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Dividend Growth Investing: My Absolute Most Favorite Idea

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It has been a long time since I last mentioned Dividend Growth Investing (DGI) on this blog. But if we retrace the steps to the beginning of the journey, readers will see that when I first started my own path to early FI, DGI was my preferred vehicle of choice.

Since that time, I’ve dabbled in the real estate space, and currently, I’m very much focused with speculating in precious metals and commodities.

Although it may appear that I am a person who likes sudden starts and stops, the truth is I have never lost sight of the big picture. When the magical day finally arrives and I am ready to start the next chapter of my life post-FI, I would like to enter that phase with complete ease of mind. In other words, I would like to be able to set it and forget it.

And when it comes down to it, the best form of income is passive income.

No More Stress!

With Real Estate Investing (REI), it is nowhere near being a passive form of income. Granted, I only own eight properties (and most of my tenants are spectacular), but nevertheless, this is something I must stay on top of each and every single day… even with a property management (PM) team in place.

As is life, problems tend to crop up when we least expect them to…

This is all fine and dandy when you are still working and used to subjecting yourself to stress, but honestly, I have never been able to envision a life of early FI where I am still stressed out and running around in circles trying to get tasks done.

To me, early FI (at least the early stages of it) is all about: traveling the world, playing on beaches, exploring new shops and restaurants, meeting interesting new people, taking on eclectic hobbies, and just NOT caring about anything but having a smashing good time!

Thoughts

This isn’t to say that I plan on liquidating my real estate holdings, but it does give me pause about adding even more units and taking on even more active duties. That is, until I get the wanderlust out of my system and am ready to settle down once again… A return to normalcy, which at some point I will want again (I think)…

Throughout the journey, I’ve come to realize this — When you are first starting out, you want to maximize your cash flow as much as possible (which might explain why I was so focused on chasing yield in 2013)…

But once you’ve eclipsed your goals and have “more than enough”, you must weigh in if the extra cash flow is worth the additional stress, strain, and time commitment.

Right now, my rental units bring in ~$2,000/month (accounting for just my own 5 rentals and no side hustle partnership deals which are already/also cash flow positive) in semi-passive income… Those aren’t outstanding numbers by any means, but please keep in mind that I decided to implement a “one step back” approach this year…

I currently have over $100,000 in cash (which I could always use as a buffer if things get tight on a given month) and another liquid $100,000+ invested in mining stocks (this excludes an additional $100,000 from retirement accounts).

Further, all of my Bay Area rental units are renting below market rate… some units rather substantially below market because I have wonderful tenants and am not desperate for the cash right now… Of course, the need to jack up rents would be a given once I leave behind my W-2 and enter early FI! This should easily contribute an additional $600+/month to the semi-passive income stream.

Anyway, short-term (pretirement), I think a combination of the semi-passive income, cash, and some freelance writing (or other side hustles) would be more than sufficient to hold me over while I relaxed some place cheap (and warm!) overseas sipping on pina colada…

As you can see, I’m very much still a work in progress…

Dividends For Later

A logical question anyone might ask is, “If you love fully passive income so much, why don’t you just convert that $200,000 into dividends NOW and just be done with everything?

Well, let’s do some math…

$200,000 -> 5% yield -> $10,000/year ->$833/month

$833/month.

Quite frankly, those figures are just not high enough to justify the risks involved… If this was 2009, sure, I might be inclined to take the bait (since I would be able to purchase stocks at substantial discounts) and secure the cash flow NOW… But with the stock market at all-time highs, there is very little appeal in that proposition…

Never ignore the risk vs. reward curve!

I guess my choices come down to this:

  • A) $2,000/month in passive income + $100,000 in cash + $100,000 in liquid funds
  • B) $2,833/month in passive income

In 2009, I would probably go with Option B

In late 2015, I will go with Option A everyday of the week…

Quite frankly, Johnson and Johnson (JNJ), 3M (MMM), Pepsi (PEP), etc. at sub 3% yields are NOT cheap.

Why on earth would I invest in those companies right now at such frothy valuations when I could just as easily speculate on commodities which are selling for pennies on the dollar, instead (which is EXACTLY what it is that I’m doing with my capital)?

Up to this point, I have not yet written a post about my “big picture” strategy, but believe me, it involves generating a lot more than $833/month in additional passive income! 😉

The BIG Picture

Without going into too many details, at some point in time, I am hoping to convert that $200,000 into some figure substantially larger.

I strongly believe in market corrections, cycles, and an eventual reversion to the mean (for all assets).

I may have to be extremely patient, but I truly believe that there will be a time and place to get back into Dividend Growth Investing.

Again, DGI is my absolute most favorite idea! Who doesn’t love 100% fully passive income that INCREASES on a yearly basis without you having to do ANYTHING?

But like everything else, there is a time and place for it… Right now, I just don’t believe that dividend growth stocks are undervalued enough to make them attractive… In a world starved for yield, everyone and their grandmother has piled on into DGI… There is just way too much retail interest in this sector right now for it to appeal to me… I’ve also learned that I really only like to buy BIG when hardly anyone else wants to touch an investment. And I’m certainly not the type of guy that is going to waste his time trying to fit a square peg into a round hole…

I don’t fall in love with my investments… or investing methodologies.

I am a Financial Freedom Investor (FFI), first and foremost. As a consequence of that, I feel the need to be forward-looking as I hunt for deep value that will in turn make the path to early FI that much shorter… and more sustainable long-term.

Why else would we do the things that we do?

But let’s say that I am massively successful in my speculations (which might take a few years) and can turn the aforementioned $200,000 into say $600,000.

Enter DGI:

$600,000 -> 5% yield -> $30,000/year ->$2,500/month

$2,500/month.

That’s enough to really matter! Especially for an extremely frugal guy like me! 🙂

Combine that with the $2,000/month from rental property and we are talking $4,500/month in cash flow, much of it fully passive.

 

Pipe dream?

 

I don’t think so…

 

I just need gold to get back to say $1,500/oz, and that ought to do it… 🙂

 

This type of strategy won’t appeal to everyone, obviously… because it requires a ton of conviction and patience (which I have)…

I look at building up cash flow differently than most investors… We all start off with the analog approach where cash flow increases incrementally and then it compounds when it gets large enough… I’ve got some of that in my portfolio myself… These days, I’m focused on the digital approach where you go from having NOTHING to A LOT instantaneously (almost)!

The digital approach is entirely more speculative and “risky” which is why it doesn’t resonate with most people out there, especially not at first glance. It’s human nature to want your cake NOW and some additional morsels every step along the way (that’s why DGI appeals to so many investors)… It’s psychologically fulfilling… Baby steps feel like progress… and passive income growth is extremely rewarding.

However, on the journey to early FI, I would argue that any incremental approach (although full of merit in its own right) needs to take a backseat to deep value.

Deep value ALWAYS wins out.

So, I’m more than willing to forsake the traditional analog approach right now, go cold turkey, and wait it out until the inevitable commodities bear market finally turns around… because when it does (and yes it is inevitable but by no means immediate), it will be that much more rewarding! When it comes to investing/speculating to get to early FI, I ONLY want to partake in any deals that have a ton of meat still left on the bone…

And if you ask anyone who really understands commodities (particularly precious metals), they will unequivocally tell you that we are in the midst of one of the UGLIEST and MOST BRUTAL bear markets EVER!

That’s music to my ears…

Buying up real estate after the bear market in 2008/2009 helped me get to my first $1MM in net worth; I’m more than convinced the current deep bear market in commodities will someday help me get to $2MM+ and indefinite financial independence.

So, as you can see, I do tend to make a lot of sudden stops and turns while on my quest to early FI… And there are no guarantees that everything will work out the way I intend and envision…

But the plan all along has been to emerge from this chaos to come back full circle. Back where we started from…

 

Dividend Growth Investing

 

But let’s face it guys — whether we are investing in real estate, stocks, bonds, currencies, commodities, etc., it’s all NOT THAT EXCITING.

 

Ultimately, for me, it’s all about being able to play on the beach on a nice sunny day without a care in the world…

 

That’s what this entire journey to early FI has been all about…

 

Fight On!

{ 17 comments… add one }
  • Financial SamuraiNo Gravatar November 29, 2015, 9:49 am

    Going from $200k to $600k will be great!

    I didn’t realize you were still working. Did you go back to your job that you took a break from? Or did you find a new job? When do you plan to permanently ride yourself of W2?

    • FI FighterNo Gravatar November 29, 2015, 6:03 pm

      Sam,

      I’ve still got the W-2 gig… I haven’t walked away just yet… It’s the same job as before.

      But the time is getting near for when we finally walk away…

      All the best!

  • JohnNo Gravatar November 29, 2015, 3:46 pm

    FI,
    You mention reversion to mean but gold has typically never been an asset class beating the stock market. What if the current levels of gold are a reversion to mean and the upside we saw in the past was an aberration?

    • FI FighterNo Gravatar November 29, 2015, 5:36 pm

      John,

      Check out gold from 2002-2011 which shows gold outperforming basically every single asset class out there… $280 -> $1900

      The miners did even better.

      It wasn’t that long ago, but that bull run was massive and created generational wealth for many speculators.

      Some would argue that the secular bull in gold is still alive and we are merely in the middle of the 50% retracement before the next explosion to the upside…

      At any rate, I feel that the miners are underpriced today even at current gold prices… Many companies are cash flow positive and generating substantial free cash, but are being punished mercilessly by the market b/c the entire sector is in disfavor.

      If you look at gold priced in other currencies (Japanese Yen, South African Rand, Brazilian Real, Canadian Dollar, Australian Dollar, etc.) it’s doing very well… The USD is shining bright right now and probably will continue to do so in the foreseeable future, but at some point it will eventually weaken again.

      And if we account for all the currency that has been printed by all nations of the world…

      Take care!

      • FI FighterNo Gravatar November 29, 2015, 5:45 pm

        I should add that the problem with gold is you CANNOT buy and hold it.

        Over long periods of time, gold will underperform. It swings way too violently in both directions.

        If you are going to speculate in this space, you MUST sell at or near a market top!

  • JCNo Gravatar November 29, 2015, 4:10 pm

    I can’t say that chasing other opportunities with some of my cash hasn’t crossed my mind. DGI is definitely not a way to quickly grow your cash flow or investment value and there’s better ways to go about it if that’s your goal. You just better know your sh!t and have the patience/conviction in your investment thesis. Because if your thought process was wrong or you give up because you run out of patience you can easily end up losing a significant amount of money plus missing out on the compounding/dividends in the meantime. DGI doesn’t have the ability to turn $10k into $20k over night but deep value or growth stocks do have that capability. I don’t know if I’d personally want to go the precious metals route but going after some higher growth or deep value could be something that heads my way. It’s just so hard though because I’m addicted to that fully passive income! For now I’m looking at some of the higher growth DG candidates like NKE, DIS, V and wouldn’t mind speculating a bit with them. I’ve also thought about doing serial writing of calls/puts to generate extra return/cash. As long as your strategy fits your needs that’s all that really matters. Thanks for the update.

    • FI FighterNo Gravatar November 29, 2015, 5:58 pm

      JC,

      Thanks for the comment. DGI is definitely the best way to go if you want smooth, consistent, and predictable (more so) returns. No arguments there…

      Exactly, like you said — you better have conviction if you’re going to speculate!

      In the case of gold, to me it’s no different than any other commodity, such as oil, which spurs the following thought, so if you would allow me the chance to ramble…

      Dividend investors will buy oil companies like XOM and CVX all day long, but there’s no denying that the oil sector is ALSO extremely volatile… Maybe not as much as say gold or uranium, but it also swings very violently (like right now).

      We’ve been conditioned to believe that oil is a safe and reliable play… but is it really all that much different from any other commodity?

      Traditionally, gold companies haven’t paid a consistent dividend like XOM or CVX, but if an investor is willing to play in the oil patch, I’m not entirely sure why they also wouldn’t be willing to play in the gold or uranium space… Low oil prices are devastating to oil companies just the same as low gold prices or low uranium prices hurt miners…

      The key is to do the research and find the best of breed companies able to ride out the storm and emerge unscathed…

      If I could pick up shares of CVX or XOM at 50% discounts, I would do so in a heartbeat… Dividends aside, we are all out there looking for value. But right now in a low yield environment, the market is placing a substantial premium on companies who pay a reliable income stream, so it’s forcing me to look elsewhere.

      Although subjective, I would say that I clearly see more value in the gold and uranium space.

      Just something to consider for dividend investors — If XOM or CVX cut their dividend would you still be interested? What if the company suspended the dividend but the share price traded at 50% off? 60%? 70%?

      At what point does value supersede the passive income?

      Because in the case of gold and silver and uranium, you can buy essentially any company out there for 80% and 90% off from their previous highs… All that’s missing is the dividend…

      Take care!

  • SimonNo Gravatar November 29, 2015, 4:41 pm

    Great read, I like the approach and think that the key to Financial Independence does not go through DGI or Yield-Chasing. It’s all about building net worth as fast and big as possible, then converting it to cashflow.

    Of course, DGI may very well be one of the best ways to do so on a risk-adjusted basis. Something i am looking into but hasn’t reached a conclusion yet. I do believe that DGI will get you there in due time and that it is VERY LIKELY to actually get you there. Going all in micro-cap mining will MAYBE get you there, but if it does it will be that much quicker. It’s all in essence about finding the best way to reliably get you to FI-levels of net worth within a reasonable time frame.

    I am also curious to how you see on real estate investing through companies, like a REIT. To the untrained eye (me) it looks alot more appealing to invest in a property manager that will pay you 90% of the cashflows and I will have to do 0% of the work. As opposed to the situation you describe in this blogpost where you must constantly work hard to attain 100% of the cash flow. I am interested in real-estate investing but it seems like way too much work for a rather small increase in output.

    Cheers 😀

    • FI FighterNo Gravatar November 29, 2015, 6:14 pm

      Simon,

      Thanks for the insightful comment; I completely agree with you.

      DGI, going through the conventional stable of favorites: JNJ, PG, MMM, T, etc. will get you there in due time, like you mentioned, but it will be a slow and gradual process.

      I definitely wouldn’t recommend anyone micro-caping it (it’s inherently more risky), but depending on the market’s mood, there may exist brief periods of time when the micro caps provide better value (like right now).

      I would never suggest or recommend anyone else do what I’m doing, but I’m betting big b/c I feel very comfortable with the risk vs reward profile of the companies I am hand selecting… Like any other investment, you have to do your due diligence and research before buying… And even then, there are never any guarantees!

      Nevertheless, each passing day that the miners get hammered, I only see more opportunity and less risk (to me, risk is largely a function of price). As long as each company is fundamentally sound and the ONLY thing holding it back is the price of the commodity itself, I feel comfortable adding to my positions.

      Because at some point, the price of gold will rise. And a rising tide will lift all boats.

      In regards to REITs, please see the following post:

      https://www.fifighter.com/finance/real-estate-thoughts/2014/04/reits-vs-rental-property-comparing-apples-to-oranges/

      There are a lot of perks that real estate investors get that you can’t get through REITs.

      Cheers!

      • SimonNo Gravatar November 29, 2015, 6:23 pm

        Thank you for the elaborate response. In regards to the JNJ, MMM and other high quality stocks, they are as you mentioned in your original post in no way cheap right now, and i do believe that even they get cheap at some point. When it comes to deep-value investments i would argue that price is not the most important factor, because if the shares skyrocket you’ll have plenty gain regardless of GAV.

        But when you are investing long term in especially Dividend growth stocks, the initial yield becomes a rather large factor of your total return, at least during the first 10 or so years. And i would argue that anyone investing even “for the long term” should be careful before they start speculating 10+ years into the future. Even if you are speculating in consumer staples. Besides, if your investing horizon is 10+ years, there is simply no way you can justify buying high now unless you expect the next bearmarket to be 5 years away. And if history is any indicator, that does not seem to be the case.

        Cheers!

        • SimonNo Gravatar November 29, 2015, 6:28 pm

          After taking a look at your very good post on REIT vs Rentals. I must add that I am against real estate investing because of the inherent leverage. I would sleep alot better taking out a 4x leverage and buying realty income than buying my own rental. That would in the current low-interest environment yield you pretty good on your equity stake.

        • FI FighterNo Gravatar November 29, 2015, 6:31 pm

          Simon,

          Thanks for the follow up and it takes us back to your original point about “building up net worth as fast as possible”.

          Once you can convert net worth into cash flow, all you care about is a reliable source of income stream… So, at that point (and not before), total returns become less meaningful and the reliability and consistent income growth trump all else.

          Like you said, the dividends will be a large part of the total return 10+ years out…

          I think the challenge most investors face is figuring out when you want to be targeting total returns and when you want to concentrate on passive income…

          Over the years, I’m starting to gravitate towards:

          Pre-FI: focus on total returns and massive gains made possible through deep value.

          Post-FI: go on auto-pilot (so you can go to the beach) and prioritize reliability and a growing income stream.

          Cheers!

          • SimonNo Gravatar November 29, 2015, 6:40 pm

            Your final point is pretty much exactly what i’m figuring on the matter. First build net worth and then convert it into financial independency. The hard part is knowing how to build the net worth.

            There are several ways to go about it and i suppose it boils down to what your tolerance for fluctuations, your mindset and your wallet will allow for. Without stepping on any toes i think DGI with bluechip stocks takes alot less effort than hunting deep value, which is probably also why there are greater gains to be found in deep value hunting.

            To be frank, most blogs i see about DGI seem to have 80% similar stock portfolios. They all include JNJ, P&G, MMM, AAPL, etc. So i think building a diversified portfolio with them should give a great return on time invested.

            I would also argue that as long as you keep track of your costs, your net worth and the current aggregate yield of either the stock market or a diversified DGI portfolio, can always keep track of “How much passive income would i have?” for any given time. It would be like having a fake portfolio focused on DGI at all times that allows you to see your current potential AND track your progress towards Financial independence.

            I may still come around to going into DGI because it seem to provide great risk adjusted returns although not the best total return. And a good nights sleep is not something to laugh about either.. after all, it’s only money… And if you are only thinking about the money, what would you do when you are finally free?

            Thank you for a good discussion as well as thought-inducing blogposts! In my opinion the best way to learn and share knowledge.

  • dannyNo Gravatar November 30, 2015, 12:28 am

    Just stumbled upon your blog today, nice post!

    Was curious what you thought about GSK,DUK,KMI or HCP, look like these have been taking a hit lately.

    • mikeNo Gravatar November 30, 2015, 9:35 am

      I’ll field this one.

      GSK: A pharmaceuticals company. Within the healthcare sector I think pharmaceuticals is one of the better ways to go. I believe they have been unjustly punished for short term headwinds (Valiant debacle, politicians wanting to stop price gouging, tax inversion deals (pfizer/agn), also pharmaceuticals have been clumped in with the bubble in bio companies causing a sell off in both. This has put a lot of pressure on pharmaceuticals. I think these factors are short term in nature. The one item I would warn you about is GSK is branching into foreign markets (emerging). With weaker/inferior global currencies it may be hard to command robust sales globally.

      DUK has operations in Brazil which may be tough to justify given the instability within that country and the current economic outlook and lower currency.

      The bottom line is that investors are pricing in the rate hike (thus hitting these higher yielding stocks the hardest). If the rate hike is delayed they will enjoy a nice bounce.

      KMI is oil. Be careful if a dividend cut happens, TIMBER!

      HCP looks decent/stable.

      *Full disclosure, I own shares of PFE and AGN. This post is for informational purposes only and not to be used or construed as investment advice.

      • mikeNo Gravatar November 30, 2015, 9:37 am

        also another note on DUK, they just bought out a natural gas company. Some investors feel they way overpaid which shows poor management.

  • Tax NewsNo Gravatar November 30, 2015, 1:53 am

    Having 0 debt is great.
    But if you had enough passive income to perpetually support your expenses,
    and you could direct your creativity and passion to do what you want, is just beyond perfect.

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