Recently the German Central Bank (Bundesbank) has calculated the total return of private households in Germany. The results were devastating! According to their report, the private households were averaging a total return of -2.5% in 2018. That figure mirrors the returns from cash deposits, stock investments, insurance claims and includes the inflation. In other words, Germans are losing wealth.
Knowing about the aversion for stocks in my country, this insight wasn’t surprising for me at all. On average, just about 10% of German people own stocks in some capacity. One of the lowest proportions in the developed world. Folks, stop and think for a moment. The stock market has historically returned an average of 10% annually. Let’s apply a more conservative assumption for future returns of about 6-8%. It’s still well above what cash deposits have to offer. And yet people love holding cash and condemn investing in equity markets. Are you kidding me?
Moreover, dividends play a major role in stocks’ long-term total returns. John Bogle, the founder of The Vanguard Group, has the following to say: “An investment of $10,000 in the S&P 500 Index at its 1926 inception with all dividends reinvested would by the end of September 2007 have grown to approximately $33,100,000 (10.4% compounded). If dividends had not been reinvested, the value of that investment would have been just over $1,200,000 (6.1% compounded) – a gap of $32 million”.
In addition to it, the impact of dividends is getting bigger the longer the time horizon becomes. In fact, over the past 81 years, reinvested dividend income accounted for approximately 95% of the compound long-term return earned by the companies in the S&P 500. Personanny, I try to have those benefits of dividends always in front of my eyes.
Firstly, it’s an important component of the total return. Even though the impact is rather weak yet, I know that its power will grow the longer I stay invested. Secondly, dividends represent real cash that hits my account on a regular basis. It’s a form of passive income. That being said, let’s have a quick look at the passive income for the month of September.
Dividend Income: September 2019
In September, 16 different companies have sent me a dividend cheque:
- Enbridge (ENB): €16.97
- Visa (V): €1.93
- Amgen (AMGN): €8.91
- Johnson & Johnson (JNJ): €24.08
- Unilever (UL): €16.48
- 3M (MMM): €7.75
- Home Depot (HD): €13.55
- Dominion Energy (D): €16.19
- Royal Dutch Shell (RDS.B): €17.15
- UnitedHealth Group (UNH): €5.00
- BlackRock (BLK): €10.18
- Bank of America (BAC): €6.97
- Becton Dickinson (BDX): €3.14
- Pepsi (PEP): €13.28
- Union Pacific (UNP): €9.03
- Broadcom (AVGO): €14.45
September’s dividend income total came in at €185.06 ($203.55). Compared to September 2018, this is an increase of 47%.
|January||€ 97.98||€ 25.26||+ 288%|
|February||€ 89.69||€ 55.35||+ 62%|
|March||€ 166.57||€ 107.33||+ 55%|
|April||€ 84.59||€ 84.92||+/- 0%|
|May||€ 326.18||€ 177.26||+ 84%|
|June||€ 160.66||€ 103.13||+ 56%|
|July||€ 78.05||€ 50.96||+ 53%|
|August||€ 119.56||€ 190.84||- 37%|
|September||€ 185.06||€ 125.87||+ 47%|
|Total||€ 1,308.34||€ 1,163.80|
I’m always pleased to see a green bar surpassing the brown one. Due to some reallocation activities, it wasn’t the case in August. However, in September 2019, this portfolio has generated a decent cash flow growth compared to last year. With UnitedHealth Group (UNH), I also welcome a new income contributor in my portfolio. I have purchased 6 shares of UNH shortly before the ex-dividend date, so I was able to collect the first dividend payment in September.
Furthermore, I’m also glad to note that the number of different companies, that provide me with dividends, is consistently growing over time. Some quick facts. While it was just 6 companies in September 2018, the number of dividend-paying stocks has grown to 16 in September 2019. I expect that number to increase going forward as I haven’t reached my desired number of holdings yet. Finally, the target is to own 40-50 individual stocks and then build them up in size.
As I keep collecting more businesses, the cash flow is increasing along the way. Today, the cumulative annual income is sitting at €1,308. That is 42% more than in the same period last year. In September 2019, this portfolio has also exceeded the income total of 2018 (€1,163). Looking forward, dividends that I’m going to collect in Q4 will represent additional income for the year. Amazing!
Speaking about Q4, I expect this portfolio to generate about €330 in dividends in the remaining three months. That means the projected annual dividend income for 2019 is at €1,638 ($1,802) as of today. Pretty close to my personal goal of €1,650 ($1,815).
In September 2019, three of my holdings have announced a dividend increase:
- Philip Morris (PM) is raising its annual dividend by 2.6% from $1.14/share to $1.17/share. PM’s 5-yr DGR is sitting at 4.6%. Taking into account the challenges in the tobacco industry as well as PM’s stressed payout ratio, that increase was more or less in line with my expectations.
- Verizon Communications (VZ) is raising its annual dividend by 2.1% from $0.6025/share to $0.6150/share. This increase is pretty much in line with VZ’s 5-yr DGR of 2.7%. If you decide to own VZ (or T) in your portfolio, you know what you will get. That is a decent yield and a steady but rather slow growing dividend. Thus VZ is an income play for me and I’m happy to be a shareholder of this solid company.
- Texas Instruments (TXN) is raising its annual dividend by 17% from $0.77/share to $0.90/share. This one was unexpected, to be honest. Although TXN has a rock-solid 5-yr DGR of 19.7%, I was rather expecting a high single-digit boost. However, one more time that was another positive surprise by TXN. I haven’t even lift one finger and TXN is rewarding me with a 17% increase. How great is that? As you can imagine, I consider myself a very happy owner here.
Dividends keep on rolling in. They are growing and reliable. No matter what the market is doing, it is almost guaranteed that quality businesses will continue to reward their shareholders. That’s the beauty of dividend growth investing. All we need to do is own wonderful companies, collect the dividends and use those dividends to buy more shares of wonderful companies. Easy peasy. Doing so, we not only build a passive income empire we also dramatically improve the expected total return. Remember, the longer the investment horizon the more powerful dividends become. That’s compounding at work. If not started yet, invest in a basket of high-quality stocks. Build them up in size, don’t trade in and out. Simply let them compound the wealth for you. It works. Good luck.