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.
Thursday, January 28, 2016
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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