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đŻÂ The Book in 3 Sentences
đĄÂ Key Takeaways
Choose quality over yield in dividend investing.
Consider long-term investments for higher returns.
Assess payout ratios and dividend growth in stocks.
MLPs can offer attractive income opportunities.
Closed-end bond funds can provide active management benefits.
Diversify with dividend ETFs for hands-off investors.
â Top Quotes
You used to have income and safety. Today, with treasure yields at 0%, you have income or safety.
Your investment strategy isnât so much about picking the right stocks as much as itâs about helping you get out of your way when it comes to making money.
Sometimes itâs better to invest in shovels than dig for the gold yourself.
đ Summary + Notes
1. What Happened to Savings Accounts and Bond Yields?
Yields of the S&P 500 are declining, but seem to stay between 1-3%.
The market share of the FAANG-M companies on the S&P 500 is 25%.
2. One Percent Matters - Why Your Financial Advisor May Be Killing Your Retirement
Most funds fail to outperform the market.
The fees are exorbitant.
3. The Ideal Income Investing Strategy
Log-term investment is what works best in the markets. Curiously, most long-term investing is defined by a lack of activity. Ignore the media and short-term moves.
Stock prices rise by a lot more over the long term, giving us the luxury of being less accurate and still profiting by a large amount.
You sell only when your original reason for investing isnât valid anymore or you want the cash.
Stay invested for at least 5 years, with 10-15 being ideal.
The 4% rule has some problems (it is a guideline, not a law):
If the market crashes early on, the amount of money equivalent to 4% will be very low
Retirement spending isnât flat.
4. Dividends 101
Instead of looking at the dividend, you need to look at the quality of the business.
Dividends provide stability.
Dividend-paying stocks become a safe haven during both bull and bear markets.
The presence of a growing dividend is a good starting point from which you can narrow down good candidates
The key to successful dividend investing is finding a company with a high yielding stock but pays out a sustainable portion of its income. Thatâs what the payout ratio measure.
Dividends are powerful for another reason. They allow you to reinvest them to capture the power of compounding.
5. Avoiding Yield Traps
High yields are not good investment opportunities.
When looking at these high yield companies, itâs best to pay attention to their free cash flows and debt levels.
6. The 2 Metrics That Matter for Income Investing â Payout Ratios and Dividend Growth
Dividend payout ratio.
The payout ratio is the percentage of net income that is paid as dividends. For example, if a company earns $1.00 per share and pays $0.30 as dividends, its payout ratio is 30%, If it pays $2.00 per share, its payout ratio is 200%.
For mature companies, the authors recommend investing if they pay out between 15% and 65% of their net income.
For Dividend Kins (companies with a record of raising annual dividend payout amount for at least 50 consecutive years) you can go up to 75%.
For non-mature companies, below 35%.
History of dividend growth.
The rate at which payouts have been growing.
A monthly dividend payment is a gimmick by itself. It would be impossible for its managers to predict what cash flow would look like over such a short time period.
7. How Capital Gains and Dividends Work in Unison
10% gains/1% yield is much better than 1% gains/8% yield
8. The 11 Principles for Finding Great Dividend Paying Stocks
The Warren Buffet test
Always treat your investments as if you are buying a business.
If your investment horizon is less than 10 years, then you are not investing. You are speculating.
Understand the business thoroughly
As a business owner, you need to drill deep into how a company makes money.
You need to understand the sector a company operates in and how the economics of that sector work.
Understand the relationship between the business & the sector
You need to look underneath the hood to reveal which companies have staying power and which are build on thin air.
Itâs a newer company, the founder should still be involved
The founder presence mitigates much of the risk that these companies pose to investors because the person with the grand vision is still on board.
Intangible asset advantage
A companyâs asset sheet lists all of its assets and liabilities.
Intellectual property is an intangible asset and includes patents, formulas, and designs.
Upper management is bought in
In public companies, insider ownership (the total percentage of shares held by insiders) greater than 20% is considered extremely high.
This info can be found on Yahoo Finance.
The company has strong advertising, marketing & sales operations
A sign of a company with strong sales and marketing is increasing revenues.
Management is willing to make short-term sacrifices for long-term results
Look at the return on equity that the managers have generated.
The company has an economic moat
Invest in companies that have some sort of unfair (but legal) advantage in the way they run their business.
The business can weather a storm
Anyone can make money when times are good.
Implement the 10-10-10 rule
The company should be paying dividends for the past 10 years at least.
The company must have consistently grown their dividend payouts over the past 10 years.
The company should be able to conceivably grow its stock prices for the next 10 years.
9. The 7 Best Dividend Growth Stocks for 2021 and beyond
Best high yield stocks
AbbVie Inc. (NYSE:ABBV)
Stock
Market Cap
Yield
Years of Dividend Increases
Payout Ratio
Beta
Info
AbbVie Inc. (NYSE:ABBV)
$263 billion
3.97%
51
53.18%
0.61
Pharma industry. Positive cash flow for the past 10 quarters. Diversified products.
Chevron Corporation (NYSE:CVX)
Stock
Market Cap
Yield
Years of Dividend Increases
Payout Ratio
Beta
Info
Chevron Corporation (NYSE:CVX)
$298 billion
3.78%
37
43.24%
1.04
Oil company. Good management.
IBM (NYSE:IBM)
Stock
Market Cap
Yield
Years of Dividend Increases
Payout Ratio
Beta
Info
IBM (NYSE:IBM)
$131 billion
4.6%
30
65.88%
0.83
Now provides cloud services.
AT&T (NYSE:T)
Stock
Market Cap
Yield
Years of Dividend Increases
Payout Ratio
Beta
Info
AT&T (NYSE:T)
$102 billion
7.88%
0
44.76%
0.67
A bad call from the book
ExxonMobil (NYSE:XOM)
Stock
Market Cap
Yield
Years of Dividend Increases
Payout Ratio
Beta
Info
ExxonMobil (NYSE:XOM)
$421 billion
3.4%
40
41.61%
0.91
Makes money from drilling and its chemical divisions.
Kinder Morgan (NYSE:KMI)
Stock
Market Cap
Yield
Years of Dividend Increases
Payout Ratio
Beta
Info
Kinder Morgan (NYSE:KMI)
$38 billion
6.47%
6
96.2%
0.95
Energy infrastructure.
10. Our 2 Favorite REITs
Realty Income (NYSE:O)
W.P Carey (NYSE:WPC)
11. Partnerships - The Underground Secret to Massive Dividends
Master limited partnership or MLP is a partnership that derives its income from a resource. To qualify as an MLP, the partnership must derive at least 90% of its income from either commodity operations, natural resources, or real estate.
MLPs are usually founded by parent firms and their largest shareholders often own stock in the parent company as well. Thus the biggest shareholders of the MLP are traditionally the management team of the parent company.
MLPs are income-generation machines, and best of all, you can buy shares in them on a public stock exchange.
MLPs operate in the energy and natural resources field.
MLP dividends arenât taxed since they reduce your cost basis in the investment.
For tax reasons, it is better to invest in ETFs that invest in MLPs.
Two high quality MLPs:
Enterprise Products Partners (NYSE:EPD)
Brookfield Renewable Energy (NYSE:BEP)
12. Closed-End Bond Funds â An Income Investorâs Dream
Closed-end bond funds offer active management advantage.
Closed-end funds can trade at a discount to Net Asset Value.
Look for funds with BB or BBB grade bonds for safety and yield.
Long-term track record and insider ownership matter in fund selection.
13. The 3 Best Dividend ETFs for Hands-Off Investors
Vanguard Dividend Appreciation ETF (NASDAQ:VIG)
It consists of 182 companies that have increased dividend payouts for at least the past ten years.
VIG is best suited if youâre not looking for the highest dividend yields but want capital appreciation to balance it out. Your investment principal will be safe with VIG for the long term and youâll manage to earn steady dividend payouts as well.
Vanguard High Dividend Yield ETF (VYM)
Holds 426 dividend-paying companies across all industries. Currently, financials and healthcare account for the largest holdings.
Vanguard Long-Term Treasury ETF (VGLT)
A primarily bond ETF.
14. Tax Implications of Dividends
US related.
15. Optimal Portfolio Construction for Dividend Growth Investing
They recommend 60% on Index, 30% on individual stocks, and 10% on alternative assets.
Having 5% of your portfolio in Bitcoin is a great hedge against a broad market collapse.
