My Dividend Income Journey

I was trawling through my old tax returns recently and it occurred to me to track my dividend progress over the years. As I delved further into my dividend income history, it became an obsession to go back as far as I could to get a full view of my progress as a dividend investor.

 

For those of you that are starting your dividend journey, I’d strongly recommend keeping track of your dividend income over the years. Unfortunately I didn’t maintain very diligent records early on in my investing journey. Fortunately tax records and share registry records helped fill the gaps for the most part.

Building a large dividend income stream takes a long time

This isn’t any kind of get rich quick scheme. I’ve been investing over 10 years and still haven’t made it close to the passive income level that I want to get to. I anticipate that its going to take me at least another 5 more years to hit my $50k/yr goal.

Progress doesn’t necessarily follow a straight linear line either. I’ve made a few of mistakes on my path, which had I been better positioned for, I could have avoided.

There has been some experimentation with different yield strategies

Upon review of my holdings, I observed that the way I inadvertently stumbled onto dividend investing was by way of a REIT and Synthetic yield strategy. In my early years I was drawn to REITs like Office Trusts and Airport securities that offered high cash distributions and strong returns of capital.

It wasn’t until some time later that I realized that debt funded distributions and returns of capital made me a little nervous as to the sustainability of the payouts, particularly if there should be an increase in interest rates that unwound the whole thing. I also realized around that time that I was attracted to strong income returns and that there was something to paying your expenses with passive income.

Here’s how I would break down my dividend journey:

2000 -2001:  The accidental dividend investor

I’ve written before that some financial failures in my early years helped me get to where I am today. My journey as an investor is far from over, in fact its probably still evolving, but at least now I have a clear direction of where I want to go and a plan of how to get there.

I was fresh out of college in 2000 and didn’t really have much of a clue about investing. Pretty tragic really, particularly as I had majored in accounting and finance, but book theory and practical application are two very different things, particularly when emotions get in the way as I soon found out.

Early 2000 was still very much when the dot com era was in full swing, and I wanted to be a part of that. Needless to say, some of those experiments didn’t go particularly well. I also happened to make a couple of forays into some of the larger Australian banks and Telecommunications companies, which collected me a small amount of dividends, more by coincidence than by virtue of a strategy

2001- 2003: The High Yield Investor

This period really laid the foundations for me to look at income investing as a strategy. I began to notice that there were a few listed stocks on the Australian market that were offering incredible yields, as high as 7% or 8%. I became interested. While I am a bit more wary of very high yield today, I was more intrigued than anything at that stage.

I stumbled across a company that held a collection of airport assets, including Sydney Airport. The stock was called Macquarie Airports (MAP). The stock had been absolutely punished by the market because investing in infrastructure assets was still fairly new at that stage. The company was offering a mouth watering yield of around 8% at the time.

Little did I know that the distributions were funded with large amounts of debt and capital return. In any case, I ventured into the stock in search of yield, and earned some very respectable distributions for several years. The stock was significantly re-rated over time. In fact, by the time I exited the stock in 2003, I had almost tripled my initial $20,000 investment.

Even though I wasn’t invested in many traditional dividend paying stocks, I developed a taste for the power of income investing.

2003-2004 : The novice dividend investor

I replaced my MAP gains with more traditional dividend paying stocks. I gravitated more to higher yielding stocks that paid dividends out of earnings, rather than those that were REITs or some other stapled security that had debt funded distributions. I wasn’t really aware of dividend growth at this point, but high current yield was more of my focus.

I recall getting caught up in a couple of high yield traps that ultimately had their dividends cut. I realized that doing a dividend screen based on yield alone wasn’t going to be enough, so I soon pivoted  to companies that I recognized, with strong brands that paid dividends. Not exactly solid structured analysis, but this seemed to work at the time.

2004- 2007:  The leveraged investor

This period was notable for a couple of things. You will notice 2004 dividend income didn’t really jump much, principally because I was doing further study and didn’t have a lot of surplus cash to invest into stocks.

In fact, I had actually taken out a margin loan against my stocks and was using the stocks as security to pay my tuition fees. [Note to readers- Never do this, I was so geared during this period that a crash probably would have cleaned me out!. I spent my last term wondering if I'd be able to pay my fees!]

It was also during this period that I discovered Dividend Growth as an explicit strategy. I remember that I read Roxanne Klugman’s Dividend Growth Investment Strategy, and suddenly dividend strategy clicked and I was reborn as an investor.

Upon graduating, I was determined to pursue leverage as a strategy to drive my dividend income via dividend growth investing. You can see a fairly rapid rise in dividend income received over the couse of 2005-2007.

There’s one big reason for this, and that was my rapidly increasing margin loan. I was by and large still invested in only Australian stocks to this point, but I was actively going after companies with a track record of raising dividends.

 

2007-2008: The US Dividend investor

During this period I decided I would use the opportunity of being in the US to also apply my dividend growth strategy to US stocks. I had picked up shares in the big US banks, noticing that they had all significantly increased dividends over time. I also had accumulated companies such as Johnson and Johnson, McDonalds and others. Similar to my strategy with Australian shares, I was going all in with leverage.

 

2008- 2009 The Unhappy Investor :(

The economic crisis hit, and I was stuck with large leverage, well over $200k. I was forced to try and rapidly unwind positions to reduce the size of my loan. The faster I moved, the quicker the market dropped.

While I managed to survive and come out of this period stronger and in tact, this was the time I vowed to never let my amount of leverage get out of control again. As you can see, the unwinding of positions and general declines in dividend income caused a hit to my portfolio in 2009, and it was the first time my dividend income actually declined.

On a happier note, my personal journey moved into a higher gear when my wife and I got married and we were now a team of 2 dividend investors!

2009-2010 The Greedy Investor

While you may think that I took the time to sit in a corner and lick my wounds, nothing could be further from the truth. I saw bargains everywhere around me and took the opportunity to rebuild, and rebuild aggressively. I was actually adding to positions again from early 2009 and was using margin carefully to help me accelerate.

Some of the bargains that I managed to pick up from the wreckage in 2009 were AXP @$11, Caterpillar @ $31 and Coca Cola @$41. I’m don’t believe  I will ever see these prices again. I made good use of leverage to expand my portfolio, and you can see that my dividend income in aggregate expanded in 2010 from 2009 in a significant way.

By mid 2010, I was looking at some very sizable capital gains from the new positions I’d acquired in 2009, and some good dividend income. However, I was still afraid of buying on margin given my past experiences and I had steadily rebuilt both my US debt and Australian debt positions buying bargains in 2009.

It was also around this time that I noticed that the Australian market had not kept pace with the US market, and that the Australian dollar was at what I perceived to be depressed levels against the USD. I decided to take some action, and cut down my total debt by selling of all my US stocks, and using the proceeds to pay down my Australian loans.

2011-2012:  The debt free investor

My dividend income really hit a high point in 2011 as I redeployed capital from my US portfolio to accelerate dividend income from my Australian positions that were offering substantially more yield.

It was also during this stage that i started my exploration of mid cap dividend paying stocks that have strong moats, good competitive advantages and have provided strong dividend growth.

Its still early days as far as the success of my mid cap dividend strategy is concerned, but in the short period that I have held these, all have recorded strong dividend and capital growth, with some positions having doubled in value.

I took some gains on some positions that I felt had become substantially overvalued relative to the yield on offer, and used the opportunity to fully pay down my Australian margin loans.

So while the dip in dividend income may look as if something had gone wrong between 2011-2012, that really reflects the elimination of all debt on my Australian portfolio through the sale of a few dividend positions.

2013 +  The confident investor

I’m entering the 2013 period  from a position of strength and confidence in the dividend growth investing strategy. While I’ve seen ups and downs in investing over the years, I have enough confidence and conviction in the method to believe that it can take me to a goal of $50k/yr in 5 years.

I’ve come full circle with my Australian positions and am looking to diversify my dividend income to have a more global exposure, starting from a very strong dividend income position.

I’m also taking advantage of what I perceive to be a very high Australian dollar at present to quickly build a strong USD based dividend income, before the US economy improves, US interest rates rise and the USD rises against the Australian dollar, which I expect to occur within the next 2-3 years.

My dividend income journey has been quite incredible to date, and I’m sure there will be more surprises in stall. Its interesting to reflect back  more than a decade ago and see the progress that’s been made and the lessons that have been learnt.

Hopefully, there have been some useful insights for those of you who are reading this too!

 

Comments

  1. Martin says:

    Nice review. I also keep track of my investments and dividends (as you may see on my website). I like your “investor type” section as per each year or period. It’s quite funny.

    I was impressed with your Aussie dividends. It is quite impressive cash flow (considering your age). What do you hold to get 27k a year? This cash flow is basically get you almost to retirement. I do not know where you are located, but you can relocate to a cheaper location and basically retire. It is amazing achievemnet.

    • Integrator says:

      Thanks Martin. The bulk of the cashflow that gets me to my current dividend income are large cap Australian stocks. The big banks and telco companies . I added to many of these positions during 2008-2009 and they actually significantly ramped dividends out of the recession.

      I actually picked up some solid US dividend during the GFC, but sold out many of them in 2010 after they had posted some large gains. I regret that in hindsight, because they were great bargains for the earnings quality they provided. The main reason I sold out the stocks was to pay down some loans I had on Australian stocks and take advantage of what was a strong US exchange rate at the time. The Australian stocks hadn’t recovered as much as the US stocks so there was better value there in my opinion.

  2. I’m impressed by your dividend income and I hope to get there in the next decade as well. Thanks for sharing your investing journey for the last 10 years. I feel that you’ve done the right thing by staying on course though there were ups and downs along the way. Keep it up! Hope you will attain your goal soon.

    • Integrator says:

      Thanks Janice. Many bumps and bruises along the way!. I feel like there are many resources now for dividend investors that didn’t exist when I first started investing, so I had to discover it for myself the hard way. Now there are many books, blogs and other resources that one can get good quality information from

      Best of luck with your dividend income journey. Patience and perseverance does pay (literally!) :)

  3. This is really incredible. You’ve really tried and tested a lot of different strategies when it comes to dividend investing. I think people always have this misconception that dividend investing is so one sided or easy to do, but there are really a lot of different directions and results you can get out of it.

    • Integrator says:

      Thanks MMD. I think for me my main variables were around holding US vs Aus stocks. I quickly worked out that high yield REITs and other debt funded distributions weren’t for me. Australian companies have typically offered higher yield, and offer access to small and mid cap companies which can provide strong dividend growth over a long period of time if picked well. I still wish I hadn’t sold some of my top quality stocks like Coca Cola, Amex, Kimberly Clarke, Caterpillar etc. All are way to expensive to get back into now

  4. Nice post, I love reading about others journeys as investors. Perhaps you’ve mentioned before, but do you reinvest all your dividends? Or have you been taking the dividend income right along?

    • Integrator says:

      Thanks First Mil!. I now reinvest my dividends (selective, as opposed to automatic in the same stock). For the first 3-4 years I used to DRIP. Then for a period of time I harvested the cash, now more recently I have started to selectively reinvest my Australian dividends into US stocks. I sometimes wistfully think what my dividend income would have been had I been reinvesting all along. I would guess close to 25% higher then where it is today.

  5. Great summary. I’ve been investing for 10 years as well. I’ve always invested in dividend stocks but I also spent a lot of time focusing on growth and value plays. I’ve even dabbled in short selling troubled companies and day trading. At this point I’m in the same place you are, a confident dividend investor.

    I’ve had to use my capital to pay for a home and multiple (wife) degrees I currently don’t have the same dividend income you have. Very cool to see your journey and the level you’ve reached. Its just a matter of time before you reach your goal.

    • Integrator says:

      Thanks Zach. I’ve also looked at growth plays, and actually do still hold a few growth plays (I’d estimate less than 5% of the portfolio). They tend to be small caps with strong growth. While the core of my portfolio is definitely large cap dividend payors, I do like small caps for the growth exposure they provide, and for the step up in growth they offer. My sweet spot are really mid cap dividend payers with strong business models and competitive advantages.

      Best of luck with your dividend income journey!

  6. Nice journey mate. $27,000 a year in dividends alone is great. Can you share with us what is the capital base to generate this amount? Can you also expand upon the leverage amount and what you went from and to during the deleveraging phase you mentioned? Please share with us ignorant Americans what the current risk free rate is in Australia and inflation so it’s more of apples to apples comparison.

    Thanks, Sam

    • Integrator says:

      Sure Sam. Total current capital invested in equities is approx $700k today. During the leverage phase I had about $500k total, $250k in equity, $250k in debt. Today, the portfolio has around $40k in total debt. 10 yr aussie govt bond yields are 3.15%, while inflation is running at 2.5% today.

  7. Mo says:

    That is tremendous, I guess being a bit younger (28) I’m a little more risk prone. I’m garnering 100k/year in high dividend stocks (10%+)… if i can get through 5 years of steady and rising dividends, i’ll be able to double the 1M i’ve borrowed on margin…. trying to be a millionaire by 30 but damn its harder than i thought it’d be.

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