If you’ve heard me say it once, you’ve probably heard me say it a dozen times: generating a reliably increasing passive income stream is one of the top prioritizes for me as a portfolio manager. I’ve oftentimes referred to my income stream as my anchor, calming my mind during periods of market volatility.
Granted, we haven’t seen much volatility during the last couple of years. Newer investors might not even realize the importance of having something tangible to hold onto when fear it swirling around you, doing its best to entice you into an irrational decision, but I imagine it’s only a matter of time before volatility rears its ugly head again, creating panic in those who aren’t prepared for it. This is the value that a piece like this brings (more for me, than for you, unfortunately). I know readers like following my trades and are interested in my process; tracking the progress of my income stream on a monthly basis is one of the most enjoyable aspects of my overall management process.
So, let’s get into the meat of it. I’ve tracked my monthly dividend income for four years now. Doing so allows me to make sure that my DGI strategy is working. It allows for me to understand just how far I’ve come since I began my DGI journey, and how far that I’ve got left to go before my wife and I will experience complete financial freedom via our passive income stream.
My focus on dividend income as my anchor against volatility is inspired by my belief that the dividends that I receive are much less speculative than counting on capital returns to fuel our retirement. Sure, any company can cut any dividend at any time, I realize this risk. But, I also realize that management teams of established dividend growth companies take a lot of pride in their dividend histories and therefore, shareholder returns are a very high priority for them.
Oftentimes, during down cycles or trying times, CEO’s of dividend growth companies will come straight out and say that protecting the dividend is at the forefront of their minds. No one wants to be the one at the helm when a multi-decade dividend increase streak is broken. This isn’t quite a guarantee, but if you’re like me and you make it a priority to invest in and “partner” with high quality management as a long-term shareholder, a certain level of trust develops during the due diligence process and these words help to put your mind at ease.
What’s more, once you’ve spent enough time analyzing company fundamentals with a specific focus on dividend sustainability and dividend growth prospects, it becomes fairly easy to detect situations where an upcoming dividend freeze/cut is likely. I’ve sold stock ahead of a dividend cut on several occasions and I’ve only ever experienced one dividend cut within my portfolio (and that was on a very high yielding, speculative REIT play where I acknowledge the risk of a cut in the article discussing why I bought shares in the first place).
As the graph below makes clear, not only is it fairly simple to target companies with sustainable dividends, but I’ve found it to be equally as simple to target those with solid growth prospects moving forward. I've left out the values of Y-Axis to protect my family's privacy regarding our wealth, but it's clear that the income that my portfolio generates is trending up nicely and every year I’ve taken a major step towards financial freedom. I plan on going in-depth on this equity selection process in the upcoming Part 3 of the “No, The Market Isn’t Rigged Against You” series. Here are links to part one and part two incase you missed them.
When looking at the graph it’s important to note that a lot of the dividend growth that my portfolio has experienced isn’t from organic growth, but instead capital infusions. I sold some property and put the proceeds into the market during 2016; this was a major contributor to the 77% y/y income gains (I only had one company: Broadcom, post a dividend that was higher than that during the year).
In 2017 there some capital outflows from the portfolio which is why monthly dividend growth slowed a bit towards the end of the year. I expect for there to be further outflows in 2018 as I pay for my wife’s graduate school tuition with funds from the portfolio. I hate withdrawing cash from the brokerage accounts but I also don’t like the idea of adding high interest debt to our household’s balance sheet in the form of student loans. I’m more than happy to leverage debt, but I’d rather do it at rates below 4% (most graduate student loans that we've been offered are in the 6-7% range).
But, even with outflows for tuition, I still fully expect to see solid income growth coming from our portfolio in 2018. I expect the recently passed tax reform to augment dividend growth announcements portfolio wide. As I pointed out in this recent piece, I like owning cash rich companies and repatriation should lead to above average shareholder returns this year.