 4% Safe Withdrawal Rate. That means you're selling off 4% of your wealth every year (sometimes actually increasing this fire sale with the rate of inflation) while hoping that the stock market rises in kind to keep your asset base stable or increasing. The problem with this strategy is that in years where the stock market performs very poorly (think 2008-2010) you'll not only be selling off your assets to pay basic expenses like rent, food and the electric bill, but you'll also be losing a large portion of your golden goose as the stock market erases large portions of your wealth. Of course it's important to be diversified away from just the stock market, but this point remains.

What about Voting rights?

This one is pretty simple. While most common stock infers voting rights, index investing generally does not. This can be a benefit or a drawback depending on your viewpoints. I personally believe that the right to cast my vote on certain company matters is important and one I like to reserve.

Which one offers more control?

Another easy one. As an individual dividend growth investor that focuses on high quality companies at attractive long-term prices, I can fully 100% control what companies I own, when and at what price. With an index fund, I have no say over that.

Conclusion.

While there are certain aspects of index investing that are attractive, like the completely passive nature of it, I find that for an engaged and educated investor the better path to wealth accumulation would be to focus on direct partial equity ownership in high quality companies that have a lengthy history of paying, and raising, dividends.

Again, I would stress that many people don't have the interest or time to educate themselves about finance and investing to the point where a dividend growth strategy makes sense. In these cases, index investing (even factoring in the shortcomings) would be the better investment vehicle. I personally quite enjoy reading stock analysis reports and looking at income statements, cash flow statements, balance sheets, annual reports and the like. I find investing to be a wonderful hobby that I'll take an even more active interest in once I'm free from the shackles of full-time employment.

What do you think? Are you a fan of index investing?

Full Disclosure: Long WMT, KO, CVX, APD, PG, PEP, WFC

Thanks for reading.

Info for VIG pulled from Morningstar.

Photo Credit: pat138241/FreeDigitalPhotos.net

Income/Expenses For March 2013

2013-04-07T17:05:00.000-04:00

Each month I will post my income/expenses for the previous month. I track every dollar in and out, so what you see is exactly what I earned and spent (rounded to the nearest dollar).

Income from March 2013:

$3,333 - Regular Paycheck
$413 -    Dividend Income
$201 -    Online Income/Bonus

Total Income: $3,947

Expenses from March 2013:

$486 - Rent
$189 - Student Loans
$142 - Groceries
$117 - Restaurants
$60 -   Fast Food/Pizza/Takeout
$53 -   Internet
$82 -   Public Transportation
$30 -   Pharmacy
$40 -   Mobile Phone
$2 - Fuel
$30 - Gym
$465 - Everything Else

Total Expenses: $1,696

*The Everything Else category includes expenses I don't have a regular budget for. This month was much higher than normal, due to gifts and travel. I spent $435 to fly home to Michigan during the last weekend of March to see my uncle/father for his 50th birthday. I also spent $21 on a CD as a present for him. I purchased 2 USA Today newspapers to have a couple physical newspapers for when I was featured in the Money section for my journey to early retirement/financial independence. That was $2. I also had to purchase a couple home goods, and spent $6 on that.

Overall, income was slightly below average for the second month in a row. That was a bit disappointing, as I have been really working hard at work to maximize every opportunity at work. Obviously, I believe in frugal living. However, at some point you can no longer cut expenses. So at that point, it makes sense to maximize the income side of the equation. I've been doing my best on this front and, unfortunately, it just didn't translate as well as I would have liked for the month of March. April is looking much better in this regard. Dividend income was a huge help this month, and was above average.

Expenses were above normal, but only because of the high cost of travel. Factoring out the trip, my expenses were $1,266, which is right about what I target per month. That being said, I am extremely happy I made the trip up for the weekend. It was worth every penny, and it was wonderful to see my family for the weekend. One of the big reasons I'm walking this journey to financial independence is to spend more time with my family. So, I always try to keep perspective and remember why I'm doing this. They say life is a journey, not a destination. Well, I'm trying to enjoy my journey while also striving for a supremely wonderful destination!

Food is one expense I'm monitoring. My food budget has been steadily creeping upward. That's not simply due to food inflation or anything, but rather my larger focus on eating healthier than I did just a couple years ago and simultaneously becoming less rigid on food costs overall. However, I do need to clamp down on this a bit. I view the $319 I spent on food this month as rather ridiculous. Please do keep in mind, however, that I don't pay for food for just myself. I do rather try to take my girlfriend out to dinner at least once per month, sometimes twice. I almost always pay for these trips, and so those costs are reflected here. If I were single I'd spend much less on food, but would probably spend more on rent. And I do quite enjoy when we go out to eat, as I try to enjoy the journey as I pointed out above. However, again, this is something I have to clamp down on.

I managed to save 57% of my net income this month. I'm actually quite happy with this figure, seeing as how income was lower than I would have liked, and expenses were higher than normal due to travel. I'm expecting much better results as we enter the summer. I have my girlfriend's and her son's birthdays in April and I also plan to travel back to Michigan again in July. I'm going to do my best, however, to minimize all other expenses.

My goal is to average a 60% savings rate of my net income, monthly. So far, I've hit rates of:

75.7% - January
48.3% - February
57% - March

I'm now at an average of 60.3% for the year so far. Fantastic! I've had a couple of rough months, with below average income, a large tax bill and travel. What these budgets show, however, is that by minimizing regular, recurring expenses one has room in the budget for unforeseen expenditures, or simply experiences, people or things you want in your life.

How are your budgets doing?

Thanks for reading.

Photo Credit: RambergMediaImages

Interview With Dividend Monk

2013-04-07T14:14:00.002-04:00

Recently, I was asked by Matt Alden, the man behind Dividend Monk, to take part in an interview for his investment newsletter. Of course I jumped at the opportunity! The interview focuses on my journey to financial independence before 40 years old, the methods and strategies I use, frugality as leverage and some stocks that I currently find attractive.

Matt publishes some of the most detailed and useful analyses on dividend growth stocks available anywhere. The fact that he publishes these reports free for his readers is fantastic, and they are a resource that I use often personally.

If you'd like to read the interview, please take a look below!

Interview with Dividend Monk

If you haven't already, please take this time to sign up for Matt's monthly newsletter. It's completely free, and contains special content he does not publish on his blog. He usually publishes information on his newsletter focusing on current market trends, macroeconomic news, interviews (he recently interviewed Chuck Carnevale and David Van Knapp) and specific dividend growth stock ideas.

Thanks so much for the opportunity, Matt!

Thanks for reading.

Photo Credit: Dividend Monk

Recent Buy

2013-04-05T22:23:00.000-04:00

Not a lot of value in the market currently, but I'm still doing what I do best: buying ownership stakes in the highest quality companies I possibly can. Not overpaying, even for very high quality, is extremely important, but the broader market continues to rally and leaves little opportunity to get a real steal on great individual assets. I refrain from valuing the market as a whole, and prefer to remember that the stock market is just a marketplace to buy and sell ownership positions in individual companies, and as such they are priced individually.

However, when the broader market is performing as well as it has (the S&P is up 8.91% YTD) a lot of individual companies are going to rise in valuation as well. A rising tide lifts all boats. Unfortunately, I prefer a drought. But, not all is lost. I keep me eye on the long-term and remember that the me of 10 years from now will be glad that the me of today is living below my means and spending my saved/excess capital on appreciating assets via dividend growth stocks that will likely be much higher priced in this future scenario.

As part of my Recent Buy series, I try to let my readers know of any equities I purchase soon after the transaction is completed. This is just one way I try to document my progress toward early retirement and financial independence.

I purchased 20 shares of Air Products & Chemicals, Inc. (APD) on 4/2/13 for $85.46 per share.

I'm extremely excited about this purchase. This diversifies my portfolio, as this is my first holding in the basic materials sector. But that really matters little to me. What really excites me is how high quality this company is and how successful it's been over such a long period of time.

APD is one of the world's largest suppliers of hydrogen and helium, while also having operations in semiconductor materials, refinery hydrogen, natural gas liquefaction, advanced coatings as well as adhesives. They operate in over 40 countries and generate 60% of revenues outside the U.S.

They grew EPS from $1.79 in 2003 to $4.66 in 2012. That's a CAGR of 11.22% over that period. EPS growth has been a bit weaker over the last few years due to a global economic slowdown, however. APD is an industrial atmospheric gas supplier, and if the industrial space slows down APD will suffer. I do believe that the global economy, and manufacturing, will pick up over the long haul and APD is positioned well to pick up some of the business in that growth with an investment in the world's largest hydrogen pipeline network along the U.S. Gulf Coast and key contracts in China and Latin America. While revenue has been rather stagnant over the last few years, APD remains committed to shareholder returns via dividend raises.

The entry yield on my purchase is 3.32%, which is obviously quite attractive in this low interest rate environment. The 10-year dividend growth rate for APD is 11.8% (similar to the EPS growth rate). I'll take a 3%+ entry yield backed by a 10% DGR any day of the week on a high quality business. APD has 32 years of dividend growth behind it. The most recent dividend raise was a full 10.9%, as APD shares now pay out $0.71 per share quarterly over the old rate of $0.64 per share quarterly. The dividend is also well covered, with a 57% payout ratio. The balance sheet is moderate, with a debt/equity ratio of 0.7. The one area of concern for me is the FCF, as rising capital expenditures has hurt FCF with relatively static operating cash flow. I am anticipating management clearly executing growth plans on a global scale.

This purchase adds $56.80 to my annual dividend total. Overall, I'm happy with my investment. APD is a global industrial business with a strong dividend growth story and committed to rewarding shareholders. Currently rating with a P/E of 17.3, it's not a steal. But, as I mentioned above there are few steals to be had right now. Using a DDM with a 10% discount rate and a conservative 7% long-term DGR the intrinsic value falls just over $100 per share. Obviously changing these numbers slightly gives you a much different number, but I think an argument could be made that the current price is at least fairly valued, and perhaps a small margin of safety might even exist.

This purchase adds a strong, global company in a sector I haven't been previously exposed to. I'll be a happy shareholder while continuing to monitor the FCF. I still have enough capital for at least two more purchases along a similar scale as this one, so I'll be actively monitoring for attractive long-term equity ownership opportunities.

I currently have 31 positions in my portfolio, as this was a new addition.

Some current analyst opinions on my recent purchase:

*Morningstar rates APD as a 3/5 valuation with a FV estimate of $92.00.
*S&P rates APD as a 2/5 star Sell with a FV calculation of $82.40.

I'll update my Freedom Fund in early May to reflect my recent addition.

Full Disclosure: Long APD

What are you buying?

Thanks for reading.

Dividend Income Update - March 2013

2013-04-03T21:14:00.000-04:00

Another month has passed by, and it's time for me to post an article on my favorite subject: dividend income. The reason why I love to post articles on dividend income is because it's pure numbers. It's hard to argue the success of long-term dividend growth investing when you can slowly and surely see dividend income rise over time and get closer to covering one's expenses.

This past month's dividends were one of my highest ever. Right now I have larger monthly dividend tallies during the last month of each quarter, but as I grow my portfolio this number will smooth itself out over time. I'm not real concerned about it right now, and actually wouldn't be that concerned if it never smoothed itself out. Through consistent budgeting, my expenses are relatively static from month to month, so ups and downs with dividend totals wouldn't really affect my ability to pay my monthly liabilities once I'm actually living off my dividends. I'd simply save the excess dividends from the higher months to make up for the slightly lower totals in other months. This is something to consider for other dividend growth investors out there that have similarly irregular monthly dividend totals.

I hope these monthly dividend income reports provide inspiration for any investors out there that are just starting out. It's easy to see these payments rising month after month and it shows that it's possible to one day pay for monthly expenses with dividends, which would provide an investor opportunities and freedom to pursue other interests than full-time work. Without further ado:

March 2013 Dividends Received

ConocoPhillips - $36.30
Aflac Incorporated (AFL) - $35.00
Intel Corporation (INTC) - $54.00
Phillips 66 (PSX) - $8.44
Emerson Electric Co. (EMR) - $24.60
Chevron Corporation (CVX) - $36.00
Lorillard Inc. (LO) - $33.00
Norfolk Southern Corp. (NSC) - $35.00
Johnson & Johnson (JNJ) - $61.00
Southside Bancshares, Inc. (SBSI) - $12.60
McDonald's Corporation (MCD) - $46.20
Avista Corp. (AVA) - $16.78
Harris Corporation (HRS) - $14.80

Total dividends received during the month of March: $413.72

This month is noticeably higher than the $251.35 in dividends I received in March 2012. That's a full 64.5% increase over one year. That's great progress, and I hope I can keep up similar levels of success as I go!

I was able to cover just over 24% of my expenses this past month through the power of dividends. It's really great to know that I was able to cover a quarter of my monthly expenditures by way of complete passive income. The progress of dividend growth investing is real and tangible. The market can decide to mark up or mark down the value of a company day by day, but the dividends will still roll into my brokerage account just like usual. Dividends are reliable just like my expenses, and that's one of the reasons I plan to use this strategy as my primary income generator through early retirement.

With the first quarter of 2013 behind us, I'm now three full months into one of my goals to generate $3,500 in dividends during the year. The year is 25% over and I am 22.5% on my way to completing my primary goal. So while I'm a little behind, I'm confident I'll be able to close the gap as the year progresses. I've now received a total of $786.31 in dividends for the year of 2013!

I'll update my dividend income page to reflect March's dividends.

How are your dividend tallies progressing? Everything progressing the way you had planned?

Full Disclosure: Long all aforementioned securities

Special note: PepsiCo, Inc. (PEP) is listed as paying out its dividend on 3/29/13, but the monies did not hit my brokerage account until 4/1/13. I record the dividends as I receive them.

Thanks for reading.

Photo Credit: sscreation's/FreeDigitalPhotos.net

Freedom Fund Update - April 2013

2013-04-01T18:22:00.001-04:00

Well, the time has come to update the Freedom Fund once again as we start another month. The Freedom Fund is my portfolio, and I think it's aptly named. My portfolio is my way to freedom; freedom from a traditional 40-year career to purchase goods I don't need to impress neighbors I don't care about. This journey is all about freedom and flexibility. One day the dividend income this portfolio generates will fully replace my day job's income and my time will be completely my own. What could you possibly want to own more than your time?

I feel extremely fortunate and thankful that I'm able to post these updates every single month which shows the power of monthly contributions to investments because of the high savings rate I maintain. It shows how a relatively large sum of money can be built through the power of time, patience and perseverance.

It's important to keep in mind that while updating the overall value of my portfolio is important for historical reference and for purposes of keeping track of total return, my main focus is on the rising dividend income stream the Fund provides.

The S&P 500 continues the epic bull run we've been experiencing since the lows of 2009. Will it continue? Who knows. I don't try to anticipate market moves or try to predict major macroeconomic moves. What will Washington do tomorrow? What's up with North Korea? Will the trouble in Europe reach our shores? Questions like these are ones I avoid because, frankly, nobody really knows the answers.

There are no shortage of "experts" out there that claim to have the answers, but they're all just clamoring for face time (or your money). I'm not an expert. I simply stick to what I know best: saving as much of my net income as I possibly can and then investing said savings into high quality companies that continue to produce products or sell services that people and other businesses want and/or need on a daily basis.

However, that all being said I do hope for a healthy correction in the broader market. A 10% drop in the general market would be a welcome sight by yours truly, and I wouldn't be surprised to see something along those lines in the near future as some investors decide to take some profit off the table. Although such a drop would have a negative effect on the value of my portfolio, cheaper shares would allow me to buy more for my money. More shares equals more dividends and more passive income, which brings me ever so closer to my goal of financial independence. I look forward to cheaper shares in high quality companies much in the same way I look forward to a sale at the grocery store. Except I spend much more money on the former than the latter!

Over the past month I decided to sell my entire position with UNS Energy Corp. (UNS) after a strong run-up and a 31% total return. Utilities in general have been strong performers over the last year as investors continue to flee to higher yielding securities in the face of prevailing low interest rates. I used the capital from that sale, along with fresh capital from my day job, to add to my position with Lorillard Inc. (LO) and also add to my position with Kinder Morgan Inc. (KMI).

The current market value of the Freedom Fund stands at $103,131.12. This is an increase of 5.06% over last month's published value of $98,166.64. I finally crossed the six-figure mark, which I'm extremely fortunate for and excited about. I talked about this very recently, noting my portfolio's rise from $5,000 to $100,000 in three years.

Overall, I'm very happy with the way the Fund is progressing. It's fairly diversified across plenty of high quality companies, with some of my bigger ownership positions in Chevron Corporation (CVX), Johnson & Johnson (JNJ) and PepsiCo, Inc. (PEP). Whether or not the global economy takes another dump or not, people will still continue to buy the products that the above companies produce. Hell, even as frugal as I am (something I take great pride in), I still buy Pepsi's products on a regular basis. I don't own a car, but my little 16 year-old scooter still requires gas and the bus I regularly ride also needs to stop by the gas station before the morning runs begin. If I get a headache, I'll be anxiously looking for some Tylenol.

I'm currently invested in 30 companies. This is a net reduction from last month, due to the aforementioned sale of UNS.

These updates are mainly designed to show the increase in the value of the underlying equities I'm invested in, but the main purpose of investing in dividend growth stocks is for the rising stream of dividends over time. So, with that said I don't put too much emphasis in these monthly updates on the value of my portfolio. I think it is a good idea, however, to keep track of the rising (or falling) value of one's securities and be aware of where they are in terms of the marketplace and whether or not certain stocks are attractively priced. It proves to be a useful exercise, for me at least, to update the values monthly. It gives me fresh perspective on which equities are performing well and which aren't, and from there I can make educated decisions (based on further due diligence) on which stocks I'd like to add fresh capital to (while considering portfolio weight as well).

Full Disclosure: Long KMI, LO, CVX, PEP, JNJ

How are your portfolios doing? The epic market run-up has you feeling great, or queasy?

Thanks for reading.

Photo Credit: Vichaya Kiatying-Angsulee/FreeDigitalPhotos.net