Tag Archives: ron-honig

$100,000 Investment Into Yearly Income: The Southern Company Example

Summary A dividend strategy is essentially turning investment into a yearly income stream. Boring utilities stocks can help you generate great levels of wealth. Here is the way it can work for you. In the article “Can A $100K Investment Produce A $50K Yearly Income? Walking The Model Step By Step” I introduced a model to generate an ongoing income steam through initial investment of $100,000 and by reinventing the net dividend flow. There were many comments and feedbacks to this model and I thank all commentators for their good inputs. One key concern that was raised was that achieving a $100,000 worth of savings is almost an impossible challenge these days. Well, I will fool you not. Getting to a significant amount of wealth is not an easy task. It requires both discipline and setting straight the priorities. There is no magic here. In order to achieve significant amount of savings one must put aside a portion of his income. These amounts can be either fixed or it can change from week to week or month to month. Nevertheless there should be constant contribution. In order to achieve something there must be a goal. A goal should be set realistically based on the ability to routinely contribute to the accumulated wealth. In the next example I will continue to use the $100,000 as the goal. After we set our mindset straight and agreed to take responsibility over our spending and savings, and after we set up a goal that is reasonable to achieve, how can we generate wealth using dividend investing strategy? The example of The Southern Company I decided to use The Southern Company (NYSE: SO ) as an example as it is conceived as a boring type of investment. It is less exciting from the growth machines out there but it can definitely fit to our purpose of generating wealth. SO is a holding company that operates in the South East counties of the U.S. It owns Alabama Power Company, Georgia Power Company, Gulf Power Company, and Mississippi Power Company, each of which operates as a public utility company. SO is the 16th largest utility company in the world, and the fourth largest in the U.S. It serves more than 4.5 million customers in Alabama, Georgia, Florida, and Mississippi. The company was founded back in 1945 and began paying quarterly dividends in 1972. SO never had a dividend cut and has been steadily increasing its dividend since the year 2002. An investor who decided back in November 2005 (ten years ago) to regularly invest in SO, to routinely invest $450 per month and buy more shares. And alongside during this period, each quarter he reinvested the dividends after tax to buy more of SO’s shares he could have reached the $100,000 goal by the end of 2014. Even after the 2015 correction in the Utilities’ stock prices he would have reached the goal again by the month of September 2015. It means that based on these particular assumptions the goal was achieve after nine years. Let’s see how it worked in more details. The investment Since SO paid a quarterly dividend through the assumed period, the investment is built out of two elements: the first one is the monthly contributions of a fixed $450. That means yearly contributions of $5,400 each year. The second element is the dividends net of 25% tax rate which have constantly grew from year to year. The higher dividends together with the higher number of accumulated shares delivered an everlasting growing purchasing power to buy more shares. As we can see in the next graph, during the recent years the dividend became a significant portion of the yearly investment and by 2014 it was about 40% of the $8,568 yearly investment. The shares accumulation The monthly contributions allowed to constantly increase the amount of shares but the accumulation was highly dependent on the share price. The next graph shows the yearly stock price average during the recent ten years alongside the accumulated number of shares during each period. At times of high stock price the accumulation power was lower. The situation of the zero interest rate brought the stock price to recent highs and by that reduced the buying power of the routine contributions. In a scenario of a hiking interest rate we might see SO’s stock price going down and by that a fix accumulation will allow to purchase more shares. The total investment value: The dividend yield went down from the levels of 6-7% in the years 2005-2009 to the levels of 5% in the recent years due to the stock price hike. But this exact hike also drove the holding value to higher levels and led the total value to exceed $100,000 by December 2014. If indeed the interest rate hike will arrive soon (and it depends how high it would reach in the next couple of years) the value of the portfolio will be highly volatile and might go down in value. The income: Which brings us to the last piece. The accumulated holding at the value of $100,000 generates in 2015 a yearly net income of $3,566. As this machine will continue to work it would grow its income power even higher. Even if the stock price will go down due to a FED’s action the power of time and reinvestment will allow to accelerate the income machine even faster (as lower stock price allows to accumulate more shares). If you are interested in the excel model behind this example you can find it here . Conclusions: Even a boring type of investment like SO can serve well the patient investor to generate wealth using a sound dividend investment strategy. Dividend strategy cannot depend on a sole stock and should be based on a diversified portfolio. The monthly contributions should be aimed towards high quality stocks that face temporary headwinds but have long and proven history. Nowadays this list may include companies like Chevron (NYSE: CVX ), ConocoPhillips (NYSE: COP ), Deere & Company (NYSE: DE ), Eaton (NYSE: ETN ), Johnson & Johnson (NYSE: JNJ ), HCP (NYSE: HCP ) and other names from the Industrial sector. A consistent strategy of constant contributions and dividends reinvestment will allow to obtain sound results overtime. There would be those who would criticize the length of the time required to achieve the goal at it was shown in this example. As mentioned earlier: there is no magic here. In order to accelerate the accumulation and reduce the length of time the monthly contributions should be higher. For example, a monthly contribution of a $1,000 would have reduce the time by ~40% allowing the goal to be achieved in early 2011 or after six and a half years. There are highly subjective decisions to be made and it will vary from one person to the other, but if the mindset should be set to take responsibility over your financials, a sound goal should be set and the only thing left is to execute the strategy. Happy investing.

3 Best ETFs To Consider When Looking For Passive Income

Summary Investors who pursue income should consider income ETFs. ETFs have the advantage of buying a portfolio of one’s favorite stocks in a single buy. Here is the list of my top three income ETFs. The week after Labor Day continued to be highly volatile. The high volatility was seen both in intra-day trading as well as the day-to-day change in sentiment. This is how the trading board ended up on Tuesday: And this is how it looked at the end of the following trading day: While traders and short-term investors are waiting to see where the markets are going to trend in the coming future, the long-term investors should look for opportunities to achieve their long-term goals. By taking advantage of the recent fear and stocks selloff, long-term investors’ goals can be achieved even earlier than the original plan. One way to do it is to put buy orders of your favorite stocks and buy those each separately. An alternative way is to buy an ETF. The advantage of an ETF is that it can give the investor an exposure to a bunch of stocks, sectors or indexes without the commotion (and the commissions) of individual stock picking. There are investors who are seeking to generate passive income by holding U.S. large cap blue chip stocks. The ETF market possess several opportunities for this type of investor. To find the best list of top income ETFs, I started with the full list of large cap value equity ETFs using etfdb.com, and from that initial list carved out the income ETFs. The list of the 29 income ETFs can be found here . In order to narrow down the list, I filtered out high management expense ratios, leaving in only ETFs that charge less than 0.4% per year. This filter allowed to narrow down the list to 16 ETFs. Since I was looking for high-income ETFs, the next step was to filter out the ETFs with the lowest dividend rate. My benchmark was the SPDR S&P 500 Trust ETF (NYSEARCA: SPY ) which is a good representative of the S&P 500 index. SPY’s current dividend yield is at 2.06%, hence I used that as my dividend rate cutoff. Following this filter, I was left with a list of 11 ETFs: iShares Core Dividend Growth ETF (NYSEARCA: DGRO ) WisdomTree Equity Income ETF (NYSEARCA: DHS ) WisdomTree LargeCap Dividend ETF (NYSEARCA: DLN ) WisdomTree Total Dividend ETF (NYSEARCA: DTD ) WisdomTree Dividend ex-Financials ETF (NYSEARCA: DTN ) iShares Select Dividend ETF (NYSEARCA: DVY ) iShares Core High Dividend ETF (NYSEARCA: HDV ) ALPS Sector Dividend Dogs ETF (NYSEARCA: SDOG ) PowerShares S&P 500 High Dividend Portfolio ETF (NYSEARCA: SPHD ) Vanguard Dividend Appreciation ETF (NYSEARCA: VIG ) Vanguard High Dividend Yield ETF (NYSEARCA: VYM ) The profile of this list can be found in this table: The next step was to assess the dividend growth history. DGRO paid dividends only since September 2014, hence due to its short history it was taken off the list. The next two tables summarize the ETFs’ yearly dividend since 2010 and the year-over-year dividend change percentage: Most of the ETFs were found to have high swings in the year-over-year paid dividend. Though most of the years the dividends have risen, there are years of dividend reduction. An income investor will pursue a growing dividend ETF and only three managed to increase their dividends since 2010: DVY, HDV and VYM. (click to enlarge) If I had to choose the single best ETF, it would have to be HDV . HDV delivers the highest annual dividend yield (3.94%) and carries a low expense ratio (0.12%). Its top holdings include an impressive list of blue chip cash machines like Exxon Mobil (NYSE: XOM ), Verizon (NYSE: VZ ), Pfizer (NYSE: PFE ), Johnson & Johnson (NYSE: JNJ ), General Electric (NYSE: GE ), Philip Morris International (NYSE: PM ), Procter & Gamble (NYSE: PG ), AT&T (NYSE: T ), Chevron (NYSE: CVX ) and The Coca-Cola Company (NYSE: KO ). In total, the ETF has 76 different holdings. The top 10 holdings account for 58% of the HDV’s investment allocation. DVY and VYM hold similar top 10 holdings in their lists and have higher diversification and a larger number of total holdings in their portfolio. Conclusions: An investor looking for an income stream based on U.S. best of breed blue chip companies, but would like to avoid accumulating these stocks separately, should consider one of these three ETFs: DVY, HDV or VYM. Based on this study, my favorite is HDV but each should do his own due diligence. Happy investing. Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. (More…) I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article. Additional disclosure: The opinions of the author are not recommendations to either buy or sell any security. Please do your own research prior to making any investment decision.

When Opportunity Reveals Itself: CMS Energy Corp.

Summary The uncertainty around the Fed’s action in September seems to be the highest driver of volatility. The correction caught up with the Utilities and REITs. Opportunities are popping up. Here is my CMS buy-point. Tuesday ended up in a red territory after being green most of the day. I have written about that couple of days ago: The sell-off will continue. Here is the end of day Tuesday summary. (click to enlarge) This time it was the REITs and Utilities (highlighted in yellow circles) that led the trading’s last hour free fall. This is completely aligned with the thesis that it is all about the interest rate hike. The China slowdown has some effect on the sentiment but the approaching interest rate hike leads to a significant sell off in sectors that are sensitive to the long term interest rate. For the first time in a while the iShares 20+ Year Treasury Bond ETF (NYSEARCA: TLT ) also suffered from a pullback on Tuesday . This makes sense as the approaching interest rate hike should lead to higher yields, but as fear has a huge psychological impact people still rush back to bonds from time to time as it is considered a safe heaven. (click to enlarge) The drops in REITs and Utilities is probably just the beginning as there is some time until the Fed will announce its decision in September. In the meanwhile some opportunities might pop up. CMS Energy Corporation CMS Energy ( CMS ) was founded in 1987 and operates in the state of Michigan. The company is more of a holding company that integrates energy companies. Its primary business operations in the fields of electric and natural gas utility, natural gas pipeline systems, and independent power generation. CMS Enterprises, through its subsidiaries and equity investments, is engaged primarily independent power production and owns power generation facilities fueled mostly by natural gas and biomass. It has three business segments: electric utility, gas utility and enterprises. In the last seven years CMS has demonstrated EPS growth and a constant dividend growth. The next graph taken from nasdaq.com illustrates the growth seen since 2008. The yearly dividend went up from $0.4 per share to $1.1 per share. This is an average of 19% over a six years period of time. The full year 2015 EPS is expected to be at the range of $1.86-1.89. This is 5-7% higher year over year. The next chart illustrates the EPS walk in 2015. It was taken from CMS Q2 earning report presentation . (click to enlarge) CMS’ dividend payout target is at 62%. This leaves the cash required for the additional capital investments that the company plans to invest over the course of the next decade. (click to enlarge) The DGR: Though CMS demonstrated a strong dividend increase in the past, based on the company’s forecast the dividend growth rate is expected to be more modest as it should be aligned with the 5-7% EPS expected growth. I feel comfortable with 5-7% growth per year but would like to make sure that my entry point is at a relatively high dividend rate. My buy-point: CMS, like the rest of the Utilities sector is going suffer in the coming weeks, until there will be more clarity regarding the Fed’s action. The stock went down below $33 per share, which based on $1.16 is 3.5% dividend rate. I would prefer to buy the stock close to its lows that supported the stock during last summer at $28 per share. This price represents 4.1% dividend yield rate. Though the stock might drop even further afterwards I believe that $28 is a good long term buy for CMS. (click to enlarge) Conclusions: The uncertainties regarding the interest rate hike will continue to take its toll, especially on high dividend rate sectors like Utilities and REITs. Long term investors should take advantage of the correction and arrange their long term investment portfolios to generate more wealth. I plan to initiate a buy in CMS at $28. Happy investing! Disclosure: I/we have no positions in any stocks mentioned, but may initiate a long position in CMS over the next 72 hours. (More…) I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article. Additional disclosure: The opinions of the author are not recommendations to either buy or sell any security. Please do your own research prior to making any investment decision.