Troy: About three years ago, I had a prospective client come in to see me and he said, "Troy,
I've been listening to you on the radio. I saw your YouTube videos. I really, really like what
you guys are doing but I wanted to come in and talk to you about my portfolio." He comes in,
we sit down, and we get to the part where we start to go through his portfolio,
and it is literally 100% tech stocks. It's all growth-oriented. It's singularly focused
and concentrated into one industry, not a lot of dividend income, no diversification,
his focus was on growth. While he did very well for many years, over this past year, he's
probably down somewhere between 30%, 40%, 50%. One of the things that I've learned after sitting
with thousands of people over the course of my career is that once you get to retirement,
one of the most secure feelings that I hear from people time and time again is when they have
multiple streams of income coming from different asset classes. If the market or I should say,
when the market goes down, their lifestyle doesn't have to change. If you're like a lot
of our clients that value stability and security over massive growth potential,
then this is a core principle that I truly believe in. I implement for myself,
and you may want to consider it as a core piece of your retirement planning portfolio.
[music]
First, a couple of ground rules here because everyone watching this video may have a varying
degree of experience or understanding. I want to make sure we're using the same terms and we
understand what those terms actually mean. What we're talking about is dividend growth stocks.
What does that mean? Well, first, a dividend is when a company chooses to take their excess
cash flow, and instead of reinvesting that in other opportunities, they say, "You know what,
there aren't many opportunities out there for us. Instead, we think the most valuable thing
we can do with this excess cash flow is return it to shareholders," that's called a dividend.
Based on the number of shares you own, you will receive $1 amount per share and that is
your dividend per share. Sometimes it's referred to as what we call the dividend yield. I've sat
with many sophisticated people over the years and they get confused when it comes to dividend yield
versus the dollar amount. I want you focusing on the dollar amount when it comes to dividends.
Dividend yields change daily for new investors. If I want to go buy a stock today,
it pays the same dividend amount typically as it did yesterday in terms of dollars,
but the stock price fluctuates. When we take the dividend amount divided by the stock price,
we get a yield, but that fluctuates daily. Now, typically on a quarterly basis,
a corporation's board of directors will declare what the upcoming dividend will be. They may keep
it the same, they may increase it, or they may decrease it. Companies that have a long
history of declaring a dividend that is higher than the previous year or the previous quarter,
those are called dividend growth stocks. They have a long history of paying those
dividends but also increasing the amount of dividend that they pay you every single year.
For this analysis, and just in general moving forward, stop looking at yield and start looking
at the dollar amount that the dividends provide you. When I close out this video,
I'm going to come back to this concept and explain a little bit more deeply why that's so important.
This strategy can be very important if you're 50, like the title of this video, or you're already
in retirement, or if you're in your 20s or 30s. I want to go through some of the numbers here. We
have a value of $1 million. This is just a nice even round number I want to start with the price
per share. These are all assumptions or averages. We're just assuming that the average share price
in this portfolio is $50 per share. That means we would have 20,000 shares. 20,000 times 50 equals
a million. I just want to convey that concept to you. Let's not get caught up in the specifics of
the average share price in these items. Now, if a stock portfolio
comprised of 20,000 shares and average share price of $50. The dividend yield is 3% but what
that means is the stock is actually paying $1.50 per share. If we go in and buy this right now,
we would simply take the total amount of dividends that we receive, divided by the investment,
$1 million, and that gets us a dividend yield. What we want to focus on is the dollars per share.
Now we're going to assume here a 5% dividend growth rate. This means that the company in
this portfolio on average over many years have increased their dividend payouts about 5% per
year. That's what dividend growth is. Now, some companies have 6% yields with no dividend
increases. Other companies maybe have 1% yields but they're increasing at 10% a year. These are
some of the nuances when it comes to dividend stock investing that we're not going to get into
in this particular video, but just to understand a lot of companies do it a lot of different ways.
What we're trying to identify when it comes to a retirement portfolio is how do we get a
decent dividend along with decent dependable to an extent. I say dependable to an extent
because dividend growth isn't guaranteed dividends themselves aren't guaranteed.
If a company has paid an increase their dividend for 20 years, that's a pretty elite status. The
company is going to do everything they can to continue to pay that dividend.
Now you have to do financial analysis, and you have to understand cash flow from operations,
you have to understand the industry, the economics. There's a lot that goes behind
building this type of portfolio. If you understand these things, and you can do it,
it's a great strategy to have in your arsenal when you're in the accumulation phase or leading
up to retirement, or even in retirement. If we don't need this income, what we're
doing is we're taking the dividends. the $30,000 we're reinvesting. That means we're simply taking
this money, that the cash flow, the dividend is the cash flow that the companies remember said,
''We don't have a better use of this money, so we're going to return it to shareholders
in the form of a dividend.'' That's you. You take that cash and you say, ''You know what? I really
like that this company does that, I'm actually going to buy more shares of these companies.''
We take the 30,000 at $50 per share, we buy more shares, and that means we get 600 more shares.
Okay? At the end of year one here, our value is $1,000,030, because in this example, the price
doesn't change, it's still $50 per share. The value is $1,000,030. Now we have 20,600 shares,
but because we have a dividend growth rate of 5%, our dividend is now $1.58. Okay.
Let's summarize what's happened here in the first year. The dividends paid out of
$30,000. We took those dividends, we reinvested, we bought more shares. Now we have 20,600 shares.
The price of the stock did not change, but something else very important here,
the dividend increase, it's a dividend growth stock. Now instead of paying a $1.50 per share,
it's paying a $1.58 per share. Guess what? We reinvested, so now we have more shares,
20,600 shares at a $q.58 per-- Our income is now $32,548. An 8.5% Increase from the prior year.
That's a pretty big increase to your income. All we've done is we've taken the proceeds
from the dividends we've reinvested, but it's not just a normal dividend portfolio,
it's a dividend growth portfolio. Not only do we have more shares paying more dividends,
but those dividends are also higher because they're dividend growth stocks.
Now, what happens if the market goes down? When you're approaching retirement or in a retirement,
it never feels good when the market is down. In the title of this video, I told you that
you should be thrilled with this strategy when the market does depreciate in value. We spend a lot of
our time here at Oak Harvests Financial Group when the market's down, coaching our clients,
explaining this is the plan. This is why you shouldn't be worried about the market going down,
because this is where you're getting your income from. This is what we're doing for taxes. This
is all part of our retirement success plan. With this strategy, when the market goes down,
so instead of having $1 million now, we have $800,000. The stock price is down
20%. It went from 50% to 40%. Remember, because we reinvested year one, now the end of year two,
we've received $32,548 of dividends. Couple things to note here. When the stock price goes down,
the dollar amount corporations pay in dividends typically does not change.
Now it could change if the board of directors says, "You know what? There's a recession coming,
our sales are expected to be down, profits, cash flow, everything is going to be hurt. We need to
not increase the dividend, we need to maybe not pay a dividend." That can happen. It is possible,
but again, companies that have paid their dividends and increased their dividend for many,
many, many years take this very, very seriously. Exxon has not only paid their dividend,
but increased it for decades. For the past several years prior to the recent spike in oil,
Exxon was having to borrow money to actually pay their dividend and increase their dividend.
This is how important it was to them. We have several Exxon employees that are clients here.
Exxon actually stopped their 401k contribution or their 401k matching program, but they kept
the dividend payments and dividend increases in place. While dividends are not guaranteed,
dividend increases are not guaranteed. What we typically see is when the stock market goes down,
that has no impact whatsoever on what the board of directors decides to do with their
dividend payment. The only thing that matters with the dividend payment when it comes to the
decision that the board of directors will make, where's our cash flow? Where are we at from a
future sales and revenue standpoint, and can we continue to sustain this dividend payment?
How long will the recession last? These are all the factors that go into that decision.
Getting a little off-topic here, but I want to point out. Now,
because of the dividends that we have from reinvesting, remember, we bought 600 shares last
time. Now, because the stock price is down and we have a higher dividend than where we started,
we're reinvesting and we're accumulating more shares. Now we receive $32,548 dividends
rounded down here to $832,000, stock price is still 40, this is the end of year two,
21,411 shares, but the dividend increased again. Now we're up to $1.66, which if we have 21,411
shares at a $1.66 per share, $35,542 in dividend payments, which is a 9.2% increase in dividend
payments above last year, and an 18.5% increase over when we originally made the investment.
When the stock market goes down with the dividend growth strategy and reinvesting those dividends,
we can take advantage of that by reinvesting, buying more shares at depreciated prices,
and at some point later in life, when we need retirement income,
all we do is we flip the switch and instead of reinvesting, now we have an income stream
that we believe would has a good probability of continuing to increase assuming we're doing the
correct financial analysis, we have a balanced portfolio across sectors, and we own companies
in that portfolio that have good cash flow, and we expect those cash flows to continue based on a
fundamental analysis of the company's business. Now, let's fast forward 10 years in time.
Share price is still $50. We have accumulated through reinvestment 30,000 shares at a 5%
average dividend growth rate. We started at $1.50. Now we're up to $2.44 per dividend. We take our
dividend multiplied by the number of shares. Now our income is up to $73,200. I have this question
mark over here on the value because I wanted to ask you, what is the value of the portfolio?
Well, pretty straightforward. We take the number of shares, we multiply by the share price,
three times five is 1.5, take all the zeros, $1.5 million. What's really cool about this strategy if
done correctly over time and managed and monitored and paid attention to, because we've accumulated
so many more shares, our original $1 million has grown to $1.5 million and we have an annual income
of 73,200, and there's a reasonable expectation that that income will continue to increase because
this is a dividend growth stock strategy. Again, none of this is guaranteed. If we want guarantees,
we have to look to more guaranteed tools. We probably shouldn't have put all of our
money into this dividend stock strategy bucket because, again, it's not fully guaranteed,
but dividend stocks can be a very valuable asset class in retirement. There's a reason
why they're part of what we call our core four here at Oak Harvest Financial Group. This is
a good example of how we can customize a retirement income and growth plan for our
clients that takes the concern about the market drop a little bit off the table for many people
because we have a plan for when that happens. As promised, I told you I was going to come
back to the concept of why we want to focus on the dollar amount that the dividend pays as opposed to
the yield. Over the years, I've sat with literally hundreds of people that they try to build their
own dividend portfolio, and what they do is they go out and they look for the highest yields.
I can't tell you what a catastrophic strategy this can be over time. While it sounds good
and you think, "Hey. I can buy these funds or I can buy these stocks and I can generate 9% on
average yield, and my $1 million gets me 90,000." Well, it sounds good initially, and some of you
watching this video, I know you're doing this, so I am talking to you because this could make a big,
big, big impact on your security long term. There's a reason why typically stocks pay
at what we call a higher yield or a 9%, 10%, 12% yield. When you understand the concept,
the math behind it, hopefully, you can translate that into an understanding of
the poor business fundamentals of those companies. If a stock is trading at $100 dollars per share
and it pays a $5 dividend, that is a 5% yield, but remember, I wanted to focus on this. Too
many people focus on the yield. Now, the company gets bad news, it tries to preserve its dividend,
so it doesn't want to necessarily reduce the dividend or eliminate the dividend quite yet, but
sales are down, margins are getting compressed, there's a new competitor entering the marketplace,
maybe technology and automation is changing the landscape, the company's in trouble.
The stock price, institutional investors realize this. They start to short the stock, they start
to sell the stock, and a lot of people hang onto it because, hey, we're still getting our dividend.
Now you come along and you say, "Oh man, there's this 10% yield stock out there. It's paying $5 a
dividend, and I can buy it for $50 per share." Well, yes, you can buy it. You're going to get
a $5 dividend, which is a 10% yield. The only reason it's a 10% yield is because the stock has
lost one or 50% of its value. It's dropped from $100 to $50. The stock is not attractive. The
fundamentals of the business are deteriorating. We do not want to have a portfolio of a bunch of
companies that are in fundamentally deteriorating financial condition in order to reach for yield.
Yes. We invest our $1 million. We get a $100,000 a year if we do this. When the company,
and a lot of these companies, they won't turn the business around. They'll cut the dividend, it'll
go from $5 to $3. Typically, they try to preserve it to some extent. Soon as they cut that dividend,
the stock, again, most likely, is going to go from $50 a share to $20 a share to $10 a share,
something along those lines. Now your investment, let's say it's a $100,000.
It loses 50% of its value, you're down 50%. On top of that, the company has reduced its
dividend. Now you're not receiving the $5 per share. You're receiving $3 or $2,
or maybe nothing. That is very, very possible. This is why you do not want to reach for yield.
You do not want a portfolio of 7%, 8%, 9%, 10% dividend paying stocks because there's a reason
typically, they pay those high yields, and it's not because the businesses are doing tremendous.
Just a brief interruption here. I hope you're really enjoying this content. Do me a favor,
please, share this video with a friend or family member, possibly a coworker,
someone who you know could benefit from this video. It helps them and it also helps us.
[music]