The Phases of Dividend Growth Investing

Since I began dividend growth investing in September 2017, I've gradually noticed that there is a common evolution of dividend growth investing from an idea, into what eventually becomes a mindset, and even a lifestyle.

In my own life, I've noticed that since I discovered the concept of dividend growth investing and how I could leverage this concept to unlock financial independence at an early age, I have wholeheartedly adopted this idea as a mindset. I'm as passionate about dividend growth investing as some are about CrossFit and veganism.

With that said, let's take a look at how I believe dividend growth investing evolves from merely an idea, into a mindset, and even a lifestyle.

Phases of Dividend Income:

Phase 0: Theoretical phase

Every eventual fanatic dividend growth investor starts at what I like to call the "theoretical phase." This is the phase in which one experiences an epiphany. They one day randomly stumble upon the concept of passive income, and upon learning of this information, they are intrigued from the start. They will do more research and come to find that one of the absolute most passive forms of income to support a lifestyle are dividend growth stocks.

They then eagerly learn as much about dividend growth investing as they can, from the selection process of stocks, evaluation of stocks, and so on. Once a potential dividend growth investor reaches the end level of this phase, they then move into the next phase of this marvelous concept.

Phase 1: Practicality phase

When a potential dividend growth investor learns of the benefits of dividend growth investing, they begin to move from the theoretical phase into what I refer to as the "practicality phase." This is when someone simply becomes so eager to move from the theoretical phase of dividend growth investing, into the phase of actually implementing dividend growth investing in their own life.

They move on from the novelty of the hypotheticals of what an investment in X company 20 years ago would be throwing off in dividends now with dividends reinvested, to the point of actually desiring to make that hypothetical a reality. The practicality phase can't happen unless an individual embraces the idea of dividend growth investing. Although it's a very practical and near sure fire way to create meaningful passive income over time, dividend growth investing is often a slow process of accumulating fresh capital contributions, reinvesting dividends, and benefiting from dividend increases, often referred to as the trinity of dividend growth investing.

The amount that a would be dividend growth investor actually eventually invests in dividend growth stocks can range from investments of less than $100 (enabled with the recent rise of brokers such as Robinhood) to tens or even hundreds of thousands of dollars. Everyone discovers the concept of dividend growth investing at different phases of their life. Some may discover it at an early age in life, such as in middle school (like myself) or they may be in their 30s or 40s with a family even. This means that everyone starts at different investment amounts and becomes a DGIer to varying degrees.

In my case, I didn't start investing until I was 20. Being as young as I was when I began investing, I started with an investment of just over $2,000 in 6 different companies. It was this investment that would radically transform my mindset from one of hypotheticals into one of practicalities. This set the stage for the next phase of DGI.

Phase 2: Collecting Your First Dividend And Embracing DGI

Once I began investing in September 2017, shortly thereafter I received my first dividend from Genuine Parts Company (GPC). It wasn't much. I owned 2 shares at the time and collected $1.35 in dividends, but it was the beginning of that radical shift in my mindset. With every dividend I received thereafter, I became more and more convinced that dividend growth investing was my path from an employee to an owner; I viewed "harnessing the power of dividend growth investing to unlock financial freedom" as a mindset and a lifestyle. It's what ultimately led to the inspiration and motto of this blog. I began to think in terms of an owner rather than a employee/consumer. Rather than seeing $100 as a mechanism of acquiring goods/services, I began to see that $100 as a way of acquiring a share of Pepsi, two shares of Altria, or three shares of AT&T. In other words, the $100 could generate an immediate income of $3-6 in relatively safe, growing dividends for me in the years/decades to come.

With dividend growth investing, I realized that average, ordinary people were becoming financially independent over the course of years or multiple decades, depending upon how aggressively they invested in terms of the percentage of their salary they invested.

At a minimum, I believe DGI to be the practical solution to the retirement epidemic that America is facing. Rather than Millennials such as myself simply assuming that Social Security will be there for us when we reach retirement age (if it isn't drastically altered by then), the wisest course of action would be for us to start investing as soon as possible. If given 30-40 years, investments can compound considerably, transforming small contributions into massive piles of capital throwing off considerable dividends.

The best-case scenario for someone that aggressively saves 50%+ of their income and invests in quality, dividend growth stocks trading at fair or better prices for over a decade, is that they will be in a very enviable position in life, allowing them to focus on their passions rather than a paycheck. They will be financially independent or close enough that they won't be chained to a job they aren't engaged in, as is the case with over two-thirds of Americans.

It's the above information that enables me to feel the way I do about DGI. It is more than an investment strategy; it is a mindset that can free you from the obligation of a job that you don't feel engaged in, a boss that you dislike, or whatever it may be. You can truly be the architect of your own life when you are financially free

It's at the end of this phase that DGIers fully commit to the concept and lifestyle that accompanies DGI. I'm personally at this stage and will be for the next several years. They will continue to accumulate positions in dividend growth stocks for years before reaching the next phase.

Phase 3: Semi-Financial Independence/Continued Conviction In DGI Strategy

This is also a phase one can be in for several years or possibly even decades, depending upon how we describe semi-financial independence. This is the point at which one is actively collecting dividends that are becoming more and more meaningful with the passage of every month. It may be $100 here or $500 there, but the key takeaway from this phase is that an individual is starting to collect enough in dividends to enable either:

A) regularly reinvest dividends along with other fresh capital contributions to accelerate the path to complete financial independence.

B) use the dividends to pay for expenses or enjoy life.

C) some combination of the two previous situations.

Within this phase, the only thing that changes non-financially speaking is that the conviction in the DGI strategy continues to be reinforced as one collects dividends for simply owning shares in a company and continuing to survive. The bar for collecting dividends is really set that low; select quality companies at reasonable valuations and wake up in the morning, so to speak.

At this point, the strategy is really on auto-pilot and there is no need to radically change it. There may be some tweaks here and there to the selection and evaluation process of investing in dividend stocks, but the philosophy of DGI stays largely the same.

With the passage of several more years and the continued trinity of dividends, the investor will eventually transition into the holy grail of dividend growth investing.

Phase 4: Financial Independence

After a long, grueling road of investing and reinvesting tens of thousands or hundreds of thousands of dollars diligently, along with years of dividend increases from the quality companies in their portfolios, the investor has finally achieved the end-goal of financial independence. This phase is characterized by the freedom of the investor in question to pursue passions, hobbies, and interests at their own leisure.

If they work at a job they enjoy, they may continue to work, allowing them to continue to contribute fresh capital, reinvest dividends, and benefit from dividend increases on a magnitude that most can't even fathom.

This would allow them to reach potentially the uber wealthy phase of financial independence, in which abundance is a part of their lives. They could use this capital to fund philanthropic endeavors, political campaigns, or just continue to reinvest it.

If one works at a job they don't enjoy or find fulfillment in, they will probably have an idea of what they would like to do with free time by the time they reach this stage as it takes a minimum of several years and potentially decades to attain.

Whatever one decides to do upon reaching financial independence, the choice is absolutely theirs. They have earned their freedom after years of dedication to the very concept that made this life possible for them to begin with.

Discussion:

What phase of dividend growth investing are you at? How close or far away are you from Phase 4? Did I miss any phases, in your opinion? As always, I look forward to reading your thoughts and thanks for reading mine.

The Importance of Income Diversification

As someone who is striving to be financially independent by the age of 35, I need to diversify my income away from my day job and into passive income, as well as other more active income streams such as Seeking Alpha. As such, I'll discuss the 3 reasons that I believe income diversification is of utmost importance to not just those that are aiming to achieve FIRE, but for everyone.

Image Source: Pexels

Reason #1: Financial Peace Of Mind In Times Of Emergency

If you're like the vast majority of Americans, you're probably reliant upon a paycheck to cover your expenses. According to CNBC, 78% of Americans indicated that they live paycheck to paycheck. The even more terrifying statistic is that nearly 10% of Americans that earn more than $100,000 per year are living paycheck to paycheck. 

This is the precise reason that I believe this country faces a major financial illiteracy crisis. When you're earning over $100,000 a year and you can't at least have an emergency fund to get you through a few months of being laid off or whatever the emergency is, you are in need of a reality check.

When half the world lives on less than $5.50 a day and you're complaining about how hard life is while sipping on your $5-6 Starbucks Ultra Caramel Frappuccino, you need to realize that you're the 1% of the world and check your privilege at the door. You're living better than 99.9% of humanity has lived and yet you're still living paycheck to paycheck. 

Many people here in the United States like to tear apart the 1% in our country, while not even realizing that those around the world would be tearing into them as they are the 1% of the world. It's the textbook definition of hypocrisy. Sure, I'll admit that there are flaws in our country, but let's face the facts and realize that there is arguably no better country in the world to create wealth than in the United States. Despite our flaws, I truly believe we are still the land of opportunity.

Aside from this rant, income diversification is paramount to your financial peace of mind. If you are laid off, you receive your paycheck a couple days late, have to purchase new tires for your car, etc., you will be in a state of financial bliss while others are panicking about how they're going to pay for these emergencies. 

If we take my case for example, I have streams of income from my employer, Seeking Alpha, and the 57 companies and 1 mutual fund that I own (33 in Robinhood and an additional 24 different names in my M1 Finance account). Although I'm still in the early stages of my journey to diversify my income, around 13% of my income originates from Seeking Alpha and dividends. This is 13% of my income that is completely independent or free from the whims of my employer. As long as I continue to write content for Seeking Alpha that provides value to readers and as long as I continue to hold my ownership stakes in my dividend paying companies, I'll continue to receive this income.

When you are diversified and have multiple streams of income, you are less reliant on the less stable income sources (i.e. an employer) to support your livelihood. This leads me into my next point.

Reason #2: Autonomy From An Employer

As I briefly alluded to above, I consider an employer to be one of the least stable sources of income, which necessitates income diversification all the more. As employees, we are subject to the whims of an employer that is trying to increase their profits while hedging their risk. This means that employers are constantly trying to find ways to automate our positions to realize cost savings. 

According to CNN, 38% of jobs are in danger of being replaced by robots and AI by 2032.  While this will create opportunity for high skilled workers, it does mean that many in the financial services sector in the United States could be replaced in the next 10 or so years. With AI capable of doing even tasks we never thought possible before (i.e. composing music), AI and robots replacing a sizable portion of the workforce in the next decade is very viable.

When you're on the other end of this trend, you're benefiting considerably. We all know that as an employee, your employer can fire you for whatever reason they'd like (i.e. you don't fit the company culture, your boss simply doesn't like you, etc). 

This is a stark contrast to when you are an investor. The CEO of Exxon Mobil isn't going to fire you because "you don't fit the culture here." They work for you, the investor. They are going to be working for you and doing everything they can to ensure that Exxon Mobil becomes more efficient of a business and more profitable in the future. 

When you reach a point that your passive income within your taxable accounts is approaching your living expenses, you are able to pursue the passions of your choice. Perhaps there is a job that you would like to take in the future that you would find more purpose in, but it pays less. When your passive income comes close to your expenses, you simply have more autonomy from your employer.

It's that gradual shift from an employee to an investor that enables you eventual autonomy from your employer, allowing you the ability to create the purpose in your life rather than having your employer create your purpose.

Reason #3: A Decline In One Income Source Could Be Offset By Other Income Sources

Building off of the first reason, it is necessary to have income diversification because when you do reach a point in which you're relatively independent of your active income source to support your lifestyle, you need to be reasonably sure that your passive income is safe and will grow at least in line with inflation.

Diversification is a necessary component of a sound financial plan because investments like General Electric are bound to happen eventually. From a fundamental standpoint, the cut from General Electric could be predicted. However, what happens when a dividend paying company such as MercadoLibre decides it would be better off eliminating its dividend to focus on growth? 

Even though MercadoLibre was a dividend safety score of 79 per Simply Safe Dividends prior to the suspension of its dividend, sometimes you just can't predict a mercurial change in capital allocation policy like that. Although you could probably sell off the position at a slight loss and buy into another dividend paying company, it's very comforting when you limit a position to no more than 3-4% of your dividend income. As such, this outright elimination would probably be easily replaced by other consistent dividend raises in your portfolio from Johnson & Johnson, Pepsico, and Genuine Parts Company. 

One could suffer a dividend elimination like that, resulting in a 3-4% reduction in their total income, but benefit from raises from other companies to the tune of 6-7% and still walk away from that dividend suspension richer than they were the year before. 

This speaks volumes of the power and safety of mind in the diversification of your passive income. Even though a far from ideal result occurred, you still ended up better off than you were the year before.

Summary: Income Diversification Is Necessary For Everyone

Whether you're aiming for FIRE like I am or you're planning for a more traditional retirement, one thing is for certain: income diversification is a necessary component to either strategy. When you have several streams of income, events that are often emergencies to others become nonevents to you. Moreover, you're not completely bound to your day job as most Americans are. To make matters even worse for Americans, most generally dislike their jobs. Finally, a decline in one income source doesn't spell financial turbulence for you as it would for most. It is for the aforementioned reasons that I believe income diversification is a necessary piece of any strategy to achieve financial peace of mind.

Discussion: 

What are your thoughts on income diversification? How much of your total income originates from non-employer related sources? As always, thanks for reading my thoughts and I look forward to reading and replying to your thoughts in the comment section below.

Reaching A Dividend Milestone & Recent Purchases

In order to achieve my financial goals for 2019, I need to aggressively invest whenever I am presented with an opportunity. As such, I made a couple investments recently.

As I've detailed before, I believe the recent volatility has provided investors with many compelling opportunities.

Of those investment opportunities, I believe the tobacco industry to be one of the most attractive spaces for investment, which led me to add to my positions in Altria Group (MO) and Philip Morris International (PM) yet again.

I won't delve too far into specifics on each company as I've already recently analyzed both Altria and Philip Morris International on Seeking Alpha. I will refer interested readers to the links provided further in this post.

Regarding Altria, I view the 7%+ dividend yield from a soon to be Dividend King that grows its dividend in the mid to high single digits to be too good of an opportunity to pass up. That 7% yield is well above the historical average. Despite the risks of smoking volume declines continuing to accelerate, the regulatory risks with the FDA taking aim at JUUL, and the considerable premiums paid by Altria for stakes in JUUL and Cronos Group, I also believe management is taking the steps necessary to continue on the past 49 years of dividend increases. Since I wrote about Altria last December, the company has also announced an agreement with Lexaria Bioscience to explore innovation in oral, reduced risk nicotine products. Quite simply, management is continuing to implement its strategy to diversify revenues. I believe my thesis remains intact and the continued decline in Altria since my article has allowed me to lower my cost basis from $62.25 a share to $56.47 a share. Although I'm sitting on huge paper losses currently, I believe in the medium to long-term, I will be just fine with this position.

Like Altria, I also believe the 6%+ dividend yield of Philip Morris International is one heck of a bargain while giving investors international exposure.

Though the company is facing currency headwinds for the past 5 years, I believe internationally, the market for Tobacco remaibs strong. Philip Morris also has a tremendous opportunity to convert smokers of other brands to their IQOS device, which I discuss in more detail in my analysis of Philip Morris International over at Seeking Alpha.

Both of these companies offer above average dividend yields historically speaking, as well as trounce the 2% yield of the S&P 500. This should reward investors with safe, strong, and growing dividends for years to come while also offering investors capital appreciation eventually.

Overall, the share of MO added and the share of PM contributed another $7.76 in forward annual dividends, bringing my forward annual dividends to $505.99 (as of January 26, 2019).

Discussion:

What purchases have you made lately? What sectors do you find most attractive currently? As always, thanks for reading and replying to my thoughts and I look forward to reading and replying to yours.

January 2019 Dividend Income

With the first month of the year in the books and the Milwaukee Bucks in first place in the Eastern Conference, it's time to examine the amount of dividends that our portfolio provided for me in January.

Overall, I received $25.81 in dividends in the month of January. Of this, I received $25.57 from 10 companies in my Robinhood account. The remaining $0.24 came from 12 companies in my M1 Finance account.

The $25.81 received in January represents a 21.1% growth compared to the $21.32 that I collected in October. Moreover, this is a 298.9% YOY growth compared to the $6.47 in dividends that I collected in January 2018!

Breaking it down further, I collected $25.57 in dividends from my Robinhood account investments compared to $21.13 in October.

This $4.44 difference can be accounted for by the following events:

The Pepsi dividend of $1.86 across my two shares being paid in January.

The acquisition of 4 Iron Mountain shares, with 3 paying dividends in January for a total of $1.83.

Collecting $0.07 less from GlaxoSmithKline for the month compared to October ($3.47 in October vs $3.40 in January).

An additional share of Altria that added $0.80 to income (and another share added shortly after the ex-dividend date).

Collecting an extra $0.01 from Ventas compared to October due to a dividend raise in December. ($3.16 in October vs $3.17 in January).

Collecting an extra $0.01 from WP Carey due to a dividend raise in December ($3.07 in October vs $3.08 in January).

I also collected $0.24 in January compared to $0.19 in October from my M1 Finance October; $0.05 more due to the Pepsi dividend of $0.02 for my small stake and $0.03 from GlaxoSmithKline as I set up my M1 Finance account shortly after the ex-dividend date, so I wasn't able to collect a dividend from them in my M1 Finance account back in October.

Summary:

Overall, January marked a small milestone. It's the first time my first month of the quarter income eclipsed $25, and yet another record for the first month of the quarter. How great are dividends?! I am looking forward to continuing to build my first month of the quarter income and hope to add a couple more shares of Iron Mountain over the next few months.

April income should be considerably better as I will receive an extra share of dividends from Altria and Iron Mountain, even if I don't continue to add to my positions. My decisions to add to my Altria and Iron Mountain positions after their ex dividend dates in December will quite literally, pay dividends in April. There will also be a few dividend increases from some of these names factored into that month. My goal is to test $30 for April. With no additions, I'll be near $28 so I believe it can be done.

Discussion:

Did you have a record January? Are you working in purchases to increase your first month of the quarter income? If so, what have you been purchasing lately?