Stacking Dividends (part II)
In June last year we looked at using borrowed money to invest in stable, dividend paying stocks. Now we know the outcome after seven months. But how should we react on the fluctuations of the equity prices? Managing an equity portfolio can be very difficult as emotions and random news might interfere with the original portfolio strategy. If one of our investments increased in value, should we buy more of it or cash it in? Maybe they said on the News that the company we invested in will lay-off 10% of their work force. Is that a sell signal?
If you read the Cash is King article, you know that our perception of money is crucial. The question is if you only work for money or if you let your money work for you. Looking at money as an employee gives you a more tangible feeling of your asset.
Let's say you save 5% of your monthly salary and consider that to be one FTE (Full Time Employee). Then you would have 12 FTE's after one year. That's a small company right there. When you have an employee work for you, you will undoubtedly keep an eye on how that employee is spending her or his time at work. Because we are cautious, we start with a 6 month probation. If the employee just surfs on the Internet all day and does not follow orders, then what do we do? We replace them of course. We don't hire more of them.
Turning Passive Income to Active Income
Now let's apply this employee mindset to our securities portfolio. We can look at the stocks that I recommended in June last year. You can see the stock performance and the dividends we received since then.
8th of June 2014: 76.67. 9th of January 2015: 95.99 (change +25.2%)
Procter & Gamble Company (PG)
8th of June 2014: 80.09. 9th of January 2015: 90.25 (change +12.6%)
Domino's Pizza Inc (DPZ)
8th of June 2014: 73.42. 9th of January 2015: 100.50 (change +36.9%)
The intention was to let the dividends cover the interest cost and if there would be an increase of stock value then that would be considered as a bonus. Well, it turns out that we got lucky and the bonus was quite handsome.
Interestingly, the below graph clearly shows that it was not just the individual companies that caused the increase of stock value. The curve patterns are almost identical for all three companies. The three companies are not in the same industry sector, but they are on the same stock exchange. The reason why we got lucky, was because we were in the right place at the right time. Find out more about this theory in this article.
Cut Your Losses and Let Your Profits Run
We fired the lazy employee and we'll do the same for any stock that is not performing. Why wait for a change when the world is full of amazing stocks and employees. Waiting for a market to turn or trying to time a purchase might sound like a good idea. However, the value of time is often forgotten. An investment that does not produce a profit has to be killed. If it does not grow, it's dead. The alternative cost is the loss we experience because our money is tied in a bad investment instead of a good one. The three stocks above faired well so we will let them continue do that. We let the profits run and continue to stack our dividends.
Why is Explosive Mode publishing financial articles?
Athletes are usually paid in lump sums, whether it's prize money, sponsorships or for commercial appearances. Professional athletes tend to earn considerable amounts of money during their active careers and have to learn how to manage it in order to survive after their sports careers are over. Explosive Mode featured athlete Eric Snaell (the Fit Businessman) writes about financial topics that cater to these athletes. His experience in banking, equity investments and entreneurship provides valuable information that is not taught at schools. You can find out more about these investment strategies in his upcoming book Independent Mode (Resign Anytime).