Successful Dividend Investor - Grace Groner?

Dividend or income investors may not be well publicized and we hardly read about them in media.

However, one of the real life stories that caught my attention is the story of Grace Groner, a secretary who worked at Abbott Laboratories since 1931.  

She bought 3 Abbott  shares in 1935 and never sold her employer's shares. When she passed away at age 100 in 2010, her estate was worth USD7 million. She left Lake Forest College (her alma mater) a gift of USD 7 million, to be used for students' scholarships. What a legacy!

Imagine a USD7 million placed in an instrument that generate 5% income return, we are talking about USD350k of portfolio income that could be channeled to serve more students in terms of scholarship. 

What she basically did was to reinvest all dividends received into her employer's shares and given long enough time, the power of compounding set in and her investment snowballed subsequently.

She taught us the importance of dividend reinvestment to grow one's wealth and invest for the long term. She also happened to hold a winner in her investment holding. Abbott Laboratories is also known for its track record in rewarding shareholders with rising dividend in the past decades.

However, not all investors are lucky, ask those who lost their retirement or investment funds when their employers went bankrupt i.e. Enron and Bear Sterns. They got burnt and if their holdings in employers' shares were the only investment they had, their golden years could have turned into a nightmare.

It took 75 years for Grace Groner to grow her small investment of USD180 into USD7 million. How is it possible for such a small amount of money to grow into millions?

The answer lies in the power of  dividend reinvestment, long term investment horizon and holdings of a successful company's shares. Not forgetting that the share price of Abbott has also increased over time.

Ultimately, she enjoyed the best of both worlds.

She enjoyed earning more dividends and share price appreciation over time by holding to a winner and showed that an average Joe could also amass a sizable amount of wealth!

Japan's Ageing Population and Healthcare REIT

It is no secret that Japan is facing a demographic time bomb with shrinking birth rate and rising proportion of ageing population. To put things into perspective, 1 in 3 Japanese will be over 65 by 2050.

Ageing population translates into sustainable or higher demand for healthcare related services such as hospital and nursing care homes or facilities. When I think of Japan's ageing population, one of the healthcare REIT that could stand to benefit from this demographic is Parkway Life REIT, a healthcare REIT listed in Singapore Stock Exchange.

Parkway Life REIT derives 62% o its rental income from Singapore hospitals i.e. Mount Elizabeth Hospital and Gleneagles Singapore etc. 37% of its rental income is derived from its 40 high quality healthcare related facilities such as nursing homes in Japan while the remaining 1% is derived from Gleneagle Intan medical centre along in KL.

Parkway Life REIT ventured into Japan in 2008 during Global Financial Crisis, has since accumulated around 40 properties in Japan. Rental income from its Japan portfolio is denominated JPY and the Japan properties are covered by earthquake insurance policy on a nationwide basis.

In addition, its nursing homes are located across various cities such as Hokkaido, Osaka, Fukuoka and more. 

In the long term, demand for healthcare services and nursing home is likely to be on the rise, placing Parkway Life REIT in the sweet spot, hence anchoring its ability to generate sustainable cash flow to shareholders.

While this is not the next killer stock that will give extremely high returns, but it could be suitable for income investors who wants to build SGD income stream.

Since IPO in 2007, its distribution per unit has grown by average 10% from 2007 to 2016 which is not an easy feet. Higher distribution per unit implies a sound fundamental REIT.

Hence, this is one of the REITs that I believe will be the direct beneficiary of Japan's ageing demographic situation. 

Note: I do not own shares in this REIT, the above sharing is merely for education purposes.

11 Interesting Points from Get Rich with Dividends Book by Marc Lichtenfeld

I recently came across this book and the title sounds catchy, hence the impulse purchase! I would like to share 11 interesting points from this book with my readers.



 Interesting Points:

1) If you are looking for growth, invest in dividend stocks. If you are looking for income, invest in dividend stocks. If you are looking for safety, invest in dividend stocks.

2) To grow the stream of dividend passive income, have a diversified income portfolio, select stocks with prospect of rising dividend payout, then reinvest the dividend to turbocharge the income portfolio.

3) Ideally, invest in dividend stock with dividend growth exceeding inflation rate to enjoy inflation adjusted stream of income.

4) Most people may not find company like Genuine Parts (NYSE: GPC), which makes auto replacement parts to be terribly interesting. Perhaps the CEO might think the business is boring too. But it makes ton of money and it has increased its dividend every year since 1956. That is exciting! 

Boring stock could be a treasure for income investor.

Boring stock such as Procter & Gamble , Colgate Palmolive may not be exciting,  but its dividend growth track record is.

5) Dividend stock idea particularly in US can be found from dividend champions list maintained by DRiP resource center.

6) From empirical research cited in the book, dividend payers in S&P 500 generated better returns compared to S&P 500 index.

7) Share buyback is also a way for company to return cash to shareholder, but dividend signals a stronger commitment although dividend and buyback are both discretionary. Imagine a company that has been paying dividend consistently and dividend needs to be paid from operating cash flow, any cut in dividend may result in negative reaction in share price. Management will usually try its best to maintain its dividend or increase its dividend if the capacity to pay is intact.

8) Empirical research by Miller and Modigliani (M&M) found out that dividend payers are less likely to report losses.  I firmly believe that this statement is applicable to Bursa Malaysia or any part of the global stock market as well.

9) Although dividend yield is important, serious income investor will also consider the safety of the dividend i.e. the likelihood we will get paid.

10) Always compare the company dividend payout against its free cash flow ( operating cash flow adjusted for capex or investing outflows). If a company pays more that its free cash flow, it may need to resort to borrowing to pay dividends which is not a good sign.

11) Dividend reinvestment plan (DRP) offered by some listed companies can be a cheaper way to reinvest the dividends.

Overall, this book is a good read and packed with actionable ideas.

4 Criterion of Good Dividend Stocks

In the past couple of months, there were many economic events that have dominated various headlines, probably those economic news would have clouded an investor's judgment.

We have US stock market scaling new high on the optimism brought by Trump's administration, noises in Europe election, foreign selling in our domestic government bond space, albeit foreign inflows into domestic equity market seems to have intensified in recent weeks. You see, market or economic events will always be in the system that we are living in. 

These events might be relevant to an income investor if these events impact the listed companies that we are investing in, for better or worse.

In times of market noises or euphoria, the following are the criterion that I will always hunt for in a listed company because these are the companies' characteristic that would deliver long term and growing shareholder returns.

The non-negotiable criterion are:

a) Proven companies with plenty of cash on their balance sheet, low debt, growing sales, good cost management and decent profitability track record.  The companies must be able to generate healthy operating cash flow, not some companies that rely on asset sales or one-off gains to ensure its survival (operating cash flow is king)

b) Companies that are defensive plus healthy growth prospect. Regardless of the state of the economy, there will always be demand for the company's products or services. I could think of healthcare business and some quality companies in the consumer sector.

c) Proven track record of its management and no prior poor treatment of minority shareholders. I will usually check Minority Shareholder Watchdog Group (MSWG) website if the companies I invest into or planning to invest into run into any issue with MSWG.

d) The services or products must carry STRONG brand name or brand equity. When people want to have happy hour, perhaps Tiger or Carlsberg may appear in their mind. 

The next time you are hunting for a dividend stock, the above criterion could offer a quick idea on the filtering process, before we look into its valuation.

Happy hunting for your dividend paying companies!