Tag Archives: dividend

$100,000 Investment Into Yearly Income: The Southern Company Example

Summary A dividend strategy is essentially turning investment into a yearly income stream. Boring utilities stocks can help you generate great levels of wealth. Here is the way it can work for you. In the article “Can A $100K Investment Produce A $50K Yearly Income? Walking The Model Step By Step” I introduced a model to generate an ongoing income steam through initial investment of $100,000 and by reinventing the net dividend flow. There were many comments and feedbacks to this model and I thank all commentators for their good inputs. One key concern that was raised was that achieving a $100,000 worth of savings is almost an impossible challenge these days. Well, I will fool you not. Getting to a significant amount of wealth is not an easy task. It requires both discipline and setting straight the priorities. There is no magic here. In order to achieve significant amount of savings one must put aside a portion of his income. These amounts can be either fixed or it can change from week to week or month to month. Nevertheless there should be constant contribution. In order to achieve something there must be a goal. A goal should be set realistically based on the ability to routinely contribute to the accumulated wealth. In the next example I will continue to use the $100,000 as the goal. After we set our mindset straight and agreed to take responsibility over our spending and savings, and after we set up a goal that is reasonable to achieve, how can we generate wealth using dividend investing strategy? The example of The Southern Company I decided to use The Southern Company (NYSE: SO ) as an example as it is conceived as a boring type of investment. It is less exciting from the growth machines out there but it can definitely fit to our purpose of generating wealth. SO is a holding company that operates in the South East counties of the U.S. It owns Alabama Power Company, Georgia Power Company, Gulf Power Company, and Mississippi Power Company, each of which operates as a public utility company. SO is the 16th largest utility company in the world, and the fourth largest in the U.S. It serves more than 4.5 million customers in Alabama, Georgia, Florida, and Mississippi. The company was founded back in 1945 and began paying quarterly dividends in 1972. SO never had a dividend cut and has been steadily increasing its dividend since the year 2002. An investor who decided back in November 2005 (ten years ago) to regularly invest in SO, to routinely invest $450 per month and buy more shares. And alongside during this period, each quarter he reinvested the dividends after tax to buy more of SO’s shares he could have reached the $100,000 goal by the end of 2014. Even after the 2015 correction in the Utilities’ stock prices he would have reached the goal again by the month of September 2015. It means that based on these particular assumptions the goal was achieve after nine years. Let’s see how it worked in more details. The investment Since SO paid a quarterly dividend through the assumed period, the investment is built out of two elements: the first one is the monthly contributions of a fixed $450. That means yearly contributions of $5,400 each year. The second element is the dividends net of 25% tax rate which have constantly grew from year to year. The higher dividends together with the higher number of accumulated shares delivered an everlasting growing purchasing power to buy more shares. As we can see in the next graph, during the recent years the dividend became a significant portion of the yearly investment and by 2014 it was about 40% of the $8,568 yearly investment. The shares accumulation The monthly contributions allowed to constantly increase the amount of shares but the accumulation was highly dependent on the share price. The next graph shows the yearly stock price average during the recent ten years alongside the accumulated number of shares during each period. At times of high stock price the accumulation power was lower. The situation of the zero interest rate brought the stock price to recent highs and by that reduced the buying power of the routine contributions. In a scenario of a hiking interest rate we might see SO’s stock price going down and by that a fix accumulation will allow to purchase more shares. The total investment value: The dividend yield went down from the levels of 6-7% in the years 2005-2009 to the levels of 5% in the recent years due to the stock price hike. But this exact hike also drove the holding value to higher levels and led the total value to exceed $100,000 by December 2014. If indeed the interest rate hike will arrive soon (and it depends how high it would reach in the next couple of years) the value of the portfolio will be highly volatile and might go down in value. The income: Which brings us to the last piece. The accumulated holding at the value of $100,000 generates in 2015 a yearly net income of $3,566. As this machine will continue to work it would grow its income power even higher. Even if the stock price will go down due to a FED’s action the power of time and reinvestment will allow to accelerate the income machine even faster (as lower stock price allows to accumulate more shares). If you are interested in the excel model behind this example you can find it here . Conclusions: Even a boring type of investment like SO can serve well the patient investor to generate wealth using a sound dividend investment strategy. Dividend strategy cannot depend on a sole stock and should be based on a diversified portfolio. The monthly contributions should be aimed towards high quality stocks that face temporary headwinds but have long and proven history. Nowadays this list may include companies like Chevron (NYSE: CVX ), ConocoPhillips (NYSE: COP ), Deere & Company (NYSE: DE ), Eaton (NYSE: ETN ), Johnson & Johnson (NYSE: JNJ ), HCP (NYSE: HCP ) and other names from the Industrial sector. A consistent strategy of constant contributions and dividends reinvestment will allow to obtain sound results overtime. There would be those who would criticize the length of the time required to achieve the goal at it was shown in this example. As mentioned earlier: there is no magic here. In order to accelerate the accumulation and reduce the length of time the monthly contributions should be higher. For example, a monthly contribution of a $1,000 would have reduce the time by ~40% allowing the goal to be achieved in early 2011 or after six and a half years. There are highly subjective decisions to be made and it will vary from one person to the other, but if the mindset should be set to take responsibility over your financials, a sound goal should be set and the only thing left is to execute the strategy. Happy investing.

VYM: A Quality Dividend Growing ETF

Summary Features great dividend growth and diversification across sectors. Traditional low Vanguard expense fees keep your costs down. Lags, though closely follows the S&P for total return. Fund 10% down for the year creates a buying opportunity. Solid ETF choice to balance with SCHD for long-term income generation. Introduction The Vanguard High Dividend Yield ETF (NYSEARCA: VYM ) is a quality ETF by Vanguard, the leader in low-cost ETFs. The fund tracks the FTSE High Dividend Yield Index which tracks stocks that are forecasted to have above-average dividend yields. The fund applies no type of quality metric or additional screening to the companies. It also excludes REITs. It currently has 434 holdings and carries an expense ratio of 0.10%. The Holdings VYM holds a wider variety of stocks than the Schwab U.S. Dividend Equity ETF ( SCHD), which I wrote about in another article . (click to enlarge) To compare, both funds are light on materials while SCHD is also very light on utilities, financials and telecommunications. A few basic stats, the top 10 holdings make up 30% of VYM, 42% of SCHD, and the top 25 makes up 58% of VYM vs. 74% for SCHD. Dividend Growth VYM has also featured great dividend growth the last several years. We need to see what the December dividend is, but using the trailing 12-month period (last raise announced 9/23/15), it grew 12.4% this past year, and has a 3-year average of 12.7%. Performance Inception to-date performance vs. the S&P has slightly lagged as mentioned in the summary. This return is assuming all dividends reinvested. Data courtesy of DividendChannel. (click to enlarge) I like to compare this with SCHD’s inception to-date results to get a closer apples-to-apples comparison of a dividend based ETF. (click to enlarge) SCHD has lagged VYM since its inception by a percentage point each year. One other comparison point between VYM and SCHD is looking at their top holdings. Since their top holdings make up the majority of the funds, it’s important to see how they are similar and where they differ. This information may help an investor decide which fund to buy into (if it’s an either/or scenario) based on the business prospects of a company(ies) that may be absent from a fund. The green colors mean the company is contained within both funds, red means that one is not contained within the other (for example Wells Fargo (NYSE: WFC ) and AT&T (NYSE: T ) are not in SCHD) and yellow denotes they are in the other fund, just not the top 30. Why Now? The market has been off its highs in 2015 as there are now several factors weighing on the market. Looking at the past 5 years, the yield has never been higher. It briefly touched over 3% during the corrections of 2011 and 2013, but has sustained 3%+ for the last few months of 2015. This offers a historically good entry point. The sharp rally of the past week has pushed the yield down however from approximately 3.42% to 3.25%. VYM data by YCharts Conclusion VYM is another great ETF product by Vanguard. The fund has had a solid track record of performance, delivering growing dividends while closely following the performance of the S&P 500. The yield is still over a percentage point higher than the S&P for investors focusing on generating more income while still delivering great total return. I like the prospects of both VYM and SCHD and think they can be compared to one another whether adding to an existing or opening a new position.

No Imminent Lift Off? Time For These Dividend ETFs

Dividend investing has seen a lukewarm year so far in the U.S. as the markets speculated a faster-than-expected Fed lift-off prompted by steady growth in the domestic economy. As a result, most dividend ETFs are trading in red in the year-to-date frame. However, a volatile start to Q4 has once again put the spotlight on income-focused investing. Moreover, a still-patient Fed and the likelihood of more cheap money inflows cheered up dividend investing all over again. Be it bonds, high dividend equities, or pass-through securities, picks that target higher yielding securities have fared well since the dovish September Fed meet. The allure rose further after the U.S. economy reported sub-par job data for the month of September last week. The soft jobs’ report has raised questions over the health of the U.S. economy and the fate of Fed’s policy tightening. Headline job gains for September came in at 142K versus the estimated 200K and the prior month’s tally of 136K (read: ETFs that Gained & Lost Post Dismal Job Data ). The originally reported July tally was also revised lower to 223K from 245K originally. The year-to-date monthly pace of job gains now averages 198K, though the pace for the last three months was way lower at 167K. This goes against the monthly average of 260K for 2014. While a subdued inflation data and global growth worries were already obstacles on the course of the Fed policy, the job data made the case worse and Fed’s policy tightening seems some way off. Investors who were earlier overconfident about a December rate hike in the U.S., have now started to push back the timeline to early next year, presuming a sluggish U.S. economic rebound. While it is a decent setting for capital gains, Treasury bond yields slumped and are at 2.07% at the time of writing, leading some to believe that a new bull market may be at hand. In this type of an environment, investors can count on income picks for Q4. While individual stock pick is always an option, ETFs give options to fairly diversify one’s portfolio. 4 Dividend ETF Picks for Q4 SPDR S&P International Dividend ETF (NYSEARCA: DWX ) If you want to stay global, DWX could be your ticket as this fund focuses only on high yielding stocks from around the globe. After all, most developed economies are supposed to carry on their accommodative stance next year unlike the U.S. This is done by tracking the S&P International Dividend Opportunities Index, a benchmark that holds about 100 securities in its basket. Currently, the $1 billion-fund is a bit heavy on traditional high yield sectors like financials (24.8%), utilities (22.8%), telecom (15.9%), and energy (14.2%), though no single company accounts for more than 3.4% of the total assets. In terms of yields, this pays a solid 5.91%, while it charges investors a reasonable 45 basis points a year in fees for the service. The fund was up over 6.9% in the last five days (as of October 5, 2015). Vanguard High Dividend Yield ETF (NYSEARCA: VYM ) This large cap centric fund provides exposure to the high yielding U.S. dividend stocks by tracking the FTSE High Dividend Yield Index and could thus be a lucrative option for those seeking higher current income. The ETF is one of the largest and popular choices in the dividend ETF space with AUM of over $10.3 billion. Expense ratio comes in at 10 bps (read: 3 Excellent Dividend ETFs for Growth and Income ). In terms of sector, the fund is widely spread out with financials, consumer goods, technology, industrials, health care, and oil & gas taking double-digit exposure in the basket. The fund yields 3.33% as of October 5 and was up over 5.6% in the last five trading sessions. The ETF has a Zacks ETF Rank #3 (Hold) with a Medium risk outlook (read: 3 Cheap Value ETFs with Strong Dividend ). Schwab U.S. Dividend Equity ETF (NYSEARCA: SCHD ) This fund tracks the Dow Jones U.S. Dividend 100 Index, which measures the performance of high dividend yielding U.S. stocks that have a record of consistently paying dividends. Notably, companies, that raise dividends regularly, appear steadier than those which offer higher yields. In a market crash, these dividend aristocrats stand out pretty strong and navigate through volatility. The product has already amassed roughly $2.51 billion in assets and has a dividend yield of 3.15%. The fund charges a meager 7 bps in fees and trades in solid volume of more than 500,000 shares per day. Consumer Staples is the fund’s focus sector with about one-fourth exposure followed by IT (19.74%) and Industrials (13.85%). It currently has a Zacks Rank #3 and added about 5.3% in the last five trading sessions (as of October 5, 2015). SPDR Dividend ETF (NYSEARCA: SDY ) This fund provides exposure to the 102 U.S. stocks that have been consistently increasing their dividend every year for at least 25 years. It follows the S&P High Yield Dividend Aristocrats Index and has amassed $12 billion in AUM. Volume is solid, exchanging more than 765,000 shares in hand, while expense ratio comes in at 0.35%. The product is widely diversified across components as each security accounts for less than 2.81% of total assets. Financials is the top sector taking up one-fourth of the portfolio while consumer staples (15.1%), industrials (13.4%) and utilities (11.8%) round off the next three spots. The fund was up nearly 5% in the last five days and has a Zacks ETF Rank of 3. Link to the original post on Zacks.com