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October 23, 2014
Jason Fieber is a man with a goal: He wants to retire at 40. Just how he’s making that happen is the thrust of his site, Dividend Mantra. He spoke with us about making the goal and making it work.
The foundation for my strategy is twofold. First, I save more than 50% of my net income by living below my means. And I use that excess capital I can generate via savings for the second aspect of my strategy, which is investing. I generally invest $1,500-$2,500 per month in high-quality businesses through common stock. And these aren’t any old businesses, but rather companies that pay dividends. Furthermore, it’s not just that they pay dividends. But they regularly and reliably increase these dividend payouts. I’ll discuss that below.
My overall portfolio strategy is to build enough equity in enough high-quality companies through diversification so that I’m confident that I can pay for expenses with ongoing dividend income. My goal is to have investments in 50 different companies, and I currently have 49 equity positions in my equity portfolio. I want 50 positions so as to reduce risk of income loss in retirement. That way, even if a company cuts its dividend, I will only see a 2% income loss, which is manageable. My goal is to generate approximately $20,000 in annual passive dividend income by the time I’m 40, which I’m more or less on pace for.
I balance risk with reward by mostly staying conservative. If you’re looking to be as confident as possible in your ability to live off of your investment income in retirement, you’ll probably want to err on the side of caution. I typically invest in low-risk businesses where the odds are on my side in regards to these companies being around in 20 or 30 years and still paying out dividends. So you’ll see that most of my portfolio is allocated to high-quality companies like Johnson & Johnson (JNJ); PepsiCo, Inc. (PEP); and Chevron Corporation (CVX). And I balance that out with smaller positions in businesses that perhaps offer more current income growth potential, but with more risk, like Orchids Paper Products Company (TIS) and Kinder Morgan Inc. (KMI).
The questions you should be asking are really specific to your personality and situation. Can you handle a 100% loss on this investment? Would you want 100% of your net worth invested in this company? If you answer no to either of those questions, you’ll want to think hard as to whether you want even 1% of your money invested there. Furthermore, we all have different time horizons and personalities. Some can take on more risk and sleep at night. Others have nightmares if any of their money is fluctuating in value. As such, be honest with yourself and invest accordingly.
Two major flags I look out for are: too much debt and failing fundamentals. If a company has too much debt, it’s difficult to grow. Failing fundamentals involves looking at the financial statements. Is revenue growing? What about net income? Is this company more successful now than it was 10 years ago? Generally speaking, major companies don’t just fail overnight. It’s a long, steady march to their death. So you have to look at those trends with a long-term eye, and separate temporary setbacks from long-term failure.
Dividend growth investing is a strategy where one buys equity in businesses with solid fundamentals and competitive advantages. And these businesses pay dividends to shareholders out of their profits. So they basically share the wealth with the owners, which is, in my view, how it should be. If I were to own 100% of a business, I would want a share of the profits without having to sell shares (ownership). I would expect a paycheck, right? But dividend growth investing takes it a step further by seeking out companies that have lengthy track records of increasing these dividend payouts. And that is an attempt to kind of separate the wheat from the chaff. Because you can’t pay increasing dividends to shareholders for decades on end if you’re not running an increasingly profitable enterprise. Dividends are paid from cash with cash, so they’re the “proof in the pudding,” if you will. In my opinion, it’s a strategy fit for anyone that’s looking to have ownership positions in great businesses that pay out increasing cash flow.
My version of a golden goose is my portfolio. I actually liken it to a money tree. The tree is the portfolio and the branches are the individual companies. So my tree has 49 branches right now. And each of these branches produce fruit in the form of dividends. Even better, every year the fruit harvests should be more plentiful. My plan is to simply pluck the fruit and live off of that at 40. I don’t cut the branches, or the tree, because then I’d run out of fruit eventually. I just let these branches continue to produce more and more fruit. So that’s like a golden goose, where the golden eggs just keep on coming. Why sell off assets or portions of your portfolio, when the golden goose, if left alone, will likely spit out bigger eggs for the rest of your life?
For more of Jason’s insights, follow Dividend Mantra on Facebook and Google+.
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