When Iāve previously asked readers what their main investing goal is, financial freedom is the #1 response. They want investment income to surpass their expenses and grow faster than inflation, so then they can do whatever they want. Work or not work, live almost anywhere, etc. Even those that didnāt offer that specific answer still said they wanted the more general goal of having growing dividend income that gives them security, extra income, and the ability to retire on their terms.
So for this issue, Iāve interviewed Jason Fieber, who is putting dividend growth investing to work with the goal of achieving financial freedom by age 40. All theories and investing strategies aside, this is a case study in how to roll up your sleeves and make it really happen.
In just three years of frugal living, high saving, and dividend growth investing, he expanded his portfolio value from $5,000 to over $100,000. His dividend income went from being non-existent to aiming for the conservative goal of $3,500 in 2013. With the continued dividend growth of his portfolio and the monthly additions of new capital, he expects to have a few hundred thousand dollars by his mid-thirties which can cover his current expenses with dividend income, and then to retire by 40. Heās doing all this while working at a car dealership and bringing in an average salary, so it really is something that just about anyone can do if they have similar priorities.
This interview will cover some of the details of specifically how heās doing this. No matter how young or old you are, or what your family situation is, or how high or low your income is, you can apply some of this to accelerate your financial independence, or secure your current retirement. Lastly, Jason provides a few specific stocks that he thinks look pretty good right now even in this rather highly valued market.
Q: How would you describe your investing strategy?
I would describe my investing strategy as a dividend growth investment strategy with a keen focus on value. I primarily stick to a universe of 300 or so stocks that have a history (at least 5 years in most cases) of raising their dividends, preferably well over the rate of inflation. This usually shows management is concerned about shareholders, and a rising dividend shows that management is also optimistic about business operations.
But, the dividend, and growth of it, is just the beginning. I also focus on how the dividend is being funded. Have profits been growing over the last 10 years? Are they likely to grow in the future? Whatās the ratio of earnings and free cash flow that is being paid out in the form of dividends? A payout ratio less than 60% is preferable.
From there, I love to look at the balance sheet. I like to focus on companies that use debt responsibly and only use leverage to grow the business in a way that creates long-term value. Interest rates are low, so some companies are using debt to buy back shares that are yielding more than the bonds. That can be an effective use of debt. For the most part, keeping debt low and well covered is key.
Finally, I focus on valuation through a quantitative and qualitative perspective. Quantitative fundamentals as discussed above are important, but I view the qualitative nature of a business as just as important. Whatās the story of a business? How is it going to grow? Are they exploring new markets? Do they have an invaluable brand name? What do people think of their products? If there is another recession, what are the odds that people stop using a companyās services or products? Boil it down, and I tend to focus on multinational blue chip companies that have low debt levels, global operations with large economies of scale, brand name products and manufacture/sell products or services that people use on an everyday basis. Johnson & Johnson (JNJ, Financial), PepsiCo, Inc. (PEP, Financial) and Chevron Corporation (CVX) are examples of some of my larger holdings.
Q: Your blog states that you plan to retire by 40. How much do you plan to retire with, and how did you determine that amount and that timeline?
I do plan to retire/become financially independent by 40 years old. I turn 31 in two months, so that gives me just over nine more years to achieve my goal. Based on my average spending levels of about $15,000/year, I believe that $500,000 invested in a combination of dividend growth stocks with smaller positions in fixed income should be enough to yield around $21,000 per year based on a 3.5% yield. I think that allows a margin of safety.
Not only is that more than I spend now, but there is a good chance Iāll spend less once Iām no longer working. For one, Iāll no longer be commuting. Secondly, I plan on having my rather small student loan debts paid off by then. Those two factors alone would reduce my spending down to approximately $1,000 per month. Itās also important to note that the $21,000 that my investments would be yielding would be an initial sum that would be rising year after year as the equities Iām investing in continue to increase dividends on an annual basis in excess of the inflation rate. At that point my purchasing power would only increase to the point that Iād have a hard time finding ways to spend all the extra money. Philanthropy would enter the picture at that point, or perhaps sooner.
Your portfolio went from $5k to over $100k in three years, and with a reasonable income. Can you provide some details here on exactly how that happened? How much did you make, spend, and save/invest in an average month?
My portfolio did grow from $5,000 to $100,000 between the periods of March 2010 and March 2013. Iām extremely thrilled and blessed. Iāve been completely open about my income, expenses and investments since my blog went online in March of 2011 (1 year in to my journey). Iāve been receiving a bit more income over the last year as I received an opportunity to work in a higher income/higher responsibility position at work at the beginning of 2012. You could probably average out my monthly income to somewhere around $3,500 during this three year period and my expenses to somewhere around $1,300.
My results over the last year have been more impressive as Iāll explain. My income has been steadily rising as the time has gone on due to aforementioned additional income opportunities at work, my increasing dividend income and also some modest online income from my blog. My expenses have simultaneously been trending down during this period as I sold my car in mid-2011, moved to a cheaper apartment located on the bus line soon after the car was sold, cut my food budget rather dramatically and just generally increased my frugality and skills/interest in spending less money.
These opposite trends have obviously increased my savings rate, which has had quite a great effect on my ability to build my wealth. I believe that oneās ability to save money and maintain a high savings rate is the way to build wealth. Achieving solid returns on investments is, while very important, secondary to saving large portions of capital and having cash to invest in the first place. Regularly saving money and investing high portions of your money should be the foundation of your wealth building strategy, then maximizing that free capital in high quality long-term investments.
(Mattās note: For more specifics, take a look at his income/expense reports on his blog. Hereās his February Income/Expense Report)
Q: What are your thoughts on frugality? Has the subjective quality of your every day life decreased, increased, or stayed approximately the same during these frugal years compared to earlier years?
Frugality has been a great leveraging tool for me. Where some use debt to leverage their chances at building wealth, I instead used frugality to save well over 50% of my net income over the last few years and invest that free capital as wise as Iāve been able to.
Iāve actually found increased happiness with frugality. Whereas before I started drastically cutting my expenses in the name of early retirement I would chase āstuffā for fulfillment, I now chase freedom. I always enjoyed having a nice car and living in a high end apartment. I liked eating out and spending my money freely. But, I always felt like I was missing something. It was like trying to drown a bottomless well. I find that many of our material desires are insatiable if we so choose to indulge. Rather, frugality has been freeing for me. I feel like itās freed me from the need to constantly chase objects and subjective approval from society, and instead Iāve put all that effort and focus on building a Freedom Fund to buy me the most valuable commodity one can have in life: time.
Q: After this 2013 market bull run, are there any dividend stocks that you currently think are at reasonable valuations? What are you buying or looking to buy currently?
As far as stocks go, I am currently focusing on certain sectors that have not run up quite as much as others. Currently, I find many stocks that are consumer based rather expensive. Utilities are also quite pricey right now due to the fact that many investors have chased yield in an otherwise low yield environment. Iām currently paying attention to individual equities in the financial sector, energy sector and technology sector. A case could also be made for certain industrial companies and basic materials holdings.
I talk often on my blog of how I stay away from valuing the market as a whole. I instead focus on individual equities, as the market filled with thousand of stocks can have many overvalued equities at any given time and many undervalued equities at any given time. Obviously, with the rather robust rise in the broad market over the last 6 months itās tough to find stocks that really scream value right now, but I still think that there are attractive opportunities out there for the investor with a long-term focus and time horizon. The market could pull-back tomorrow, but this doesnāt really concern me. Iām buying partial ownership stakes in high quality companies for a right to receive a portion of future earnings in the form of dividends. For the most part the current market value of those stakes is only of importance when Iām buying, as cheaper shares allows my limited capital to buy a bigger ownership stake.
If the market decides to severely discount what my stakes are worth, Iām highly likely to just buy bigger stakes in the high quality businesses that the market thinks are worth less than what they really are. The marketās loss is my gain.
Aflac Incorporated (AFL, Financial)
Although Iām already heavily allocated to it and do not plan on buying right now, I find Aflac Incorporated (AFL) to be one of the stronger values on the market currently. Thatās even after a rather big run-up over the last year or so that has slightly eclipsed the broader market. Itās currently trading with a TTM P/E of just 8.50 and a forward P/E just above 7. The yield currently stands at 2.83%, and is backed by a rather robust history of growth in revenue, profits and the dividend. The 10-year dividend growth rate stands at 19.3%. Not too shabby.
I think there are some concerns about the Japanese Yen, and it should be noted that Aflac does around 80% of its business in Japan. Also, the balance sheet remains a bit risky with exposure to undesirable European sovereign debt. Aflac has made some moves to reduce that exposure, but risk remains. Overall, I think the market is presenting an opportunity here with AFL after weighing the risks and rewards. I increased my AFL stake back in early February.
Kinder Morgan Inc. (KMI, Financial)
Another company I really like right now is Kinder Morgan Inc. (KMI). This is the General Partner to the underlying partnerships of Kinder Morgan Energy Partners LP (KMP) and El Paso Pipeline Partners LP (EPB). This is a complex investment, but needless to say the underlying business really isnāt. KMI owns units of the partnerships and certain increasing distribution rights called Incentive Distribution Rights (IDR) that ensure as the partnerships succeed, KMI will receive an ever-growing piece of the pie.
The business is primarily infrastructure in nature, as the partnerships own and operate pipelines and storage stations that transport and store natural gas, oil, CO2 and other energy products. KMI is the largest such operator in the country, which is simply fantastic. They operate a toll-like business that collects fees whenever someone wants to use their pipelines and stations to move and store energy. As the natural gas build-out continues here in the U.S., KMI will be an integral part of that growth.
Currently, they offer a yield approaching 4% with an announced growth rate of over 12% for the foreseeable future. Another great thing with KMI is that since itās not an MLP, one doesnāt receive a K-1, which can complicate taxes. Seeing as how the yield and growth rate of the dividend can be a general proxy for your returns assuming a static stock valuation, one can see the attractive qualities of this investment. I very recently increased my stake in this company as well.
Wells Fargo & Co (WFC, Financial)
Finally, I like Wells Fargo & Company (WFC) here. Itās attractively priced with a P/E under 11 and it is currently extremely focused on delivering shareholder returns by way of dividend raises and share buybacks. They raised their dividend by 14% earlier this year, and then just recently by another 20% after receiving Fed approval to increase dividends and buy back shares. WFC is one of the more conservatively run big banks here in the U.S., focusing on old school banking like mortgage lending and holding deposits.
I know it sounds cliche, but I like siding with Warren Buffett when possible. Currently, Warren holds 466 million shares of this company, so my lousy 40 may not sound like muchā¦.but Iām actively looking to increase my stake in this company. It currently offers an entry yield of 3.23%, and Iām confident the next dividend raise will be in the double digits again. WFC did issue a lot of shares with the all-stock deal that they used to acquire Wachovia during the height of the financial crisis, but Iām anxiously anticipating the share count to be reduced through aggressive share buybacks. I initiated my position in this company just last month and Iād like to increase it.
(Mattās note: Along similar lines, itās worth mentioning that not only does Buffettās company hold 466 million shares of WFC, but he has been actively increasing his number of shares in this bank even though itās already one of his largest holdings. Back during the market bottom of 2009 when WFC stock was around $9/share, Buffett was quoted as saying, āIf I had to put all of my net worth into stock, that would be the stock.ā)
So for this issue, Iāve interviewed Jason Fieber, who is putting dividend growth investing to work with the goal of achieving financial freedom by age 40. All theories and investing strategies aside, this is a case study in how to roll up your sleeves and make it really happen.
Interview with Jason Fieber
Jason Fieber runs the investing blog Dividend Mantra. In his late 20āĀ²s, he had a negative net worth with several thousand dollars in a checking account and a student loan total that was far higher. So as he puts it, he had a lower net worth than when he was a newborn, which after nearly three decades of living is not a comfortable place to be (but very common). He researched different investing strategies, and after a false start with mutual funds and a few stocks that āsounded goodā, he got into Dividend Growth Investing.In just three years of frugal living, high saving, and dividend growth investing, he expanded his portfolio value from $5,000 to over $100,000. His dividend income went from being non-existent to aiming for the conservative goal of $3,500 in 2013. With the continued dividend growth of his portfolio and the monthly additions of new capital, he expects to have a few hundred thousand dollars by his mid-thirties which can cover his current expenses with dividend income, and then to retire by 40. Heās doing all this while working at a car dealership and bringing in an average salary, so it really is something that just about anyone can do if they have similar priorities.
This interview will cover some of the details of specifically how heās doing this. No matter how young or old you are, or what your family situation is, or how high or low your income is, you can apply some of this to accelerate your financial independence, or secure your current retirement. Lastly, Jason provides a few specific stocks that he thinks look pretty good right now even in this rather highly valued market.
Q: How would you describe your investing strategy?
I would describe my investing strategy as a dividend growth investment strategy with a keen focus on value. I primarily stick to a universe of 300 or so stocks that have a history (at least 5 years in most cases) of raising their dividends, preferably well over the rate of inflation. This usually shows management is concerned about shareholders, and a rising dividend shows that management is also optimistic about business operations.
But, the dividend, and growth of it, is just the beginning. I also focus on how the dividend is being funded. Have profits been growing over the last 10 years? Are they likely to grow in the future? Whatās the ratio of earnings and free cash flow that is being paid out in the form of dividends? A payout ratio less than 60% is preferable.
From there, I love to look at the balance sheet. I like to focus on companies that use debt responsibly and only use leverage to grow the business in a way that creates long-term value. Interest rates are low, so some companies are using debt to buy back shares that are yielding more than the bonds. That can be an effective use of debt. For the most part, keeping debt low and well covered is key.
Finally, I focus on valuation through a quantitative and qualitative perspective. Quantitative fundamentals as discussed above are important, but I view the qualitative nature of a business as just as important. Whatās the story of a business? How is it going to grow? Are they exploring new markets? Do they have an invaluable brand name? What do people think of their products? If there is another recession, what are the odds that people stop using a companyās services or products? Boil it down, and I tend to focus on multinational blue chip companies that have low debt levels, global operations with large economies of scale, brand name products and manufacture/sell products or services that people use on an everyday basis. Johnson & Johnson (JNJ, Financial), PepsiCo, Inc. (PEP, Financial) and Chevron Corporation (CVX) are examples of some of my larger holdings.
Q: Your blog states that you plan to retire by 40. How much do you plan to retire with, and how did you determine that amount and that timeline?
I do plan to retire/become financially independent by 40 years old. I turn 31 in two months, so that gives me just over nine more years to achieve my goal. Based on my average spending levels of about $15,000/year, I believe that $500,000 invested in a combination of dividend growth stocks with smaller positions in fixed income should be enough to yield around $21,000 per year based on a 3.5% yield. I think that allows a margin of safety.
Not only is that more than I spend now, but there is a good chance Iāll spend less once Iām no longer working. For one, Iāll no longer be commuting. Secondly, I plan on having my rather small student loan debts paid off by then. Those two factors alone would reduce my spending down to approximately $1,000 per month. Itās also important to note that the $21,000 that my investments would be yielding would be an initial sum that would be rising year after year as the equities Iām investing in continue to increase dividends on an annual basis in excess of the inflation rate. At that point my purchasing power would only increase to the point that Iād have a hard time finding ways to spend all the extra money. Philanthropy would enter the picture at that point, or perhaps sooner.
Your portfolio went from $5k to over $100k in three years, and with a reasonable income. Can you provide some details here on exactly how that happened? How much did you make, spend, and save/invest in an average month?
My portfolio did grow from $5,000 to $100,000 between the periods of March 2010 and March 2013. Iām extremely thrilled and blessed. Iāve been completely open about my income, expenses and investments since my blog went online in March of 2011 (1 year in to my journey). Iāve been receiving a bit more income over the last year as I received an opportunity to work in a higher income/higher responsibility position at work at the beginning of 2012. You could probably average out my monthly income to somewhere around $3,500 during this three year period and my expenses to somewhere around $1,300.
My results over the last year have been more impressive as Iāll explain. My income has been steadily rising as the time has gone on due to aforementioned additional income opportunities at work, my increasing dividend income and also some modest online income from my blog. My expenses have simultaneously been trending down during this period as I sold my car in mid-2011, moved to a cheaper apartment located on the bus line soon after the car was sold, cut my food budget rather dramatically and just generally increased my frugality and skills/interest in spending less money.
These opposite trends have obviously increased my savings rate, which has had quite a great effect on my ability to build my wealth. I believe that oneās ability to save money and maintain a high savings rate is the way to build wealth. Achieving solid returns on investments is, while very important, secondary to saving large portions of capital and having cash to invest in the first place. Regularly saving money and investing high portions of your money should be the foundation of your wealth building strategy, then maximizing that free capital in high quality long-term investments.
(Mattās note: For more specifics, take a look at his income/expense reports on his blog. Hereās his February Income/Expense Report)
Q: What are your thoughts on frugality? Has the subjective quality of your every day life decreased, increased, or stayed approximately the same during these frugal years compared to earlier years?
Frugality has been a great leveraging tool for me. Where some use debt to leverage their chances at building wealth, I instead used frugality to save well over 50% of my net income over the last few years and invest that free capital as wise as Iāve been able to.
Iāve actually found increased happiness with frugality. Whereas before I started drastically cutting my expenses in the name of early retirement I would chase āstuffā for fulfillment, I now chase freedom. I always enjoyed having a nice car and living in a high end apartment. I liked eating out and spending my money freely. But, I always felt like I was missing something. It was like trying to drown a bottomless well. I find that many of our material desires are insatiable if we so choose to indulge. Rather, frugality has been freeing for me. I feel like itās freed me from the need to constantly chase objects and subjective approval from society, and instead Iāve put all that effort and focus on building a Freedom Fund to buy me the most valuable commodity one can have in life: time.
Q: After this 2013 market bull run, are there any dividend stocks that you currently think are at reasonable valuations? What are you buying or looking to buy currently?
As far as stocks go, I am currently focusing on certain sectors that have not run up quite as much as others. Currently, I find many stocks that are consumer based rather expensive. Utilities are also quite pricey right now due to the fact that many investors have chased yield in an otherwise low yield environment. Iām currently paying attention to individual equities in the financial sector, energy sector and technology sector. A case could also be made for certain industrial companies and basic materials holdings.
I talk often on my blog of how I stay away from valuing the market as a whole. I instead focus on individual equities, as the market filled with thousand of stocks can have many overvalued equities at any given time and many undervalued equities at any given time. Obviously, with the rather robust rise in the broad market over the last 6 months itās tough to find stocks that really scream value right now, but I still think that there are attractive opportunities out there for the investor with a long-term focus and time horizon. The market could pull-back tomorrow, but this doesnāt really concern me. Iām buying partial ownership stakes in high quality companies for a right to receive a portion of future earnings in the form of dividends. For the most part the current market value of those stakes is only of importance when Iām buying, as cheaper shares allows my limited capital to buy a bigger ownership stake.
If the market decides to severely discount what my stakes are worth, Iām highly likely to just buy bigger stakes in the high quality businesses that the market thinks are worth less than what they really are. The marketās loss is my gain.
Aflac Incorporated (AFL, Financial)
Although Iām already heavily allocated to it and do not plan on buying right now, I find Aflac Incorporated (AFL) to be one of the stronger values on the market currently. Thatās even after a rather big run-up over the last year or so that has slightly eclipsed the broader market. Itās currently trading with a TTM P/E of just 8.50 and a forward P/E just above 7. The yield currently stands at 2.83%, and is backed by a rather robust history of growth in revenue, profits and the dividend. The 10-year dividend growth rate stands at 19.3%. Not too shabby.
I think there are some concerns about the Japanese Yen, and it should be noted that Aflac does around 80% of its business in Japan. Also, the balance sheet remains a bit risky with exposure to undesirable European sovereign debt. Aflac has made some moves to reduce that exposure, but risk remains. Overall, I think the market is presenting an opportunity here with AFL after weighing the risks and rewards. I increased my AFL stake back in early February.
Kinder Morgan Inc. (KMI, Financial)
Another company I really like right now is Kinder Morgan Inc. (KMI). This is the General Partner to the underlying partnerships of Kinder Morgan Energy Partners LP (KMP) and El Paso Pipeline Partners LP (EPB). This is a complex investment, but needless to say the underlying business really isnāt. KMI owns units of the partnerships and certain increasing distribution rights called Incentive Distribution Rights (IDR) that ensure as the partnerships succeed, KMI will receive an ever-growing piece of the pie.
The business is primarily infrastructure in nature, as the partnerships own and operate pipelines and storage stations that transport and store natural gas, oil, CO2 and other energy products. KMI is the largest such operator in the country, which is simply fantastic. They operate a toll-like business that collects fees whenever someone wants to use their pipelines and stations to move and store energy. As the natural gas build-out continues here in the U.S., KMI will be an integral part of that growth.
Currently, they offer a yield approaching 4% with an announced growth rate of over 12% for the foreseeable future. Another great thing with KMI is that since itās not an MLP, one doesnāt receive a K-1, which can complicate taxes. Seeing as how the yield and growth rate of the dividend can be a general proxy for your returns assuming a static stock valuation, one can see the attractive qualities of this investment. I very recently increased my stake in this company as well.
Wells Fargo & Co (WFC, Financial)
Finally, I like Wells Fargo & Company (WFC) here. Itās attractively priced with a P/E under 11 and it is currently extremely focused on delivering shareholder returns by way of dividend raises and share buybacks. They raised their dividend by 14% earlier this year, and then just recently by another 20% after receiving Fed approval to increase dividends and buy back shares. WFC is one of the more conservatively run big banks here in the U.S., focusing on old school banking like mortgage lending and holding deposits.
I know it sounds cliche, but I like siding with Warren Buffett when possible. Currently, Warren holds 466 million shares of this company, so my lousy 40 may not sound like muchā¦.but Iām actively looking to increase my stake in this company. It currently offers an entry yield of 3.23%, and Iām confident the next dividend raise will be in the double digits again. WFC did issue a lot of shares with the all-stock deal that they used to acquire Wachovia during the height of the financial crisis, but Iām anxiously anticipating the share count to be reduced through aggressive share buybacks. I initiated my position in this company just last month and Iād like to increase it.
(Mattās note: Along similar lines, itās worth mentioning that not only does Buffettās company hold 466 million shares of WFC, but he has been actively increasing his number of shares in this bank even though itās already one of his largest holdings. Back during the market bottom of 2009 when WFC stock was around $9/share, Buffett was quoted as saying, āIf I had to put all of my net worth into stock, that would be the stock.ā)
