August 2018 Dividend Income

The beginning of the month is my favorite time. It's a time to look ahead at increasing your dividends, and a time to reflect on the previous month. Another month has gone by, which means it's time to examine what the dividend portfolio provided for me in dividends for the month of August.

Overall, August was yet another record month for me in terms of dividend income. I collected $41.19 in dividends from 12 different companies. When compared to my dividend income for the middle month of the prior quarter in May, my dividend income grew 21.6% from $33.86 to $41.19! This sort of growth is primarily because I am starting from such a small capital base that even a small investment, along with dividend increases and dividend reinvestment have a measurable impact on my dividend income.

Let's delve into how my income grew from $33.86 in May to $41.19 in August, shall we?

This $7.33 growth in income from May to August can be explained by 3 things. Over the past few months, I've initiated a new position of 4 shares in EQT Midstream Partners LP (EQM) (by selling 3 shares or half my stake in CVS), a new position in Abbvie of 2 shares (ABBV), and a new position in General Mills (GIS) of 4 shares. The addition of ABBV increased dividend income by $1.92, the addition of GIS added another $1.96 in dividends, and lastly the substitution of CVS for EQM added $2.86 in dividend income ($4.36 in income from EQM versus the $1.50 of income from CVS that I gave up when I sold my 3 shares). In total, these transactions alone added $6.74 in dividend income.  Another $0.43 came from the purchase of 1 more share of Enterprise Products Partners (EPD). The final $0.16 in additional income was a result of the dividend raise from Lowe's (LOW) from $0.41/share quarterly to $0.49/share manifesting itself as I own 2 shares.

The great thing about this is that my dividend income in November will be even higher without any additional effort on my part. I recently added to my stake in Abbvie, so that will add another $0.96 in quarterly dividends alone. This doesn't take into consideration any possible dividend increases that will occur among my holdings by November. For instance, EQM has a trend of raising its distributions on a quarterly basis, and I expect this to be no different for the next distribution. Although I won't be able to contribute any new capital to the account that could possibly increase my dividend income for the middle month of the quarter, I will continue to pool my dividends and selectively reinvest into an existing holding. I'm not sure whether it will be a holding that has paid me dividends during this month, or a holding from a different month because I don't know what opportunities Mr. Market will present to me in a couple months. I will, however, continue to contribute to my retirement plan through my employer which will be a nice boost to my end of quarter month income.

How was your August? Did you get any dividends from new names in your portfolio or is your portfolio pretty well established already? What was your quarter over quarter dividend growth from May to August?

Expected Dividend Increases for September 2018

Another month has passed us by, which means it is time for another installment of the expected dividend increases series. Prior to delving into the dividend increases that I anticipate for the DGI portfolio for the month of September, I'll start by recapping the dividend increase(s) from August, and their impact on my dividend income.

For the month of August, I only received one dividend increase. Although it's nice to get multiple raises in a month, a raise is a raise and I'll take it. Especially when the only raise you receive is a double digit increase! Altria Group (MO) raised its quarterly dividend from $0.70/share to $0.80/share, amounting to a 14.3% raise for shareholders. This raise added $1.20 to my forward annual dividend income. As I alluded to in last month's expected dividend increases article, Altria is a company that absolutely creates value by returning its gobs of cash to shareholders. They recognize that their investors are dependent upon them as a source of their income, and they don't disappoint. This company has raised its dividend every year, without fail for the past 49 years. For perspective, Altria (and its predecessor, Philip Morris Companies) raised its dividend through the highly uncertain and litigious 1990s for tobacco companies, through the Great Recession, the Vietnam War, the tech bubble, and despite the smoking prevalence in the US declining from 42% of adults in the early 1960s to 14% currently, the company has been able to achieve this due to the highly addictive and inelastic nature of cigarettes. Fortunately, the company is diversifying into the smokeless segment to combat this shift from cigarettes to e-cigarettes. The company also owns a wine business, Ste. Michelle Wine Estates, and a roughly 9.6% stake in AB Inbev (BUD). Management has been very diligent with managing its dividend over the years as it maintains a target payout ratio of roughly 80%, while using the other 20% of adjusted diluted earnings per share to pay down debt, engage in share buybacks, and to fund its transition away from traditional cigarettes. This attitude of returning cash to shareholders was on display again as the company's annual dividend amounts was raised to $3.20/share against latest 2018 earnings guidance of $3.94 to $4.03/share.

As we get further into the year, dividend increases are clearly becoming sparse. I've found that the vast majority of dividend increases come in the last month of the year, as well as the first couple months of the following year. With that said, I don't expect many dividend increases in September.

Predicted Dividend Increase #1

Realty Income (O) last announced a 0.2% dividend increase this past June. If O follows its trend of raising its dividend every quarter, we should be set for a dividend raise sometime in September. Given that O raises its dividend every quarter, the increase will be smaller than what investors receive from companies that raise their dividend once a year. Having said that, I believe that the raise will be somewhere in the ballpark of 0.3%, increasing the annual dividend from $2.64 to $2.648. The total impact of this dividend raise on my 4 shares of the company would amount to just over $.03 a year. While these dividend increases seem minuscule, one has to keep in mind that the largest dividend increases from O generally come at the beginning of the year to the tune of around 3-4%.

Predicted Dividend Increase #2

Like O, WP Carey (WPC) typically increases its dividend every quarter by a small amount. For the past two years, they have increase their dividend by 0.5% each quarter. I expect this trend to continue into this September. The quarterly dividend should be increased from $1.02/share to $1.025/share. This would increase the annual dividend income that my 3 shares produce from $12.24 to $12.30, for an increase in annual dividend income of $0.06.

Conclusion

Although I am only expecting two small dividend increases this month that will increase annual dividend income by $0.09, the alternate situation of never starting dividend growth investing is much worse. Who could say no to getting raises simply for acquiring shares in a company and holding them as long as the fundamentals of the company remain intact or improve? It's absolutely, without a doubt the most passive source of income out there, and the dividend raises are the gift that keeps on giving.

Discussion

How many dividend raises are you expecting for September? What impact will the projected increase have on your dividend income going forward?

Why Not Start Investing Today?

If you're anything like me, you probably enjoy the idea of your money working for you. After all, it takes money to live. If your money isn't working for you, you must work for your money. But you may be wondering what I mean when I talk about making your money work for you. That serves as the basis of what we'll be outlining today.

What Do I Mean?

When I refer to making your money work for you, I am referring to the keyword in this post being "investing." Quite simply, investing is the act of expending money with the expectation of that money you expended growing in purchasing power over time. In other words, investing is the act of delayed gratification. When you adopt the mindset of delayed gratification, you are adopting the mindset that by not spending this dollar I have today, I can grow this dollar to 2 dollars 10 years from now. This capital that you earned through time and patience can be used to fund your lifestyle, and in turn, it can be used to provide you the freedom that many workers yearn for.

As I mentioned not long ago, the path to becoming an equity investor has never been easier. As such, it deeply saddens me that 46% of Americans don't own stocks. I liken the US stock market as equivalent to the "Wal-Mart Supercenter" of investing. The US stock market has exposure to every industry in the US economy to diversify your portfolio, from utilities, to energy companies, to pharma companies, to media companies, to railroad companies, financial services companies, and so much more. Now, there are many ways to invest, including real estate, and I don't want to dissuade anyone from pursuing those investment options, but my personal philosophy is why go through the hassle of being a landlord when real estate investment trusts (REITs) like Realty Income (O) can handle all the headaches that go along with being a landlord on your behalf as an investor in their business.

My Preferred Method of Investing

As anyone that has followed this blog a bit can guess, I am a dyed in the wool dividend growth investor. This short piece about dividends by Morgan Stanley concisely illustrates precisely why I am a dividend growth investor. Companies have different ways to manipulate earnings through accounting, which means that dividend growth investing is a way for companies to "show me" the success of their business, and not just tell you about it. Secondly, dividend paying stocks tend to be less volatile in bear markets, meaning that their stock price is less likely to be as negatively impacted by a downturn in the stock market. And when done right, investors in these dividend paying companies continue to be paid growing dividends through these tough times. This is very helpful to many investors psychologically as I certainly wouldn't want to part with a company that continues to pay me a growing dividend even through a recessionary period. Moreover, because management generally takes paying sustainable dividends seriously, it forces them to be more discerning about how they reinvest their profits back into the business with the intent of increasing profits. Lastly, management can't screw up what it doesn't control. If a company sends half of its profits to an investor, the investor now has the responsibility to decide how they should allocate their capital. They can use it to pay bills, save it, or reinvest it into another dividend paying company.

But What About The Market Near All-Time Highs?

As everyone is probably aware, the market has been constantly hitting or testing new highs. With that said, investors and wannabe investors would be wise to remember the adage that "time in the market beats timing the market." There have been countless times since this bull market began in 2009 when the investor community believed that we would enter another recession and stocks would soon plummet. One such instance that I remember was when major credit rating agencies downgraded the debt of the US government. However, as we know, the market continued to soar to all time highs, and these news events look completely irrelevant now looking back. As Dividend Sensei over at SeekingAlpha puts it, the market is constantly climbing a wall of worry. Investors that exited the market years ago when there was concern the market would crash have missed out on serious gains, which goes to show that nobody can accurately predict exactly when the market will crash. It's been proven that the typical equity investor significantly under-performs the market. This isn't because investors lack in the intelligence to perform in line with the market or outperform the market, rather it comes mostly from a lack of discipline and emotional intelligence.

Takeaways

One can begin to create a mostly passive dividend income stream today by selecting dividend growth companies that are trading at fair to better valuations. There are nearly 900 dividend paying companies that have increased their dividends for at least the past 5 years that you are free to skim through for idea generation for investing purposes. The longer a company's dividend growth streak continues, the more indicative it is that the company has strong fundamentals (i.e. wide business moat, strong balance sheet). As dividend growth investors, we are looking for such companies to grow our dividend income, and allow our money to work for us, so we don't have to work for our money.

Disclaimer

As always, please remember that I encourage investors to do their own due diligence, and the mention of any companies in this article should not be construed as an endorsement to invest in them.

Discussion

What is your preferred method of investing? How hard is your money working for you?

The Path to Becoming An Equity Investor Has Never Been Easier

In this era of investor friendly, low cost brokers that we find ourselves living in, I find it somewhat unsettling that 46% of Americans don't own stocks. The even more disturbing part is that those who don't have access to a retirement account through an employer are less likely to have money invested in the stock market.

Given that we know the US stock market is the single greatest creator of wealth over medium to long term time horizons, why don't more Americans invest in the stock market? Below, I'll present some of the misconceptions that some Americans may have regarding the stock market that hold them back from investing. I will also offer a rebuttal for each of these misconceptions.

Reason 1: "Investing Is Only For The Wealthy"

I believe that one of the primary reasons that so many Americans don't own stocks is that they believe one must have access to thousands of dollars to begin to invest, so they just never start because of this mistaken belief. As we will discuss below, there are no shortage of options to choose from when investing. 

Twenty years ago, I'd agree to an extent that investing wasn't as accessible. Investing wasn't automated in those days, meaning more work to execute a trade (calling your broker to place a trade), and the costs were considerably higher; although in the last few years this has changed considerably. As I alluded to in my review of Robinhood, signing up for the broker is a very easy and user friendly process. It didn't take me more than 5 minutes to sign up, and a couple minutes to link my bank account to begin investing funds. Robinhood charges no fees to purchase stock. This is fantastic for investors that are just starting out and only have a few hundred dollars to invest. As long as you have enough money in your brokerage account to buy whole shares of stock rather than fractional shares, there is nothing stopping you from becoming a shareholder in some of the finest companies on the planet, and making your money work for you. If Robinhood isn't exactly your style, you could perhaps consider M1 Finance for free automated investing. Even if you prefer the bigger online brokers like Schwab, you can still trade cheaply for $4.95. The point is that regardless of if you have $300 to invest or a cool $1 million, you have access to so many fantastic brokers that allow you to begin investing with much less than you may have thought.

Reason 2: "The Stock Market Is Rigged"

What many Americans will argue when you tout the benefits of investing in the stock market is that it is rigged. In their view, institutional investors (also commonly referred to simply as "Wall Street") are screwing over the retail investor also known as "Main Street" or "the little guy"). This couldn't be further from the truth. Like retail investors, institutional investors also participate in the stock market. Unfortunately, what we continually see is that retail investors commonly try to time the market, and they also panic sell at rock bottom prices when we encounter recessions or a cyclical industry like energy experiences a bust cycle. It should come as no surprise to anyone that when one bases their investment decisions off emotion, they will make foolish decisions, selling precisely when they should be buying or buying precisely when they should be selling. As a result of these foolish decisions on one end of the spectrum, the party on the other end will benefit from the foolish decisions of the other party. Somewhere out there, there is someone who sold BP at $29 a share in January 2016, while someone else bought BP at $29 a share. The former likely experienced significant losses depending upon their cost basis, while the latter has experienced 49% in price appreciation with the current price of over $43 a share, not even including 10 dividend payments the latter investor has collected from BP over this time meaning they collected another $5.95 in the form of cash dividends that they could have reinvested into BP or other dividend paying stocks during that time, or they simply enjoyed the dividends however they chose during that time.

Reason 3: "Investing is Complicated. It's Rocket Science."

As we discussed in the second reason, many believe that the stock market is rigged primarily because they don't understand that the stock market is filled with many great businesses that generate real profits for their owners (shareholders). That is simply because although we live in the golden age of investing, we also live in the age of  "information overload" or "analysis paralysis." People will often over-analyze the stocks that they own, and sell for the most immaterial reasons because of the opinion of some writer about a particular company they own. Many that don't invest are discouraged because they have been led to believe by the financial media that only professionals with an MBA in finance are qualified to invest in the stock market. The truth is that investing can be as simple or as complicated as you'd like it to be. If you don't have the time to invest yourself or you don't feel qualified, you can absolutely invest in low cost index funds. Even Warren Buffett, the world's greatest investor advocates that the vast majority of people should contribute regularly to a low cost index fund, set it and forget it for a few decades to let compounding do the heavy lifting, and propel individuals to a safe and secure retirement. Because investing is a game of patience and endurance, it's incredibly important to know your risk tolerance. I believe the question of whether you are possibly equipped to invest in the market yourself can be answered by the following question. If the stock market were to drop 50% in the next week (assuming that the fundamentals of the global economy are relatively intact and there isn't a zombie apocalypse) would you say A) "Heck yeah, the stock market dropped 50% for absolutely no reason. I'm going to buy up as many quality dividend paying companies as I can." Or would you say B) "Oh no! The stock market dropped by 50% in the last week. I better sell before I lose everything!" Regardless of what you said, it's absolutely fine either way. One of the most important rules in investing is to know thyself. If you would continue buying stock if the market plunged, you may possibly be suited to strike out on your own and begin a strategy such as dividend growth investing (DGI). If not, you'll do well for yourself to contribute to a low cost index fund, and mostly forget about it for a few decades. There is no right or wrong answer. Investing isn't a one size fits all subject. That's exactly what makes it such a broad and fascinating subject.

Takeaways

In no way do I write these sorts of posts to demean or criticize my fellow Americans. Actually, I write these types of posts to try to educate and inspire everyone to invest in the stock market. As they say, "getting started is the hardest part." Whether you decide to invest on your own or you invest through index funds, please know that before you do either, you must know your risk tolerance. Whichever way you choose, just know that there are so many great low cost options at the tips of your fingers that weren't around 5 or 10 years ago.

Discussion

Are there any reasons you think I missed why more people don't become equity investors? What is your investing style? Do you prefer an active approach like DGI or a more passive approach like index fund investing?