Investing For Monthly Income: Dividend Aristocrats And Kings

Photo by Cristina Gottardi

Why I Closed My Self-Directed Roth IRA

Many years ago, I started a self-directed Roth IRA so that I could use my IRA funds to invest in real estate, mainly as a hard money lender. My partner has been having a hard time finding good deals lately, due to the low interest rates. When I started, we could charge borrowers 12%, which is a pretty sweet return. The last couple of years have seen that drop down to 6%. Now that interest rates are rising, we’re back at about 8%, but it’s still not close to what I used to be able to earn.

Besides the lack of deals, the second reason I’m exiting from this is the account fees are pretty steep. The IRA custodian assesses a yearly fee of around $375. I started out with $35,000 years ago and that fee was about one and a half month’s income at 12%. Over time, the account has grown to roughly $70,000 and at 8%, that fee is now less than 1 month’s income. However, deals have been fairly hard to come by over the past year, so there were many months where I wasn’t generating any income.

I also felt like the custodian was, shall we say, not the best. I mean, they are a legit company and everything they did was legal, but they just weren’t very technologically savvy. Their website kinda sucked. It just had the feel of a really small, understaffed company to me, even though they are not. I didn’t feel very comfortable using them now that the account value had doubled.

So I opted to close the account and roll the funds into my Roth IRA at Schwab and invest in the stock market.

(As a side note, I started the self-directed IRA with $35,000 and I ended up with slightly more than double that in 8.73 years. According to this calculator, that works out to an annualized ROI of 8.26%. When I started it, I had hoped to earn around 10% - 12%, as that's what I was getting at the time. Still, this was a Roth IRA, so the returns are tax free and, according to this calculator, that's equivalent to an after-tax return of 11.0%. My returns could have been better, but I was not invested in anything for the last 9 to 12 months I had the account.)

Now that the rollover process has been completed, I’ve got $70,000 ready to invest in the stock market. The big question is how to invest it.

Of Aristocrats and Kings

One of the financial blogs I follow, Wallet Hacks, recently had a post about building a monthly income portfolio. In other words, build a portfolio that recevies dividend income every month. This isn't a new idea and I've heard of many other investors that have done the same thing, but my recent lump sum transfer into my IRA meant I could jump start this strategy with a big chunk of change instead of building it up from zero.

Most companies pay dividends quarterly, although some, mostly REITS, pay monthly. The goal of this type of portfolio then, is to own stocks so that their quarterly dividend payout dates are staggered. Have some that pay out during the first month of the quarter, some the second month of the quarter, and some the third month of the quarter. This way, you have income coming in every month. As a real estate investor at heart, I’m really big on cash flow and this concept appeals to me.

The question becomes which stocks should you buy? Because you will (theoretically) be relying on these dividends for monthly income when you are retired, you want companies that will be around for the long haul and will not reduce or cancel their dividend. Luckily, there is a name for these companies: Dividend Aristocrats.

A Dividend Aristocrat is a company that has had a history of at least 25 years of increasing dividends. Twenty five years is a long time, so these companies tend to be fairly well established and will likely be around for years to come. (Although age is not a guarantee of a profitable company. Just look at Sears.) These are stable companies that have a history not only of continuing to pay, but of also increasing their dividends. This is important over the long term because inflation will eat away at the value of the payments if they do not increase over time.

Dividend Aristocrats is not a term that financial bloggers dreamed up. The list is actually compiled and tracked by Standard & Poors.

But if you want even more security, there is a subset of the Dividend Aristocrats that are even more impressive – the Dividend Kings. These companies have a record of not twenty five, but fifty years of continuous dividend increases! That’s pretty damn impressive. These are stocks you can buy and hold forever and never think about again.

My Choices

I selected three to five companies from the list of Dividend Kings that distribute dividends in the first, second, and third months of each quarter. Below is my list, with my final choices in yellow. The last two entries in the list, the Vanguard and Schwab index funds, I already own and I’ve listed when they pay out dividends as well. I should also note that I already own shares of Coca-Cola, another Dividend King.

First Month

One thing you’ll notice is I didn’t just go for the company with the highest dividend yield. Rather, I choose the companies based on my thoughts about them and my existing portfolio positions. For example, Federal Realty Investment (FRT) Is a real estate investment trust (REIT) has the highest dividend yield in the bunch, as is common for REITS, but I passed on it. Why? My portfolio already contains a large position in Realty Income (O), which is also a real estate trust. As an added bonus, Realty Income already pays dividends each month.

(On a side note, a Roth IRA is a great place to hold shares of REITs. Due to their unique legal structure, REITs are not taxed at the corporate level, which lets them return more money to investors in the form of dividends, but the trade off is their dividends are taxed as regular income to the recipient instead of at the lower qualified dividend tax rate. Regular income is subject to the highest income tax rate, so by holding shares and receiving dividends in a Roth IRA, where the distributions are tax free, you’ve changed the dividend income from being taxed the highest rate to not being taxed at all!)

That leaves a choice between Cincinnati Financial Corp (CINF) and Genuine Parts Co (GPC). GPC is a company that is a distributor of replacement parts of autos and industrial equipment, office products, and electrical materials. They own the NAPA brand of auto parts. Although they have a higher yield than CINF, I ruled them out because I can see there may be pressure on the auto parts industry years from now. Electric cars have very few parts to wear out and the ones that do will likely not be serviceable by consumers. Granted, gas vehicles will continue to dominate the roads for years and years and GPC is involved in other industries than just automotive, but I just feel like this is a shrinking industry.

The only choice left is Cincinnati Finanical Corp. They are a property and casualty insurance company. Insurance is something that people will always need and, being a shareholder of Berkshire Hathaway, I’m very familiar with insurance float and how insurance companies use this “borrowed” money to invest and generate income. Now there will be times when natural disasters strike and that will cause short term hits on income and / or company reserves, but that’s the nature of the business. In short, I like their industry and the company in particular.

Second Month

Three choices here: Colgate-Palmolive (CL), Hormel Foods (HRL), and Lowes (LOW).

I rejected Colgate-Palmolive because of millennials. (Why not blame something else on them?) Consumer trends change and brands that have been around forever, such as Colgate and Irish Spring, are seeing sales declines as consumers' tastes shift away from huge corporate brands and focus on locally crafted, boutique brands. I don’t think Colgate-Palmolive, or Proctor & Gamble, or any other of these huge old-school conglomerates will be going out of business anytime soon. Rather, they will adapt to changing tastes, either by spinning off their own boutique brands or buying up existing ones. However, it takes a while for companies this large to react, and that may result in losses that could put pressure on dividend payouts.

Hormel is out because they are, for the most part, a meat company. Like Colgate-Palmolive, they are subject to changing consumer tastes and buying patterns. Does anyone (outside of Hawaii that is) still buy Spam? I guess they must, since it's still being made, but I don't know anyone who buys it.

The harmful effects of large scale meat farming on the environment are negative and undeniable. Granted, many articles on this topic seem to be quite alarmist, but the negative consequences to the planet are numerous. Changes will be coming and it remains to be seen how that will affect meat producers.

That leaves Lowes. As a homeowner, I’m quite familiar with their stores. Their industry seems, to me at least, fairly recession-proof. When the economy is booming and people buy new houses, they will head to Lowes to purchase home improvement items. When the economy is tanking, people will stay in their homes longer, which means trips to Lowes to purchase repair parts. People will always need a place to live and stores like Lowes and Home Depot seem to have a fairly stable and dependable business model.

Third Month

Dover Corp (DOV), Emerson Electric (EMR), Johnson & Johnson (JNJ), 3M (MMM), and Stanley Black & Decker (SWK). I’m going to go against my previous reasoning here and invest in Johnson & Johnson, a large, old conglomerate. I’m not too concerned about millennials or changing consumer patterns here because J & J doesn’t just sell consumer products. They also sell pharmaceuticals and medical devices.

The other companies either don’t excite me or I know little about their industries (Dover Corp. - manufacturer of industrial products, Emerson Electric - engineering services, and 3M – all kinds of stuff) or they overlap industries with other stocks I own. (For example, Stanley Black & Decker overlaps somewhat with Lowes). So for diversification reasons, I’m investing in Johnson and Johnson as a medical / health care industry stock.

If I allocate one-third of my $70,000 to each of the above stocks, I’ll have an average monthly income of about $146. Not a bad start. And I figure I’ve got a least 10 years to reinvest dividends before retiring, so that should compound nicely. That $146 is also on top of the $136 I'm already getting each month from my shares of Realty Income.

What do you think? Have you made any similar investing plans?


Note: This article is not advice to buy or sell any stock. Perform your own due diligence.

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Net Worth Update: End of January 2019

At the end of each month, I post an update of my net worth, including a brief discussion of any notable events that might have occurred. The latest month's figures can always be found under the Featured menu in the menu bar at the top of the blog.

Last updated: End of January, 2019
Net Worth: $908,548
Change from last Month: -$2,722

Events Of Note Last Month:

My SQL courses on Udemy generated $78.92 of income. My courses on SkillShare, meanwhile, earned $44.95. I also earned $1.31 in royalties from my real estate ebook. Someone read almost the whole book in November, so that $1.31 represents the maximum amount I can earn from each reader. (At least, the readers who read it for free on their Kindle. I don't remember what I earn from people who actually buy it outright.) I also received $45 from a class action lawsuit settlement and that was sent off to my car loan.

I missed posting my December net worth update, but that was probably just as well since the stock market tanked that month. No need to relive that bloodbath. The good news is the market has rebounded a bit. I'm still down, but not too much.

The process of closing my self-directed IRA and transferring the funds to my regular IRA account finally finished! I started this process back in September! In terms of my Mint net worth snapshot below, this means my Property value dropped by $70,400 and my Investments value went up by that amount. This is just due to the way Mint characterizes manual account entries. I've got an interesting idea on how I'm going to invest that money, but more on that in another post.

Our semiannual trip to Las Vegas is happening later this month. I'm pretty excited about this because the last time we were there, we finally qualified for the top tier of the Cosmopolitan's player's club, which means, among other things, we can now get picked up at the airport by a hotel limo! Well, it might not be an actual limo. They have limos, Lincoln Town Cars, and even a Tesla or two! We got a great deal this time - four free nights (although we're only staying 3), $200 in dining credit, and $425 in free play.

Not much else to report on the financial front. Well, one more thing. My company announced the 2018 bonuses this week and I got a nice $9,000. It's not paid out until later in February though, so it won't be reflected in my numbers until next month. I'm sure I'll lose a good chunk of that to taxes, but I've got plans for whatever is left. More on that later as well.

Net Worth Update

The stock market bounced back from the horror of December, but it hasn't yet regained all its losses. I'm still down $2,722 this month over November.

November 2018

January 2019

If you have any questions or suggestions for topics, please drop me a line in the comments section!

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First Tesla Service, Wheel Damage, and The Drop Stop

The trip to Arizona over the holidays put about 3,200 miles on my car, which brought me to around 8,000 miles total. Tesla recommends rotating the tires every 6,250 miles, so it was time for that service.

Making the appointment was easy - I could do it through my Tesla account on the web. The Bellevue service center was booked for weeks, but the one in Seattle had openings, so I took my car there on a Saturday morning. The location is in a warehouse district and I can understand why the other location was booked out so far in advance. The Bellevue center is in a nice part of town with shops nearby. It also is a showroom and delivery location, so there are lots of shiny new Teslas there. This location was more industrial, although the street was still lined with Teslas. Here's an image from Google Street View:

Nothing wrong with the location, but it's not as nice as Bellevue. Rather than dropping my car off, I opted to wait for the service to be performed and the little waiting room inside had a old Roadster on display, covered in signs asking people not to touch it.

I had a free cup of coffee and started reading a book. By the time I was done with the coffee, my car was ready. Total cost was $68 plus tax.

Wheel Damage

While I was there, I asked about getting some road rash on one of my wheels repaired. About 1 month after getting the car, I was in a parking lot trying to turn down an aisle to find a parking space. A car going the other direction was leaving the aisle and was taking up more than half of the lane. I turned sharp to avoid it and my rear wheel hit the curb. I was pissed! Here's a couple views of the damage:

Ouch!

The service center does not repair wheels, but they did give me a card of a company they recommend for repairs and I scheduled an appointment. The wheel is being fixed on Friday and will cost about $350. A whole new wheel is $1,000. *sigh* I'll post pictures of how the repair turned out.

I have not had any other issues with the car. In the wrap up in the post about my road trip, I wrote about how Autopilot could be a little jerky on the brakes and somewhat swervy when the lane width changes. The car got a software update the other day and it seems that Autopilot is a bit smoother now. I've only used it a handful of times since the update, so maybe it's just my imagination, but it's possible they improved their driving algorithms a bit.

Drop Stop

One problem I have, as well as many other people it seems, is dropping stuff on the side of the seat, where it falls down between the seat and the center console. I came across this YouTube video of another Tesla owner who bought a squishy tube that is supposed to stop that from happening. The Drop Stop, as it is called, fits between the seat and the console and basically fills the gap so items can't fall between there. There is a hole that the seat belt buckle goes though and that is what holds it in place.

For twenty bucks, I figured I'd try it. I've got black seats, so when it is installed, it's really not noticeable.

What can I say about a tube of squishy material? It works. Because the phone charger is in the center console, I would often drop my phone down the side of the seat when I was picking it up or plugging it in. That's a pain because once that happens, you have to wait until you are parked to go into the back seat, reach under the driver's seat and retrieve your phone. This device stops you from having to do that.

The package comes with two stops, one for the driver's seat and one for the passenger seat. The only complaint I have is that the unit doesn't stay firmly in place in my car. During normal driving, it's fine. However, I've got Easy Entry set up on my car, so when I park, the seat moves back to make it easier to enter and exit, and then when the car is powered up, the seat moves forward to my driving position. This repeated movement causes the front part of the Drop Stop to either slide down towards the floor or up and out from between the seat and center console. It's not drastic and it takes about a week of driving before I have to readjust the front part of the stop, but it's a bit annoying. Still, it's less annoying than losing my phone between the seats! And if you had a car where the seats didn't move so often, this would be perfect.

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Cord Cutting: The Cable / Satellite TV Industry Is Dying A Slow Death

Photo by Sebastien LE DEROUT

Two weeks ago, our household did what many other households are doing in droves: we cut the cord. Specifically, we cancelled our satellite TV subscription.

The final straw was a notice I received saying DirecTV was going to raise rates at the end of January. I no longer have the notice, but if I recall, it also stated that they would no longer issue refunds for cancelled services. With cable and satellite TV, you pay in advance, so if you cancelled, they used to refund you your unused subscription based on the day you cancelled your service. Now, with DirecTV at least, you no longer can cancel at any time. Well, you can, but your cancellation becomes effective at the end of your billing cycle. This means if you just paid for a month of service and you want to cancel, instead of getting a refund for the rest of the month you aren't going to use, your service won’t be cancelled until the end of the month you paid for and you won’t get any money back.

Exit Cable TV

That notice caused me to re-evaluate my subscription and the industry in general. The no-refund policy is a big “F you” to subscribers.

We rarely watch TV and earlier in 2018, I dropped from DirecTV’s 2nd lowest tier (“Entertainment”) to their lowest (“Select”). Because we have two televisions we were also being charged a $7 second television fee each month. Talk about gratuitous fees! (Back when we were subscribing to Dish Network, we were also charged a monthly “DVR fee.”)  Even at their lowest tier, the price increase in 2019 would push our bill to over $100 each month.

There is no way we watch enough TV to justify that expense. I can’t think of a single television show we watch regularly that isn’t available elsewhere. Most of the shows we watch are on Amazon Prime or Netflix and we rarely watch sports, usually only viewing the Super Bowl or a World Series game or two. The most basic package we could choose from DirecTV gives us 155 channels, of which we watch, at most, 3. It was like throwing money down the drain.

The cable industry knows they have a problem. Bloomberg just published a story about how cable companies are raising their rates to offset losses caused by cable cutters.

Cord cutting is accelerating. According to the Bloomberg story, the third quarter of 2018 saw the largest ever rate of decline in subscribers. So what do the companies do?

Raise rates! Sure! That won’t drive more people away!

Good lord. This is Economics 101. When people stop buying your product, you don’t increase the price!

The companies are blaming the rate increase on increases in costs for carrying local and sports programming. Try getting rid of some of that crap instead!

Guess what? Not everyone wants all those channels. I don’t need 4 varieties of ESPN (or even 1 for that matter), FETV, Enlace, Jewelry Television, or World Harvest Television. I don’t even know what most of those channels are! Why should I have to pay for them? Until I can order channels a la carte, I won’t be going back to cable or satellite.

Enter Streaming

Instead, I’m streaming what I want (and only what I want) from Internet services. That also makes it easier to add and cancel subscriptions as needed.

Amazon Prime Is King

We, like roughly 65% of all American households, are Amazon Prime subscribers. That gives us access to some movies and music programming already. We also subscribe to CBS All Access (for Star Trek: Discovery), Starz (for Outlander), and Amazon Music Unlimited (for greater music options). We just decided to start watching Game of Thrones (yeah, we’re a bit behind the times), so we subscribed to HBO as well. (HBO on DirecTV would be an extra $53.99 per month, although that would include Starz.)

What’s nice is each one of those channels is available through Amazon Prime as a standalone subscription. No additional TV hardware to install. No satellite dish to put on my house. No monthly equipment fees.

Stopping and starting subscriptions is easily done through my Amazon account. My wife only needs Starz when the current season of Outlander is airing. There are about 13 episodes per season and they air once a week, so we subscribe for 13 weeks, then cancel Starz. Same thing with CBS All Access. Star Trek: Discovery had 15 episodes last season. When that season ended, I stopped our subscription.

So What Are We Saving?

Amazon Prime is $119 per year, which translates to $9.90 per month. I would be a Prime subscriber even if no movies were included (indeed, I became a Prime subscriber before the program included any video or music) simply because I order a lot from Amazon and the free shipping is worth it. But let’s go ahead and include the cost of Prime in this comparison.

Our Amazon Music Unlimited plan is the Family plan so all three of us can use it simultaneously. That runs $14.99 per month.

Starz is $8.99 per month (but we only subscribe for 3 months).

CBS All Access (commercial free version) is $9.99 per month. I could save $5 by getting the version that has commercials.

HBO is $14.99 – we’ll cancel this as soon as we are done with Game Of Thrones (the final season should be out by the time we finish the previous seven seasons).

Total monthly cost for all packages: $58.86 per month maximum. Given that we’ll be subscribing to some of these channels for only two or three months a year, the average monthly cost (assuming we keep CBS All Access all year) comes to $40.86. And that doesn't change no matter how many TVs I use to watch.

For DirecTV, the monthly cost with HBO and Starz would be about $160 and I’d be stuck with a 1 or 2 year contract, preventing me from changing programming or cancelling without another charge. And that doesn’t even give us the option to stream music to our TV, phone, or tablet like Amazon Music does.

Is it any wonder people are ditching cable?

What Am I Missing?

I won’t lie. There are some things we are missing. My wife wanted to watch the Golden Globes Red Carpet on E! We had no way to stream that. So for now, we went without. It wasn’t a big deal and those two once yearly events certainly aren’t enough to justify a year-long cable TV subscription. I’m also certain that those events will end up on some streaming service eventually.

We’ll also likely want to watch the Oscars and the Oscars Red Carpet. I don’t know if we’ll be able to stream those, but the main Oscar show will be broadcast over the air, so we can get that for free using an HD television antenna.

Those Damn Millennials!

Although I am not a Millennial, I have to agree with them on this. Add cable and satellite TV to the list of things they are killing.

It's not their fault, really. They were born into a world where the Internet makes just about anything available. I remember years ago, when I was a wee lad and cable TV was just becoming available. Because it was so new, everything was amazing. Most people went from having 12 or so local over-the-air channels to several dozen or even a hundred channels. In those early days, more channels was a huge selling point. It didn't matter if they were channels you never watched. The important thing was you could watch them if you wanted to! One hundred channels was far better than twelve!

And two hundred was better than one hundred! Cable packages started to swell, as providers added more and more stations, which were becoming increasingly more niche and of interest to fewer and fewer viewers.

Then the internet came along and each niche now had its own unlimited, worldwide platform. Sadly, cable companies have never quite grasped this. They continue the arms race of who can provide the most channels. Unfortunately, those channels are not free to cable customers or the cable companies. Someone has to pay for them and the current means of doing so is to spread the cost out over all cable subscribers.

That has now reached a tipping point and cable customers are cancelling in droves. I've joined their ranks.

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