I recently ran across a video at Kitco’s Video News page that featured an interview with Kevin O’Leary who is a Canadian entrepreneur who founded SoftKey, a software company that eventually acquired The Learning Company before selling out to Mattel. Apparently, he is also on the show Shark Tank on ABC which I have heard about but never bothered to watch.
I don’t think it is important to watch the full video, but I do think that he made one very important point which I will share with you and which I am working on implementing:
- Never buy a stock that doesn’t pay a dividend!
It is really quite simple and makes a lot of sense. He doesn’t look at earnings when evaluating a stock. He looks at free cash flow and wants to make sure that some of that cash is being returned to the owners (the shareholders) of the company.
A Transition in Thinking
I am starting to see from where he is coming. Much of the market’s return has been the result of dividends. Just take a look at the following graph which I found at The Market Oracle:
If this graph doesn’t convince you of the importance of dividends, which account for over half of the S&P 500’s, then how about I show you another graph that looks at the performance of the Dogs of the Dow vs the S&P 500. In case you didn’t realize it, the Dogs of the Dow are those stocks in the 30 from the DJIA that have gotten so beat up in terms of price, that their dividend yield is among the top 10 of those 30 stocks.
So had you been holding stocks that paid dividends, there really would not have been a lost decade. You would have received consistent payments of cash to add to your portfolio enabling it to grow and make money. You can just look at the graph and see that the S&P 500 lost money during the decade that saw two major shocks. And yet, stocks that paid dividends (namely, the Dogs of the Dow) actually made money.
Fortunately, it is possible to teach this old dog some new tricks. That is why I am simply working on changing all the stocks in my retirement accounts to dividend paying stocks and tracking my dividend income this year. I did manage to hit my goal for the 1st quarter. Over the next 25 years, I will allow those accounts to grow and reinvest those dividends into more stocks.
In fact, I will probably buy some more STX and INTC this week since they have been holding up quite nicely during this recent market decline. I will also watch the ONXX $46 puts get exercised on Friday so I can start my purchase of Nucor (NUE) next week. I won’t get the dividend for this quarter, but should be in a position to pick it up in the third quarter. The same holds true for INTC and STX since the ex-dividend date has passed. Nevertheless, adding to these positions is just a good idea.
Obviously, I will continue to publish the quarterly update on the dividend progress and see if it continues to grow. According to the charts above, it should be a great plan!
As promised, I wanted to take a look at and share with you my stock dividend plan for 2012. This is for my retirement accounts which are individually directed but aren’t receiving any additional funds. My future retirement deposits are being made in my new 401(k). As I had mentioned, the plan was to increase my dividends to $1000 per quarter, but I think that it will happen in this last quarter of 2011 so a set of new goals will have to be made. Once I share these, I will explain how I plan on meeting those goals in the upcoming year. I feel this is a valuable exercise since eventually my retirement plan is to live off dividends and real estate rental income without touching the principal. Of course, I will also insist on being debt free prior to retirement.
New Dividend Goals for 2012
I plan on shooting for $1500 in the first quarter and increasing that total by $300 per quarter through the end of the year. That means $1800 for the second quarter, $2100 for the third quarter, and $2400 for the fourth quarter which breaks down to $800 per month on average. Some of these numbers seem doable, but others seem like a stretch. Of course, I will only know as I make the necessary adjustments and track the results periodically. So, how do I plan on achieving these goals.
Current Stock Holdings
Right now, I hold the following shares: SLW, AKS, SDRL, ONXX, DRYS, AKAM, STX, INTC, GME.
Of these, ONXX, DRYS, AKAM, and GME do not pay out any dividends. The first part of the plan will be to replace several of these with stocks that do pay out dividends. I recently bought some shares in STX and will buy some more once AKAM ends up being called away. As you may know, I do sell covered calls on many of the stocks that I hold and AKAM could be called out this Saturday when expiration arrives. It will be called away at a profit so I am not upset with allowing it to go. This means that AKAM will be replaced with STX.
ONXX is being shopped around and made a nice run recently. I want to work with it a little more and increase my profits by selling some January calls. Ultimately the plan will be to replace those shares with Nucor (NUE) since I will be getting rid of AKS. Even though AKS pays out a dividend, it is not as much as the Nucor dividend. This is the second part of the plan, namely replacing the lower yielding stocks with ones that pay out more in the same industry. With this switch, I will still maintain the exposure to the steel industry for when the world comes out of its slump and inflation rears its ugly head.
GME is also likely to be called away this week assuming European debt doesn’t blow up in the next five days, and I will be using the proceeds to add to my Intel holdings. I also plan to add to my SDRL holdings with the AKS proceeds when I can manage to exit with a profit. That might take another month or two.
I will be making no changes with DRYS for the moment since I am really trying to work with the covered calls as part of another technique that I am trying. Suffice it to say that I could get rid of the stock if necessary to achieve my goals, but now is not the time.
All in all, about 36% of my portfolio will be moving from non-dividend paying stocks into dividend paying stocks. I would expect that by the end of the year, I will be coming awfully close to my goal of $2400 for the quarter. I hope to generate some more funds for the account by selling covered calls and using the proceeds to add to my positions. If I can do that, reinvest the dividends, and have some of the companies increasing their dividends next year, it may not be long until I am making over $1000 per month in dividend payments. Another couple decades of growth should mean that by 2038, I won’t need to worry about Social Security!
Readers: What do you think? Does the plan sound reasonable? Do you have any investment plans for 2012?
There has been a lot of press surrounding the announcement that Warren Buffett bought 57 million shares of IBM to become one of the largest investors in the technology giant. But I am more excited about the 9.3 million shares of Intel that Berkshire Hathaway purchased during the latest quarter.
Why is that you ask?
Because I own shares of Intel!
I think it is immensely exciting to know that the world’s greatest investor and I are thinking alike. It wasn’t like I followed his lead and purchased the stock after hearing about his investment. I bought it in August since I felt that the dividend yield of 4% was awfully hard to beat in a crappy stock market. I don’t see the market doing much over the next few years anyway since the perceptions about the economy are so negative. We could even be in for another lost decade for all I know, so I felt that getting some dividends and growing my retirement portfolio in that fashion was a good idea.
Not an Original Idea
Unfortunately, I have to confess that investing in Intel stock was not exactly my idea. Personally, I suck at stock picking. Rather I compensate for that by buying protective puts on my stocks. After all, you just never know when the market may take a 20% or greater tumble so I want to have some portfolio insurance in place.
No, I got the idea from my engagement in the personal finance blogging community and reading all of the blogs from the different dividend investors. I was able to pick out a certain pattern. Namely, everyone was writing about Intel. So I figured, why not?! I ended up purchasing the stock at $20.30 in August and it has done well since that time.
Getting Ideas for Investing
There are plenty of good ideas out for investing out there. I think the problem comes because there can be too much information for some people to decide. Should I invest in individual stocks or mutual funds or exchange traded funds? Should I use bonds or preferred stocks or CDs for income? How much international exposure should I have? Is now a good time to invest in real estate? Should I allocate a portion of my portfolio to precious metals or did I miss it? What is the best asset allocation to have? Will there be another recession? Is there a risk of inflation or deflation? And on and on and on….
The amount of information can be overwhelming at times. So people just fail to think about it and put off investing. They ignore it altogether and wake up one morning ready to retire (or more likely, downsized) and figure out that they haven’t saved enough when all they needed to do was to get started as early as possible and invest consistently over time.
I get many of my ideas for investing from reading. I read a lot. I read several different investing blogs and investing sites. I used to have a subscription to Forbes and would read it cover to cover but I was getting behind in my magazine reading due to my online activities so I decided to let the subscription expire and save the money. I still get BusinessWeek and read it cover to cover. I am still about 6 weeks behind. Most of my ideas come from these sources. Then I will look to see if the stock has options available. If so, then I will consider it. I refuse to invest without protective puts any more.
Since Intel was a rather large stock with which I was familiar, I felt fairly comfortable investing for the dividend. It seemed like the downside risk of the stock when added with some put options was extremely minimal. It simply was a matter of acting on the available information. I must confess that it is nice to have the conformation that Warren Buffett is a fellow investor.
Readers: Where do you get your investing ideas? Or is the information overload just too much?