Monday, November 21, 2016

2016 Total Dividend Increase Summary

Today my last company reported their dividend hike for the year of 2016. It was Becton Dickinson and they raised the dividend by 10.6%. I was very satisfied of this hike since I was expecting 10% since the start of the year. This is very much in line with what BDX does in the past, so business as usual.

At the end of the year after every company has announced their dividend policy, I tally up how each company did and try to see how my income grew just from dividend increases alone. Below is a table on the dividend history this year for each month in 2016. The second table below shows for each company the dividend hike, the dividend yield as of 11/21/2016, and the current company holding size as of 11/21/2016. From these numbers I can calculate my overall portfolio dividend increase and the overall portfolio dividend yield.

Sunday, November 20, 2016

Making the case for buying a home

Although this blog is primarily focused on dividend growth investing and the ever increasing accumulation of periodic dividend checks, I wanted to step back and talk about housing since it's such an important topic since everybody has to deal with it. Housing is an absolute necessity that everybody requires and is an important part of everybody's daily life. I have always wanted a house to live in and one that I can call my own. I would like to own my own plot of land and not have to share walls with neighbors who play trance music all night. I want to be able to plant my own tree and plants. I want to have my own clean indoor parking garage and not have to worry about other drivers hitting my car. I want my own backyard where I have a dog run around. My target home is in the standard "American" style home with 2 car garage, 3 or so bedrooms and 2 bathrooms, a kitchen and living room, and a back + front yard. I don't want a large McMansion but I don't want one that's too small either. I am targeting 1200-1400 sq ft.


I live in San Jose in California. The price of housing here is very expensive due to the high number of tech employees and companies hiring. Although the price is high, I am considering and putting together a plan for November of next year to find a home to purchase. I am targeting a starter home in the $750-850,000 price range with a 20% down payment. This is a hefty amount so I will have to take some of my dividend growth stocks and liquidate them to help pay for the down payment :(

By November of next year I will have saved some more cash from my job, but I will still need to liquidate around $70k of my current holding of stocks (I currently have around $240k in dividend stocks) to help pay for a 20% down payment.

The mortgage rates when I checked now were around 4.1% and the property taxes are around 1.1%. The mortgage rates have a likelihood to go up even further since the Fed is likely to increase interest rates in December 2016. Trump's desire to increase US infrastructure spending may also cause interest rates to rise further (as seen in the spike in bond yields after he took office). Higher interest rates will lower prices of homes since it will cost more to borrow. I hope by November of next year the prices of homes will decrease relative to the increase in rates (if rates do increase) so that I can decrease my down payment.

To convince myself that buying a home is a financially sound decision I compared two extremes of life:
1) Buying a house and living in it for life
2) Renting for life
For those that don't want to read through the math, the summary I found is that owning a house is substantially cheaper and the quality of life in owning far exceeds what one can get from renting for life in the equivalent price category. Those that are still young should start young since the benefits are even greater the younger one is.


Buying a home and living in it for life (+60 more years for a buyer in his late 20s):
I am going to use a reference $850,000 home in San Jose (picture shown above) that is 3-4 bedroom 2 bath, front and back yard, 2 car garage, and 1300 or so sq ft. This is the cookie cutter old school American style house.

Down payment: For a $850,000 home at 20% down, one will need to pay right at the start $170,000

Mortgage: For 30 years, a mortgage at a 4.1% rate with 1.1% in property taxes and some small amount for property insurance will cost around $4200 a month. Assuming the buyer is in the 28% tax bracket since one needs an income to support this mortgage, one can get around $750 back a month in tax returns if one itemizes the mortgage interest and tax. That means in 30 years one has to pay 30 yrs * 12mo * ($4200-$750/mo) = -$1,242,000

Tax: After the mortgage you will still need to pay 30 years of property taxes at 1.1% to hit 60 years. This amount is 30yrs * ($850,000 * 1.1%) = -$280,500

Maintenance: Houses need maintenance or else things just break. Assume worst case you need to spend 1% of the house's value every year which is $8500 a year or $708 a month. For the entire lifetime this totals 60yrs * $8500 = -$510,000

Just from looking at payments, the total payment costs in 60 years of the above items summed together is -$2,200,000

One needs to remember however that after 60 years, the home owner can have the option to sell the estate and give it to his spouse or heirs. Assume the house had 0 appreciation throughout the 60 year period (highly unlikely) and the owner can sell for the original price of $850,000. Then the home owner in 60 years of living in the house has actually spent just $2.2M-$850k = -$1,350,000

If you consider that the home price will accumulate with US usual inflation of 2% a year (highly likely since the US prints money like crazy), then the final home price will rise from $850k in 2017 to $2.73M by the year 2077. If the buyer wants to liquidate or pass the asset on to his heirs, the home owner actually has no net cost since he will profit by around +$500,000

Now let us look at the total cost of ownership of a rent-for-life...

Renting for life (+60 more years for a person in his late 20s):
I will use average renting cost right now in the San Jose bay area. Since I have lived here for 4 years and shopped+lived in 3 different apartment complexes, I have a decent understanding of apartment prices in the Silicon Valley area. A 1 bedroom 1 bathroom apartment here will be $2300 assuming one chooses one with a decent standard of living. Very small and less than desirable (unsafe, unclean, etc) 1 bedroom apartments can range from $1800-$2200. Recall that this is a 1 bedroom apartment compared to the 3-4 bedroom house used in the previous scenario.

I will assume rents increase at 2% a year to keep up with historical US inflation rates. This is actually very conservative since bay area rents have been actually growing at 8%-10% annually (I started with $1400-1600 a mo in 2010-2012 then $1700 a mo in 2013, then $1900 a mo in 2014-2015, then $2300 a mo in 2016 and now I have to move since it's increasing again). The prices shot much faster than the average inflation rate after the economy in the bay area came out of the 2008-2009 great recession.

60 years of Renting a 1 bedroom/1bath apartment in San Jose:
For non-math readers, this equation just means summing up all 60 years of $2300/month rent and include the 2% annual inflation rate.
 
= -$3,150,000

Renting is abhorrently expensive and I can attest first hand that the increase in rent year after year to keep up with inflation will completely screw over anybody. Even if I reduce the inflation from 2% to a measly 1%, the total cost of ownership is still $2.25M which is more than the cost of owning a 3-4 bedroom home for 60 years. From this point of view it's completely not worth it since the quality of life in a 1 bedroom apartment is not comparable to a single family home.

To make the comparison even more clear, I will use the best price one can get for a very small single family home (say 2-3 bedrooms) in San Jose. This will on a good day be $3500 a month.

60 years of Renting a 3 bedroom single family home in San Jose:
= -$4,800,000

It will cost one over 4 million dollars to rent for life in a single family home.




Although my dividend portfolio annual income will take an income hit next year since I will have to liquidate some shares to fund the down payment, I think the lifetime financial decision to own verses rent is clear. I would rather suffer the initial upfront burden of the 20% down payment and secure my future financially than continue to suffer the effects of rental appreciation. An investor must also remember that one cannot sleep on shares. An investor can however live in a house if he has to. With renting, one has nothing to show at the end of one's life, whereas a home owner has the option to sell or pass on his home after he no longer needs it.

The case study above in San Jose, California shows that renting will put you behind $3-5 million while buying will at the very worst case put you behind $1.3M if your house somehow doesn't appreciate in 60 years, but one will likely profit at the end of the day by owning a house for 60 years due to the effects of inflation.

For those in different cities, you can do the same study to see how renting vs buying stands. If rents are substantially cheaper for some reason than buying, then one should consider the option of renting as well.

Tuesday, November 15, 2016

Recent buy: PM & SJM

On Tuesday at around 8am PST I will add the following:

Philip Morris (PM): $500
JM Smucker (SJM): $500

This $1000 yields on average 3.55% which will add $35.5 to my yearly income.

Monday, November 14, 2016

What I'm doing about the latest corrections

I was traveling last week so I didn't do as much research as I normally do. When I sat at the airport I flipped through the numbers and saw a lot of changes over the last few days especially after the Trump election (talk about a change!) and the large rise in US Treasury yields.

The rise in yields definitely had a larger impact on my portfolio I think than Trump becoming the commander in chief. When yields rise, people flee away from higher yielding stocks. For me this primarily means my consumer staples, utilities, REITs, and telecom (although I don't hold much anymore). Other high yielding sectors like MLPs will also be affected. My largest holdings are in the consumer staples and it is my favorite sector so seeing it pull back so much was a nice change. I like consumer staples because the companies are not cyclical. They provide products that people use everyday, which makes it more likely that their dividends will continue to raise year after year.


Take a look at the recent drop. This is like a 10% drop over the entire staples index. For more of the other indexes I track visit: http://www.youngdividend.com/p/sector-view.html

I want to own companies that have growing earnings. That way they can increase their dividends they pay me every year. Here are some names I am having on my watchlist. There are definitely better valued buys in the staples sector but I want to only reserve my additional buys to growing companies not slow growers. I will try to balance my buys into some higher yielders and lower yielders. Lower yielders usually grow faster while higher yielding companies are more mature.

Likely better return companies:
CHD (still pricey), lower yield high growth
CLX (fair value), high yield moderate growth
HRL (fair value), lower yield high growth
MO (a bit pricey), very high yield stable growth
PM (fair value), very high yield stable growth but with forex challenges
BF.B (still pricey), lower yield moderate growth
MKC (still pricey), lower yield moderate growth
SJM (undervalued), high yield good growth

Slower growers but very high quality:
CL (fair value), moderate yield slow growth
KMB (fair value), high yield slow growth
GIS (fair value), high yield slow growth
PEP (fair value), high yield slow growth


In addition to other sectors, I am liking Realty Income (O) for REITs. It has pulled back a lot and is starting to look attractive. If the healthcare medical devices pull back more I am very interested in BDX, SYK, and BCR. That space is still holding up strong. I am not very interested in Utilities right now aside from Next Era Energy (NEE). I am also not interested in Telco (AT&T and Verizon) since their growth rates are too slow for me.

Stay tuned for my buy choices.

Wednesday, November 9, 2016

Recent buy: APD, SJM, SBUX

I will be adding the following:

APD: $200
SJM: $304
SBUX: $1850

Starbucks has recently hiked its dividend by 25% and its yield is starting to become much more attractive for such a high grower. The market has fallen severely after Trump officially became the president. This is presenting me with great buying opportunities especially in the Consumer Staples and Utilities sectors.

Friday, November 4, 2016

October 2016 Portfolio Summary

Introduction:
The purpose of this blog is to document my journal to accumulate passive income. If an investor wants to become independent, he needs to make sure that he has several sources of income. Many people today rely purely on their primary vocation for financial support. Having worked in the tech industry for several years, I have seen many of my colleagues given the "pink slip" as companies reduce their expenses. One's employment is never guaranteed and this is very scary indeed. One's consistent paycheck from his employer should never be taken for granted. In order to take control of one's life, a person must become an employer (or business owner) and not remain as an employee forever. As an employer, you own assets and people that produce income for you. You keep a portion of the profits from a profitable enterprise. The employees are there to work for you to bring in profit and you will pay the employees a small portion of your profits to ensure they come in to work the next day. In the future, I want to be on the side of the employer or shareholder or business owner. I do not want to remain an employee forever since the accumulation of wealth is only linear as an employee (based on hours worked and wage) while the accumulation of wealth for a capitalist is exponential. My current goal as an employee is to accumulate as many businesses as I can to pay for my living expenses.

October:
The market was rather shaky in October. From what I've noticed, September and November have often been volatile months with the indexes often dropping several percentages. It seems this year that the volatility is continuing into November as well. Part of my reasoning is that the elections are coming up in a few days and there is large uncertainty. There is also the Federal Reserve decision in December which many believe will be a hike to the interest rate. For the month of November, the Federal Reserve decided not to hike the interest rate. I believe also that many of the companies that are not doing so well this year will continue to drop as the year ends. Many people are looking to perform tax loss harvesting including me. Those people will sell the losers to reduce their taxable income.

I pasted the charts below for the S&P500 index, the crude oil prices, and the dollar index. My portfolio follows similarly to the S&P500 index because my portfolio is very diversified. I would say my portfolio rises and falls less than the S&P500 (less volatility) because of my larger weighting in consumer staples and my low exposure to technology, banks, and industrials. The oil price is shown because today's market often times follows the price of oil. Oil is seen as a demand indicator and when oil prices fall, institutional investors often sell. This is rather contradictory since lower oil prices will help many companies since oil is a basic commodity that companies use to produce their goods and services. The dollar index is shown because a strong dollar will have a negative effect on many of my companies that are multinational. A strong dollar means less sales overseas since our goods are more expensive for foreigners to purchase. 


The S&P500 is correcting. Although this may be seen as bad news for most people I welcome this change. It allows me to purchase companies at a large discount. The yield will also now be higher for many of the dividend aristocrats I follow. The US dollar has risen in October but is largely stabilized around 95. Crude oil prices have taken a tumble lately. I am not invested in energy or oil stocks anymore so this is not something I am too bothered with.

Portfolio:
My portfolio at the end of October is trailing a bit below $1/4 million. I seem to be having some difficulty going off the 1/4 million mark and it's largely due to the market uncertainty and selling happening before the 2016 election and December Fed hike decision. My positions are sorted from highest to lowest. The right columns of the table show the S&P credit rating (AAA being the best), the Value Line Financial Strength rating (A++ being the strongest), and the Value Line Safety rating (1 being the safest).

My general guideline in investing is to buy high quality. It is better to pay more for a few extraordinary high quality company than to buy a lot of cheap good companies. The portfolio's goal is income accumulation. All of my companies pay dividends and all of them raise the dividend every year. The coverage of that dividend is paramount and I do everything in my power to ensure the companies are safe in covering their dividends.

Name Ticker Sector       Value   Weight        Divies      Yield S&P Fin VL Fin VL Safety
Altria Group Inc MO Staples $36,412.09 14.78% $1,365.38 3.7498% A- B+ 2
Home Depot Inc HD Discret $11,368.87 4.61% $261.09 2.2966% A A++ 1
Johnson & Johnson JNJ Health $11,218.71 4.55% $312.09 2.7819% AAA A++ 1
Philip Morris International Inc PM Staples $10,239.44 4.16% $442.65 4.3230% A B++ 2
Visa Inc V Financial $10,170.04 4.13% $83.23 0.8184% A+ A++ 1
Realty Income Corp O REIT $8,974.37 3.64% $384.05 4.2794% BBB+ A 2
PepsiCo PEP Staples $8,141.90 3.30% $229.83 2.8228% A A++ 1
Kraft Heinz Co KHC Staples $7,924.62 3.22% $220.51 2.7826% BBB- A 2
General Mills, Inc. GIS Staples $7,823.10 3.17% $245.75 3.1414% BBB+ A+ 1
Ross Stores Inc ROST Discret $7,372.47 2.99% $64.97 0.8812% A- A 2
Kimberly-Clark KMB Staples $7,081.03 2.87% $229.28 3.2380% A A++ 1
Nike Inc NKE Discret $6,344.89 2.57% $81.66 1.2869% AA- A++ 1
Mastercard Inc MA Financial $5,899.19 2.39% $43.20 0.7323% A A++ 1
3M Co MMM Industrial $5,804.30 2.36% $154.48 2.6614% AA- A++ 1
Reynolds American Inc RAI Staples $5,422.23 2.20% $181.93 3.3552% BBB A 2
Becton Dickinson and Co BDX Health $5,381.95 2.18% $82.04 1.5244% BBB+ A++ 1
The Coca-Cola Co KO Staples $5,104.36 2.07% $170.02 3.3310% AA- A++ 1
Church & Dwight CHD Staples $5,011.03 2.03% $80.64 1.6092% BBB+ A+ 1
Hormel Foods Corporation  HRL Staples $4,675.83 1.90% $74.44 1.5921% A A 1
Medtronic, Inc. MDT Health $4,634.33 1.88% $97.68 2.1078% A A++ 1
Starbucks Corporation SBUX Discret $4,603.99 1.87% $71.15 1.5453% A- A++ 1
Dominion Resources, Inc D Utilities $4,374.49 1.78% $164.74 3.7660% A- B++ 2
McCormick & Company MKC Staples $3,906.98 1.59% $70.84 1.8132% A- A+ 1
TJX Companies Inc TJX Discret $3,866.14 1.57% $56.00 1.4485% A A++ 1
Automatic Data Proc, Inc ADP Tech $3,812.45 1.55% $90.48 2.3732% AA A++ 1
NextEra Energy Inc NEE Utilities $3,719.10 1.51% $104.51 2.8101% A- A 2
Xcel Energy Inc XEL Utilities $3,653.25 1.48% $122.31 3.3481% A- A+ 1
McDonald's Corporation MCD Discret $3,585.07 1.45% $120.66 3.3656% BBB+ A++ 1
Air Products & Chemicals, Inc APD Materials $3,534.83 1.43% $91.37 2.5847% A A+ 1
Stryker Corporation SYK Health $3,043.86 1.24% $40.01 1.3143% A A++ 1
Southern Co SO Utilities $2,840.05 1.15% $126.25 4.4453% A- A 2
AT&T Inc T Telecom $2,690.79 1.09% $143.98 5.3508% BBB+ A++ 1
Colgate-Palmolive Co CL Staples $2,486.89 1.01% $54.97 2.2106% AA- A++ 1
Procter & Gamble Co PG Staples $2,286.04 0.93% $70.75 3.0947% AA- A++ 1
Abbott Laboratories ABT Health $2,280.54 0.93% $61.80 2.7097% A+ A++ 1
Verizon Communications Inc VZ Telecom $2,036.08 0.83% $100.35 4.9285% BBB+ A++ 1
Clorox Co CLX Staples $1,603.22 0.65% $44.72 2.7894% A- B++ 2
C R Bard Inc BCR Health $1,567.64 0.64% $7.51 0.4790% A A+ 1
WEC Energy Group, Inc. WEC Utilities $1,402.35 0.57% $47.68 3.3997% A- A+ 1
The J. M. Smucker Company SJM Staples $986.73 0.40% $22.73 2.3038% BBB A++ 1
Aqua America Inc WTR Utilities $918.36 0.37% $23.92 2.6049% A+ A+ 2
Misc Type ……….. Partial Totals Weight Yrly Dividends  Avg Yield …..832 …..9 …..82
Equity Stocks $234,203.62 95.04% $6,441.65 2.7504%
Liquid US Dollars $9,949.51 4.04%
Non-Liquid Assets $2,278.50 0.92%
. .. Equity + Misc Weight …..2 ….. …..222 …..2222 …..223
Total $246,431.63 100.00%



My largest weightings are in consumer staples. These companies are corporations that make products we use everyday, which is why they are called staples. These include stuff like water and drinks, food, shampoo, toilet paper, toothpaste, cigarettes, food spices, and laundry detergent. They are not high flying growth stocks but they do continuously grow their dividends and are readily capable of covering their dividends due to the anti-cyclical nature of their business. The majority of my portfolio are in positions I would classify as Core or Super Core. These business are ones I can trust for the long term. I don't see many of these going out of business any time soon since they offer products and services we all need no matter the economic situation. Supporting and Speculative positions are usually companies that I classify as less robust but may offer larger capital gain growth than my Core positions. I try to balance my portfolio between super growth and steady payers.

My Progress:

Here is the graph showing my progress so far to reach $1 million. With $1M I hope to have a 2.6% average yield on my portfolio which is around $26,000 a year in passive income from my assets.

My portfolio has been flat for several months because the market has been falling and I have been able to offset that with my periodic contributions. Although my portfolio has been going no where, my dividends have been growing as seen in the plot below.

One must remember as a dividend growth investor that the ultimate goal is income accumulation, not share price accumulation. Share price accumulation is only icing on the cake to income accumulation. Usually, when companies increase their dividends, their share price will rise along with it but this is often an after effect of the business being successful. As long as my portfolio's dividend income continues to rise, I am content. If my income is dropping because my companies have to cut their dividend, then I will become concerned.


Stay tuned for next month's update.

-YD