PDF Summary:Dividend Growth Investing, by Freeman Publications

In today's low-yield environment, investors seeking reliable income can no longer rely solely on traditional fixed-income assets such as bonds. Dividend Growth Investing by Freeman Publications explores alternative investment vehicles that offer both steady payouts and the potential for growth.

The guide delves into equities, real estate investment trusts (REITs), and master limited partnerships (MLPs). It teaches how to evaluate companies based on dividend history, payout ratios, and management strength. Readers will learn to build a diversified portfolio of dividend growers while avoiding common pitfalls like exorbitant fees and unsustainable "yield traps."

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• Some ETNs may have lower trading volumes, which can lead to wider bid-ask spreads and difficulty in buying or selling at desired prices.
• To write a covered call, you must own the underlying stock. This means you are exposed to the risks associated with holding the stock, such as price declines.
• Exchange-Traded Notes (ETNs) are unsecured debt securities that track an underlying index of securities and trade on a major exchange like a stock. They do not pay interest but offer a return linked to the performance of the index.
• Yield is inversely related to the price of a security. When the price of a stock or bond decreases, its yield increases, assuming the dividend or interest payment remains constant. This is because yield is calculated as the annual dividend or interest payment divided by the current price.
• A significant drop in share value might also reflect changing investor sentiment, where investors lose confidence in the ETN's ability to deliver sustainable returns, leading to sell-offs and further price declines.
• Understanding how a company's dividend growth rate compares to its industry peers can provide insights into its competitive position. A decline might suggest that the company is underperforming relative to others in the same sector.
• A yield trap occurs when an investment offers a high dividend yield that seems attractive but is unsustainable due to the company's declining financial health. This can lead to reduced dividends or capital loss.

Chasing after high yields could lead to financial difficulties that may offset the advantages of a higher income.

The Kinder Morgan case serves as a clear illustration of this principle. Prior to the substantial drop in the stock price in 2015, the company's dividend yield stood at 8%, but it was decreased to 2% following the board's resolution in response to the falling crude oil prices that year. Since 2016, the stability of the stock's value has been observed, with price fluctuations prior to the cut attributed exclusively to expectations concerning the stock's dividend outcomes. Investors have recognized other master limited partnerships within the energy industry that yield similar returns with a more robust potential for growth. When choosing investments, it's essential to consider factors beyond the asset's yield.

Context

• Kinder Morgan is one of the largest energy infrastructure companies in North America, primarily involved in the transportation and storage of natural gas and other energy products.

Other Perspectives

• High yields can compensate for higher risks if the investment is sound and the investor has a well-diversified portfolio.
• The timing of the dividend cut could coincide with falling crude oil prices but might also reflect a delayed response to previous financial overextension or an anticipation of future market trends beyond immediate oil price changes.
• The term "stability" is relative and could be misleading; even small fluctuations can be significant depending on the context and the investor's strategy.
• Investors often consider a range of financial metrics and company fundamentals, such as earnings growth, debt levels, and management quality, which can also lead to price fluctuations.
• The energy sector is particularly volatile and subject to geopolitical, environmental, and regulatory risks, which could compromise the growth potential of any MLP within the industry.

Investing in dividends is fundamentally about receiving a portion of a company's profits in the form of dividends, the gradual growth of these payments, and the resulting rise in the value of the investment.

The reliability of a company's dividend payouts can be assessed by looking at the proportion of earnings allocated for shareholder dividends.

A carefully adjusted rate of profit distribution guarantees that shareholders are fairly compensated while also retaining adequate capital for the growth of the business.

The author underscores the importance of the dividend payout ratio as a crucial indicator for assessing stocks that pay dividends, pointing out that a notably high payout ratio often suggests the possibility of a forthcoming decrease in dividend payments. To determine the payout ratio, one must divide the dividend payment of the company by its net earnings. A firm that distributes all its earnings as dividends retains no capital for the improvement or reinvestment in its business activities.

Practical Tips

• Create a personal investment game where you allocate virtual funds into different "companies" (which could be categories like savings, stocks, retirement funds, etc.). Periodically review your "investments" to determine how much profit to reinvest for growth and how much to "distribute" to yourself, mimicking the shareholder compensation process.
• Start a savings challenge with friends or family where each person commits to reinvesting a portion of their income into a shared investment fund. This collective approach not only helps you save but also creates a support system for making smarter financial decisions, mirroring the concept of retaining earnings for future growth.

A significant payout of earnings in the form of dividends might suggest a forthcoming decrease in these payments.

Freeman Publications suggests investing in established firms that distribute between 15% and 65% of their earnings in the form of dividends. Coca-Cola stands out as an illustrative case, maintaining a dividend payout ratio of 73%, slightly higher than the ideal limit, yet it demonstrates consistent stability owing to its dominant position in the market and the robustness of its business strategy. Investors should not hastily view a substantial dividend payout ratio as alarming. The sector a company operates within has a considerable impact on its success. Mature, dominant companies can afford to pay high dividend payouts, whereas younger companies that are looking to grow rapidly need to reinvest more of their capital to sustain growth.

Practical Tips

• Create a dividend tracker spreadsheet to monitor changes in dividend payouts from your investments. By inputting the dividend amounts you receive each quarter, you can spot trends and anticipate potential decreases in future payments. This proactive approach allows you to adjust your investment strategy accordingly.
• You can analyze the competitive landscape of your chosen field by creating a simple spreadsheet to track key players and their strategies. Start by identifying the top five competitors in your area of interest or industry. Research their market share, product offerings, marketing strategies, and customer reviews. Update this spreadsheet monthly to stay informed about changes and trends, which will help you understand market dominance and inform your own strategic decisions.
• You can analyze the growth potential of companies before investing by using online financial services that offer company performance metrics. Look for indicators such as revenue growth rate, market share expansion, and R&D spending to gauge a company's reinvestment in growth. For example, a tech startup with a high revenue growth rate but low dividend payouts might be channeling funds into product development, indicating potential for future profitability.

Top-performing stocks that distribute dividends typically exhibit a steady rise in their dividend disbursements.

Companies that have regularly increased their dividends over the years typically provide more reliable sources of income.

The writer posits that a key indicator of a well-managed and solid company is its consistent increase in dividends coupled with a steady payout ratio. The book references a study by a prominent investment company from 2013, which monitored the performance of U.S. stocks between 1972 and 2010, and found that companies that habitually increased their dividends yielded an average yearly return of 9.5% throughout the 38-year period, which was markedly higher than the 1.6% return from firms that did not distribute dividends.

Other Perspectives

• Some sectors, such as technology, often reinvest profits into research and development rather than paying dividends, yet they can still be reliable and provide significant returns to investors.
• The study's timeframe does not include the last decade, which has seen significant economic changes, including technological advancements and market dynamics, that could affect the relevance of the findings to current investment strategies.
• The 1.6% figure does not consider the risk profile of the non-dividend-paying companies, which could be substantially different from those that do pay dividends, potentially affecting the comparison of returns.

The long-term growth in an investment's worth is attributed to the rising dividends.

This measurement further assists investors in pinpointing businesses known for their reliable history of providing stable shareholder returns. The approach is simplified by observing the historical trends of various companies raising their dividends. Dividend Kings stand out for their reliable provision of dividends to shareholders for over fifty years, whereas Dividend Aristocrats have upheld the practice of disbursing dividends for over a quarter of a century, and Dividend Achievers have done so for a duration exceeding ten years. The author recommends selecting firms that distribute dividends and also conducting thorough reviews of their financial records and additional evaluations before deciding on investments.

Practical Tips

• Use social investing platforms to follow experienced investors who focus on dividend growth investing. By observing their portfolios and moves, you can learn from their strategies and see how they apply the principle of looking for companies with a history of raising dividends.
• Start a dividend reinvestment plan (DRIP) with a brokerage that offers this service to automatically reinvest the dividends you receive into purchasing more shares of the company. This can compound your investment over time without requiring additional funds from you.
• Use a decision journal to record the reasoning behind each investment choice, including the financial data reviewed and the external evaluations considered. This practice helps you track your decision-making patterns and improve over time. When you look back, you might notice certain biases or triggers that led to less optimal decisions, which you can then work to correct in future investments.

The combination of an asset's increase in value and the income from dividends is vital in calculating the overall return from an investment.

Focusing solely on the dividend yield can lead to monetary setbacks should the stock's value decrease.

The author illustrates the importance of capital gains with the example of the so-called “junk bond” market: bonds with extremely high interest rates in the neighborhood of 12-15%, often issued by companies in financial distress to raise capital quickly. While these bonds’ high-interest rates can be attractive to income-seeking investors, they rarely make up for the considerable risk of capital losses when the underlying bond price declines (which is highly likely since the issuer is generally a poorly performing company). The initial value of bonds, commonly known as the par value, is typically the basis for their quoted prices, expressed as a percentage. Often, investors buying junk debt will pay far less for the bond than its par value, but they will still end up losing their entire investment in case the company goes bankrupt.

Context

• The junk bond market gained prominence in the 1980s, largely due to the work of financiers like Michael Milken, who helped popularize their use in corporate takeovers.
• Credit rating agencies assess the financial health of bond issuers. Lower ratings suggest a higher risk of default, which is why these bonds offer higher interest rates to attract investors.
• Poorly performing companies might breach bond covenants, triggering penalties or defaults, which can lead to a rapid decline in bond prices.
• Par value, also known as face value, is the amount that a bond issuer agrees to pay the bondholder at maturity. It is typically set at $1,000 for corporate bonds.
• This is a key metric for bond investors, representing the total return anticipated if the bond is held until it matures, factoring in the discounted purchase price.
• Investors with a short-term focus may be more vulnerable to losses from junk bonds, as they might not have the time to recover from potential defaults or market downturns.

Accumulating wealth by allocating funds to stocks that distribute dividends allows for the dual advantage of collecting consistent payouts and experiencing an increase in the value of the investment.

Freeman Publications endorses a method that emphasizes blending growth in investment value with dividend earnings to develop a profitable long-term investment portfolio. Focusing exclusively on one aspect can impede the creation of lasting wealth. Selecting stocks with a focus on increasing dividends offers the dual advantage of potential capital appreciation and the generation of income. As their earnings increase, their share prices tend to rise, and the dividends they pay out typically see growth over time.

Context

• These are companies that have consistently increased their dividends for at least 25 consecutive years, often seen as stable and reliable investments.
• While dividends provide immediate income, capital appreciation refers to the increase in the stock's price over time. A balanced approach ensures that investors benefit from both the income generated by dividends and the potential increase in the stock's market value.
• Investors often have varying needs for income and growth at different life stages. A balanced approach can better align with changing financial goals.
• Dividend growth can act as a hedge against inflation, making such stocks more attractive during inflationary periods, potentially boosting their share prices.

The manual offers comprehensive instructions on choosing premier stocks, such as real estate investment trusts, which are celebrated for their regular distribution of dividends.

The publication highlights seven notable stocks, including AbbVie, Chevron, IBM, and others, with AT&T and ExxonMobil among them, all distinguished by their progressively rising dividends.

These stocks provide appealing dividend yields, robust business fundamentals, and potential for growth.

The publication from Freeman highlights a select group of stocks that meet their criteria for profitable, high-yield dividend shares, citing examples such as AbbVie, Chevron, IBM, and includes Kinder Morgan in this exclusive list. The firm known as People's United Financial. These stocks offer high yields, have stable business models, and are operating in sectors that are poised to do well as the global economy rebounds from the pandemic.

Other Perspectives

• IBM has faced challenges in adapting to the rapidly changing technology sector, and its growth potential may not be as strong as other tech companies that are more innovative or have a larger market share.
• The list may not reflect the latest developments or unforeseen events that could affect the performance of People's United Financial after the publication of Freeman's report.
• Stability in business models does not guarantee success post-pandemic, as unforeseen challenges or shifts in consumer behavior could impact the sectors these companies operate in.

The assessment considers factors including the percentage of profits paid out in dividends, the consistency of those distributions, the effectiveness of the company's management, and its robust standing in the marketplace.

The assessment of each company is conducted with careful adherence to the guidelines for investment presented in the eighth chapter. The approach includes evaluating the company's operational success, scrutinizing the quality of its leadership, and analyzing the structure of the industry or sector the company operates within. The fundamental value of a distinguished firm is reflected in the increase of its dividend payouts. The assessment of each stock highlights their strengths and weaknesses, focusing specifically on whether the risks tied to their operational structures are enduring or temporary. Long-term risks can have a detrimental and enduring impact on a company, while temporary risks are often mitigated as time progresses.

Other Perspectives

• The focus on dividends might not be suitable for all types of investors, particularly those who are more interested in capital gains than income.
• The criteria used to assess management effectiveness can vary widely, leading to inconsistent or biased evaluations if not standardized across industries or companies.
• The focus on marketplace standing could lead to an underestimation of the importance of internal company culture and employee satisfaction, which also contribute significantly to long-term success.
• The emphasis on operational success might lead to short-term thinking, as companies strive to meet benchmarks at the expense of long-term strategy and sustainability.
• Focusing too heavily on leadership quality might overlook other critical aspects of a company's operations, such as its financial health, competitive advantages, or innovation capabilities, which could be more indicative of its long-term success.
• Relying heavily on the industry or sector structure might not account for the potential of a company to disrupt or redefine its sector, which could be a significant factor in its growth and profitability.
• In some cases, a distinguished firm may choose to execute share buybacks instead of increasing dividend payouts, which can also reflect its fundamental value.
• The process of highlighting strengths and weaknesses could be subjective, depending on the analyst's perspective and potential biases.
• Risks tied to operational structures may not always be clearly categorized as enduring or temporary; some risks may evolve over time or be a combination of both.
• Long-term risks can sometimes be offset by long-term opportunities that arise, which can lead to a net positive effect for a company.
• Some risks thought to be temporary may become permanent if the underlying cause is not identified and addressed promptly.

The book also recommends diversifying one's investment portfolio by including prominent Real Estate Investment Trusts such as Realty Income and W.P. Carey.

Real Estate Investment Trusts have a reputation for steady expansion and solid earnings, supported by robust financial reports and wise management decisions.

The writer recommends paying attention to the regular dividend payments and outstanding fiscal management demonstrated by Realty Income and W.P. Carey. Since its inception, Realty Income has maintained a steady stream of monthly dividends, having done so more than 600 times and enhancing its dividend payout on 107 separate instances. By consistently investing $5,000 annually into this firm and achieving an average yearly growth of 15.3%, your investment would grow to $530,000 over a period of two decades. After three decades, your status would be that of a millionaire in the property market. W.P. Carey has gained recognition for its robust ability to withstand economic downturns and has maintained a track record of raising its dividends when others have decreased theirs. During the 2020 lockdowns, W.P. Carey excelled by collecting nearly all of its due rents, outperforming its closest competitor, which only secured 52%.

Practical Tips

• Consider setting up a monthly "REIT Review" in your personal calendar where you analyze the performance of various REITs and their sectors. This habit will help you understand market trends and identify which REITs are performing well. You might use a spreadsheet to track metrics like dividend yield, occupancy rates, and leverage ratios, comparing them month-over-month to spot opportunities or risks.
• Create a visual investment tracking chart to hang in your home office or living space. This chart can serve as a daily reminder of your investment goals and progress. You might use a poster board and stickers for each milestone you reach, such as every $5,000 invested, which can help reinforce your commitment and make the process more engaging.
• Create a contingency fund specifically for times of economic uncertainty. Start setting aside a small percentage of your rental income into a separate savings account. This fund can act as a buffer during periods when rent collection might be lower than usual, allowing you to cover property-related expenses without immediate financial stress.

Income-seeking investors often find REITs particularly appealing due to the tax advantages they provide.

The author tells us that REITs can be structured in a number of ways, which makes them attractive to investors who desire some degree of diversity. Certain categories of properties, such as residential and commercial, are the focus of some, along with those designated for industrial purposes. Others, such as Realty Income, focus on net leases which require tenants to cover the majority of operating costs, which makes them fundamentally more stable than other REITs. Investors are often drawn to the fiscal advantages that come with investing in real estate investment trusts. REITs frequently categorize a portion of their payouts as a capital reimbursement. The type of dividend in question reduces the original sum invested. By adopting this strategy, you can reduce your current tax obligations and delay paying taxes on the capital gains from your dividends until you decide to sell your investments.

Other Perspectives

• Investors seeking global diversification might find REITs limiting if they are primarily focused on a single country's real estate market.
• Market conditions and economic cycles can influence investor attraction to property types, sometimes making certain categories less appealing despite an investor's initial preference.
• Net lease REITs might seem stable due to their structure, but they can still be subject to interest rate risk, as rising rates can increase borrowing costs and affect profitability.
• The tax advantages associated with REITs may be subject to legislative changes, which could reduce or eliminate the benefits that currently attract investors.
• Investors who rely on investment income for current expenses may find the reduction of their investment principal through capital reimbursements counterproductive to their income needs.
• The tax treatment of REIT dividends as a return of capital can lower the cost basis of the investment, which could result in a higher capital gains tax when the investment is sold.

The manual suggests considering both Enterprise Products Partners and Brookfield Renewable Partners as exemplary choices for Master Limited Partnership investments.

When evaluating investments in entities known for their favorable tax implications on earnings, investors must carefully assess the structure and inherent risks involved.

The author suggests Enterprise Products Partners (EPD) and Brookfield Renewable Energy (BEP) as two Master Limited Partnerships that cater to investors prioritizing income, offering substantial dividend yields from assets within the energy industry. Enterprise Products Partners is engaged in the natural gas industry, while Brookfield Renewable Partners focuses on generating energy from renewable sources. Despite this year's difficulties within the energy industry, Freeman Publications points out that there are still worthwhile opportunities for investors who are able to pinpoint them. EPD and BEP have structured their operations to be less affected by the volatility of oil and gas prices.

Practical Tips

• Set up informational interviews with tax advisors or experienced investors who specialize in tax-efficient investments. Prepare a list of questions that focus on understanding the structure and inherent risks of such investments. Ask about their experiences, what they look for in a tax-advantaged investment, and any red flags that might not be immediately apparent. Use the insights gained to inform your own investment evaluation process.
• Start a monthly investment club with friends or community members focused on the energy sector. This creates a shared learning environment where each member contributes a small amount of money and collectively decides on energy investments. It's a way to pool resources and knowledge, making it easier to enter the market without requiring large individual capital or expertise.
• Engage in energy-saving practices at home to reduce your dependency on oil and gas. Simple actions like improving insulation, using energy-efficient appliances, and adopting smart home technologies can lower your energy consumption. As a result, when energy prices are high, your reduced usage will help mitigate the financial impact on your household budget.

The publication emphasizes the approach of focusing on midstream Master Limited Partnerships as a means to lessen the effects of volatile commodity prices.

Enterprise Products Partners operates in the midstream sector of the natural gas industry. EPD plays a crucial role as a midstream operator, ensuring that energy producers have a reliable means of transporting and storing hydrocarbons, which serves as a safeguard against the volatility of commodity prices. BEP operates power generation facilities that utilize renewable sources and secures long-term agreements to provide clients with electricity. Freeman Publications highlights how both of these MLPs have solid financials, consistent dividend payout increases, and a favorable long-term outlook.

Practical Tips

• Start a monthly review of your investments to assess the impact of commodity price changes. This habit will help you understand how different sectors react to market shifts and can guide you in making informed decisions about rebalancing your portfolio. For instance, if you notice that your investments in upstream companies are suffering due to a drop in oil prices, you might consider increasing your stake in midstream MLPs, which may be less affected by such changes.
• You can deepen your understanding of midstream operations by tracking the performance of a midstream company like EPD. Create a simple spreadsheet to monitor their stock price, quarterly reports, and news releases. This will give you a practical sense of how midstream operations impact financial performance and the energy market.
• Advocate for renewable energy in your local community by encouraging local businesses and government buildings to consider renewable options. You could start a petition, write to local officials, or support local legislation that promotes the use of renewable energy sources.
• Explore community solar projects to benefit from long-term energy agreements indirectly. Community solar allows multiple individuals to benefit from a single, large-scale solar array, which often comes with long-term power purchase agreements. Look for local community solar initiatives and join one to enjoy the benefits of a long-term electricity supply agreement without having to manage it yourself.
• Engage in conversations with friends or family members who have investment experience. Ask them about their criteria for assessing a company's financial health and what they consider as solid financials. This can provide you with practical insights and real-world perspectives that can enhance your understanding of financial statements and investment principles.
• Consider setting up a mock investment portfolio if you're not ready to invest real money. Use an online stock market simulator to practice investing in MLPs and watch how dividend payouts increase over time. This hands-on experience can help you understand market trends and the impact of reinvesting dividends without any financial risk.
• Create a personal finance blog to document your MLP investment journey. Use the blog to track the performance of your MLP investments, share insights on why you believe in their long-term potential, and engage with a community of like-minded investors. This can serve as a motivational tool for you and provide real-life case studies for others interested in MLPs.

The publication emphasizes the benefits of employing closed-ended bond funds to enhance income.

Actively managed funds can generate attractive returns when their market price dips below the aggregate value of their underlying assets.

The author highlights that investors seeking income and returns that exceed typical bond yields might find closed-end bond funds to be a compelling choice. Investors face specific limitations when seeking to purchase stakes in funds with a fixed capital pool, known as closed-ended funds. The fund collects a specified sum of capital from contributors before it stops accepting further investments, which is the reason it's termed "closed-ended." The fund's marketable assets provide the manager with the freedom to concentrate on pinpointing favorable investment opportunities and to distribute funds effectively. Closed-End Funds offer the advantage that their market prices may greatly differ from their net asset value, which can result in considerable markdowns. Investors who prioritize income generation often find that they gain considerable advantages by obtaining dividends with yields that typically exceed those available through direct fund investments.

Practical Tips

• Create a simple spreadsheet to track the price-to-NAV ratio of funds you're interested in. Set up alerts for when the market price falls significantly below the NAV, which could indicate it's a good time to consider investing. This proactive approach allows you to act quickly on potential undervalued funds.
• Engage in paper trading, which involves recording investments in closed-end funds without actual financial commitment. Monitor the market and decide when you would theoretically buy or sell shares of a closed-end fund, noting how market conditions affect your decisions. This practice will give you a better understanding of the market dynamics that fund managers may consider when distributing funds.
• Engage with online investment communities to discuss and analyze closed-end fund markdowns. Platforms like investment forums or social media groups can be valuable for sharing observations and strategies with other investors. You might find that others have noticed markdown trends you've missed or can offer advice on how to capitalize on these price differences. Remember to approach such discussions critically and do your own research to validate shared insights.
• Develop a habit of conducting monthly 'dividend health checks' on your portfolio. Each month, take some time to review the companies whose stocks you own or are considering owning. Look beyond the dividend yield and assess the company's overall financial health, recent news, and industry trends. This will help you ensure that your income-generating investments are sustainable and not at risk of cutting dividends.

Investors must still conduct a thorough evaluation of different factors, including the historical track record of the manager, the composition of the investment portfolio, and the related expenses.

Believing that closed-end funds are a surefire and rapid source of investment income is mistaken. Investors must still evaluate the fund management's effectiveness by examining the history of dividend payouts, the diversity of holdings in the investment portfolio, and the fees tied to the fund. Some CEFs can be acquired at significant discounts to their net asset value, potentially offsetting the effect of their generally higher fees, thereby offering investors an excellent opportunity to capitalize on expert management without facing extra costs.

Other Perspectives

• The size and scale of past funds managed could differ from the current fund, which could affect the manager's ability to replicate past success.
• Evaluating the composition of an investment portfolio can be a complex and technical task that may require expertise beyond the capability of many individual investors, potentially necessitating reliance on financial advisors or analysts.
• In some cases, the impact of fees might be negligible compared to the potential returns of the investment, making the evaluation of expenses less critical.
• Some CEFs specialize in high-yield sectors or employ strategies that can lead to rapid income generation, such as investing in high-dividend stocks, high-yield bonds, or other income-producing assets.
• In certain market conditions, such as a bull market, even poorly managed funds might show a strong history of dividend payouts, which could mislead investors about the true effectiveness of the management.
• In certain market conditions, a diversified portfolio may underperform compared to portfolios concentrated in sectors that are outperforming the broader market.
• Some funds with higher fees may provide access to unique investment opportunities or asset classes that are not readily available elsewhere, which could justify the additional cost.
• Discounts to NAV can fluctuate, and relying on this factor alone for investment decisions may not be prudent; a discount can narrow or widen depending on various market conditions, which could affect the investment's performance.
• Acquiring CEFs at discounts does not guarantee that the impact of higher fees will be offset, as the discount may not be sufficient to cover the ongoing costs, especially if the fees are significantly higher than average.
• The performance of a CEF is also influenced by market conditions, which can overshadow the impact of expert management.