Monthly Archives: April 2014

Dividend Investing – Back to Basics

A lot has been written about Dividend Investing (DI) and Dividend Growth Investing (DGI). However, for an absolute beginner, when he starts reading about DI/DGI, he is like a dear in front of the head lights and does not know what it is all about and what to do. I am starting a series of articles that will explain about the whole process of Dividend Investing: what it is and how to begin your financially independent (FI) journey.

I felt that there is a need to connect DI with your own life that you live and only then, it will start to make a better sense by providing living and breathing examples to a beginner who just started his journey. Only then, a beginner can really make a connection and more importantly make thoughtful decisions as espoused by Benjamin Graham, Warren Buffet, John Bogle, and other investing legends.

This article starts with your daily life style that an absolute beginner can relate to and understand. Before looking into what Dividend Investing is all about, I will present you with an inventory of our various activities that you perform every hour, every day, every week, every month, every quarter, every year in and every year out without fail, which at the most fundamental level are as follows:

  • Air: You need to breathe in air and without it you can’t live even for a second. This air is FREE. No company or government has a monopoly on this. Hence, there are no real private businesses around this FREE supply source. Hence, no one makes any profits out of it (I am not talking about Beijing Air, where some smart entrepreneur could still think of ways to make money 🙂 like auctioning a jar of fresh air from Alps for $86 bucks!).
  • Get to Work:  In order to getting to your school or work, you need to do brush, bath, shower, shampoo, dress and beautify yourself in order to impress someone 😉 All these satisfying elaborate activities require touching many products. What products come to mind and who makes them: Colgate, Johnson & Johnson, Proctor and Gamble, Kimberly-Clark, etc. I call this as the most important observation that can make you a smart investor and giving you a 6th sense. This can serve you much better than reading several Wall Street analysts’ reports, watching top-notch TV honchos and reading hedge funds recommendations. You can extend these sharp observation skills to other businesses around yourself while driving or where ever you visit and see who is attracting droves of customers.
  • Food: In order to pump in some calories into your human body, you need to at-least drink water or drinks and eat some sort of food. Who makes these products: Coca-Cola, Nestle, Hersey, Star Bucks, McDonald, Chipotle, Pepsi, …. you can fill in your favorite. Point of this exercise is to observe the products or services that you and others will need on an on-going daily basis and what companies provide those necessary products. These companies must be dominant players and in some cases almost have virtual monopoly and are said to have a “wide moat” around them as Warren Buffet calls. It will be very difficult for new competitors to come in and knock them down.

You can continue and expand this exercise to your other daily needs like Energy, Shelter, Fun/Entertainment, Health, Defense, Finance, and many other areas, some even beyond my imagination like golden curtains in bathroom 🙂

You toil hard from 9 to 5 in office to make money, $$$$$$$$… and you use that money to purchase necessary products and services. Now, think about it: you literally drain your life, blood and energy on them and it makes perfect sense to get some money back from these companies, but, how. This is where Dividend Investing (DI) comes into play. You need to own these very companies (investing). Once you do, these companies will reward you with a form of cash back (dividend) on a regular basis (monthly or quarterly) and isn’t getting some money back awesome! This is the crux of Dividend Investing (DI), my friends.

When you purchase a share in these profit making enterprises, you are really buying a very-very small slice of the big pie (unless you have an elephant gun like Warren, to eat big slices 🙂 of pies). But, that’s okay; our pie will grow with more money invested in these companies as time goes by. They will shower you with dividends and that buy more shares (ownership) and this keeps growing resulting into a big snow ball effect, where rolling snow from hill gathers more snow, resulting into a bigger and bigger ball, and when the money ball becomes so big that all of your expenses are covered by the dividends, you have achieved Financial Independence (FI) and freedom to live a life that you always wanted. You have free time and do things that you really love to do, travel around world, learn about amazing new cultures and soak in the wonders of nature or simply sit back and relax! Life should be moments of pleasure and filled with activities that you have great passion about. This is what I call enriched life filled with happiness.

All the best on your FI journey! Thanks for reading.

Full Disclosure; I am long on securities for companies mentioned in this article.

Weekend Reading – April 19, 2014

A learning mind is always open to new ideas, thoughts and endeavors in life and there is no frontier that is beyond human race. Here are some of the best articles that I enjoyed this week and they can sprout seeds of new thinking or reinforce existing ones.

High Frequency Trading (HFT) explained by Mark Cuban
I am a big fan of Mr Cuban due to many reasons, first he is a Mavericks like me 🙂 and more importantly due to his great entrepreneurial  and business acumen. Recently, he started a conversation on  HFT and I am sure it will be fun reading for you. Also, he appears on Shark Tank TV show which is awesome to learn about the valuations of deals that are clinched in the show itself by sharks who sometime fight to get a good deal 😉

Sentiment Survey by American Association of Individual Investors  (AAII) 
I’m a regular subscriber to AAII and love to read thoughtful articles published in this pedigreed journal. Its instructive to know the investors survey and as of 4/16,  there are more investors in bearish camp (34.3%), as compared to those in bullish camp (27.2%). As being a contranian, it might indicate that market may still have more legs to run before it really runs out of gas. AAII also runs a Model Shadow Portfolio whose run of 17.8% in last 10 years is simply fantastic by any means.

Two Minute Solution By Wealthy Retirement
Steve MacDonald comes up with 2 minute retirement solution every week and it is very soothing to hear his voice. In the above link, he talks about Proctor & Gamble Company (PG) that has raised dividends since last 57 years in row and last toasted it with 7% raise.

How to Make Money Buy Happiness by MMM
Yes, we want to be financially independent (FI) but whats its end-goal. Passive income that FI status endows upon us is to ultimately provide Happiness and that’s all what it counts in our enriched life. Mr Money Mustache explores various aspects of money like buying feelings and frugal to cheap. It is awesome read!

Income Diversification with 50 stocks by Dividend Mantra
Jason has been building his portfolio that he calls as Freedom Portfolio and ultimately wants to include 50 high quality stocks for diversifying his income streams, which is awesome. Even if one of the stock goes to zero, it will only impact max 2% and that will be more than covered by dividends. Good plan for winning financially independence (FI).

20 Favorite Dividend Growth Stocks from 20 DG Bloggers
DGSI talks about 20 dividend growth stocks and it is a good starting list to research stocks from. I also own many of these blue chip stocks in my Portfolio for passive income they provide.

Starting From Zero has also prepared a nice potential buy list for April.

Full Disclosure: I own PG and many other securities in my Portfolio.

If you know any other great article or blog that I can share with readers, please do drop a line to me. Thank you.

How to Start Your Dividend Investing (DI) Journey

All beginner investors have a dilemma and high level of anxiety that many so-called experts fail to comprehend and empathize with. When I started my FI journey in late 2011, I had a steep learning curve and diving into area of personal investing was not easy at-all as it was never taught to me formally. After all, you are putting your hard-earned money to task and never know whether you are getting into some sort of Ponzi scheme and really need something that will grow your money.

I’m of the mold of Do-It-Yourself (DIY) and therefore started a journey of learning about investments with full devotion. I read many-2 investment books with big names like Benjamin Graham’s Intelligent Investor, William Berstein’s Four Pillars of Investing, Your Money or Your life, The Millionaire Next Door, etc. and tried to learn: “What to buy” and “How to buy” stocks to get financially independent (FI).  Read more.

How to track your Tax Refunds – 3 Easy Steps

This is the tax season and tax returns are being filed during this time of the year with April 15th as the deadline, unless extensions are applied for. While talking to some of my colleagues, I told them that you can track your refunds but they did not know about it. So, I decided to write this post to help folks who want to check the status of their refund. Here you go. Read more.

My Watch List for April – 3 Stocks

I’m always looking out for good quality securities, and if they are under valued that’s great and if they yield high dividend income, even better!

I’ve been pondering about following 3 stocks since some time. In fact, I own two of them and thinking to add 3rd one which is high dividend.  As soon as more capital becomes available, I will be gnashing my teeth in some of these great companies.

1) Abbot Laboratories: ABT

Abbot Laboratories is a pharmaceuticals and health care products company that was founded in 1888. In 2011, Abbot announced that it planned to separate into 2 companies: Abbot and AbbVie, primarily, research-based pharma company.

ABT is trading at P/E ratio of 23.20 with a healthy yield of 2.30% and Market Cap of $58.07 Billion. It’s 52 week was $40.49 and currently at $32.70 looks under valued, almost 20% down from its 52 week. I will be looking to add positions in ABT.

2) Hewlett-Packard Co: HPQ

Hewlett-Packard is a multinational IT technology company with varied interests in hardware, software and services and was founded by Bill Hewlett and Dave Packard in 1935 in a car garage. HP has many marquee products under their belt like printers: Deskjet & Laser, PC, Palm, and many others. 

HPQ is at reasonable P/E ratio of 11.90, a yield of 1.80% and Market Cap of $62.01 Billion. It’s currently trading at $32.72, almost at its 52 high of $33.66, however, considering it’s no where close to 5 Yr high of almost $50, has much room to move further. I started adding positions when it was almost $20 last year and looking to add few more.

3) Prospect Capital Corp: PSEC

PSEC is a leading provider of private debt and equity capital and is a genre of business development company (BDC) and due to monthly payment, it can be a great fit for dividend income earners.

PSEC is at P/E ratio of 9.30, an excellent yield of 12.30% and Market Cap of $3.36 Billion. It is currently trading at $10.82, which is 7% lower than its 52 week high of $11.62. PSEC has moved up quite a lot in last 5 years and it can be considered as fairly or little over-valued, however,  due to its high dividend and also monthly frequency, I will look forward adding to my portfolio.

Are there any securities you are considering to add to your portfolio?

Full Disclosure: Long on ABT, HPQ.