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Thoughts On Dividend Income

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Posted by Everyday-Freethought on 2016-05-09 at 06:56:36

This is a post about dividend income

There has been some drama in the dividend growth investing (DGI) blogosphere. The guy who ran Dividend Mantra sold it to an outside company, and for months there was little original content. The sellers said the original author (henceforth DM) would still provide content, but there was nothing.

There were a lot of comments expressing discontent, and those posts were later deleted.

This led to some discussion on other sites. One was Mr Money Mustache.

Most people there are indexers and said DGI is not as good. Obviously, I disagree.

One person said DM was stupid for only using taxable accounts and putting no money into tax-advantaged accounts. That I agree with.

A few disputed the notion in DGI that selling shares is like sawiing off a tree branch while you are sitting on it. I agree with that metaphor. You can only sell shares once. But many companies pay dividends for years. It’s sort of like a cow or a chicken. You can get milk or eggs from them multiple times, but you can only eat them one time. You can only sell a share once. My goal is to never sell and to live off the dividend income.

Some on the forum that the DGI investors might not reach the goal of living off dividends. That is true, but that is not a valid objection to DGI. ANY plan could fail. If that invalidates DGI, it invalidates everything.

One person pointed out that while index investing can be judged by total return, DGI should be judged by the growth of the dividend income. Many on the forum disagreed, and insisted total return is the ONLY way to judge a portfolio. I disagree. While it is bad if a stock goes to 0, the point of DGI is to not rely on price alone. We saw a lot of people get hosed relying only on price in the dot com bust with stocks, and for just about every asset class in the Great Recession. Meanwhile, many DGI stocks kept paying. The funny thing about relying on price is that when you really need money, usually the price goes down. Dividends are not guaranteed, but neither are capital gains. And you might not get them when you REALLY need them.

Maybe things will change in the future, but if the same thing happens for two cycles in living memory, you should pay attention.

Plus, I invest in some pretty big companies. If my stocks go to 0, then whatever you are investing in is probably hosed too.

I don’t think a lot of indexers understand DGI. Some of them accused DGI investors of chasing yield. As I have mentioned in the past, for many DGI investors, a high yield is actually interpreted as a sign to get out. Most prudent DGI investors also look at P/E ratio, payout ratio, and dividend history.

To me, “chasing yield” is holding a stock that pays 10% for a year and then selling. Most of the stocks that DGI investors are interested in have yields from 2% to 4%, and we intend to hold for a long time. Ideally, for life.

I am considering going more towards DGI ETFs. That is sort of like indexing. It’s like “indexing without the bad stuff”. But I really have no desire to buy the whole domestic market if I can avoid it. My 401K through work offers regular index funds, but no DGI funds; in this blog I mostly talk about accounts that I have full control over. As I said, I do not want to rely on capital gains. I want cash flow. Not potential cash flow. Not theoretical cash flow. Not cash flow dependent on getting a higher price. But actual cash flow. As Josh Peters wrote in The Ultimate Dividend Playbook, when a private equity firm want to take a company private, their offer price will be based on the company‚Äôs cash flow. Why not get that money now? Why wait until I sell? If the only time you benefit from owning a stock is when you sell (in other words, when you stop owning it), then it is pretty dumb to own that stock in the first place. Why should my money go into firms that are not paying dividends? As far as I am concerned, US stocks that do not pay dividends are dead weight.

Granted, with foreign firms, it is a different story. There are not as many DGI ETFs for foreign stocks. Directly buying a stock listed on a foreign exchange would cause more tax headaches than it is worth. But for stocks on domestic exchanges, and as for my house, we stick with DGI.

One person said indexing is better, and asked if us DGI investors thought we were smarter than the market, and advised us to listen to what the market is telling us. Well, it has shown that companies that have grown their dividends do better than the total market. S & P has a page on the Dividend Aristocrats, and it has a chart applet that you can use to compare the Dividend Aristocrats against the S & P 500. Guess what? The Dividend Aristocrats do better than the overall market. So, no, I don’t think I am smarter than the market. Unlike you, pompous indexer, I am listening to what the market is telling me.

The High Yield Dividend Aristocrats also did better than the S & P 500, but not quite as much.

Also, if you look at the fact sheets for those indexes, the “High Yield” Dividend Aristocrats index yields about 3%, while the regular Dividend Aristocrats index yields about 2.52%. The High Yield Dividend Aristocrats index has stocks that have increased dividends for 20 years, while the Dividend Aristocrats index has stocks that have increased dividends for 25 years. So I guess “High Yield” is relative.

There was a lot of discussion about the returns of DM. Some said the only reason his portfolio gained was because he added capital to his accounts. Below is a very large table with information about some of my dividend holdings. This shows stocks for periods in which I did not buy any additional shares. I did re-invest the dividends.

For each stock, there are two rows. The first is the first dividend payment I got. The second is a more recent payment. This chart was made earlier in the year, so it does not have the latest. For some, it might have a transaction from a couple of years ago. For each stock, I looked at the earliest and latest for a time period in which I only got new shares through dividend reinvesting. For the second row of each stock, the “Income Increase” is calculated by dividing the second income amount by the first. The “Div Percent Increase” is calculated by dividing the second dividend payout amount by the first. Some stocks split, so that may affect the amounts. I think the “Income Increase” is more consistently useful.

So for ABM, the income from the dividends increased 34%, while the payout amount per share increased 19%. I also went from having 50.3 shares in 2010 to 56.74 five and a half years later. I would say that is a pretty good return.

Constituent Name Symbol Bought Shares Price Num Shares Div Income Div/Share Total Shares IncomeIncrease Div Percent Increase Yearly Div
ABM Industries Inc ABM 2010-05-03 21.91 0.3080 6.75 0.1350 50.3080 0.00 0.00 0.54
ABM Industries Inc ABM 2015-11-02 29.01 0.3110 9.03 0.1600 56.7490 1.34 1.19 0.64
Archer-Daniels-Midland Co ADM 2010-09-09 31.95 0.2850 9.03 0.1500 60.4960 0.00 0.00 0.60
Archer-Daniels-Midland Co ADM 2015-03-10 47.00 0.3860 18.16 0.2800 65.2310 2.01 1.87 1.12
Automatic Data Processing ADP 2010-10-01 42.03 0.4290 18.08 0.3400 53.6200 0.00 0.00 1.36
Automatic Data Processing ADP 2016-01-04 86.98 0.3620 31.49 0.5300 59.7790 1.74 1.56 2.12
AFLAC Inc AFL 2010-12-01 51.50 0.2880 15.07 0.3000 50.5370 0.00 0.00 1.20
AFLAC Inc AFL 2014-03-03 63.86 0.3110 19.52 0.3700 53.0720 1.30 1.23 1.48
Air Products & Chemicals Inc APD 2010-05-10 74.57 0.0920 6.86 0.4900 14.0920 0.00 0.00 1.96
Air Products & Chemicals Inc APD 2015-11-09 138.81 0.0930 12.91 0.8100 16.0290 1.88 1.65 3.24
American States Water Co AWR 2010-09-01 33.33 0.3890 13.00 0.2600 50.3890 0.00 0.00 1.04
American States Water Co AWR 2015-12-01 40.64 0.6200 25.20 0.2240 113.1150 1.94 0.86 0.90
Black Hills Corp BKH 2010-06-01 28.69 0.3810 10.80 0.3600 30.3810 0.00 0.00 1.44
Black Hills Corp BKH 2015-12-01 42.63 0.3450 14.71 0.4050 36.6550 1.36 1.13 1.62
Constituent Name Symbol Bought Shares Price Num Shares Div Income Div/Share Total Shares IncomeIncrease Div Percent Increase Yearly Div
Chubb Corp CB 2010-04-06 51.90 0.1430 7.40 0.3700 20.1430 0.00 0.00 1.48
Chubb Corp CB 2014-07-15 94.03 0.1170 10.91 0.5000 21.9390 1.47 1.35 2.00
Colgate-Palmolive CL 2010-11-15 78.58 0.3460 26.57 0.5300 50.4830 0.00 0.00 2.12
Colgate-Palmolive CL 2015-11-16 66.86 0.6250 41.79 0.3800 110.6070 1.57 0.72 1.52
Clorox Co CLX 2011-02-14 71.26 0.4210 27.78 0.5500 50.9250 0.00 0.00 2.20
Clorox Co CLX 2015-11-13 122.20 0.3580 43.75 0.7700 57.1720 1.57 1.40 3.08
Chevron CVX 2010-06-10 70.79 0.2000 14.40 0.7200 20.2000 0.00 0.00 2.88
Chevron CVX 2015-12-10 86.87 0.2940 25.54 1.0700 24.1670 1.77 1.49 4.28
Dover Corp DOV 2010-06-15 45.41 0.1240 5.46 0.2600 21.1240 0.00 0.00 1.04
Dover Corp DOV 2015-12-20 63.78 0.1530 9.76 0.4200 23.3960 1.79 1.62 1.68
Consolidated Edison Inc ED 2010-06-15 43.35 0.3480 14.88 0.5950 25.3480 0.00 0.00 2.38
Consolidated Edison Inc ED 2015-12-15 61.85 0.3280 20.29 0.6500 31.5390 1.36 1.09 2.60
Emerson Electric Co EMR 2012-03-09 49.67 0.0000 20.27 0.4000 50.6650 0.00 0.00 1.60
Emerson Electric Co EMR 2015-12-10 48.64 0.5450 26.51 0.4750 56.3560 1.31 1.19 1.90
Eaton Corporation ETN 2011-05-27 50.67 0.3410 17.00 0.3400 50.3410 0.00 0.00 1.36
Eaton Corporation ETN 2015-08-25 55.06 0.5470 30.12 0.5500 55.3170 1.77 1.62 2.20
Constituent Name Symbol Bought Shares Price Num Shares Div Income Div/Share Total Shares IncomeIncrease Div Percent Increase Yearly Div
Hormel Foods Corp HRL 2010-05-15 41.25 0.1120 4.62 0.2100 22.1120 0.00 0.00 0.84
Hormel Foods Corp HRL 2015-11-16 67.64 0.1780 12.04 0.2500 48.3550 2.61 1.19 1.00
Illinois Tool Works ITW 2011-01-11 54.37 0.3140 17.00 0.3400 50.3140 0.00 0.00 1.36
Illinois Tool Works ITW 2016-01-07 87.52 0.3350 30.31 0.5500 55.4520 1.78 1.62 2.20
Johnson & Johnson JNJ 2010-06-15 58.42 0.2750 16.20 0.5400 30.2750 0.00 0.00 2.16
Johnson & Johnson JNJ 2014-12-09 108.05 0.2220 23.94 0.7000 34.4250 1.48 1.30 2.80
Kellogg Company K 2014-06-16 67.21 0.6800 46.00 0.4600 100.6800 0.00 0.00 1.84
Kellogg Company K 2015-12-15 70.96 0.7370 52.30 0.5000 105.3460 1.14 1.09 2.00
Kimberly-Clark KMB 2011-04-04 65.38 0.5380 35.44 0.7000 51.1730 0.00 0.00 2.80
Kimberly-Clark KMB 2016-01-05 126.48 0.3930 50.99 0.8800 58.3340 1.44 1.26 3.52
Lowe's Cos Inc LOW 2010-11-03 21.92 0.2580 5.50 0.1100 50.2580 0.00 0.00 0.44
Lowe's Cos Inc LOW 2015-11-04 74.21 0.2040 15.14 0.2800 54.2890 2.75 2.55 1.12
MDU Resources Group Inc. MDU 2010-07-01 18.03 0.4200 7.88 0.1580 50.4200 0.00 0.00 0.63
MDU Resources Group Inc. MDU 2016-01-04 18.56 0.5860 10.88 0.1900 58.5910 1.38 1.20 0.76
3M Co MMM 2010-06-12 78.30 0.0840 6.30 0.5250 12.0840 0.00 0.00 2.10
3M Co MMM 2015-12-14 156.51 0.0890 13.92 1.0250 13.6650 2.21 1.95 4.10
Constituent Name Symbol Bought Shares Price Num Shares Div Income Div/Share Total Shares IncomeIncrease Div Percent Increase Yearly Div
Northwest Natural Gas Co NWN 2010-08-13 45.93 0.4400 20.85 0.4150 50.6990 0.00 0.00 1.66
Northwest Natural Gas Co NWN 2015-11-13 46.77 0.5950 27.83 0.4675 60.1230 1.33 1.13 1.87
Procter & Gamble PG 2010-11-15 64.33 0.3830 24.69 0.4820 51.6340 0.00 0.00 1.93
Procter & Gamble PG 2015-11-16 76.09 0.5100 38.81 0.6629 59.0910 1.57 1.38 2.65
Piedmont Natural Gas Inc PNY 2010-10-15 28.10 0.4980 14.74 0.2800 50.4980 0.00 0.00 1.12
Piedmont Natural Gas Inc PNY 2015-10-27 39.33 0.4940 20.47 0.3300 59.4300 1.39 1.18 1.32
RLI Corp RLI 2011-03-18 54.72 0.2560 13.93 0.2900 48.2830 0.00 0.00 1.16
RLI Corp RLI 2015-12-22 59.71 0.3890 23.26 0.1900 122.8370 1.67 0.66 0.76
RPM International Inc. RPM 2010-07-30 18.56 0.5340 10.25 0.2050 50.5340 0.00 0.00 0.82
RPM International Inc. RPM 2015-10-30 45.65 0.3510 15.68 0.2750 57.3680 1.53 1.34 1.10
Questar Corp STR 2011-06-13 17.60 0.4420 7.63 0.1530 50.4420 0.00 0.00 0.61
Questar Corp STR 2015-12-14 18.71 0.6420 12.01 0.2100 57.8280 1.57 1.37 0.84
Sysco Corp SYY 2010-10-22 29.48 0.4320 12.50 0.2500 50.4320 0.00 0.00 1.00
Sysco Corp SYY 2016-01-22 39.55 0.4510 17.98 0.3000 58.4600 1.44 1.20 1.20
Texas Instruments TXN 2010-08-16 24.28 0.2400 6.00 0.1200 50.2400 0.00 0.00 0.48
Texas Instruments TXN 2015-11-16 57.86 0.3660 21.18 0.3800 56.1120 3.53 3.17 1.52
Valspar Corp VAL 2011-01-14 35.30 0.2890 9.96 0.1800 55.6470 0.00 0.00 0.72
Valspar Corp VAL 2015-12-16 82.83 0.2350 19.49 0.3300 59.3040 1.96 1.83 1.32
Vectren Corp VVC 2010-12-01 25.90 0.6540 17.25 0.3450 50.6540 0.00 0.00 1.38
Vectren Corp VVC 2015-12-01 42.13 0.5610 23.64 0.4000 59.6720 1.37 1.16 1.60
Constituent Name Symbol Bought Shares Price Num Shares Div Income Div/Share Total Shares IncomeIncrease Div Percent Increase Yearly Div
Walgreen Co WAG 2010-12-11 36.43 0.2570 9.33 0.1750 53.5580 0.00 0.00 0.70
Walgreen Co WBA 2015-12-11 83.96 0.2490 20.87 0.3600 58.2140 2.24 2.06 1.44
WGL Holdings Inc WGL 2010-05-01 35.83 0.2950 10.57 0.3775 28.2950 0.00 0.00 1.51
WGL Holdings Inc WGL 2015-11-02 61.36 0.2560 15.71 0.4625 34.2320 1.49 1.23 1.85
Exxon Mobil Corp XOM 2011-03-10 84.38 0.2860 24.39 0.4400 55.7210 0.00 0.00 1.76
Exxon Mobil Corp XOM 2013-12-10 95.84 0.3870 36.51 0.6300 58.3360 1.50 1.43 2.52
Intel INTC 2010-06-01 21.42 0.3330 7.09 0.1580 45.3330 0.00 0.00 0.63
Intel INTC 2013-12-02 23.63 0.4730 11.17 0.2250 50.1180 1.58 1.42 0.90
AT&T T 2010-08-02 25.94 0.8030 21.00 0.4200 50.8030 0.00 0.00 1.68
AT&T T 2014-11-03 34.84 0.8050 27.75 0.4600 61.1270 1.32 1.10 1.84
Coca-Cola Co KO 2011-04-01 66.34 0.3620 23.70 0.4700 50.7780 0.00 0.00 1.88
Coca-Cola Co KO 2015-10-01 39.51 0.9380 37.08 0.3300 113.3050 1.56 0.70 1.32
Sonoco Products Co SON 2010-12-10 33.04 0.5150 16.95 0.2800 61.0530 0.00 0.00 1.12
Sonoco Products Co SON 2015-09-10 38.68 0.6200 23.98 0.3500 69.1240 1.41 1.25 1.40
Constituent Name Symbol Bought Shares Price Num Shares Div Income Div/Share Total Shares IncomeIncrease Div Percent Increase Yearly Div

Image generated from an applet on S & P site, assumed allowed under Fair Use. This shows that the Dividend Aristocrats (the blue line) outperformed the S & P 500 (the green line) over the past ten years.

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