The Little Engine That Could

Dividends are the Little Engine that can. Dividends can and do climb.

When I learned to read, one of the books I remember is “The Little Engine That Could.” Engines have always been something that amaze me. They can do a lot of work with little human effort. The engine in our car can move us from Madison to Milwaukee in a time that would have amazed the charioteers in the Roman army. A wise dividend growth strategy can be the engine that can climb the retirement income hill.

The Strategy In a Few Words

The dividend strategy I use for most of our investments is simple. It involves asking the same questions about each investment. There are a few fundamentals that I consider when I buy an investment. The first question is generally, “Does this investment pay a dividend?” The second is, “Is the dividend reasonably safe?” The third is, “Does this company or ETF provide increasing dividends?” Then, “Has the company ever reduced their dividend?” Most of the fundamentals can be determined in about two minutes on the Seeking Alpha web site.

Dividend yield is not the main criteria. Yield can be deceptive. Furthermore, a non-dividend paying stock is not a bad thing. I have investments that do not pay a dividend.

Finally, the business has to be one I understand. If I don’t understand the company or the way they can grow their business, then I proceed with caution. For example, I understand Target. Yesterday we went to Target and the parking lot was full. The aisles are full of product. The Target web site does the job for those who don’t want to go to the store. There are businesses I do not understand, but over time I have become more familiar with them. Oftentimes these businesses are more speculative in nature. For example, I understand the bitcoin far better than I once did, and now that I do, I won’t buy the bitcoin as an investment.

Different Types of Investments in a Graph

Whenever you see a graph of any set of numbers, always ask the question, “What is this telling me?” Perhaps even more importantly, “What is this not telling me that might change my perspective?” The following graph would lead you to believe that my approach for investing is the best one. However, there are a couple of things missing from this graph. First of all, the trend line for the S&P 500 is equal-weighted. This is not the same as the normal S&P 500 index. If Apple is part of an equal-weighted index of 500 stocks, then the investment in Apple is far smaller than it would be in the normal S&P 500 index. It is only 1/500th of the total investment in an equal-weighted index.

Equal weighted index information is not always a fair comparison. Be careful with graphs.

The other thing missing is a careful comparison of value stocks versus growth stocks. Many ETFs and mutual funds may perform better than the S&P 500 index, at least for some discrete time slices. The trick for growth investing is knowing what is growing and how long it will grow. Most funds fail miserably at this game.

Dividend Tracker Sanity Check

The iPhone app that gives me a quick look at the flow of dividends from our investments has some features that are new to me. Because I have a dividend growth focus in our retirement years, huge growth in the portfolio is no longer needed. If income can increase, then we don’t have to sell any of our investments to take care of expenses, larger purchases, home improvements, or travel costs. Perhaps you can benefit from these tools as well. If nothing else, you will see why I like the dividend growth approach to investing.

Dividend Tracker Projected Income

The first view is a summary view that helps me see the project income for the current quarter along with the anticipated dividends through the end of 2021. It also projects (guesses) the estimated income for the next twelve months. Please note that these numbers are not confirmed by actual dividend announcements. These are calculations based on anticipated behaviors of the investments currently in our portfolio.

Project income for Q1 2021 is reasonably safe. The other projections are rough guesses.

Dividend Tracker March 2021 Dividend Pay Dates and Income

The next two slideshow images show the days we will receive income on all six of our Fidelity Investments accounts. One shows the icons for the companies or ETFs paying the dividend. The other shows a reasonable estimate of the dollar amount we will receive each day. March is atypical. By that I mean it is a quarter end for dividends, so payments will be higher than they were in January and February.

Dividend Tracker Dividend Details for March 28-31

As you can see in the following screenshot, we hold shares of ETF VYM in three of our accounts. We hold shares of ARCC in five of our six accounts. However, the VYM dividend amounts are estimates. The reason is simple: Vanguard has not yet announced the dividend for Q1 2021. The dividends for ARCC are confirmed.

Confirmed income and estimated income for some of our holdings March 28-31

Dividend Tracker Increasing Dividends

Finally, I can see the impact of dividend increases based on a percentage and a dollar gain. The dollar amounts are for one quarter, not the increase impact for the entire year.

You can see the percentage increase of the most recent increase and one quarter’s additional income.

Summary Thoughts

It would be counterproductive for us to sell our investments during a market downturn. The only investments I consider selling would be those that suspend or reduce their dividends. The current price of the assets on the market generally do not impact the flow of dividends, assuming the payout ratios are within my 20-70% range. Even if a business has lower earnings to be paid in dividends, they generally don’t like to reduce or suspend their dividend payments unless there are no other alternatives. So the little engine that can continues to chug regardless of the stock market’s up or down behaviors.