Category Archives: Financial Independence

Financial Independence and Dealing with the Haters

Since I decided that my end goal from all of this saving and investing activity I’ve been doing will be used to achieve financial independence and give me the option to retire early I’ve told very few people. Those that I have told, have often responded with negative criticism. Why would you want to do that for? one relative asked. What are you going to do, just sit around for the rest of your life if you don’t work?

Ah no, I don’t plan on sitting around all day. Why would I work hard, maintain a high savings rate, practice delayed gratification just to look forward to 40 years of sitting around doing nothing? I don’t want a traditional retirement lifestyle when I retire early. By traditional, I mean sitting around a lot, watching day-time television and not taking advantage of all the free time you have. Not my idea of a good time.

Once I achieve financial independence I plan on living life to the fullest without being burdened with having to go to work 5 days a week for someone else. I want to be able to choose how I spend my time and focus on things I can’t do if I’m tied down to working 40 hours a week. That doesn’t mean I’ll necessarily stop working either. One of my goals in life is to eventually own a small business. Maybe something with rental real estate. I come from a family of tradesmen, so maybe something in the building field? I’m still not sure but what I’m sure of is that being financially independent will allow me to pursue this goal if I want without being pressured to live off the income it produces immediately.

Also, like I’ve mentioned in my long-term goals post a while back, I’d like to travel more and try some new hobbies. Working 40 hours a week for someone else isn’t going to allow me to do all of these things.

If you choose to pursue a goal of retiring early you have to prepared to face some criticism at some point. Why will people be against you quitting the rat race early? Jealousy? Thinking you’re not contributing to society by quitting working so early? Maybe, but who really knows.

That’s whats great about this country (and most others for my friends to the north and overseas πŸ™‚ ) though, you don’t have to follow a script, you don’t have to fit in, you can choose to live your life anyway you want. Not everyone is destined to go to work for someone else for 40 plus years. Some like me and all the others out there pursuing this goal are okay with sacrificing having expensive lifestyles today for the opportunity at years and years of freedom down the road. Yeah, saving a lot of your income each month sucks. Yes, not going out drinking every single Friday night with friends isn’t so fun (especially when you’re 21 πŸ˜‰ ). So why do I choose this lifestyle? I want freedom to live my life the way I want to and be able enjoy it while I’m still relatively young.

How have your friends and family reacted to you trying to become financially independent? Have they been mostly positive or have you had to deal with the haters too? Thanks for reading.

Why I Invest in Retirement Accounts

One of the interesting debates around the early retirement/financial independence blogging community is whether to invest in retirement accounts like IRA’s and 401k’s or just focus on taxable investments since there are no restrictions on when you can withdraw money. After all, why would you want to invest your money in accounts that are designed to not be withdrawn from until you are in your 50’s? I personally invest in retirement accounts and wanted to share my reasoning behind this today.

In addition to my two taxable accounts, a regular brokerage account and my Loyal3 account, I also invest in a Roth IRA and the Thrift Savings Plan (TSP). In my Roth I invest in dividend growth stocks. In my TSP, which is a 401k type plan for federal employees, I am limited to a small variety of index funds so I split my monthly contributions to a S&P 500 index fund and a small-cap index fund. Even though these funds don’t pay dividends they do have probably some of the lowest expense ratios that you’ll find in the mutual fund industry. My TSP makes up a relatively small percentage of my overall portfolio, my primary focus is on accumulating shares in high quality dividend growth stocks.

Since a Roth is funded with after-tax dollars, meaning you pay tax now on your income and then all withdrawals in retirement are tax free, you can withdraw your contribution principle at any time without penalty. Earnings on your investment cannot be withdrawn penalty free until you reach the age of 59 1/2. The beauty of this arrangement is that it doesn’t actually matter what you withdraw, as long as the withdrawal amount doesn’t exceed what you’ve contributed. Meaning, when I start withdrawing from my Roth once I reach financial independence, I’ll only be taking out dividends that are produced from my stocks, and won’t be selling off any of my stocks a.k.a. principal. As long as the amount I take out in dividends doesn’t exceed the past contributions I’ve put in I don’t have to pay a penalty. This will allow me to reduce my taxes in early retirement.

With my TSP, contributions are pre-tax meaning I can deduct them from my income taxes today and then pay normal income tax rates when I begin withdrawing. My plan is to roll the funds accumulated in this account over to a Traditional IRA once I leave my current job so I can have a bit more freedom in how I invest the money. If I wanted to take it one step further, I could rollover a traditional IRA into a Roth so I would be able access that money before normal retirement age and save money on taxes. The only downside to this strategy though is that contributions from a traditional to a Roth aren’t available to be withdrawn for 5 years. Obviously this strategy wouldn’t be an optimal one for those that are able to invest in dividend growth stocks in their 401k or can’t fund a Roth due to income requirements since this would involve selling your stocks in order to rollover or convert. Check out this great article by the Mad Fientist for more information about a traditional to Roth strategy which as he points out saves you more money in taxes over the long-term.

What type of retirement accounts, if any do you use? For my fellow financial independence seekers, have your goals changed the way you view and use retirement investment accounts?

Patriots and Blue Chip Investing

If you follow me on twitter (@startingfrzero) you probably know that I’m a pretty big fan of the Boston area sports teams, especially the New England Patriots. Over the last few days the team has signed All-Pro cornerback Darrelle Revis ( πŸ™‚ )and are working on signing former Seahawks cornerback Brandon Browner after several years of subpar play by their defensive backs in the playoffs.

Over the last few years, really ever since 2008, the team has been using washed up veterans, undrafted players better suited to special team roles, and rookies in their defensive backfield. While this money saving strategy had worked well in the regular season the last couple years, allowing the Pats to rack up a lot of wins, every year it seems to fall apart in the playoffs like this year in the AFC game at Denver and two years ago vs. Baltimore. This offseason the team decided to be aggressive and acquire top of the line players in an effort to finally get another championship.

So what does this have to do with stock investing? Signing cheaper, less talented players to achieve the team’s goal of winning another Super Bowl is akin to dividend growth investors buying lower quality dividend stocks and then trying to retire early. Lower quality stocks can lead to dividend cuts, which if happen during retirement could force you to go back to work to make up for the loss of income or cause you to change your lifestyle in a negative way. Kinda like once that subpar play catches up to the team in the playoffs, it ends their season. Mortgage REIT’s and other riskier dividend stocks can be great investments and make you a lot of money with their high yields but I wouldn’t want to count on them in the long run.

Like most investors, I’ve made plenty of mistakes when buying stocks. A few of them related to this topic was buying Intel (INTC) and Powershares Financial Preferred ETF (PGF) when I was starting out. Although both had fairly high yields for this low interest rate environment that we’re living in right now with a 4% and almost 7% yield respectively at the time, neither were good investments for reliable dividend growth which is what I’m trying to achieve. Intel’s dividend has remained stagnant for 7 quarters now. Had I done more research before I bought both of them instead of just chasing yield I would have realized that future dividend growth would probably be limited. I sold Intel last year after a small rise in the stock so I could turn a profit but continue to hold PGF since it is a relatively small position in my portfolio and it’s not worth it with commission costs to sell right now. It has been paying out the same monthly dividend of .09 cents per share since I bought it so I right now I’m keeping it as a sort of “fixed income” type investment. If the dividend ever gets cut though, it’ll probably be sold.

Today I try to only purchase blue chip dividend growth stocks like Coca-Cola (KO), Chevron (CVX), and Realty Income (O) and hope to add others like Exxon-Mobil, Johnson & Johnson, and General Mills in the future. Even though I usually have to pay a premium for these types of investments (like considering KO at a P/E of 20 a fair valuation) it will pay huge dividends (see what I did there? πŸ˜‰ ) for me in the future as I know I can count on a rising stream of income from these stocks. While “less blue chip” stocks have a place in a portfolio, (I mean we all need to have some fun with investing every once in a while right? πŸ˜› ) they shouldn’t make up the core of your retirement/financial independence accounts.Β This would be like trying to get to the Super Bowl with a bunch of rookies playing defense against a Tom Brady or Peyton Manning, it’s just not going to work. πŸ˜‰

Full Disclosure: I am long KO, CVX, O, and PGF. Please see my disclaimer page.

Do you have a investing policy with only investing in blue chips? Do you ever add in a riskier, higher yielder to boost your income? What percentage of your portfolio do you allocate to these types of stocks? Share below with a comment.

How General Mills and Mad Money turned me into a Dividend Growth Investor

Back when I was starting to learn about investing, I spent most of my free time reading investing and personal finance books such as those by Peter Lynch, Robert Kiyosaki (Rich Dad, Poor Dad series), and Jim Cramer.

I also watched Jim Cramer’s Mad Money show almost every evening.* Although his investing style is a lot different than what I’m doing now with dividend growth stocks, I did learn a lot about stock investing that can applied to DGI such as maintaining proper diversification in your portfolio and how to value companies.

Although I hadn’t started investing any money yet, I researched stock ideas a lot, including many of the ones featured on the show. At the time, I was thinking I would eventually start a portfolio that was based only on total return, that is, capital gains. Basing a portfolio off of dividends never even occurred to me. On the show and in all the books I had read, dividends were always mentioned as sort of a bonus that stocks sometimes paid with investing for stock price appreciation being the main focus.

One day, Cramer spent some time discussing some potential investments in the consumer staples sector. I don’t remember all of them but both General Mills (GIS) and Kellogg (K) were mentioned with Cramer thinking that General Mills was the more attractive option at the time as far as valuation went. I researched GIS online and quickly discovered that the company had been paying out dividends for 113 straight years (at that time, now 115!) without ever cutting it. It had been kept at the same level for multiple years occasionally over the company’s history but never cut. That amazed me, especially with so much of the investing talk in 2012 still about recovering from the 2009 recession where so many companies cut or eliminated dividend payments due to the tanking economy. “How was GIS able to sustain and grow their dividend through this latest financial crisis and all the other ones over the last 100 plus years?” I asked. My research online eventually led to Seeking Alpha where I learned all about dividend growth investing from some of the great contributors on the site and from there began focusing most of my research activities to dividend paying stocks. I eventually started investing at the beginning of 2013.

Ironically, I still don’t own GIS in my portfolio (I valued stocks a little too conservatively when I started out and was trying to look for a better entry point), but it was the one stock that really started me on this journey to financial independence. It seems like dividend growth investing and early retirement seem to go hand on so many of the articles and blogs about the topic on the web and I soon realized that this strategy gave me a concrete and seemingly easy plan to be able to achieve my goal of financial independence. Well at least easier than becoming an expert stock picker of growth stocks. πŸ˜‰ Dividend growth investing could provide me with a steady stream of income that I could live off of instead of trying to just build up a large portfolio and then gradually sell off stocks to fund my retirement, being completely vulnerable to the whims of the market.

 

*Wow, I sound like a huge geek, what kind of 20 year old watches Mad Money everyday? πŸ˜‰

For all my fellow dividend growth investors out there, how did you get started with this type of investing strategy? Was it a particular stock like me or something else? Comment and share your story. Thank you for reading.

Cash Flow, Retirement, and Dividend Growth Investing

“Age doesn’t retire, your cash flow does.”

Yes!!!

Finally a retirement article in the mainstream media that gets it. This quote is from an article I read on the Fox Business site the other day (link here) that explains how while a savings goal is important for retirement, you also need to figure out a way to produce reliable cash flow from those savings so as not to run out in retirement. How much passive income (cash flow) your investments produces really does determine when you are able to retire.

There are many ways to achieve reliable cash flow to pay for your living expenses and while the article doesn’t really get into any specific strategies, I would like to talk about one today.

Dividend growth investing.
So what is dividend growth investing? D.G.I. as it is commonly called is investing in blue chip companies that have long track records of paying out part of their earnings in the form of dividends to their shareholders. The best of these also steadily increase the amount of the dividend each year, often at paces above the rate of inflation.

Creating a reliable stream of dividend income by accumulating shares of stock in some of America’a greatest companies that also give you annual raises above the rate of inflation is how I plan on being able to retire and hopefully be financially independent before I’m 40. Companies that fit this profile include Coca-Cola, Chevron, Procter and Gamble, General Mills, Wal-Mart, and Johnson & Johnson.

Your investments grow in two ways when investing in dividend growth stocks. First like other stocks you enjoy rising share prices as companies grow and when the overall market does well. Second you get dividends deposited into your brokerage account every 3 months (or monthly for some!). Unlike the first type of gain which you can only actually use when you sell, the dividends you receive do not require you to sell anything. You are simply being paid to own the stock and be a part-owner of these companies.

So should only retired people invest in dividend growth stocks?

Not at all! Personally I believe it is a great strategy for anyone who is investing, whether that be somebody already retired looking for dependable cash flow in retirement, those in the work force looking to pack away for retirement or another long-term saving goal, or millennials like myself just starting out.

So what are the downsides to dividend growth investing?

Like any investment strategy investing in dividend growth stocks can have some downsides. If you are investing for total return, that is growing your investment total value as much as possible, you are not really focused on how much income your investments are producing for you. With dividend growth investing, the opposite is true. While total value is a nice way to measure your progress, I do it every month in my Balance Sheet Updates, the important metric is how much income you are making from dividends. When starting out, it takes a long time to build up a portfolio that creates enough dividend income.

For example if you buy stocks such as the aforementioned Coke, Chevron, P&G, General Mills, Wal-Mart, and J&J you are going to end up with a portfolio that yields around 3% for your initial yield on cost (dividend yield you will receive based on purchase price, as you get dividend raises, your yield on cost grows). This means for every $1000 you have in your portfolio you’re only getting 30 bucks back in dividends. Blah. If your only investing a hundred bucks or less like I was when I was first starting out, it seems like it will take forever to get to a point where your dividend income can cover all of your day to day expenses.

Ok, I’m getting a little off track here, but my main point is that the biggest downside to dividend growth investing is being able to weather through the days of small dividend checks, avoid getting discouraged, and staying on track with your strategy. That means no going and chasing the latest hot stock (Facebook anyone?) and abandoning your plan.

Dividend growth investing takes a long time before you start to see meaningful results but once you do, it becomes clear how this type of investing will allow you to be able to earn a reliable stream of income when you retire. As the article linked above explains, it’s all about the cash flow!

Full Disclosure: I am long Coca-Cola (KO), Chevron (CVX), and Wal-Mart (WMT). This post is simply my own opinions on investing and should not be taken as professional financial advice. Only you are responsible for your investing. Good luck and please share your thoughts below with a comment. Do you practice D.G.I. and how do you like it?

The Key to Achieving Financial Independence

The key to achieving financial independence is avoiding lifestyle inflation.

What is lifestyle inflation you ask?

Lifestyle inflation is when you progressively live a more expensive lifestyle as your income grows throughout life. The way people are often able to justify these types of increases is often because they “deserve it.” Like, I’ve worked hard this past year and got promoted so I deserve a new snowmobile (and all the related maintenance/registration/insurance costs that go with it). Maybe so, but wouldn’t you rather continue with your same frugal lifestyle instead of setting yourself up with a lifestyle that’s going to limit your ability to save for your retirement?

Obviously all of us are going to be susceptible to some lifestyle inflation over the course of our lives and there’s nothing wrong with that, as long as it doesn’t get out of control. It’s one thing to move out of your parent’s basement to a small one bedroom apartment, and then on to a larger place once you get married and start thinking about starting a family. It’s a whole other case when you get a raise or bonus at work and immediately go out and spend the money on an ATV or as the down payment on a new car you “deserve.” This type of lifestyle inflation will hinder you down the road and prevent you from building the kind of wealth needed to retire comfortably (or early for those people like me :)) and often lead to a heavy consumerism lifestyle which in turn often leads to debt.

So there you have it, the key to achieving financial independence. Obviously you need to do more to achieve financial independence but this is the crucial first step that the rest of your financial journey hinges on. Just keep lifestyle inflation in check and it will enable you to save more than you ever thought possible, allowing you to live a more financially secure retirement, or push hard towards an early retirement/financial independence goal.