I will be discussing the makeup of my current portfolio and what I hope to accomplish now and in the future.
Tracking Dividend Income
BMY: I initially picked Bristol-Myers Squibb for one reason. I had been reading up on options trading, specifically selling calls, and needed to buy 100 shares of a stock to be able to sell one contract. It was right around $27 a share, meaning that I was able to afford to buy 100 shares. I was also able to sell a call for a premium of around $0.32. I sold an approximately three-month call option at a strike price of $29. Fortunately, the option expired just before the stock rose above $29 (it came within a penny of being able to be executed). I still would have made money if I had to give up the shares so it would not have been the end of the world. I’ve since held on to it and actually added 30 more shares since Schwab rates it as a solid A stock and it has a great current dividend and past dividend history. I’m still debating if I’ll be selling more call options, but right now with the market being so volatile, I think I’m going to hold off for a few years and just accumulate the dividends. I’ll talk more about the power of dividends below.
SCHC: Schwab International Small-Cap Equity. My attempt at getting international exposure. The benefit of a Schwab specific ETF is that I can add small amounts to it at regular intervals and not be charged a commission. It, and all the Schwab ETF’s, also have very low expense ratios. It’s true that it is not as cheap as stocks, but these ETF’s are a cheap way to diversification. As I build my portfolio, I’ll ultimately transition to stocks but for now ETF’s (or no-load mutual funds) are the way to go.
SCHV: Schwab U.S. Large-Cap Value ETF. Same reasoning as above. Provides a good exposure to large cap stocks that are thought to be well-valued.
Roth IRA: I’m trying to max out my Roth with $5000 a year.
SCHA: Schwab U.S. Small-Cap ETF. I believe that much of the growth in the stock market will come from small-to-mid cap stocks. This will hopefully give me good exposure to that market.
SCHD: Schwab’s latest ETF: U.S. Dividend ETF. I’ve been doing a lot of reading on dividends and really like the philosophy behind this ETF. It seeks to replicate the Dow Jones U.S. Dividend 100 Index, an index designed to measure the performance of high dividend yielding stocks issued by U.S. companies that have a record of consistently paying dividends, selected for fundamental strength relative to their peers, based on financial ratios. Dividend growth is as much a factor (or maybe more) as current dividend yield. “All index eligible stocks must have sustained at least 10 consecu- tive years of dividend payments, have a minimum float-adjusted market capitalization of $500 million USD and meet minimum liquidity criteria. The index components are then selected by evaluating the highest dividend yielding stocks based on four fundamentals-based characteristics — cash flow to total debt, return on equity, dividend yield and 5-year dividend growth rate. Stocks in the index are weighted based on a modified market capitalization approach. No single stock can represent more than 4.5% of the index and no single sector can represent more than 25% of the index, as measured at the time of index construction, reconstitution and rebalance. The index composition is reviewed annually and rebalanced quarterly.” This is my latest Roth purchase, but one that I’ll keep contributing to in order to generate future income. Ultimately, it would be nice for dividend paying stocks to provide all or more of the required minimum distribution that I’ll eventually have to pay.
GE: General Electric is a company that everyone is familiar with. I purchased them in 2004 with the proceeds from a forced sale of a mutual fund. I decided to invest in the company directly through a dividend reinvestment program. This allows me to purchase more shares at the low cost of $1 per trade. Dividends are reinvested at no cost. GE took a huge hit a number of years ago and this stock is by far my worst performer. My compound annual growth rate is -6.01% (as of 11/7/2011). Since the stock more than lost half its original value, I have been purchasing more stock in order to decrease my average cost per share to something more reasonable. I technically haven’t lost anything until I decide to sell. I’m going to be holding on to it for at least 20 years, at which point the compounded effects of the dividends should providing some income. However, I’ll have to spend the next few weeks to months thinking about if I should give up on this strategy, take the loss, and put this money into, say, McDonald’s, which has a much better recent dividend history… However, it does look like GE has begun increasing its annual dividend payments again so I might just hold on to it. It will be interesting to watch my Yield on Total Capital Invested increase over time.
Update on GE: I just sold it all on 12/12/2011. See my post here: Selling General Electric Stock in my DRIP. I sold them not because I don’t like their fundamentals or the fact that they just raised their dividend. I sold because having all my investment accounts at Schwab will ultimately make everything easier to manage. So, after waiting 30 days so as to not violate the Wash Sales rule, I might be purchasing GE stock again and turning on Schwab’s free dividend reinvestment option or, more likely, dividing that money among my IRA investments.
Other than BMY, I’ll be sticking with ETFs for the next few years. With my current income and expenses (paying off medical school debt, etc), I am unable to put a reasonable enough amount into each stock to make up for the commission.
Blog updated on November 12th, 2011 with post about some technical terminology, including CAGR, YOC, and YOTCI. Compound Annual Growth Rate, Yield on Cost, and Yield on Total Capital Invested, respectively. (I just made up the YOTCI acronym on the spot.)
For those of you interested in a DRIP (Dividend Reinvestment Program) and/or DCA (dollar-cost averaging), please see my blog post here: DRIP/DCA Spreadsheets. I have links to public Google Spreadsheet templates for those specific things.
My current strategy is to reinvest the dividends automatically. However, I’ll eventually want to take the distributions as cash and use them to rebalance my asset allocation and/or purchase new stocks entirely. With how small my distributions are now, however, it just makes more sense to put them into something rather than just sit in my account earning essentially 0% interest.
Here’s a couple of great dividend investing resources:
1. Dividend Stock Discovery Tool: Currently rates GE a “D” given its recent significant cut to its dividend. I might have to seriously consider moving my money out of GE…
2. Dividend Reinvestment (DRIP) Calculators
3. Edward Jones U.S. Market Insight article: Don’t Reach for Higher Field, Focus on Quality.
4. The High Dividend Yield Return Advantage: An Examination of Empirical Data Associating Investment in High Dividend Yield Securities with Attractive Returns Over Long Measurement Periods.
5. 10 by 10: The Interaction of Dividend Yield and Growth.
6. Dividend Growth vs. High Yield: Some Surprising Findings
7. Stocks That Raise Dividends Outperform
8. 6 Tricks To Manage a Dividend Portfolio With Less Than $10,000
Post updated on: 12/12/2011