My Dividend Income Portfolio Online

[Eladio]

I've been on the dividend growth investing / dividend income investing path for a few years now and started posting my portfolio online last year.

My goal is to try and generate a livable income for my wife and myself by the time our youngest is out of high school. That's about 7 years or so. I'm figuring about $2000 month from investments, plus a rental or two, plus part time, or temp work as needed.

We've been making good progress with new additions of capital every month and a bull market.

For anyone interested, here's the April 1st Update for the dividend portfolio:

Dividend Income Investing.com – Dividend Income Portfolio Update April 1st 2013

Eladio

 

[Rich]

Eladio:

I sort of stumbled into dividend investing (using E*TRADE and their dividend reinvesting program) starting in May 2010. My spouse and I had had around $150K sitting in MM accounts just twiddling its thumbs for a couple of years in anticipation of buying a second, winter home.


Decided to rent instead (glad we did that!) and got into dividend stocks by accident. Our portfolio is mostly; Exxon, Conoco-Phillips, Johnson & Johnson, Con Ed, Duke Energy, DuPont, Coke, Verizon and ATT. I also bought around $25K worth of CEF, a gold holding company (now worth around $22K) as an insurance policy against who knows what.


Anyway, according to E*TRADE, as of this moment we could generate $8,570 a year in income from what we have now. Again, according to E*TRADE, our total gain has been 27.87%.


I would like to tell you that this is all a result of my brilliant business and trading acumen, but that’d be a lie. I just bought the most boring, steady equities I could find and it sort of worked out.


I note you mentioned Yield on Cost. Lots of folks don’t really understand the significance of that concept. Basically (feel free to correct me if I’m in error) it means that if you buy an equity at X dollars, which yields Y dividends, over time both the value of the equity as well as the size of the dividend will increase, effectively giving you a higher percentage return than is shown on paper for that equity as the return is coming from equities purchased at a lower cost. Not a great explanation, but it’s the best I can do off the top of my head!


For the record what I’ve done in the past, and plan to do in the future, is to take all my SS money and buy dividend paying stocks in E*TRADE. I’ll stop when the monthly amount of money generated by the dividends hits $1,000 dollars.

Rich

 

[grumpy]

I'm a bit of a skeptic when it comes to yield on cost as a useful calculation. Maybe because for many of the dividend stocks I own that calculation equals infinity. As my shares appreciate I sell small blocks until I have recovered my initial investment. Then "playing with house money" I pretty much ignore market fluctuations.

 

[Eladio]

Rich and Grumpy,

Yeah, yield on cost is one of those grey areas in investing. Some people love to use it as a gauge of how well there investment has done. Others see it as a hamper that clouds their judgement about when to sell an overvalued position and move on.

I like to include it because it shows what is really possible and achievable with dividend growth investing.

For example:

The current yield on Coca Cola (KO) is: 2.77%

However, the yield on the position that I hold is: 3.33%

Now obviously, that tells me I'm doing something right.

Yield on cost maybe something more of a feel good statistic for me, but I like to keep track of it and it keeps me motivated.

Eladio

 

[FIRE'd@51]

Anyway, according to E*TRADE, as of this moment we could generate $8,570 a year in income from what we have now. Again, according to E*TRADE, our total gain has been 27.87%.

From the end of May 2010 through the end of March 2013, the S&P 500 is up 44%, not including dividends.

 

[Rich]

From the end of May 2010 through the end of March 2013, the S&P 500 is up 44%, not including dividends.

Yup. If I had a crystal ball that's where I would have put all my money!!

Or, go to Vega and let it ride on red...

Rich

 

[obgyn65]

To the OP : please feel free to introduce yourself in the "Hi, I am" forum.

 

[DeborahB]

Rich and Grumpy,

Yeah, yield on cost is one of those grey areas in investing. Some people love to use it as a gauge of how well there investment has done. Others see it as a hamper that clouds their judgement about when to sell an overvalued position and move on.

I like to include it because it shows what is really possible and achievable with dividend growth investing.

For example:

The current yield on Coca Cola (KO) is: 2.77%

However, the yield on the position that I hold is: 3.33%

Now obviously, that tells me I'm doing something right.

Yield on cost maybe something more of a feel good statistic for me, but I like to keep track of it and it keeps me motivated.

Eladio

I have the same feeling about yield on cost, because a LOT of the dividend stocks I own have doubled or close to it - so the current yield and yield on cost are wildly different. I like the statistic.

I'm doing very much what you are doing and I'm retired. I currently am getting over $34K a year in dividends, with only $6300 in taxable accounts. I also keep some cash. And I have SS... all in all plenty to live on with no debt except current credit cards.

I was lucky - I had cash when the market dropped and I invested wisely (but not in all cases ). Anyhow a lot of stocks that are yielding 4% now were yielding 8% when I bought them. If we have a crash I'll look for more to buy.

You're doing great!

 

[ziggy29]

The problem with yield on cost is that it ignores that other opportunities had the chance to grow the value from the original invested amount, too.

In 2000 I bought $4,000 in I-bonds with a 3.4% real yield. (My only regret is not having enough money at the time to buy a lot more.) Now those bonds are worth about $8,300 if I redeemed them today. So with a (say) 5.4% composite yield given 2% inflation, I could say my "yield on cost" is 11.2%.

Indeed, we can even say it about money put in a low-interest savings account, which over a couple of decades will still produce a "yield on cost" that is quite high today.

 

[Texas Proud]

The other problem with yield on cost is that it ignore other potential investment options...


As an example... say your YOC is 25%.... you say great... I will keep the stock... but, if current yield on the stock is 2%... not so great..

So, your option is to keep your stock at 2% current yield, or sell your stock and invest in a stock that has a 8% yield...

Which is better when it comes to yield Yep, the 8% yield puts more money in your pocket TODAY....

This ignores all other factors for investing... so not a good reason to make a change... but, it does show that YOC is meaningless...

 

[killingme]

Dogs of the Dow is a reasonable investment strategy which works in two ways, generally speaking if yield is up more people buy driving stock price up and subsequent yield percentage down. What's really interesting is when you add in bollinger bands and tweak the standard deviations indicating periodic trends and sweet buy sell points.

 

[Eladio]

Quick Update for everyone for dividend portfolio activity during the month of April 2013:

Added AAPL, BBL, BP, IBM, INTC, and SCHE.

Dividend increases were good this month as well.

Seeing more volatility in the market, but it looks like every dip is being aggressively bought.

Follow along:

Dividend Income Investing.com – Dividend Income Portfolio Update May 1st 2013

Eladio

 

[Eladio]

June 1st update to the dividend portfolio is up for those that are interested:

Dividend Income Investing.com – Dividend Income Portfolio Update June 1st 2013

I've been adding energy (BP, LNCO), cyclical (CAT), financial (WFC), and technology (DLR, XRX).

Sold CapLease Inc (LSE) on a takeover offer and 60% capital gain.

Eladio

 

[photoguy]

What kind of decisions does one make based on YOC?

It seems not useful since (1) doesn't normalize for the length of time you've had the investment (as ziggy suggests) and (2) is a backward looking measure which cannot be predictive of future of yields.

 

[MooreBonds]

What kind of decisions does one make based on YOC?

It seems not useful since (1) doesn't normalize for the length of time you've had the investment (as ziggy suggests) and (2) is a backward looking measure which cannot be predictive of future of yields.

While I agree that I don't use YOC to actively manage or make decisions based solely on that, I will say that it is kind of a neat metric to see just how the dividend has grown over time. Also, because I DRIP every dividend possible (except for preferred stocks), it will gradually increase my average cost basis over time, so it's not just a simple "I bought this 10 years ago and look at my YOC now!", and it's slightly more useful to look at YOC when I use a slowly increasing average cost basis including DRIPed dividends (assuming the stock is going up!

Plus, because I'm looking to live just off of dividends from my portfolio when I retire, it does help me see how the dividends have grown over time for a particular stock, which is somewhat more useful to know compared to my unrealized capital gain/loss for a particular stock (since I'll be more concerned about dividend levels when I retire, not as focused on my capital gains/losses because I have very little dependency on selling stocks at gains to live off of).

True, I'm not going to project a certain growth rate into the future based on previous dividend growth....but it's not any different than looking at your cost basis of a stock, then looking at it's current price, and not 'projecting capital gains/losses into the future' based on that movement. Yet, I doubt many people would pooh pooh a column in a spreadsheet showing unrealized gain/loss for a stock.

 

[Eladio]

@Moorebonds,

Thank you for that detailed reply.

@photoguy,

I agree that YOC is not the most useful metric for making decisions on the current state of your portfolio. For me, it's motivating to see the YOC rise and the cost basis per share drop over time. However, there are times that a stock is significantly overvalued and might need to be sold for a profit despite a really nice yield on cost.

I'm facing that situation right now with GES and MSFT. Both have had significant run ups in price and are very vulnerable to a pullback. So, I have to look at the other options for stocks that may offer better returns over time. If I sold and redeployed the proceeds into an undervalued stock, my overall portfolio yield and income would most likely increase as well.

So, I guess the lesson is to remain objective and don't get emotionally attached to a stock.

Eladio

 

[SunGuy]

If I am only 25 (almost 26), should I put my dividend stocks into a Roth IRA or a regular investment account?

I have been buying mainly Ecotality(ECTY) with what money I can spare a month in my regular investment account.

I like ECTY because with the success of Tesla Motors(TSLA) and the other car companies all working towards producing more EVs.

It seems like a great long term stock to buy.


So for a nice monthly dividend I have been looking at Armour REIT (ARR).

 

[jerome len]

Question: Wouldn't it be a lot easier, less espensive then paying trade costs to purchase all these individual stocks to just buy Vanguard dividend mutual funds and ETFs? I do, they seem to do well and I don't worry about following all these individual stocks. What does everyone think?

And, I buy one ETF that only owns stocks that have increased their divident every year for at least 10 years.......so, I have that good feeling that my income will increase in the future. What am I missing?

 

[yakers]

Easier definitely, every financial asset requires some attention, so less is better. As to expensive not if you get free trades as I do with Wells Fargo PMA and others with some financial companies. And there is no management fee for holding a stock. Holding individual stocks is a higher return-higher risk opportunity with the added feature of allowing better tax loss harvesting. I am mostly index funds, wife balanced funds (guess who has done better?*) with some individual stocks in an investment account. Sure to drive any purest crazy but it has worked for us. *Answer to above, wife's IRA Wellesley fund has beaten my index and my managed portfolio.

 

[FIREd]

Question: Wouldn't it be a lot easier, less espensive then paying trade costs to purchase all these individual stocks to just buy Vanguard dividend mutual funds and ETFs? I do, they seem to do well and I don't worry about following all these individual stocks. What does everyone think?

And, I buy one ETF that only owns stocks that have increased their divident every year for at least 10 years.......so, I have that good feeling that my income will increase in the future. What am I missing?

How did your fund perform in 2008 income-wise?

It seems like a lot of equity income funds cut their dividend distributions quite dramatically in 2008-2009 because they were heavily invested into financials. One of my funds cut its distribution by ~35% and the recovery income-wise was very slow. If you are an income investor, then I think that your focus (a somewhat stable dividend income) is quite different than a fund manager's (total return to look favorably relative to competing funds trumps a stable dividend income). So now I prefer to create my own "mutual fund" of individual stocks, focusing on maintaining a balanced, diversified, and hopefully growing source of income.

 

[Animorph]

If I am only 25 (almost 26), should I put my dividend stocks into a Roth IRA or a regular investment account?

That depends almost completely on your tax situation. As a very general rule high dividend income shares should be placed in the retirement account to avoid paying income tax rates on nonqualified dividends and paying any immediate taxes on qualified dividends. However, if you keep your taxable income, including long-term capital gains and all dividends, within the 15% tax bracket, then qualified dividends are tax free and nonqualified dividends are only taxed at 15%. And the 10% tax bracket would bring that down a little farther. That comes close to eliminating tax considerations from the equation, or even reversing the normally favored location.

 

[Onward]

It seems like a great long term stock to buy.

That is an excellent reason not to buy it.

 

[clifp]

Easier yes.
Cheaper not at all.

If we look at say the VIG Vanguard Dividend Appreciation ETF, it has an expense ratio of .1%. According to M* , it has 146 stocks, the top 20 holding account for 63% of the value. The annual turnover is 15%.

Simply replicating it would cost you $730 at $5/trade for a one time cost. (Actually lots of place provide free trading for new accounts0. Then it would cost ~$220 a year. But a much simpler approach would be the purchase top 20 holding and then every fourth holding leaving you with 50 stocks and one time cost of $250 and annual cost of $70. You'd also have much more flexibility for tax selling.

In contrast if you have a $1 million portfolio and have 50% invested in VIG, your annual expenses are $500 a year and you have much less flexibility for tax selling

 

[photoguy]

If you care about tracking the index, how do you handle liquidity events like rebalancing (either selling/buying) without having a huge number of transactions?

 

[clifp]

If you care about tracking the index, how do you handle liquidity events like rebalancing (either selling/buying) without having a huge number of transactions?

The turnover rate for VIG is 15% on a portfolio of 146 stocks that means you sell 22 stocks (although they probably is a merger or two in the mix) each year and buy 22. For a total of 44 transactions not a huge number. If you want to cut down the transaction down further buy the top 20 and randomly select 30 to 40 of the remaining 126.

There is virtually no data that suggests that cap weight index perform better than any other type of scheme like equal weight, so I wouldn't sweat trying to perfectly replicate the index.