On my quest to financial freedom I have set goals for myself to make sure I’m going to succeed. One of these goals is to get a 3,5% return in dividend at the moment of acquisition on my stock purchases. Another of my goals is to get a dividend pay increase of 8% per year every year.
In order to reach these goals, I have to find a balance between initial yield and dividend growth.
My ultimate goal is to retire at or before 45 years old with enough passive income to be able to live without being obliged to work for someone else forever.
To reach my goal, I invest in income generating assets. Today, I have added 90$ to my annual income!
ARCP or American Realty Capital Properties is a real estate investment trust or REIT. REIT are in the obligation to return to shareholders at least 90% of their taxable income!
At current price, ARCP offers a juicy 8% yield. Recently, the management of this well-known REIT has taken an unpopular decision by acquiring 500 lots rented to Red Lobsters, a “not so popular” franchise… Share price went from 15$ to 12$. I saw that as an opportunity because even though Red Lobster is not the greatest and most popular restaurant in the world, the REIT doesn’t own Red Lobsters. It owns the building, the land and the possibility to lease these buildings to anyone else. Red Lobsters are generally well-located in urban american cities. They may struggle to get the rent paid with Red Lobsters at some point, but hey! Its 500 great locations in great american cities! It will grow in value and they will find other tenants if needed!
I might be wrong, but I believe that real estate value and income will grow with time. After all, we all know someone who knows someone who could have bought a rental apartment for peanuts back in the days!
When I buy REITs, I get two or three times the initial yield I get when I buy blue chips. It is sometime tempting to buy only REITs. My goal could be reached a lot faster. I could easily fill my portfolio with REITs, MLPs, high yield stocks without taking dividend growth into consideration and get a 7-10% return in dividend. It would be great! With a 100,000$ invested, I could get 9000$ of reoccurring income without touching my principal! I could see my dividend income pile up at the speed of light.
But, in life, there are no free lunches. Everything you get comes at the expense of consequences. Dividends are no different.
High yield stocks usually carry more risk and might also offer less appealing dividend growth.
Take Mattel (MAT) for example. Its current yield is at 4,46%! Sounds like an interesting yield given the fact that the current S&P500 yield is at 2,3%. Its current P/E is at 13,89 while the S&P500 current P/E is at ±18.7. It is considered by David Fish as a dividend challenger, which means that Mattel has increased its dividend for 5 consecutive years. Recent news about Mattel aren’t very good and its stock price has been beaten up. The share price went from 48$ to 34$ within the year. Barbie’s sales are down, Fisher Price sales are down, overall Mattel sales are down… Is the dividend sustainable? Will they increase it this year? It’s very hard to say. There is a lot of uncertainty surrounding Mattel.
I bought Mattel shares a 35,65$ in february after a devastating Christmas sales report. I saw an opening to get a quality title at a fraction of the price. Then, the price went up to 41$ and oscillated between 37$ and 41$ for a while until the last devastating quarterly report that Mattel published.
Still, I believe that Mattel is having hard times but that management will find its way through the storm. They already made good decisions. They signed an agreement to make a movie about Barbie. Lego had good results with that strategy. They also recently bought MegaBrand, a Canadian company, competitor of Lego. They also signed new agreements with Disney… The ball is rolling! It might takes time, but I think that Mattel offers good upside potential. But, this is all speculations based on my own point of view and analysis of facts that I believe will help Mattel recover. I might be dead wrong! Morningstar currently rates it 4 stars by the way.
At current price, I’m invested at a loss of capital. Not a big one, but like everybody, I prefer seing gains than losses. If Mattel has another bad quarter or cut the dividend, it could be devastating for its share price… This could happen. But, I believe they will at least keep a dividend. They might not increase it, they might decrease it, but I don’t think they will cut it completely. Time will tell… But this juicy yield comes with a cost, the cost of uncertainty and the risk of losing hard earned capital.
Now, compare Mattel to Johnson & Johnson. This company is like a big castle on top of a mountain. It has paid and raised a dividend every year for 52 consecutive years. With JNJ, it is hard to get an initial yield of 3%. Its current yield is at 2,8%. Why? Simply because there is almost no uncertainty with JNJ. Investors considers it almost like a treasury note or a bond. It pays a dividend every quarter, it raises it every year at a great rate far above inflation. It’s a great dividend growth stock. But, with 100,000$ invested in JNJ, you would only get 2800$ per year in income the first year… Hell, that’s not a lot! Still, I own 6 shares and plan to add to my stake every time I can get more shares at a reasonable price.
Why? Simply because dividend growth is what is going to give me a protection against inflation. It’s great to have current higher income, but if there is no growth, than inflation will soon make it less appealing.
ARCP has paid a dividend every month for years and even increased its dividend often over the last 3 years. But, I don’t expect high dividend growth here. There is also some uncertainty around ARCP and investors currently seem to prefer other titles. Interest rates and when the FED will finally start to raise them is one thing that could also bring this title down. But, I personally think that ARCP is a good place to park money for a while given its current price. I also think that over the long term I’m going to be an happy shareholder and that’s why I decided to increase my stake to 200 shares.
Do you own any REITs?
[author] [author_image timthumb=’on’]http://quityourdayjob101.com/wp-content/uploads/2014/03/ID-10050051.jpg[/author_image] [author_info]Hi, my name is Allan. I’m the masked blogger. Like you I’m a modern slave, prisoner of a 9@5 job in Corporate America. They told us when we were young that we would live in a society of leisure and that technology would permit us to work only a couple of hours per day. But we live in a society of stress and uncertainty. My situation could be a lot worse and I know it. So many humans are suffering on this planet. But a golden cage remains a cage anyway. At least, I have an escape plan. I will retire before 45 years old over my passive income. This is a dream that is so powerful that I will make sure it happens. To build my wealth, I mainly invest in undervalued dividend growth stocks. [/author_info] [/author]
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