Month: December 2018

Evaluating Stocks Part VIIIB: More Math Behind The Magic

Never forget these two axioms:

Money frees us, but its pursuit may enslave us.

It’s not how much you have at the end; it’s how much you could have made.

I was ready to move on to funds, but some people contacted me to give all of you some concrete hard numbers to look at it rather than all my usual argy-bargy ivory tower talk.

Sarcastic Reader: About damn time!

So, let’s talk real concrete numbers and make it simple as possible. Let’s say you and your friend both save up some money and have $10,000 to invest.

Your friend decides they will pile all their money at once into a S&P 500 index fund.

You, on the other hand, decide to spread your money out into ten good paying dividend stocks ($1,000/company) all at once and have all dividends reinvested into the stock that generated that dividend in the first place.

So, let’s state that the time you’re putting in your money is January 1998 and finish our calculations at the end of November 2018. I’m picking these dates on purpose. First of all, a twenty year time spread is to show how time is your friend when doing investing of any kind, especially dividend growth investing. Secondly, I purposefully included both the tech sector bubble being burst in 2001 and the financial crisis of 2008-2009 to demonstrate how this strategy of dividend growth investing performs when the market heads south on you (and majorly south in the case of 2008/9).Thirdly, since December 2018 is still in progress (Oh, is it ever), I can’t include in returns as of yet. For people who want to look at different years or longer or shorter time spreads, use these calculators to do your own calculating.

So having said all of that, here we go…  

Your friend puts in $10,000 in January 1998 into a S&P 500 index fund and checks where they are at on 12/1/18.

The total return for the S&P 500 (with the dividends reinvested) over the above time period is 313.007% which sounds staggering, but is actually only at a 7.045% annual average return over that time. Employing that ever so sweet Rule of 72, it would take your friend 10.22 years to double their money.  The Rule of 144 suggests that it would take your friend 16.18 years to triple their money.

To be clear in concrete numbers what all of that means, your friend would have put in $10,000 in a S&P 500 index fund (with any dividends reinvested) on January 2, 1998 and on December 1, 2018, your friend would have…drumroll please…$39,060.11.

You, on the other hand, have decided to put $1,000 in ten different dividend paying stocks since you’re a savvy investor and perhaps influenced by what you read on the Internet (ahem) which is totally fine because everyone knows that whatever you read on the Internet must be true.

So here’s a list of these ten money maker stocks of yours…

3M, Altria, AT&T, Cincinnati FInancial, Clorox, Coca-Cola, Colgate-Palmolive, Johnson & Johnson, McDonald’s, and Procter & Gamble

All of them are dividend champions and all pretty famous companies that have 40 or more years of increasing dividends. (I suspect that you have heard of all of them except for perhaps Cincinnati Financial.)

The conditions are the same: $1,000 into each company on 1/2/1998 and checking again on 12/12018 with all dividends reinvested.

Here we go…  

Company            Annual Return              Total Cash Value

3M (MMM)                11.59%                             $9,157.00

Altria (MO)                15.03%                             $16,886.49

AT&T (T)                     4.52%                              $2,349.22

Cincinnati Financial (CINF) 5.83%             $3,148.81

Clorox (CLX)             8.79%                               $5,474.44

Coca-Cola (KO)       3.65%                                $2,065.12

Colgate-Palmolive (CL)     8.89%                $5,610.83

Johnson & Johnson (JNJ)   9.51%                  $6,292.12

McDonald’s (MCD)             12.33%                 $10,522.98

Procter & Gamble (PG)       5.82%                 $3,142.38

Total Averages/Returns       8.616%              $64,649.39

So, head to head, the S&P 500 route gives your friend a 7.045% annual return and $39,060.11 versus an annual return of 8.616% and $64, 649.39 via your dividend growth investing strategy.

So some thoughts on all of this…

  1. A solid dividend growth investing portfolio will almost always outperform the S&P 500 provided all dividends are reinvested.
  2. None of the above figures have yet been taxed or subject to fees which only a mutual fund/ETF would be subject to and not the individual stocks themselves.
  3. A dividend growth investing strategy SHOULD NOT substitute for core holdings in index funds like the S&P 500.. This should be the second layering of investing on top of the foundation of your core holdings of index funds. As you can see, however, it can bring better returns than S&P 500 which is why it should be considered if it is within your risk tolerance to do so (and certainly why I employ this strategy).
  4. Note how varying your returns are over the years even within dividend champions. This demonstrates why you shouldn’t put all your eggs in one basket if you decide to go into individual stock picking, even if it is the dividend champions.
  5. Note how impressive Altria has been with 15% annual returns over the past two decades and comprising over 25% of the above returns. So much for the death of smoking…

On to evaluating funds next time!

I’d love to hear from any and all of you about your thoughts, so we can all learn from one another.

Please spread the word about this blog to your friends (real and virtual), family, and colleagues. Talk to you soon.

Until next time…

Evaluating Stocks Part VIII: The Math Behind the Magic of Dividend Growth Investing

Never forget these two axioms:

Money frees us, but its pursuit may enslave us.

It’s not how much you have at the end; it’s how much you could have made.

Let’s show the math behind dividend growth investing in real terms.

As stated before, the key to dividend growth investing is not only a steady growth of income, but the increase in shares generating more and more dividend income each quarter. The other variable in dividend growth investing is the price of the stock which can increase or decrease thus accordingly altering the number of shares purchased each time a dividend is generated (usually quarterly). Thus, the interrelationship between all of these three variables (dividend amount, increase in dividend, and stock price) is complex and virtually impossible to predict in terms of total value in the stock, the amount of dividend generated, and the number of shares owned at any given point in time.

The outcomes even in a positive sense (ie, increased value after investing your money) are myriad depending on what any of these variables do at any given time, especially with a fluctuating stock price.

However, we have to start somewhere and to give you an idea of how this mechanism of dividend growth investing would look...behold!

For those of you who like to see the math dividend payment by dividend payment…

Sarcastic Reader: Who are these freaks!?!  

…here you go.

To see the total returns dividend paying stocks have generated over the years, there are calculators that do all the heavy lifting for you and can give your total return for said stock derived from the exact date of initial purchase, amount initially purchased, and accounting for ongoing regular investments if that was ever done after the initial purchase.

People will argue that you cannot 100% predict that companies will continue increasing dividends until the day you retire…which is true….though this is as predictable as the market gets if you’re putting money into a company that has increased dividends for over half a century consecutively. Even with ongoing dividend growth with some companies which have not yet reached Dividend Champion status, the total returns can be staggering as noted here.

Of note, there is a psychological aspect to dividend growth investing that I use to help me keep the faith during the fallow times.

Perhaps, this is self rationalization amongst dividend growth investors, but the way to look at it to steady the course once you’ve moved forward and put your hard earned money at risk (and—don’t fool yourself—that is exactly what you’re doing any time you invest) is the following:

When your stock price is down, you’re buying shares of a great company at an even better price.

Who doesn’t like a sale?

When your stock price is up, you’re worth more.

Who doesn’t like to be richer?   

Who indeed…?

I’d love to hear from any and all of you about your thoughts, so we can all learn from one another.

Please spread the word about this blog to your friends (real and virtual), family, and colleagues. Talk to you soon.

Until next time…

Evaluating Stocks Part VIIB: Long Live The Aristocracy

Never forget these two axioms:

Money frees us, but its pursuit may enslave us.

It’s not how much you have at the end; it’s how much you could have made.

A good friend of mine (and a very savvy investor) pointed out that SDY is not the only Dividend Aristocrat fund available which is both true and false simultaneously.

Sarcastic Reader: Uh…what now?

PWT: It’s the Schrodinger’s Cat of the financial world.

Realize again what the Dividend Aristocrats are (companies who have increased their dividends for 25-49 consecutive years, but are only in the S&P 500 as opposed to Dividend Champions who have the same dividend history as Dividend Aristocrats, but are not necessarily in the S&P 500—so there are 50 Dividend Aristocrats and 115 DIvidend Champions for 2018) and then let’s take account of what funds are out there to help mimic their earnings potential.

  1. The first one is actually the only true Dividend aristocrat fund ProShares TR/S&P 500 Aristocrats ETF (NOBL) because it is the most strict in what it allows as an investment—only tur Dividend Aristocrats. The upsides are that these are equally weighted with each company making up 2% of the fund and the expense ratio is quite cheap at 0.35%. However, there are a few problems here—the fund has been around for 5 years (since late 2013), the dividend yield is only 1.6%, and thusly (it’s axiomatically true that you cannot sound stupid and win any argument when using the word ‘thusly’) has underperformed the market at times and certainly the Dividend Aristocrats themselves.  Of note, earlier this year, all of the stocks in the portfolio have an average PE ratio of approximately 21.
  2. The SPDR ETF (SDY) invests in any company that increases its dividend yearly for at least 20 consecutive years therefore it’s not quite Dividend Aristocrats only, but mostly. The dividend yield is 2.5% with a an expense ratio of 0.35%. It is the only Dividend Aristocrat fund that has been around for over a decade. And the returns over the last ten years has been over 10%.
  3. The Vanguard Dividend Appreciation ETF (VIG) has invested in a total of 182 stocks, but is comprised of only dividend Achievers (companies that increase their dividends yearly for 10-24 years). The expense ratio is only 0.08%, but the dividend yield is only 1.94%. This combination leads to a radically different rate of total return of 3.12% this year  which is below the average rate of inflation (3.3% remember?) (and that’s before you even subtract out the expense ratio).
  4. The iShares Select Dividend ETF (DVY) has 98 stocks in it, all of which are Dividend Challengers (ie, companies that increase their dividends yearly for 5-9 years consecutively). It has a dividend yield of 2.81% with an expense ratio of 0.39%. The 10 year total return (before fees/taxes) was 10.28% and was 8.43% since inception of the fund (2003).
  5. There are many other funds that are comprised of dividend payers, but realize virtually none of these are actually comprised of true Dividend Aristocrats as detailed above therefore your returns can be quite different than that of the Dividend Aristocrats. So do your research (even preliminary stuff  as above).

I’d love to hear from any and all of you about your thoughts, so we can all learn from one another.

Please spread the word about this blog to your friends (real and virtual), family, and colleagues. Talk to you soon.

Until next time…