I have been browsing ET for about 8 months now and I finally made an account. I am a senior in college studying engineering. After I graduate I have a job lined up that will pay a starting salary of about $60,000 a year. From various internships and part-time jobs I will graduate with about $10000 saved up. I have always been interested in trading to supplement my income. However, from spending a considerable amount of time on ET, I have gotten the impression that making money this way requires a lot of time and dedication. So a few days ago I was wondering if I could make much money from buying dividend stocks. I made a model to try to calculate this on excel (which I have attached). I used a stock screener to find 10 stocks that have high dividends and look fairly stable (aren't about to drastically reduce their dividends). 10 seemed like about the right amount because it would allow me to remain fairly diversified while still being able to keep a close eye on them. So I assumed a starting amount of $10000 and that I would invest $20000 a year, or $5000 a quarter, which won't be too hard because I will be living by myself and won't have a whole lot of expenses. I set up the model so that the money is evenly distributed between the 10 stocks and the dividends are reinvested in the stocks. I did not take into account changes in stock price or taxes, which is probably a large source of error. After I had this all set up I calculated out 50 years and found that by the end I would be worth over $300 million. This was quite shocking to me so I double checked everything but it all seemed right. So my question for you guys is what am I doing wrong? My model at this point is still very rudimentary and I am sure that there are many things that I can still improve. However, if I could make even a fraction of this by using this strategy it seems like it would be worth it for the simplicity. Thanks for your help!
1) You're probably assuming an average annual growth rate that is too high. 2) You're assuming that the stocks you're investing in now, will "survive" 50 years into the future. 3) To save $20,000 annually, after taxes and expenses, from a $60,000 annual salary seems slightly excessive. 4) You're investing in a lot of "cheapy" stocks. "Good" growth stocks have "high" prices and keep trending higher. 5) The early years of the decade tend to be crappy for stocks. Wait until mid-2013 to start what you're planning to do. 6) Your model can "work" as it is if EVERYTHING goes "perfectly". You have to expect to liquidate some holdings along the way and for some big losers to crop up in the portfolio if you're trying to imitate Warren Buffett's "strategy".
You're basically doing a dollar-cost average with dividend re-investment. On the surface, not a bad concept, but: 1) Looking at your dividends, your average return looks to be somewhere around 15%. Is that sustainable for 50 years? I highly doubt it. There were lots of REITs handing out 10-15% dividends a few years back (Google novastar for an example). 2) Other than NLY (which I like), there's not a lot of history is some of those companies and who knows what their staying power is like. Also, some of those companies are pretty darn small (one had 9 employees). 3) You're horribly over-exposed to mortgage and finance. You may check out a site called dividata.com, which has a nice dividend history report so you can see how your particular stock dividends have been affected over time. Also do a search for "dividend aristocrats" which tends to give you lists of stable companies that pay dividends and have a good history of increasing. My $0.02
Stocks like NLY are far from having safe dividends. First the yield curve will invert many times during 50 years. Also mortgage refis will cut down their earnings(some predict this will happen pretty soon) Your portfolio has an avg yield of 15%, ask yourself why wouldn't other investors buy all these stocks they can in a world where everything else yields so much less. The answer is of course, because there is a LOT of risk on stocks yielding 15%
I'm a very conservative person. I believe before anyone invests in the stock market outside their IRA/401K, they should have 6 months to 1 year of what I call F**K you money. If your job makes you unhappy or you get cut, you need cash available to get you over the hump. After that, you're young and your plan sounds great. You should talk to a tax specialist to look into Roth IRAs. The money you put in there would not be tax deductible, but is not taxable when you take it out. As for what the account will be worth over time, assumptions are a killer. When I was your age, you could buy triple tax free highly rated municipal bonds over 10% interest. 30 year mortgages were over 14%. Tax specialist planning for someones min. rate of return on their savings for retirement were set around 6-8% and thought they were conservative. Today, those people that are retired receive below the inflation rate out 10 years. No one knows...that's the fun part.
You claim a $60,000 salary. That is somewhere around an after tax take home salary of $3100-$3300 every 4 weeks assuming you are contributing 5% to a 401k. If you can save $20,000 / year I would be both impressed and give you a pat on the back. It can be done, but at 23 yrs old and your first job, I'd be surprised. If you are looking to get into stocks, I would put $2,000 into each stock. Diversify, buy a safe dividend stock, a tech stock, a very speculative microcap company, gold stock, oil / nat gas stock.
Thank you guys for all the input. Based on your suggestions I edited my model. The new one is attached. The main thing I changed was that I chose to invest in higher quality stocks that still had relatively high dividend yields. The only stock I did not change was NLY because it seems pretty solid. I also diversified my holdings and made sure I was not overly invested in one industry. I also decided that invested $20000 a year is a good goal but also pretty ambitious so I changed it to $16000 a year or $4000 a quarter. After these changes my new net worth in 50 years would be about $15.5 million, which seems a lot more reasonable. As far as change in dividends goes some of the dividends will increase and some will decrease so an assumption that the will stay about constant seems OK. I was also thinking about adding in an expected growth for the stock market. Obviously this is extremely difficult to predict, especially for the long-term. However, I was thinking an average increase of 3-5% a year would not be too far-fetched. I will be interested to see how this effects the model because as the price of the stocks increases the value of my holdings will also increase but the dividend yield will decrease, because I assumed it too be constant. Of course I could also add in dividend growth as well. It seems like the more I think about this the less confident I am in the ability of a model to predict anything long term.
Dividends are very over hyped. If you look at price to risk to dividend you are paying more for the div then you would for a company that just reinvested in itself. A couple obscure things you may want to look at: Stocks that consistently pay a once a year special div(not going to show up in yield) Stocks that pay a stock div (also not going to show up in yield) Small cap value that pay a small but increasing div (funds and large investors wont touch)
Your being very smart and if you live frugally you will achieve your goals. Rmorse is right. Try to set this up in a roth ira and/or a traditional IRA. I don't see taxes in your spreadsheet. There is lots of research to support buying and holding dividend stocks over the long term. Price fluctuations will be your friend and you will natually be long the economy (which is probably a good thing over the course of your life) and you will get paid to do so.