Dividend Yield On Cost (In Theory & In Practice)

The YouTube video that started it all. Back in 2017, I filmed a video at The Bay Club Redwood Shores about How to Yield 20+% On Cost. This was one of my more successful videos from my early days on YouTube.

Back then, I used a hypothetical example on the whiteboard to explain the concept. The idea: A smaller starting yield can eventually turn into 20% on-cost, or more. How? The investor’s purchase price is fixed/constant, but dividend payments can increase over time, for the highest quality dividend stocks. Simply hold for the long-term and let time pass, while dividend increases keep accumulating. (The hard part: Actually having the willpower and patience to endure long periods of waiting for the magic to happen.)

If you have not seen it yet, you just got to check out my OG PPC Ian video:

What Is Dividend Yield?

The highest-quality dividend stocks out there tend to pay quarterly dividends here in the United States. Each dividend payment represents a portion of the company’s earnings that the Board of Directors returns to shareholders. Loyal shareholders deserve a portion of the profits, right? That’s why the company is in business, after all. (Side note: We want the company to retain some of the earnings to reinvest into future business growth. But, we also want some level of dividends being paid to keep the team shareholder/profit-focused, in my humble opinion.)

Let’s look at a hypothetical stock with ticker PPCIAN. Let’s say PPCIAN trades at $100/share and offers an $2/share quarterly dividend. PPCIAN then offers a starting dividend yield of ($2*4)/$100 or $8/$100, which equals 8%.

Dividend yield is a measure of how much cash flow the investor receives from an investment in any given year. (Side Note: Investors can use dividends to pay real world bills!) It’s a similar concept to interest from a savings account (or a CD account). However, there are two keep differences. Qualified dividends (here in the US) are taxed as long-term capital gains (generally viewed as advantageous), while savings account interest income is taxed as ordinary income (generally viewed as less advantageous). And, dividends in the best companies tend to grow over time, while interest is generally range-bound.

What Is Dividend Yield On Cost?

Let’s say, over time, that hypothetical company/stock PPCIAN grows its profits, on a consistent basis. Each year, profits grow. In year 1, let’s say earnings are $10/share. Remember, the year 1 dividend was $8/share? PPCIAN paid out the majority ($8/$10=80%) of earnings in the form of dividends. This 80% metric is called payout ratio. (Side note: Payout ratios tend to vary by company and by industry. 80% is considered a higher payout ratio, but I use this as a hypothetical example because the real stock discussed later in this post tends to have payout ratios in this general range.)

Let’s now zoom out to year 5. Over the course of 5 years, PPCIAN manages to grow profits to $20/share. Because profits have increased, the (somewhat efficient) stock market has rewarded shares of PPCIAN with a price increase (all the way up to $200/share). Maintaining its 80% payout ratio, PPCIAN’s quarterly dividend grows from $2/share to $4/share over these 5 years.

If someone buys in year 5, they pay $200/share. Since dividends are $4*4=$16/share, the starting dividend yield in year 5 is $16/$200=8%. Interesting, since the share price has increased with earnings, the starting dividend yield has remained consistent over the years. (Side Note: This truly shows the value of time and the value of buying earlier. Time is generally on the investor’s side, when it comes to high quality dividend growth stocks.)

Remember, in this hypothetical example you were smart enough to buy 5 years ago at $100/share? Key Point: Your share acquisition price does not change, it’s fixed in time. Dividends/year are now at $16/share. While your acquisition price is fixed, dividends per share can grow over time, and they have in this example. So, your dividend yield-on-cost has doubled all the way to $16/$100=16%. This is the power of dividend growth investing. This is the power of dividend yield on cost.

What I describe here is referred to as simple yield on cost. It assumes that dividends are just spent over the years. The model gets even more impressive with dividend reinvestment. A model of true dividend yield on cost would provide even more impressive results because dividends are used to buy even more shares (which pay dividends). All of this is part of the dividend snowball concept which spans three major pillars: 1) dividend increases, 2) dividend reinvestment, and 3) net new capital invested.

Today, however, I want to keep it simple, with the concept of simple yield on cost. Simple yield on cost is impressive all on its own without all the extra bells-and-whistles.

Unlocking 25.5% Simple Dividend Yield On Cost

So, remember I started this post with a reference to my early (hypothetical) video from 7 years ago? I’m so excited because I just crossed a major (realy world) milestone in my portfolio. I bought Altria (MO) at a value price back in 2009 and held all these years (about 15.75 years so far).

I’m now yielding a staggering simple 25.5% on-cost with my initial tranche of Altria shares from 2009. Things have come full-circle, a bit. I started out with the theory, back in the early days of this YouTube channel, and now I’m able to share a concrete example of dividend yield on cost working in the real world.

The greatest lessons I have learned over the years, as it pertains to yield on cost are as follows:

Understand the math and the theory. It can keep you very motivated when others are shouting, “Sell, the market’s crashing.”
Time is your best ally in the stock market. Think in terms of decades, not years.
Have realistic expectations. Dividend increases are not always linear because business profit growth is not always linear. There will be periods of fast growth and periods of slow growth. The dividend will (generally) only increase when earnings increase.
Ignore the haters, and focus on YOU.
Buy and hold, tune out the noise. The day-to-day volatility does not matter. We invest in dividend-paying stocks so we can enjoy life. Get out there and enjoy the real world. Or, at least focus on something productive such as earning more income to deploy. Obsessing over stock prices and sensational news media are disempowering.
Reinvest if you can, it only accelerates the dividend snowball effect.
Add more capital, if you can, as it also accelerates the snowball.
Keep living expenses low, and avoid lifestyle inflation if you are lucky enough to earn more income over time.
Stay in great health so you can enjoy your massive dividend income of the future.
1Build a really solid emergency fund so you do not risk tapping into your dividend portfolio when inevitable emergency expenses arise. I view this as building a moat of defense around my dividend stock portfolio.
Always prioritize YOU and your family.
Check out my YouTube Channel, PPC Ian, for over 400 videos about dividend stock investing. I’ve been at this a long time, and I share my real world journey on YouTube for all to see.

I hope you enjoy my brand new video highlighting my experience yielding 25.5% on cost:

Thanks for reading and thanks for watching my videos too!

DISCLOSURE: I am long Altria (MO) and Starbucks (SBUX). I own these stocks in my personal dividend stock portfolio.

Because the information herein is based on my personal opinion and experience, it should not be considered professional financial investment advice or tax advice. The ideas and strategies that I provide should never be used without first assessing your own personal/financial situation, or without consulting a financial and/or tax professional. My thoughts and opinions may also change from time to time as I acquire more knowledge. These are, as discussed above, solely my thoughts and opinions. I reserve the right to delete any comments for any reason (abusive in nature, contain profanity, etc.). Your continued reading/use of my YouTube Channel, blog, email newsletters, whitepapers, Excel files, and other materials constitutes your agreement with and acceptance of this disclaimer.

COPYRIGHT: All PPC Ian videos, Excel files, guides, and other content are (c) Copyright IJL Productions LLC. PPC Ian is a registered trademark ™ of IJL Productions LLC.

Value Dividend Stock: I Bought A Lot of Shares (But It Carries Risk)

By PPC Ian Leave a Comment Aug 5 0

It’s very rare that a core, world-class dividend stock goes on sale. It seems that 3M (MMM) has been on sale for a number of years now, with the discounts getting more heavy in recent years. There’s rarely a free lunch with investing. Meaning: When a stock goes down, there is typically a reason. The question, however, is can the company survive the challenges it faces and re-emerge as a winner? I just published an in-depth video on YouTube sharing my thoughts on 3M’s Q2 earnings report, with my thoughts on their large litigation risks. Without a doubt, MMM is one of the riskier positions in my portfolio, especially when I take into consideration that its ~5.0% portfolio weight. In today’s blog post, I want to share a few of my top-level thoughts about 3M (MMM), but first make sure to watch my YouTube video!

Watch My Brand New Dividend Investing YouTube Video

Thought 1: The Litigation Risk Is Real

3M stock is rallying on the news that they are creating a $1 billion trust for earplug litigation related to their acquisition of Aearo Tech back in 2008. They are also setting aside another $240 million for case-related expenses. I believe the stock has rallied on this news because 1) the exposure is less than previously anticipated and 2) there is some directional level of certainty around the matter (Wall Street hates uncertainty). (Side note: I like to buy when there is uncertainty because I can extract value that way as a long-term investor taking on calculated risk.)

The bigger issue, in my eyes, is their PFAS-related litigation. PFAS is a chemical that can seep into water, air, and soil. At this point in time, the cost of possible/alleged PFAS-relate exposure is unknown. What I do know, however, is we live in a world where anything is possible. Just look at 2022. In fact, I just shared a Dividend Investing Video that highlights some crazy, remarkable trends affecting investors in 2022. Because it’s almost impossible to price risk in 2022, I personally have big concerns around PFAS litigation. (And, the rest of the investing community does as well, hence the forward PE ratio trending in the 13s for MMM.)

Thought 2: I’m Excited About The Healthcare Spin-Off

Also in their Q2 earnings release, 3M announced the spin-off of their healthcare division (anticipated to close by the end of 2023). I was excited to see this because 1) it probably allows the healthcare division to avoid some of the existing litigation risk, 2) healthcare is their fastest-growing division, and 3) I see this being a productive spin-off (much like UTX combining with Raytheon and spinning off OTIS and CARR). I plan to hold onto both New 3M and Healthcare Spin-Off. The only downside here is I’m now going to have yet another position to manage. I have too many positions in my portfolio, and will eventually need to start trimming down, just a little bit.

Thought 3: I Bought A Lot More. What Else Can I Do?

As a dividend stock investor, I am fighting tooth and nail to reach the goal of dividend-based FIRE (financial independence retire early). I’ve made great progress against this goal, but I’m still on the journey. Our world is more uncertain than ever. There is more perceived “risk” in anything these days. MMM is a risky position in my portfolio, but ultimately I’m taking on calculated risk to reach my gaol. At a 4.19% starting dividend yield (with possible growth ahead once litigation is figured out), I cannot ignore the opportunity. What else can I do? Sit home, scared? Or, go out there and fight for my dividend-based freedom? I am choosing the latter, for my personal situation.

Please share in the comments below what you think about 3M stock. As a dividend investor, it’s a bit challenging to see the slow pace of dividend growth in recent years. That being said, the reasonable payout ratio gives me confidence that stronger dividend growth may resume after the litigation challenges have passed. It’s just going to take a good amount of patience. Perhaps I’ll just let this one be (with dividend reinvestment intact) and check back in 5 years.

As we close out today, I want to say “Aloha” and “Mahalo” for reading my blog post and watching my latest YouTube video. Please make sure to subscribe to my YouTube channel for more dividend investing videos.

DISCLOSURE: I am long 3M (MMM), United Technologies (UTX), Otis (OTIS), and Carrier (CARR). I own these stocks in my personal dividend stock portfolio.

DISCLAIMER: All information and data on my YouTube Channel, blog, email newsletters, white papers, Excel files, and other materials is solely for informational purposes. I make no representations as to the accuracy, completeness, suitability or validity of any information. I will not be liable for any errors, omissions, losses, injuries or damages arising from its display or use. All information is provided AS IS with no warranties, and confers no rights. I will not be responsible for the accuracy of material that is linked on this site.

Because the information herein is based on my personal opinion and experience, it should not be considered professional financial investment advice or tax advice. The ideas and strategies that I provide should never be used without first assessing your own personal/financial situation, or without consulting a financial and/or tax professional. My thoughts and opinions may also change from time to time as I acquire more knowledge. These are, as discussed above, solely my thoughts and opinions. I reserve the right to delete any comments for any reason (abusive in nature, contain profanity, etc.). Your continued reading/use of my YouTube Channel, blog, email newsletters, whitepapers, Excel files, and other materials constitutes your agreement with and acceptance of this disclaimer.

COPYRIGHT: All PPC Ian videos, Excel files, guides, and other content are (c) Copyright IJL Productions LLC. PPC Ian is a registered trademark ™ of IJL Productions LLC.

Dividend Stock Investing Tips That I Live By

By PPC Ian Leave a Comment Jul 28 0

Our world and our economy are certainly changing in 2022! In fact, I just shared a YouTube video about Terrible Trends I See For Investors. There’s a lot to worry about. That being said, times of great worry can create huge opportunities for investors with very long-term, multi-decade time horizons. That’s why I’m just sticking to the basics these days, the core tips that have always worked for me during my 20+ years of dividend stock investing. In today’s brand new YouTube video (embedded below), you can see the very tips that I use in my personal dividend stock investing strategy, right now in our ever-changing world.

It’s been a while since I’ve shared a post here on my blog. I thought it would be fun to start posting again, sharing a few of my favorite videos and insights in text. After watching today’s video, you can see the over-arching theme for me is simple – I’m going “back to basics”. I have tried it all, seriously. I’ve had many successes, and I’ve made a few mistakes too. I’m always learning and evolving, as investor. There is one, single strategy that has almost always worked in my personal situation, and that is the strategy of dollar cost averaging into core, quality, world-class dividend stocks (at reasonable prices).

Boring Is Best, With Dividend Stock Investing

These days, my strategy is not that exciting, because I keep doing the same thing over-and-over. In fact, I think this embodies one of the key challenges of successful dividend stock investing: It takes SO much persistence, willpower, and time. I cannot rush the process. There are no shortcuts. I just need to follow my plan, year-in and year-out.

Putting Stanford Computer Science To Work With Dividend Stocks

While the entire process can be daunting, I learned something key during my Stanford Computer Science Days (I majored in CS at Stanford University) that helps greatly with my dividend stock investing. When building a complex, overwhelming computer program, the best practice is to break the complex problem down into really simple parts. Then, it’s possible to assemble all of those easy parts into a complex solution (computer program).

I’m applying the same theory to dividend investing. Dividend investing is not rocket science. It does require tremendous patience and persistence, however. Getting from where I am now to the finish line (Fat FIRE that can support my entire family) can seem a little overwhelming at times. However, all I need to do is take this complex problem and break it into small, easy-to-manage parts. That’s why I’m dollar-cost-averaging into my favorite dividend stocks weekly. I’m typically not making huge purchases (although sometimes I do). I just need to put “one foot in-front of the other”, and keep going. I don’t need to focus on the end result, today at least. I just need to focus on what I can do right now, today! It’s so much more motivating and tangible this way.

Back To Basics

So, it’s back to basics for me, and I’m just building my core dividend stocks brick-by-brick. Then, I’m letting time, reinvestment, and dividend increases do the rest!

Thanks for reading my post today and watching my video. I look forward to seeing you in the comments below!

DISCLOSURE: I am long 3M (MMM), Johnson & Johnson (JNJ), Starbucks (SBUX), Caterpillar (CAT), Hawaiian Electric. (HE), and PepsiCo (PEP). I own these stocks in my personal dividend stock portfolio. I am also long Treasury Bonds and I Bonds.

COPYRIGHT: All PPC Ian videos, Excel files, guides, and other content are (c) Copyright IJL Productions LLC. PPC Ian is a registered trademark ™ of IJL Productions LLC.

Brand New Dividend Stock Investing Merch Is Here

By PPC Ian Leave a Comment Apr 11 0

Dividend Stock Investors: You have been waiting for this! I am thrilled to announce that four new custom dividend investing merch styles (t-shirts and sweatshirts) are now available in my PPC Ian Teespring Store:
https://teespring.com/stores/ppcian

The designs are custom, the quality is top-notch, and these styles are sure to impress. I’m personally wearing them on the regular.

Since I first launched my Original Merch Styles last August, interest and support has been incredible. My favorite part: Seeing all of YOU sharing your custom merch photos on social media! Thank you, everyone, for your support!

Your purchase supports the PPC Ian Dividend Investing YouTube Channel. Made of premium quality, these t-shirts and sweatshirts are sure to impress. With a slimmer cut, I’m 170 lbs and wear a size large. I’m wearing these new styles (and my original OG styles) on a regular basis to show my love and appreciation for dividend stocks.

I now offer four new styles inspired by the dividend stock investing lifestyle:

Style 1: Coffee, Money, Sleep, Repeat (Disclosure: I am long SBUX)
Style 2: Dividends All Day Every Day
Style 3: Stacking Dividends
Style 4: Dividend King (Dividend Queen Available too)

Fun Fact: Styles 3 (Stacking Dividends) and 4 (Dividend King) were inspired by community members, who each received a free t-shirt for their slogan suggestions!

Merch Care Tip: To keep your styles fresh, clean, and pristine, I recommend washing in cold water on a delicate cycle and hang drying. Due to the number of colors and intricate patterns, I especially recommend washing styles 3 and 4 with care and sensitivity.

I want to take this opportunity to sincerely thank YOU. Your likes, comments, subscriptions, and merch purchases truly mean the world to me. The amount of effort that goes into the channel is staggering (it’s a labor of love that I do for the culture), and your merch purchase truly makes an impact. I hope you enjoy the new styles as much as I do. Thank you!!! #ThugLifeInvesting

Here’s my Teespring store:
https://teespring.com/stores/ppcian

New Dividend Merch Styles

Click the photos to see them in larger size, for all the merch details.

I’m Buying This Dividend Stock Pick Immediately (AbbVie)

By PPC Ian Leave a Comment Jun 26 0

I am incredibly excited to announce that I am purchasing position number 41 in my dividend stock portfolio. I’m talking about a stock that has gone on bargain basement sale. As a dividend value investor, I just cannot pass up this opportunity. I’m talking about AbbVie (ABBV).

If you’ve been following my YouTube Channel for a while (we’re now 30,000 dividend stock investors strong), you know that I have been watching AbbVie for a while. In fact, I was thinking about buying 2018, but I just did not like the current value at that time (starting yield too low) and the dependence on Humira (61% of revenue with patent expiring in 2023).

I’m excited to announce that the world changed in such an unexpected way (this is what makes dividend investing so much fun). AbbVie announced they will acquire Allergan (AGN), the maker of Botox, for $63 billion dollars! With this acquisition comes a ton of diversification and a great starting dividend yield since AbbVie stock has been in free fall and fell another 16% on the news! My two concerns have been answered: Humira is down to 41% of total sales and AbbVie’s starting dividend yield is now 6.51%. More than that, the forward 2019 PE on Abbvie at current levels ($65.79 per share) is 7.49. Does not get much better than that from a value standpoint!

Check Out My AbbVie YouTube Video

Let’s start today with my video analysis of AbbVie, filmed while chillin’ at the Holiday Inn.

Here’s Why I’m Buying AbbVie (ABBV) Stock

I want to start out today with the good stuff, my overall conclusions on the situation with AbbVie and Allergan. Let’s jump into the pros and cons of this acquisition.

Pros of Owning AbbVie (ABBV) stock

AbbVie is a dividend GROWTH powerhouse (5-year compound annual growth rate of 21.75%) with a high starting yield of 6.51%. It is SO rare to find a dividend stock that exhibits a high starting yield AND high growth. ABBV may be the BEST example of this around right now.
Value is unparalleled. Current share price is $65.79. Forward 2019 consensus estimate for EPS is $8.78. $65.79 / $8.78 gives me a 2019 PE (price / earnings ratio) of 7.49. YES, yes, y’all.
Concentration risk is way down. Humira becomes 41% of the combined company revenue.
Dividend payout ratio on ABBV right now is only 49% on forward 2019 EPS. They have room to increase the dividend.
Allergan has some concentration on Botox (about 29% of their revenue), but overall they have a nicely diversified portfolio. I think this brings a world of diversification to the combined entity – love it.

Cons of Owning AbbVie Stock

There is a trend out there against certain companies. Two sectors that the more liberal folks don’t like include sin stocks and pharmaceuticals. Some folks believe that these sectors are hurting our health care sector and hence they want to attack them. For example, ABBV raised Humira cost by 9.7% in 2018. Some believe that is costing the health care system too much. (The argument is not valid, in my opinion, because EVERYTHING out there costs the healthcare system money. For example, everyone is using their smartphones too much. Everyone is bent over looking at them all day. I’m sure that costs the healthcare system quite a bit. And, what about all those burgers that we all eat? That said, I digress, and don’t want to get into the political stuff here.) Due to this single reason, I am careful to diversify my portfolio. I am already heavy on pharma (due to my positions in Johnson & Johnson (JNJ) and also Pfizer (PFE)). ABBV will never be a huge position due to associated risk.
Debt levels are going to be huge! AbbVie has $36.6 billion in long term debt. Allergan has $23.8 billion in long term debt. The acquisition will be funded via stock and cash. Based on my calculations, it looks like the cash component will be $40.26 billion. Adding all that up, we’re looking at $100.66 billion in total debt – yikes! Thankfully, interest rates should be low for a while and hopefully AbbVie pays that debt down fast.
There’s still a lot of concentration in Humira and the patent expires in the US in 2023. That said, AbbVie now has settlements with Samsung and Amgen to receive royalties from their biosimilars. (Go, AbbVie Legal team – yes!)
Huge concentration of revenue in the US. I would prefer more globally diversified revenue.

Annual Report Analysis

During my analysis, I started digging into the annual reports, and here’s what I found for AbbVie:

Net earnings are not growing as fast. While they surge from 2014 to 2015, I feel that’s a one-year anomaly. So, I start looking at 2018 vs. 2015. 2018 vs. 2015 analysis, or 3-year CAGR, is 3% – not as strong as revenue growth would imply.
Net margins are a nice 17%.
Diluted EPS has a 3-year CAGR of 5%. (I again look at 3-year period due to weird 2015 vs. 2014 surge.)
Long-term debt has a 3-year CAGR of 5%.
US accounts for 66% of their business, by revenue.
Humira, the world’s biggest selling drug, accounts for 61% of their revenue.
Comparing 2018 vs. 2016, cash flow surges 91%. I absolutely love the cash flow growth.

Here’s what I’m seeing in the Allergan (AGN) annual report:

Strong revenue growth! Comparing 2018 vs. 2014, CAGR is 36%! (That said, I do see a similar phenomenon where there’s a big jump comparing 2015 vs. 2014 – just like ABBV). Looking at the 3-year CAGR (2018 vs. 2015), I’m getting a nice revenue CAGR of 8% – still very impressive.
So far, they are losing money! This is a bit concerning. That being said, consensus estimates to have the company making great money this year – more on this next.
US accounts for 78% of the revenue of this Irish company! Sure wish there was more international.
Worth noting – AGN had a 2% range dividend before the huge share price run-up (due to the acquisition). They started paying a meaningful dividend in 2017, and have been raising it. I do think the combined company will take a note from ABBV’s management and pay MASSIVE dividends.
A fun note on AGN: Their Botox drug is trademarked, but has no patent. They did this on purpose since trademarks never run out, while patents have a 20-year span. That said, trademarks offer less protection. So interesting how the legal teams do what they do at these pharma companies. There is a competitor to AGN that has created a biosimilar to Botox, and AGN is going after them for copying the formula. We shall see how that turns out.

Is AbbVie Paying a Fair Price For Allergan?

So, I started wondering if ABBV is paying a fair price for this acquisition that greatly diversifies their business at a time when Humira patent is running out of steam. I think they are! Here’s how I look at it: The total deal price for the buyout values AGN at $188.24 per share. If I take $188.24 and divide by 2019 consensus estimates of $16.64 EPS, I get a forward 2019 PE of 11.31. I feel that 11.31 PE is a very fair price for ABBV to buy AGN – nice.

I’m Buying This Dividend Stock

Here’s where I’m personally at. I own 40 dividend stocks right now and ABBV will become position 41. Right now, I’m coming back from a business trip. I have no ability to buy stock on the road since I don’t log into brokerage accounts from the road. I only do this on secured (not shared) networks. So, I missed the deep discount and ABBV already jumped up a few percent today. That is OK. This stuff does not have to be precise. It’s directional and ABBV is still near its lows (and I think it will stay around here for a while +/- 10 or 15%).

I don’t have a ton of spare cash sitting around right now. So, I’m going to buy a big chunk now, but it will take me a good year of averaging in to arrive at my full position (around 0.8% or 0.9% of my portfolio). I may not get the bottom, but I’ll accumulate my shares near the bottom (close enough, I’m ok since I like to buy and hold forever). I’m using the same strategy to build my ABBV position that I used for General Mills (GIS) last year. I enjoy having a “pet stock” like that where I’m building the position because it keeps me focused each month on getting the position to target size.

Of course, I’m being real with myself here that this needs to be a smaller position. I already have JNJ and also PFE. ABBV is riskier, in my opinion. That said, I like the yield and I like the diversification in a sector that does carry some risk. I’m also being real that a lot of loud people out there vocally don’t like the sector. I’m taking on some risk here consciously, just like I do with sin stocks. Don’t want to fool myself. There is risk here!

Right now, I’m trying to bring up my current cash flow. We want to start using some of our dividends to pay bills SOON (any year now). As such, my focus switches a bit more to high yield and that’s what I’m thinking when I buy stocks these days. ABBV is nice in that it offers that high yield and growth. I will continue to share my ABBV journey as it unfolds on My YouTube channel and My Twitter too – so please make sure to subscribe! What do you think? Please share in the comments below!

Here’s My Original Video Analysis of Abbvie from Last Year (2018)

DISCLOSURE: I am long Apple (AAPL), Altria (MO), Johnson & Johnson (JNJ), Pfizer (PFE), and General Mills (GIS). I own these stocks in my stock portfolio. I plan on initiating a position in AbbVie (ABBV) in the next few days.

COPYRIGHT: All PPC Ian videos, Excel files, guides, and other content are (c) Copyright IJL Productions LLC. PPC Ian is a registered trademark ™ of IJL Productions LLC.

Dividend Investing For Beginners (My Complete Guide)

By PPC Ian Leave a Comment Jun 17 17

My dividend investing YouTube Channel, PPC Ian, is now 29,000 dividend investors strong! With so many new subscribers and so many videos (198 on the topic of dividend investing spanning a staggering 69 hours and 30 minutes), I have received the same request over and over: "Ian, where do I start? Ian, where can a beginner go?" Of course, one route is to just sit down and watch all 198 videos for 69:29:59 straight, although that is probably not practical for most people! Today’s blog post provides an alternate route for those just getting started, it’s my quick guide to get you up to speed!

Today’s blog post is my "get started here" guide for anyone new to my YouTube channel or dividend investing in general. I hope you find this guide helpful. If you do, the greatest way you can thank me is by heading over to the PPC Ian YouTube channel and subscribing! Let’s get started!

What Are These Dividends?

I’m going to start at a philosophical level. Dividends are, in my opinion, the answer to the everyday person’s problems. I’m talking about feelings of stress, financial worry, and even a lack of "greater purpose" in life. I’m serious. Dividends are a life-changing force that bring a smile to my face each and every day. Dividends are the financial stability that allows us to all breathe a bit more, enjoy life a bit more, and be a little bit less tied to typical "job" income (progressively more so over time). More than that, dividends can bring a great sense of purpose to life.

Technically speaking, dividends are payments that stock shareholders (owners) receive for owning a shares of particular company. Let’s take an example: I own stock in McDonald’s (MCD). It’s my number three favorite dividend stock of all time (check out This YouTube video on MCD to learn more). Each quarter, McDonald’s pays me, as a shareholder, $1.16 for each share I own in the form of a cash dividend. Why do they do this? When you buy stock, you become a shareholder. When you are a shareholder, you are a part owner in a corporation. Dividend companies choose to take a portion of their profits, paying it back to shareholders.

Makes sense, right? After all, what’s the purpose of a company? Ultimately, it’s twofold: 1) Fulfill a greater purpose out there (in the case of McDonald’s, they feed billions) and 2) generate profits for the owners. When you’re a shareholder, you are an owner. Great companies, like McDonald’s, give their owners what they deserve: their cut of the profits. (Going to the philosophical level again, when you buy your first share of stock, you are no longer part of the employee class. You get to graduate to the owner class. Being an owner is the way to go in terms of getting the most out of life, in my humble opinion.)

Why Invest For Dividends?

What if I told you that you can earn money while you sleep? Think about it: Right now, you have to get up early, go to work, and earn money through blood, sweat, and tears to pay for everyday expenses like your cup of Starbucks (SBUX) coffee. What if I told you that some of your expenses (or even all of your expenses) can be completely covered without job income? What if I told you that you can sleep in, go for a long run, and then pursue your hobbies, and still pay for that cup of coffee? That’s what dividends are all about.

When you start investing for dividends, you slowly but surely build up a stream of passive income (dividend income). This is to be contrasted with earned income (job income). Earned income is great, and without earned income it’s impossible to have investment capital for dividend stocks. Also, I truly believe that we are all here to fulfill a purpose. So, I’m not saying that work is bad (I work incredibly hard each and every day). In the modern world, however, work can be bad because so many people are forced to work beyond the laws of time and physics. (Side note: Once all of your expenses are covered by dividends, you are then free to choose any "work" you like including pursuing your hobbies full time. Dividends create true choice in life.)

As I get older, especially now that I have a wife and two amazing children, I realize that time is so limited. I only have so many hours I can work a job. My job income is limited by time. However, if I take some of my job income and invest it in dividend stocks, those dividends turn into a stream of passive income! They work while I sleep, providing passive income. Other than the energy spent to earn my investment capital (through active/job income) and the energy to research and find great dividend stocks, dividends are completely passive (require no/little ongoing effort from me). They just come in, and I can then use them to pay bills.

In the early days those dividends will be small and may only pay for a Starbucks coffee here and there. However, one day, the dividend snowball will become so large that it can pay for ALL living expenses. That’s my personal and ambitious goal, especially living here in the expensive SF Bay Area. You can learn all about my Financial Independence Retire Early goals in This YouTube Video About FIRE.

Dividend Companies Vs. Growth Companies

There is a lot of misinformation out there about dividend companies. A lot of folks believe that it’s an "either/or" proposition when it comes to dividends and growth. A lot of people out there say that dividend companies do not grow. Meaning: You get some cool cash flow via dividend checks, but you sacrifice growth. The same people say that you must buy true growth stocks like Facebook (FB), those that do not pay dividends, to experience growth.

While it is true that some of those pure play tech companies that lack a dividend are growing very quickly, I am here to argue that dividend companies also provide growth: Growth in their revenues, growth in their share prices, and growth in their dividends too (we’ll get more to this later)!

It’s truly NOT an "either/or" proposition. Let’s look at my number one favorite stock of all time, Johnson & Johnson (JNJ), as an example. (By the way, make sure to check out This YouTube Video Where I Explain JNJ In Detail.) Comparing 2018 vs. 2008 (from their annual report, their 10-K):

JNJ’s revenue is up 30%.
Their net earnings are up 18%.
And, their dividend is up a staggering 119% (it has been increased for 56 consecutive years).

Now, the growth for Facebook during the same period has, no doubt, been much more substantial. The point, however, is that it’s not "either/or". Dividends offer a relatively conservative strategy (as compared to growth investing) that offers a component of growth and also cash flow (dividend checks paid out to shareholder, like me).

I Prefer Dividend Stocks To Growth Stocks

At the end of the day, I prefer dividend stocks vs. growth stocks for a few reasons:

I will, one day, pay all of my bills with passive income from dividends. Right now, I have the ability to pay a good chunk of my bills with dividends, as I have been investing in such stocks for over 20 years (with the bulk of my portfolio built in the last 10 years). I do not believe in selling shares to pay bills. Why? Stock markets go up and down. What if I need to pay a utility bill and the stock market is way down? In such a situation, growth investors are forced to sell really low. Dividend investors, by contrast, do not need to sell shares. They simply take their dividends and then pay the bills. If one wants true passive income, I do not believe there is a better avenue than dividend stocks.
I am a conservative investor. I have tried it all: tech stocks, penny stocks, day trading, and more! At the end of the day, I have found that slow and steady really does win the race. Dividends offer a relatively conservative strategy that I can utilize to build true wealth and cash flow over time. I don’t have to take on the risk of high-flying tech stocks. I simply buy tried and true companies like PepsiCo (PEP). (By the way, make sure to Check Out My YouTube Video on PepsiCo.)
I trust companies that pay dividends. When the management team decides to pay a dividend, they show respect to the shareholders (the owners). I truly believe that money sitting around in corporate bank accounts can get wasted on lavish company parties, unnecessary acquisitions, fancy office upgrades, and more. That cash belongs to the shareholders. I trust companies that pay dividends to treat the owners right, and to make smarter choices around their cash management.
Dividend investing, in the United States, is relatively tax-efficient. Buying low and selling high (growth investing) can expose one to hefty short-term capital gains taxes (if one needs to sell to pay bills). Qualified dividends, by contrast, are taxed as long-term capital gains. (Check out This YouTube Video To Learn More About Dividends and Taxes.)
Dividend investing gives me hope! Life is not always easy (and that is honestly a good thing, since success is so much sweeter that way). With each share of stock that I buy, I am one step closer to covering all of my expenses with passive income. I am always buying dividend stocks (in reasonably small amounts) since I like to stay in the game. That constant buying gives me the confidence and excitement that I am getting to my goal. Dividends are for everyone. They give the everyday person the means to automate income. And, it’s not only the destination that matters. Even $50/Month in Dividend Income starts paying for something! The early success is so motivating!
Last, dividend stocks tend to perform well. Certain studies show that dividend stocks (value stocks) tend to outperform growth stocks very long periods of time. Personally, as a Stanford University Computer Science graduate, I know a lot about data. And, I know that data can be used in different ways to tell different stories. So, rather than rely too much on external studies, I just like to run the numbers myself. In this YouTube video, I share how My Stock Portfolio is Beating the S&P 500, with a lot less risk (in my humble opinion).

My Personal Dividend Stock Portfolio

So, you like the strategy and want to see what a typical dividend stock portfolio looks like? I have actually shared My Complete Dividend Stock Portfolio on YouTube. Some fun stats:

I own 40 dividend stocks. (I filmed the YouTube video before I owned my newest position of Chubb.)
I have been investing for over 20 years, but the bulk of my portfolio has been built in the last 10 years (especially in the last 7 years). A few times in my investing history, I have had to liquidate the lion share of my portfolio to fund a house down payment. I do not envision us moving anytime soon, and I do not anticipate selling my portfolio again. This time, it’s forever and I’m in it to automate all income and cover all expenses!
I tend to buy stocks of all sizes: large cap, medium cap, and small cap. I specialize in larger companies since I like those that can stand the test of time without getting pushed around by activist investors and hostile M&A activity (mergers and acquisitions).
I have made countless stock market purchase orders. I have placed orders as high as $10,000 and as low as $50. (You can learn all about My Personal Transaction History In This YouTube Video.)
My average portfolio current yield is 3.89%. However, this is just my current yield, not yield on cost (a really important topic covered later in this guide and throughout my YouTube channel).

Getting Started With My YouTube Channel

At this time, we’re almost 2,000 words into this guide, and it’s getting really long just like my YouTube videos! I bet your time for a break from reading! To change things up a bit, I want to get you on over to my YouTube Channel, but I first want to give you a quick tour and some hacks.

PPC Ian YouTube Channel Guide:

If you want to learn my opinion on a particular stock, please search on YouTube for "ppcian + STOCK-TICKER-HERE". For example, "ppcian WMT" will give you My Video on Walmart. (NOTE: My video titles don’t always include the stock ticker, but YouTube’s search functionality is super smart and will return the right ones for you.)
If you want to learn about a particular topic, search for "ppcian + TOPIC-HERE". For example, "ppcian MLP" returns My Video on Master Limited Partnerships.
Make sure to check out my video descriptions. They always contain a write-up of the video with helpful insights and links. Also, my newer descriptions contain timestamps. I know a lot of you have limited time, and those timestamps come by popular demand. Simply click a timestamp to fast forward to a particular point in the video that is of interest to you.
Don’t forget my playlists. If you head on over to My Playlists Tab, you can quickly find my videos broken down by sub-category. The playlist view makes it a lot easier to find what you’re looking for.
Head on over to My Videos Tab to see all of my videos in reverse chronological order. Just scroll down to see the older ones.
Make sure to read the comments and participate in our thriving dividend investing community. We are 29,000 dividend investors strong and each video contains a multitude of insights in the comments. I personally try to read and respond to most comments. Many of our older discussions will provide a wealth of information to you.
One last bonus hack: Here on my blog, check out the tabs at the top. I link to all of my important whitepapers, guides, and spreadsheets right here on my blog! I have published a ton of free spreadsheets, for example, and they’re all conveniently here on my blog. For example, here’s My Yield On Cost Worksheet.

Let’s take a pause now, and please head on over to my YouTube Channel. Hope you find a video or two that you enjoy. When you come back, it will be time to discuss some metrics!

Dividend Investing Metrics

Here’s where it starts getting a bit more technical. I’m not going to get too technical today, since this is a beginner’s guide. I am, however, going to quickly outline the metrics that matter to me when selecting and managing my dividend stocks:

Revenue Growth: I like companies that consistently growth their revenue over time.
Earnings (and Earnings Per Share) Growth: Again, up and to the right.
Gross Margins, Operating Margins, and Net Margins: I prefer companies that have sold margins, since such margins are indicative of a competitive moat in the form of brand and intellectual property. And, great margins give a buffer should the company hit hard times. Of course, some industries are characteristically higher margin (software, for example) than others (utilities, for example).
Strong Balance Sheet: I prefer those balance sheets that carry little debt, and positive shareholder’s equity (assets greater than liabilities). With interest rates at historic lows, many companies these days have taken on huge debt to fund share buybacks and acquisitions. These days, it’s a bit tougher to find those rock solid balance sheets, so it’s always refreshing when I find one.
Growing Cash Flows: Sometimes, net earnings do not tell the entire story. I like to look at the statement of cash flows to ensure that the business is growing true cash flow over time.
Dividend Yield: Calculated as the dividend per share (annually) dividend by share price, I like starting dividend yields that are anywhere between 2% and 8%. Lower than 2% is typically a bit too low for me (won’t provide meaningful cash flow in sufficient time). Above 8% is sometimes indicative of a "yield trap", a company that may not be able to maintain the dividend. Of course, there are always exceptions.
Dividend Growth: I like companies that tend to grow their dividend over time. Those companies that grow their dividend get me to financial freedom the fastest because I can buy now and receive more dividend income with each year that passes. Typically, my favorite companies raise their dividend by 7% on average, per year.
CAGR (Compound Annual Growth Rate): The CAGR formula helps dividend investors understand the average growth rate of any of the metrics discussed thus far (especially dividends). Just Google CAGR for the formula. Given an ending value, a starting value, and years elapsed, CAGR shows the average amount the given metric has grown per year (on average).
Payout Ratio: Calculated as dividends/EPS, payout ratio gives a sense of how much of earnings are going to dividends and how much are being retained. Payout ratios differ by industry. Utilities tend to pay out most (all) of earnings. In general, for a household brand name company like Procter & Gamble (PG) or Kimberly-Clark (KMB), I like payout ratios in the 40-60% range over the long-run.
Yield On Cost: There are two ways to calculate yield on cost: Simple Yield on Cost and Yield on Cost With Dividends Reinvested. Since these topics are a bit more involved, I have linked each of the terms in the prior sentence to my YouTube videos explaining them. I love these metrics because they give a sense of how far along I am and how hard my capital is working for me. They literally show me the dividend yield I am receiving (on my purchase price) after holding onto a position for number of years. On Altria (MO), I am now yielding 20% on cost on my first tranche (simple yield on cost). Meaning: For each $100 invested (not counting reinvested dividends), I am yielding $20 per year.
Market Capitalization: Simply put, market cap shows how much a company is worth. I like to diversify by all different market caps (one reason I own 40 stocks), so I have exposure to small, medium, and large enterprises. My average market cap tends to skew a bit larger.
Dividend Consistency: Since I invest for dividends and dividends alone, I always enjoy understanding how many consecutive years a company has paid dividends and also how many consecutive years a company has increased its dividend. I always apply CAGR calculation to here to understand dividend growth over time, on average.
Share Price: Typically, I enjoy buying additional shares of my favorite companies when share prices are down (and the stock is in value territory).
PE Ratio: Also known as the Price/Earnings Ratio, this metric gives a sense of value. Lower PE Ratios are good, as they indicate the company is trading at a lower multiple of earnings.

Dividend Growth Investing

Ok, that’s enough with the metrics for today’s beginner’s guide! I want to now take a moment to pay homage to the phrase "Dividend Growth Investing" (notice the word "Growth"). I don’t typically invest in dividend stocks. I invest in dividend GROWTH stocks. Meaning, my companies:

Grow their business (revenue, earnings, and cash flow)
Grow their dividends over time (dividends are not static but actually grow)

Of course, we already covered why it’s not "either/or" when it comes to dividend stocks vs. growth stocks. I like those that exhibit both! This is so important because those companies that are actually growing have the financial means to grow their dividends. And, those companies that grow their dividends give me a higher yield on cost over time! Meaning: My invested capital progressively works harder for me. I have time on my side, I can wait for the dividends to grow. And, after years have passed by, the compounding of those dividend increases gives me a huge yield on cost!

At the end of the day, dividend growth investing works because of The Miracle of Compound Interest. (Make sure to check out the YouTube video I just liked, to really understand how the math works.) I’m talking about:

Corporate revenues and profits growing.
Dividends growing over time.
Dividends being reinvested to buy more shares (until one chooses to tap into dividends to pay bills.) There’s a key example at the beginning of My Latest Video that goes into this concept in detail.
More capital being invested over time.
It all compounds tremendously over time!

At the end of the day, I’m throwing a lot at you here. The key insight is that compound interest and time work on your side. Invested capital is important too, but if you have some time until your retirement (or early retirement), that time and the nature of compound interest can get you a lot more cash flow than you would think! Slow and steady wins the race. Dividend investing is for everyone!

Helpful Websites and Tools

On my YouTube channel, I regularly share stock analysis, like My Recent Analysis of United Technologies (UTX) and Raytheon (RTN). Where do I pull the metrics for my analysis?

First and foremost, I like to go the actual corporation websites and pull their annual reports (also called 10-Ks). I have to spend some time digging, but I always prefer pulling data direct from the source. Such annual reports offer the most helpful info on the income statement, balance sheet, and statement of cash flows. Worth noting: I also like to follow quarterly reports (10-Qs), but I do not place quite as much weight. I am investing forever, so quarterly fluctuations and results do not matter to me quite as much, as I’m all about the long-term.
I also make use of the Nasdaq website. Nasdaq is great for showing dividend per share history over time. If you Google "STOCK-TICKER dividend history", Nasdaq always shows up towards the top.
Last, I like to make use of Yahoo! Finance. Yahoo! Finance offers great summarized data, but I always like to verify data just in case.

Now, you may be wondering what’s a great place to get started actually buying dividend stocks? I tend to suggest the following avenues to newer investors: Dividend Reinvestment Plans (check out my YouTube video) and also Large, Established Brokerages (also check out my YouTube video).

The financial industry builds up a lot of data about how commissions can eliminate results. And, that is true for many investors who pay ongoing commissions. Dividend investing tends to be commission-friendly since one buys and holds forever. As such, as long as my buy commissions are less than two percent (and my dividend reinvestment is free or close to it), I do not get too worried about commissions. I actually prefer to pay commissions if I can leverage a really big, reputable, and well-established brokerage firm.

No More Drama

The stock market is full of drama. I’m talking about people literally shouting on the trading floor. I’m talking about stock prices surging and then plummeting. I’m talking about people on TV giving their opinions on how the world is ending! I’m talking about IPO (initial public offerings) in companies that have no promise of earning anything, ever!

Dividend investing erases all the drama. In fact, I do not even care about my aggregate portfolio value, since I never plan to sell. When you buy and hold forever with no plan of selling, it truly is a liberating experience. You free yourself from the worries of stock market fluctuations. (Of course, I do check my portfolio value form time to time just to feed by ego and as an overall signal if the companies I own are doing ok.)

At the end of the day, the only metric I follow closely is my aggregate dividend income. Regardless of the economy, the types of companies I own tend to pay (increasing) dividends over time. Even during a horrible recession, I can watch my dividend checks come in (at increasingly higher levels). And, I can measure the percentage of my expenses covered by such dividends.

Even greater: When the stock market is in the gutter, I can take comfort that new capital (and reinvested dividends) are buying more shares at progressively lower prices. I love a plummeting stock market because it allows me to reach financial freedom faster. Dividend investing really is a drama-free strategy. We all have enough to worry about in our lives, our stock portfolios should not be another cause for concern. Our stock portfolios should be a source of comfort, another stream of income that can work when you cannot (24/7)!

Investing Prudently

This guide would not be complete if I failed to mention risk. Any stock market strategy, including dividend investing, carries some element of risk (especially since the stock market is towards the end of one of the largest bull market runs of all time). A Stock Market Crash could be around the corner.

I am literally ready for my stock portfolio value to drop 50%, and I am fine with that! Why? I only invest for dividends, I do not care about short-term portfolio value (I actually get excited when stocks are down since I can buy more value that way), and I do have some cash on the sidelines for emergencies (an emergency fund). Ultimately, you will need to assess your own risk tolerance. (Stock market investing may not be for you if you would be concerned about a 10% portfolio value drop.) And, you will certainly want to consider paying off all debt and creating an emergency fund before beginning any stock market investing.

Dividend investing does carry an element of risk, but quite frankly anything in life worth having carries an element of risk!

Dividend Investing Is For Everyone

I created my YouTube channel, PPC Ian, to share my passion for dividends with the world. PPC Ian is dividend investing for EVERYONE. It’s my firm belief that everyone can start small, go slow and steady, and build a meaningful stream of dividend income. That dividend income can provide great comfort, meaning, and purpose in your life.

Also, along the way, do not forget that your dividend income can also be used to make our world a better place. For example, you could choose to donate a portion of your dividends to charity. Or, you could allow your dividends to buy your own time back so you can do good deeds first-hand. Dividends open up a world of greatness. I wish you tremendous success on your personal dividend investing journey!

DISCLOSURE: I am long McDonalds (MCD), Starbucks (SBUX), PepsiCo (PEP), Chubb (CB), Walmart (WMT), Procter & Gamble (PG), Kimberly-Clark (KMB), Altria (MO), and United Technologies (UTX). I own these stocks in my stock portfolio.

COPYRIGHT: All PPC Ian videos, Excel files, guides, and other content are (c) Copyright IJL Productions LLC. PPC Ian is a registered trademark ™ of IJL Productions LLC.

Dividend Stock Pick

By PPC Ian Leave a Comment May 21 0

I truly enjoy a good buying opportunity in the stock market. I invest for dividends, and one day my dividends will cover all of my living expenses. When my favorite stocks go down in share price, my starting dividend yield goes up (in other words, I reach financial freedom faster). Needless to say, I love a good buying opportunity (and these have been very rare in recent years due to the overall lofty stock market).

Lately, I have enjoyed buying shares of my favorite industrial companies, because they have been plagued with lackluster earnings reports and overall macroeconomic issues. Our strong economy and overall bull stock market is in its late stages, in my opinion. A recession and stock market crash is on the horizon, most likely, within the next few years. As leading indicators, some of my favorite industrials are starting to exhibit weakness. This is to be expected, as they are cyclical. Large B2B (business to business) purchases can be delayed, unlike a consumer purchase of Huggies Diapers by contrast.

Regardless of market conditions, I am always averaging into stocks because I am unable to perfectly time the market and I enjoy immediate cash flow. After all, I want the opportunity to tap into my dividend cash flow at any time. I solely invest for cash flow, and do not care about capital appreciation (although I do view long term capital appreciation as a proxy of solid company performance). Some of my favorite industrials are on sale right now and I am buying!

One of my favorites (in fact my #10 favorite dividend stock of all time) is 3M (ticker MMM). Over the past few weeks, I have truly enjoyed averaging into this industrial stock, with a rare 3.44% starting dividend yield and a PE (2019 forward) in the 17.58 range. And, these guys sport a 5-year dividend CAGR (compound annual growth rate) of 11% (although I expect dividend increases to slow a bit over time). I expect to continue adding to my 3M position throughout 2019 as long as the share price remains low.

Everyone knows about my stake in 3M and my latest purchases from my 3M YouTube videos. However, there is another industrial stock that I have owned for years that is also a relative market value right now. (It’s not a top 10 favorite stock like 3M, and is a smaller position, although one I love.) It seems like nobody talks about this stock. It’s a smaller one, but a powerful one from a dividend standpoint (they have increased their dividends for the last 48 years, a track record only surpassed by 10 US companies). I’m talking about Leggett & Platt (LEG).

For those unfamiliar with Leggett & Platt, they produce white label beds, springs, and furniture. When you go to a hotel room or an office, for example, a good portion of the furniture are likely from Leggett & Platt (or at least assembled with Leggett & Platt parts). They are also involved in the automotive, aerospace, wire, rod, fabric, machinery, hydraulic cylinder, and specialty foam industries too. With their recent acquisition of Elite Comfort Solutions, a foam mattress company, Leggett & Platt has truly solidified themselves as a leader in the mattress segment. At the end of the day, everybody needs to sleep and everyone enjoys sleep so much more with a comfortable mattress. I do not see Leggett & Platt’s business going anywhere.

At a high level, there are five key reasons I absolutely love Leggett & Platt right now!

Reason 1: Their starting dividend yield is a sweet ($0.40 * 4) / $37.90 = 4.2%, a very solid starting yield in this market.
Reason 2: They recently raised their quarterly dividend from $0.38 to $0.40, an increase of 5.3%. Such an increase shows that management is very confident in the business, despite the macroeconomic issues. A shareholder-friendly company, they have increased their dividend for the last 48 years!
- In the last 5 years, their dividend is up 33% or 5.92% per year on average (CAGR).
Reason 3: Looking at the average analyst estimate of $2.47 2019 forward EPS, I get a 2019 forward PE ratio of $37.90 / $2.47 = 15.34.
Reason 4: I originally initiated my LEG position at $29.43 per share back in 2013. At $37.90, I feel like we are getting into really low share price territory from a historical perspective. I love purchasing shares in 2019 in the $30s.
Reason 5: Dividend payout ratio is reasonable. At $1.6 per year, dividends represent 65% of EPS, providing the company sufficient buffer for the unexpected. (Worth noting: Management does want the payout ratio to reach 50%, meaning dividend growth will likely be a bit slower until the ECS acquisition is fully digested.)

Now, this business does not come without risk. From a size standpoint, their market capitalization is $4.96 billion. Overall in terms of my dividend stock portfolio, Leggett & Platt is one of my smaller positions. I like smaller companies because they provide diversification to the portfolio and have potentially more upside (easier to grow when you are smaller vs. larger). That said, smaller companies can sometimes be more susceptible to competitive forces and adverse M&A activity (hostile takeovers and private equity, for example).

Perhaps more than this, however, I am concerned about foreign competition. While Leggett & Platt has been in business since 1883 and literally invented the bedspring, one must always keep their eyes on lower cost alternatives from overseas in our now global economy. In fact, recent company releases even discuss a foreign "anti-dumping" matter they are currently working on. Due to their large patent portfolio, breadth of capabilities, and multitude of business units, however, I generally believe LEG has staying power.

I’d like to close out today’s dividend stock profile with some interesting metrics from Leggett & Platt’s 2018 annual report:

This is a very high revenue (and lower net margin) business. Net earnings in 2018 were $306 million on $4.270 billion of sales! ($306 / $4,270 = 7.17% net margin)
Revenue growth trends are nice. 2018 is up, in particular due to the ECS acquisition. However, even looking pre-acquisition (2017 vs. 2013) revenue has increased steadily each year and is up 13.4% in total.
Earnings per share are up nicely in the 5-year period. Comparing 2018 vs. 2013, EPS is up 68.66%.
Net cash provided by operating activities is a bit less "up and to the right" as compared to revenue and EPS (it’s a bit more up and down). That said, it has increased by 5.5% over the 5-year period. This will be a key metric to watch in upcoming annual reports.
The balance sheet appears to be well-managed with assets exceeding liabilities (positive shareholder’s equity). It will be important to watch the balance sheet, however, now that the ECS acquisition has been completed. (I hope they pay down debt quickly, over the coming years.)
Their business is very diversified! Following are sales by product line:
- Bedding Group: 21%
- Automotive Group: 19%
- Fabric & Flooring Products Group: 17%
- Work Furniture Group: 7%
- Consumer Products Group: 11%
- Home Furniture Group: 9%
- Wire Group: 9%
- Aerospace Products Group: 4%
- Hydraulic Cylinder Group: 2%
- Machinery Group: 1%
LEG has a nice Patent and Trademark portfolio. The patents, in particular, create a competitive moat.
- 1,427 patents issued
- 598 patents in process
- 980 trademarks issued
- 143 trademarks in process
Sales are geographically diverse, although I’d like to see even more international exposure.
- USA: 63%
- Europe: 12%
- China: 12%
- Canada: 7%
- Mexico: 4%
- Other: 2%

While Leggett & Platt will never be a core position in my 40-stock portfolio, I am so proud for it to play a supporting role. That’s why I went ahead and purchased more shares today at $37.90, and I’ll continue to look for opportunities to pick up more shares throughout the year. Ultimately, I believe in their diversified business, I love the exposure to industrials (I tend to be underweight in that sector), and I’m a fan of the 4.2% starting yield!

DISCLOSURE: I am long Leggett & Platt (LEG), 3M (MMM), and Kimberly-Clark (KMB). I own these stocks in my stock portfolio.

COPYRIGHT: All PPC Ian videos, Excel files, guides, and other content are (c) Copyright IJL Productions LLC. PPC Ian is a registered trademark ™ of IJL Productions LLC.

What If You Had To Pay With Dividends?

By PPC Ian Leave a Comment Mar 21 1

Sitting at Starbucks (Nasdaq: SBUX) right now, I’m enjoying a hot chocolate and a chocolate croissant. My creativity and productivity is often higher at Starbucks than in a quiet zone, so I really enjoy powering through work in this amazing environment. Also, I’m a proud shareholder, and enjoy the fact that Starbucks pays a dividend (albeit a small one). This experience cost me $6.00 plus $0.50 tip, for $6.50 total. (Actually, it cost me a little less since I’m in their loyalty program and get free drinks from time-to-time, but let’s ignore that fact for the sake of simplicity.)

Manage Every Single Dollar

$6.50 may not seem like a lot at face value. And, in my opinion, it’s totally worth it for the experience I received. That being said, the best investors and business operators know how to manage every single dollar. They treat experiences like this as a treat, rather than a day-to-day routine. Every last dollar counts, and this $6.50 represents far more underlying value when viewed through the lens of dividends, one of my favorite financial concepts of all time. Today’s post is meant to encourage you and me to ask one simple question before making any purchase, "What if I had to pay for this with dividends? Would I still make the purchase?"

Dividends: The Only True Form of Passive Income

For those new to dividends, they simply represent the company paying a portion of profits back to shareholders. Many large companies, the kinds of companies I like to invest in, pay dividends quarterly.

The best companies have long, consistent track records of growing their dividends, oftentimes for decades upon decades. The best companies keep their payout ratios, the percentage of earnings that are distributed back to shareholders, at reasonable levels so they have a buffer of security (and don’t risk a dividend cut when times get tough and earnings suffer). Dividends, in my opinion, represent perhaps the only true form "passive" income. You don’t have to do anything other than own stock in amazing companies (and keep good records).

SBUX: Every $100 Invested Generates $1.34 Pear Year

Let’s look at Starbucks and their dividend. Currently trading at $59.86 (as of 3/17/16 intraday), Starbucks pays shareholders a quarterly dividend of $0.20 (or $0.80 per year). That’s $0.80 / $59.86 = 1.34% dividend yield. In other words, for every $100 invested, I earn $1.34 in dividends per year.

$485.07: The Real Cost of My Hot Chocolate and Croissant

Now, let’s say I had to pay for my $6.50 snack/meal at Starbucks out of dividends. I would have to own $485.07 worth of Starbucks stock at 1.34% yield to pay for my single Starbucks experience ($485.07 * 1.34% = $6.50). Now, let’s say I went to Starbucks every single day of the year (like some people do). $6.50 * 365 = $2,372.50. In order to pay for this expense with Starbucks dividends, I’d need to own $177,052.24 worth of Starbucks stock at 1.34% yield ($177,052.24 * 1.34% = $2,372.50).

To be fair, Starbucks does increase their dividend each and every year. In the last five years, for example, Starbucks dividend has increased by 108%. So, if I wanted to invest in Starbucks stock now, hold for five years, and then enjoy my $6.50 experience daily five years from now, I’d "only" need to invest $85,121.15 right now (assuming rate of dividend increase stays similar).

How Much Would You Have To Invest To Make That Purchase?

I’m not saying to avoid Starbucks here. I’m not saying to pinch every penny. I am saying to be conscious of every single business and personal expense. Whenever you make any purchase in business and life, mentally consider if you’d still make the purchase if you had to pay for it via dividends. Think about how much money you’d have to invest and how hard you’d have to work to save that capital before making your purchase.

You Are A Business, You Have A Market Capitalization Just Like SBUX

At the end of the day, you are a business. You are no different than Starbucks. If you can eliminate expenses from your life, your personal market capitalization increases. Remember from my recent post about Your Margin Is Made On The Margin, that margin is leverage. If you increase your margin (your profit) just a little bit, your market capitalization (or value) could skyrocket. This rule applies to businesses and people. Manage your own life as if you are a business. Whether the expense is small or large, all savings matter and create leveraged value. Dividends provide an amazing lens illustrating why margin creates so much value.

Reinvest Your Savings In Dividend-Paying Stocks

I’d like to close bringing this discussion full circle. When you start saving money, what will you do with your extra cash? You may want to consider investing in dividend-paying stocks, especially those that have a consistent track record of increasing dividends (safely) year in and year out.

Use your savings to start generating even more income, in a passive fashion, which will compound and snowball over time. You’re at the tipping point when your dividends become considerable, perhaps covering a big portion of your expenses (or even all of them). Add that dividend income with your own earned margin, and your own market capitalization will skyrocket.

My winning strategy:

View all expenses through the lens of dividends. Would I still make that purchase if I had to pay for it via dividends? Leverage this concept to be considerate and frugal.
Reinvest my savings in dividend-paying stocks, those that are safe and increase dividends over time.
Reach the inflection point where my dividend income snowballs and I’m able to fund significant life expenses via passive dividend income. Maintain my conservative financial ways and dividends could cover all expenses one day.

Disclaimer: Long SBUX. This blog post is just for entertainment. I’m not a financial advisor, and this is not investment advice.