by Dividend Growth Investor | December 26, 2012 1:00 am
As outlined in my dividend retirement plan, my ultimate goal is to reach financial independence. This would be achieved at the so called dividend crossover point, which is the point at which dividend income exceeds expenses. Achieving this long-term goal however takes time, patience and persistence in sticking to and executing your plan. It helps to break down the long-term goal into a plan with achievable and actionable steps.
For example, if you goal is to retire in 10 years, the sub-steps could include achieving a 10% coverage of your target income in year 1, 20% in year 2 etc. It is also important to readjust your plan accordingly, and be realistic about the external environment. For example, if hitting your target requires you to invest in dividend paying stocks yielding 4%, when the quality income stocks pay only 3% on average, you need to account for that. On the contrary, if you manage to receive a large lump-sum to invest (bonus or inheritance), and you are now 15% closer to achieving your goal instead of 10%, you need to readjust your goals for next year.
One of the goals for my income portfolio is achieving a 6% annual organic dividend growth. This growth ignores the effect on dividend income of reinvestment and addition of new funds. I usually look at the portfolio composition at the end of the prior year, and calculate the estimated dividend income for the new year. I then compare the estimated income for current year, to the estimated income for new year and check to see if I have achieved my goal. I believe that a 6% goal in average dividend growth is achievable, as it is only about 0.50% more than the long-term average dividend growth in the Dow Jones Industrials Average index. This is an important metric, because once I retire, I would need to have my dividend income safely increase above the rate of inflation, in order to keep its purchasing power over time. In 2012, my dividend income grew by 7.10%. Of course, my total income increased faster than that because I reinvest dividends and also add new funds to my portfolio.
My income goal is to reach a 60% dividend income replacement ratio. This means that my dividend income would cover roughly 60% of my expenses in 2013. In 2012, the percentage was roughly 50%. I do not speak in numbers in order to avoid extra unnecessary confusion. If my target monthly income was $10,000, this would cause discussion that this is too much, and is not realistic. The discussion would go in the direction that I need to spend less. If my target monthly income was $1,000, then the discussion would go in a way that this income is not sufficient for someone to live on. After all, these are my numbers, so the numbers that would work for you are much different.
The interesting thing about dividends is that they are not typically paid evenly every month, which is OK This is why, when I discussed in an earlier article my dividend crossover point, my income seemed to exceed 60% of expenses in several months of the year. However, these are typically the months of November, August, May and February, when my Master Limited Partnerships pay their generous distributions.
In summary, my goals for 2013 are part of a long-term roadmap that would help me to reach out my long-term goal of retiring using dividend stocks. These goals will be achieved by owning qualirty dividend stocks which grow distributions by at least 6%/annually. The next two steps include reinvesting dividends selectively and adding new funds in attractively priced quality income stocks.
The types of dividend stocks I plan to add in 2013 include:
Becton, Dickinson (NYSE:BDX), a medical technology company, develops, manufactures, and sells medical devices, instrument systems, and reagents worldwide. The company has raised distributions for 41 years in a row. Over the past decade Becton Dickinson has managed to boost dividends by 15.70% per year. The stock is trading at 14.10 times earnings and yields 2.30%. I plan on initiating a position in this stock somewhere in first quarter of 2013, as long as it trades below $79.20 per share. Check my analysis for more details.
McDonald’s (NYSE:MCD) franchises and operates McDonald’s restaurants in the global restaurant industry. The company has raised distributions for 36 years in a row. Over the past decade McDonald’s has managed to boost dividends by 27.40% per year. The stock is trading at 17 times earnings and yields 3.40%. This is the cheapest valuation for this global blue chip that I have ever seen, and I think that the stock has been beaten up unjustifiably. Check my analysis for more details.
Wal-Mart (NYSE:WMT) operates retail stores in various formats worldwide. The company has raised distributions for 38 years in a row. Over the past decade Wal-Mart Stores has managed to boost dividends by 17.90% per year. The stock is trading at a 14.10 times earnings and yields 2.30%. Check my analysis for more details. The company was attractively valued for a brief period in 2011 – 2012. If dividends increase by 8% in March 2013 however, the current prices around $69 per share would make it attractively priced for me.
YUM! Brands (NYSE:YUM), together with its subsidiaries, operates quick service restaurants in the United States and internationally. The company has raised distributions for 8 years in a row. Over the past five years YUM! Brands has managed to boost dividends by 31.30% per year. The stock is trading at 18.80 times earnings and yields 2.10%. I like the recent weakness in the stock, which I consider to be short-term in nature. If the stock falls further to $54 per share, I plan on adding to my position in it. If the company’s stock price remains relatively flat in 2013, but dividends increase by approximately 15%, I might consider adding to my position in the stock.
This of course is just a sample of the types of companies I plan to add to in 2013, as I will probably do somewhere between 24 – 36 purchases.
Full Disclosure: Long MCD, WMT, YUM
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