February was a very significant month as I achieved a long awaited accomplishment and milestone for the first time. I saw a minimum of $1,000 of investment income deposited into our dividend growth portfolio for each consecutive month of the past year. Some months had been as high as $1,400 but consistently achieving a minimum of $1,000 has taken some time.
I have one goal for retirement; to develop a tax efficient income that grows annually above the rate of inflation and provides adequate cashflow for our expenses, wants and needs.
In both bull and bear markets the portfolio has served me well. The income has rarely taken a hit (MFC in 2009 and HSE in 2016) and dividends have replenished my cash reserves allowing me to buy when the market presented opportunities. The portfolio has even been modelled and adapted for clients; each achieving similar levels of success based on their risk tolerance and asset mix. The compounded annual growth rate (CAGR) has been just over 18%.
My initial investment in 2005 yielded roughly $60/month and this has grown considerably over the years. $60 or $1,000 may seem significant or insignificant depending on your outlook, but it’s an accomplishment that I am very proud of because reaching this goal is positive reinforcement for investing in the method that I chose and reinforces the need for me to continue.
The portfolio has achieved this by investing over 90% of the dividends received back into more shares of the companies held within the portfolio (along with some aggressive moves in down markets and disciplined actions as portfolio manager). The rest of the dividends have been used to maintain a minimum cash balance for opportunities, to pay taxes and to repay a reasonable amount of borrowed money from the 2008-2009 market crash.
The value of the overall portfolio has increased considerably as well. In retirement, if I attain my goal, I should rarely or never need to touch the principle of the portfolio for my own needs.
The portfolio is comprised of a number of stocks, ETF’s and preferred shares. That’s right….I hold no bonds (yet). Over 75% of the common stocks raise their dividends yearly with some raising their payout in the 4-6% range and some as high as 8-10%. I like a balance of low yielding high dividend growth mixed with high yielding low dividend growth stocks. Of the 23 stocks in the portfolio 12 are allocated to the low yield high dividend growth stocks to ensure that each year my dividend income rises by at least 8%. Reinvesting all of the dividends is essential; I cannot reinforce this enough. Reinvesting the dividends into positions with lower allocations and distributing capital appropriately is also essential.
Stocks that do not pay a dividend are exceptionally rare in the portfolio, but currently there are a two (BRK.B & GIB.A). Each is present for different reasons with each carries the unique feature of superior growth in book value per share. Like Buffett I would rather own pieces of great companies at a good price then good companies at a great price.
I also do not market time…or should I say I don’t buy only when a stock is cheap. A long time ago I learned that to own a great company you need to pay a good price; otherwise who is going to sell it to you?
Great companies are rarely cheap or mis-priced and when they are I strategically and intentionally back up the truck. Missing a stock by $2/share does not bother me; missing the dividend growth, the increase in book value and the continuing expansion of their market share is many situations worth a $2/share premium. Yes the stock could get cheaper, but I always ask myself, “What if it doesn’t?”
My early investing years are full of opportunities where I should have bought but sought to time the market. If a company doesn’t get cheaper and gets more expensive I have missed out on a potential gain, on dividend income while I waited and any additional positive impacts management has made. If the stock gets cheaper I can always re-evaluate, add to the company or simply stay put. I buy for the long-term and an important lesson is looking at some of my longest held positions (Investments since the beginning: RY, BNS & TD. SAP, MRU & CNR. ACO.X & ENB) and ask myself, “What should I have paid?”
No doubt had I bought more shares earlier in my longest held positions my overall gains would be higher. I should have bought more, earlier and I would be further along in my journey with more yearly dividend income to show for it. I didn’t though because I didn’t understand the value in value. I didn’t know to buy great companies at good prices until I had 10 years of investing experience. If I could go back and correct my hesitations and errors I would be much closer to retirement or financial freedom already.
So what is my next goal?
$2,500/month which would equal $30,000/year in dividend income and after that $5,000/month which would more then cover my retirement expenses in today’s dollars. At my future marginal tax rate those dividends will be taxed at a fraction of my tax rate today for income leaving more after-tax money in my pocket. Assuming I continue to increase my dividends by 8% per year my goal should be attainable by the time we look to retire.