Dividend Portfolio: 2009 Year End Update

dividend-new-yearYear 2009 was the first time that I made my goals public. It has been a truly a roller coaster ride. The year started with equity markets going down steeply, and then it came back up quite significantly. Throughout the year I continued to add good quality dividend growth stocks in my portfolio. So how did my dividend portfolio perform with reference to my goals set at begin of 2009? The table below shows the summary of parameters at end of year 2009. The portfolio now has:

(1)  Dividend Cash flow is $2221 (2008: $1358, Target: $3000);

While I continued to increase year-over-year dividends, I missed my goal by large margin. The primary reason I missed my goal is desire to maintain asset allocation and valuations. Many of the stocks that I would like to buy have had significant run ups and hence the valuations did not justify buying them. In the beginning of 2009, when I had identified my goals, I had not anticipated this level of change in the market pricing. For year 2010, I have set my dividend cash flow goals at $3200. continue reading rest of the article….

My 2020 dividend cash flow goal – A Simplistic View

In my investment process, I have mentioned about my 2020 dividend cash flow goals. I am targeting to achieve a dividend-based cash flow of $30,000 by year end 2020. In this post, I am discussing a back-of-envelope empirical exercise to demonstrate the feasibility of achieving this goal.

At end of year 2008 the dividend champion list has 128 companies. The annual dividends that these companies pay range from $2.80 to $0.20. The average dividend for all of 128 companies is $1.17 and the average price is $35.71. In addition, there are 75 companies that pay at least pay $1 annual dividend. The average dividend of these 75 companies is $1.53 annualized.

Let us assume we invest in 50 companies that will pay at a minimum $1 annual dividend. This is just an assumption for empirical calculation and has no basis.

· with my end goal of $30000, we will have to buy 600 shares per stock [30000/50].

· total funds needed = [50*600*$35.71] = $1,071,419 i.e. we can have this cash flow today with one million dollar.

Now let us do empirical optimization and make it simple.

Looking at dividend champion list, the average dividend for 75 companies (with at least $1 dividend) is $1.53 annually. Assume that the 50 companies that we have invested in has average annual dividend of $1.53. In fact I expect this average to be more – but let us be conservative and simple).

· number of shares needed per companies = [30000/(50*1.53)] = 393

· total funds needed = [50*393*$35.71] = $701,780 i.e. now need $702K.

In this calculation, we still need to include dividend growth (positive effect), dividend reinvestment (positive effect), and price appreciation (perhaps negative effect).

Let us consider that at begin of 2009; we have 50 shares of one company stock in our portfolio and each stock costs us $35.71. Each share has an average annual dividend of $1.53. Therefore, the total investment in one company is $1786.

· we will consider dividend growth rate of 8% every year;

· dividends are reinvested only once at the end of each year; and

· at the end of each year, we will appreciate the price of stock by 8%.

Let us do the math:

· at end of 2009, total dividend received $76.5, price of share $38.57

· beginning 2010, number of shares [(76.5/38.57)+50] = 51.984

· end of 2010, total dividend received $85.9, price of stock $41.65

· continuing this until end of 2020 – number of shares 76.706, total annual dividend $273.6.

· on our initial investment of $1786, we will receive dividend cash flow of $273.6

Extrapolating this for 50 shares each in 50 companies

· total invested capital [50*50*$35.71] = $89,275

· total dividend cash flow [$273.6*50] = $13,682

· we have still not reached our end goal of $30,000 dividend cash flow.

Solving this backward, to achieve $30,000 dividend cash flow, we get:

· 110 shares for each company [total 50 companies*110 shares].

· total initial investment is $196,405.

To summarize….

As of today, if we invested $196,405 in 50 companies from dividend champion’s list (and bought 110 shares for each), we should be able to reach our 2020 goal. The yield on cost would be 15.3% [30,000/196,405]. This assumes dividend growth of 8%, annual dividend reinvestment, and share price appreciation of 8%.

Our first calculation of one million dollar came down to approximately $196K. This can be further optimized by including quarterly reinvestment, stock selection, and initial buy price.

The purpose in this empirical calculation is to show (1) the significance of dividend growth and dividend reinvestment; and (2) we can use simple back-of-envelope calculation to figure out the initial feasibility of our goals. To evaluate the first pass feasibility of our objectives we do not necessarily need complicated mathematical models. Once we understand that the objective/goal is reachable (and not out of whack), then we can go to next step to understand how to execute the process and optimize it for best results.

Year 2009 Dividend Portfolio Goals

This is the first time I will be making my investing goals public. In addition, I also plan to provide quarterly reviews on how I am making progress. My dividend portfolio consists of two investments buckets. One bucket consists of dividend stocks, and the second bucket consists of dividend ETFs/CEFs. Since both of them provide dividend cash flow, I review both in combination (and not standalone). The standalone analysis is used during the asset allocation and/or diversification analysis.

In order to establish my goals for 2009, first I will present the current state of my dividend portfolio. It will form the baseline on which I will continue to build my portfolio. The table above shows my existing 2008 year end portfolio parameters. The portfolio has:

(1) $1358 per year as dividend cash flow;

(2) Yield on my original investments (YOC) is 5.17%;

(3) Lost 19% of the value (relative to loss of 38.61% in S&P500); and

(4) Personal rate of return (XIRR) as -9.0%

In the prevailing economic environment, companies are showing reduced earning, paring down growth plans and expenditure, and slashing and suspending dividends. Not only that many companies are not able to look forward and predict their own earning expectations. To me, not able to put an expectation is a sign that management is either not able to plan (clueless?) or not sharing the true state of their business. I do not see any economic drivers that, at least in first half of 2009, will make market go up. I anticipate that Year 2009 will continue to show pessimism with occasional burst of optimism. As dividend based investor, I can invest in some really good companies at bargain prices.

In first few initial years, my focus is on accumulation based on divided cash flow. Therefore, my dividend cash flow driven target is as follows:

(1) Generate dividend cash flow of $3000 per year (currently at $1358).

(2) YOC will get affected because it will be based on my initial buy price. One argument is markets would drag down the price, while the other argument is that demand-driven dividend companies would be at higher price. Additionally, I will need to balance initial yield vs. risk to dividends. With this contrasting perspective, I am anticipating my YOC will drop down below 5.0%. I will target it not to drop below 4.5%.

(3) XIRR and value is something that I keep track for relative comparison. My preference is to keep both parameters on the positive side and keep my portfolio value better than S&P500. Unfortunately, I do not have any direct control over it. I will invest in good companies and hope that Mr. Market will do the rest.

In addition to these tangible targets, I have few other intangible areas of portfolio management that I need to continue to work on. These are:

(1) Manage asset allocation and diversification from risk-to-dividend viewpoint; and

(2) Invest in international dividend paying companies.

For me, the challenge in these targets is to be able to provide sufficient funding and balancing dividend risk versus initial yield.

Dividend Tree Investment Process

The purpose of my starting this blog spot is to share my journey in achieving my investment goals. In the process, I expect to continue my learning process by discussing contrasting views, and hopefully make smaller mistakes. Continuing with my motto of keeping things simple, this page describes my seven step investment process in a broader context. I foresee that over a period of time, this page will act as index page for my complete investment process. continue reading rest of the article….

Dividend Tree Investment Goals

If I do not know where to go, how can I start the journey? This seems to be a very simple question we face day-in and day-out. But when it comes to investment plans, in general, most of the individuals fall short in identifying the defined final destination. In this post, I will discuss what is my vision and what would I like to achieve in my dividend portfolio. I have started planting the dividend seeds. Only time will tell whether I can reach that goal, and grow the tree with dividend fruits।

Since the name of this blog spot is Dividend Tree, here I will focus on my goals for my dividend-based portfolio. It is to use my savings to generate a stable and sustainable stream of passive cash flow. So why not just use savings, CDs, and/or other fixed income vehicles? Well, a $100K invested in CD’s and/or savings will generate at the most 4% or 5% interest income. Additionally, it does not have potential to increase the value of my capital. Instead, if I make investments in fundamentally strong companies which consistently pay and grow (y-o-y) dividends, then I will not only have an “increasing” passive cash flow but also have a potential for capital appreciation।

To begin with, I am targeting to have an annual dividend-based cash flow of $30,000 by year 2020. I came up with this number after analyzing and modeling some of the past historical data for few blue chip companies (e.g. JNJ, PFE, GE, BAC). While I plan to discuss this model sometime in future post, the model showed that with consistently growing dividends and by continuously reinvesting it, this level of cash flow is an achievable target। Since this is based on past historical data, I acknowledge that it may not be possible to repeat such scenarios in future। However, I have identified a tree that I want to grow, so that I can plant the seeds now.

Time will tell whether I can grow my tree of dividends. For now, I have started planting the seeds, and have started my efforts to grow it.

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