Value Dividend Investing System

Let me start by saying I am not a professional investment broker. I have no educational background that should lead you to think that I am giving professional advice. I’m just an engineer, who knows how to make spreadsheets and is looking to not be left behind as the world moves forward.

Having met some of my previous investment and saving goals I’ve recently moved on to try and improve my ability to retire as young as possible. Further, I recognize that with Beth’s schooling, we are a bit behind in where we should be investment wise. This is not to begrudge her the education, which in and of itself was an investment we see paying off, but an acknowledgement that for ten years or so, my job was the only one pulling retirement funds out.

Since my first week out of college I’ve put aside 5% of my income. My employer will match up to 5% so I took all of the free money I could. This has been invested in the Government’s TSP program, a very well-run and stable system for growing your nest egg. I have few complaints about it, and odds are if they met my demands, it would only confuse things.

I’m now looking for some longer term investments to make to pay out in twenty to thirty years. With this kind of goal in mind I went out seeking guidance and counsel from the interwebs.

I’ve always been a fan of Warren Buffett. Not just because he’s rick, there are a lot of rich people, but because I think he embodies the “Get Rich Slowly” principle of long view, value based investment. He has a few simple rules that he uses to invest by. He only invests in companies he understands. He considers his investments to be “buying ownership of a business” instead of the usual “buying a stock hoping it goes up.” Finally I like his “buy a wonderful company at a good price, not a good company at a wonderful price” approach.

With all that in mind, the Dividend Investing Strategy combines with Value Investing made the most sense. The goal is to acquire companies that pay a healthy dividend. Use that dividend to buy more stock in companies that pay dividends. All the while you’re stock value goes up over time, hopefully outpacing inflation, and with it your dividend outpaces inflation. If started early, done right, and well-funded, you can set up a PERMANENT income stream to fund you through retirement while still leaving a portfolio to your loved ones when you die.

I started by buying a list of companies I know of, that historically pay dividends, and have a long growth history. These include the usual suspects of Coca-Cola, Johnson and Johnson, AT&T, McDonalds, etc. I weeded out companies I have some moral problems with (tobacco, low wages, racist history) or I don’t see being around in 30 years (i.e. Best Buy) and was left with about 40 companies. I then organized these into a Google Sheets spreadsheet with an automatic stock information feed (see the command “googlefinance()”) and set to work with a rule set.
Here are my rules.

1. Dividend payment higher than 2%,
2. Price to Earning Ratio (P/E) of less than 20,
3. Currently priced at 90% or lower than the 52 week high.

Once I have the shortened list for the month I look at the financials. Are they low because it’s a good deal, or because they made a serious business mistake. From what I read, these rules, while restrictive, will usually kick out a few companies as potential investments a month. I’ll hold off on purchases until I can make them in orders bigger than $500 to keep my investment cost below 1%.

Then Buy, Hold, Profit.

Get a little Captain in your Portfolio

So last week I bought GM stock. Seemed to be reasonably priced, and if me and Warren Buffet are thinking the same investment is a good one, I can't be that far off. I plan on holding onto GM for a good long time. They are currently paying a dividend I can reinvest elsewhere and while I think its a long road ahead, I see good things from American Cars again. I like that Chevy has more diesels (so VW no longer holds the field for non-luxury brand sedans), GM has more hybrids, and they're turning a lot of bad press about recalls into sales on cars (through the use of $500 discounts.)

Today I made my second Buy 'n Hold purchase. Using my tracker spreadsheet (which I'll discuss in a different post), A stock I liked called Diageo came up at a good value. Diageo is the brand holder for some serious Adult Beverage firepower, including my personal favorite Captain Morgan, and also several brands used al over my family like Crown Royal and Smirnoff. I have no fear these brands are going anywhere.

Diageo was trading 10% off its 52 week high, and its P/E ratio was below 20. These are two of my clues to investigate a stock to see if its a value. I purchased it at $118.87, so we'll check back in a few months and see if I chose wisely.

Investment plans

Recently I hit a milestone from a financial perspective. Beth and I have been saving for the last few years and now have accomplished two of my main goals, we have a three month emergency fund, and we have saved enough for the adoption fund (minus some legal fees, nursery outfitting etc). With that in mind its time to start working on a new war chest of money.

I have usually set aside a few hundred dollars in my ING Direct (now Capital one 360) online account as mid term cash reserves. That worked well for a while, but the interest rate was always sad. It currently sits at 0.75%. Better than my checking account, but nothing to write home about. So I want my money to do some more work. I need to go a bit riskier and focus on real honest to God investment. Over the last few weeks I 've developed a new strategy.

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First I 've been playing with Betterment for several months and I 've been generally happy with their approach. I 've set up an automatic deposit of $200 a month into an account I 'm calling "Spending Money." This is used to invest in a big basket of stocks and bonds that will, in theory, grow at a better more reasonable rate than my sad 0.75%. There 's risk here, but for this account I go 70% Bonds and 30% stocks as I view this as short term investment money that I can and will pull out for large home projects, vacations, etc.

The nice thing about betterment is that you can set up a bunch of sub-accounts, with different goals and time lines. It will then calculate how much you should set aside and what mix of stocks and bonds you should use to maximize your chance of meeting your goal. So if you want to take a trip to Italy in three years, just set up a goal, name is Italy, say you need three grand in three years. It will tell you how much a money and make a one click setup available.
Its the kind of "set it and forget it" approach to investing I approve of. I only have the "spending cash" account right now, but I may set up some other goals later on, like finishing the basement, or buying property for the next house. And you can withdraw money whenever you want. They got in trouble for saying it 's like a bank account, but I can understand the thinking behind it.
I also plan to do larger deposits into this account when I have leftover money at the end of the month. As long as you set an automatic $100/month your cost of using the service is 0.35%, with a drop to 0.25% after you hit $10,000.
So if you have a few extra bucks at the end of each month looking for a home, take a look at Betterment.

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My second area of investment is VERY long term. My goal is to retire at 57. In order to do that I need to get some additional sources of income and investment other than the pension I 'm working on. With that in mind a dividend based investment strategy seems to be in order.
I started by looking at just some stocks I was interested in buying. Then I noticed that some of them paid an annual dividend, usually in the 3-5% range. "Well," I though "If they pay as much as my bank pays, and I get to own the stock that will slowly but steadily rise over time, that's like double dipping. I like double dipping." So i started to research.

I read this book, Retire With Dividend Growth: A Better Way, and it made a ton of sense. I 've further followed the Dividend Growth Investor blog, and started to do some math.
If Ispend $500/month on a common stock that grows 5% a year. and that stock pays 3% commission a year, then by the end of the second year, I 've spent $12,000, I have $13,000 in value, and I 'm making $30 a month is dividend, that just free income. I 'm assuming I 'm using that money to buy more stock with, which certainly help get that compounding up.
Lets say I do this for five years, then the costs of everything else just gets too much, and I can 't put away more money. At this point I have $36,000 value in my account and a monthly income stream of $90. Adding no more money to this account but just reinvesting that dividend. by the time I retire I 'll have a monthly income stream of $450, or $5,400 a year. Not amazing, but that certainly fun money. It pays for a car, or two vacations a year.

Lets say I continue, $500/month. This gets easier over time since $500 means less later on than it does now. 25 years of $500 a month gets me a value of roughly half a million dollars, with a monthly dividend of $1,200. Seems like rent is paid forever.

Compare this to just putting $500 in a bank account at 1%: Value of $151k with a monthly interest stream of $125. Same money with vastly different results. I could stop saving in five years and still beat the bank account.

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I set up an account with Tradeking. I went with them because they have the lowest transaction fee I was about to find at $4.95 a trade. You can find a few places that are lower but they either do bulk trading where you don 't know the price you 're getting, or you need to pay a lot of money up front. I 'll discuss some of these other options at a different time.
So far I 've only made one purchase, 28 shares of GM. this is not a long time recommended dividend stock, but I believe they will be, so we 'll see. In the future I 've developed a trading system that will focus on long term winners with LONG history of dividends.

Spicy Bread and Butter Pickles #3

I've tried several Bread and Butter pickle recipes over the last few years since I started growing cucumbers. After the first few rounds, I decided that spicy red pepper flakes added a nice bite to these and complimented the sweetness. So this is my final Spicy Bread and Butter recipe. There's no reason to make a non-spicy version.

Spicy Bread and Butter Pickles #3

• 10 Cups of sliced cucumbers (i used about 8 cucumbers, but this will vary with type)
• 1 large sweet onion - diced or sliced, depending on if you like to eat the onions)
• 1/2 Cup pickling salt
• 3 Cups white vinegar
• 2 Cups sugar
• 2 Tbsp whole Mustard Seeds
• 1 tsp celery seeds
• 1 tsp ground turmeric
• 1 tsp red pepper flakes
• An additional 2 - 3 tsp of red pepper flakes
• Pickle Crisp

Combine the sliced cucumber and onion in a large bowl. Separately dissolve salt in two cups of warm water. Pour salt water over cucumber and onion mixture. Add additional water (cold is fine) until mixture is covered. Set aside for 2.5 hours. [This wait time is important. We are using the brine to move salt into the vegetables. This is the only salt in these pickles, and if you cut this time short you'll notice the the lack of taste.]
After the soak in the brine, pour out liquid, rinse and drain cucumber onion mixture. Set aside.
In a large pot (i used an 8 Qt) pot combine the vinegar, sugar, mustard seeds, celery seeds, turmeric, and the teaspoon of red pepper flakes. Bring this to a simmer and stir until sugar is dissolved into the vinegar. Once this is mixed together, add cucumbers and onions. Simmer for ten minutes.
The pickles are now done. This recipe makes 5 pint jars that can be canned in a boiling water bath for 10 minutes. Any pickles that don't fit, I usually put in a Tupperware container in the fridge and eat.

The Outcome:

1. Great, a real crowd pleaser.
2. I recommend you let them sit three days in the fridge or two weeks in the jars before consuming to maximize taste.