dividend stock ladders

[unclemick]

I ladder my hobby stocks- (remember I'm INTJ, left handed, 80% balanced index, and fond of De Gaul and the Norwegian widow). With that disclaimer - here's what I do.

Since 1994, using then Moody's now Mergent's Handbook of Dividend Achiever's pick four or five stocks every 1-3 years and buy using Moneypaper to get DRIP plans. I use div + div growth, long record of div and a low/no cost DRIP as pick criteria. Give them 7-10 years to compound divs/div growth and keep the ones that yield over 7% in div or total return on money invested. Sell every 1-3 years the ones that don't make the cut. Also DCA some and buy on dips - which muddies the water a little. I know of no easy way to put 'math power' to evaluate this method because of spin off/merger/survivorship AND what would I compare it to - ? a value fund index?.

Any - wise - just a fun hobby, but it has creaped up to 25-30% of my taxable income stream (no SS or IRA takeout yet). My barkpark notes say I haven't beat my balanced index over ten years. ? Any thoughts on how to set up an analysis of the technique? Remember - I'm selling some laggards and suffering mergers along the way - so take out has been lumpy?

 

[John Galt]

unclemick............I'm happy for you, having fun with
your "hobby". Sounds like a bunch of work to me, but
like you said "different strokes"

John Galt

 

[JWR1945]

I know of no easy way to put 'math power' to evaluate this method because of spin off/merger/survivorship AND what would I compare it to - ? a value fund index?.

I recommend that you calculate your income stream after adjusting for inflation.

If you are willing to put in more effort, do something along the lines that hankjoy has done. Make references to the current yield relative to your initial outlay (as measured in real dollars). You could look at the composite (add up all of your costs and compare that with the total income stream) and/or do the same thing with individual companies.

[The Government publishes inflation statistics on the net. I can supply a web address, if needed. It is pretty easy. I would start with www.firstgov.gov and it would only take one or two steps for me to find the data.]

Your income stream using this method lasts indefinitely. You are never forced to sell shares. You do sell some shares, but only because you see more attractive opportunities. To make a stock market index comparison, let me suggest that you base it on the S&P500 dividend amount [not yield] in real dollars. Professor Robert Shiller includes the dividend amount (in both real and nominal dollars) as well as the index value (or price, in both real and nominal dollars).

The only complication is that you make purchases every now and then that you may want to account for. This is the same as if you were making similar purchases of the S&P500 index. You would like to know how someone who buys when you buy and sells when you sell would have done, not simply how the S&P500 index performs.

My suggestion for a fancy comparison is that you set up a spreadsheet that shows your actual income stream as compared to a hypothetical income stream from S&P500 dividend amounts if purchases and sales were always identical.

Have fun.

John R.

P.S. The nay-sayers don't understand your question.

 

[charlie]

unclemick,

I also invested in DRIP stocks via MoneyPaper several
years ago and acquired about 40 as I recall. I would
use the quarterly report as a trigger to invest about
$100 per quarter in each stock. This was when my
laundry was doing pretty good. I sold all but 10
the last few years and am considering selling them
as well. Basically, I like the DRIP concept except
during tax time. A real pain was when a stock would
spin-off another stock that I wasn't interested in.

Another problem was what to do with the first share
you bought through MoneyPaper. Many companies
would not allow you to deposit the share for safekeeping. You were then stuck with the 1st share
when you sold off. Right now I am sitting on shares
from 5 different companies that I don't want and
can't even give to my church because the broker fees
for selling are more than the stock is worth.

After reading Bernstein, I became even more aware
of the diversification risk of holding individual stocks,
even 40 is not enough.

Good luck with your "hobby". As for me, that era has
passed.

Cheers,

Charlie

 

[wabmester]

As a card-carrying nay-sayer, all I can say is ... err, uhm, nay. Nay!

 

[JWR1945]

More details for unclemick:

Get Professor Robert Shiller's data either as an html file as an Excel spreadsheet.
http://www.econ.yale.edu/~shiller/data.htm

We use the first three columns: the date, S&P Composite Price P and Dividends D. To convert to real dollars, we may choose to include the fifth, which has the Consumer Price Index CPI.

The date has the form of the year, dot, the number of the month (01 = January, 02 = February, etc.).

For each purchase (and sale) that you have made (and will make), scroll down to the closest month. Read the price P and Dividend amount D. For example, if you made a purchase in November of 2000, the date would be 2000.11 and the price P would be 1378.04 and the dividend amount D would be 15.993333.

Next you would project that purchase to a later date. Professor Shiller's complete data ends at 2002.06 and, unfortunately, that is as late as we can extract from his data. [I am sure that other sources have the index value P and dividend amount D for later dates. Be very careful, however, to make sure that the other sources produce the same (nominal) numbers as Professor Shiller. There are lots of subtle ways that can cause you to get different numbers.]

Reading from 2002.06, the price P was 1015.28 and the dividend amount D was 16.01.

Now bring the original purchase up to date. Multiply your purchase amount (which I will call BUY) by the ratio of the recent price (2002.06) and the price at the earlier date (2000.11). This would be the value of your holdings if you stripped all dividend payments from an S&P500 income stream. That is, the current price of an investment in the S&P500 index = (BUY)*(1015.28/1378.04). [That is right. It would have lost money, even today.]

To calculate the current dividend amount, you multiply the current price of the earlier investment by the current dividend yield, which is the current dividend amount [in this example, 16.01] divided by the current price of the S&P500 index [in this example, 1015.28].

The final equation for the current dividend amount from an initial investment of BUY = (BUY)*(1015.28/1378.04)*(16.01/1015.28 ) = (BUY)*(16.01/1378.04) = (BUY)*(0.011618 ) = (BUY)*(current dividend amount in Professor Shiller's data divided by the old S&P500 price).

You may prefer to keep each item separate.

So far, everything is in nominal dollars. To convert everything into real dollars, multiply the investment amount by the later value of the CPI and divide by the earlier value of the CPI. The November 2000 value of the CPI was 174.1. The 2002.06 value was 179.9. Scaling by (179.9/174.1) would express the original investment BUY in terms of dollars in June 2002. If we preferred, we could express everything in 2003.11 (where Professor Shiller's data ends) using the 2003.11 CPI number (185.8 ). That is, we would multiply BUY*(185.8/174.1).

An alternative calculation is to convert everything back in terms of November 2000 dollars. This is attractive since it can convert gains and losses directly. The ratios are inverted.

In terms of my example, an original investment of BUY into the S&P500 index would have fallen in price to 73.676% of its original value [in June 2002] in terms of nominal dollars. In terms of the initial purchase price in real dollars, the price would have fallen by another factor of (174.1/179.9) or 96.776%. An original investment of BUY into the S&P500 index would have fallen to 71.30% of its original value in real dollars.

The dividend amount from an original purchase of the S&P500 index of BUY would have fallen to BUY*(1.1618%) in nominal dollars and BUY*(1.1618%)*(0.96776) = (BUY)*(1.12434%) in terms of real dollars [as of June 2002].

You would identify this final yield, 1.12% of your original investment amount, with how well your actual investments are doing. Remember that we are interested in an income stream that (notionally) lasts forever.

We are hindered somewhat because Professor Shiller's data on dividend amounts stop in June 2002. I doubt that they have changed too dramatically since then. As for prices, the S&P500 index has rallied to 1120.68, a dramatic improvement of (1120.68/1015.28 ) = 1.1038137 (i.e., a solid 10.4% gain) as compared to its June 2002 level. The price would have recovered to 81.32% of the original investment (in terms of nominal dollars).

This does not directly affect the dividend amount. It does directly reduce the dividend yield.

That is what I would do. I hope that this brightens unclemick's day.

Have fun.

John R.

 

[unclemick]

I shall return.

Got a water well on the fritz (serving two camps) and guests here and on the way for Memorial Day. Glad to have stirred some debate. Don't go away - I'll be back.

 

[John Galt]

Hi unclemick. So, you "shall return" like MacArthur.
That's cool. I plan to emulate him someday, i.e.
like an old soldier, I will never die but just "fade away".

John Galt

 

[LazyMan]

I'm also guilty of having a hobby drip portfolio. It started when I decided to cancel my extended cable and invest the money instead. I reasoned that since the money was coming out of my entertainment budget, I might as well get some entertainment in investing it.

I get a kick out of reading about the fortunes of "my" companies in the business news. It gives me something to chat about with "active traders" at cocktail parties, and I thoroughly enjoy voting my measly handful of shares against the board's dumber resolutions. When they start offering an open bar at the annual meeting I'll be sure to attend.

I take the approach that I am buying an income stream not a tradable commodity, so I never sell and tax time is a breeze. What is bought stays bought. Someday (a long, long time from now) my heirs will recieve the original paper stock certificates endorsed with my own manuscript.

I'm not convinced of the long term risk. When I'm buying giant multinationals, risk of them doing worse than the market is fairly high, but risk of their going bankrupt is low. Companies like 3M or Johnson & Johnson are diversified into so many different countries, markets, and products that it would take an apocalyptic scenario to really destroy them. For example, take the companies that have been dropped from the DOW-- as a group they've gone on to outperform their index (although many of them are stodgy, forgotten firms in unglamourous industries with less growth than dividend).

My rule is simple-- every month I send off a cheque to whichever company's stock price has dropped the most in the trailing 3 months, provided they haven't done something really stupid or reduced my dividend. Market risk is my friend. Since I don't want to sell, a lower price is always a better price.

Of course it's easy to be sanguine since I really don't have a lot of money in that portfolio. Actually, I don't really have much money in any portfolio since I'm (sadly) only at the start of my career. For the most part I'm a passive-management, low-cost-ETF, fixed asset balance style investor.

 

[unclemick]

The weather's great, the water well air bubble is fixed, roast, and ribs so far - barbequed chicken, sausage, boiled shrimp and watching the wave riders and party boats. My neighbor brought his 55 T bird by for inspection.

I have a chunky webtv so I will need to use my erstwhile stepdaughter's computer to try a spread sheet(microsoft?).

Charlie -I too have 4-5 spin off, canceled plans due to mergers and certificates that would 'cost' to sell. One of the pains of DRIP plans.

GDER - sorry to hear about Quicken - I breifly entertained purchase and putting it on her computer. Any other 'cheap' spreadsheets out there. I have a guest(her) with crushed heel and a computer for at least six months.

SWR - not near to your level of analysis - baby steps first.

No. 2 pencil - 78k in lumps over ten years - 75k 'out' as in spent 35k cap gains/return of cap and reinvested 40k dividends. About 8.49% yield on remaining original money and about 4% current yield marked to market. Handgrenade wise - rough double versus my un-touched IRA (all money in at start) rough triple. Beware the experience of one. Still thinking 'some comparison of relevant data bases' if they can be found is the way to go.

Meanwhile - back to Memorial Day.

 

[John Galt]

Hi unclemick. Sounds like you are having fun.
Weather stinks here.

After the companies causing obesity are sued out of existence, I am quite certain the trial attorneys will
turn their attention to "chunky webtv".

John Galt

 

[JWR1945]

How about this simplified metric? Use the ratio of the (current S&P500 dividend amount) to the (S&P500 index value from ten years ago).

This is baby step number one. You will like the answer. Later, you can separate your investment dollars and apply them to the S&P500 on the appropriate dates. For now, act as if you only made one investment.

The latest S&P500 dividend information that I have is $16.01 from June 2002. I doubt that it has gone up much. Ten years ago, the S&P500 index stood at 454.83 (in June 1994). The yield on the initial investment would have been (16.01/454.83) = 3.52%.

You have reported a yield on your initial investment of 8.49%. In terms of generating a perpetual income stream, you are doing better than twice as well as an investor in the S&P500 index!

In terms of applying this approach, my calculations assume that you strip off all dividends since they provide your income stream. The $35K spent in cap gains/return of cap balances the $40K of reinvested dividends almost exactly. Treat those factors as a wash. The basic comparison is close enough: your yield on initial investment is 8.49% while and index equivalent approach would have provided 3.52%.

Have fun.

John R.

BTW, if you were to include inflation, both percentages would be reduced to 78.5% of the reported numbers. The S&P500 dividend has returned only 2.76% of perpetual income in terms of real dollars. You have achieved 6.66%, which is a whole lot better than the traditionally mentioned withdrawal rate of 4% plus inflation. Of course, the traditional 4% number sometimes means a final balance of zero after 30 years. Your 6.66% number is for an income stream that never ceases.

 

[unclemick]

Thanks John R

Now I feel better, even though balanced indexed did 'better'? thru expanding P/E and generally falling interest rates.

Since hobby stocks are my drug of choice (in contrast to sane ER's) should I push it and try to trump my 8.49% by buying a Hankjoy type stock to get better yield 'right now'?

Seriously, what considerations can you think of that might come into play when trying to balance current yield versus dividend growth.

MLP's, royalty trusts, closed end funds, foreign ADR's are way outside of my current menu of 'norwegian widow' - utilities, oils, banks, food, drug, REITS and dividend achievers.

 

[JWR1945]

Don't buy anything that you are not comfortable with.

Many of HankJoy's selections require quite a bit of work while you do your due diligence. You need to know enough so that you will not be blindsided. Blindsided by what? If I knew or if you knew, we wouldn't be.

I would draw a corollary with investing in international stocks. I know enough about them to know for sure that I would be hopelessly vulnerable. There are all sorts of reasons. Europe has lots of RIGHTS offerings (which are virtually unheard of in the USA) that allow them to extract new dollars from existing share holders just to stay even. Emerging markets? When is there too much money in a market with almost no liquidity and how am I supposed to know? [HINT: when a broker tries to sell it to me.]

As for your balanced index fund apparently having done better, it is likely that you would have to sell some of it to assure yourself of an increased stream of revenue.

Especially with the S&P500 index, there is a considerable danger associated with contracting multiples (lower P/E ratios). Until an owner of the S&P500 index sells some of his shares, he is not assured of his capital gains. Dividend amounts (especially, in nominal dollars) have increased but multiples have increased faster. The dividend component is reliable. The capital appreciation is not.

This does not necessarily mean that you want to buy perpetual income streams for your hobby stocks. Still, it seems attractive to me to pay $100000 to buy an annual income stream of $6600 that increases at least enough to keep up with inflation and that lasts forever.

Have fun.

John R.

BTW, I doubt that working with the numbers seems nearly as tedious now as before you found out that they had something good to say.

 

[wabmester]

The consensus seems to be that this is an interesting idea, but too much work for those of us who are either lazy or retired (which I think is just about all of us). So, I think the three of you dividend-heads should start a newsletter. It'll supplement your income, and it'll allow us to evaluate your ideas while remaining lazy. I'll provide webhosting for you, if you like (I want a free subscription).

 

[unclemick]

Wab

Are you trying to con me! A NEWSLETTER IS WORK!!! Putzing with hobby stocks is one thing - WORK! is another. I'm not even sure I want to give up my no. 2 pencil for a spreadsheet. yet.

Besides, if the cycle comes around again(more than 3), Wall Street will feed the ducks. Many a 'rising dividend' mutual fund has come and gone.

Meanwhile, I shall putter on - AS A HOBBY!

Heh, heh - thanks anyway.

 

[JWR1945]

unclemick: Don't let wab get away with a free subscription for free hosting.

I figure that we can charge him $200 to $500 per year. We don't promise how often we will publish. We don't tell him how many pages. [In fact, we don't even promise to fill out a single completed page.] We don't even have to tell him what will be in it. [I was thinking about crawfish recipes. We might as well give him something of value.]

Have fun.

John R.

 

[cute fuzzy bunny]

I would suggest a BALANCED newsletter consisting of crawfish recipes and old garfield cartoons, in a 60/40 blend.

 

[sgeeeee]

I would suggest a BALANCED newsletter consisting of crawfish recipes and old garfield cartoons, in a 60/40 blend.

That's not bad, but I would suggest that 15% - 25% of the crawfish recipes and about 10% of the cartoons should be foriegn. (Although I would avoid French cartoons).

 

[unclemick]

Not French - Cajun - perhaps some recycled Justin Wilson jokes from his cooking show. Tell TH to put on his marketing hat - perhaps some ad space for dryer sheet manufacturers can be sold. Plenty of crawfish receipes floating around LA - free for the publishing.

 

[cute fuzzy bunny]

I've got one of justin wilsons cookbooks and darned if that isnt the one I use recipes out of more often than most other books i've got.

Of course we deep fry our turkey for thanksgiving using his rub recipe for it.

Should we include any emerging market cartoons, and any thoughts around shellfish that have consumed precious metals along with lead and mercury?

Maybe we should simply retain the existing recipe/cartoon section and add in a dollop of bad puns and jokes?

 

[John Galt]

Hey TH, if you need bad puns and dopey jokes, you
can count on me.

John Galt

 

[unclemick]

And perhaps some curmudgeons in training? I can't wait to spot a new mutual fund ad with the 'D' word (not dryer sheets or diversification). Can you smell a cycle coming? Meanwhile back at the ranch, I'll keep my trusty no. 2 sharp and put off spreadsheets for now. A book report on Lowell Miller would allow me to be even more lazy.

 

[unclemick]

Oh and one more thing - I like to do a GDER once in while - take my expenses and multiply by 25. Spring Efficient Fronter and REHP have articles showing 'tracking error' so individual portfolios can vary widely from a 'reference' portfolio. I like to put my 'hobby' stock income stream in like a pension and only count my balanced index when I play with FIREcalc. I also lump everything and divide by 25 as a cross check.

 

[John Galt]

Hello uncle mick. I am not familiar with taking your
expenses and "multiplying by 25". What is that supposed to give you? A 25 year required income stream?

John Galt