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Highlights from this episode include:

  • The wealthy investor’s secret to profiting even when the market is in the tank (2:55)
  • Why understanding the dividend growth model can make you rich… or destroy your financial life (4:08)
  • A foolproof way to pick company stock with the best chance to pay off (4:52)
  • The little known reason dividends shield you from bankruptcy even when stock price has plummeted (9:44)
  • Why dividends alone aren’t enough to judge a company and what you need to look for to safeguard your investment dollars (13:05)
Read Full Transcript

Do you hate the thought of working past 55 or 60? Do you hate not being able to live the life you deserve today? Do you hate not knowing what your financial future looks like? It's time to stop doing what you hate, here's your host, Mr. Harold Green.

(00:20): Hello. Hi everybody. This is Harold Green and it is time to stop doing what you hate. How are you doing today? Hopefully you are having a fantastic day. I am looking forward to sharing today's show with you. And the title is dividend growth investing that's right. Dividend growth investing, but I'm, I'm building on a previous show where I talked about the truth regarding annuities and just a brief recap. Annuities are safe, money, asset items like life insurance, CDs in the bank and money market can be safe depending on where it's being held. As far as annuities go, they pay you a stream of income. If you want, they have asset protection built in. You can use them for estate planning. However, in some cases they're extremely, you know, they're not flexible. So you gotta be careful when you're looking at the annuities and you also have to look at the ratings of the annuity company to make sure they're solvent.

(01:12): They have enough cash to pay their bills and things of that nature. So you don't want to get involved in an annuity and find out it's the worst thing that you ever did. So building on top of that, since we are talking about investments, I'm going to put the disclosure out there for you. All investments, including real estate are speculative in nature and involve substantial risk of loss. I encourage investors to invest carefully. I encourage investors to get personal advice from professional investment advisors and to make independent investigations before acting on information that I publish. Again, take responsibility for your investing. You're going to have to do your due diligence and make sure you are making the right choices. Okay? So let's get into dividend growth investing you guys ready? Let's get it. One, two, three, let's get it. Let's get it. So I'm going to be using information from my accounting course.com.

(02:08): And it's talking about what is a dividend growth model. You're going to hear that out there and the weeks and days to come right now, there's a sector rotation going on. Somewhat people are bailing out of the technology sector and they are going back into the things that were getting hammered during the covert downturn. So you're going to, you're going to see a lot of volatility in the market here in the next, you know, all the way up until the election. People are just grasping and looking for the right place to go. But I'm going to tell you ahead of time, if you have a solid financial plan and you have a solid investment plan, this should be of very little concern to you. If you have a plan. And if you don't have a plan going to tell you guys ahead of time, you are swimming with the sharks without having a plan.

(03:04): Okay? You are well, actually you're swimming with the sharks outside of the cage. That's the thing. So the plan is the Cajun. It keeps you safe, and we're going to talk about the dividend growth model. And so let's get into it. I'm going to go into the definition. And also this is kind of like the math behind dividend growth investing. When I was going through the investment exams and these formulas, I tell you, they kicked my butt. I was never great. And high school with Matt and things of that nature, or even going into the, these certification programs and whatnot. This math was like, it was a beast. And so thank God for software. Thank God for calculators, because I tell you they're saving me every single day, but still we have to understand the math behind what we do. So we're going to get into this dividend growth model evaluation model that calculates the fair value of a stock.

(03:49): And it assumes that the dividends grow either at a stable rate and perpetuity or at a different rate during the period at hand. So what is the definition of a dividend growth model? So the dividend growth model determines if a stock is overvalued or undervalued, assuming that the firm's expected dividends grow at a value G forever, which is subtracted from the triple R, which is required rate of return or K therefore the stable dividend growth model formula calculates the fair value of the stock as P equals D slash open parentheses, open parentheses K dash G close parentheses. The multi-stage stable dividend growth model equation assumes that G is not stable in perpetuity, but after a certain point, that dividends are growing at a constant rate. So that's very, very, very important because you definitely want to invest in companies that are growing their dividends every single year at a certain percentage.

(04:49): And we're going to look at an example. So we have company, a leading retailer company that declares an annualized dividend of $3 and 23 cents per share for 2017. And you might want to just take some notes on this. And it just goes into an example. Maria is a financial analyst who follows company a and she wants to calculate the fair value of the company stock using the dividend growth model based on historical performance, Maria assumes that the company's dividends will grow at a constant rate of six in perpetuity. She also assumes the triple, our required rate of return based on the company's fundamentals and historical data is 13%. Their former Rio calculates the price of the stock as follow up. So there's a lengthy formula there that goes into how to calculate that information out. And the stock is currently trading at it before dollars and 68 cents a share.

(05:36): And based on the formula, the stock is overvalued because the formula P equals D one slash open parentheses K minus J closed parentheses equals $3 and 23 cents slash parentheses. And there's 13% minus 6% close. It equals $3 and 23 cents a share divided by 7% equals $46 and 14 cents, but is trading at $54 and 68 cents a share. So it's overvalued. Now that can be a good thing on what you're buying that stock for, but for dividend growth may not be a good idea. And we're going to get into that in a second. So Maria wants use the multi-stage dividend growth as well because constant dividend growth in perpetuity is not really so based on the historical performance, she assumes that the company's dividend will grow by 8% and seven 2017, 12, and 18 and 14% in 19, and then will increase at a constant rate of 7%, the required rate of return to get that those 13%.

(06:33): So a good number for dividend growth would be the 8% a year, seven to 8% a year, maybe even six. And I'm real calculates that expected dividends from 2017 to 19 based on growth assumptions, and then perpetuity. And then she calculates the rest of that out from 17 to 20, by raising the expectations, you to the power of one too, and three at the end of that, in that formula and so on. So what she gets at the end of the day after calculating all these things out, it still shows that the current stock is trading and it is over valued. Okay. So when I build out models for dividend growth, what I'm looking for is I am looking for stocks that have low volatility and low volatility is important because sometimes times when you are investing for dividends, some of the stocks you buy can be extremely volatile, right?

(07:33): And here's how dividends work dividends are paid. You get dividends based on the number of shares you own. Let's say, example, your portfolio is giving you 5% dividends every single year, based on the number of shares that you own. Let's use a million dollars as a safe Amber. So you have a million dollars in your portfolio. So guess what you're owed and dividends that year, you are owed $50,000. Now what happened when the Corona hit well, when Krone hit, it took the value of that portfolio down, depending on the stocks. And if it was energy point, I tell them you're, you're down probably about 70% or so in that portfolio. So it took your millions dollars from a million down to 300,000. So you probably lost seven, a hundred thousand dollars in value. Now this is for dividend growth, investing, buy and hold. Not as this is assuming that you're not going to sell that stock.

(08:29): All right, you're just going to hold it because you want that $50,000 a year income. It's like putting that money in that annuity and then them paying you out $50,000 a year for five years, 10 years or 15 years, depending on the the term that you, you said, however, the value of the annuity doesn't go up and down. However, that value of the dividend growth portfolio will go up and down and it can be extremely volatile. So I look for stocks that have low, and I would say moderate volatility. That would be a better use of the word moderate and so on risk number, according to Riskalyze, and that software that I use to look at how risky a stock is and re investing, according to your risk tolerance is very important. However, doing Corona viruses, sometimes you try to invest according to your risk tolerance, even the stuff that what's conservative, you got beat over the head and you, and you lost value.

(09:23): Okay? So that's, this is a whole different world, but I just want, I'm gonna bring you guys a little bit information on dividend growth investing as to how it's supposed to be done. So back to that million dollar portfolio, it's gone down to $300,000, but guess what, if you don't sell anything, if you don't sell and panic, you're going to get that same 53 that was in dollars a year because those dividends are based on the number of shares that you own. So what about the growth part of it? Well, the growth part is basically capital appreciation. You, you want stocks that not only pay you dividends, but stocks that grow every single year. Okay. So I'm gonna run through the list and just kind of pick out some of the ones that you guys know really well. Colgate Palmolive company, they have a risk score of 68 and that's pushing more into the aggressive side is it's moderate, but it's pushing more towards the aggressive side.

(10:16): And right now they have a potential return of 4.3, 7%. But the annual dividend is 2.19, which is okay. It's just kind of low Proctor and gamble. They have a risk score of 63. That's a little bit more moderate return, potential 4.4%. Dividend is 2.2%. I'm Lockheed Martin. You guys heard of them. Their risk score is an 82, but their potential rates turn is a 8%, but their dividend is 2.38. So this is, this is one of those stocks where if you're investing for dividend growth and you had, had had monies in them, Lockheed Martin near to date is down 1.2% year to date. So that portfolio would be down and then year over year they're downstairs. So like basically 1.04%. So although they're a high volatility stock, they didn't see a whole lot of movement in their price, I believe. And then, so the ones that we had and my dividend model AstraZeneca, that's the the drug maker potential return 1% dividend 2.51, but the risk is 87 Chevron.

(11:27): That's an energy company. Their risk scores is a 90, which is really high. So they're really high in volatility, but their annual dividend is 5.91%. So if you're investing in Chevron, you've probably seen a lot of movement in Chevron and then the value of that stock. But if you hung onto it and not sold it, you're still getting that same dividend of 5.91%. Another one of my favorite for not a lot of volatility and they've been really cooking and that's McCormick company with a risk score of 68 pushing aggressive return is 6.6, 8% potential in annual dividend is not that great. 1.19, but this is, this is part of the growth side though. Okay. So for me, I loaded up on some McCormick and put that in my client's portfolio early on and McCormick a year to date is up 18.92%. But over the last six months, McCormick is up 31%.

The last three months, McCormick is at 18%. And over the last month, McCormick is only up 1.8%. So that tells you about that rotation. That's going on. People are starting to rotate from things probably that are doing well because of coronavirus back towards the other direction. And so when you're looking at your dividend growth investing, you want to make sure that you are putting stocks in there that that make a lot of sense for being there. And one of the companies that we're paying a high dividend not too long ago was PK. And that was parked hotels and resorts park, hotels and resorts. They've been slammed right now. They're trading at $10 and 59 cents a share. They were paying 16% a year in dividends, but because the revenues are not there, PK is not going to be in my dividend growth model. However, I will put park hotels into the portfolio for just the pure growth and the future speculation.

(13:32): So I'm not buying a whole lot of that for my clients. And, but I'm not going to tell you what percentage of the portfolio that makes up and you're going to have to, if you're, if you're out there investing on your own, that's something you're going to have to look at in terms of how you want to build your portfolio and how you're going to adjust those to your financial plan. So I just wanted to bring you guys some knowledge today in regards to dividend growth, investing, how to make sense out of it. And if you're out there and you're, you don't know which way to go, and you, you really don't have time to fool around with this stuff and do all the research. I want you to do me a favor, give me a call (808) 521-4401. And then I will definitely put together a plan with you that probably could have some dividend growth investing in there and it, but it's just going to depend on what you need or the future. So you never invest without a plan. And I'll tell you, you definitely want to plan to invest if you haven't already done so in the future. So thanks for giving me the opportunity to share with you guys today. And until next time, one, two, three, let's get it.

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