Someone once said the the only thing you can count on, other than death and taxes, is change.
No s**t, Sherlock.
This 2017 retrospective touches on the toughest year, bar none, in my adult life. In spite, and as a result of furious effort, endless hours, at least 3 advisors and many nights of poor sleep, I am on the verge of being unemployed for the first time in 30 years.
It's not all bad, because I'm precisely where I need to be, but the compulsion to "transform in place" rather than lock the door and throw away the key on a deteriorating set of relationships cost me an incalculable amount of gray hair and general misery.
Looking forward, all is good. The key is not to fight to preserve something from the past, rather take what is there and craft something new with it. I have a great set of plans, some of which will probably fail spectacularly, but no matter; I'm in it for the fun, not the money or the fame.
Something I learned, perhaps for the first time in a very profound way, is that the place I am happy is directly at the bleeding edge of innovation. My kind of innovation doesn't require a lifetime of computer science. I am a "low tech" kind of guy, but there are endless places one can make improvements that all add up to "grease"; smoother, simpler, more efficient products and processes when one puts one's mind to work.
So, what has charged me up for the last several years as my primary wage earning work has become less and less fulfilling and the environment in which I work became a hostile place for me? Innovation. Innovation in thinking about burn prevention in far away places. Innovation in how we replace skin after a major burn. Innovation in how we take the principles of burn care to places who could never afford how we do it. Innovation in treating scars with lasers. I have come to accept that I'm a frustrated inventor, engineer in the disguise of a surgeon. Starting in January, I'll earn a salary on short term surgical assignments out in the periphery and spend most of my time developing an independent laser scar treatment program, designing widgets in my mini-maker lab and pursuing the burn prevention objective in Africa. These are all things I am passionate about, have enjoyed doing in the recent interval and have nothing to do with the pressure cooker environment of an inpatient burn center.
How are the finances going to work out? God will provide...Seriously, I believe that. I also can't sit on my duff waiting for a check. We sold and bought a house this year, reducing monthly costs 20%. We will refurbish and invite the inlaws into the ADU and reduce costs another 20%. I will fund IRAs, but no more qualified plan for the time being. I'm on a virtual scavenge hunt to purchase the tools I need in the pre-owned market to keep costs down. I will have to ratchet back my life insurance costs again. I will need to work for wages 7-10 days per month to allow me to pursue the other items in the remaining time. It will be a grand adventure!
As much as I abhore everything about our national government at this point, I imagine the tax bill that just passed will benefit me. I intend to expense everything I can through the new business, drive my taxable income down to precisely what cannot be invested in the business.
Our overall retirement savings are in good shape; we have passed the point where savings can provide us a sustainable income from dividends/distributions/interest payments only. It's a bit scary not shoveling more at it, but I don't think we'll be missing out on round-the-world cruises for the lack of more retirement savings, since we weren't planning on that anyway.
I haven't seen a thing worth changing about my portfolio lately; the last bolus of money entering the qualified plan comes sometime in early 2018. If I invest anything outside of a tax free/deferred environment, it will be purchasing tax-free muni's or something similar. I think it's more likely I will invest in the opportunity to share ground with others who need housing in a beautiful place ( my new spread).
more reflection next time...
Thursday, December 21, 2017
The higher they fly...
Who knows how and why the stock market behaves as it does?
We have a hot mess in the White House, A lunatic at the helm, but we have record low( if you massage the numbers correctly) unemployment and equity markets continue to escape gravity in spite of threats of rising interest rates, sinking dollar, federal policy chaos.
The fact is, value should follow earnings first and foremost. Clearly some equities have performance to back up their evaluaton. The market still shows signs of overvaluation with many equities at historic valuations, hardly deserved by enlightened management.
Still, I remain fully invested, adding to my own holdings more often than adding new equities.
I am collecting over 50k in dividends for the first time this calendar year. Were I to fold my small TIAA/CREF account to my IRA and then figure out the impact of my wife's retirement accountants on our potential dividedend/distribution were they rolled into such an account. I would do this rapidly, but the companies that hold her retirement funds put up considerable barriers to transferring money out of their clutches.
The portfolio won't generate enough dividend income to support us at this juncture, but the cash flow is growing considerably year by year. Circumstances at work make me want to quit yesterday, except for that uncomfortable issue about tuition, home mortgage and health care coverage.
it still seems that the best strategy is hands under the weight of ones own backside. I have augmented a few positions that are available at a bargain and will continue this as funds come in until all positions are deemed fully invested and worm castings, compost and tea are available for routine use. At that point I'll either swap a few or capitulate and use funds to round out the whole.
more to come...
Nathan Kemalyan
We have a hot mess in the White House, A lunatic at the helm, but we have record low( if you massage the numbers correctly) unemployment and equity markets continue to escape gravity in spite of threats of rising interest rates, sinking dollar, federal policy chaos.
The fact is, value should follow earnings first and foremost. Clearly some equities have performance to back up their evaluaton. The market still shows signs of overvaluation with many equities at historic valuations, hardly deserved by enlightened management.
Still, I remain fully invested, adding to my own holdings more often than adding new equities.
I am collecting over 50k in dividends for the first time this calendar year. Were I to fold my small TIAA/CREF account to my IRA and then figure out the impact of my wife's retirement accountants on our potential dividedend/distribution were they rolled into such an account. I would do this rapidly, but the companies that hold her retirement funds put up considerable barriers to transferring money out of their clutches.
The portfolio won't generate enough dividend income to support us at this juncture, but the cash flow is growing considerably year by year. Circumstances at work make me want to quit yesterday, except for that uncomfortable issue about tuition, home mortgage and health care coverage.
it still seems that the best strategy is hands under the weight of ones own backside. I have augmented a few positions that are available at a bargain and will continue this as funds come in until all positions are deemed fully invested and worm castings, compost and tea are available for routine use. At that point I'll either swap a few or capitulate and use funds to round out the whole.
more to come...
Nathan Kemalyan
Saturday, May 27, 2017
Memorial Day reflections;
What a wonderful thing!.. 3 day weekend, sun is shining, nothing on the agenda that takes me away from my beautiful acre, other than things to whip it into shape.
The holiday also afforded me the chance to think about the people in my life who have given of themselves to serve this country; My father and paternal grandfather, great uncle, maternal uncle, niece and nephew. My family has not lost a member to war in the last several generations to my knowledge, for which I am grateful to God, and my heart goes out to those who have. Making that supreme sacrifice for this big, conflicted, messy and hugely aspirational country drives me to my knees in humility for their courage. The fact that I am sitting so smugly in my recliner gazing out on the beauty of it marks what I owe them for their service.
What a winter and spring it has been, both personally and in the public square. I have been way too self-absorbed over the last 2-3 years, trying to sort out what is nothing short of a midlife (well, a little later than midlife) crisis regarding my work and the environment in which I work. I think I may finally be coming around the final turn, understanding in retrospect that this has been a period of discernment that will take me to the last big chapter in my professional life. It has been very hard-won insight and it includes mourning what I will leave behind as I step into the next chapter.
I will earn less money and a lot more joy where I am going. My biggest uncertainty is how to maintain essentials like health insurance for my family and keep expenses covered while pursuing the path of my passion for improving access to the benefits of health improvement and low-tech/hi-tech solutions for the poorest people on earth.
The status of my financial security is a subject of endless amazement and amusement. In spite of what seems like utter chaos at the highest levels of government and international relations, the market chugs along, delivering increasing earnings, lower unemployment, doggedly persistent high valuations, broadly speaking, and the rising number of pundits piling on to the prediction game for a coming bear market.
In my multinational holdings, aside from tax policy that traps money abroad, a stagnant domestic market is balanced by robust emerging market. Some valuations have corrected very significantly.
While I remain focused on cash flow from dividends and new contributions, I have been able to view all this with less anxiety than in years past. I am becoming increasingly comfortable in this mode of investment, understanding my portfolio to be a business that generates revenue, rather than a pot of gold that grows and shrinks. In fact, the overall trend is solid growth, but this is better measured in share counts and dividend cash flow than in valuation.
What have I done over the last 5 months with new contributions? I have added to a few positions in the 401k, added a few selected positions in the industrial/business support area. Not much more.
A few of my positions have appreciated to the point that they occupy twice the weight of the average position. However, I have never fully accepted the rationale behind "rebalancing". I"m more content to follow the "never sell" advice of some of the voices I listen to in my reading. I am a "rarely sell" person. I keep track of the gross cash flow month by month which informs me a basic level that the strategy is working. I don't monitor as closely as I should, i.e. looking at growth trends or early warning signals for trouble in a business. That can be my next big task, becoming more deliberate and efficient in higher level surveillance.
Here's hoping that Twittler doesn't drag us into a war...
Ciao
The holiday also afforded me the chance to think about the people in my life who have given of themselves to serve this country; My father and paternal grandfather, great uncle, maternal uncle, niece and nephew. My family has not lost a member to war in the last several generations to my knowledge, for which I am grateful to God, and my heart goes out to those who have. Making that supreme sacrifice for this big, conflicted, messy and hugely aspirational country drives me to my knees in humility for their courage. The fact that I am sitting so smugly in my recliner gazing out on the beauty of it marks what I owe them for their service.
What a winter and spring it has been, both personally and in the public square. I have been way too self-absorbed over the last 2-3 years, trying to sort out what is nothing short of a midlife (well, a little later than midlife) crisis regarding my work and the environment in which I work. I think I may finally be coming around the final turn, understanding in retrospect that this has been a period of discernment that will take me to the last big chapter in my professional life. It has been very hard-won insight and it includes mourning what I will leave behind as I step into the next chapter.
I will earn less money and a lot more joy where I am going. My biggest uncertainty is how to maintain essentials like health insurance for my family and keep expenses covered while pursuing the path of my passion for improving access to the benefits of health improvement and low-tech/hi-tech solutions for the poorest people on earth.
The status of my financial security is a subject of endless amazement and amusement. In spite of what seems like utter chaos at the highest levels of government and international relations, the market chugs along, delivering increasing earnings, lower unemployment, doggedly persistent high valuations, broadly speaking, and the rising number of pundits piling on to the prediction game for a coming bear market.
In my multinational holdings, aside from tax policy that traps money abroad, a stagnant domestic market is balanced by robust emerging market. Some valuations have corrected very significantly.
While I remain focused on cash flow from dividends and new contributions, I have been able to view all this with less anxiety than in years past. I am becoming increasingly comfortable in this mode of investment, understanding my portfolio to be a business that generates revenue, rather than a pot of gold that grows and shrinks. In fact, the overall trend is solid growth, but this is better measured in share counts and dividend cash flow than in valuation.
What have I done over the last 5 months with new contributions? I have added to a few positions in the 401k, added a few selected positions in the industrial/business support area. Not much more.
A few of my positions have appreciated to the point that they occupy twice the weight of the average position. However, I have never fully accepted the rationale behind "rebalancing". I"m more content to follow the "never sell" advice of some of the voices I listen to in my reading. I am a "rarely sell" person. I keep track of the gross cash flow month by month which informs me a basic level that the strategy is working. I don't monitor as closely as I should, i.e. looking at growth trends or early warning signals for trouble in a business. That can be my next big task, becoming more deliberate and efficient in higher level surveillance.
Here's hoping that Twittler doesn't drag us into a war...
Ciao
Sunday, January 22, 2017
I guess it's not a bad dream after all
I woke up the other morning in a cold sweat. The Chief Narcissist is about to become our president. Either America has lost it's marbles, or there are nearly 50% of the public who have no sense of outrage when their chosen leader tramples all over the concept of simple decency. Today at the Sunday service, our Rector emphasized that it is our task to be in the world acting as the body of Christ, actively promoting the values of love, charity, patience, advocacy, long-sufferage in a time when even our leaders threaten the welfare of many amongst us.
It blows my mind that the markets have responded with about 8% rise over the last 10 weeks as a result of the election. What do these people think this man is going to do? Maybe there will be some elements of tax relief, or rollback in regulations, but I doubt our currency is going to become less valuable and our exports to explode any time soon. The world is too unstable a place for people of means to bet on Russia, China or any other large economy to safeguard their personal investments.
Even if the money is in offshore banks, they are still bidding up American institutions, real-estate, American based multi-nationals. European governments are requiring private depositors to PAY to keep their money safe with negative interest rates.
In spite of all the craziness and the bitter aftermath of the election, it hasn't hurt my investment performance. I'm thrilled to see the portfolio do what it was designed to do; outperform in flat and declining markets like most of last year, and spin off increasing dividend payments that can be reinvested. I like the capital gains as well, although they blunt the effect of the DRIP on number of shares and overall dividend payments.
After the KMI debacle, there have been no gross melt-downs in the portfolio. The smallpcap weighted 401k has experienced more volatility than my IRAs that are pumped full of blue-chip dividend paying large-cap stocks. However, it finished nicely in the positive and had a much greater leap in dividend payments, even accounting for the added investment contributions. I sold Johnson Controls after several years of holding it. It was the last of the battery storage companies I bought out of personal interest, but not on the DGI plan. I have redeployed that cash to better prospects. The 401k is sitting on several sizeable unrealized capital losses, but the dividend performance remains strong, and my holding period is infinite unless something drastic happens with my portfolio, apart from some failure in a company's fortunes.
I'm going to have to liquidate some holdings, as I will be in need of bridge financing to move to a new home. I'll probably use this time to clear out some of the laggards and leave the portfolio with its strongest performers. I'll take a loan from the 401k and a short term loan from my IRA to complete the down-payment, then repay them out of the proceeds of the sale of the current home
So what did I learn in the last 4 months? Mostly how to sit on my hands. I deployed some new cash in the 401k and switched some equities into the 401k by selling in the IRA and purchasing in the 401k to allow me to redeploy assets in the 401k. I improved the quality of that portfolio in the process.
Having built out the equities in my portfolio to the degree of diversity I want, now my task is to progressively improve the quality of the holdings, finding companies with higher credit ratings, lower volatility, slanted towards defensive sectors and low- to mid-cap values if I can find them with an adequate pedigree. This results rather low trading frequencies, mostly limited to deploying new money in the 401k.
Using DRIPs halves the amount of purchasing I would otherwise be doing, as all dividends are automatically reinvested. There are no brokerage fees on those reinvested dividends, so my account maintenance fees are truly tiny. Were I invested in funds, between the fund managers and the retirement account manager, I'd be shelling out between 5-10k in management fees every year. My new contributions to the 401k result in about 4-5 purchases per year, so the total cost of investing runs roughly around $100 per year.
I have an associate who pays $6000 per year for an advisor to tell him which funds to buy in his retirement plan. He buys funds individually, so he doesn't get a large institutional class of funds. I'm guessing those funds cost him another 5-10k per year.
At this point in time, I probably spend 2-4 hours/ week reading about investing and checking in on my holdings. That makes 100-200 hours/year. I'm paying myself somewhere between $50-100/hour by self-directing an individual equity portfolio.
Since dividends tend to be more predictable than stock price, I continue to focus on building share count, understanding that the dividend per share is paid whether or not the shares are at a yearly high or yearly low. The primary effect of price is on how many additional shares I can buy at each dividend payout.
This year I'll expect to collect 3+% more shares on the positions I own, and another 3-4% in new contributions. That secures 6-7% growth in the portfolio. Additional growth will come from capital appreciation and dividend growth. I will be thrilled if the portfolio grows by 10% in value of which 7% will come from deploying dividend dollars to reinvestment. Any capital gains will be welcome.
It blows my mind that the markets have responded with about 8% rise over the last 10 weeks as a result of the election. What do these people think this man is going to do? Maybe there will be some elements of tax relief, or rollback in regulations, but I doubt our currency is going to become less valuable and our exports to explode any time soon. The world is too unstable a place for people of means to bet on Russia, China or any other large economy to safeguard their personal investments.
Even if the money is in offshore banks, they are still bidding up American institutions, real-estate, American based multi-nationals. European governments are requiring private depositors to PAY to keep their money safe with negative interest rates.
In spite of all the craziness and the bitter aftermath of the election, it hasn't hurt my investment performance. I'm thrilled to see the portfolio do what it was designed to do; outperform in flat and declining markets like most of last year, and spin off increasing dividend payments that can be reinvested. I like the capital gains as well, although they blunt the effect of the DRIP on number of shares and overall dividend payments.
After the KMI debacle, there have been no gross melt-downs in the portfolio. The smallpcap weighted 401k has experienced more volatility than my IRAs that are pumped full of blue-chip dividend paying large-cap stocks. However, it finished nicely in the positive and had a much greater leap in dividend payments, even accounting for the added investment contributions. I sold Johnson Controls after several years of holding it. It was the last of the battery storage companies I bought out of personal interest, but not on the DGI plan. I have redeployed that cash to better prospects. The 401k is sitting on several sizeable unrealized capital losses, but the dividend performance remains strong, and my holding period is infinite unless something drastic happens with my portfolio, apart from some failure in a company's fortunes.
I'm going to have to liquidate some holdings, as I will be in need of bridge financing to move to a new home. I'll probably use this time to clear out some of the laggards and leave the portfolio with its strongest performers. I'll take a loan from the 401k and a short term loan from my IRA to complete the down-payment, then repay them out of the proceeds of the sale of the current home
So what did I learn in the last 4 months? Mostly how to sit on my hands. I deployed some new cash in the 401k and switched some equities into the 401k by selling in the IRA and purchasing in the 401k to allow me to redeploy assets in the 401k. I improved the quality of that portfolio in the process.
Having built out the equities in my portfolio to the degree of diversity I want, now my task is to progressively improve the quality of the holdings, finding companies with higher credit ratings, lower volatility, slanted towards defensive sectors and low- to mid-cap values if I can find them with an adequate pedigree. This results rather low trading frequencies, mostly limited to deploying new money in the 401k.
Using DRIPs halves the amount of purchasing I would otherwise be doing, as all dividends are automatically reinvested. There are no brokerage fees on those reinvested dividends, so my account maintenance fees are truly tiny. Were I invested in funds, between the fund managers and the retirement account manager, I'd be shelling out between 5-10k in management fees every year. My new contributions to the 401k result in about 4-5 purchases per year, so the total cost of investing runs roughly around $100 per year.
I have an associate who pays $6000 per year for an advisor to tell him which funds to buy in his retirement plan. He buys funds individually, so he doesn't get a large institutional class of funds. I'm guessing those funds cost him another 5-10k per year.
At this point in time, I probably spend 2-4 hours/ week reading about investing and checking in on my holdings. That makes 100-200 hours/year. I'm paying myself somewhere between $50-100/hour by self-directing an individual equity portfolio.
Since dividends tend to be more predictable than stock price, I continue to focus on building share count, understanding that the dividend per share is paid whether or not the shares are at a yearly high or yearly low. The primary effect of price is on how many additional shares I can buy at each dividend payout.
This year I'll expect to collect 3+% more shares on the positions I own, and another 3-4% in new contributions. That secures 6-7% growth in the portfolio. Additional growth will come from capital appreciation and dividend growth. I will be thrilled if the portfolio grows by 10% in value of which 7% will come from deploying dividend dollars to reinvestment. Any capital gains will be welcome.
Sunday, October 9, 2016
October Madness
October Madness;
I just finished watching the second presidential debate, a glorious mudfest if there ever was one.
I'm thinking that the only way the public will get to hear what each candidate thinks about the issues is to put them in separate rooms and not allow either to hear what the other said. Perhaps they could then each read the others statement and craft a rebuttal, which neither would hear until they read the debate transcript later. The whole thing is madness; presidential election politics turned into the grandest of charades.
Funny thing, after several years, I have only paid passing attention to my portfolio over the last few months. I looked tonight to see that prices on the higher yield holdings have moderated a bit (not a lot, however). Some cash has built up in my qualified plan, as I haven't just immediately deployed it. I'm wondering if a fat pitch will come along from somewhere. I still check the blogs, but nothing particularly appeals to me, so I'm now doing what others have done, sitting on cash. I wish I could sell puts in the qualified plan, but I'm not allowed.
The summer swoon didn't happen. September didn't bust me. October hasn't yet. I wonder what the election handicappers are saying will happen depending on which candidate is elected. What happens if neither gets enough votes to clinch it and the minor party candidates can't get a majority either?
This is another time where sitting on one's hands doesn't seem like such a bad thing to do. The dividends roll in, dividend growth happens, DRIP happens, compounding happens, new money waits for good opportunities. Seems like a good way to ride through the roller coaster of national political housekeeping season.
I just finished watching the second presidential debate, a glorious mudfest if there ever was one.
I'm thinking that the only way the public will get to hear what each candidate thinks about the issues is to put them in separate rooms and not allow either to hear what the other said. Perhaps they could then each read the others statement and craft a rebuttal, which neither would hear until they read the debate transcript later. The whole thing is madness; presidential election politics turned into the grandest of charades.
Funny thing, after several years, I have only paid passing attention to my portfolio over the last few months. I looked tonight to see that prices on the higher yield holdings have moderated a bit (not a lot, however). Some cash has built up in my qualified plan, as I haven't just immediately deployed it. I'm wondering if a fat pitch will come along from somewhere. I still check the blogs, but nothing particularly appeals to me, so I'm now doing what others have done, sitting on cash. I wish I could sell puts in the qualified plan, but I'm not allowed.
The summer swoon didn't happen. September didn't bust me. October hasn't yet. I wonder what the election handicappers are saying will happen depending on which candidate is elected. What happens if neither gets enough votes to clinch it and the minor party candidates can't get a majority either?
This is another time where sitting on one's hands doesn't seem like such a bad thing to do. The dividends roll in, dividend growth happens, DRIP happens, compounding happens, new money waits for good opportunities. Seems like a good way to ride through the roller coaster of national political housekeeping season.
Sunday, June 19, 2016
Still here in June
This year I didn't go away in May. I haven't actually ever done that. I agree that activity in the markets seems to settle down during the summer months, but I recall a 10% correction or two during the summer in past years. The overall market has been flat; a recent surge, but otherwise range-bound for about 2 years. Recently, my portfolio has surged ahead of the broad S&P 500 index. People say it's a flight to quality, purchasing yield at any cost, such things. It's well known that the kind of large-cap dividend-paying stalwarts that I made into the foundation of my retirement portfolio out-perform in down markets and under-perform in rising markets.
So, I didn't go away in May. I'm essentially fully invested. If there's a sizeable correction this summer, I'll be there for it. I think I'll just have to come to terms with the fact that I'm not comfortable holding a large pile of cash. Some folks see the rise and fall in stock values as gains and losses. I try to buy at reasonable valuations, so I don't view price reductions as a loss in value. I'm more interested in the compounding of shares that come from reinvesting the dividends. It's hard to make a purchase and then see the stock price swoon, particularly when it stays down over a longer period. BUT...lower price means more impact of dividend reinvestment; more rapid compounding. As long as I'm confident that I've purchase a company with favorable long term prospects, I'm happy to view my holdings in terms of the number of shares I own and the dividends thrown off by each share. Total return is a byproduct of yield and P/E multiple. The yield is always positive and tends to moderate swings in the valuation. Positive yield produces cash flow in the portfolio. Cash is reinvested in the companies that pay the dividends. As share count grows, dividends grow. Dividends may also grow by virtue of executive decisions. Dividends per share can grow if the company is repurchasing and retiring stock.
I recently subscribed to another premium service. I'll have to spend a bit on the tools provided to get full benefit. However, it's the tools I'm after. The advice is secondary. I want to see the performance parameters that are meaningful to me. I want to see value of my holdings, dividends in dollars and % yield. I want to see share count and how it is rising with dividend reinvestment. Once I have that, I may be able to monitor my portfolio much more effectively.
So, I didn't go away in May. I'm essentially fully invested. If there's a sizeable correction this summer, I'll be there for it. I think I'll just have to come to terms with the fact that I'm not comfortable holding a large pile of cash. Some folks see the rise and fall in stock values as gains and losses. I try to buy at reasonable valuations, so I don't view price reductions as a loss in value. I'm more interested in the compounding of shares that come from reinvesting the dividends. It's hard to make a purchase and then see the stock price swoon, particularly when it stays down over a longer period. BUT...lower price means more impact of dividend reinvestment; more rapid compounding. As long as I'm confident that I've purchase a company with favorable long term prospects, I'm happy to view my holdings in terms of the number of shares I own and the dividends thrown off by each share. Total return is a byproduct of yield and P/E multiple. The yield is always positive and tends to moderate swings in the valuation. Positive yield produces cash flow in the portfolio. Cash is reinvested in the companies that pay the dividends. As share count grows, dividends grow. Dividends may also grow by virtue of executive decisions. Dividends per share can grow if the company is repurchasing and retiring stock.
I recently subscribed to another premium service. I'll have to spend a bit on the tools provided to get full benefit. However, it's the tools I'm after. The advice is secondary. I want to see the performance parameters that are meaningful to me. I want to see value of my holdings, dividends in dollars and % yield. I want to see share count and how it is rising with dividend reinvestment. Once I have that, I may be able to monitor my portfolio much more effectively.
Monday, May 30, 2016
My favorite reading site for individual investing is Seeking Alpha. Certain authors bring out tons of comments. Recently, one of the better authors touched on the commonly debated question of whether it makes more sense to purchase lower yield, higher dividend growth companies or higher yield, lower dividend growth companies, or both. This is a topic that interests me a lot, because it can inform the next purchase, or drive the evolution of a portfolio, even if you have eschewed pure growth stocks, or low yield stocks that don't appear to have any intention of growing their dividend.
This post is an attempt to get the issues down on paper and examine them
First there are the things that we can all agree on; head to head, a higher yield stock will produce more cash flow at the front end, irrespective of the dividend growth rates. Lower yield, higher dividend growth stocks take some time before their rising earnings result in an absolute cash payment that matches or exceeds the payments of the higher yield stock.
Second, you can model that tortoise/hare thing using simple spreadsheets or tables. The point where both investments are paying the same cash output is typically a fairly long time in the future. The point at which the lower yield stock actually has produced more dollars in dividend payments is even further out in the future.
In order to reach that point of dividend equivalence, certain things have to happen; First, one has to assume the earnings growth rates, dividend growth rates and dividend policies remain the same over time. Unless these things are assumed, there's no way to know if and when that parity will be reached. For a low yield, high dividend growth company to exceed the higher yield company in dividend dollars per share paid, or total dividends paid, it's earnings growth needs to be much higher and one would expect it's capital gains would produce a much larger position for the same dividend production. Those who advocate this kind of stock for investors who have a long horizon and no need for a great deal of cash flow are essentially advising for total return and not assuming that dividends will contribute all that much to total return.
Second, one has to choose whether dividends will be taken as cash, used to reinvest in the same stock or other stocks. If the higher yield stock is completely reinvested in itself, the point of dividend parity is pushed even further into the future, irrespective of what occurs with the lower yield company's dividend.
Which assumptions are more likely to be true over the long haul?
A low yield, higher dividend-growth stock will continue to behave the same over the long haul?
A higher yield, lower dividend-growth stock will continue to behave the same over the long haul?
What about that low yield, high dividend growth company? High earnings growth supports a high dividend growth rate, but high earnings growth eventually yields to the law of large numbers, when the growth prospects moderate. High dividend growth eventually produces a higher yield. The low yield, high dividend growth company becomes a higher yield, lower dividend growth company. If one depends on the board-room to continue raising the dividend, eventually that comes increasingly from a rising payout ratio. At some point, the terminal growth rate and terminal dividend yield should be fairly constant, at the rate of inflation. Essentially, that means there is no longer ANY inflation adjusted growth. In that circumstance, the only way one can build wealth is to reinvest dividends and compound the number of shares owned. If one reinvests shares in this company during it's rapid growth phase, one accelerates the total return, the dividend growth and the growth in share count, but it starts from a very low, almost insignificant point, so most of the increase in value comes from earnings growth and the P/E assigned by the market. As the company becomes that mature, lower growth company, dividend payments become a larger percentage of the total yield and retained earnings no longer lead to higher growth, or higher dividend growth rates.
What about that higher-yield, lower dividend growth company? First, one needs to look at the payout ratio. In the extreme, a company could be a cash generating juggernaut, but not growing at all. In that case, it might have a 100% payout ratio, delivering all earnings to the owners as dividends. There is no dividend growth whatsoever. Earnings yield equals dividend yield equals total return.
What about the company that pays out 80% of earnings and grows slowly? That company compounds it's earnings internally slowly. As such, it's dividends grow slowly, as most of earnings are already distributed and it can't grow any faster than the small fraction of retained earnings allow it to grow. If that company retains earnings and continually purchases other companies, it may be able to grow it's top line that way. Depending on how it manages the merged shares, it may produce rising dividends per share, so the owner sees rising dividends. The company may also repurchase shares, driving the dividend per share up by distributing earnings amongst a declining share count.
Irrespective, if dividends are taken as cash, the dividend growth is anchored by earnings growth and the company's policy around repurchasing shares and issuing stock as incentive pay to insiders.
If one needs every cent of dividend payment to pay expenses, then the owner is dependent solely on composite performance of earnings and board-room decisions for growth in yield. If one sells shares to generate income, the ability of the portfolio to generate more income is impaired to that degree.
If some dividends can be turned back into new purchases, share count rises and dividends also rise.
If one is in the accumulation phase, all dividends can be turned back into share accumulation. So, if that is occurring, which horse wins the race, the one that grows more rapidly or the one that churns out more cash? It depends on your definition of winning, and how far it is to the finish line from the start line. If the model runs to infinity, the lower yield, higher dividend growth company will always win. However, in the real world, there is no endless growth. For the individual investor, there is a finite horizon. At some point, the investments must become the replacement for the paycheck.
The sweet spot for most investors is a level of savings such that dividend payments cover all living expenses and still allow for reinvestment as well. Few individuals escape gravity in this fashion.
So, should one take dividends as cash? Should one bank on steady conditions over many years and gamble that the lower yield, higher dividend stock will eventually catch and outrun the higher yield, lower dividend growth company and deliver adequate cash on which to live? Would higher capital gains and selective liquidation of stock be a better plan than trying to live solely on dividends? Should one reinvest each dividend in the company that paid it? Should one collect dividends and selectively reinvest? Somewhere in-between? For each investor the answer will be different.
What about me? First, I have chosen to use dividend reinvestment plans to turn all dividends back into the companies that issued them. If one is careful with the definitions, one can distinguish between current yield (dividend per share), dividend per originally purchased share (yield on cost), raw dividend growth (dollars collected within the position) or composite dividend growth (dollars collected within the entire portfolio) Some individuals need every horse to be accelerating at a minimum rate, or that horse is replaced with another. Some need the whole team to be accelerating at or above a threshold rate, or the slowest horses are retired and replaced. Some are simply happy to add horses and accelerate at the same rate, but pull a bigger wagon. Some are willing to sell off horses as the finish line approaches.
I have generally emphasized that I'm making a portfolio bet, and any "rebalancing" that I do is with new money, buying more shares within positions to prevent any other position from becoming overly influential in the composite performance. That means collecting dividends as cash and selectively reinvesting isn't for me.
I also like the advice of one participant in the conversation to never sell, unless forced by a buyout. That demands more due diligence on the buy side, but also simplifies the decision making on portfolio holdings. I'd prefer to use the "rarely sell" approach. I have a few positions that are approaching double the mean position size. That means 4% rather 2% of the portfolio, with my roughly 50 holdings. That hardly worries me, but if one of those companies melts down, it does have a disproportionate effect on my portfolio's performance. There isn't enough new money to raise every other position to the 2x mean level and establish a new mean. So, I live with a degree of imbalance, or I sell some shares. So far, I'm living with the imbalance.
One thing to remember; high valuation moderates the impact of dividend reinvestment, as each share costs more money. Dividends are paid per share, and don't track price. They do track earnings, roughly speaking. Low valuation enhances the impact of dividend reinvestment, since lower share price results in more rapid share accumulation. Thus, the DRIP plans serve to maintain a degree of balance in the positions.
I am also very skeptical about those who predict long term high growth rates. Certain companies have achieved it (like Nike) over decades. If one wants to predict long term growth rates, you're more likely to be successful with very mature companies that produce essential goods and services, generally with low, steady growth. I am more interested in the near term performance than the 30 year performance, because I know I can redeploy assets if the story changes sometime in the future.
It's a fact that dividends are always positive, that valuations can very widely, and that companies that have paid dividends over a long period of time are likely to continue paying equivalent or larger dividends, unless something goes south with the business. That suggests that compounding in share count may be more reliable than the internal compounding of retained earnings. Companies don't necessarily allocate capital into equivalent or higher returning endeavors. However, if that capital is given to me as an owner, I know exactly what I will do with it. I will reinvest it in either the company that paid it, or another company that I think has better prospects. Thus far, I'm not reinvesting one company's dividends into other companies, but if I did, it would still be a form of share compounding within the portfolio. My stake in a company that pays a high dividend but has low growth can still grow at a meaningful rate ( T, D, S). If the company is using cash to repurchase shares and the share count is declining as a result, it enhances the performance of my position, irrespective of the growth rate of the company.
One wise senior investor who talks alot about dividend paying stocks says that a carefully selected growth stock can produce total returns that far outstrip the impact of dividends, as long as you correctly identify the candidate. Another wise senior investor whose portfolio is full of dividend paying stocks says that the first rule of investing is to avoid losing money, and the second rule is to always remember the first rule. I'm not a gambler. I don't know which growth stock will run like a rocket to the moon. I do know that I can identify companies whose long term growth and dividend policy are fairly predictable, so the chance that I will experience a permanent loss of capital is quite small. Being a risk adverse investor, I'm betting on the steady-eddy approach, rather than attempting to shoot the moon.
This post is an attempt to get the issues down on paper and examine them
First there are the things that we can all agree on; head to head, a higher yield stock will produce more cash flow at the front end, irrespective of the dividend growth rates. Lower yield, higher dividend growth stocks take some time before their rising earnings result in an absolute cash payment that matches or exceeds the payments of the higher yield stock.
Second, you can model that tortoise/hare thing using simple spreadsheets or tables. The point where both investments are paying the same cash output is typically a fairly long time in the future. The point at which the lower yield stock actually has produced more dollars in dividend payments is even further out in the future.
In order to reach that point of dividend equivalence, certain things have to happen; First, one has to assume the earnings growth rates, dividend growth rates and dividend policies remain the same over time. Unless these things are assumed, there's no way to know if and when that parity will be reached. For a low yield, high dividend growth company to exceed the higher yield company in dividend dollars per share paid, or total dividends paid, it's earnings growth needs to be much higher and one would expect it's capital gains would produce a much larger position for the same dividend production. Those who advocate this kind of stock for investors who have a long horizon and no need for a great deal of cash flow are essentially advising for total return and not assuming that dividends will contribute all that much to total return.
Second, one has to choose whether dividends will be taken as cash, used to reinvest in the same stock or other stocks. If the higher yield stock is completely reinvested in itself, the point of dividend parity is pushed even further into the future, irrespective of what occurs with the lower yield company's dividend.
Which assumptions are more likely to be true over the long haul?
A low yield, higher dividend-growth stock will continue to behave the same over the long haul?
A higher yield, lower dividend-growth stock will continue to behave the same over the long haul?
What about that low yield, high dividend growth company? High earnings growth supports a high dividend growth rate, but high earnings growth eventually yields to the law of large numbers, when the growth prospects moderate. High dividend growth eventually produces a higher yield. The low yield, high dividend growth company becomes a higher yield, lower dividend growth company. If one depends on the board-room to continue raising the dividend, eventually that comes increasingly from a rising payout ratio. At some point, the terminal growth rate and terminal dividend yield should be fairly constant, at the rate of inflation. Essentially, that means there is no longer ANY inflation adjusted growth. In that circumstance, the only way one can build wealth is to reinvest dividends and compound the number of shares owned. If one reinvests shares in this company during it's rapid growth phase, one accelerates the total return, the dividend growth and the growth in share count, but it starts from a very low, almost insignificant point, so most of the increase in value comes from earnings growth and the P/E assigned by the market. As the company becomes that mature, lower growth company, dividend payments become a larger percentage of the total yield and retained earnings no longer lead to higher growth, or higher dividend growth rates.
What about that higher-yield, lower dividend growth company? First, one needs to look at the payout ratio. In the extreme, a company could be a cash generating juggernaut, but not growing at all. In that case, it might have a 100% payout ratio, delivering all earnings to the owners as dividends. There is no dividend growth whatsoever. Earnings yield equals dividend yield equals total return.
What about the company that pays out 80% of earnings and grows slowly? That company compounds it's earnings internally slowly. As such, it's dividends grow slowly, as most of earnings are already distributed and it can't grow any faster than the small fraction of retained earnings allow it to grow. If that company retains earnings and continually purchases other companies, it may be able to grow it's top line that way. Depending on how it manages the merged shares, it may produce rising dividends per share, so the owner sees rising dividends. The company may also repurchase shares, driving the dividend per share up by distributing earnings amongst a declining share count.
Irrespective, if dividends are taken as cash, the dividend growth is anchored by earnings growth and the company's policy around repurchasing shares and issuing stock as incentive pay to insiders.
If one needs every cent of dividend payment to pay expenses, then the owner is dependent solely on composite performance of earnings and board-room decisions for growth in yield. If one sells shares to generate income, the ability of the portfolio to generate more income is impaired to that degree.
If some dividends can be turned back into new purchases, share count rises and dividends also rise.
If one is in the accumulation phase, all dividends can be turned back into share accumulation. So, if that is occurring, which horse wins the race, the one that grows more rapidly or the one that churns out more cash? It depends on your definition of winning, and how far it is to the finish line from the start line. If the model runs to infinity, the lower yield, higher dividend growth company will always win. However, in the real world, there is no endless growth. For the individual investor, there is a finite horizon. At some point, the investments must become the replacement for the paycheck.
The sweet spot for most investors is a level of savings such that dividend payments cover all living expenses and still allow for reinvestment as well. Few individuals escape gravity in this fashion.
So, should one take dividends as cash? Should one bank on steady conditions over many years and gamble that the lower yield, higher dividend stock will eventually catch and outrun the higher yield, lower dividend growth company and deliver adequate cash on which to live? Would higher capital gains and selective liquidation of stock be a better plan than trying to live solely on dividends? Should one reinvest each dividend in the company that paid it? Should one collect dividends and selectively reinvest? Somewhere in-between? For each investor the answer will be different.
What about me? First, I have chosen to use dividend reinvestment plans to turn all dividends back into the companies that issued them. If one is careful with the definitions, one can distinguish between current yield (dividend per share), dividend per originally purchased share (yield on cost), raw dividend growth (dollars collected within the position) or composite dividend growth (dollars collected within the entire portfolio) Some individuals need every horse to be accelerating at a minimum rate, or that horse is replaced with another. Some need the whole team to be accelerating at or above a threshold rate, or the slowest horses are retired and replaced. Some are simply happy to add horses and accelerate at the same rate, but pull a bigger wagon. Some are willing to sell off horses as the finish line approaches.
I have generally emphasized that I'm making a portfolio bet, and any "rebalancing" that I do is with new money, buying more shares within positions to prevent any other position from becoming overly influential in the composite performance. That means collecting dividends as cash and selectively reinvesting isn't for me.
I also like the advice of one participant in the conversation to never sell, unless forced by a buyout. That demands more due diligence on the buy side, but also simplifies the decision making on portfolio holdings. I'd prefer to use the "rarely sell" approach. I have a few positions that are approaching double the mean position size. That means 4% rather 2% of the portfolio, with my roughly 50 holdings. That hardly worries me, but if one of those companies melts down, it does have a disproportionate effect on my portfolio's performance. There isn't enough new money to raise every other position to the 2x mean level and establish a new mean. So, I live with a degree of imbalance, or I sell some shares. So far, I'm living with the imbalance.
One thing to remember; high valuation moderates the impact of dividend reinvestment, as each share costs more money. Dividends are paid per share, and don't track price. They do track earnings, roughly speaking. Low valuation enhances the impact of dividend reinvestment, since lower share price results in more rapid share accumulation. Thus, the DRIP plans serve to maintain a degree of balance in the positions.
I am also very skeptical about those who predict long term high growth rates. Certain companies have achieved it (like Nike) over decades. If one wants to predict long term growth rates, you're more likely to be successful with very mature companies that produce essential goods and services, generally with low, steady growth. I am more interested in the near term performance than the 30 year performance, because I know I can redeploy assets if the story changes sometime in the future.
It's a fact that dividends are always positive, that valuations can very widely, and that companies that have paid dividends over a long period of time are likely to continue paying equivalent or larger dividends, unless something goes south with the business. That suggests that compounding in share count may be more reliable than the internal compounding of retained earnings. Companies don't necessarily allocate capital into equivalent or higher returning endeavors. However, if that capital is given to me as an owner, I know exactly what I will do with it. I will reinvest it in either the company that paid it, or another company that I think has better prospects. Thus far, I'm not reinvesting one company's dividends into other companies, but if I did, it would still be a form of share compounding within the portfolio. My stake in a company that pays a high dividend but has low growth can still grow at a meaningful rate ( T, D, S). If the company is using cash to repurchase shares and the share count is declining as a result, it enhances the performance of my position, irrespective of the growth rate of the company.
One wise senior investor who talks alot about dividend paying stocks says that a carefully selected growth stock can produce total returns that far outstrip the impact of dividends, as long as you correctly identify the candidate. Another wise senior investor whose portfolio is full of dividend paying stocks says that the first rule of investing is to avoid losing money, and the second rule is to always remember the first rule. I'm not a gambler. I don't know which growth stock will run like a rocket to the moon. I do know that I can identify companies whose long term growth and dividend policy are fairly predictable, so the chance that I will experience a permanent loss of capital is quite small. Being a risk adverse investor, I'm betting on the steady-eddy approach, rather than attempting to shoot the moon.
Subscribe to:
Comments (Atom)