Today's issue of Daily Dividends features an edited and condensed column from guest writer Jason Fieber. Several years ago, Jason undertook an ambitious project to retire by the age of 40 by investing in dividend-paying securities. You can learn more about his experience through his website,
DividendMantra.com. We hope you enjoy.
March 27, 2015
4 Investing Tips To Sleep Well At Night
By Jason Fieber
I recently wrote about keeping it simple. When investing, you should be able to easily decipher what a company does and be able to explain that synopsis to a child.
But there are some additional points I wanted to address, as well as explain how this fits within the overall theme of financial independence and living off of dividend income.
Below, I expand on that original article with some additional thoughts that address sleeping well at night, avoiding asset classes that may not fit your personality and being confident in your decisions.
When I look at my portfolio, I breathe a deep sigh of relief. I've handpicked every stock. And almost every company I'm invested in runs a fairly simple business model, mostly predicated on selling ubiquitous products and/or services.
That type of ubiquity and quality provides an enduring nature to operations, where it would take some kind of worldwide calamity on par with nuclear war to wipe them out.
It's in this ease of understanding that allows me to sleep well at night, or SWAN.
I sleep like a baby. I promise you that. I'm not up at night worrying about what's going to happen tomorrow with any of the companies that I'm invested in.
I'm not worried about whether or not Norfolk Southern Corp. (NYSE: NSC) is going to continue transporting various goods across its rail and freight networks.
I have no concerns over whether or not PepsiCo, Inc. (NYSE: PEP) will continue selling Doritos chips and Tropicana drinks over the next 10 years.
And I'm not worried about whether or not people are going to continue buying Crest toothpaste to brush their teeth, which is manufactured by The Procter & Gamble Co. (NYSE: PG).
If I were invested in, say, Pandora Media, Inc. (NYSE: P), which was a darling growth stock at one time, then I probably wouldn't be sleeping so well. Are people going to find a better, more interesting way to access music? How will this company make money in five years? I have no idea. And watching the stock decline some 47% over the last twelve months would probably have me up all hours of the night.
It's important to be confident in an investment. Keeping it simple and focusing on quality gives me a ton of confidence.
When I understand what a company does, am assured of its quality and can reasonably explain it to a child, it gives me the confidence necessary not only to initially invest, but to invest more down the road, if necessary and applicable.
Take that Pandora example again. Would I be confident enough to buy more stock in the company after a nearly 50% drop over the trailing twelve months? Absolutely not, especially when the company didn't generate profits in 2014. How can I be confident that they'll generate a profit in the future? How can I be confident that they'll still even be around in a decade?
But if Pepsi dropped by 20% or 30%, I'd absolutely be interested in buying more shares. I understand the business model. I get how they make money. And they're sending me dividends every quarter, reducing the amount of capital I have on the line with every dividend payment. And I'm 100% confident that they'll still be around tomorrow, a year from now and 10 years from now.
Even better, because a stock's price and its yield are inversely correlated, a cheaper stock would provide me a higher yield, thus giving me more bang for the buck and more cash flow for the same investment amount.
Keeping Asset Classes Simple
I'm often asked why I don't invest in real estate via rental properties. And that relates to desiring a simple life.
Rental properties can provide higher returns than the stock market, but it's certainly not an apples-to-apples comparison and it's also not a given. Does one have the desire to deal with tenants, credit reports, repairs, maintenance, management companies, banks, leverage and vacancies? Only you can answer that question for yourself, but I have no desire for that.
I like easy. As I discussed in the original article on this topic, a simple blue-chip stock like
The Coca-Cola Co. (NYSE: KO) has returned more than 10% annualized over the last 10 years, even with all the headwinds it's dealt with over the last three-to-five years.
And guess what? Coca-Cola doesn't call me when a toilet at headquarters isn't working. I'm not emailed when a refrigerator or a roof needs replacement. They just send me my cash dividends. And I like cash more than hassles. So that's a great relationship there.
When thinking about investments, one should consider the "hassle factor." The higher that factor is, the less likely I'm going to invest in it and the higher the returns I'll need to even consider it. Why hassle oneself when it's not necessary? Now, you might love owning rental properties and everything it comes with, but you need to consider whether that's right for you.
After all, how do you want to spend your time once you're financially independent? Maybe you want to spend it managing properties. Maybe you don't. But, either way, stay true to yourself.
How Will The Dividends Continue To Flow?
One final point: The reason I like to keep it simple is that I like to have a reasonable assumption about future cash flow.
I plan to become financially independent by 40 years old, living off of the rising dividend income my portfolio generates. The last thing I want to do is not be able to sleep at night, because I don't know if my next dividend is going to hit my account.
I invest specifically in companies like Johnson & Johnson (NYSE: JNJ), Kinder Morgan, Inc. (NYSE: KMI) and Unilever PLC (NYSE: UL) because I can reasonably assume that they'll still be in business a decade from now, they'll continue growing cash flows and they'll consistently pay and increase dividends.
So when I think about cash flowing and growing, I think about good odds. And when I think about good odds, I think about high-quality businesses. And when I think about high-quality businesses, I think about products and services that should remain in high demand for years or decades to come.
Finally, when you think about great businesses that produce growing cash flow and share that with shareholders in the form of growing dividends, you should think about simple business models.
Look, some of the greatest businesses in the world not only generate the kind of growing profits that are necessary to pay growing dividends, but they also have excellent visibility, which gives one the confidence necessary to assume that the cash flow will continue flowing and growing. And it just so happens that these businesses are also fairly easy to understand. What could be more wonderful than that?
P.S. Our friend Jason uses a strategy very similar to StreetAuthority analyst Amy Calistri. In fact, several years ago StreetAuthority handed Amy $200,000 to build a portfolio of the best dividend payers on Earth. Her ultimate goal: earn a dividend "paycheck" for every day of the year. So far, she's collected 1,889 dividend checks and has turned her initial $200,000 into over $310,000 in just over five years.
Best of all, Amy's strategy is so simple, anyone can use it. In fact, a StreetAuthority employee and novice investor, Matthew Michael, has begun using the strategy to start a retirement account for his two young daughters. To hear more about his story and learn how you can earn similar results for yourself, click here.