6/23/19

$50 per Paycheck Buy and Hold Starter Dividend Portfolio


As an experiment and for fun, I decided to start a real money buy and hold dividend stock portfolio, with an initial amount of $200 and an additional $50 every two weeks. I thought it would be interesting to see how the portfolio value and dividend amounts will grow over time. It will also show how anyone interested in dividend growth investing can get started with a small amount of money.

If the portfolio is all you are interested in, scroll all the way down to the bottom to see the holdings and sector allocations.

There are a couple of reasons I haven't done this earlier with real money: trading fees and the difficulty of buying fractional shares.

Trading Fees

Trading fees vaporize returns from small investment amounts because they amount to a large percentage of the overall asset purchase. When you buy a stock or ETF* at a broker that charges a commission, your investment has to go up twice the commission amount for you to break even. For small investment amounts this is cost prohibitive.


For example, suppose you have $50 to invest, you want to buy stock XYZ, which costs $40 per share, and your broker charges you a commission of $4.95 each time you buy or sell. You can buy 1 share of XYZ. With the commission, your total upfront cost is $44.95. If you ever sell XYZ, you'll be charged another $4.95. So for you to break even on the trade, XYZ has to go up not only the $4.95 that you paid the broker to buy it, but also the $4.95 that you'll pay to sell. That's a total of $9.90. The stock has to go up from $40 to 49.90 per share for you to break even, or 24.75%. That is no way to invest, but it is a great way to lose money.

The common rule of thumb is that broker commissions should be no more than 1% of the total amount you invested, so that your stock or ETF holding only has to go up 1% for you to break even. So, if the broker charges $4.95 on each leg of the trade, for it to be worth it you should be buying at least $990 worth of the stock or ETF. If you can only stash away $50 from every paycheck or $100 per month, saving up that $990 would take you around 10 months. Not only would your money not be working for you all that time, in the end you'd only be able to buy one holding. Not cool.

*Note that most brokers now offer numerous ETFs that can be bought and sold without paying a commission. That is great. The problem is that nothing stops the broker from terminating its agreement with one ETF family in favor of another, or getting rid of commission free ETFs completely. For example, TDAmeritrade used to offer Vanguard ETFs commission free. They don't anymore. Any broker can do this with any ETF family or individual ETF. So it's possible that you will have to pay commissions to sell ETFs that you originally bought commission free.  Because of this, small individual ETF positions are not advisable even if they are commission free (e.g., 1 share of SPY, 1 share of VIG, 1 share of IJR, etc. However, taking advantage of a commission free ETF to build a large holding over time is a great way to go, as by the time you sell, the trading fee will be a negligible percentage of your total trade.

Fractional Shares


For the longest time, most brokers have not allowed fractional share purchases apart from automatic dividend reinvestments. In other words, every trade you make must be in whole shares. There was Sharebuilder, that did allow fractional shares, but after being sold from ING to Capital One and most recently to E*TRADE, as far as I know it no longer offers that ability.

Being able to buy fractional shares helps when you have small amounts to invest. Suppose again that you have $50 to invest and that your broker does not charge commissions or you are buying an ETF that your broker offers commission free. (Robinhood and Firstrade, for example, don't charge trading fees.)

If you want to buy a stock or ETF that trades over $50 per share and your broker only allows you to trade whole shares, you can't buy it until it drops or splits to $50 or under, or you get more money to invest. Some stocks and ETFs worth having will likely never drop to $50 per share, so that would mean you would either have to wait for more money to come in or never buy that stock or ETF. If you choose to wait for more money, that means the money you have available to invest now is not working for you immediately. It also means you can't invest in anything else while you are saving up for the purchase.

On the other hand, were a broker to allow you to buy fractional shares, then you could take that same $50 and buy 0.33 shares of a stock or ETF that trades for $150, or 0.25 shares or a stock that trades for $200, or buy half of two stocks that each trade for $25.

Enter M1 Finance

Now there's a broker that both doesn't charge commissions and allows fractional share purchases. This is perfect for small investors that want to build their portfolios over the long term. M1 Finance has been around since 2015, but I've only heard of them two weeks ago. Better late than never, I guess.

I figured I would start an individual stock dividend portfolio and in the process learn more about M1 Finance so I can write a review later.

Portfolio Construction

I am a big believer in the notion that stock prices and performance are often divorced from the underlying company's performance. A company can be doing great, but that doesn't mean its stock price will rise. It might fall--a lot. A company can be doing poorly, and its stock price can rise. That doesn't seem correct, but it's true. Otherwise, go find terrible companies and buy puts on them or short them (profit from the stock price going down).  If it's easy, you'll make tons of money. I assure you it's not easy.

That's why I prefer dividends. While they are never 100% reliable, dividends are much more reliable than stock price appreciation. Whether it's a bull or bear market, as long as the company is doing well, you'll get your dividend payment. If the company does really well, it might raise its dividend.

I am also not a big fan of stock research. It is a waste of time. Just look at all the analysts that make buy, sell, and hold calls, and the talking heads on the financial channels. They're right about half the time (less, actually), and they're experts that do this investing stuff for a living. If reading 10Qs made you rich, everyone would be a stock market billionaire. Also, research only tells you about what happened in the past. It can portend the future, but that doesn't mean the past will repeat itself. And most likely, all that good stuff from that past is baked into the price.

That's why I like to buy not a few, but a lot of stocks. Some of the companies will do great, many will do average, some will go out of business. Which ones will be which? No one knows and it's a waste of time trying to figure it out.

So why individual stocks and not an ETF? ETFs are great and are suitable for most investors. But here are a few reasons. For one, I think this is more fun to play with individual stocks. Also, you can pick the ETF, but you can't pick its holdings or its holdings' weight. Most ETFs are market cap weighed, so the largest companies take up the biggest share of the ETF portfolio. There's arguably nothing wrong with that and may in fact be the right approach.

However, the ETF's performance and the dividends it spits out pretty much mimics the performance and dividends of its largest holdings.  For example, Columbia Sportswear (COLM) is less than 0.01% of the iShares Core Dividend Growth ETF's (DGRO) portfolio. Is there really a point for DGRO to hold COLM? Columbia Sportswear can triple in price and quadruple its dividend. Holders of DGRO would never know because that increase in DGRO's share price and dividend amount wouldn't be distinguishable from its daily price fluctuations. But if any of DGRO's top holdings tripled, you would see it right away.

That's why I ignore market caps in the portfolio. Every stock is pretty much equally weighted (I tried to make them exactly equal, but M1 Finance didn't let me. It's close enough, though).

Third, ETFs charge management fees. Yes, these are really small, but if you don't have to pay them, why should you?

I set about choosing stocks in the portfolio by looking at the holdings of DGRO (this was used as a quality screen--the ETF holds companies that have at least five years of uninterrupted dividend increases and pay out less than 75% of earnings) and selecting the ones that had a dividend yield between 2.5% and 7%. (The dividend yield is the expected annualized dividend payment per share divided by the share price.) Unfortunately, and after I spent hours entering my selections into my M1 "pie", I found out that the portfolio is limited to 100 individual holdings. Hopefully M1 will allow more in the future.

I whittled my list down to 90 something, then added a few non-US stocks from the telecom, health care, and energy sectors, for a total of 100 stocks. I might replace some holdings with others in the future, or add new ones if/when M1 allows. For example, many companies that should probably be a part of a dividend portfolio aren't included in this one for the above reasons, like McDonald's (MCD), Lockheed Martin (LMT), and Apple (AAPL). Their lower dividend yield didn't let them make the cut. While I was tempted to put them in anyway, I decided to stick with the mechanical rules and disregard my personal preferences and biases.

The Portfolio

Disclaimer: Buy at your own risk. You will lose money!

Now that that is out of the way, here is the almost equally weighted portfolio, with each holding comprising around 1% of the total. (The weightings will change as the stock prices wobble.)

Initial Value: $200
Holdings: 100
Dividend Yield: 3.612%



Sector
Percent of Portfolio
Real Estate
5
Utilities
12
Tech
4
Industrials
10
Health Care
10
Financials
12
Communications
7
Basic Materials
2
Consumer Staples
14
Consumer Discretionary
13
Energy
11


TICKER
COMPANY
ABBV
AbbVie Inc.
ADM
Archer-Daniels-Midland Company
AES
The AES Corporation
ALV
Autoliv Inc.
AMGN
Amgen Inc.
AXS
Axis Capital Holdings Limited
AZN
Astrazeneca PLC
BCE
BCE Inc.
BEN
Franklin Resources Inc.
BF.B
Brown Forman Inc Class B
BG
Bunge Limited
BIG
Big Lots Inc.
BMY
Bristol-Myers Squibb Company
BOKF
BOK Financial Corporation
BP
BP p.l.c.
BUD
Anheuser-Busch Inbev SA Sponsored ADR (Belgium)
CAT
Caterpillar Inc.
CBU
Community Bank System Inc.
CCI
Crown Castle International Corp. (REIT)
CFR
Cullen/Frost Bankers Inc.
CHA
China Telecom Corp Ltd ADS
CHL
China Mobile Limited
CLX
Clorox Company (The)
CNP
CenterPoint Energy Inc (Holding Co)
CSCO
Cisco Systems Inc.
CVX
Chevron Corporation
D
Dominion Energy Inc.
DKS
Dick's Sporting Goods Inc
DLR
Digital Realty Trust Inc.
EAT
Brinker International Inc.
ED
Consolidated Edison Inc.
EMR
Emerson Electric Company
ENB
Enbridge Inc
EVR
Evercore Inc. Class A
EVRG
Evergy Inc.
FAST
Fastenal Company
FL
Foot Locker Inc.
GILD
Gilead Sciences Inc.
GSK
GlaxoSmithKline PLC
GT
The Goodyear Tire & Rubber Company
HBI
Hanesbrands Inc.
HOG
Harley-Davidson Inc.
HUBB
Hubbell Inc
IBM
International Business Machines Corporation
INGR
Ingredion Incorporated
INTC
Intel
ITW
Illinois Tool Works Inc.
JCI
Johnson Controls International plc
JNJ
Johnson & Johnson
JPM
JP Morgan Chase & Co.
K
Kellogg Company
KO
Coca-Cola
KR
Kroger Company (The)
KW
Kennedy-Wilson Holdings Inc.
LEG
Leggett & Platt Incorporated
MDU
MDU Resources Group Inc. (Holding Company)
MMM
3M Company
MPC
Marathon Petroleum Corporation
MS
Morgan Stanley
MSM
MSC Industrial Direct Company Inc.
NFG
National Fuel Gas Company
NGG
National Grid Transco PLC PLC (NEW) American Depositary Shares
NUE
Nucor Corporation
NUS
Nu Skin Enterprises Inc.
NVS
Novartis AG
NWE
NorthWestern Corporation
O
Realty Income Corporation
OGE
OGE Energy Corp
ORAN
Orange
OXY
Occidental Petroleum Corporation
PAG
Penske Automotive Group Inc.
PB
Prosperity Bancshares Inc.
PEG
Public Service Enterprise Group Incorporated
PEP
PepsiCo Inc.
PFE
Pfizer Inc.
PG
Procter & Gamble Company (The)
PSX
Phillips 66
PTR
PetroChina Company Limited
RDS.B
Royal Dutch Shell PLC American Depositary Shares (Each representing two Class B)
RHI
Robert Half International Inc.
SJI
South Jersey Industries Inc.
SJM
J.M. Smucker Company (The)
SLB
Schlumberger N.V.
SNY
Sanofi
SON
Sonoco Products Company
SPG
Simon Property Group Inc.
T
AT&T
TD
Toronto Dominion Bank (The)
TGT
Target Corporation
TOT
Total S.A.
TROW
T. Rowe Price Group Inc.
TXN
Texas Instruments Incorporated
UPS
United Parcel Service Inc.
VOD
Vodafone Group Plc
VZ
Verizon Communications Inc.
WABC
Westamerica Bancorporation
WBA
Walgreens Boots Alliance Inc.
WHR
Whirlpool Corporation
WYND
Wyndham Destinations Inc. Common Stock
XOM
Exxon Mobil Corporation

The Plan

Add $50 every two weeks and watch this little seed become a tree.

Benchmark

Every portfolio needs a benchmark to see how poorly one is doing. As of this post, the closing price of the S&P 500, as tracked by the SPDR ETF SPY closed at $249 on 6/21/19 and an initial $200 investment into it would buy 0.8032 shares.

6/9/19

Simple Money by Tim Maurer | Personal Finance Book Review


Tim Maurer's Simple Money starts with the premise that personal finance is more personal than finance and focuses on the theme of "enough." The book is not so much about improving the state of your finances as it is about leading a "richer life" with a "freer mind." That is not to say that following Maurer's guide will not improve your finances. It will, but the book's goal is more to improve the reader's life. Having more money is a subset of that and not a goal in itself.

Simple Money is different from other personal finance books in that it provides a sort of one stop shop for everything in the realm of personal success and fulfillment, from goal setting to finding your life's calling, to how much life insurance one should buy, to saving on car insurance and everything in between. There is even a chapter on how to use a free Trello account to organize your life. That is quite an achievement when you consider the relatively short 286 page length and how much of the content is repeated.

Every chapter begins with a sort of executive summary that tells you why you might want to read it. Each chapter ends with a summary of its content and invites the reader to enter into a journal any insights gleaned therefrom. While I normally hate this kind of repetition (it reminds me a bit of those shows on TV where there is a summary of what just happened before and after every commercial break), this format worked well in introducing and reinforcing ideas and didn't feel like page padding. That said, I skipped many of the concluding summaries.

Simple Money is a quick read if you read straight through, but most would benefit from rereading and doing the exercises, which aim to simplify traditionally complex topics and involve answering thought provoking questions. Most people have trouble deciding what they want from life, apart from general and vague statements like "I want to be rich" or "I want to be happy." Maurer's exercises, which he has derived from financial experts, psychologists, philosophers, and other researchers, help turn these general wishes into actionable and attainable goals that Maurer calls "next actions."

Next actions differ from regular goals because they are associated with a larger project (e.g. save for retirement) and are self-selected, authentic, and others-oriented. Mauer persuasively claims that goals formed in this way are much more likely to be achieved than traditional goal setting because they align your subconscious/emotional/reptilian brain with your rational brain, which he takes from another researcher in metaphorically calling the elephant and the rider. The elephant is much bigger and will do what it wants despite what the rational rider says. The trick is to get the elephant, your subconscious mind, to want to do what the rational mind knows is correct. When the two work together, they are unstoppable.

No personal finance book would be complete without guides on how to save money and how to invest. Simple Money has an abundance of both. It even comes with a sample index fund portfolio, which Maurer claims has produced 10% annualized returns for the last 38 years with 20% less volatility than the S&P 500.

The portfolio is

Asset Class
Allocation
US Large Cap
7.50%
US Large Value
7.50%
US Small Cap
7.50%
US Small Value
7.50%
International Value
15%
International Small Cap
15%
US Treasuries
40%




While I enjoyed reading Simple Money and found it enlightening, I didn't like the author's tone. There was something annoyingly preachy about it. This is subjective, of course. The book is worth the time it takes to read it, and the more you put into the exercises, the more you will get out of it.