Dividend Mantra

I'm Not Buying Stocks, I'm Buying Ownership In High Quality Companies

2013-06-18T21:47:00.000-04:00

I've been investing surplus capital from carefully saving over 50% of my net income for over three years now. I've done this month in and month out, building up my Freedom Fund to a respectable six-figure portfolio that has equity ownership stakes with 35 different high quality companies that pay out dividends, and raise them on a regular basis.

Did you notice that not one time in the above paragraph did I mention the word "stocks"?

The longer I do this, the more I learn. And one thing I've learned along the way is that I've almost come to the point where I don't really like the word "stocks" any longer. I think there are certain connotations with the word, and people somehow associate stocks with gambling or day trading, like the stock market is some kind of casino.

I've never looked at the stock market like that. I don't do any kind of day trading, and I've always associated myself as a long-term investor. The stock market, to me, is a way to access a portion of the large capital markets. It's a way for me to invest my excess capital in wonderful businesses that have a habit of growing earnings by 6-10% or more annually, and likewise growing dividends in a similar manner.

Whenever I invest my hard-earned capital with a company I look at myself as a partial owner of that company, because that's exactly what I've become. I'm not just buying some paper certificate (digital certificate these days), I'm buying an actual ownership stake with the business. I look at all parts of the company. I look at the fundamentals (income statement, balance sheet, cash flow statement), the long-term earning power, the products or services they provide and whether or not I anticipate demand for the aforementioned to continue well into the future, geographical representation and growth of such, diversification, high quality brand names, economies of scale, supply chains and logistics, management and even historical acquisitions. I like to take a look at the complete business, and ask myself one important question: would I feel comfortable having my entire net worth in this one company? If the answer is no, why would I want even 5% of my net worth invested?

While I believe diversification is extremely important (I do have investments with 35 companies, after all), there's not one company I'm invested with that I wouldn't be a proud owner of if I owned 100% of the entire company. Even some of my smaller ownership positions have the same love.

Take Medtronic, Inc. (MDT) for instance. I currently own just 37 shares of this wonderful medical devices business. Would I love to own all 1.02 billion shares all to myself if I could own no other businesses? Of course! Take a look at the last four years. We just went through one of the worst economic downturns this country has ever seen, and yet MDT has seen EPS grow from $1.97 in 2008 to $3.43 in 2012. Not bad, huh? And this isn't some recent phenomenon. They have been growing dividends for over 35 years on the back of growing earnings, with a 10-year dividend growth rate of 15.5%. Medtronic also has very little debt on the balance sheet, with a debt/equity ratio right about 0.4 right now. And they have worldwide exposure, currently serving customers in over 120 countries. I'd definitely give up every other investment I have to cast my fate alone with MDT.

Now, as a private small-time investor this is only a dream, and luckily so. I don't have to own just one business. I can own pieces of as many high quality business as I feel appropriate. Currently, I'm targeting my Freedom Fund to eventually own stakes in about 45 or so high quality businesses. But that's just it. I'm not buying stock certificates here. I'm buying actual ownership stakes in these businesses. Every time Medtronic sells a pacemaker or insulin pump I earn a very (very!) small portion of the profits they earn from that sale. I earn that portion via the dividends that company, and all the other companies I have ownership stakes in, send me as a portion of the profits I'm entitled to as a part-owner. It's simply fantastic!

And that's what's so wonderful. It's not just pacemakers and insulin pumps that my Freedom Fund is invested in. Another one of my equity stakes is in McDonald's Corporation (MCD). Whenever McDonald's sells a Big Mac or a Premium McWrap I earn a wee tiny percentage of the profits from those sales. Somebody just purchased a bag of Tostito's (PEP)? Money in my pocket. You need some Crest toothpaste (PG) to brush your teeth? You see where this is going.

I have hand crafted my portfolio into a dividend-churning machine by focusing on the fact that I'm a part-owner in these companies. I don't look to make a buck by buying something cheaply and then trying to sell it to someone else down the line for more money. That's too hard. Why would I want to do a bunch of guesswork and hoping and preying that someone will pay more for something that I bought for less? Makes no sense to me. I'd much rather focus on an almost guaranteed way to build wealth over the long-term, and that's to think and act like an owner. And when you're enamored with a business at $50 per share, you're absolutely in love at $40 per share. That's why I enjoy averaging down. I don't look at it like I'm losing money. I look at cheaper share prices as an opportunity to own an even larger percentage of a great business at a cheaper price. Even better, the dividends that I'm receiving as a portion of the profits are even larger because I now own a bigger portion of the company. Who doesn't love a good sale?

My advice is to stop thinking about your investments like stocks that you can buy and sell at a whim. In this day and age, with instant ticker prices and cheap transaction costs, it's easy to get caught up in the excitement of buying and selling and thinking of your stocks like little casino chips. But this isn't really all that exciting. It's stressful. What is exciting is being an owner of a high quality business that's going to make you a lot of money over many decades, compounding your investment many times over. People hear of these stories where someone turns $180 into $7 million and wonder how they did it, when the answer is very, very simple. They invested in a great business, reinvested the dividends and let compounding work its magic. And this works, if you just stay out of the way and allow great businesses to do what they do best: make lots of money and share that money with you. And why would they share that money with you? Because you co-own the company!

How about you? Do you think of your investments as ownership stakes?

Full Disclosure: Long MTD, PEP, MCD, PG

Thanks for reading.

Photo Credit: thephotoholic/FreeDigitalPhotos.net

Why This Blog Exists

2013-06-16T17:58:00.000-04:00

This weekend, Dividend Mantra hit 1,000,000 pageviews! Simply amazing. I started this blog back in March, 2011 never anticipating any kind of readership at all. I thought I would put my information out there and hopefully a couple people would find some inspiration and I could start some kind of dialogue with like-minded investors. I'm extremely proud of what this blog has accomplished thus far, and I hope to continue reaching new people in an exponential manner as time goes on.

I've always wanted to put an article together explaining exactly why I write this blog and what I'm really looking to accomplish from it. With the 1 million pageview milestone now achieved, I can think of no better time than now.

This blog exists for two reasons:

Inspiration through action.

There's countless books/videos/products out there that promise to show you how to become wealthy or achieve financial independence. These are usually based around the premise that the author has achieved wealth or financial independence using the tools and strategies described within the product. I have never particularly cared for products like these because they are based in the past. The author gives you a rundown of what they supposedly did to get to where they're at and then you, as a reader, are supposed to extrapolate that out into your own life. What they did years ago may work now, or it may not. But mostly the problem is that they selectively pick parts of their strategy and give you the best parts of it. Who wants to buy a book if it's filled with mistakes and errors and doesn't promise anything at all? People want to be sold on something, even if it's not realistic or actionable. Glossy magazines and books promising million dollar accounts is where it's at. I'm not selling anything here, and I'm certainly not pushing anything that I don't believe in personally or act on myself. I walk the walk rather than talk the talk.

This blog is a live, organic and evolving look at one man's journey to build wealth and achieve financial independence via frugal living and investing in high quality companies that pay rising dividends. You can see everything I'm doing: what I'm earning, how much I'm spending, where the money comes from and where it goes, what I'm investing in and why, the mistakes I've made and the victories I've accomplished. There is no product here, no vague parables that leave you scratching your head and nothing based in the 80's. This blog is in the now. This blog is filled with actionable advice because it's based around real-world decisions I'm making and then sharing with you, the reader, as I go. I want to inspire others through my own action.

There's many people out there that don't believe you can achieve financial independence on a middle class salary while investing in a conservative manner. They think you have to make big money or take big risks. I don't believe this to be true. Every 50% loss you take requires a 100% gain to just break even. The journey to true wealth is a much less bumpy ride when you're investing for consistent 8-10% long-term returns than trying to swing for home-runs and get instant 10-baggers while absorbing the large losses as they come. Reaching financial independence, to me, is about planning and executing. You need to have patience, persistence and perseverance. It's about living on much less and investing the surplus into wonderful companies that share their profits with you. I put a plan together when I first started this blog detailing exactly how I was going to retire at such an early age while making a modest income. I've executed the plan to the best of my ability over the last couple years and built my portfolio from $5,000 into six-figures in the meantime. This isn't a book on how I did this, but rather a look into how I'm doing it right now, in real-time! This blog is about action, not theory.

A chronicle documenting the realistic possibilities of frugal living and investing intelligently.

I believe the power of living below your means is much greater than people give it credit for. I think I've done a decent job proving that you don't need a six-figure income to build fairly substantial wealth in a short period of time. Looking at my gross income, I've averaged about $53,000/year over the last three years. While on a worldwide scale this puts me near the top echelon, this is the median income for a 25+ year-old male with a bachelor's degree here in the U.S. I'm certainly blessed to earn what I do, and I'm grateful for it.

What I'm trying to accomplish by chronicling my journey is to inspire others through proof of concept. You can read about someone's journey after they already accomplished it and they can tell you until you're blue in the face about how they did what they did. But if you don't believe it's possible, you'll never be inspired. I'm trying to inspire through proof. This blog is proof that it's not necessary to earn six-figures, because I don't. I earn a rather achievable income for many readers, so it's not like anything I'm doing is unrealistic or "out of reach".

While I believe living below your means and your savings rate trumps your ability to earn an outsized return in the stock market, investing as intelligently as I possibly can is a cornerstone of this blog and the strategy I'm using (dividend growth investing). Saving money is extremely important, but stuffing it all under your mattress, or in a savings account earning 0.001%, will not get you anywhere near financial independence. I'm chronicling my investments by peeling back the curtain. I publish my stock purchases and sales as well as my portfolio live for the entire world to see. I've made mistakes, and I'll continue to make them. Knowing that you can make mistakes too and still achieve all your dreams is inspiration in itself. I believe that investing in high quality companies that pay out rising dividends is a superior way to build wealth over time and I also believe that using these dividends to pay expenses in retirement, rather than selling off assets, is a wonderful way to avoid the pricing of individual securities at any given time. Who wants to build a huge nest egg of assets only to need to sell of 4-5% of them in a year when the broader market is down 10% or more? I believe that collecting dividends passively and then using them to pay expenses in retirement is much easier than trying to time the sales of underlying assets and I'll show you exactly how I do it once I am financially independent. This blog won't end when I reach FI, but rather continue on to show exactly what financial independence looks like and the possibilities therein!

Conclusion

These are the reasons why this blog exists. But this blog wouldn't exist, no matter how great the ideals behind it and no matter how much drive I had to share them, if it weren't for you readers. So please continue to follow the journey as we mutually inspire each other to reach our individual aspirations. I hope to reach 2,000,000 pageviews next, but what I'm really hoping for is to continue showing through my own actions in real-time how possible it really is to achieve your dreams. Belief must come first, and action second. I only prey that you believe in this because I'm doing my best to show how realistic all of this is. It's then up to you to take action!

Thanks for reading.

Photo Credit: Stuart Miles/FreeDigitalPhotos.net

Three High Quality Dividend Growth Stocks On My Radar

2013-06-13T21:25:00.000-04:00

"Price is what you pay. Value is what you get."

- Quote by Warren Buffett.

Words have never rang truer. Warren Buffett is one of my personal heroes, and I can think of few quotes that more embody his thesis on investing than the one I've included above.

I'm including that quote because it's easy to get caught up in the excitement of the stock market. When stocks are going up seemingly every single month and it appears impossible to pick a bad company, one needs to be even more persistent on focusing on the intrinsic value of the companies that are being investigated for a possible investment of long-term capital. Time heals all wounds, but overpaying even for a very high quality company can lead to sub-par total returns for a long period of time. I believe in paying fair value for a high quality company, but if I can get high quality for a price below fair value I'm a very happy investor.

This being said, I'm going to include a list of three stocks that could allow an investor to buy equity in high quality companies for what I feel are reasonably attractive prices relative to their intrinsic value and the broader market as a whole.

General Electric Company (GE)

GE is the first stock I ever purchased, way back in early 2010. I promptly sold it when I couldn't think of a reason why I bought it in the first place. That sale, and the research I started shortly thereafter, led to the valued oriented dividend growth investing strategy I'm currently using. I'm actually a bit anxious to bring the journey full circle and make an investment in GE the 36th company I own equity in. We'll see what happens. I currently find GE attractively valued here at just under $24 per share. I recently used a Dividend Discount Model to value shares, and using a 7% growth rate and a 10% discount rate I got a Fair Value on shares at $27 per share, which lines up nicely with what Mornigstar currently values the shares at. A current yield of 3.21% is attractive and GE has been aggressively increasing the dividend since they had to cut it back in 2009 during the depths of the Great Recession. GE has raised the dividend five times since the cut and Jeffrey Immelt, the CEO of GE, has publicly stated that shareholder returns, and the growth of the dividend, is a priority. They are reducing the size of GE Capital, the division that led to a lot of their financial problems during the recession due to overexposure of subprime mortgages and a freeze of capital markets, and using dividends (like the recent $6.5 billion dividend to parent GE) from this division to reinvest back into core assets and return value to shareholders. GE is also actively selling off non-core assets, like the recent sale of NBC Universal and its headquarters. The P/E ratio of 16.55 is very moderate and the payout ratio of 53% leaves room for future dividend growth, especially anticipating earnings growth from some of the structural changes and focus on infrastructure moving forward. GE is currently near the top of my watch list.

Exxon Mobil Corporation (XOM)

Not much to say here. Exxon Mobil is the second largest company in the world, often trading places for the #1 spot with Apple Inc. (AAPL) depending on the day and their respective stock prices. Exxon has been raising the dividend payout for 31 consecutive years, which is a fantastic feat for a company that operates in such a cyclical industry like energy exploration, production and refinement. The price of XOM shares today at just over $91 per share is pretty close to Fair Value, which I calculate at right about $90 per share. Fact is, XOM is one of the highest quality companies in the entire world and paying fair price for a company of this kind of quality is something I'm generally okay with. The entry yield at 2.76% leaves a little to be desired, but this is actually on the high side of its historical yield level. The payout ratio is currently at just over 25%, so obviously there is plenty of room for growth of the dividend. The balance sheet is flawless and XOM has a proven track record of success. The P/E ratio of 9.31 is fair for this company, however I'd be looking to buy shares if they can dip down to the $87-88 level. I'm also interested in some of the other oil supermajors like Chevron Corporation (CVX) and Royal Dutch Shell PLC (RDS.B) at current prices.

General Mills, Inc. (GIS)

General Mills is one of those boring investments that just continues to deliver returns to shareholders. A fantastic company with a superb product lineup. They operate in more than 100 countries and they have more than 100 leading U.S. brands. Brands like Cheerios, Pillsbury, Bisquick, Chex Mix, Wheaties, Trix, Haagen-Dazs, Betty Crocker and Fiber One are just a sample of some of the great brands under the General Mills roof. Shares are currently priced with a P/E ratio of 18 and offer an entry yield of 3.1%. I think GIS is attractively valued here, and one could make an argument that shares are worth up to $53. General Mills has raised the dividend for the last 10 years and has been paying out dividends for an impressive 114 years. The payout ratio stands at 55.8%, which is a tad on the high side but certainly sustainable. I was actually interested in purchasing an equity stake with General Mills at the same time the deal involving the purchase of H.J. Heinz Company (HNZ) by Berkshire Hathaway Inc. (BRK.B) and 3G Capital was announced. GIS was one of many food-related companies that spiked significantly after the deal was announced, and the shares just kind of ran away from me. This is an unfortunate side effect of being a cautious investor like myself. I don't react as fast as the market and prefer to take my time and do the due diligence necessary to really immerse myself into a company. I was looking at the most recent annual report for GIS at the same time shares were skyrocketing. I was hoping for a quick return to planet Earth, but it was not to be. A pullback in GIS shares would have me intensely interested as I love the brand names and rich dividend history this company offers.

Price is what you pay. Value is what you get. I think all three companies I have listed offer a reasonable price-to-value relationship for today's elevated market.

I have enough capital to make one more purchase and I have been intently watching shares in all three of the above companies closely over the last week or so hoping for a good entry point. We'll see what the next couple weeks offer. I've been active already this month, with the purchase of shares in Digital Realty Trust, Inc. (DLR) and the addition of an equity stake in Oneok, Inc. (OKE). For now I'll continue to sit on the sidelines with what little capital I have left and hope for a small correction to offer a small window of an opportunity to a modest value investor like myself.

How about you? Like any of the above three companies?

Full Disclosure: Long CVX, DLR, OKE

Photo Credit: digitalart/FreeDigitalPhotos.net

Recent Buy

2013-06-11T19:47:00.001-04:00

The broader market continues to show strength on the back of speculation that the Federal Reserve will continue Quantitative Easing because the economy has not shown that it is strong enough to continue a recovery by itself. Whether or not QE continues or tapers, and whatever the reason the broader market continues to be modestly overvalued really matter not to me. I don't focus on major macroeconomic trends or try to predict the future, and my success doesn't hinge on my ability to do so. My success simply hinges on my ability to find wonderful businesses and buy equity positions in these businesses at attractive prices relative to their intrinsic value. I believe that equity positions in high quality businesses is the best way to build wealth over the long haul.

As such, I decided to put more cash to work into what I believe is a high quality business trading for an attractive price on a long-term basis.

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 35 shares of Oneok, Inc. (OKE) on 6/10/13 for $43.95 per share.

Oneok is a diversified energy company. They operate in three segments, including: Oneok Partners, Distribution and Energy Services (Energy Services to be discontinued April 1, 2014, however).

This is a really interesting company. While they are one of the largest natural gas distributors in the United States, serving over 2 million customers throughout Oklahoma, Texas and Kansas and while they also have the Energy Services segment that primarily markets natural gas and related services to other natural gas distribution companies, electric-power generators and industrial customers, the primary reason I invested in OKE is for the sole General Partner and 43.4% ownership of Oneok Partners, L.P. (OKS). This is the real growth engine behind the company, and makes this company one of the premier midstream energy companies in America.

Oneok Partners, L.P. (OKS) is a Master Limited Partnership that focuses on the gathering, processing, storage and processing natural gas and natural gas liquids.

OKE's future growth will be largely dependent on the growth of OKS because they not only own 43.4% of the Limited Partner units, but also 100% of the Incentive Distribution Rights, which effectively grants OKE an increasing share of the cash flow the partnership generates. Combine a growing payout directly to OKE via the IDR (because they are the sole GP), along with growing payouts to the Limited Partners (of which OKE owns 43.4% of) and one can see how this investment can provide superior cash flow returns to an investor. Another factor that continues to tie OKE's success to OKS is the fact that OKE continues to purchase OKS common units while simultaneously buying back OKE shares. If OKS continues to grow and focus on high ROE projects, OKE will continue to see outsized returns from the partnership. OKS has announced $4.5 billion of growth projects through 2015 and OKE has targeted dividend growth of 65-70% between 2012 and 2015.

I've discussed why I'm such a fan of ownership stakes in General Partners of well-run Master Limited Partnerships before. I'm long Kinder Morgan, Inc. (KMI) and discussed some of the thesis behind that ownership stake, as well as a little on how a General Partner and Incentive Distribution Rights (IDR) works here.

OKE has experienced significant growth since purchasing the majority of the General Partner of Northern Border Partners in 2004, then later in 2006 becoming the sole General Partner and renaming it Oneok. Before that they were primarily a utility company (and still operate as one). OKE is a dividend growth stock, and has been growing the dividend for 11 years. The 10-year dividend growth rate stands at 15.1%, and it isn't slowing down. The dividend increased by 18% in 2012 over 2011's payout. The most recent dividend increase was earlier this year, in which OKE increased the quarterly payout from $0.33 per share to $0.36 per share. That's an increase of 9%, and I think there's a chance it might increase again. The payout ratio stands at 86.2% of earnings, but as stated earlier earnings are not necessarily a great way to analyze the profitability of a GP of an MLP. It's better to focus on cash flow and Limited Partner/IDR distributions.

Focusing on the value of a company is what I pride myself on, and I'm comfortable buying shares in OKE at current prices. OKE is up 2.53% YTD, while the S&P 500 is up just over 14% YTD. More importantly, it's down 14.64% since April 22 and on the day of purchase it was down 1.83%. I purchased shares in OKE at the same price they were going for in December of 2011. The P/E ratio of OKE is currently just over 26, but this can't really be compared to a typical utility because of the obvious MLP/GP structure and the growth behind that. Also, as an asset-heavy MLP there is significant depreciation which negatively affects earnings.

Using a Dividend Discount Model and a very conservative 7% long-term dividend growth rate (well below the historical average) and a 10% discount rate I get a Fair Value on shares at just over $51 per share. I believe OKE shares are currently attractively valued after the significant drop in price over the last month or so. Shares are trading for less than 10% above the 52-week low and I think a comfortable margin of safety exists at the current price.

OKE offers me an entry yield of 3.28% on my purchase price, which is obviously attractive factoring in the historical and targeted dividend growth. This purchase adds $50.40 to my annual dividend tally based on the current quarterly payout.

I currently have 35 positions in my portfolio after this purchase, as this was another new investment (I'm on a roll!).

Some current analyst opinions on my recent purchase:

*S&P rates OKE as a 3/5 star Hold with a Fair Value Calculation of $34.50.

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

Full Disclosure: Long OKE, KMI

Thanks for reading.

Income/Expenses For May 2013

2013-06-09T18:55:00.000-04:00

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 May 2013:

$5,010--Regular Paycheck
$150--Dividend Income
$637--Online Income/Bonus

Total Income: 5,798

Expenses from May 2013:

$485--Rent
$325--Health
$189--Student Loans
$129--Groceries
$103--Restaurants
$91--Fast Food/Pizza/Takeout
$75--Internet
$47--Pharmacy
$40--Mobile Phone
$32--Public Transportation
$30--Gym
$24--Fuel
$2--Movies
$500--Everything Else*

Total Expenses: $2,076

*The Everything Else category includes expenses I don't have a regular budget for. This month the main expense was $448 to account for the costs related to the purchase of my time machine. This accounts for all expenses after I included the costs of the purchase price, sales tax, title transfer fees and registration. This amount is net of the profit I received from the sale of my first two scooters. I also had to purchase a new pair of shoes for work at $26, as I actually wore the last pair down to the point where a hole was in one of the shoes. I also purchased a Mother's Day gift for my aunt ($26).

Income this month was fantastic. This is the highest I've seen all year! This is partly due to the fact that I was paid $457 from Google AdSense for earnings from the month of April (Google is always one month behind). That spike in online income was due to the some of the mainstream media coverage Dividend Mantra received, so I'm very grateful for that. This blog takes an incredible amount of time to run in the fashion I deem appropriate, so I'm very glad when I can earn a decent income from the time I spend on it.

Expenses were higher than normal, mostly due to the aforementioned costs related to the scooter I recently purchased. Otherwise, my other expenses were mostly kept in check. Fuel was a little high this month. I had to put some fuel into a rental car I received from work for a work-related function that was out of town.

Food was again high. I hope to contain this category as we head into the summer months. There always seems to be a reason it's higher than I'd like. This month I went out to eat a lot more than normal as my oldest sister visited me and I also went out to eat a couple times with Kraig from Young Cheap Living. We all had a great time, so the extra expenses were worth it.

My internet expense was higher than normal. Comcast decided to up my internet fees, so you can be assured I've already called them and had that lowered. I'm now on a $36.99/mo (plus taxes and fees) plan for the next six months, so going forward it'll be even cheaper than it was before. Plus, I'll get a credit on next month's bill. Sweet!

The health expense category was again high because I had a tooth filling this month ($195). I have three other potential issues with my teeth, but only one cavity that had to be taken care of immediately. I'll have to address the other three teeth at some point down the road. The rest of that expense category was my newly minted health care insurance.

I managed to save 64.2% of my net income this month, which is actually quite wonderful considering that this was a very expensive month for me compared to my historical average expenditure levels. I hope to get my expenses down a bit over the summer and heading into the fall. The only big expense I have looming is a plane ticket that I have to purchase to visit my family in late July for my sister's wedding reception. Other than that, I hope it's smooth sailing.

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
64.2% - May

I'm now at an average of 63.3% for the year so far. That's above my goal, and we're already through tax season and a big purchase. I'm very confident that I'm going to exceed my goal.

How are your budgets doing? Any unexpected expenses, or is everything going as planned?

Thanks for reading.

Photo Credit: RambergMediaImages

Weekend Reading - June 8, 2013

2013-06-08T15:55:00.000-04:00

Wow! How time flies by. I started this blog as a modest little spot on the world wide web just over two years ago as a way to document my journey to early retirement/financial independence on a middle class income. It's grown far beyond my wildest dreams and the greatest benefit of running the blog has been the relationships I've developed with fellow bloggers and you readers. Without this blog I would have never met Kraig over at Young Cheap Living and I wouldn't have such a wonderful resource here in Dividend Mantra with which to learn from so many fantastic investors. I'm here to learn as much as I am to share, so thank you all for supporting my journey and sharing your ideas and success. It makes us all better investors and people.

I'm now nearing 1 million pageviews. Quite amazing. I never would have thought that this site would be what it is today. Obviously being featured in national media like The Today Show certain helped, but in the end it's you regular readers that make this blog what it really is.

I hope you all are having a wonderful weekend! I'm taking my girlfriend and her son out to Chili's tonight for a little 2 eat for $20 for us and an entree for him. We'll go out and have a little fun while eating on the cheap. We may even squeeze in a margarita or two!

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

Coca Cola: Fairly Valued in Low $40's for 2013
Dividend Monk analyzed The Coca-Cola Company (KO) and as I had predicted he determined that it's trading for a fair value at the current price in the $41 range. This is one of the highest quality companies in the world and many times it's worth paying up for quality. I'd much rather pay fair value, or even slightly above, for a high quality company than pay a cheap price for a low quality company.

PepsiCo (PEP) - A great dividend stock for long-term investors
Dividend Growth Investor analyzed the "other" beverage giant in PepsiCo, Inc. (PEP) and concluded that it's fully valued. Again, a very high quality company trading for pretty close to its intrinsic value. I'd much rather pay 20 times earnings for KO or PEP than pay 6x earnings for a company that has unsure prospects going forward. I'm a long-term investor and I want to know that my investment is going to be solvent (and worth much, much more) 10 years from now than having to stay up all night wondering what's going to happen. I sleep very well at night with my Freedom Fund constructed in a manner to allow such.

The Glory Of Investing In Utility Stocks
Tim discussed why utility stocks are so attractive for income investors. It's not like people are all of the sudden going to no longer need electricity or water tomorrow, and the stable business model allows these companies to pay out dividends to investors for many decades on end. While he doesn't view many utilities as attractive investments right now due to valuation concerns (a concern and view I share), he thinks that at the right price a few utility holdings are a fantastic way to boost the income and stability of a quality dividend growth portfolio.

Get Rich With: "the ChaCHING!" Instinct
Mr. Money Mustache discussed the benefits of delayed gratification and how this concept can build wealth over the long haul. Delayed gratification is at the heart of what I'm really doing here. I'm delaying the purchase of goods now so that I can have even more purchasing power later. Of course, I'm going to be using that purchasing power to buy the most expensive commodity of all: time!

Monthly Review: May 2013
Dividend Growth Machine reviews how the month of May went for him, and it looks like it went very, very well. He received a hefty tally of dividends and saved almost 40% of his net income (even while putting a deposit down on a new apartment). Fantastic stuff.

May 2013 Dividend Income Update
Exponential Dividends published the dividends he received during the month of May. He's only 23 years old and already has a fantastic portfolio of high quality dividends. He's starting way earlier than I did, and it's likely he'll be far ahead of where I'm at when he's my age. People always say "I only wish I would have started earlier" when talking about investing. Well, he actually is starting earlier.

Twice as Much Money Won't Make Us Twice as Happy
Go Curry Cracker wrote about diminishing marginal utility and how it applies to money and your life. He also showed how lucky we all are to live in an age where in most countries electricity is common, running hot water can typically be had relatively easily , air conditioning is common and the internet age is here. Compare these modern amenities that many Americans consider a base standard of living to the amenities of the kings, presidents and pharaohs of yesteryear. They lived at the height of the standard of living of their time and yet they lived like paupers compared to how most of us live today. Try not to lose that perspective! We live in an age of abundance. It's a modern first world luxury to actually have money left over at the end of the month to invest.

Own These World's Leading Brands And Never Fear A Recession Again
Chuck Carnevale, one of my favorite authors over at Seeking Alpha, discussed why it's so important for a long-term investor to focus on high quality companies that have world leading brands. These brands insulate many of these companies from economic cycles and the inevitable downturn. Even during the recent Great Recession people still drank Coke (KO), took Tylenol (JNJ) and shopped at Wal-Mart (WMT). I enjoy owning a small part of all three of these high quality companies.

Why your house is a terrible investment
Jim Collins wrote up a fantastic post on why your house is a terrible investment. One of the most complete lists I've ever seen. It summarized my thoughts on the matter in an excellent, concise manner. While I view home ownership as wonderful for most people as a lifestyle choice (raising a family, close to schools, good neighborhood), they are typically horrible long-term investments compared to equities. Renting a cheaper place and investing the difference into high quality businesses will very likely lead to much greater returns over time, which is why I'm so bullish on equities.

Dividend Income Progress Update - May 2013
D4L updated us on his dividend income, which is some otherworldly stuff. He's on pace to earn over $23,000 in dividends over the next 12 months. By the time I'm earning dividend income like that I'll be financially independent and living life on my own terms. Really inspiring stuff!!

So Long and Thanks for All the Fish!
Finally, we have the sad news that Avrom over at Dividend Ninja is taking a break from blogging, perhaps permanently. He's looking forward to new ventures in life and I really wish Avrom the best. He provided immense support for my fledgling blog the early days and really inspired me to keep going. We all hope you find the next great thing in life, Avrom!

Full Disclosure: Long KO, PEP, JNJ, WMT

Thanks for reading.

Photo Credit: Benoit Mahe

Dividend Income Update - May 2013

2013-06-05T21:18:00.001-04:00

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.

May was another solid month for dividend income. I get pretty giddy every time I log in to my brokerage account and see fresh capital via dividend deposits. I don't know. I'm easily entertained. It was only a few years ago that every single dollar that hit my checking account came by way of me getting out of bed, showering and going in to work. Now, the idea of me living off my dividend income by 40 years old is becoming more and more realistic. How amazing!

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:

May 2013 Dividends Received

Toronto-Dominion Bank (TD) - $12.28
AT&T Inc. (T) - $22.50
Raytheon Company (RTN) - $13.75
General Dynamics Corporation (GD) - $11.20
Southside Bancshares Dividend (SBSI) - $3.23*
The Procter & Gamble Company (PG) - $30.68
Kinder Morgan Inc. (KMI) - $57.00

Total dividends received during the month of May: $150.64

*This was not a usual dividend payout, but cash in lieu due to a 21:20 stock split by SBSI. This was to represent the .15 shares that I lost in the stock dividend.

Again, another great month! This was a significant improvement upon the $97.07 I received in May, 2012. That's an increase on the order of 55.2%, which is superb. If I could increase my dividends by percentages like this every year I'd be a very happy investor.

I was only able to cover about 7.4% of my expenses this past month via passive dividend income. This is a rather low number for me, mostly due to the fact that my expenses were much, much higher than normal. I'll be discussing this in my upcoming income/expense report. I hope to start getting this number up to around 20% or so on a regular basis over the next few months.

My goal is to receive $3,500 in dividends during the year of 2013. We have now seen five months pass us by and I've been able to generate $1,170.02 in dividend income so far this year. That averages out to about $235 per month. Extrapolating that out over 12 months puts me a little short of my goal, but I anticipate exceeding my goal as some of the equity purchases over the last few months start to pay out dividends over the latter half of the year.

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

Full Disclosure: Long all aforementioned securities

Thanks for reading.

Photo Credit: sscreation's/FreeDigitalPhotos.net

Recent Buy

2013-06-03T22:08:00.000-04:00

Well guys, I'm doing the best I can in this market. I'm not seeing a ton of compelling opportunities out there, but I do see that Real Estate Investment Trusts as a group have taken quite a tumble lately. It could be due to a rotation out of higher yielding securities and into cyclical plays, or it could be that the Federal Reserve Chairman, Ben Bernanke, has hinted toward a tapering of QE if the economy continues to improve (which could cause interest rates to rise). It's not really my concern as to the "why", but rather the "how can I take advantage of this". And the best way I can think of to take advantage of this situation is to start purchasing high quality real estate investment trusts at attractive long-term prices relative to intrinsic value.

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 Digital Realty Trust, Inc. (DLR) on 6/3/13 for $59.34 per share.

DLR was not even on my radar until very recently. Some of you readers started commenting about the company and hinted that it could be a good value at current prices. So I decided to do some due diligence and find out as much about the company as I could. I liked what I saw and after seeing the stock fall almost 3% on Monday (with the Dow Jones up almost 1% for comparison), I decided to initiate a position with this REIT.

DLR has been particularly weak lately, and is down -13.48% over the last month. This is likely due to the fact that REITs have been weak in general, but also because a hedge fund manager, Jonathan Jacobson of Highfields Capital Management LP, stated it's a stock to sell short and is only worth $20 per share. I didn't view the argument as particularly compelling, but I'm glad he made it public because DLR has become a pretty attractive value after the comments were made in early May.

DLR is a Real Estate Investment Trust that owns data centers and leases them out to high quality tenants with long-term leases in place. They own 122 properties with 22.7 million rentable square feet in over 30 markets throughout the world. They have approximately 2,000 leases with over 550 tenants. While North America currently accounts for about 80% of their annualized rent, Asia is a big growth opportunity for the company and they currently own properties in Hong Kong and Singapore. They are looking to expand aggressively in China and Japan.

They work with three different sets of clients. First is Colocation & Cloud, Managed Service Providers/System Integrators (think International Business Machines (IBM)). Second is Corporate Enterprise Users (think PepsiCo, Inc. (PEP)). Finally, we have International Network & Telecom Providers (think AT&T Inc. (T)).

While no single tenant accounts for more than 9.1% of annualized rent, they aren't as diversified as some of the other REITs I've looked at. They do have some very high quality tenants to count among their biggest clients, however, like Facebook Inc (FB), AT&T Inc. (T), Verizon Communications Inc. (VZ) and Morgan Stanley (MS). The great thing about DLR is that they have consistently high same store occupancy rates (typically above 93%) due to high barriers to exit (typically tenants have considerable equipment and technology in place). They should continue to see very stable, and rising income streams going forward as their average lease term still has 6.9 years remaining. Also, as IT and cloud computing continue to grow DLR should see a continued piece of that pie. The great thing about this company is that there are high barriers to entry as new data centers require significant capital and specialized experience. These buildings also require specific cooling and electrical needs that can't be served through normal retail structures.

What really struck me about DLR when I started to look into the company was the history of spectacular growth since they went public late 2004. They have a compound FFO growth of 18.7% since that time, which is phenomenal. The dividend growth is obviously one of the first places I looked and they've growth dividends by a CAGR of 15.3% since 2005. Again, phenomenal. Especially considering the high yield you get with this security. The current entry yield on this stock is 5.27%. I don't anticipate the dividend growth to continue at such a robust rate, but I'd be happy with mid-to-high single digit FFO and dividend growth. The most recent dividend increase was 6.8%, with the new dividend payout at $0.78 quarterly per share over the old rate of $0.73 quarterly per share.

Looking at the valuation, DLR is fairly attractive here. I would ignore the P/E ratio on this one because REITs are better valued by using FFO (Funds From Operations) which represents earnings with depreciation and amortization added back in to give a more accurate picture of how profitable the enterprise is. The P/FFO is right about 12.9 right now. Using a Dividend Discount Model while using the same assumptions (10% discount rate and 5% long-term dividend growth rate) as I used with my recent purchase of another REIT (Realty Income Corp. (O)) I get a Fair Value on shares at $65.52. I think a margin of safety exists here of at least 10%, and this is one of the better opportunities in the market if you believe in the long-term story of increased data storage needs, server businesses and cloud computing (which I do).

I'm likely done buying REITs for a while now as I wanted to dip my toes into this sector and get my feet wet. I think there is some value to be found here but typically I like to concentrate on companies with significant competitive advantages via brand name products or proprietary services, significant economies of scale, lengthy history of share buybacks and dividend raises (I always prefer the latter). REITs typically have lower dividend growth and have to issue new shares to fund acquisitions and growth, so while I appreciate the high yield they offer my portfolio for current income to "supercharge" my reinvestment abilities, I plan to keep REIT exposure to 5-7% of my entire portfolio.

This purchase adds $78.00 to my annual dividend income based on the current payout.

I currently have 34 positions in my portfolio after this purchase, as DLR is a new investment.

I usually like to include analyst valuation opinions on my purchases, but neither Morningstar nor S&P Capital IQ track this stock.

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

Full Disclosure: Long DLR, O, PEP, T

What are you buying? See any compelling values out there?

Thanks for reading.

Freedom Fund Update - June 2013

2013-06-02T18:55:00.000-04:00

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 job I don't desire 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 Fund didn't have a particularly active May. I just didn't see that many opportunities over the last 30 days to deploy capital. I do of course believe in purchasing ownership positions in high quality companies through all market cycles and continued that mantra as I made a purchase on the last day of the month. I initiated a position in Realty Income Corp. (O) during the last two minutes of trading on the last day of the month of May. It wasn't pretty, but I still put a little capital to work for myself into what I believe is a high quality company trading for a fair price. This holding provides a very attractive entry yield in this rather expensive market (4.78%), and also provides monthly dividend income which I can use to reinvest back into the Fund via further ownership stakes in wonderful companies.

The current market value of the Freedom Fund stands at $112,842.62. This is an increase of 2.1% over last month's published value of $110,508.00, which is rather low due to the the simultaneous effects of a less active month (in terms of purchasing equities) and a rising fund value. The larger the value of my fund, the harder it will be to make meaningful impacts to the value in terms of percentages. This increase was mostly due to the fresh capital infusion, with which I used to make the purchase I listed above.

I'm excited for what the next month brings us. The market took a nice tumble on the last trading day of May, and some are speculating this may be the start of something larger. Who knows? I know I certainly don't. I only know to focus on the things I can control: ignoring all the noise out there and sticking to what I've been doing over the last three years.

I'm currently invested in 33 companies. This is an increase since last month as I initiated a new position 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 O

Thanks for reading.

Photo Credit: Vichaya Kiatying-Angsulee/FreeDigitalPhotos.net

Recent Buy

2013-05-31T21:37:00.000-04:00

Boy, wouldn't you know it. I go talking about sitting on cash and Mr. Market does me a favor. The Dow Jones Industrial Average fell by over 200 points today, for a 1.36% drop. Not much in itself, but there were a few companies that dipped even more than that and many of these companies have been weak even before the broader market turned south. I've been tracking a few companies that I thought would fit well in my Freedom Fund, but I had to wait for the right price. Today, I think I found a reasonable price for shares in one of these companies and so I decided to pull the trigger. I guess I get to stay true to my 'monthly stock purchase' mantra after all!

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 40 shares of Realty Income Corp. (O) on 5/31/13 for $45.53 per share.

There's a few reasons I really like this company. First, they call themselves the "monthly dividend company" because of their long track record of paying dividends monthly (going back to when they first went public in 1994, or 514 consecutive monthly payouts). Gotta love a company that takes their dividend seriously like that! Second, it offers me diversification into real estate, as Realty Income Corp is an equity REIT (Real Estate Investment Trust) that primarily invests in real estate and earns an income through the rent they charge their tenants. This is my first REIT holding. I have been hesitant to invest in the sector since it's been on a tear over the last couple years, but O has come down quite a bit lately. Over the last 5 trading days alone O is down over 10%. That kind of under-performance gets my attention.

Realty Income is a Triple Net REIT, meaning the lessee is responsible for the costs related to the care and maintenance of the building, the rent fee itself as well as any net real estate taxes on the structure. So, this puts Realty Income in a very nice position, in my opinion.

O is very diversified, not only in terms of tenants but also geographically. They have properties in 49 states, and have a total of 3,525 properties. Some of the tenants that are among the top 15 in terms of total portfolio revenue include high quality companies like Fed-Ex, Walgreen's, Family Dollar, and CVS Pharmacy.

One big reason I purchased shares in this REIT is because of the high entry yield it offers. At the current monthly dividend payout of $0.1812292, O offered me a yield on my cost of 4.78%. This entry yield is backed by 19 years of dividend growth. Although the dividend growth has not been fantastic, it has been extremely consistent over the last 19 years and they raised the dividend by over 19% earlier this year.

Taking a look at the valuation, shares in O appear fairly valued here. Using a Dividend Discount Model with a 10% discount rate and a long-term dividend growth rate of 5%, I get a Fair Value on shares at $45.68. Obviously very close to what I actually paid. Not a steal to be sure, but I think this purchase offers me further diversification in my portfolio, a fairly high yield and access to monthly dividend payouts. O is trading for a P/AFFO (Adjusted Funds From Operations) of about 19 here. Again, not a steal but the recent drop of more than 10% in shares perked my attention.

This purchase adds $87.00 to my annual dividend total based on the current payout. Overall, I'm happy with putting a little capital to work in a high quality REIT like O.

I currently have 33 positions in my portfolio now, as this was a new addition.

Some current analyst opinion on my recent purchase:

*Morningstar rates O as a 3/5 star valuation with a FV estimate of $43.00.

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

Full Disclosure: Long O

What are you buying?

Thanks for reading.

Special note: I'm in the midst of fighting a nasty case of gastroenteritis. So if there are any glaring errors with the article, please point them out. I'm not myself right now.

Dividend Growth Investing And The Joy Of Doing Nothing

2013-05-29T22:01:00.001-04:00

“You do things when the opportunities come along. I've had periods in my life when I've had a bundle of ideals come along, and I've had long dry spells. If I get an idea next week, I'll do something. If not, I won't do a damn thing.”

"Investors should remember that excitement and expenses are their enemies. And if they insist on trying to time their participation in equities, they should try to be fearful when others are greedy and greedy only when others are fearful."

"The stock market is a no-called-strike game. You don't have to swing at everything - you can wait for your pitch."

- Quotes by Warren Buffett.

What do these quotes mean, and why am I starting an article off with them? Well, I don't have a lot of real compelling stock ideas right now. I certainly have my eye on a number of high quality companies that I'd either love to own a part of, or increase my ownership stake in. But I feel that investors are being a bit greedy right now, so I'm consciously choosing to be a bit fearful. While I abstain from timing the market or valuing the entire market, I continue to believe in thoughtfully valuing individual companies through qualitative and quantitative analysis and only purchasing shares when they are trading for prices comfortably below their intrinsic value which confers a margin of safety. And right now I'm finding margins of safety on high quality companies to be few and far between.

As many of you know, I'm extremely bullish on equities over the long-term and I've invested monthly excess savings from my day job into dividend growth stocks every single month for three years save for a short period of time last summer when I took a break from blogging and investing. However, this may be one of those rare times I don't purchase stocks during the course of a month.

What I've found is that dividend growth investing is wonderful for times like this, when the stock market is valued at all-time highs and us value-oriented investors are left scratching our heads for attractive opportunities in which to put new capital to work. Dividend growth investing can actually be wonderful for inactivity.

The joy of doing nothing can be powerful indeed because the wonderful companies that I'm already invested in - companies like Johnson & Johnson (JNJ), The Coca-Cola Company (KO) and Philip Morris International Inc. (PM) - these companies are still sending me dividend payments just the same as they have for decades before. The great thing is that these dividends continue to stockpile in my brokerage account. It's like a wealth snowball being built right in front of me, except I'm not doing any of the work. I'm not rolling any snow or trying to source a carrot nose. The companies are actually increasing my liquidity so that I can take advantage of Mr. Market's eventual mood change. At that time I'll be very ready to be greedy when others are fearful.

I still have a couple days to purchase shares in a high quality company before the month ends, but if I don't I'm comforted by the knowledge that I don't have to swing at every pitch. Maybe the pitch that Mr. Market is throwing at me right now is a wide-left ball. Maybe in two weeks I'll have a fastball right down the middle that allows me to get on base. Who knows. What I do know is that I'm slightly empowered right now by inactivity, and I'm realizing the joy in actually doing nothing.

As I've said many times on this blog, a dividend growth stock portfolio that's providing solid passive income doesn't build itself, and so for over three years I've been wiring money from my checking account to my brokerage account like a giddy schoolgirl, anticipating buying stocks as soon as the wire transaction cleared. And that strategy has worked very well, allowing me to build a six-figure portfolio during that three year period.

But right now I do wonder if being fearful while others are greedy isn't a prudent move to make. As always, I believe cash to be a horrible asset that will only guarantee losses to inflation over time. However, liquidity via excess capital can be a powerful tool indeed if Mr. Market's historically bi-polar personality profile takes a sudden turn from manic to depressive.

In conclusion, I am currently finding some solace in doing nothing. I am not seeing many high quality companies that are trading at prices with any significant degree of a margin of safety to their intrinsic value, and so due to such I take great pleasure in continuing to receive my dividends from the wonderful companies I'm invested in. I know that these companies are building me a nice little balance sheet with growing cash. I may not have an elephant gun when the time is right like ol' Warren, but I'll be happy to go hunting with the pea shooter that my investments are providing me. Free bullets, anyone?

How about you? Find the joy in doing nothing, while collecting your dividends?

Thanks for reading.

Photo Credit: CNN Money

Equities: Unlimited Upside With Limited Downside

2013-05-26T01:38:00.000-04:00

I'm a huge fan of investing in stocks, as you can probably tell by my almost 100% allocation to the asset class in my Freedom Fund. More specifically, I'm very enthusiastic about investing in ownership stakes with high quality companies that have a history of rewarding shareholders by paying out a portion of profits via dividends. Furthermore, I stick to an even narrower universe of these high quality companies that not only pay these dividends, but raise them on a regular basis (at least annually). I've discussed before why I'm such a huge fan of this strategy, known as dividend growth investing. But today I'm going to reveal one of the biggest reasons I'm so enamored with investing in stocks as an asset class, and this can be broadly applied to stocks that pay dividends or do not pay dividends.

With investing in stocks, one needs to consider that the potential upside is almost unlimited while the potential downside is limited to only your original capital investment. You can invest $1,000 with "Company X" and this equity stake can only do one of three things: it can appreciate in value, it can depreciate in value or the value can stay static.

Obviously the least desirable of these three outcomes is that the value depreciates. But this is the true beauty in investing in stocks. Your stock can only depreciate to $0, but nothing more. A stock cannot go below $0. Therefore your biggest downside is losing all of your capital. If "Company X" goes bankrupt and your entire equity stake becomes worthless (actually highly unlikely in reality) you lose all the capital you initially invested. In this case you lose $1,000.

But what if the company becomes wildly successful?

Let's say you hold your equity stake in "Company X" for 30 years and the company increases in value by a factor of 10. That means your $1,000 investment becomes $10,000. That's a capital gain of $9,000. And if "Company X" pays dividends your initial investment has a gain that is even larger than this (especially if you're reinvesting the dividends). You risked $1,000 and gained $9,000 in this case. Think it doesn't work like that? Doesn't happen in real life? Think again.

Let's take a look at a real-life example.

You could have invested $1,000 in Altria Group Inc. (MO) (then known as Philip Morris) on 5/25/1983, which would have bought you 16.88 shares (closing price $59.25). That was 30 years ago. Those shares are now worth $15,023.80 on a split-adjusted basis (you now have 405.06 shares). That means you only put $1,000 on the line, but received over $14,000 for a gain of 6,390.83%. In this case the downside was 100%, but the upside turned out to be over 6,000%. (Source)

Obviously this is cherry picking a name from the past, but the point remains: your downside to investing in stocks is limited only to the capital you invested, while the upside is theoretically unlimited. Therefore, I feel the reward to investing in stocks far outweighs the potential risks. And this risk can be mitigated further by diversifying your capital into many different companies. I personally plan to have equity ownership stakes with at least 40 different companies by the time I'm done investing fresh capital and living off my dividend income.

This risk/reward relationship is one of many reasons I personally prefer stocks over every other asset class available.

For comparison sake, let's take a look at some of the other popular asset classes available:

With bonds, this upside/downside relationship does not exist in nearly the same manner. Your upside is limited by the coupon (yield) the bond gives you, as well as any potential capital appreciation that may exist by way of interest rate changes which could make your bonds more valuable if yields on new bonds fall (obviously unlikely looking forward as we are in a low interest rate environment). Bonds do not allow you to share in the growth of a company, however, so potential appreciation on your bonds is much less than stocks. The downside of bonds is a bit more limited than stocks, though, as bonds have a higher ranking in the capital structure of a business, meaning that if a business goes bankrupt bond holders are first in line to get reimbursed. However, the risk of capital depreciation is still there, and bonds are more sensitive to interest rates. Bonds have a tighter upside/downside spread in my opinion, meaning the downside and upside are both more limited than stocks. But I don't want limited upside. I want unlimited upside. Bonds, in my opinion, are much better for capital preservation, rather than capital growth.

Physical real estate certainly has the potential for significant upside, but real estate is hyper-local meaning that values on real estate are specific to a geographical region. Also, real estate is much different from a business. A business produces revenue, and therefore profits, via products or services that it sells to the public or other businesses. Real estate is simply shelter. It doesn't actually produce anything. Real estate can produce rental income for the owner, however, so income can be squeezed from this asset class. For the most part, residential real estate valuations are tied to incomes. If incomes fall, residence values fall in kind. If incomes rise, people can afford more luxurious abodes, and therefore usually bid up the prices of local real estate. Also, it's much more difficult to diversify with physical real estate as real estate holdings typically tie up a large amount of capital due to the costs of one physical holding. It's relatively easy to pay $7 to buy $1,400 worth of Chevron Corporation (CVX) stock. You can't really do this with real estate. The transaction (friction) costs are much higher, and in most cases you're not talking about fractional ownership like you are with publicly owned companies. You also have ongoing maintenance and tax costs. Because of this, I would more likely prefer to own real estate via Real Estate Investment Trusts (REITs) that behave and trade much more like stocks.

Overall, the upside/downside relationship with real estate is mixed. Your downside is not as great as stocks, because the odds of a property going to $0 in value is almost impossible. However, you could purchase a property that needs unforeseen repairs fairly quickly that can drain any available spare capital you have, and local markets could make it difficult for the asset to appreciate appreciably over the rate of inflation. Also, the odds of physical real estate appreciating at the rate of a group of wonderful companies with fantastic products/services and ones that operate with sufficiently high margins is very unlikely. This opinion is backed by the Case-Shiller Home Price Index which shows that home prices as an aggregate have barely appreciated over the rate of inflation going back over 100 years. Also, this doesn't take into account the value of your time, as physical real estate tends to be more hands-on than stock ownership. Overall, I view the downside of real estate more limited than stocks, but the upside also not nearly as attractive as what stocks have potential for. Also, the difficulties of diversification, high transaction costs, hands-on nature and need for local market knowledge are traits that make real estate as an asset class less attractive than stocks (in my opinion).

I'm not even going to discuss gold or other physical metals. I've revealed my distaste for gold before. Upside and downside are completely dependent on what the next guy down the line is willing to pay for your unproductive metal.

And cash is obviously unattractive for many reasons. It will only depreciate over time, as inflation eats away at its purchasing power. So, you're guaranteed to slowly bleed money while your upside is basically non-existent. Cash is useful, however, when there are few attractively valued opportunities out there. When markets fall, bringing assets back into valuations that are near historical norms, cash can be useful to take advantages of opportunities. Cash is only good when you're turning it into an appreciating asset at attractive valuations looking out over the long-term.

Some people may think I'm crazy to put almost all my wealth into stocks. But I don't think I'm crazy at all. I think stocks represent the best possible opportunity to build wealth in a capitalist society. Owning pieces of high quality companies and reinvesting the profits they send you via rising dividends is simply a fantastic way to build your wealth over the long haul. Picking a great group of high quality companies that pay, and increase, dividends while allowing time and compounding to work its magic will almost certainly provide you the greatest risk/reward relationship available. Your downside is limited only to original capital you've invested, while the upside is limited to the potential of the company you're investing in, the price at which Mr. Market is willing to pay for your ownership stake in said business, whether or not you were reinvesting dividends and your own emotional limitations (trying to time the market). Buying and holding quality companies for the long-term while ignoring the noise will eliminate almost every single potential drag on your investment upside.

How about you? Do you enjoy this upside/downside relationship in stocks?

Full Disclosure: Long CVX, MO

Thanks for reading.

Photo Credit: Stuart Miles/FreeDigitalPhotos.net

Edit: Corrected timeline for MO investment

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