Just over a year ago, I bought my very first dividend-paying stock in the form of BP. Little did I know that this one little purchase would lead me to become a dividend junkie and scream with excitement every time a dividend cheque hit my account. But that is exactly what has happened and I am sure glad I took that initial first step. I am now elated to say that I am expecting to receive £1000 in dividends over the course of the year. This post is there to discuss how I went from having 0 in dividend income to hitting the 4 figure mark. I will also be discussing the important lessons I have learnt in this journey.
It is a great feeling to say that I have cracked the four-figure mark in annual dividend income. To be precise, I’m expecting £1,030 in dividend income over the coming 12 months. That’s money that will come my way no matter what I do. I could spend the whole of next year simply eating, sleeping and watching TV and the dividends would still roll in. Although £1,030 in dividends is nowhere close to meeting all my expenses or living on, it is a great psychological boost to cross the four-figure mark.
How I aimed to build my Dividend Growth Portfolio.
Having done a lot of reading and a whole lot of research before starting my dividend investing journey, I realised that the key for this strategy to work would be to invest in high-quality companies when they are undervalued.
High-quality companies are those that are profitable, have good returns on equity, show consistent growth, are able to handle and survive downturns in the economy, has no or very little debt, has a bullet-proof balance sheet, has a solid long term record, has a history of paying increasing dividends and has a strong management team.
A company is undervalued when its current earnings yield is higher than its average earnings yield. I like to use the 10-year average earnings yield value. In other words, its current P/E ratio is lower than its historical P/E ratio.
It is also important to note that you should not pay too much attention to the dividend yield, which merely shows the dividend as a percentage of the current stock price. Far more important is the dividend payout ratio, which shows the dividend as a percentage of earnings. This way you see how much of the EPS is actually being returned to the investor. Also, look at cash flow. Free cash flow is key to buying back shares and hiking dividends.
Now that I have set out some of the rules I followed when investing in solid dividend payers, here is how I actually went doing it.
How I reached £1000 in dividend income
- Goldcorp (July 2015) – This in all honesty was a speculative purchase. I felt that gold prices were really low at the time and investors had left gold stocks for dead. Many investors believe that holding gold, or gold stocks for that matter, is useless as it has no intrinsic value. But as famed hedge fauns manager Ray Dalio says, those that don’t know the value of gold don’t know the history of money.
Having researched many gold mining companies, I bought 133 shares in Goldcorp in July 15. And low and behold, a month after purchasing my stock, a dividend cut was announced. This was truly a dire time to be in the gold industry. But I kept my head as I knew gold prices would rise and that Goldcorp was one of the worlds best gold mining companies. Gold prices have recovered this year and this stock is now up over 20% on my purchase. Dividend Income: £9
- BP (September 2015) – This was my first purchase since implementing a dividend growth strategy. In essence, this was my first true dividend-paying stock. I purchased BP during the September market meltdown and was able to get a yield of over 8%. I bought 538 shares in BP for just under £1800. I expect to get between £150 and £180 in dividends for the year depending on the USD/GBP exchange rate. The weekend pound(£), at the moment has certainly helped push up the BP dividend. Dividend Income: £176
- Royal Dutch Shell (December 2015) – My portfolio currently has 256 in Shell. The shares came about in two ways, an outright purchase of RDSB shares and through Shell’s takeover of BG Group Plc. Like my purchase of BP, my dividend yield on Shell stock is over 8%. My current annual dividend on RDSB is £340 but this again depends on the GBP/USD exchange rate as Shell declared its dividend in USD. Dividend Income: £340
It may seem strange that the high yields I got on BP and Shell seem to oppose my rule of not focussing on dividend yields but payout ratios. Both BP and Shell could barely cover their dividend payments at the time of my purchase due to the oil downturn. But, as a long term investor, you need to look at long time horizons. You should not let short term cyclical factors affect you. Miners and oil producers were hated between August 2015 and February 2016 because commodity prices were falling all across the board. But as a long term investor, this is the best time to buy; when other investors are the most fearful. Commodities will rise in the long term and when you look back at history, it will show that this was a great time to buy miners and oil producers.
- Tritax Big Box Reit (February 2016) – I took part in the Tritax IPO in February and sold some shares soon after for a decent capital gain. I still hold on to 604 shares and recently added 35 more in the rights offer. Dividend Income: £23
- G4S (April 2016) – At the time of purchase, G4S looked severely underpriced. The market was pricing in the worst-case scenario for the stock. Since my purchase, the stock has rallied over 25%. Dividend Income: £55
- Cobham ( April 2016) – This defence contractor is a dividend champion as it has raised its dividend for 25 years straight. Although the rights issue this year came as a shock, the underlying business fundamentals still appear intact and I expect the company to do well over the next few years. Dividend Income: £96
- Telefonica (June 2016) – My broker was offering free trades of certain European stocks during June. Free trade is never a reason to purchase stock but I have been following Telefonica for a while. The owner of the 02 networks is saddled with debt but I believe the business is strong enough to come through the current turbulent period. Dividend Income: £10
- Astrazeneca (June 2016) – I bought this just before the Brexit vote as I believed it was going to be a winner no matter which way the vote swung. The stock is up over 25% since purchase as investors believe that a takeover bid will be made for the company. Dividend Income £53
- BT (June 2016 and October 2016) – Like AstraZeneca, this stock was unduly sold off before the Brexit vote. The stock has remained low since then as there are fears around the pension deficit and there is still uncertainty surrounding the open-reach unit. I added to my purchase in October due to continued stock price weakness. I know have 314 shares in BT. Dividend Income: £47
- Burberry (July 2016) – Retail stocks were heavily sold off in the aftermath of the Brexit vote. It took a while for investors to realise that Burberry earns the majority of its profits from overseas and the weak GBP (£) will give a boost to earnings. Luckily, I was able to bag myself 10 shares before the stock started climbing again. Dividend Income: £4
- Next (July and October 2016) – With torrents of free cash flow and a strong brand, it is easy to see why I bought into Next. Retail stocks are trading at depressed levels across most of the worlds major markets and thesis a good time to load up on them for long term investors. Dividend Income:£16
- Britvic (July, August, October 2016) – Another stock that was sold off in the aftermath of Brexit was soft drink manufacturer Britvic. The stock has been volatile of late and thus I have added to my position on stock price weakness. I currently have 236 shares in this company. Dividend Income: £55
- Essentra (August 2016) – The company saw its shares being heavily sold off on the back of earnings coming in below expectations. In my view, the stock was oversold and thus I purchased 34 shares. Dividend Income: £7
- AG Barr (August, September, October 2016) – AB Barr is one of those wonderful businesses that every dividend growth investor needs to own. It has raised its dividend for 16 years straight and still has plenty of room to expand internationally. Dividend Income: £15
- Pearson (August, September 2016): The education company is currently in the mists of a transition. Low spending on academic books this past year has seen Pearson’s stock price crash over 25%. I do believe that Pearson has a decent technological transformation strategy and the company will be stronger this time next year. Dividend Income: £20
- SSE (August 2016) – This was my first utilities purchase. SSE offers safety and a high yield but dividend increases can be below RPI (Inflation). This has the the effect of eroding your dividend purchasing power over time. But the high initial yield should offset this. Dividend Income: £10
- Vodafone (September 2016) – This multinational telecoms company is a top holding of many UK equity investors. The company is nearing completion of its ‘project spring’ programme and this should translate into higher earnings in the coming years: Dividend income: £8
- Hikma ( September and October 2016) – It is always great to see directors buying shares in their own companies and this is exactly what is happening at Hikma. The Chief Executive, Chief Financial Officer and a few other senior people are loading up on the companies shares. With excellent growth prospects and a diversified stream of healthcare income, Hikma looks an attractive proposition for a dividend growth investor. Dividend Income: £5
- Capita (September 2016) – The company saw its share price sink ager its latest set of results. I bought shares as I do believe that the stock is oversold. Capita is still a great business with excellent free each flow generation and a healthy dividend payout ratio. Dividend Income: £55
- Gilead (October 2016) – The most profitable biotechnology company in the world has seen its shares trade at single-digit valuation levels due to declining sales and a threat of Hilary Clinton becoming president. But even though sales are declining, the company still remains immensely profitable and has a bullet-proof balance sheer that is full of cash. Dividend Income: £20
- Centrica (October 2016) – With energy prices being in the doldrums and customers leaving in droves, Centrica has had a real hard time over the past couple of years. But the good news is that there is a clear strategy change and their is a clear focus on becoming a consumer centric business. Dividend Income: £9
- Whitbread (October 2016) – I bought the Costa and Premier Inn owner using the monthly stock purchase. Amount Invested: £155.65, Dividend Income: £4
- Pennon (October 2016) – Although Utilities have been bid up in this low-interest-rate environment, Pennon looked like one of the most attractive stocks in the sector at the time of purchase. Dividend Income: £6
It is hard to believe now but just over a year ago, I had £0 in dividend income and didn’t even know the power of passive income. I didn’t believe that you could get money rolling into your account without doing any work. I didn’t know the wonderful feeling of owning companies. But that has all changed and I am a true dividend believer now. By working hard and meticulously investing over the past year, I am starting to reap the rewards of my dividend investing philosophy.