Thursday, October 30, 2014

Dividend income growth... 16 months in review.

If you follow any of my previous posts, you know I am a believer in dividend growth investing.  We've consistently been able to achieve an increase of our portfolio's annual dividend income since we started using this strategy with the lowest annual portfolio dividend income increase of approximately 5%.  We grow our dividend income through dividend reinvestment, new monies added to the pot, and from dividend increases.  This year and a half has been a bit of a special case from past years because we have added NO NEW MONIES to our investment pot.  Therefor the increases over the past 16 months are solely from the pooling of dividends and then reinvesting them, and from dividend increases which have been plentiful this year.   I've also incorporated some covered call writing in our RRSPs to add a little extra cash-flow but those are really small potatoes compared to effect of the reinvestment and increases of the existing dividends.  From July1 2013 to October 30 of 2014 we have increased our dividend income by a compounded rate of 17.5% over those 16 months.. or just over 1% per month.  Our portfolio currently yields about 4.5%, so over the 16 months about 6% of the growth came from reinvestment and the remaining 11.5% is from dividend increases.  This represents an annual dividend growth rate of about 8.6%. Not too shabby.

The following chart shows the increase to our annual dividend income for each month, which includes both reinvestment and dividend increases.



Note that every month there was an increase in our total dividend income.  Every month had some form of increase and there were no decreases.  In order to give this chart a bit more meaning, lets assume that July 1st 2013, we made $10000 a year in dividend income.  The monthly increases to that amount would look like this:



... to the point where $10000 in dividend income turns into $11749, 16 months later.

If you've been watching the stock market over any period of time, you know that we always see increases and decreases in stock prices, usually by the second during market hours sometimes with big swings to the upside and the downside.  This watching of the market go up an down can rattle some people as they watch their portfolio value increase or decrease by up to double digit swings within short periods of time.  The above chart is the kind of chart I like.  Our dividend income continues to rise month after month.  Some months we had dividend increases and other months we deployed some of the dividend monies that had built up and bought some more stock.. usually ones that we thought were depressed. on sale, or were due for a sustainable dividend hike in the future.

Tuesday, October 28, 2014

#38 Use good debt wisely, get rid of bad debt completely.



Most people have some form of debt.  Credit card debt, student debt, mortgage debt, car loan, family loans, investment loans, payday loans, rotating lines of credit, and consolidation loans are probably the most common types of debt.  People typically use debt to buy something when they don't have the money for it at that given moment in time.  We as a society don't often save up for things before we buy them, but rather buy them and then pay back the loan over time... that's just the way most people do it these days, particularly younger people just starting out who have no savings to begin with.  The problem with debt is that if taken on for the wrong reasons, or if handled irresponsibly, it can make your life more difficult rather than easier.

But not all debt is bad.  We are quite comfortable taking on large amounts of debt but we only take on what we consider to be "good debt" and that brings us to defining good debt vs bad debt.  We use a fairly simple definition but it has some room for subjectivity.  Good Debt results in a better longer-term fiscal situation for our family as a whole.  Bad Debt results in a worse fiscal situation.

Another way of looking at it would be asking the question:  Does the cost of paying the interest plus the principle make up for it FINANCIALLY in the long run?

Here are my thoughts on what are good types of debt and what are bad.

Credit Card Debt - Bad Debt.  Interest rates are too high and most people use credit cards to buy things that depreciate over time.  If you don't pay your credit card off quickly, the interest will eat up a lot of your money.

Student Debt - Generally Good.  Assuming you are using the the associated education to make more money than you would without the education, then yes Student Debt can be Good.  Once you're done your education, I advise to pay off student debt quickly.  I would however challenge people taking "basket weaving" classes whether those types of diplomas/degrees are worthwhile for the money and interest that they are required to pay back, often for years and years. 

Mortgage Debt - Generally Good Debt.  It allows you to choose where you live and how long you live there by owning property.  Its debatable whether a home is an investment, but the benefit of being in control of where you live and knowing that rent wont be going up every year can help you budget your money more easily.

Family Loans - Generally Bad Debt.  Owing a family member may make sense in some cases, but I'm not a fan of owing family simply because its awkward and usually one side feels they're not getting the treatment they'd like. 

Investment Loans - Good Debt.  If you can make more money on the investment than you are paying for in interest costs, this is definitely good debt in my books.  We regularly use investment loans as part of our investment portfolio.

PayDay Loans - Definitely Bad Debt.  Essentially legal loan sharking. 

Rotating Lines of Credit - Depends on the usage, but I would bet most people are using it for consumer spending.  If you use it for investing purposes, then a Line of Credit can be good debt.

Car Loan - Bad Debt.  New Cars depreciate like crazy the first few years.  Buying a car may be a necessity, but we prefer to pay off car loans very quickly or don't have a loan at all.

Consolidation Loans - Bad Debt.  Usually the lesser of the evils of loans in that consolidation loans usually have lower interest rates than other high interest loans such as credit cards or some car loans. The downside is that this often still consumer debt, just at a different rate.  Pay it off.

Kim and I both had student loans in the 10s of thousands of dollars, which we paid off within a few years once I started working. At present, we have an investment loan and we will be buying a house next Spring which will mean we will have a mortgage again.   Both of these loan-types will help better our financial situation and so we are quite comfortable having them and generally not in a hurry to pay them down.  We have no other types of debt at the moment and we intend to keep it that way.  Whenever we've had other types of debt, we've work very hard to pay it down as soon as possible.  By only having debt that helps our financial situation and doesn't hurt it, it means we don't fuss over our debt as much as other people, and we know that by paying the debt off, we aren't merely pouring our money down the drain, or lining the pockets of others.  We obviously need to make sure that the amount of good debt we have remains at a manageable level that we can be expected to be able to cover with our monthly income.  That is where budgeting comes in.