It’s dividend income update time. One of my favourite times of the year as I get to review my previous three months worth of passive income received from my ISA portfolio. Counting up my dividends does bring a certain kind of joy in these bleak and gloomy times. Given my strategy of wanting to acquire enough passive income to cover my costs and be financially free, it is really the dividend payouts that I care about. Dividends provide the extra bit of sense and stability when everything around doesn’t quite seem to make sense
My dividends really do provide me with a comfort blanket during times of market turbulence as we have experienced recently. The market can be irrational at times as it seems to gyrate up and down on a whim but dividends add that bit of stability, reliability and predictability to my portfolio. Sure, dividends may not increase every year and a cut or elimination is even possible as we have seen all to well this year but the odds are greatly reduced when you diversify among different companies and sectors and focus on dividend quality – free cash flow, EPS and payout ratios.
So how did I do over the months of July, August and September?
Over the last three months, 35 companies sent cash my way in the form of dividends.
The total combined value of these payments add up to £974.
This is slightly lower than the £1,102 in dividend income I received during the same quarter last year as I have experienced a few dividend cuts. This is a set back but it is a rather small one in the grand scheme of things. The ark of my quarterly dividend figures is firmly bending upwards over time. Just look at the figures over the years.
- 2015 q3 dividend income = £0
- 2016 q3 dividend income = £195
- 2017 q3 dividend income = £578
- 2018 q3 dividend income = £756
- 2019 q3 dividend income = £1,102
- 2020 q3 dividend income = £974
Looking at the long term trajectory, my dividend income is treading upwards and I am convinced that it will continue to do so setting new records with every passing year.
I still find it amazing that I have gone from £0 passive or ‘unearned’ income at this same point in 2015 to £975 in this quarter and £2,984 so far for the year with three month still to go. I wish I learnt about the power of passive income sooner but I am thankful to have learnt about it at a young enough age.
The dividend income I receive is treated as a bonus above my pay from employment. I treat it as fun money that can be used to fund my passion for travel or watching live sport or simply used for a night out on the town. But in this case, I want to take advantage of the power of compounding and thus have re-invested the dividend income I received. I have used the money to buy even more shares in great companies so that my dividend income can further increase. I am using money to make more money. It’s a vicious money making cycle that anyone can be part off. All you have to do is get started.
For first time investors who are looking to one day live off dividends and consider this a priority, here are some filters to build a truly defensive income portfolio.
Screen only for stocks that have been raising their dividends for more than twenty years.
Screen for companies that have their dividend pay outs adequately covered by free cash flow.
Screen out the ones that haven’t grown earnings by at least 5% this decade. Given the gravity of the 08-09 crisis, the companies left on your list will be the truly goodies.
Then remove banks, insurance, mining and anything subject to product obsolescence (like Kodak film).
That’s about as defensive as it gets. There are a lot of opportunities you’d miss by following such stringent rules, but if your aim is “I want 99% success rate with a portfolio of common stocks”, that’s the best prescription there is for how to start your research in a quick and effective manner.
As long as you stay away from derivatives, investing is hardly quantum mechanics. The companies you are able to invest in (listed companies), make products, offer services and have to submit annual reports which are available to anyone. They either make a profit or they don’t. They either have positive free cash flow or they don’t. They either pay a dividend or they don’t. It is really that simple. When looking to invest in a business, take a common sense approach. Ask yourself, ‘would I buy the whole company at its current valuation if I had the cash to do so’. If the answer is yes, thinking about buying shares – a partial ownership – in that company would be a good idea.