Get Rich with Dividends: A Proven System for Earning Double-Digit Returns by Marc Lichtenfeld

Chapter 1 Why Dividend Stocks?

• According to Ed Clissold of Ned Davis Research, if you'd invested $100 in the S&P 500 at the end of 1929, it would've grown to $4,989 in 2010 based on the price appreciation alone. However, if you'd reinvested the dividends, your $100 would've grown to $117,774. Clissold says that 95.8% of the return came from dividends.
• If you reinvest your dividends for the next 10 years, while the dividend is increasing and the stock price is falling, you'll wind up with about $17,000. That's a 70% increase, or a compounded annual growth rate of 5.45%—despite a decline in stock price of 13%! But what if you invested in a 10-year treasury, paying 2.5% per year? After 10 years, you would get your $10,000 back, plus collect $2,500 in interest for a total of $12,500, or a compound annual growth rate of 2.26%. So in this example, your stock investment lost 13% in price yet still more than doubled the performance of a 10-year bond where your principal is guaranteed.
• Save money—try to save 10% of your income to put to work in dividend-paying stocks. If you can't save 10%, start smaller and work your way up.
• The 10–11–12 System is designed to generate 12% annual returns over the long term, cost next to nothing, be extremely easy to implement, and take up very little of your time over the many years you'll use it.

Chapter 2 What Is a Perpetual Divided Raiser?

• To qualify to be an S&P Dividend Aristocrat, a stock must meet these four criteria: Be a member of the S&P 500 index. Have increased its dividend every year for at least 25 years in a row. Have a market capitalization of at least $3 billion on the day the index is rebalanced. Trade a daily average of at least $5 million worth of stock for the six months before the rebalancing date.
• Dividend Aristocrats represent the bluest of the blue chips—big, solid companies with two-and-a-half-decade or longer track records of raising dividends.
• The DRiP Resource Center (http://dripinvesting.org) maintains a list called the Dividend Champions.
• The Aristocrats and Achievers lists are maintained by two institutional financial firms: S&P and Nasdaq. Both lists are reconstituted once per year. The Champions and Contenders lists are maintained and dutifully updated every month by David Fish of the DRiP Resource Center.
• As with most investments on Wall Street, the seemingly safer investment typically offers a lower yield and growth prospects—in this particular situation, I'm talking about dividend growth, but often share price growth is less for safer companies than those with more risk.
• Dividend Aristocrats are members of the S&P 500 that have raised their dividends every year for at least 25 years. Dividend Champions are any stocks that have raised their dividends for 25 consecutive years. Junior Aristocrats include companies that have raised their dividends between five and 25 years in a row.

Chapter 3 Past Performance Is No Guarantee of Future Results, but It's Pretty Darn Close

• So, in normal years, you have better than a 90% chance of seeing your Aristocrat company continue to raise dividends. And in years of financial collapse, roughly 80% of the companies continued to increase their dividends.
• You should still check in with each company from time to time and make sure the dividend is being paid, the dividend is raised annually, and no crisis is jeopardizing the dividend or the company's long-term health and prospects.
• In fact, if the market overreacts, that's positive for investors who are reinvesting dividends because they'll be able to do so at lower prices.
• After 38 years, the dividend cutters were worth only $82 after a $100 original investment, a compound annual growth rate of–0.52%. The nonpayers were worth a whopping total of $194, for a minuscule 1.76% annual return. Companies that paid a dividend but kept it flat were worth $1,610, or 7.59% annually. But the dividend raisers and initiators generated a compound annual growth rate of 9.84% and were worth $3,545.
• Historically, the S&P Dividend Aristocrats index has outperformed the S&P 500. Since inception in 1990, Aristocrats have returned 901% versus the S&P 500, which returned 469%.
• the Sharpe ratio measures how much return you are getting for the amount of risk you are taking.
  • The higher the number, the better the risk-adjusted return.
• The key to obtaining the incredible results shown in the two examples is to find companies that not only have track records of growing dividends every year but also raise dividends at a large enough rate so that they keep ahead of inflation and become wealth builders.
• You can't reinvest bond interest. Of course, you can buy another bond if the interest payment is large enough or buy a stock or any other type of investment. But it will take time and cost you money to make another trade. Conversely, if you're reinvesting the dividends from a stock, the dividend payment and reinvestment happen at the same time and for free with most brokers. It's one less thing that you have to think about, while your money compounds and grows.
• Great Depression and the Great Recession. So in the past, you've had a 9% chance of losing 27% of your money over 10 years investing in stocks or a 6% chance of losing 40% of your money investing in high-yield bonds.
• In fact, a psychological term, the Lake Wobegon effect, is a bias in which people overestimate their abilities. Investors are notorious for this trait.
• 60% of large-cap funds failed to return as much as the S&P 500.
• The numbers are even worse when you expand the time horizon. Over three years ending in June 2014, a staggering 85% of large-cap mutual funds underperformed. 77% of midcap funds missed their benchmarks as did a mind-blowing 92% of small-cap funds.
• Analysts would wait until stock prices rose and then forecast that stock prices were about to rise. After interest rates fell, analysts would forecast that interest rates were due to fall. Analysts are terribly good at telling us what has just happened but of little use in telling us what is going to happen in the future.5
• The remedy is to not be an active stock picker. To be successful, buy stocks that fit the criteria in this book, and leave them alone for 10 or 20 years.
• Trying to trade in and out of the market is a fool's game.
• Do you really know when Intel is going to miss earnings or when the market is about to tank? Let me answer that. You don't. Neither do I. And neither does that lady from Goldman Sachs or that guy from Fidelity.
• Interestingly, overconfidence tends to be seen more often in companies with lower growth and lower cash flow, exactly the kind of companies where a CEO should not be overconfident.
• Companies that have a track record of increasing their dividend every year tend to continue raising it every year.
• Reinvesting dividends protects you and allows you to profit in extended bear markets.

Chapter 4 why Companies Raise Dividends

• long-term investors should have more confidence in a company that pays dividends as it has more permanent operating cash flow than a company buying back shares, which is manipulating the share count to boost the EPS and possibly the price of the stock.
• Return on equity (ROE): A ratio that represents the amount of profit generated by shareholders' equity. The higher the ROE, the better. The formula to calculate ROE is: net income/shareholders' equity. Example: A company has net income of $10 million and shareholders' equity of $100 million. Its ROE is 10%.
• Perhaps the most famous cash acquisition flop was the 1994 purchase of Snapple for $1.7 billion by Quaker Oats. At the time, Quaker Oats was a publicly traded company. Most on Wall Street believed that Quaker was overpaying by $1 billion.
• Quaker sold Snapple for just $300 million, losing $1.4 billion in three years.
• Activist investor: An investor that owns 5% or more of a company's outstanding shares and files a 13D document with the Securities and Exchange Commission. The 13D lets the company and the public know that the investor may demand or is demanding changes from management or the board.
• Investors who buy stocks with 4%+ yields that grow every year by 10% are typically doing so because of the income opportunities. As long as the dividend program remains intact at the levels the investors expect, they probably will stay quiet, let management do its job, and collect dividend checks every quarter.

Chapter 5 Get Rich with Boring Dividend Stocks (Snooze Your Way to Millions)

• if you bought a stock with a 5% yield and 10% dividend growth rate, and the stock price increased just 1% per year, the stock would be worth over $145,000 after 20 years. However, if the stock price increased 5% per year, you'd wind up with about $128,000, a lower value.
• Even if your stock doesn't move much over the years but continues to raise the dividend at a healthy clip and run a successful business, you shouldn't worry about it.
• Beta: A measure of volatility or risk. It is the correlation of a stock's or portfolio's change in value in response to a move by the overall market. A stock with a beta of 1 will move exactly the way the broad market moves. A stock with a beta of 0.5 would result in a price change that is half of the market's. A stock with a beta of 2 would be double the market's move.
• According to the study, $1 invested in 1968 in the quintile of lowest-volatility stocks was worth $59.55 in 2002. This contrasts with a result of just $0.58 for stocks with the highest volatility.
• I absolutely love researching tiny biotech companies that could be the next 5 or 10 bagger (a stock that goes up 5 or 10 times the original investment). But those trades are for the money that you'd take to Vegas. That's not investing unless you really know something about the company that Wall Street does not. And even then, they're a big risk.
• So although this chapter is all about the ease of the system, you can step on the gas once in a while with any extra funds that you can afford to invest. I strongly encourage you to do so when you're able.

Chapter 6 Get Higher Yields (and Maybe Some Tax Benefits)

• Mutual Funds
  • The price of the fund fluctuates exactly with the price of the assets in the fund.
• A closed-end fund is essentially a mutual fund with an important difference: It trades like a stock. Its price is determined by supply and demand for the fund itself, not entirely by the price of the assets.
• Premium: The price an investor pays that is higher than the actual value of the fund's assets. Discount: The price an investor pays that is lower than the actual value of the fund's assets.
• When researching a closed-end fund, you always want to know whether it is trading at a premium or discount to its net asset value (NAV)—the value of the assets in the fund.
• Book value per share: The amount the company would be worth if its business were liquidated. It is calculated by subtracting liabilities from assets and dividend by the number of shares outstanding. An easier way of doing it is dividing shareholders' equity by number of shares outstanding.
• Wall Street is not in the habit of giving away free money. If a fund has a yield of 14% when 10-year Treasuries are paying 2.5% and a strong common stock yield is 4%, you should have a clear understanding of why the fund's yield is so high. Are the assets distressed? Is the dividend sustainable? Will the fund company remain solvent?
• MLPs
  • These distributions are treated as returns of capital by the Internal Revenue Service (IRS), so investing in MLPs can be a tax-deferred strategy for generating income.
  • The distribution most MLPs pay is usually 80% to 90% return of capital.
• Dividends and has raised its dividend for 37 consecutive years. However, there are several MLPs that are also Perpetual Dividend Raisers. Plains All American Pipeline (NYSE: PAA) has raised its distribution for 13 consecutive years, and TC Pipelines (NYSE: TCP) has a 15-year streak of annual distribution increases.
• REITs
  • Real estate investment trusts (REITs) are also very popular with income investors.
  • REITs do not have the same tax implications as MLPs. In an MLP, you are considered a partner in the business. In a REIT, you are a shareholder.
  • A change in interest rates may make borrowing money more difficult for the REIT, lowering its growth rate, or making it tougher for its tenants to pay the rent.
• Perpetual Dividend Raisers include Health Care REIT (NYSE: HCN),
• years—and Tanger Factory Outlet Centers (NYSE: SKT),
• BDCs
  • A business development company (BDC) is a publicly traded private equity investment firm.
  • Usually you need boatloads of money or connections to get into a private equity investment.
• In 2004, venture capitalist Peter Thiel invested $500,000 in Facebook (NYSE: FB). For his half-a-million-dollar investment he received 10.2% of the company.
• BDCs that specialize in making loans to companies may have more reliable dividends as they can pretty much project what their income stream will be from loan payments (assuming the default rate isn't higher than expected). So in that case, you may have less upside but more consistency when it comes to income.
• New Mountain Finance (Nasdaq: NMFC) pays a 9.2% yield.
• You Don't Have to Play Mahjong with Mrs. Zuckerberg
• For example, Main Street Capital Corporation (Nasdaq: MAIN) is a $1.4 billion market cap BDC that, as of October 2014, paid a yield of about 6.7%.
• Many BDCs pay a robust yield, but as with any investment, there is no such thing as a free lunch.
• Preferred Stocks
• Preferred stocks are sort of a combination of a bond and a stock. They pay a higher dividend,
• Financial institutions make up about 85% of all preferreds,
• Par value: The face value (price at which it was first offered) of a bond or preferred stock.
• Closed-end funds are mutual funds that trade like stocks.
• Return of capital is a cash distribution that is tax deferred and lowers your cost basis.

Chapter 7 What You Need to Know to Set Up a Portfolio

• You'll want industrials, technology, energy (often master limited partnerships [MLPs]), REITS, health care, consumer staples, and a host of other sectors.
• The Oxford Income Letter Portfolio—An Example
• For more information on the portfolios, please visit www.oxfordincomeletter.com or www.oxfordclub.com.
• However, I wouldn't invest that way. Deciding which stocks you're going to buy based on which week of the quarter they happen to pay out their dividend is not a smart thing to do.
• You want to pick the very best stocks that offer the juiciest yield with the greatest degree of safety and opportunity for dividend growth.
• In September 2014, the S&P 500's dividend yield was 1.86%. Over the past 50 years, the average yield has been 1.98%.1 Generally speaking, I look for companies whose yield is at least one and a half times that of the current S&P 500's and preferably at least two times.
• Payout ratio = Dividends paid/Net income
• Depreciation: An accounting method that lets a business expense the cost of equipment over its useful life.
• Example: The trattoria buys $1 million worth of equipment and pays for it in the first year. If the equipment should last 10 years, we can take $100,000 as an expense off our profits every year for 10 years, even though we paid the $1 million in the first year.
• You can see that while the net income that will be reported to the government for tax purposes is $100,000, the cash flow—the amount of cash the business actually generated—is $200,000.
• When I look at the payout ratio, I calculate it using free cash flow or cash flow from operations. It's a more accurate representation of whether a company will be able to pay its dividend than using earnings.
• Net income is something accountants dreamed up. Cash flow is something businesspeople rely on.
• As I mentioned, since stock prices follow earnings over the long haul, you, of course, want to be invested in a company with earnings growth. But for the purpose of analyzing the dividend and its likelihood of being cut or growing in the future, cash flow is a more reliable indicator.
• DRiP Resource Center (http://dripinvesting.org), which publishes a list of all the stocks with a minimum of five consecutive annual dividend raises.
• There's another column here that may be useful: the column with the header 5/10. This is the ratio of the average annual dividend raise over five years versus 10 years. This shows whether a company has been raising the dividend more over the past five years than it has on average over 10. Think of it as a momentum indicator for dividend raises. So, in Becton, Dickinson's case, if you divide the 5-year average of 12.7 by the 10-year average of 17.6, you get 0.694. Anything over 1 signifies a 5-year average higher than the 10-year average. Below 1 and the 5-year average is below the 10-year—perhaps signifying that the dividend increases are slowing down.
• why the annual dividend raise had slowed to a crawl. Is it a new policy? Is the payout ratio too high? Has cash flow dried up?
• A free website, www.dividata.com, offers dividend history data as well.
• generally speaking, if you want an idea of which direction dividend growth is moving and how much growth you can anticipate, take a look at the last 1-, 3-, 5-, and 10-year averages for a ballpark figure.
• As you can imagine, management rarely agrees with this opinion, but sometimes when the clamoring gets too loud, it throws investors a bone with a special dividend.
• Also, if you're calculating the payout ratio, be sure to remove the special dividend from your equation.
• One last thing, though: Do look at the total dividends paid, including the special dividend, to make sure they don't exceed the company's cash flow.
• Make sure you know where the cash is coming from to pay that special dividend.
• When looking at payout ratios, use cash flow.

Chapter 8 The 10–11–12 System

• The three important criteria in picking dividend stocks that, in 10 years, will generate 11% yields and 12% average annual total returns are: Yield Dividend growth Payout ratio
• You can play with the dividend calculator, which is available for free on the Get Rich with Dividends website at www.getrichwithdividends.com, and change the variables to see how the investment will perform when the inputs change.
• Free cash flow: Cash flow from operations minus capital expenditures.
• In the current low-interest-rate environment, a 4.7% yield on a stable company is pretty solid. You can go down to 4% if you need to, especially because as investors have started searching in earnest for yield, they have been buying up the dividend-paying stocks, sending the yields lower.
• 4.7% is not a hard-and-fast rule, but it's above the historical average annual U.S. inflation rate of 3.4% since 1914.
• Certainly look for a 10% growth rate, but don't sweat it if you can't find exactly what you're searching for. Since the growth rate will fluctuate depending on management's decisions, what it will be is really not completely knowable. The starting yield is certain, however, and the past payout ratio that signals whether the dividend is safe is also known.
• Annual stock price appreciation: 7.84% (historical average). Annual dividend growth rate: 10%. Necessary starting yield: 4.7%.
• To illustrate the power of compounding, even in a bear market, look at how many shares you'd have at the end of 10 and 20 years based on the first example, where the starting yield is 4.7% and the dividend grows 10% per year. (See Table 8.8.).
• At least once a year, look at your stocks to see if any of the following has occurred: Increased payout ratio Decline in cash flow, earnings, or sales Change in dividend policy
• Try to invest in stocks with a minimum of a 4% yield, 10% annual dividend growth, and a maximum payout ratio of 75%.
• Calculate the payout ratio based on cash flow from operations or free cash flow.

Chapter 9 DRIPs and Direct Purchase Plans

• Flexible Reinvestment Program (FRIP). You can't automatically reinvest your dividends in the stock that pays them. Rather, the dividends can be reinvested in any eligible stock or exchange-traded fund (ETF), including those that don't pay dividends.
• You can also buy more stock directly from the company if it offers a direct stock purchase plan (DSPP).
• Healthcare Realty Trust (NYSE: HR), a real estate investment trust specializing in health care, charges no fees or commissions for direct purchases or reinvestment of dividends and allows you to reinvest the dividend at a 5% discount.
• Some companies offer discounts of as much as 5% on reinvested dividends. In those cases, it may be worth participating in a DRIP—but be sure that other fees don't eliminate the benefit of the discount.