Dividends

This is my December 2018 FFJ Portfolio dividend income update. The portfolio was created in January 2017 for the purpose of demonstrating how investing in high quality companies with competitive advantages and with a record of consistently increasing dividends can assist investors in reaching their long-term financial goals without the need to speculate or to chase dividend yield.

By being able to reasonably accurately forecast future cash inflows, it is possible to reduce stress levels related to finances. Furthermore, consistency and predictability on the cash inflow front will provide households with the opportunity to make decisions that might be otherwise impossible if cash inflows are subject to wild variances.

 

Now that December 2018 has come to an end it is time to see how the FFJ Portfolio fared for the month and for all of 2018.

December 2018 Dividend Income

During the month of December the holdings in the FFJ Portfolio generated:

Core Accounts

CDN ~$971 and USD ~$2,574

Side Accounts

CDN ~$1483 and USD ~$1,301

Full Year 2018

In my December 2017 FFJ Portfolio article I set 2018 dividend income targets of CDN$13,200 and USD$15,200. I, however, subsequently increased my targets a few times during 2018 as I deployed funds toward the purchase of shares in several high quality companies over the course of the year.

In February I decided to segregate the portfolio into two groups for personal reasons: ‘Core Accounts’ and ‘Side Accounts’. The first purchases through the Side Accounts were made in February but it was not until mid-March after equity values experienced a slight pullback that I started to add positions to the Side Accounts in a more meaningful way.

As previously indicated, I revised my 2018 dividend income targets a few times with my final revision being reflected in my October 2018 report; I projected the holdings in the Core Accounts would generate CDN ~$14,000 and USD ~$17,500 and the holdings in the Side Accounts would generate CDN ~$7,000 and USD ~$4,000 for all of 2018.

As it turns out, the dividend income generated for the year through the Core Accounts slightly exceeds $14,000 but is $125 shy of $17,000. The dividend income generated through the Side Accounts is ~$7,400 but only USD ~$3,400. I have, therefore, fallen short of my consolidated dividend income target.

The record of the monthly dividend income generated through the Core and Side accounts within the FFJ Portfolio can be accessed here.

The holdings in the Core and Side accounts can be accessed here.

2019 Dividend Income Projections

One of my/my wife's key goals for many, many years was to step away from the workforce well before the typical retirement age. In order to eliminate any reliance on a third party providing us with a paycheque, we needed to establish an ongoing stream of income that would outpace the rate of inflation; there may be multiple ways in which to achieve this but we chose equity investing and rental real estate.

In order to have some degree of success in achieving this key goal, we set the following criteria:

  • our sources of income should not be dependent on the exchange of time for money.
  • our income must come from the streams of income generated from our assets rather than the sale of our assets since we do not want to be in the predicament of having to liquidate assets at less than opportune times.

Various studies have shown that if you do not write down specific and measurable stretch goals and look at these goals frequently then you have merely established ‘wishes’. I have, therefore, closely tracked our family’s dividend income to the point where I can forecast the monthly dividend income for the upcoming year with a reasonable degree of accuracy (judging from my 2018 results I can be ever so slightly off the mark!).  I do not forecast the future value of any of our investments.

The reason I am so focused on the level of income generated is that for a little more than a decade we will need to rely almost entirely on the streams of income generated from our Registered and non-Registered equity investments to cover our living expenses (rental income is viewed as side income for now but as some stage we will no longer want to own investment properties and we will need to dispose of them). Once we reach the stage where mandatory withdrawals must be made from our ‘Registered’ accounts, I will need to pay far closer attention to the value of our holdings as the annual mandatory withdrawals will exceed the annual dividend income generated.

I decided to adopt this strategy after having followed the teachings of Warren Buffett and Charlie Munger for many years. In fact, I recently posted a brief article entitled Just Looking At The Price Is Not Investing which contains a link to a Warren Buffett interview conducted in early 2018. In this interview he draws a comparison between investing in equities and a farmer owning an income producing farm. The first 10 minutes and 10 seconds of the video is well worth watching. After this point Squawk Box interviewer Joe Kernan enters the picture and wastes viewers’ time.

NOTE: There is very likely some type of advertisement that precedes the video in which some active trading system is promoted. I do not encourage active trading.

In my November 2018 Dividend Income Report I indicated I had completed a very quick back of the envelope calculation to arrive my projected 2019 dividend income targets. Now that 2018 has come to an end I have more closely analyzed the FFJ Portfolio’s projected dividend income for 2019 and have set the following targets.

Core Accounts - CDN $15,000 (~$14,000 in 2018) and USD $18,000 (~$17,000 in 2018)

Side Accounts - CDN $19,000 (~$7,400 in 2018) and USD $12,000 (~$3,400 in 2018)

These targets are subject to amendment during the year because if equity valuations become increasingly attractive I intend to acquire more shares in high quality companies.

Recent Activity

Wild swings in equity prices during the month of December reaffirm my position that trying to predict the short-term value of stock prices is a fool’s game.

The unpredictability of stock prices over the short-term is the reason why I am of the opinion that investing in great companies should be approached like you would any other major purchase….buy at a reasonable price as it is impossible to consistently acquire shares at the 'best' price.

On this basis, I took the opportunity to acquire 500 shares of The Bank of Montreal (BMO), 500 shares of The Canadian Imperial Bank of Commerce (CM), and 100 shares of FedEx (FDX) in December; all shares are held in the ‘side accounts’ within the FFJ Portfolio.

I certainly did not catch the ‘best’ price but I am reasonably confident the shares of these companies will be of greater value several years into the future. Most importantly is that I am highly confident that the stream of dividends will grow in value at a rate which will outpace the rate of inflation.

Covered Calls

In 2017 and 2018 I have written several covered calls on holdings within the FFJ Portfolio and in undisclosed accounts. All these covered call positions have expired worthless meaning I have retained the option premiums I collected and I have kept the underlying shares.

I only have two outstanding covered call positions and these are currently profitable. Anything, however, can happen between now and the January and March expiry dates.

Mistakes

I certainly do not expect all my investment decisions to pan out a planned. This is clearly borne out in my Constellation Brand trade where I will most likely lose my ~$5,100 'investment'; in my Constellation Brands – Employing the Use of a Bullish Option Strategy article I explained why I decided to purchase calls.

Mistake #1 - This trade was purely speculative. I did not have any interest in taking a position in a cannabis company but I wanted to potentially benefit from the growth of this industry through an investment in a profitable liquor company which owns a significant stake in Canopy Growth (WEED.TO).

Mistake #2 - Rather than close my position for a tidy profit within a few days of initiating my position I now stand to lose the entire amount I ‘invested’ as the options expire January 18, 2019, my strike price is $190, and the stock is currently trading at ~$160.

Over the course of investing over the last 30+ years I have broken even or lost a little bit of money every time I have stepped out of my comfort zone and have taken a somewhat speculative position. You think I would have learned my lesson by now!!

Final Thoughts

I recognize there will be consternation among many investors if we continue to experience extreme volatility in the equity markets. These conditions are likely very foreign to investors who have only begun investing in equities within the past few years. If you fall in this category, here are a few things I highly recommend you keep at the top of mind:

  • invest exclusively in high quality companies;
  • invest at attractive/reasonably attractive valuations;
  • tune out the noise;
  • do not employ leverage;
  • investing in equities should be done with money that will not be required for at least 5+ years. Anything can happen in the short-term and you certainly do not want to be in a predicament where you need to access funds invested in equities during a 'down' market.

That’s my roundup for December.

Here’s hoping you made progress on your journey to financial freedom!

Note: Thanks for reading this article. Please send any feedback, corrections, or questions to [email protected].

Disclaimer: I have no knowledge of your individual circumstances and am not providing individualized advice or recommendations. I encourage you not to make any investment decision without conducting your own research and due diligence. You should also consult your financial advisor about your specific situation.

I wrote this article myself and it expresses my own opinions. I am not receiving compensation for it and have no business relationship with any company whose stock is mentioned in this article.

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