In September 2020 I decided to try my hand at dividend growth investing, in October 2020, the Income Portfolio was born. A year on, these are the lessons I have learned and my takeaways from the experience.
Before I jump into the more intangible lessons and learnings, I’ll share the portfolio performance. Take this with a pinch of salt. I have calculated the performance using the TWR (Time Weighted Return) method, taking the return for each month and using the formula here. My stock buying takes place on the first trading day of each month, so I can easily calculate the return for any one month. This return will be different to the IRR (Internal Rate of Return) or MWR but should give a decent indication of the portfolio’s performance. I have been recommended a new portfolio tracking tool that measures the MRW/IRR, more on that in a later section.
The TWR below is significantly higher than the actual return I received. Some of the largest monthly returns (in percentage terms) were generated when the portfolio was small (November 2020) which would be accounted for in the MWR/IRR but not TWR. My monthly deposits have also increased from about $200 per month in October 2020, to over $600 per month in October 2021. So as I said, a pinch of salt is necessary. The other thing to keep in mind is that the S&P 500 may not necessarily be the best comparison in terms of performance, but I use it for simplicity sake. This is an income portfolio, after all, it is designed to produce an income stream.
From the end of September 2020 to the end of September 2021, the S&P returned 28.08%. A fantastic return by any means. The TWR for the Income Portfolio for the same period was 48.57% (again, a pinch of salt). While this comparison may not be exact, it tells me I’m on the right track (insofar as a year of data can do).
One thing that has become abundantly clear over the last year is how exposed I am to US companies and the US dollar. With that in mind, my focus will be to increase my exposure to European dividend companies over the next year. The main reason for the imbalance is the ease of screening US-listed stocks. Finviz is a fantastic resource but does not cover EU equities, meaning there is a lot of manual work involved in evaluating EU stocks.
From October 2020 to October 2021 I received the following amounts as dividends (amount after withholding tax but before income tax):
GBP = £27.14
USD = $72.81
Total in EUR = €103.54
If you want to see the breakdown of these dividends, I would suggest checking out the Monthly Updates where I go into more detail. Let’s be honest, €100 is a small amount but I won’t let that discourage me. At the time of writing, my estimated annual income from this portfolio is €280, nearly 3x what I received in the first year. This will grow significantly over the coming years as I continue to invest and the companies I am invested in continue to increase their dividends.
There is an important lesson here. To generate an income from dividends you have to start somewhere. The folks you see earning thousands per month in dividend income started at the same place you and I did, zero. Persistence and consistency will pay off in the future.
The Benefits of Dividend Growth Investing
Before starting the Income Portfolio, all of my investing had been done through various company pensions. While this is easy and tax-efficient, there tends to be very few options in terms of choosing specific funds. In Ireland, you are limited by your provider’s options, and I have not even contemplated the self-directed route yet (that is a post topic for another day). Investing in a pension has allowed me to invest in a hands-off manner and automatic, which is fantastic for ease of use but not great for garnering actual investing experience.
The Joy of Investing
The first benefit I have noticed over the last year is how fun it is (for me at least) to regularly invest actively. I know the sceptics may say that it’s always easy to invest in a bull market, but it is the actual process I am enjoying and not necessarily the returns (although they are nice). I look forward to the first trading day of each month (which is when I do my buying). The process of depositing money into the account, seeing what stocks meet my criteria and setting up my orders is fun for me. Most people I know have no interest in doing any of the above, but I’m guessing if you are reading this post you are interested in investing. This isn’t limited to dividend growth investing, but as it’s my first foray into individual stock selection I thought it was worth a mention.
The Psychological Impact of Dividends
This benefit will probably appear as a standalone post at some point in the future, but for now, a quick synopsis will do. In my opinion, receiving dividends into your brokerage account provides a little psychological boost. No matter how small the dividend, when it gets paid into your account it’s a small, concrete return on your investment. There is a debate as to whether dividends are an effective way to provide shareholders returns, but that’s a debate for another day. During times of turmoil and market dips, a dividend can provide a nice reminder that even if the price is falling, you are still receiving a cash return on your investment.
Along with the regular cash injections into the brokerage account, the overall income of a dividend portfolio provides a psychological boost. Assuming the companies you hold don’t cut their dividends, your forward income remains unchanged through market fluctuations. It doesn’t matter if your portfolio is down 10% in a week, the income you will receive over the next year remains the same. This benefit was most clearly highlighted for me in September. My portfolio was down over 5% in September, which is not a nice feeling at all. At the same time, my future yearly earnings from the portfolio remained the same. This allowed me to think along the lines of “my portfolio may be performing poorly now, but the income I receive from it won’t change”. The hardest part of investing is staying invested. Although the psychological benefits might not be that great, every little boost helps.
The Unforeseen Drawback of Regular Investing
I’m happy with my approach to investing, and the Income Portfolio in particular, however, there is one slight drawback. This drawback is probably akin to listing “perfectionist” as one of your weaknesses in an interview but I feel like it’s worth sharing.
Since I have started the Income Portfolio, I have found myself wanting to invest a little too much. To put this into context, I’ll share how my process works for funding the account. Unlike most personal finance blogs, I don’t “pay myself first” and commit money to my investment account as soon as I get paid. I know, shocking. I usually have a target amount I want to see in my account at the end of the month (€500 for the last few months). This is earmarked for the Income Portfolio. As the end of the month approaches, I have a good idea of what I need and how much I can put into the brokerage account. While this approach gives me more flexibility than the traditional method, I have found myself putting off spending on things so I could have more money to invest.
That new set of tyres for the car looks a lot less appealing than a 5% dividend yield! While trying to strike a balance between spending and investing is an issue at the moment, particularly in the lead up to Christmas, it shouldn’t be an issue long term (see next section).
To say I’m excited for the next year is an understatement. On a personal level, I’m excited to continue to furnish our new house and finish off whatever remaining jobs I have to do. (This list will probably never end, but progress is progress). On the financial front, I will continue to invest in both a pension and the Income Portfolio, with some positive changes. As mentioned above, occasionally it can be a stretch to invest €500 per month. In the new year, I will start a new job that will bring in approximately €1,000 extra per month. This will allow me to increase my brokerage contributions, while also allowing me to spend some more and finally re-start my savings. Earlier this year my savings were wiped out when we bought the house, it’s time to build an emergency fund. I’m also looking forward to the new role. While it is in the same field as I have worked for the last 10 years, it is a higher level and significantly different from anything I have done before.
Spending some more is an important part of the equation. Many people will tell you to put every salary increase you get into a retirement fund or investing account, but I don’t ascribe to this way of thinking. I think it is important to live a little and reward yourself with extra discretionary income after a raise. The below tweet caught my eye last week. Not all spending increases are bad. I’m happy to increase my spending on non-essentials while also increasing the amount I save and invest. Balance is the key.
People who talk about “lifestyle creep” have already made a critical error
The phrase “lifestyle creep” implies something bad
But do you call your children’s “clothing creep?” Or “tastebud” creep?” Of course not!
Growth is a normal, positive part of life
Same with spending
— Ramit Sethi (@ramit) November 5, 2021
Along with my regular investments, I plan to start exploring the world of growth investing. I’m not interested in the growth vs. value or growth vs. dividend debates, I’m a firm believer that there are many approaches to reach financial freedom. With that in mind, I believe the time is right to start looking at some companies that don’t pay a dividend and are traditionally more volatile, stay tuned for updates.
The ccc will likely be replaced by quarterly updates. I know I don’t post too often, and the monthly updates are a great way for me to keep content fresh, but I have found it difficult to carve out the time required to run the numbers and write the posts. I haven’t made a firm decision, but don’t be shocked if my poor output gets even poorer! As I mentioned earlier, I have found a new portfolio tracking tool that may make my life easier. Portseido is free to use and takes a lot of the manual work out of calculating performance, I would recommend checking it out.
Overall I’m happy with how I have progressed in the last year, both in a personal and financial capacity. As I have grown older I have come to realise that progress is a key part of my happiness, whether that’s on a financial front, personal front or even a fitness front. Long may the progress continue.
For those of you interested in exploring the world of investing further, I would strongly recommend checking out Twitter. Over the last year, I have been able to interact with some fantastic people across a broad range of investing styles. A few people I would recommend checking out are Wolf of Harcourt Street, Dividend Growth Investor, European Dividend Growth Investor and Irish Born Investor. Twitter gets a bad rep for being a toxic place (and there is some of that in the investing circles) but the positives far outweigh the negatives in my eyes.
As always, before investing your hard-earned money, make sure you do your research.
The Stoic Trader