Category Archives: Stock Chatter

Do You Want To Build A Snowman?

Although not a new concept, I like to think of my dividend growth stock portfolio as a snowball.

If you can imagine standing at the top of a really steep hill, building your snowball from scratch starts with getting your hands on some snow. And the snow, in the case of a dividend growth investor, is capital.

The Snowball Analogy

The snowball analogy is pretty cool, because the power of compounding eventually takes hold. You take a handful of snow, roll it into a ball, and then start to roll that ball downhill. Over time, it eventually becomes bigger and bigger as it accumulates more and more snow. The hope is to eventually turn that once-small snowball into a self-propelling machine. You’ll push that snowball along for many years yourself, adding fresh snow as you go. But eventually the snowball rolls all by itself.

Once that thing is rolling downhill all by itself, you’ll be alleviated of a lot of work. And that’s where you want to eventually be!

The Power Of Compounding

You can see this work with real numbers.

Investing just $1,000 at an 8% return, compounded monthly, turns into $24,273.39 after 40 years. So you take an initial $1,000, which doesn’t seem like much snow. But roll it down a hill steep and long enough, and you end up with something sizable. $1,000 won’t deliver much dividend income all by itself, but almost $25,000 will produce ~1,000 per year in dividend income, assuming a 4% yield.

That’s your initial investment returned to you every single year.

You can see what happens when you add even relatively small amounts of snow and give that snowball a long enough ramp to roll.

The power of compounding is real. 

Build A Giant Snowball Reasonably

The goal is to build the snowball as big as reasonably possible, while still enjoying yourself along the way. Dedicating your life to only building the biggest snowball you can will likely not lead to the most vibrant life possible, but at the same time the snowball itself will provide a lot of benefits unto itself, as the larger the snowball, the more passive dividend income you’ll likely generate. And the more passive income you can generate, the more time you have to spend time on things that matter to you. A delicate balance, but a lot of legwork early goes a long way.

But one fantastic aspect of all this snowball building is the fact that, one large enough, it obviously starts to pick up snow all by itself. Building a snowball from scratch involves a lot of work on your part from the get go. You rummage around and scrape up as much white stuff as you possibly can. You pack this snow into a wonderful circle and you plop it onto the ground. You start to roll it down the hill, and pick up more snow as you go. Doesn’t seem like a lot of fun at first.

See, just like a real snowball, over time your portfolio will start to build all by itself. And dividend growth is the secret behind the magic and over time, it becomes a lot more fun!

The Snowball Eventually Rolls Itself Downhill Via Dividend Growth

The dividend growth process proves that over time your snowball will eventually gain momentum, rolling itself down the hill with more force than you could provide. That’s really the power of dividend growth. It’s amazing how much a snowball can grow even without someone pushing.

Looking into the future, the power of dividend growth is amplified. I anticipate to earn $2,000 per year in dividend income in less than five years, essentially getting me closer to  financial independence.  You can see how this builds on itself year after year, increasing the spread between income and expenses and thereby the margin of safety in early retirement.

This is really why dividend growth investing can be so wonderful, and how a snowball can start to roll downhill all by itself. The key is to get a really long ramp, start early, and regularly add snow for a while. It’s hard at first to add snow month after month, pushing it along. It’s cold outside and pushing doesn’t sound like very much fun. Maybe you’d rather be inside drinking some hot cocoa. And I can’t blame you.

But if you take the time to put a solid portfolio together with equity in wonderful businesses that regularly and reliably pay and raise dividends, eventually you’ll be sipping hot cocoa under a warm blanket while that thing rolls downhill all by itself. You’ll likely be financially independent at this point, and you’ll be able to do whatever you want in life. You’ll be able to spend more time with loved ones, travel abroad, golf, read, or go on a long road trip. Whatever. But you won’t have to push anymore!

Work Hard or Work Smart?

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Do The Poor Rich Need Dividends?

I was recently reading an article on Yahoo! About bankers and other professionals working in the finance industry becoming frustrated by the lack of blockbuster bonuses being given out by major banks like Goldman Sachs (GS) and other big financial businesses. You can read it below:
Bonus Withdrawal Puts Bankers in “Malaise”

But, if these “financial professionals” actually followed good financial sense and lived below their means, invested in quality dividend growth stocks and followed a long-term financial plan the loss of income that wasn’t promised in the first place (A bonus) wouldn’t be as painful. I have to be honest, I sometimes fall for this trap too, every now and then I have to check myself and stay focus. Nothing is wrong with enjoying life, but we have to evaluate what is really a need or want, especially when money can be tight in the future.

When your income drops, you could simply stop reinvesting your dividends and temporarily use them for paying day-to-day expenses until you’re back on your feet and able to reinvest them. That’s one of the strengths of dividends that are rarely talked about: flexibility. Once they land in your brokerage account, you can reinvest them, use them for paying expenses or just let them sit there.

So, do the poor rich need dividends? Maybe. They definitely need a better financial plan.

Work Hard or Work Smart?

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Why This Stock Is Picked

From time to time I have discussed why I have picked certain stocks for the Skyy Fund, but want to discuss further in detail. Every investor should have a certain set of criteria that a stock must meet before he or she decides to buy. My overall entry requirements aren’t really set in stone. Investing isn’t a science as much as it is an art form. Stock prices aren’t set by any kind of scientific measure and I don’t engage in buying stocks in such a manner either.

Basically, I have five entry requirements.

P/E Ratio

I look for a stock to have a current P/E ratio below 20. I define current price-earnings ratios by the ttm (trailing twelve months) figures. Forward P/E ratios are also helpful, but of course future EPS figures can only be analyzed and guessed, as nobody can tell the future. This is one criteria that I’m pretty firm on. A P/E ratio higher than 20 likely means the stock is overpriced for some reason.

5-Year Growth Of Dividend

A lot of dividend growth investors require 10 years or more of dividend growth. I’m not that strict, as that would preclude a lot of great companies that have less than 10 years of growth, but have clearly shown shareholders a commitment to dividend growth. When I look at companies that have less than 10 years of dividend growth I’m a little stricter in other departments and I will research a little further to feel confident that continued growth of EPS and dividends can be sustained.

A Great Product

This goes without saying. Any company I invest in must have a wonderful product that people either need, or want so badly that they are not willing to go without it. It should be a product that people loathe to go without. Once people drink a Coca-Cola and fall in love, it’s very hard to switch to store-brand cola products. Once you taste a Big Mac and love it, you are unlikely to stop buying Big Macs in the future. If you’re addicted to Marlboro’s, it’s likely that you are going to keep buying them…even if the price goes up. We all know of our dependence on oil. And this leads me to my next piece of criteria.

Pricing Power

Any company that produces a wonderful product naturally has a degree of pricing power. They have the ability to raise prices with inflation to keep margins healthy. If McDonald’s raises the price of a meal tomorrow by five cents, that is probably going to have no effect on my decision to purchase that meal. I would think that most of the population would agree with me on that. Yet, that five cent increase means a big boost to margins for McDonald’s when you consider how many customers they serve worldwide on a daily basis!

Dividend Growth %

I generally like to see a 10-year dividend growth of at least 6% (annualized) before I’ll commit money to a position. I’m not extremely strict with this one and I will consider companies with slightly less growth, but not much. I prefer growth in the double digits when I can get it. For companies with less than 10 years of growth I shoot for a higher growth rate to compensate for the lack of record.

Work Hard or Work Smart?

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Figuring Out The Dividend

When I make posts about Skyy receiving a dividend on facebook, I sometimes get asked what is a dividend? To be honest I forget to some people this is an unknown knowledge. I take for granted in observing investments, that the term “dividend” is well known and generally obvious. In a previous post called “Dividend Investing Template” I talk a little about what a dividend is but will break it down further below.

A distribution of a portion of a company’s earnings decided by the board of directors, to a class of its shareholders. The dividend is most often quoted in terms of the dollar amount each share receives (dividends per share). It can also be quoted in terms of a percent of the current market price, referred to as dividend yield.

The distribution of earnings, which can be in the form of money, shares or even property, is a method in which the company tries to reward the shareholder for investing in the company. I want to know that the company is healthy and producing profits. People can look at balance sheets all day, but the best way to know a company is healthy and actually has cash is when they return some of that money directly to me. Can’t beat Facts!

Not all companies return a portion of earnings back to shareholders. Most growth companies, which are defined as any company that is growing faster than the relative market, do not pay a dividend. The growth company usually would rather reinvest the earnings back into the business to keep the growth rate high. This could be perceived as a positive or a negative, depending on your point of view.

For me, myself, & I, we prefer not to invest in growth companies. First, there is no guarantee that the company can actually get a better rate of return on the money than I can. Second, I like to reinvest the dividends and therefore compound my investment. I can’t reinvest money when I’m not receiving any from the company I’m investing in. There are cons to receiving dividends for keeping the earnings. I get taxed on the dividend, which some view this as double taxation as an unfair and a natural disadvantage to dividend investing. Also, there is perhaps the chance that I won’t grow that money as fast as the company can. As many of you know and the people who follow me knows I view receiving dividends as a positive, because it gives me freedom of choice in how to reinvest that returned money.

At times I just don’t understand why more people don’t save and invest. It’s like they don’t want to build wealth or leave something for their family. Or make excuses of why they can’t save. Receiving cash is great and no matter the situation, with the money going into the account, I can choose how to use it!

Work Hard or Work Smart?

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Economic Moat For Protection

We humans as individuals tend to put up barriers when situations are not going right in our lives. We push others out and further our distance from them, creating a bigger moat. Now this can be a good thing depending on the situation, but as far as investments are concerned this is a Great position to be in!

Basically, an economic moat is a competitive advantage that a business has that prevents other businesses from taking market share from them.

Warren Buffet talks/mentions economic moats from time to time. He gives the example that the company is a castle, and the economic moat is like the moat that surrounds a castle. The wider the moat, the better defense a company has. A company can have a wide economic moat with pricing power, a well-known brand name, and large distribution. Companies that have a wide economic moat include:

Coca-Cola which is one of the most recognized brand names in the world, and has a wide economic moat with pricing power and a fantastic distribution network. Their global reach and expanding footprint ensure that the wide moat is unlikely to breakdown anytime soon. I’m pretty sure Coke will be around until the day I die.

Wal-Mart which is the largest retailer in the world has somehow become an economic moat as a retailer. Wal-Mart has made itself a wide moat through its distribution network and its ability to negotiate pricing with its suppliers and manufacturers, whcih allows it to sell goods at a discount rate.

With the 30+ companies that Skyy owns I have a few that are speculative plays, but the majority of the companies will be around for many years to come! In the end, its’s important to focus your money on companies that have economic moats. These moats (stocks) provide the company a natural defense from competitors and ensure that they stand the test of time!

Live Long & Prosper

 

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