AUTOMATIC INCOME
How to Use the Power of Dividend Investing to Beat the Market and Generate Passive Income for Life
MATTHEW PAULSON
Automatic Income: How to Use the Power of Dividend Investing to Beat the Market and Generate Passive Income for Life
Copyright © 2017 by Matthew Paulson. All rights reserved.
No part of this book may be used or reproduced in any manner whatsoever without written permission except in the case of brief quotations embodied in critical articles or reviews. Please do not participate in or encourage piracy of copyrighted materials in violation of the author’s rights.
Published by American Consumer News, LLC.
First edition: January 2017
ISBN: 978-1539737667 (print)
Cover design: Rebecca McKeever
Editing: Jennifer Harshman (HarshmanServices.com)
Book Design: James Woosley (FreeAgentPress.com)
Printing: Amazon CreateSpace
TABLE OF CONTENTS
Introduction
Chapter One: The Case for Dividend Investing
Chapter Two: Dividend Investing Basics
Chapter Three: How to Select Dividend Stocks
Chapter Four: How to Discover Great Dividend Stocks
Chapter Five: Taxation of Dividend Stocks
Chapter Six: How to Build a Dividend Stock Portfolio
Appendix One: Helpful Resources
Appendix Two: S&P Dividend Aristocrats
Appendix Three: Legal Disclaimers
Thank You
Acknowledgments
About the Author
INTRODUCTION
Preparing for a secure retirement just isn’t as easy it was 30 years ago. Investment returns were much more consistent on a year‑to‑year basis than they are today. There was no deluge of complicated investment options to choose from. You could either invest in major public companies like AT&T and General Electric, or you could buy one of a handful of mutual funds that were available at the time. Social Security was in the black and you didn’t have to worry about whether or not you would actually receive the benefits promised to you. You could work for a big employer and know that if you put in the work, you would have a secure job until the day you retired.
In the 80s and 90s, you could simply invest in an S&P 500 index fund and receive consistently good rates of return on your money. Between 1980 and 1999, there were only two years where the S&P 500 had a negative annual total return and they were both pullbacks of less than 5%. You could build up a nest egg inside of an IRA or a 401K plan and know that it would consistently grow by about 10% each year. You could withdraw 4% to 5% of your portfolio each year in retirement without eroding your portfolio value and even give yourself a raise every year in retirement to account for inflation.
Unfortunately, those days are gone. Between the crash of technology stocks in 2000, the 9/11 attacks in 2001 and the ongoing war on terrorism, the S&P 500 had three consecutive years of negative returns between 2000 and 2002. We had a couple of good years in the 2000s, but those returns evaporated when the S&P 500 lost 37% of its value in 2008 during the Great Recession. Major American corporations, like General Motors and Merrill Lynch, went bankrupt. Tax revenue fell sharply and the national debt doubled in just a few years. Interest rates fell to near zero and the government had to step in and provide an unprecedented economic stimulus to get the economy back on its feet.
We have had some good years since the Great Recession ended, but the promise of working for an employer for life and setting aside money in a 401K plan, then having a secure retirement has all but disappeared. Corporations are no longer loyal to their employees. Social Security is effectively insolvent. Financial experts are now telling us that we are going to have to work longer and live on just 3% of our investment portfolio during retirement.
We can no longer rely on the government or big corporations to take care of us during our retirement years. We can’t simply throw money at the S&P and expect to receive consistently good returns over the long term. These strategies may have worked for people retiring 25 years ago, but people who are in their 20s, 30s, 40s and 50s need a new investing game plan that will offer them superior returns, consistent growth, and the opportunity for a secure retirement.
Enter Dividend Investing
What if I told you that there was an investment strategy that could provide you with a secure stream of lifetime cash flow? If there was an investment strategy that would allow you to live off of 4% to 6% of your portfolio each year without having to ever sell shares of stock or touch your principal, would you be interested? What if this strategy was less volatile than the S&P 500 and has historically offered higher returns than the S&P 500? What if the income stream generated by this portfolio actually grew by 5–10% each year? Would you be interested?
This investment strategy actually exists and it’s not a super‑secret hedge fund that’s only available to the ultra‑wealthy, a little‑known strategy that will stop working as soon as everyone knows about it, or the next Ponzi scheme waiting to unravel. This strategy is quite simple and frankly, incredibly boring — but it actually works. This miracle investment strategy is investing in dividend stocks. While it might not seem like there’s anything all that special about companies that pay dividends, the performance numbers will change your mind.
Standard and Poor’s keeps track of a list of S&P 500 companies that have grown their dividend every year for at least 25 consecutive years, known as the S&P Dividend Aristocrats Index. This group of 52 companies includes household names like 3M, AT&T, Chevron, Coca‑Cola, Exxon Mobil, McDonald’s, Procter & Gamble and Wal‑Mart. It would be natural to think that these long‑established companies wouldn’t grow as fast as the broader market, but actual investment returns tell a different story.
The Indexology blog recently published a chart comparing the performance of the S&P Dividend Aristocrats Index to the performance of the S&P 500 between 1990 and 2015. While investing in the S&P 500 resulted in cumulative returns of about 1,100% during this time frame, the S&P 500 Dividend Aristocrats Index had cumulative returns of more than 1,900%.
During the 10‑year period ending in September 2016, the S&P Dividend Aristocrats has indexed an average annual rate of return of 10.14% while the S&P 500 Index has returned an average annualized rate of return of just 7.22%. No one will deny that dividend stocks have had a good run during the last few decades, but what about over the long term? It turns out that dividend payments are responsible for 40% of the annualized returns of the S&P 500 over the last 80 years.
Do I Have Your Attention Now?
Dividend investing really works and you can make it work for you, too. You can use the power of dividend investing in your personal 401K plan, your IRA, and your individual brokerage account to create an investment portfolio of dividend‑growth stocks that will generate a steady income stream, be less volatile than the broader market, and offer returns that are superior to the S&P 500. You can build a dividend‑stock portfolio that has an annualized yield of 4%–6% and that yield will grow by 5%–10% each year as companies raise their dividend over time. Dividend investing offers a perfect combination of income investing and growth investing. You get income from the dividend payments you receive as well as long‑term capital gains from price appreciation in the stocks you invest in. If dividend stocks continue to perform as they have over the last 10 years, it’s not unreasonable to expect an annualized rate of return of 10% in the years to come.
Just about everyone who is investing their money has the same goal — to have enough money in savings and investments so that you never have to work again (if you don’t want to). You might want to retire at age 65 or you might want to retire early at
age 55. Maybe you never want to retire, but you want the freedom and flexibility to work part‑time or take a job you are passionate about that doesn’t pay very well. Regardless of what your specific retirement goals are, dividend investing can help you achieve them. If you invest in dividend‑growth stocks throughout your working lifetime, you can simply stop reinvesting your dividend payments at retirement and start living off the dividend payments you receive. You may never even have to sell any of the shares of stock you own, which will allow you to leave a significant inheritance for your children and your grandchildren.
How to Earn $100,000 (Or More) Per Year in Retirement
Let’s imagine for a moment that you are 35 years old, are married, and have never saved a dime for retirement. You know that saving for retirement is important, but other things have just been a higher priority. You bought a house, you had a couple of kids, and you just never got around to opening a retirement account. You and your spouse decide it is time to take action and begin planning for your future and saving for retirement.
You and your spouse max out your Roth IRAs and invest $12,000 per year in dividend‑growth stocks from age 35 through age 65. You don’t have a 401K plan through work, you don’t do any other investing, and you never increase the amount you’re saving each year. You earn an average rate of return of 10% per year and reinvest your dividends along the way. At age 65, you would have a total $2.26 million in your retirement account. If your portfolio were to have a dividend yield of 4.5%, you would receive $101,700 in dividend payments each year.
By simply maxing out your Roth IRAs and investing in dividend stocks for part of your working lifetime, you can have a retirement portfolio that will generate $100,000 per year in dividends. You won’t have to sell a single share of stock during retirement to pay for your lifestyle. You won’t have to take a part‑time job as a greeter at Wal‑Mart, and you won’t have to rely on the government paying you the Social Security payments you’ve been promised. Unlike most Americans, who retire broke, you’ll have a steady stream of cash deposits coming into your brokerage account each month from great American companies like Johnson & Johnson, Coca‑Cola, General Electric, Verizon, Wal‑Mart, and Wells Fargo.
I Love Dividend Investing
In my role as the founder of MarketBeat.com, a financial‑news service that makes real‑time financial information available to investors at all levels, I have been looking for an investment strategy for the last six years that I could wholeheartedly recommend to the 425,000 people who subscribe to our daily newsletter. I evaluated the performance of just about every tried‑and‑true investment strategy and every hot new asset allocation only. Almost without exception, every portfolio I looked at offered unremarkable returns, would only work well in certain market conditions, or simply couldn’t stand the test of time.
The only investment strategy I have found that has historically offered superior returns and has stood the test of time is dividend‑growth investing, which is the strategy I use in my own personal investment portfolio. My portfolio currently contains 30 dividend‑growth stocks and a few other income‑generating investments. My brokerage account currently has a dividend yield of 4.45% and the companies I invest in have raised their dividends by an average of 7.3% over the last several years. If my portfolio companies continue to raise their dividends at their current rate, I’ll be receiving a 9% dividend yield on my original investment after 10 years and an 18.2% dividend yield on my original investment after 20 years. My portfolio also happens to be 30% less volatile than the S&P 500 (as measured by beta) and has outperformed the S&P 500 since I started tracking my personal performance about three years ago.
I know what you’re thinking: “Just tell me what companies you bought!” I have provided a list of ticker symbols for the companies I own in one of the appendixes for full disclosure purposes, but that does not mean you should just go and buy those stocks. The purpose of this book is not to recommend any specific dividend stocks or suggest the companies that I currently own are superior to the broader market or will offer above‑average returns in the years to come. Don’t just blindly copy someone else’s portfolio. The way to do well with dividend investing is to do your own research, understand the characteristics of high‑quality dividend stocks, and build a portfolio of solid dividend‑growth companies.
What You’ll Learn
This book is designed to be a primer for anyone looking to learn about dividend investing. It assumes you have a basic understanding of what stocks are and how the stock market works, but is very accessible to anyone who’s just getting started. Here’s what you’ll learn in this book:
The Case for Dividend Investing (Chapter 1) – You’ll learn why investing in dividend stocks is arguably the best way to invest in the stock market. You’ll learn how investing in dividend stocks compares to investing in broad‑market indexes. You’ll learn about how risky dividend stocks are relative to other investments.
Dividend Investing Basics (Chapter 2) – You’ll learn all of the terminology relevant to dividend investors. You’ll learn how announcement dates, ex‑dividend dates, record dates, and payable dates work. You’ll learn about common types of dividend stocks, such as blue chips, real‑estate investment trusts, utilities, master limited partnerships, royalty trusts, and business‑development companies.
Evaluating Dividend Stocks (Chapter 3) – You’ll learn to tell high‑quality dividend stocks from the rest of the pack. You’ll learn why you shouldn’t always invest in the highest‑yielding companies. You’ll learn how to evaluate the stability of a company’s dividend and its possibilities for long‑term growth. We’ll also go through and analyze several stocks so that you can put your newly found research skills into practice.
How to Discover Great Dividend Stocks (Chapter 4) – You’ll learn what websites, newsletters, and research tools I use personally to identify, research, and evaluate dividend stocks. You’ll learn more about the S&P Dividend Aristocrats Index and other lists of stocks with long track records of dividend growth. You’ll also learn several shortcuts to identify companies that pay great dividends and have strong long‑term growth potential.
Tax Implications of Dividend Investing (Chapter 5) – Not all dividend payments receive equal tax treatment. You’ll learn which types of companies’ dividends will be taxed at capital‑gains rates and which will be taxed at your ordinary income rates. You’ll also learn how to invest in dividend stocks inside of a retirement account.
How to Build a Dividend Stock Portfolio (Chapter 6) – We’ll put everything together in this chapter and show you how to build your very own investment portfolio of dividend stocks. You’ll learn whether you should invest in a dividend‑growth mutual fund or ETF or whether you should buy individual dividend stocks. You’ll learn if you should reinvest your dividends or if you should ever sell any of your dividend stocks. You’ll also learn how to actually start living off your dividend stock portfolio in retirement.
Of course, I don’t expect that this will be the only book on dividends that you ever read. In Appendix One, I’ve included a number of books, newsletters, and websites that you can read to learn more about dividend investing. In Appendix Two, I’ve included a list of the companies on the S&P Dividend Aristocrats Index so that you have a starting point for your research. Appendix Three contains a legal disclaimer and disclosure of the dividend stocks that are currently in my portfolio.
Let’s Get Started
The best time to start building your portfolio of dividend‑growth companies was five years ago, but the second best time is today. It’s never too early or too late to start investing.
Every month that you let go by without saving for retirement is a month of missed dividend payments and missed capital appreciation.
Make a decision today that you are going to take control of your future and begin building your investment portfolio of dividend‑growth stocks.
Take the first step toward planning a more secure retirement by
reading the remainder of this book and learning how to evaluate and invest in dividend stocks.
CHAPTER ONE
The Case for Dividend Investing
Before diving into the fine details of dividend investing, it’s worth taking a step back and thinking about what goals you are actually trying to accomplish through investing and how you might best achieve those goals. If you’re like most people, you’re dependent on the month‑to‑month income provided by your day job or your business. If you were to lose your job or if your business were to fail, you would be in a world of hurt after a few months. The goal is to set aside money for the future inside of IRAs and 401K plans so that you don’t have to continue to earn a paycheck in retirement. If you build a big‑enough nest egg, you can live entirely off the money generated by investments and won’t have to work a part‑time job to supplement your income in retirement.
The concept of putting money away to live on during retirement is pretty basic, but most people are miserable failures when it comes to saving retirement. Thirty-three percent of Americans have literally nothing saved for retirement, according to a study from GoBankingRates. Sixty-six percent of all Americans have less than $50,000 set aside for retirement, which will cover 1–2 years of retirement at most. Only 13% of Americans have set aside $300,000 or more for retirement. If you are part of the vast majority of Americans that aren’t saving enough for retirement, get ready to work a part‑time job and eat beans and rice in retirement. Instead of playing with your grandchildren, taking life easily, and traveling around the world, you’ll be stuck stocking shelves in a grocery store or greeting people as they come into Wal‑Mart. If that’s you, I implore you to start investing today so that you can have a better future in retirement.
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