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.
Sunday, October 9, 2016
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.
Sunday, April 24, 2016
what a difference a month makes
Here we are in the end of April; spring has really sprung. What a difference a month makes; days are longer, brighter. We're getting plenty of spring showers to help the natural world emerge.
We're through the January market correction and out the other side, with valuations rising even higher. I'm still sitting on my hands mostly, but I decided after all these years to get out of my MLPs to avoid any downstream UBTI implications in the future. KMI isn't a MLP anymore, so I haven't sold it. EPD, a much more solid player, is an MLP and I was sad to see it go, but I think there are equivalent opportunities now in the oil majors, the REIT sector and other miscellaneous corners of the investment world. Also, for the first time in history, I'm just letting a bit of cash sit in the account. Since I don't have any compelling ideas, I'm happy to wait for a fat pitch to come my way.
The portfolio hit a new high; 2% higher than ever before, without any significant contributions for over 4 months. This is mostly a valuation issue, but those steady dividends, reinvested, amplify every move, as there are that many more soldiers in the army to march up and down the hill. I just noticed that my year to date, one year and 3 year internal rates of return have turned nicely positive since the latest move. Valuation is a fickle thing, but share count doesn't move up and down for the buy and hold investor, rather the direction is almost exclusively up.
If I reinvested 8% dividends and distributions into more shares yearly in a flat market, I'd have a very respectable yield. I am reinvesting 3+% and adding 5% to the portfolio, so portfolio growth will be in the realm of 8% if the market runs flat, and greater if there is any capital gain performance.
I'm happy with 8% portfolio growth. I'll be happier when earnings, dividends and contributions put me in the 11-12% range. I'll keep watching, learning better how to spot risk, re-deploying cash when it arrives and there's an opportunity shining in front of me.
April showers bring May flowers; let it rain...
We're through the January market correction and out the other side, with valuations rising even higher. I'm still sitting on my hands mostly, but I decided after all these years to get out of my MLPs to avoid any downstream UBTI implications in the future. KMI isn't a MLP anymore, so I haven't sold it. EPD, a much more solid player, is an MLP and I was sad to see it go, but I think there are equivalent opportunities now in the oil majors, the REIT sector and other miscellaneous corners of the investment world. Also, for the first time in history, I'm just letting a bit of cash sit in the account. Since I don't have any compelling ideas, I'm happy to wait for a fat pitch to come my way.
The portfolio hit a new high; 2% higher than ever before, without any significant contributions for over 4 months. This is mostly a valuation issue, but those steady dividends, reinvested, amplify every move, as there are that many more soldiers in the army to march up and down the hill. I just noticed that my year to date, one year and 3 year internal rates of return have turned nicely positive since the latest move. Valuation is a fickle thing, but share count doesn't move up and down for the buy and hold investor, rather the direction is almost exclusively up.
If I reinvested 8% dividends and distributions into more shares yearly in a flat market, I'd have a very respectable yield. I am reinvesting 3+% and adding 5% to the portfolio, so portfolio growth will be in the realm of 8% if the market runs flat, and greater if there is any capital gain performance.
I'm happy with 8% portfolio growth. I'll be happier when earnings, dividends and contributions put me in the 11-12% range. I'll keep watching, learning better how to spot risk, re-deploying cash when it arrives and there's an opportunity shining in front of me.
April showers bring May flowers; let it rain...
Monday, March 28, 2016
Holding the line
Another month has passed. No big additions have entered the 401k, so I haven't been in the buying mode. Thus, I also haven't liberated any cash in the IRAs. The recent correction has re-corrected. Not having cash, I couldn't take advantage of it. That is the eternal dilemma; hold cash for opportunities, or invest it so it's at work; I can't have it both ways.
This month has been characterized by sitting on my hands. I've thought about liquidating the few bond funds I have held for several years. They have performed miserably over the last few years. I don't see much reason to assume it'll be better any time soon. I think the best thing going is the DRIP programs. If I weren't DRIPing, I'd have about half a position worth of cash every 3 months to take advantage of price corrections in stocks I own or want to own. On the other hand, I wouldn't be growing each position. I still like the fact that each position grows by 2.5-5% yearly through the DRIP.
I don't have any intention to sell stocks, so fluctuations in their valuation doesn't concern me as much as the growth and safety of their dividends. Another interesting feature of the DRIP is that the dividend DOES grow every year, even if the dividend per share doesn't, because reinvestment is increasing the share count by the percentage yield every year. Fortunately, the dividend per share does grow yearly for almost all of my holdings, so the compounding is accelerated by that fact.
I see conditions in my profession continuing to deteriorate. I see stressers tearing at the fabric of our mutual goodwill. I'm still almost 12 years from eligibility for full social security. I'm looking for another pathway; one that replaces dread with anticipation. There are still a few things in the world of work that charge me up. I'm ready to jettison everything else. Unwinding the last entanglements is the hardest task, as these are the most entrenched entanglements of all.
I guess it's getting to be time to figure out exactly how much it will take to live, so I can begin to zero in on that target date for retirement.
This month has been characterized by sitting on my hands. I've thought about liquidating the few bond funds I have held for several years. They have performed miserably over the last few years. I don't see much reason to assume it'll be better any time soon. I think the best thing going is the DRIP programs. If I weren't DRIPing, I'd have about half a position worth of cash every 3 months to take advantage of price corrections in stocks I own or want to own. On the other hand, I wouldn't be growing each position. I still like the fact that each position grows by 2.5-5% yearly through the DRIP.
I don't have any intention to sell stocks, so fluctuations in their valuation doesn't concern me as much as the growth and safety of their dividends. Another interesting feature of the DRIP is that the dividend DOES grow every year, even if the dividend per share doesn't, because reinvestment is increasing the share count by the percentage yield every year. Fortunately, the dividend per share does grow yearly for almost all of my holdings, so the compounding is accelerated by that fact.
I see conditions in my profession continuing to deteriorate. I see stressers tearing at the fabric of our mutual goodwill. I'm still almost 12 years from eligibility for full social security. I'm looking for another pathway; one that replaces dread with anticipation. There are still a few things in the world of work that charge me up. I'm ready to jettison everything else. Unwinding the last entanglements is the hardest task, as these are the most entrenched entanglements of all.
I guess it's getting to be time to figure out exactly how much it will take to live, so I can begin to zero in on that target date for retirement.
Thursday, March 10, 2016
March Madness
Crazy; spring came a month early. There's a bar fight going on at the highest level of politics, the presidential election. The pundits calling for the sky to fall amongst the world's economies. There's a super-regional disaster continuing to evolve in the middle east. The Arab spring has turned into a nightmare. What is it about those tribal peoples that makes them want to gouge each other's eyes out and worse?
I'm trying to keep my equilibrium in the midst of instability at work, a desire to make big changes in our financial footprint at home, a serious process of re-evaluating priorities about work and life in general. In the middle of that, I'm continuing to attempt to make progress for our long term income security with retirement investments.
My wife has about 12% of our liquid assets in company retirement vehicles. These are tax deferred, invested in mutual funds. We don't have a lot of choice in choosing funds, so they are deployed to broad market index funds. I think they are loaded up with fees, because they haven't performed particularly well, but perhaps better than a savings account. That means 88% of the liquid assets are in my IRAs and 401K accounts. I am as deeply into Roth vehicles as I can get at the moment. I am not converting pre-tax to post-tax, but I did roll 401ks to IRAs when my business merged and changed it's tax ID.
I have written about the dividend production and it's growth. That continues. At the moment, values have recovered to a point that we are about 2% off the all-time high for the portfolio. Dividends are also near their high point. A couple of melt-downs in the energy sector have produced a temporary setback, but I think it will be temporary, as most of my companies are continuing to raise dividends and I am reinvesting dividends. Nothing new there.
So, what IS new? Well, I'm thinking of doing some "asset swapping". My 401k account is a self directed account, but it has some restrictions. The plan policy prevents me from using options or a margin account. I don't have any desire to trade on the margin. I would like some "overdraft protection" in case I make a market rate purchase and the price rises beyond my cash position between the order and the execution. I don't have much desire to trade options, but I wouldn't mind creating some additional cash returns on my assets. If I purchase shares in the 401ks and sell the same shares out of the IRAs, I'll create some cash in a place where I can use it differently.
There are companies I'd like to own at lower prices. I could collect put premiums while waiting for my price. There are companies whose price doesn't move all that much. I could consider selling some calls. I'd need a new strategy for selling calls, as I don't own companies at the moment that I'd like to have called away. It's never a good strategy to make a decision you'll regret if things don't go exactly as you desire. If you sell a call, it should be ok to have the call exercised. If you sell a put, you should want the shares at the strike price. So, it's easier to use options to buy shares that you don't own, since the price at which you'll receive them should always be better than the alternative; buying them outright, at the time you deploy the cash one way or the other.
It may be that what's really happening is that I am getting itchy fingers. I know one thing; As I deploy new contributions, I have a very hard time simply holding cash. I tend to invest it in the best opportunity I can identify, then wish I had some cash when prices drop. Selling cash covered puts would play directly to the problem and the desired strategy; put cash to work AND get shares at lower prices.
I'm going to think about this one a little more...
I'm trying to keep my equilibrium in the midst of instability at work, a desire to make big changes in our financial footprint at home, a serious process of re-evaluating priorities about work and life in general. In the middle of that, I'm continuing to attempt to make progress for our long term income security with retirement investments.
My wife has about 12% of our liquid assets in company retirement vehicles. These are tax deferred, invested in mutual funds. We don't have a lot of choice in choosing funds, so they are deployed to broad market index funds. I think they are loaded up with fees, because they haven't performed particularly well, but perhaps better than a savings account. That means 88% of the liquid assets are in my IRAs and 401K accounts. I am as deeply into Roth vehicles as I can get at the moment. I am not converting pre-tax to post-tax, but I did roll 401ks to IRAs when my business merged and changed it's tax ID.
I have written about the dividend production and it's growth. That continues. At the moment, values have recovered to a point that we are about 2% off the all-time high for the portfolio. Dividends are also near their high point. A couple of melt-downs in the energy sector have produced a temporary setback, but I think it will be temporary, as most of my companies are continuing to raise dividends and I am reinvesting dividends. Nothing new there.
So, what IS new? Well, I'm thinking of doing some "asset swapping". My 401k account is a self directed account, but it has some restrictions. The plan policy prevents me from using options or a margin account. I don't have any desire to trade on the margin. I would like some "overdraft protection" in case I make a market rate purchase and the price rises beyond my cash position between the order and the execution. I don't have much desire to trade options, but I wouldn't mind creating some additional cash returns on my assets. If I purchase shares in the 401ks and sell the same shares out of the IRAs, I'll create some cash in a place where I can use it differently.
There are companies I'd like to own at lower prices. I could collect put premiums while waiting for my price. There are companies whose price doesn't move all that much. I could consider selling some calls. I'd need a new strategy for selling calls, as I don't own companies at the moment that I'd like to have called away. It's never a good strategy to make a decision you'll regret if things don't go exactly as you desire. If you sell a call, it should be ok to have the call exercised. If you sell a put, you should want the shares at the strike price. So, it's easier to use options to buy shares that you don't own, since the price at which you'll receive them should always be better than the alternative; buying them outright, at the time you deploy the cash one way or the other.
It may be that what's really happening is that I am getting itchy fingers. I know one thing; As I deploy new contributions, I have a very hard time simply holding cash. I tend to invest it in the best opportunity I can identify, then wish I had some cash when prices drop. Selling cash covered puts would play directly to the problem and the desired strategy; put cash to work AND get shares at lower prices.
I'm going to think about this one a little more...
Thursday, January 28, 2016
How do you decide if your portfolio is doing ok?
A lot of the dialogue in the dividend growth investing community centers around taking a different view of performance than the dominant view of total return and portfolio valuation. DGI practitioners ascribe to rising dividends exceeding the rate of inflation as the primary metric of success with a stock and/or a portfolio. measuring dividend growth in a stock or portfolio isn't difficult; you simply add up the numbers and compare this year to last.
I'm a little more interested in looking at my portfolio as a business; a conglomeration of holdings that produce income. I have capital expenses, very low operating expenses, revenues and profit. What do I do with my profits? I spend them all on new revenue producing assets. I could spend all my time observing the market value of the assets; more important is how those assets produce revenues.
A share of stock is a discrete fractional claim on the earnings of a company. A fraction of those earnings are returned to owners as dividends; a cash payout that can be reinvested or used for other purposes. If the company earns more per share next year, there's a good chance that the dividend paid per share will also rise. However, you won't have any larger proportional claim on future earnings. To get a higher proportional share of earnings, you need to own a larger share of the company stock. Therein lies the added value of dividend reinvestment. If my portfolio yields 3.5% in dividends per year and I reinvest all of that in new shares. I have a 3.5% larger cash producing engine the next year. If each share captures a higher per-share payout, the cash producing engine grows more, because the dividend payment has risen and even more shares are purchased.
So how would it look if I simply kept track of the number of shares I own in all companies, the total dividends received each year and calculated the rate of share growth, the rate of dividend growth and the rate of dividend/share growth as indicators of overall investment performance? I wonder if that would be a more simple means of determining how the income generating capacity of my portfolio is changing year to year.
I'm a little more interested in looking at my portfolio as a business; a conglomeration of holdings that produce income. I have capital expenses, very low operating expenses, revenues and profit. What do I do with my profits? I spend them all on new revenue producing assets. I could spend all my time observing the market value of the assets; more important is how those assets produce revenues.
A share of stock is a discrete fractional claim on the earnings of a company. A fraction of those earnings are returned to owners as dividends; a cash payout that can be reinvested or used for other purposes. If the company earns more per share next year, there's a good chance that the dividend paid per share will also rise. However, you won't have any larger proportional claim on future earnings. To get a higher proportional share of earnings, you need to own a larger share of the company stock. Therein lies the added value of dividend reinvestment. If my portfolio yields 3.5% in dividends per year and I reinvest all of that in new shares. I have a 3.5% larger cash producing engine the next year. If each share captures a higher per-share payout, the cash producing engine grows more, because the dividend payment has risen and even more shares are purchased.
So how would it look if I simply kept track of the number of shares I own in all companies, the total dividends received each year and calculated the rate of share growth, the rate of dividend growth and the rate of dividend/share growth as indicators of overall investment performance? I wonder if that would be a more simple means of determining how the income generating capacity of my portfolio is changing year to year.
Sunday, January 17, 2016
Is it working?
My IRA accounts hit the same value this week that they held in February 2014 and September 2015.
I am calm. I didn't sell anything. I didn't rebalance. I didn't do anything other than resist the temptation to feel bad that most of the stocks I own are on sale. As usual, I don't have cash to put to work. I deployed what I had last month.
I checked the dividend performance; $37,552 in the last 12 months. In addition, the 401k paid out around $6564, for a total of $44,116
New 401k contributions in 2016 will give me about $1650 in dividends. I can expect the existing holdings to raise dividends around 5%. Also, reinvestment will produce an additional $ 1350. That would mean that 2016 dividends could top $49,000. That would be an 11% increase in dividend income from all sources.
It seems like the strategy is working. It's important to realize that the new 401k contributions and the reinvested dividends will add about 7% to my share count. The DRIP adds 3.7% and new purchases closer to 5%. If dividend growth and the compounding throw in another 2% or so, it'll take me to the goal.
That is why I am calm. I should be downright happy, since at lower prices I'll be buying shares at a discount. However, I'll be buying across 2016 and who knows what prices will do in that interval. I could also see 1-2% shaved off it one or more companies melts down like KMI and TGP did in '15.
How will I feel if we enter a bear market and valuations drop further? What if the economy dips back into recession? What will happen if every dividend payout freezes and my dividend growth is limited to new purchases, or 5%. Provided I'm able to contribute to the 401k similarly to previous years, I can't see a likely scenario where dividend cash flow will diminish in the next year. Valuations may vary, but cash flow should remain positive and increase. That's a sign of a healthy business. My little retirement conglomerate is producing revenue and profits. Because I plow all profits back into the business, I can expect 7-10% composite growth in the business due to new investment and reinvestment of dividends. I can live with that.
There is a huge temptation to listen to the popular press follow the ticker tape and feel glum about current volatility and short term declines in the stock market indices. Tuning it out is nearly impossible. Bargain shopping for great companies in the coming months should help counter some of the tendency towards angst.
I am calm. I didn't sell anything. I didn't rebalance. I didn't do anything other than resist the temptation to feel bad that most of the stocks I own are on sale. As usual, I don't have cash to put to work. I deployed what I had last month.
I checked the dividend performance; $37,552 in the last 12 months. In addition, the 401k paid out around $6564, for a total of $44,116
New 401k contributions in 2016 will give me about $1650 in dividends. I can expect the existing holdings to raise dividends around 5%. Also, reinvestment will produce an additional $ 1350. That would mean that 2016 dividends could top $49,000. That would be an 11% increase in dividend income from all sources.
It seems like the strategy is working. It's important to realize that the new 401k contributions and the reinvested dividends will add about 7% to my share count. The DRIP adds 3.7% and new purchases closer to 5%. If dividend growth and the compounding throw in another 2% or so, it'll take me to the goal.
That is why I am calm. I should be downright happy, since at lower prices I'll be buying shares at a discount. However, I'll be buying across 2016 and who knows what prices will do in that interval. I could also see 1-2% shaved off it one or more companies melts down like KMI and TGP did in '15.
How will I feel if we enter a bear market and valuations drop further? What if the economy dips back into recession? What will happen if every dividend payout freezes and my dividend growth is limited to new purchases, or 5%. Provided I'm able to contribute to the 401k similarly to previous years, I can't see a likely scenario where dividend cash flow will diminish in the next year. Valuations may vary, but cash flow should remain positive and increase. That's a sign of a healthy business. My little retirement conglomerate is producing revenue and profits. Because I plow all profits back into the business, I can expect 7-10% composite growth in the business due to new investment and reinvestment of dividends. I can live with that.
There is a huge temptation to listen to the popular press follow the ticker tape and feel glum about current volatility and short term declines in the stock market indices. Tuning it out is nearly impossible. Bargain shopping for great companies in the coming months should help counter some of the tendency towards angst.
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