Your Savings Rate Trumps Your Investment Returns

How Much Are You Saving?

If you're like me, and you're seeking financial independence at a relatively young age, you're looking for the most efficient and reliable way to the promised land. I've found that the best way to financial independence is to save large parts of my net income by living below my means, staying out of debt and investing said savings wisely. But, while "investing wisely" can be somewhat subjective, saving a large part of your income is not.

Investing In Dividend Growth Stocks

I choose to invest my savings into dividend growth stocks. I like to purchase shares of high quality businesses that have a long history of being efficiently run and returning value to shareholders. I like investing in businesses that provide society with needed services and products that people crave. These companies have "wide economic moats", or strong defenses against competition. They usually have large distribution and supply networks, household brand names and pricing power which allows them to raise prices on their products or services over time. These increased prices drop down to the bottom line and allow these businesses to raise dividends over time. I also like to invest in these companies at attractive prices, which provide me a margin of safety against market downturns.

Savings Rate Vs. Investment Returns

This is all well and good. Investing your hard-earned money in high quality companies that pay rising dividends at attractive prices is a surefire way to success. But, as much as I consider myself an astute investor, the most important consideration to your journey to financial independence should be your savings rate first, and your investment returns second. So, you need to be a saver first and an investor second.

Weekend Reading - September 23, 2012

Boy, do I love dividend growth investing. You invest your capital with high quality companies which pay out dividends to loyal shareholders, and are able to sustain rising payouts over the long-term. You are then able to reinvest these distributions, which due to their rising nature over time, become larger and larger reinvestments. These larger reinvestments then purchase larger and larger amounts of shares, which pay out larger distributions due to your increased ownership in said companies.

This effect of reinvestment that compounds itself not only through dividend reinvestment, but a dividend that also increases over time, is simply wonderful. I've heard of this type of compounding referred to "hypercompounding" due to the fact that you're not just compounding your wealth due to organic reinvestment of wealth, but your wealth is actually being reinvested at increasingly amplified amounts. Simply amazing.

High quality companies continue to allow shareholders to "hypercompound" their wealth through dividend payouts that rise year after year. For example, McDonald's Corporation (MCD), the worldwide restaurant, recently raised their dividend 10%, going from a $0.70 dividend per share, paid quarterly, to a new $0.77 quarterly dividend per share. Philip Morris International (PM), the global cigarette manufacturer, also recently raised its dividend. The new payout for PM is up 10.4%, after rising from $0.77 quarterly per share to the new $0.85 quarterly per share.

When was the last time you got a 10% raise at work? I've never gotten a 10% raise at work. And, even if I did I know it wouldn't be sustainable year after year after year. After these double digit dividend raises, your reinvested dividends just started compounding themselves at an increased rate. Hmm, we might be on to something here.

As I look forward to a day of football after a long 6-day workweek, I'll know that I'm one day closer to financial independence because wonderful companies continue to reward me as a loyal shareholder.

Here are some excellent articles from fellow dividend growth investors, frugalists and personal finance bloggers from the past week.

Recent Buy

Well, to be honest I wasn't planning on purchasing anything else this month. I felt very content with my recent purchases of KMI shares and INTC shares over the past couple weeks. Especially with the stock market so high, I felt I wanted to hold back a little capital to see what October brought us.

But, when a position of mine takes a dip of almost 10% in one day I tend to take notice. And take notice I did. Today, Norfolk Southern Corp. (NSC), one of the largest railroads in the nation, dropped almost 10% today after it released news yesterday that it expected third quarter earnings well below analysts expectations.

When an investor sees a company's stock sink like NSC did today, and that investor also has skin in the game, they can either panic and mash the SELL button or they can meet opportunity at the door and let it in. I decided on the latter.

As part of my Recent Buy series, I try to let my readers know of any equities I purchase soon after the transaction is completed. This is just one way I try to document my progress toward early retirement and financial independence.

YOLO

Where are you going?

You Only Live Once. YOLO.

A classic adage, with a "cool" new spin. Historically, this term has come to mean 'live in the now'. To not put off tomorrow what one can do today, as one is not promised tomorrow. I will certainly not argue the point that life is only lived once, and I also believe that it is painfully, regrettably short.

I hear this term YOLO more and more lately as my generation has seemed to latch on to it. I have especially become familiar with it, and the historical meaning behind it, due to my desire to live frugally and (hopefully) retire before 40 years old. I think that people generally mean well when they refer back to the 'you only live once' argument when trying to remind me how short and limited life is.

Recent Buy

Well, Ben Bernanke, the Federal Reserve Chairman, recently announced the Fed is going to buy $40 billion worth of mortgage bonds per month until unemployment eases and the general economy improves. There is no definitive time frame for what is now QE3 (3rd round of Quantitative Easing), since the end of it will only come when the economy improves...and nobody knows when this will happen. The new "QE3: To Infinity and Beyond!" is designed to keep interest rates low, which is supposed to spur lending and improve hiring in the private sector. This may or may not actually help, and may actually lead to higher inflation down the road due to the printing of new money to pay for the bonds. Essentially, the Fed is swapping books with banks, exchanging money for debt.

I'm no economist. I'm just an everyday guy who works at a car dealership, trying to live well below my means and invest enough of my savings to live off of before 40 years old. I don't know what's going to happen, and although I think QE3 is a bad idea for a number of different reasons, I simply cannot predict the future. Because of this, I continue to do the only thing I know how to do: invest in high quality companies at attractive long-term prices.

The stock market certainly liked the news of QE3, most likely because of the liquidity it provides the economy and the profitability it may provide to U.S.-based firms due to a weakening dollar and their goods becoming cheaper to overseas markets. Over the last 5 days, the Dow Jones Industrial Average is up over 286 points, and over 2%. That's just in one week! But, as I always like to remind everyone: I don't invest in the market, as I'm not an index investor. I invest in individual companies, and I consider a company's valuation on a case-by-case basis.

As part of my Recent Buy series, I try to let my readers know of any equities I purchase soon after the transaction is completed. This is just one way I try to document my progress toward early retirement and financial independence.

Two Great Gym-Free And Equipment-Free Exercises

A while back, I tried to give up my gym membership and the $30 per month it was costing me. I failed miserably at this task. I don't talk about it a ton here, but I used to be a amateur competitive bodybuilder in my teens. I started working out at 11 years old and competed in my first contest at 14 years old. I thought about including a picture of myself backstage at that first contest for the context of the article, but none of you readers want to see me in a male bikini. Trust me!

A Gym Expense Might Be Worth It

I started working out a a gym when I was only 13 years old, and actually had to have my parents sign off on a liability form. I've been working out at a gym ever since. I find a gym to be a worthwhile expense, so don't get me wrong here. It's not only a very small price to pay for better health, and one could almost consider it a cheap health insurance policy, but the gym is also a great place to meet like-minded people. There's been many days when I've gone to the gym and felt like crap. "Why am I here? I don't feel like working out at all today!". But, being at the gym and seeing so many people getting their workouts in motivates me to do the same.

Beautiful Day

Today was an absolutely gorgeous day here in Sarasota, Florida. It's one of the first days like such we've had in a long while. It's been a very hot summer, punctuated by afternoon thunderstorms. But, today gave way to a beautiful Wednesday with a nice easterly breeze, low humidity and bright sunshine mixed with puffy, white clouds. It was an afternoon made for a postcard. Yet, I didn't get to enjoy any of it.

Trading Vs. Investing

Note to readers: I originally wrote this article for The Div-Net, and published it on February 2, 2012. But I never re-published it here and after going through some drafts I thought I would publish it here as I think the ideas are timeless. 

There are many ways to make money in the stock market. There are a lot of pundits and followers of different strategies that would have you believe that they have a magic way to exploit the market for extraordinary profits with minimal work and time. Every time I read claims like that, I ask myself: "If it was so easy, and it makes you rich so fast, why are you busy writing articles instead of making millions of dollars?". Believe me, if someone has a "secret" that makes tons of money in a short period of time they're not going to share it with the world.

Income/Expenses For August 2012

Each month I will post my income/expenses for the previous month. I track every dollar in and out, so what you see is exactly what I earned and spent (rounded to the nearest dollar).

Recent Buy

A rising stock market is not my friend. More expensive stocks and higher valuations puts me in the unfortunate position where new capital does not go as far. Higher priced stocks provide an equity investor a lower percentage of ownership of said companies when purchased at a static dollar amount, and also provide a lower long-term total return and lower entry yield. A stock market that experiences drastic upward moves may look good on paper, as the portfolio value will inevitably follow the market's march higher, but these increased stock values only serve you if you sell your stocks. As a dividend growth investor, my primary goal is to build an ever-rising dividend income stream from great companies with economic moats and strong fundamentals. That stream is hard to increase if I'm selling stocks.

This all being said, I also believe in finding value in all market conditions. I do not believe in market timing. If the DJIA falls 500 points tomorrow is it a good time to buy? How will you know? Maybe it'll fall another 500 points the following day. I tend not to concentrate on the overall market valuations. I do use the DJIA, S&P 500 and Nasdaq numbers as rough overall guides to broad equity valuations, but it's the individual companies I'm investing in, not the market. So, I decided to put further capital to work today.

As part of my Recent Buy series, I try to let my readers know of any equities I purchase soon after the transaction is completed. This is just one way I try to document my progress toward early retirement and financial independence.

Dividend Income Update - August 2012

Another month has passed by, and it's time for me to post an article on my favorite subject: dividend income. The reason why I love to post articles on dividend income is because it's pure numbers. It's hard to argue the success of long-term dividend growth investing when you can slowly and surely see dividend income rise over time and get closer to covering one's expenses.

I'm going to post the details below of my dividend income from the month of August. I'm also going to include numbers for dividends from the months of May, June and July as well. I wasn't actively blogging for a couple months, but I was of course keeping track of my dividends and you can see what the totals were below. So, this is going to be fun!

I hope these monthly dividend income reports provide inspiration for any investors out there that are just starting out. It's easy to see these payments rising month after month and it shows that it's possible to one day pay for monthly expenses with dividends, which would provide an investor opportunities and freedom to pursue other interests than full-time work. Without further ado:

Freedom Fund Update - September 2012

Well, the time has come to update the Freedom Fund once again as we start another month. The Freedom Fund is my portfolio, and I think it's aptly named. My portfolio is my way to freedom; freedom from working at a job I don't enjoy to purchase goods I don't need to impress neighbors I don't care about.