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dividends

Dividend Investing

DGI Portfolio Updates

by Yoda

I have been tracking my Dividend Growth Investing (DGI) portfolio for 3 years now & publishing since 2. I check up on my portfolio once every quarter. I wanted to present it in a way that is easy to understand and helps look at the benefits of dividend investing over the long term. Presenting a timeline of dividends my DGI portfolio kicks every quarter.

Feel free to click on any event on the timeline to read more details about that quarter. I also created a month over month dividends over time graph. It helps me visualize compounding effect of my DGI portfolio. You can see how dividends have increased every month over month, every year like clockwork!

dividends over time 2020

 

Here is the latest sector breakdown of my DGI portfolio holdings at end of 2020:

dgi portfolio sector breakdown

Check out how you can create your own dividend tracking google sheet with graphs and charts shown here.

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Dividend InvestingInvesting

How to make a dividend tracking spreadsheet

by Yoda

I am sure you would agree when I say tracking your dividends and portfolio performance is one of the most challenging aspects of dividend investing. Most excel formulas work for few months before having issues with data providers leaving you helpless.

What if we get the data directly from the source? IEX is an exchange that provides an Application Programming Interface(api) to get dividend data for free and reliably.

In this blog post we will make use of a google sheets, latest IEX cloud api and google finance api to create your own dividend tracking sheet.

So head over to google sheets and start a new sheet to follow along.

Just give me your version of dividend tracking spreadsheet

FYI if you do not want to go through the whole process of creating a new sheet from scratch, adding formulas, formatting it etc,  you can just go to the last section and download my own google sheet. Then you can use it to do dividend tracking of your own portfolio. For other’s who want to be more adventurous, please follow along.

Stock Data sheet

Let’s first work on the Stock Data sheet, this sheet will have info like stock ticker, current price, current yield, yield on cost, quantity you own, etc. So, on the top row, let’s have these headers on a new google sheet: (I added things like Ticker, Name, Quote, Avg Cost per Share, Cost Basis, Dividend Yield, Dividend income, PE ratio, eps etc.)

dividend tracking sheet1

Our next step is to get data populated in this sheet. in order to do so, we will make use of google finance function in sheets. Basically syntax for getting anything from google finance function  is:

GOOGLEFINANCE(ticker, [attribute], [start_date], [end_date|num_days], [interval])

So, the ticker name is mandatory and after that you can have 1 or more attributes.

  • Going back to our sheet, you need to populate the column A with ticker of your stock. To populate its name, you can use =GOOGLEFINANCE(A2,”name”) under B2 shown belowdividend tracking sheet 2
  • Similarly, you can use formulas like given below to get other details about the respective stock:
    Function & Syntax Description
    =googlefinance(A2,”price”) To get the latest price
    =googlefinance(A2,”pe”) To get the Price earnings ratio
    =googlefinance(A2,”eps”) To get the earnings per share
    =googlefinance(A2,”high52″) To get 52 week high price
    =googlefinance(A2,”low52″) To get 52 week low price
    =googlefinance(A2,”marketcap”) To get market cap of the stock

    After I fill some of these values for my first row, I get the following:

    dividend tracking sheet 4

  • When it comes to quantity purchased, avg cost basis per share, total cost basis, those depend from person to person and these values can easily be obtained from your brokerage account. After you get those you can very easily fill the following using formulas mentioned here:
    Column in Excel Formula
    Market Value =C2*D2
    Change $ =G2-F2
    Change % =(H2/F2)*100
    dividend tracking sheet 5

    After that, our sheet looks something like this:

  • Now coming to dividends, I have observed Google’s function is not that great. Its hit or miss. Sometimes it shows dividends sometimes it doesn’t. However, I found another api we can use to get the data related to dividend columns which is more reliable than Google’s api. Its called IEX cloud API.  Up until mid June 2019 they used to allow to get the dividend data for free without any registration. But now they require you to register and get an api key.
  • So, lets try to do that. Head over to the IEX Cloud registration page and create account. iex cloud register
  • Next choose the START plan which is free. It provides 500K requests to the API every month which is more than enough for a pretty big portfolio. Even if you request to get data from it multiple times a day every day for the whole month.  iex cloud pricing
  • Verify your account from your email and then login to the iex cloud api account. After verification, log on and from the home page of iex cloud api account, head over to API Tokens section as shown: iex cloud api home
  • Under the API Tokens section you will find your key which you can use in google sheets. Copy the publishable token as shown using the copy button. iex cloud keyNow here I have 3 options to get dividend amount into your sheet:

Current Dividend (Easy to setup)

In this method, you will need to copy this code and paste it into the script editor of your google sheet as shown:

dividend tracking sheet 6

script dividend sheet

Once you do this, you are mostly done. The formula to use this script in a cell to get the dividend amount is:

=if(isblank(A11),,GETDIVIDEND2($A11,”xxxx”))

enter formula

calculated dividend

Again, you will need to replace the xxxx with your personalized api key from the last step. A11 will be the field of the ticker you are trying to get dividend info for. This should get you the current dividend for most US listed stocks. For e.g. for AAPL this will return the current latest dividend.  I wrote a function that uses your key to get the dividend from IEX cloud api. Then use that and the dividend frequency to get the annual dividend amount.

Sometimes a company has just announced the most recent raise and not paid it out. In such cases, IEX returns the trailing 12 month dividend. For some stocks like BUD which pays out twice a year and has payouts where one is larger and next is smaller, this might not work. For these 2 use cases, you can take a look at the next method. Please let me know if you come across any other stocks for which this script fails below in comments. I will try and improve the script code to account for any issues you may notice. This particular formula usage is shown in line 2-4 of my sheet if you download it. Do remember to replace the xxxx with your API Key, since IEX no longer allows users to share the same key to get this data.

Current Dividend Scraping Finviz (Easiest)

In this method, we will just use the IMPORTHTML function google provides. We will then get the dividend paid out annually from a finance website and populate it in appropriate column as shown. We use the following formula in this approach:

=REGEXEXTRACT(SUBSTITUTE(index(IMPORTHTML(“http://finviz.com/quote.ashx?t=”&A3,“table”, 10),7,2),“*”,“”),“(.*) .*”)

sometimes the formula doesn’t get copied properly. So try to enter this formula manually in your google sheet.

where A3 has the ticker of the stock. I have used this in the row 5-8 of my google sheet provided. You may use this method whenever the first one fails(like in case of stocks like BUD). This method also gets the latest forward looking dividend yield just like the last one.

Current Dividend Scraping Stock Analysis (Easiest)

In this method, we will just use the IMPORTXML function google provides. We will then get the dividend paid out annually from StockAnalysis.com and populate it in appropriate column as shown. We use the following formula in this approach:

=IMPORTXML(“https://stockanalysis.com/stocks/”&A9&”/dividend/”,”//*[@id=’main’]/div[2]/div/div[2]/div[2]/div”)

sometimes the formula doesn’t get copied properly. So try to enter this formula manually in your google sheet.

where A9 has the ticker of the stock. I have used this in the row 9-12 of my google sheet provided. This method also gets the latest forward looking dividend yield just like the last one.

You can get dividend for etf’s based in USA using the below formula with slight tweaks: =IMPORTXML(“https://stockanalysis.com/etf/”&A7&”/dividend/”,”//*[@id=’main’]/div[2]/div/div[2]/div[2]/div”)

If you want to get dividends for stocks listed in TSX try the formula below: =IMPORTXML(“https://stockanalysis.com/quote/tsx/SU/dividend/”,”//*[@id=’main’]/div[2]/div/div[2]/div[2]/div”)

You can use any of the three methods for any number of rows in your google sheet depending on what works or doesn’t. I will make sure at least one of the methods mentioned above works at any given time.

  • With the information about dividend per share, you can easily get information about columns on dividends as follows:
    Column Formula
    Annual Div Income =D2*J2
    Yield on Cost =(K2/F2) format as percent
    Annual Yield =(J2/C2) format as percent
  • In addition to this, I have 2 columns that I added at the end, Actual Shares Purchased & Actual Cost Basis. These are completely optional and will be used to calculate your real returns on original investment. So, if you do DRIP, this will be very helpful. These columns must be filled manually, and you need to go to your brokerage website to find this info. For instance,  I have some WFC stock which I bought 3-4 years back and turned DRIP on. Now last year I bought some more WFC stock out of my own pocket so my WFC holdings in my broker account look like this:dividend tracking sheet 9So, what I know is all my DRIP transactions are anything with fractional shares in quantity column and my whole number quantity transactions are made with actual out of pocket money. Therefore, I just add up the quantity columns for whole numbers to get the Actual Shares Purchased column. I add up the cost basis for those transactions to get my entry for the Actual Cost Basis column. Important thing to remember is you must update these 2 columns any time you increase position in a stock with actual money or sell some of your positions. Those transactions will affect values in these 2 columns. When you buy any new stock, value will be easy to calculate first time. It should be same as D(quantity) and F(Cost basis). So, ideally you shouldn’t be trading much and this update will be very rare.
  • And now, our first row is completely done:dividend tracking sheet 10
  • Now, in order to add new stocks, your work keeps getting smaller and easier.  For instance, let’s add some tickers like BLK, DIS, MO, PSX,SO,QCOM, VFC, ZBH etc.dividend tracking sheet 11
  • After adding the tickers from your portfolio, all you need to do is drag down from bottom right of the cell of first row in a column. That will basically call the same formula for that column for all your tickers. I have highlighted the columns for which you can do this. After doing it for all these columns here is what we get:dividend tracking sheet 12
  • Now enter information in columns D, E, F, P,Q and R in that order. Rest of the columns you can again drag down as show in previous screenshot. So now we are starting to get all of our data in the stockdata sheet.dividend tracking sheet 13
  • Now, lets add some totals and calculate returns and format the table to get some colors in:dividend tracking sheet 14Notice how the return incl. dividends is a tad bit higher mostly because of some highlighted rows where I assumed, I bought some shares after receiving dividends using DRIP. Please also note these are just numbers I made up, they might not be factually correct, but this is just to give an example of how you can use the last 2 columns in the sheet. This is the end to the stockdata sheet for our dividend tracking.

Pie Chart showing your Sector allocation

Now that our stockdata sheet is ready lets do some graphs. Let’s say you want to be aware of which sectors you are allocated into and how much of your total portfolio.

  • Lets add a new sheet called sectorallocation and add the sectors you want to track as shown:dividend tracking sheet 16
  • Now, under the percentage column, in order to get the correct allocation we are going to add this formula for utilities := ((SUMIF(StockData!P2:P12,”Utilities”,StockData!G2:G12))/StockData!G13)*100
  • What it will do is, see the sectors we assigned in our main stockdata sheet for any of the rows say Utilities, if so add the values in those rows up and divide by the total value to get the percentage allocated to that sector. Similarly, do this for all the other rows. You can copy the formula, but you will need to replace the Utilities with the sector of the row. So, we get this:dividend tracking sheet 15
  • Now, lets add a pie chart to the sheet and add your data ranges from A2:A11,B2:B11. After that, we get the following:dividend tracking sheet 17
  • At the end you get a pretty nice pie chart showing your allocation in different sectors. This can help you be aware in what sectors you are more exposed and if you decide to buy a new stock, you can see what sector you are very less exposed to and maybe look at a company there.

Monthly dividend tracking sheet

So far, we created our stockdata sheet which shows our yield on cost, annual dividends, return with and without dividends etc. Our sectorallocation sheet shows how much or less are you exposed to various sectors. In addition to these, let’s create a sheet to track our monthly dividends. This sheet will help us to create more data and understand our monthly cash flows from dividends. It can also eventually allow you to plot your dividend gains over few years/months of investing. You can see yourself on your way to living off dividends.

  • To do this, add a new sheet and enter the columns as shown till December:dividend tracking sheet 19Now for the first 2 columns, get the data from your StockData sheets and populate them. Once that’s done, now you need to manually fill in what dividends you got every month from different stocks. This process can be a bit time consuming. Although, you should be able to get all the data from your broker. On my broker’s website, I just login and go to the transactions screen. Then filter to only show dividend transactions. This allows me to go through a few months of transactions at a time and fill this sheet quickly. In addition, we can also enter information for 2018 and previous years if possible, in new sheets. However, this depends on if you can get the data from your broker for previous years. Then using that data, we can add some YOY(Year Over Year) percentage increases for your dividend stocks as shown:dividend tracking sheet 20
  • Now, this gives you better idea of how fast your dividend is growing every month. You can even play around with some extra rows and add Year end increase in dividends year over year for the full total etc. Now lets create a graph to show dividends received form companies in Q1 2019. Lets add a bar chart to the sheet for 2019 Monthly dividends and use the following data ranges:dividend tracking sheet 21
  • Again, you can play around with the data ranges to change this chart from quarterly to annual ranges. That way you can get different type of graphs. Please feel free to check out my real money dividend portfolio which uses this google sheet in practice.
dividend tracking sheet main
dividend tracking sheet 22
Check out this article on creating your own dividend tracking sheet using IEX and google api's. Makes it look pretty easy! Click to Share

Dividends over time sheet

If you have been using this dividend tracker for a couple of years, you will have enough data for a new chart. You can track your dividends month over month and year over year. This allows us to see the dividend compounding effect over long term.

  • Add a new sheet titled MonthYearSumm.  Next we will just copy data from our other sheets like 2020Monthly, 2019 Monthly into the following format: dividends over time table
  • Again remember, you need to copy the monthly dividends you made over past years in the table above. Once you have filled in the table, you can then create a new chart of type column chart with no stacking. dividends over time chart setup
  • You can use the customize tab to change look and feel on the chart. Once finished, the new chart looks like this: dividends over time graph
  • As you can see, this chart allows you to look at your progress over time. You can see your dividends increasing month over month, year over year. Really gives perspective into long term compounding effect of dividends if you stay the course.

OK this is great! Now give me this sheet!

I do realize making your own excel from scratch can be daunting even with the above given steps. So, in case you just want a copy of the sample google sheet. Please enter your email below and I will send you the sheet with easy to follow instructions on how you can set it up for your portfolio. Again, I think if you are buying individual stocks for dividends, its utmost important to track and measure your performance. So you know how you perform against the market and can see the effects of compounding in real time. I usually update my personal sheet once a quarter and publish my quarterly results on this blog.

If you liked this article, it will be great help if you can share it with your social circle using any of the share buttons on the post.

Also check out how I get my financial news using a free Barron’s & wsj subscription.

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Dividend Investing

Quarterly Dividend Update: Q3 2020

by Yoda

Dividend Investing for me is a long-term strategy. I like to buy great companies at good value based on historical metrics and dividend safety. Hold them for a long time, re-invest dividends and wait for compounding to do its magic. Most countries are trying to open their economies and putting COVID in rearview mirror. However, cases in most places are increasing. A US election is also looming which could cause wild swings in the market. Despite all this, Q3 2020 just saw the market going up and up backed by the ever growing tech stocks. However I haven’t changed my plan at all. I am planning to keep buying stocks and ETF’s.  Here is my Q3 2020 quarterly dividend update:Q3 2020 Table

Total: $753 for Q3 2020 (up 28% from Q3 2019 & up 3.5% from Q2 2020)

Here is a graphical view of the same data:Q3 2020 graph

Check out my and download/make your own dividend tracking sheet here and create awesome graphs as above for free.

I recently added a new chart to my dividend tracking sheet. It allows me to see my dividends grow over long term. I have been tracking my dividends for last 3 years. Here is the result so far till Q3 2020.

dividends over time

As you can see, dividends have kept on growing month after month, year after year for almost 3 years now! You can see the dividends compounding very clearly in this graph.

My Buys in Q3 2020

I added to my existing open positions which I thought were at attractive valuation. I also added a new stock to my portfolio.

  • Added very little to my Abbvie(ABBV) position.
  • Added to my Cisco Systems Inc. (CSCO) position. You can read more about my complete research on Cisco Systems here.
  • I added to my position in Kontoor Brands (KTB). They had a better quarter than the last one. Plus the management is planning to give an update on the dividend reinstatement at end of Q3. This is still a long term hold for me. Full research here. I also started selling covered calls for income on side using my KTB position.
  • Bought some more in Monmouth Real Estate Corp. (MNR). This is a REIT that is focused on industrial properties. They only have investment grade clients like FDX, AMZN, KO, HD, RTX etc. They even collected 98-99% rent during the last 3 months. Bought some at starting yields of 6.9 % and then added a bit more during the quarter.
  • I also added to my position in Store Capital (STOR). Its a REIT company that rents individual standing real estate properties to a variety of tenants.  They collected only 68% of rent in April but it has increase to 86% in last month. They also did not cut dividends during this time which bodes well for them.
  • Added to my position in Wells Fargo (WFC) in 20 & 30’s.
  • I added to my position to V F Corp (VFC). They have not yet cut any dividends. Plus historically VFC has been a very acquisitive company and have a very long history of paying dividends.
  • Also added to my position to VTI. Not as much as I should have, but I will continue doing this.

I am projecting an increase to 2900$ in forward annual dividends as compared to 2103$ I made in 2019!

My Sells in Q3 2020

NONE! I hope to continue doing this. The less I touch my portfolio, more time it gets for compounding and growing.

Thoughts about Q4 2020

Upcoming quarter will have Q3 earnings from most companies in my portfolio. We also have the US elections coming up at the end of the year. Elections have historically not been the best year for returns. Seeing as we are already positive so far this year, it will be interesting to see how much volatility we have in the last quarter. I know one thing for sure: I will keep buying stocks and ETF’s during this quarter.

Check out my complete dividend portfolio here.

Click this link for my 2019 Annual dividend income update.

Dividends stocks do come with some risk, but with precautions you can avoid the risky one’s and choose the best dividend paying/growing stocks for your portfolio. I prepared a guide where I discuss some key ratios, fundamentals, some important resources to look at while deciding to buy a dividend stock. Also find out how to get free access to Morningstar, Value Line, workaround paywall behind popular news sites like Seeking Alpha etc.  Consider signing up for free instant access to the pdf version of the insights into dividend investing.

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Dividend Investing

Selling covered calls for income for beginners

by Yoda

Curious about selling  covered calls for income ? Not sure what are options, what is a call and where to get started? In this article we will discuss what are options contract, what is a covered call and how to sell covered calls for income. We will also look at risks associated with such a strategy.

What are Options?

An option is a contract between 2 parties. There are 2 types of options contract:

Call Options

Buyer of an option gets the right (not obligation) to buy the stock at a particular price (strike price) by a date(expiry date). On opposite side of the trade, seller of call option has an obligation to sell the stock at strike price by that date.

Let’s say stock XYZ is trading at 50$. Now, call buyer might expect the stock to go to 55$. But, he doesn’t want to pay 100*50(5000$) to own stock and wait to get to 55$. So, they will look for a call option on the stock. Let’s say its for 52 strike price for .50 a contract (each contract is 100 shares), 1 month expiry into future. So, they will end up paying about 100*.50 = 50$ for the option on stock XYZ. Option buyer was able to buy the right to buy these 100 shares of XYZ for 50$ in commission/premium. Commission goes to the seller of the option. 2 things can happen till expiry:

  • If at any time until expiry, price of XYZ reaches 52$ (strike price), buyer will be thinking his bet is turning true. When it reaches 52.50 (his commission plus strike price) then any price above it is pure profit on the stock. So, buyer can exercise their right to buy XYZ from seller at 52*100= 5200. Sell it all to book their profit. In such situations, contract is In The Money (ITM).
  • Price stays below 52$. In such cases, buyer still has the right to buy the sellers stock for 52*100=5200$. But, if they can get it for 51.99*100 = 5199, why would they exercise their call option? Thus, the contract option expires worthless and is Out of The Money (OTM).

selling covered calls for income diagram

Put Options

Gives the buyer of the option contract right (but not obligation) to “sell” a stock at a specified price(strike price) within a fixed period of time(expiry date). On the other side of this trade, the put seller takes on the obligation to buy that stock at the strike price. The put seller also gets some commission to take on the obligation for the put option. I won’t go into more details with an example since we only need to learn about call options for covered call.

What is a Covered Call?

Covered call is just a simple call option in which the seller already owns the underlying stock. As the call option seller has the obligation to sell the stock, the seller has two options: either sell the call option first and think about buying the stock later when the buyer of the call exercises their right to buy the stock at strike price(naked call). Or else, they can first buy or have an existing position of a stock and then sell the call option based on that. In this case, they already have covered the part of them being able to sell the stock at strike price if the buyer exercises their right.

covered vs naked call difference

Advantages of Covered Calls

  • Income! You get to keep the premium/commission from each covered call you sell. It also helps you reduce your cost basis. You can sell them every month or 45 days to boost your annual returns.
  • Exiting a stock position. Lets say, you have 100 shares of stock ABC and its currently trading at 39. You want to exit out at 41.50. You can look for a call around that strike price. This way, you make some commission by selling the call plus also get exactly 41.50*100 $ for your stock. Obviously for this to happen your stock needs to go at that price and call exercised. If that doesn’t happen you can always sell another call and collect the commissions waiting for it to reach that strike price.

Disadvantages of Covered Calls

  • You cap your profit potential. Speaking of the previous example, if the stock goes to 45 by expiry, you still get 41.50 for your stock and the call buyer will probably buy your stocks and make profit on the difference.
  • During the period between your selling of covered call and its expiry, you cannot trade away the underlying stock. Since the call buyer has the right to those stocks, they can buy it form you anytime before expiry.
  • You might end up selling a stock you are long on.

Selling Covered Calls for Income

Now let me walk you through the process of selling covered calls for income on an existing stock position via Schwab.

  • Make sure you can trade options on your broker’s platform. Different brokers have different ways to approve you. Schwab’s application can be found here. Each broker has levels of access that comes with options. First level is enough at most brokers for selling covered calls for income. Here is an explainer on Schwab’s levels. schwab options levelDepending on your broker, it will take 1-3 business days for them to approve you for selling covered calls for income.
  • Next, search for the stock for which you are selling covered calls for income. Make sure you have at least 100 shares of that stock within one account. You should also come out positive on your cost basis if your stock gets sold at strike price. We do not want to end up making a loss on overall cost basis.  For me, this stock was Kontoor Brands (KTB), find it and hit trade: Depending on if you are enabled for options trading, you will see options under strategy. We want to choose Call here under strategy. So we are saying I want to trade (buy or sell) a call option.
  • Next, we need to figure out what expiry date options do we want to sell covered calls for. For this we need to look at the options chain for this stock. Most brokers will provide you the chain right there when making the trade. Click the link icon and then go to options chain:options summaryselling covered calls for income option chainThis is from a very recent screenshot, so numbers might not be accurate. Stock price was around 23$ at this time. What you see on left of the strike column are details for selling covered calls.
  • Bid is maximum price any call buyer is willing to pay at that time. Ask is the minimum price a call seller will accept at that time. Volume is the number of options contracts bought or sold any day. OI (open interest) refers to number of open contracts.
  • Eventually, I was able to find a 30$ strike price call contract with expiry date of 16th October 2020. As you can see below, the bid was about .15 cents and ask was about .45 cents per contract. So I entered a limit price order of about .25 cents for 1 contract. selling covered calls for income KTB order previewWhat this means is, if someone enters a contract to buy a call for KTB stock for .25 cents or higher with expiry of 16th October, my contract will get sold. The buyer will then have right to buy my 100 shares of KTB at pre-agreed strike price of 30$ anytime by 16th October.  For that right, I get .25*100 = 25 $ commission. This part of selling covered calls for income matters to us, the call sellers.
  • The action will always be sell to open. It means you are selling a call to open a contract position for the underlying stock.selling covered calls for income KTB place orderOnce, you place the order and it gets filled, then you will see the commission in your account immediately. The contract gets assigned against your existing 100 shares. covered call assignedThat’s it!

Learn to sell covered calls to make some extra income on the side on your existing stock positions. Click to Share

Risks when selling covered calls for income

  • Most of us dividend investors are long on our stocks. Main aim is to hold stocks, get dividends and let compounding do its magic. Selling covered calls for income makes you technically short on the stock. You are hoping for your stock to stay down in price so it doesn’t get called and you get the dividend on the side.
  • You are literally betting here. Betting on where the price of the stock will be by expiry date. As we all know this can go either way. So, be ready to part with your stock position if your stock reaches the strike price.
  • Be aware of dividends and earnings dates. Sometimes, if a stock is paying dividends and the current stock price plus dividends will allow the buyer of your call to make even a few cents (even if the current stock price is lower than strike price). Buyer might call your stock and sell those shares. Similarly, earnings announcement leads to some volatility for most stocks. So, its possible your stock crosses the strike price and gets called by the buyer and you loose those shares and some potential extra profit.
  • Figuring out what stocks to use for selling covered calls for income and at what price and expiry date requires research in itself. You need to make sure the options for a stock have enough volume, open interest and you make a good commission when selling covered call for it. Usually, options near expiry date and with higher difference in current price and strike price will give very less commissions. So, you need to maintain a balance between commission and strike price and expiry dates. Otherwise, you may end up with a call options trade that doesn’t get filled. This is beyond the scope of this post, but you can check more about it here.

Conclusion

My strategy for all stocks I own is to be long on them. However, selling a covered call allows me to make some extra income. Although, I could be selling my shares at strike price. I could be generating tax events. I could potentially end up selling my stocks at less than cost basis generating loss. So, my plan is to sell covered calls for income at very high strike price. Its possible that I will get very less commissions because strike price is high, but I am interested in making sure my stock doesn’t get assigned/called away by call option buyer.  I also want to make sure the strike price will always be greater than the cost basis of the stock. Plus, I want to do this in my IRA account to not create any taxable events. Let me know in comments about your thoughts on this.

Disclaimer: The above are just my opinions expressed in the article. I am not your fiduciary or an investment advisor. Do not consider this as investment advice to you. This article is just for informational and entertainment purposes. Options are a risky product so do your due diligence before buying or selling any options.

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Q2 2020 table of dividends
Dividend Investing

Quarterly Dividend Update: Q2 2020

by Yoda

Dividend Investing for me is a long-term strategy. I like to buy great companies at good value based on historical metrics and dividend safety. Hold them for a long time, re-invest dividends and wait for compounding to do its magic. In contrast with Q1, Q2 2020 has been great for investors. From the bottom in March, the indexes almost rebounded back to their pre-Covid levels. I cannot and won’t even try to figure out what happens next. All I am planning to do is to keep buying stocks and ETF’s.  Here is my Q2 2020 quarterly dividend update:

Q2 2020 table of dividends

Total: $727 for Q2 2020 (up 40% from Q2 2019 & up 2% from Q1 2020 )

Here is a graphical view of the same data:

Q2 2020 graph

Check out my and download/make your own dividend tracking sheet here and create awesome graphs as above for free.

My Buys in Q2 2020

So, the volatile market has offered some great opportunities! Frankly speaking I was not a 100% prepared to think about what to buy. I definitely had some stocks in my watch list, but I had not looked at them in a long time. Plus I got busy with a lot of work and so did not get much time to research any new stocks. So, at first I decided to add to my existing open positions which I thought were at attractive valuation. I also added a new stock to my portfolio.

  • Added to position in A.O. Smith (AOS) in 30’s and low 40’s. They have had issues with revenue drop off in China since 2019. However, I like the safety of their dividend and their expansion in India. Eventually, they should get back to growth in revenues.
  • Added to my Cisco Systems Inc. (CSCO) position. You can read more about my complete research on Cisco Systems here.
  • I added to my position in Kontoor Brands (KTB). This is one of few stocks that is still around its March lows. They ended up having to cut their dividend. Because of this a lot of dividend based funds had to force sell this stock putting pressure on their stock price. This is still a long term hold for me. Full research here.
  • Started a position in Monmouth Real Estate Corp. (MNR). This is a REIT that is focused on industrial properties. They only have investment grade clients like FDX, AMZN, KO, HD, RTX etc. They even collected 98-99% rent during the last 3 months. Bought some at starting yields of 6.9 % and then added a bit more during the quarter.
  • I also added to my position in Starbucks (SBUX) in my Roth after selling some of my position form a taxable account.
  • Added to my position in Wells Fargo (WFC) in 20 & 30’s.
  • I used to have a small position outside my 401K in VTI before the crisis. However, last 3 months saw stocks go down so fast and come back up very fast. Working a full time job and researching what individual stocks to buy was looking difficult. I was just not finding enough time. So, I added to my existing positions which I had looked at before and opened new positions in MNR and HON only. But, throughout the crisis, I added big to my VTI position. No need to think/research much before adding to it. I am planning to continue adding to it every month. Since it will become a big part in my portfolio with all the buys, I also plan to add it to my statistics for every quarter.

I am projecting an increase to 2900$ in forward annual dividends as compared to 2103$ I made in 2019!

My Sells in Q2 2020

  • I sold my Starbucks SBUX position in taxable account and bought it in my Roth.
  • Sold my small CSCO position in taxable account and bought some in my Roth.
  • I had a small position in Trow Price (TROW). I decided to sell that from my taxable account and will focus more on my Blackrock Inc. (BLK) position.

I did have Kontoor Brands (KTB) and Disney(DIS) cut dividends in Q2 2020 to preserve cash. Both business were challenged by the virus and seems like a relevant action to take. I decided to not cut them in my portfolio as I still think they will bounce back from this over the long term.

Thoughts about Q3 2020

Upcoming quarter will have Q2 earnings from most companies in my portfolio. We will get to know more impact of the virus on companies. In the last week, we have had a steep rise in cases in many US states. Some states have hit a pause on reopening and some brought few restrictions back. It will be interesting to see if states want to close economies again or just carry on and not go back to the lock down people experienced in last 3 months. I know one thing for sure: I will keep buying stocks and ETF’s during this quarter.

Check out my complete dividend portfolio here.

Click this link for my 2019 Annual dividend income update.

Dividends stocks do come with some risk, but with precautions you can avoid the risky one’s and choose the best dividend paying/growing stocks for your portfolio. I prepared a guide where I discuss some key ratios, fundamentals, some important resources to look at while deciding to buy a dividend stock. Also find out how to get free access to Morningstar, Value Line, workaround paywall behind popular news sites like Seeking Alpha etc.  Consider signing up for free instant access to the pdf version of the insights into dividend investing.

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Dividend Investing

All about making a living off dividends

by Yoda

Passive income has become a big topic now a days. As people become more busy and stressed, they are trying to search for alternate sources of income. Something they can earn passively. Making a living off dividends is one of the best ways to take part in investing and growing your wealth. Be warned this is not a get rich easy scheme.

Living off dividends passive income strategy requires you to put a lot of time and effort over a long term to be successful. I wanted to break down some myths about dividend investing with facts and explain how you can be successful in this strategy.

Let’s get started!

What is a Dividend?

When any public company makes a profit any year, it needs to decide what to do with its profit. This is usually called the question of capital allocation. A company can:

  1. Invest back in its business in R&D, in operations to grow more and make more profit next year.
  2. Invest in acquiring a new company and boost its return on invested capital.
  3. Return capital to shareholders in form of buying back stocks thereby boosting EPS(Earnings Per Share) or by giving dividends.

A company need not only do 1 or 2 of the above-mentioned things. They can employ all 3 strategies every year. That third point above is where dividend investing comes into picture. Dividend is essentially your share of profit in a company in which you own stock. When you purchase a stock of a company you are part owner in that company. You have the right to vote for the board of directors in the company. By voting them in, you expect them to make sensible decisions on the above 3 criteria. So, the executives in the company every year/quarter announce if they will have a dividend or not. They announce the following dates too which are important to know when investing in such stocks:

Record Date Date on which the broker will check to look who all own the stock that day to calculate how much dividend owner of stock on record will get.
Ex-Dividend Date Once you buy a stock it takes couple of days for the transaction to settle and for you to be a shareholder in the company. So, this is the date before which you need to buy the stock in your brokerage, for you to show up as the owner of the said stock by record date. This is usually 1-3 days before record date.
Payment date That’s the date on which you will get the payment of dividends in cash/stock in your account as per the company’s policy. Mostly its cash and you can re-invest it automatically or use it for buying other stocks.

Why Dividends?

Dividends are actual income (Passive Income)

No doubt capital gains via price appreciation of a stock are good. However, you need to sell the stock to realize the gain. With dividends you get a part in the profits of the company without selling the stock. You can choose to reinvest it again to get more dividends next year. Over long term, you will see your dividends compound and you would see yourself living off dividend income alone. Again mind you this can easily take from 10-25 years depending on how much you invest every year. Nothing in life is easy and dividend investing needs time and effort on your side, but its definitely possible. I know a few people already living off dividends in retirement.

Dividends force executives to be more sensible

Importance of this cannot be understated. Sometimes management makes foolish decisions to acquire companies out of their circle of competence. They spend a lot of money and years down the line, we don’t see any returns at all. A lot of such acquisitions must be written off in balance sheet in form of goodwill impairment. Having a dividend policy forces the management to make more sensible/disciplined decisions. This leads to better returns for you as an owner in the company.

Risk Management from volatility

Dividend stocks are a way to lower the risks arising from volatility in daily/monthly/yearly stock movements. Since the owners of dividend stocks get their dividends as income every year, they are more open to not selling the stock in tough times and giving the company a chance to tackle problems at hand. Many companies that have an established dividend policy also have a large base of owners who are looking for those dividends to come in like clock work and they are more forgiving of the performance of the overall appreciation of stock.

Dividends taxed favorably

Dividends are taxed favorably under the current tax scheme. You pay lesser taxes for qualified dividends as compared to your taxes on income.

Dividends Drive overall Stock returns too!

There is a lot of data and analysis done that proves companies that pay dividends outperform companies that don’t pay dividends over long periods of time. Look at this chart below for a comparison between the index of dividend stocks vs non div paying stocks (courtesy Hartford Funds):

dividend vs non dividend

As you can see in the last 4-5 decades dividend growth stocks have outperformed the whole market. Check out some articles from Hartford Funds and Raymond James which go on to give way more data on how over the long term, dividend stocks outperform non dividend paying stocks.

Dividend Yield Investing vs Dividend Growth Investing

Dividend yield is basically ratio of total dividends given out per year by the price of the stock. For e.g. if AT&T (T) pays out 2.00$ every year and its current price is 31.62$ then the yield is 6.32%. So, it might make sense to buy the stocks yielding the highest to get more income. However, do not go chasing the yield. Usually stocks with 10-20% dividends are highly risky and prone to getting dividends cut soon.  Dividend Yield Investing (DYI) focuses on having more income from your stocks. Usually people who are close to retiring and have a more conservative approach prefer dividend yield investing. Usually if you look at high yield companies they do not increase the dividends by huge amount every year. In case of AT&T its usually 1-2% per year.

Total Return= Dividend starting Yield (6.32%) + increase of 2% in dividend payout every year + capital appreciation

Meaning you get 6.32% return every year using dividends alone. I haven’t even included any stock price appreciation yet in the above calculation. Neither did i include dividend raises, nor did you sell any stocks to get this money in your pocket. See the magic of dividends?

People who are younger and have much more time to compound money usually should do Dividend Growth Investing(DGI). This is where you forgo the initial high dividend yield in favor of higher dividend increases every year. E.g. Starbucks (SBUX) yield of about 2.79% at price of 51.62$ as of 15-JUL 2018. However, if you notice the annual rate of increase of dividend over the last 5 years, its almost 20-25% annually!

Total Return = Dividend starting Yield (2.16%) + 20% increase in dividends every year + capital appreciation

Just as Einstein mentioned, compounding is the 8th wonder of world. Real magic happens if you re-invest these dividends to buy more of the same stocks. Since more stocks next year would result in even more dividends. This is where dividend growth investing also leaves dividend yield investing behind. If you continue to Dividend Re-Investment Program (DRIP) and reinvest dividends its easily possible you will have a much higher yield in 8-10 years for your DGI stock as compared to the DYI stock.

Let’s look at Starbucks and AT&T stocks as of 15th Jul 2018:

att vs sbux living off dividend in future

You can see the starting and ending yield on cost in these 2 investments above. Over time a DGI stock usually performs and returns way more money. However, it obviously comes with its risk. At&T has many years of history in successfully paying dividends. Starbucks has only 5-6 years of history paying dividends. But there are many indicators and fundamentals to look for when choosing such stocks.

Case against Dividend Investing

Dividend payout = Lower share price

This is true, every time a distribution gets paid out the price of the stock goes down by equivalent value on the payout date. People argue what’s the point of getting dividends. However, that’s just being very short term in thinking. If you plan on holding such stocks forever and you should, how should a short-term blip on payout date matter at all? Over the long term, company grows and so does the stock price!

Dividend paying companies grow less

Another argument is only companies that have stopped growing or have no use of cash, pay out dividends. Such companies cannot efficiently allocate capital and so choose to give out dividends. So capital appreciation on the stock gets hit. You won’t be able to make much off of capital gains on stock. However as mentioned earlier, good dividend stocks bought at correct price have great potential to provide above average returns.

Preferential tax treatment for dividends can change

This is a minor threat. Currently you pay less taxes on dividends as compared to short term capital gains on stock sales. However, nobody knows the future, and this can change at any time. When that happens, its possible such stocks can fall out of favor.

Dividend stocks make you miss out on fast growing industries

Usually most dividend stocks belong to consumer cyclical, consumer staples industries. Companies that have very stable fixed stream of income. Some financial companies etc. Argument is that tech stocks which grow the fastest usually never pay dividends. So, if you do not buy such stocks you are missing out on the best growing stocks in the market. However, there are big tech companies like Microsoft, Apple, Intel, Cisco etc. that pay dividends and increase them at a fast rate. Secondly, I never said to not have any non-dividend paying stock in your portfolio. Ideally you should have a balanced portfolio of stocks, bonds, REIT’s as mentioned in my earlier article on portfolio building.

Dividends are not guaranteed

This is true. In the recent past companies like Kinder Morgan Inc (KMI) and General Electric (GE) have cut their dividends. They were considered dividend stalwarts but fell into a lot of trouble and had no choice but to cut dividends. However, for such companies there were always signs. Things like payout ratio which was increasing, financial health was deteriorating, too much debt, not being shareholder friendly etc. But most of these signs were identifiable.

How much do you need for living off dividends?

There is no fixed answer to this question. You know how much you spend annually and how much you would need. For e.g., lets say you need about 45K annually in your retirement around age 60. Assuming you go on to live for another 30 years, you need about 1.3 million dollars (30*45000). Another way to think in terms of dividends is you need about a million dollar portfolio of dividend stocks to generate about 50K$ every year at 5% dividend yield. You will only be living off the dividends. Principal can still keep on growing at a healthy rate.

Also realize that its possible you do not even have to actually save a million dollars. You can just keep on investing money over 15-20 years & re-invest dividends. Your portfolio will keep on growing during that time, eventually reaching a million dollars. At that point you can simply stop investing stop re-investing and live off of dividend income.  Here is a calculator that shows how starting with 0$, investing 12000$ annually with a dividend yield of about 4% and below avg price appreciation of 5% you can get to 1.4 million dollars in 30 years.

living off dividend calculator

The above are just some numbers I plugged in. You can even do this 12K investment in your Roth account and your taxes will be 0! Feel free to play around on the calculator with different numbers, but living off dividends is definitely possible.

Best free resources to get you started with dividend investing

Dividend Condition(DIVCON) free ratings

This is a free rating system developed by the firm Reality Shares. They rank dividend stocks from highest (5) to lowest (1) depending on their probability of increasing dividends in next 12 months. They look at cash flow, future earnings, buybacks, dividend trends, etc. to come up with this rating. Although not iron clad, but its a good thing to check up on when deciding to buy a dividend stock. We have heard the saying safest dividend is the one that has just been raised. This tool allows you to find out stocks that most likely will raise it! Its also a good idea to look at their quarterly list of worst ranked (1) stocks which hints at possible divided cuts. This could allow you to highlight a stock in your portfolio and go deeper into it. Check more about them here.

Invest alongside the Superinvestors!

Its always good to have some extra information while investing. Sites like Insider Monkey, Whale Wisdom & DATAROMA allow you to see what the most famous super investors like Buffett, Munger, Bill Ruane (Sequoia Fund) etc. bought in the most recent quarter. Most of these websites have free signups which give you the most data you would ever need! I am not saying to blindly buy what Superinvestors are buying. But its always good to get more information.  Do your own research, look at fundamentals and make your own decision.

Dividends stocks do come with some risk but with right precautions you can avoid the risky one’s and choose the best dividend paying stocks for your portfolio. I created a free guide for you to get started on your journey to living off dividends. I discuss some key ratios, fundamentals, some important resources to look at while deciding to buy a dividend stock. It will show you how to get free access to Morningstar and Value Line reports and how to look at them from dividend point of view. I discuss how you can read most financial news articles from Seeking Alpha, WSJ, Barrons for free even if they are behind paywall! Consider signing up below and get the free pdf version of the insights into dividend investing research and how to keep your dividend income safe.

Check out my complete dividend portfolio of stocks.

Create your own dividend tracking google sheet with graphs and pie charts.

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quarterly dividend update Q22019 graph
Dividend Investing

Quarterly Dividend Update: Q2 2019

by Yoda

Dividend Investing for me is a long-term strategy. I like to buy great companies at good value based on historical metrics and dividend safety. Hold them for a long time, re-invest dividends and wait for compounding to do its magic. This quarter though, I decided to focus and keep/move more of my dividend stocks in my and my wife’s Roth accounts. So I did end up selling in small quantities wherever it made sense in my taxable accounts. Ideally I would like to buy and never sell. Here is my Q2 2019 quarterly dividend update and comparison with Q2 2018.

quarterly dividend update Q22019

Total: $516.76 for Q2 2019

Here is a graphical view of the same data:

quarterly dividend update Q22019 graph

My Buys in Q2 2019

  • Bought about double my existing position in A.O. Smith(AOS) when 2 firms released short articles and the stock price went down to low 40’s. My original position was in my taxable account. This year I am focused on moving a lot of my taxable dividend positions to Roth accounts. This seemed like a good opportunity to do it.
  • Doubled my position in AbbVie Inc. (ABBV ) after they announced they are buying Allergen Plc (AGN) and it fell by 16%. Dividend is still pretty safe. They even announced plan to further focus on dividends.  New company will have 18-19 billion in cash flows which is probably the main reason for the deal(diversification of revenue of course). Huge debt now becomes a concern now.  I am planning to watch this like a hawk. Need to see debt go down next year as they mentioned in their presentation.

 I would expect my Q3 quarterly dividend update to reflect higher dividends with the help of these buys.

My Sells in Q2 2019

  • Sold my small position in Coca-Cola Company(KO) at gain from my taxable account, purely to move proceeds to Roth. I might start building a position back in KO but not at these prices.
  • Sold my small position in Vodafone Plc(VOD) at loss from my taxable account, again moving proceeds to Roth. Plus this was leading to some dividend being withheld and not being able to re-invest dividends owing to foreign entity in my broker’s account.
  • Sold my 1 stock position in Apple Inc.(AAPL) at gain from my taxable account again to move money to Roth. I would like to start a position again in this maybe if it gets back to Dec-Jan 145$ prices.
  • Sold some of my position in National Instruments(NATI) from my taxable account. I just sell some of this position when it becomes too large, to reduce risk of too much of 1 stock.

Check out my complete dividend portfolio here.

Click this link for my Q1 2019 dividend update.

Check out my and download/make your own dividend tracking sheet here.

Dividends stocks do come with some risk, but with precautions you can avoid the risky one’s and choose the best dividend paying stocks for your portfolio. I prepared a guide where I discuss some key ratios, fundamentals, some important resources to look at while deciding to buy a dividend stock. Also find out how to get free access to Morningstar, Value Line, workaround paywall behind popular news sites like Seeking Alpha etc.  Consider signing up for free instant access to the pdf version of the insights into dividend investing.

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Dividend Investing

Quarterly Dividend Update: Q1 2019

by Yoda

Dividend Investing for me is a long-term strategy. I like to buy great companies when they are out of favor. Hold them for a long time, re-invest dividends and wait for compounding to do its magic. I have been investing in dividend stocks for the last 3-5 years, but only started recording my dividend income since 2018. I decided to share my dividend investing journey on a quarterly basis from Q1 2019 on wards.

Here are the results from Q1 2019 and comparison with Q1 2018:

quarterly dividend update q12019

Total: $412.37 for Q1 2019

Here is a graphical view of the same data:

quarterly dividend update q12019 graph

My Buys in Q1 2019

  • Bought about 33% more position in DIS (Walt Disney Company) a few weeks before the Disney+ streaming announcement.
  • Bought some more of T (AT&T) purely for income.
  • Increased 50% more position in MO (Altria) in February.
  • A starter position in XOM (Exxon Mobil Corporation) and ABBV (AbbVie Inc.) in February.

Most of these buys in Q1 2019 did not contribute to any dividend income in Q1. But I would expect my Q2 income to grow much faster with the busy buying quarter I had in Q1.

My Sells in Q1 2019

None!

Check out my complete dividend portfolio here.

Please consider subscribing for quarterly updates to my dividend portfolio.

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Dividend Investing

My Dividend Investing Portfolio

by Yoda

After index investing, my next favorite investing strategy is Dividend Investing. You can read about it a lot over here. In this article I wanted to give details on my dividend portfolio. I divide my stocks into various sectors. Although, I do not have any target percentages for any sector. I plan on buying stocks based on their valuation and opportunities Mr. Market produces, not based on a target percentage for each sector. I am still young and do not want to restrict myself  by only buying a limited amount of some individual stock. Maybe a 5k position is large in my portfolio as of today but 10-15 years later it might not even be half of what I want each position to be. I plan on holding these holdings for a long time and re-investing dividends to create that compounding effect. Most of my stocks are in either my or my wife’s Roth accounts. Some dividend stocks although, are in my individual broker account which I purchased when I did not know too much about tax efficient investing. Read more about tax efficient investing here.

I will try to keep this portfolio as much updated as possible. Without much delay here is my current dividend stock portfolio (As of 31st MAR 2020):

Ticker Company Name Sector Quote Dividend Amount Dividend Yield Research Article Link
ABBV AbbVie Inc Health Care 76.19 4.72 6.20%
AOS A. O. Smith Corp Industrial 37.81 0.96 2.54%
BLK BlackRock, Inc. Financials 439.97 14.52 3.30% BLK Analysis
CSCO Cisco Systems, Inc. Information Technology 39.31 1.44 3.66% CSCO Analysis
DIS Walt Disney Co Consumer Discretionary 96.6 1.76 1.82%
HON Honeywell International Inc. Industrials 133.79 3.28 2.45%%
KTB Kontoor Brands Inc Consumer Discretionary 19.17 2.24 11.68%% KTB Analysis
LW Lamb Weston Holdings Inc Consumer Staples 57.91 0.92 1.61%
MO Altria Group Inc Consumer Discretionary 38.67 3.36 8.69%
NATI National Instruments Corp Information Technology 33.08 1.04 3.14%
O Realty Income Corp Real Estate 49.86 2.79 5.60%
PEP PepsiCo, Inc. Consumer Staples 120.10 3.82 3.18%
PFE Pfizer Inc. Health Care 32.64 1.52 4.66%
PM Philip Morris International Inc. Consumer Discretionary 72.96 4.68 6.41%
PSX Phillips 66 Consumer Staples 53.65 3.6 6.71%
QCOM QUALCOMM, Inc. Information Technology 67.65 2.48 3.67%
SBUX Starbucks Corporation Consumer Discretionary 65.74 1.64 2.49%
STOR Store Capital Corp Real Estate 18.12 1.4 7.73%
T AT&T Inc. Telecom 29.15 2.08 7.14%
TCEHY TENCENT HOLDING/ADR Information Technology 49.09 0.115 0.23%
TGT Target Corporation Consumer Discretionary 92.97 2.64 2.84%
TROW T. Rowe Price Group Inc Financials 97.65 3.60 3.69%
VFC VF Corp Consumer Discretionary 54.08 1.92 3.55%
WFC Wells Fargo & Co Financials 28.7 2.04 7.11%
XOM Exxon Mobil Corporation Energy 37.97 3.48 9.17%

Dividend Portfolio by Sector Breakdown

portfolio pie 2020 q1

 

Do remember, this is just a listing of all the dividend stocks I own and their per share metrics as of As of 31st MAR 2020. This doesn’t represent my own size of individual positions or my yield on cost on these stocks.

Please check out my latest quarterly dividend update here. Check out my buys and rare sells for the latest quarter.

Also check out how I get my financial news from WSJ and Barron’s for free every day.

 

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Investing

REIT Investing: What, How and Why

by Yoda

As you all know from my previous articles, dividend investing is my favorite style of investing. Although along with that, I also like to make sure my portfolio has different type of assets.  One way to do this is via real estate. However not all of us have the money to pay every month for mortgage. Here is where Real Estate investment Trusts (REIT) come in.

REIT what if i told you

What are REIT’s?

A REIT is a company that owns, operates and manages real estate assets around the world and collects rent to make money. There can be publicly traded or privately held REIT’s. The good thing about public REIT’s is that they are required by law to pay out at least 90% of their taxable income in form of dividends.  This makes them excellent alternative to just normal dividend stocks. Public REIT’s usually operate in a single industry.  For e.g. Data Center, Telecom towers, industrial, storage, healthcare properties etc. This is not a hard and fast rule though. Some REIT’s do invest in all types of properties. There are also some REIT’s which invest in mortgages and make money using the interest payments on mortgage instead of collecting rents and managing properties.  They are called mREIT’s but we will only be focusing on Publicly traded normal REIT in this article.

Advantages of REIT’s

Juicy Dividend Yields

Since REIT’s are legally mandated to pay at least 90% of their taxable income, they have high dividend yields. Most REIT’s can pay 4-5 or even 7% sustainable dividend yields. As compared to the average 2-3% dividend of rest of the S&P 500, REIT’s dividends are amazing! These yields are also usually very stable since most tenants are in long term leases which have increases priced every year as per inflation at least. However, check out various ways to ensure/safeguard you keep getting dividends at the bottom of the article.

Instant Diversification

Since we know its very important to diversify in various asset classes in your portfolio.  REIT’s help in this regard. REIT’s indirectly make you owner of real estate. They usually have low correlation with stocks so, helps with reducing risk in your portfolio.  Plus, best part is you get to be a real estate owner without doing the hard work in maintaining or collecting rents or paying any mortgage. Agreed they do trade like stocks, but REIT underlying asset that produces income is real estate.

Liquidity

Publicly traded REIT’s can be bought and sold just like stocks. So its easier to re balance your portfolio if needed. There are other private platforms like Fundrise and Real Estate Mogul that allow you to invest in REIT’s. But they are bound by extra rules on when you can sell and how much you need minimum to invest. So, publicly traded REIT’s are what I would suggest buying.

Proven long term performance

REIT’s over the last 25-30 years have returned over 11% annually reinvesting dividends. That is a great rate of return for any asset class given the fact we have had 2 recessions in that time. (courtesy NAREIT)

reit performance

This kind of performance has been almost second to no other group of equities.

Risks/Disadvantages of investing in REIT’s

Sensitivity to Rising rates

In a rising rate environment like today’s, REIT’s compete with other asset classes. For e.g bonds and US treasury rates increase which are usually safer than REIT’s. So a 3% bond would be appealing to people as compared to a 4% REIT with amount of risk involved and REIT usually under-performs. However, having said that if you are a young investor with retirement after a decade or two or more. Then what is there to worry about! Just relax and reinvest the dividends and watch your income from REIT stocks keep growing. Over long term even rising rates usually benefit economy and help in raising rents across most properties and helping REIT’s.

Industry Risks

Most REIT’s operate in a specific industry and are susceptible to business risks weighing down respective industry. For e.g. recent fears over retail apocalypse over slowing sales in 2016-2017 lead to huge decreases in stock prices of most retail-oriented REIT’s. However, if you just focused on fundamentals and bought/invested then, most REIT’s are way more up since then this year.

Tax treatment for you

As we know publicly traded REIT’s are required to pay out at least 90% of their taxable income and they are exempt from paying any income taxes. But then for this reason, you get taxed at full income tax rate on unqualified dividends you receive from REIT. Instead of the favorable tax treatment at lower tax bracket for normal dividend stocks.  So, its important to understand what type of investing account they should go in to minimize taxes/eliminate taxes. Yes! its possible to pay absolutely no taxes on REIT’s and get the high dividend yield they offer.

Different Type of REIT Sectors

As mentioned, REIT’s can operate in different industries and business. Type of industry has a lot of impact on REIT’s ability to earn rents. Here are some examples:

  1. Industrial: These invest in making warehouses, distribution centers, logistics center for housing any kind of equipment’s, process, materials required by customers. Some examples include Prologis Inc, Plymouth Industrial etc.
  2. Telecom: These invest in creating tower sites that which network operators use to provide cell services. Some examples include American Tower, Crown Castle Inc etc.
  3. Data Center: These invest in building huge infrastructure for data centers which big tech companies rent. They are usually fitted with features like extra cooling, 24*7 power supply and extremely secure environment. Some examples include Digital Realty, Cyrus One etc.
  4. Retail: These invest in single standing or mall like shopping centers. Some examples include Realty Income, Store  Capital etc.
  5. Healthcare: Theses invest in creating hospitals, nursing homes, skilled nursing facilities etc. Some examples include Omega Healthcare Inc, Sabra Healthcare etc.

Other sectors include Office, Residential, Timber based REIT’s etc. You can find more about them here. Its important to know that at any given time, its easily possible that one sector of business is booming and REIT’s involved in that sector will also be booming.

In Conclusion

There are a lot of other factors like adjusted funds from operations AFFO, management etc to look at when choosing REIT’s. Factors to ensuring/safeguarding that dividend yield. Correct investment accounts to buy REIT’s in etc. To know more on how to go about choosing best REIT’s please consider subscribing below for free to help support the blog.

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