Saturday, March 27, 2010

Dividends - A Safe Way to Retire?

A Different Way to Retire: Dividends
I recently picked up, from the library, a book called, "Stop Working: Here's How You Can," by Derek Foster.  Foster is the self-proclaimed "Canada's youngest retiree" (at age 34).  He's written a few books, but this was his first.  It was a fairly easy and interesting read.  Being relatively short, I finished it in a couple of days.  It was also interesting because it was unconventional.  I'll go through the main points of his book here.  If you're interested, grab a copy from the library or Foster's website.  I've put a link on the right.

So what is the conventional way of retiring?  For most people (myself included), it's all about accumulating a large sum of money.  By having this large sum (say $1-2 million), even if you live off the interest, the money should be able to last you well into your golden years.  Since it is not easy to accumulate such an amount of money in a short time, either one has to invest aggressively in the stock market, or one accumulates wealth over a long period of time.  Either may not be the ideal routes for everybody.  Foster presents yet a third way.

Increasing Dividends During a Bear Market
Foster's book can be summarized in one sentence: accumulate stocks/income trusts with steadily increasing yields during a bear market.  Let me illustrate with one of the examples in his book.  He looked at Royal Bank of Canada (Ticker: RY).  In 1995, the stock was at $15.56 and paid a dividend of $0.59/year.  That equates to 3.8% yield per year.  Over the next 9 years, the yield steadily increased and by 2004, it had increased to $2.02/year or 13.0% yield (relative to your initial investment).

Since the stocks that you would buy would be recession-proof stocks with a long history of increasing dividends (e.g. stocks like McDonald's, Proctor & Gamble, Johnson & Johnson), the chances of dividends being cut or the stock depreciating are low.  What you are banking on is an ever increasing yield.  You also rejoice when there's a bear market, because good companies like P&G will likely not decrease dividends even during a bear market, but like most other companies, its stock value will decrease.  When this happens, the effective yield of the stock goes up (i.e. the amount of dividends remain the same while the stock price decreases).  So, for Foster, the lower the stock price goes, the better.

An Example from 2009
If you had bought Proctor and Gamble (Ticker: PG) in March 2009, you would have been able to buy it for $47 (stock price is now around $64).  The dividend paid for 2009 is $1.72 or 3.7%.  Looking at the history of the dividend increases, the dividends double every 5 year or so.  So, in 10 years, if the dividend increases follow what has occurred in the last 30 years or so, the yield would be about 14.8%.  If you had placed $100K in P&G stock in March 2009, by 2019, you would be receiving $14,800 per year in dividends.  As time passes, this amount would continue to increase, at a much faster pace than inflation.  So, you will get wealthier and wealthier!

How Much Do You Need to Retire?
Foster shows a sample portfolio in his book, which I suspect is fairly close to what his portfolio looked like.  The "sample" portfolio cost $100K and by the time of his retirement, was worth about $330K.  The dividends from this portfolio was $18,845.  There are, however, a few caveats with this method: i) you need to have paid off your mortgage, ii) you definitely can't live like a king, iii) if the stocks you own decide to cut dividends, as unlikely as it may seem, you'd be in trouble fairly quickly.

So, Does It Work?
Foster wrote his book in 2005.  As we all know, the Great Recession hit in 2008/, was he able to continue his retirement?  In short, yes, but after some quick googling, I found that he had reportedly sold all of his equities in February of 2009 and had gone into the market of options (soon to be discussed in this blog).  It appears that he has done exactly the opposite of what he has advocated in his first book.  But in the end, he is still semi-retired (he works as an author now, promoting his books).

In my opinion, Foster's method is definitely a viable way of ensuring a steady income.  However, I would still try to accumulate a greater portfolio value before retiring to ensure there's some buffer if another recession hits.  While you may not need $1 million to retire, you may want to have $1 million so you have a safety net if something bad happens.

One last word: if you need to do some retirement planning in this conventional way, be sure to read my previous post on retirement.

Wednesday, March 17, 2010

The Bull Market Rages On!

The bull market is raging on as I predicted in my previous post.  From a technical standpoint, an indication of a continuation of an upward trend is that higher highs and higher lows are being made.  The previous high was made around March 18 at 1150 points on the S&P500.  We are now at 1160.  The previous low was made around February 7 at 1045 points, whereas the low prior to that was made on November 1 at 1029 points.  So, clearly, the "higher highs, higher lows" pattern is still continuing.  But let's be vigilant lest things turn south again.  However, there's not too much data that points in that direction.

Monday, March 8, 2010

Do You Have Extra Cash?

It's been an interesting day.  I got 2 emails from 2 separate readers and both were asking for help.  One was a publisher of Catholic material and one was a producer of Catholic films.  One was looking for investor capital to fund their ministry and the other was looking for contacts in starting a TV channel.  As much as I'd like to help, I'm just a young, poor Catholic guy struggling through life, but sharing my investing thoughts on this blog.  If you happen to be a super rich guy who wants to support a meaningful Catholic ministry, please let me know and I'll put you in contact with these 2 readers.  Thanks in advance!  If you are not super rich, maybe you can keep these 2 readers in your prayers and ask the Lord to bless their ministry.

I am truly amazed at what great things can be done on the web.  It really is able to connect people when used correctly.

By the way, the market has been on a tear!  If the S&P500 breaks 1150 by a good margin in the coming days/weeks, it'd be safe to say the bull market is still ON!  Keep your eyes open!

Tuesday, March 2, 2010

Which is Your "True Religion"?

My true religion is definitely Catholicism!  But today, I'm not talking about religion at all!  I'm talking about fashion.  As you may or may not know, True Religion (ticker: TRLG) jeans are all the rage in LA (and the entire US for that matter) these days.  They are high-end jeans that I would probably never own, but people are willing to fork over $150+ for one of them.  In Canada, you can only buy True Religion products from specialty stores that import them.  As a result of this anecdote, there's not too much exposure to the international general public, and this makes it a gem!

As my wife, Renee, will attest, I have very little fashion sense.  But I do know a good stock when I see one.  It is a small cap stock at currently $650 million market cap.  It has no debt, a trailing PE of 13.5, PEG of 0.39 (!!), and growth is estimated to be 31% over the next 5 years.  If the above acronyms have no meaning to you whatsoever, please read my fundamental analysis posts here and here.  In short, this stock looks a little undervalued for its growth potential.  As well, it had an amazing quarter in Q4 of last year and the stock jumped about 30% in the past week.  I'm watching for a pullback and will potentially stock up (no pun intended).

If True Religion becomes the next Diesel, and they are expanding into international markets (Toronto, London and Tokyo), you could see its market cap grow by many fold.  So, whip out your calculators and check this stock out.  I know I'm getting my Excel spreadsheets ready!

Update (2010-03-03): One huge point I forgot to mention is the ethical aspects of investing in True Religion.  I did some googling and found that True Religion does NOT use sweatshops!  Alleluia!