Investing in Thailand – DIF.BK

Some trends are in plain eyesight and yet often disregarded by investors. This is especially true for digital infrastructure. While we often assume that things like 3G, 4G, 5G, wi-fi, broadband access, etc. are already everywhere, we are only scratching the surface of what this industry is about to grow into. From industry 4.0 to smart cities. This is a market that should not be missed in any investors portfolio. And one such a stock in Thailand to add is DIF.

DIF is the shortcut for Digital Infrastructure Fund, and the company does pretty much what the name says. Putting money into relevant infrastructure projects. Or as they describe it on their website HERE:

Digital Telecommunications Infrastructure Fund (DIF) (Previous Name: TRUE Telecommunications Growth Infrastructure Fund (TRUEIF)) is Thailand’s first telecommunication infrastructure fund offering opportunity for everyone to invest in telecommunication infrastructure which experiences constant growth and therefore allows investors to enjoy recurring incomes while simultaneously helps developing the sharing of telecommunication infrastructure. 

The Fund has been established with a view to raise funds from investors via both domestic and international offerings. The funds raised from the offerings will be used to invest primarily in infrastructure businesses, particularly in telecommunications infrastructure assets that cover the entire country such as telecommunication tower, fiber optic cable, transmission equipment, broadband system and/or incomes generated from the businesses.

Units of the Fund has been listed and traded in the SET since December 27, 2013.

This gives you a broad overview, but to go a little more into detail and which areas specifically are concerned, the fund is getting involved in the following sectors:

  • Railway or Pipeline Transportation
  • Electrical Grid
  • Waterworks
  • Road, Expressway, or Concession Way
  • Airport or Airfield
  • Deep Sea Port
  • Telecommunications or Telecommunication-Related Infrastructure and Communications
  • Alternative Energy
  • Water Management/ Irrigation
  • Natural-disaster prevention system including the alert and management systems to mitigate the intensity of such natural disaster
  • Waste Management

As we know, most of these areas in Thailand are under strict control and funding by the government, so the income is pretty reliable and the investment yield is high. At the time of writing these lines, the dividend yield is 8.35%.

Another cherry on top: This is one of the few stocks in Thailand that is paying a quarterly dividend. Every March, June, September and December this reliable dividend is being transferred to your account, and as we experienced over the last 2 years, it’s COVID-resistant.

A solid pick for passive income and hopefully another piece of the puzzle to reach financial independence.

Investing in Thailand – BGC.BK

Green investments are gaining traction, and while not as exciting as some online start-ups, there are lots of opportunities in this growing market. Also in Thailand. One crucial company for Thailands future success on the environmental front is BGC.BK. What does the company do? Let’s take a look at an excerpt from the “About us” part of their website:

BGC or BG Container Glass Co., Ltd., a subsidiary of Bangkok Glass Public Company Limited, operates in glass packaging business. The plant was established in 1974 and started its production in 1980 in Pathumthani with the production capacity of 150 tons per day. Currently, BGC has 5 glass packaging plants with the largest number of production capacity in Thailand.

From just one furnace, today, BGC has grown steadily. The company was incorporated into BG Container Glass Company Limited in the year 2016 and was registered as Public Company Limited in the year 2018 The company is built on a foundation of innovation, advanced production technology and effective performance that can be recognized internationally. Moreover, the products meet the standards and cover all needs of diverse customers.

With a commitment to innovation and new products, quality control and environmentally friendly for remaining the leader of Thailand integrated glass packaging market.

So there you go. It’s all about glass.

Commitment to reduce plastic usage will drive future business growth

Living in Asia one can’t help to notice the ridiculous amounts of plastic that is being used here for almost everything. Plastic bags, bottles, jars, food containers. And beyond those items critical for daily consumption, it goes even further. It’s very common to see households with plastic furniture, dishes and cutlery, even decorations. As a European arriving first time in Thailand, I was honestly shocked. But change is coming, slowly but steady, and glass solutions will play a crucial role on that front.

BGC.BK is a key player in this market, providing standardized solutions for jars, bottles, bottle closures, and caps. They have a wide range of products adjusted to international standards, and with the government pushing slowly towards plastic reduction in the market, they are poised to grow further.

Reading this I admit that while I am trying hard to make this sound like an exciting opportunity, it’s really not. It’s a pretty boring business with lots of old-school elements to it. Factories, chain-supplies, standard distribution. All basic industry 101. But that doesn’t change the fact that it’s an already profitable company in a growing market, with almost no local competition, and an experienced team.

Solid dividend four times a year

Another key point for me to invest in BGC is the dividend policy. BGC has an annual dividend yield of above 4% and pays out 4 times a year. Last year the company paid a dividend in May, June, September and December. This year should be the same. Anyone interested in a passive-income strategy should therefore have this stock on a watchlist. Or in a stock account.

Disclosure: I am managing a portfolio that has purchased BGC.BK since 2020, and I am adding shares of BGC to this portfolio on a regular basis.

Portfolio year-end evaluation

As the year is coming to an end, it’s time for a portfolio re-evaluation. I do this every year in order to determine what I did good, bad, or just wrong, and what I can and should do better in the next year.

Keeping a cool head

I wrote it many times. When it comes to investments, you need to keep a cool head and take emotions out of the equation. You need to stick to your thesis and know that you’re in for the long run no matter what. But this is easier said than done.

When your shares are moving up for a while and you see your profits surging by 20%, 30%, or even 50%, you might feel the urge to sell your shares just to make sure that you can actually keep that profit. I call this phenomenon “negative greed”. It’s greed because you want to keep the profits, and you want to make sure that your account gets credited before anything happens to it (like another downturn in the market). But it’s “negative” because once the shares are sold, you have obviously no more shares that could grow even further from there. You secure profits, but you lose chances for more profits.

Similarly, when your shares are moving down, it’s hard to stay cool while watching your account going negative into the double digits. When a recession hits and all you can see is a screen with red numbers on it, thoughts will crawl into your head. Thoughts, that question your decisions, making you wonder whether that whole thing is just a big scam that you fell for, and that you should have better listened to all your non-invested friends who think you’re nuts for being an investor.

On both counts, I did quite well in 2020. While I experienced all the emotions and drags as described above, ultimately I kept a cool head. The only shares I sold were those of Apple (AAPL) after the stock-split. They soared by over 150% and I sold some to be able to buy a few new shares of other companies which I considered to be good opportunities. What did I buy?

New investments

  • Wereldhave – A dutch shopping mall operator who suffered dramatic losses in its share price in recent months and who is due for recovery once this whole Covid drama is over
  • Starbucks – The company is showing over and over again that it’s one of the best in the market. The pandemic didn’t hit it as hard as one would have thought, and it will come out stronger in the aftermath
  • Veolia – After watching a documentary on Netflix about drinking water (the show is called “Explained”, highly recommendable) I decided to start focusing more on water-related investments

I also started a savings plan into an ETF. It’s called “Xtrackers MSCI World Information Technology UCITS ETF 1C” and it’s focused on tech-investments world-wide. 100 Euros a month that have started to flow into this ETF, completely paid by the dividends I receive each month.

One more word about Wereldhave. I had this company in my portfolio in the past, and I sold it at a loss when they cut the dividend and when the covid crisis hit. But I kept it on my watchlist and observed the stock movements on a weekly basis. When I noticed that the stock stopped moving further down (after dropping more than another 50% since the time when I sold them) and the company announced a new management team as well as a full restructuring of their business model, I got back in. The shares are now up 40% since I bought them.

Dividend growth

In terms of dividends, Starbucks and Veolia will contribute to my annual income in 2021 as they both pay stable and each year growing dividends. Wereldhave used to pay a strong dividend until the crisis hit. They canceled all dividends in 2020, and I don’t think the company will be able to pay out any dividends in 2021. I expect them though to start paying dividends again sometime around 2022.

My dividend income shrank in 2020 compared with 2019. This was mainly due to my largest and also most disappointing investment: A company called Aurelius (AULRF). It’s a business development company (BDC) which I purchased back in 2018. It was showing not only superior growth opportunities but also had an amazing dividend yield, and since 2018 it developed into my single largest holding position.

Unfortunately, it also became my most disappointing investment. The share price dropped by almost 70% and the dividend was cut down to zero in 2020. However, in the last couple of weeks recovery started to kick in. My losses are now at -56% and given the recent business reviews, I am quite confident that shares will continue to tick up. Also, the dividend should recover in 2021. But I admit, this one is my single largest nail-biter.

Overall it looks like my dividends year on year will reduce by some 11,60%, and this despite the growth of my total invested cash by 8,99%.

Monthly passive income

The total decline of dividend payments by 11,60% is obviously not great, but overall, my monthly passive income remained largely stable. My total dividend yield on investment came down to 3,22% from 3,97% in the year before. For 2021 I expect it to move back up into the 3,5% to 3,9% range.

Considering the scale of the covid crisis, I see my thesis of investing and putting money to work in the stock market confirmed. And 2021 is almost guaranteed to produce similar or better results, with most stocks set to soar once the vaccine distribution starts kicking in.

Breaking Rules

Nothing is as it should be this year. 2020 will go down in history as one of the worst years for my generations (X / Y – I am right on the brink).

Highest unemployment as far as I can remember across the globe. People are restricted to travel between countries, in some areas even between cities. Foodbanks, charities, and NGOs are stepping up and doing what they can to get people through hard times, even in the richest and most developed nations. Medical supplies are running short, equipment gets scarce. And governments are printing cash for people like there is no tomorrow.

Every weakness of our economic systems has been exposed by now. The mantra of a small government and an unhinged economy has been crushed to pieces. Whether it’s Germany, the US, UK or Thailand: Without government support it would all collapse.

It’s a terrible situation, but we will get through this, as humanity always did. There is light at the end of the tunnel, and I am confident that we will thrive again once this is all over.

And having said that, as bad as it is, it’s also a great lesson and experience for us. Instead of lamenting and complaining, we have right now the opportunity to analyze the situation and to think about how we can handle a similar occurrence in the future. Because we know that this wasn’t the first, and certainly won’t be the last pandemic that we will have to deal with.

Financial independence should grab more spotlight than ever before

The current situation showed lots of weakness in the structure of our society, especially to those who are in the rat race. As the crisis triggered massive unemployment, salary cuts, and put people in danger of losing access to their basic needs like shelter, food, and healthcare, it has never been more obvious that the rules we follow are flawed.

People are talking about jobs, minimum wages, worker protections. Protections from evictions, free medical support, and other measures to help all of us getting through the challenges of the pandemic. And it’s all good and right. We need to work, we need to have our rights protected, and we need a framework of rules to make sure those in power don’t abuse those who are not in a position to protect themselves.

Unfortunately, the same rules that protect us are also the rules that limit our opportunities. They push us into the rat race, into the dependence on people who employ us, and on governments that care for us. We give away some parts of our freedom and receive in return limited protection that helps us to make it through the days ahead.

But those who really want to get at least a slice of their freedom back, they got to break out of the rules and take ownership of their future. It’s especially situations like the current crisi, when financial independence becomes more important than ever.

Being financially independent means that you can afford to have a shelter without relying on the government, that you can put food on the table without relying on charities, and that your health is protected. Financial independence is not about getting rich. It’s about freedom.

The steps for reaching financial independence are only a few:

  • Earning as much as you can
  • Spending as little as possible
  • Saving and investing the surplus
  • Building passive income

Only four steps that explain it all. Simple and while not easy, definitely achievable with the right mind-set, plan and determination. And the benefits are immense. Not only may it allow you to retire early from your regular job. Achieving financial freedom will also empower you to pursue other paths and passions which you might have not considered previously due to financial commitments that couldn’t be neglected.

Even more importantly though, it will also prepare you for hardships, and situations as we are experiencing right now. It’s undeniable that those who build up emergency funds that cover 6-12 months of expenses, or who have passive income streams, are significantly less worried while the virus is causing panic and havoc across the world.

The FIRE movement is just a smart thing to do

When you explain the idea of financial independence and the FIRE movement to people who never thought about it, you will hardly find anyone who would disagree with it these days. There is nothing about massive unemployment, stagnant wages, and deteriorating economic conditions that would encourage people to go back to the old days.

And this is not a one-off event. It will happen again. Maybe it will be another virus. Maybe something else. But we know that hard ships are part of the equation throughout our lives. So wouldn’t it be a smart thing to do something about it? To prepare for it?

As my readers know, I am promoting investing in stocks. And surely, many companies got in trouble and had to cut or reduce their dividends, hence also impacting my passive income. But what this crisis showed me clearly is that while there is no 100% protection in this kind of environment, the odds are still clearly favouring investors over regular workers.

I work in the hardest hit industry of the pandemic: I am a hotel manager. And while my salary was cut by up to 40% as my hotel had to close for a few months, my passive dividend-income went down only by 9% on average year to date so far, and I expect it to remain on that level.

If you ever had doubts whether FIRE is for you, these doubts should be gone by now. And whether you invest in stocks or real estate, or any other way that generates passive income streams, it should be (or become) a part of your plan.

The pain continues… for some

We are now in the middle of the third quarter of 2020. August. And the world doesn’t look much better than it looked in the second quarter. In fact, despite all the happy talk that you might hear occasionally on some news, data points increasingly towards a bad fourth and final quarter as well.

So the pain will continue and might even increase. More companies will close their doors. More people might lose their jobs, or endure salary cuts. Many people will remain dependent on the support from governments, friends, families, or charitable institutions… and sometimes strangers.

The suffering is not equal

But some suffer more than others, and guess who is suffering the least? Well, from what I see, income investors have suffered very little in comparison to regular folks.

When I look at my income portfolio, it looks as bad as it gets with current total performance in value development of -29%. Almost a third of the money I invested has disappeared. On paper. In reality, it doesn’t disappear until I sell the shares – which I have no intention to do within the next 20 years or so.

But interestingly, my dividends for this year will be holding up much more stable. According to my most recent forecast, my dividend income for this year will fall only about -8%.

Cash is king

In a crisis like this, income investors have the advantage that most of their investments are/were around financially strong companies, which generate either strong cash flows or which are simply rich.

In addition to this, many dividend-paying companies tend to offer essential services. Whether it’s water, energy, food, or our most addictive tech-entertainment. Those companies keep earning money no matter what and can largely sustain their dividends even in a global crisis.

Having strong cash flows and/or a well-prepared emergency fund, those companies can navigate through the storm, and even use their strong cash position to grow and expand their business. One should not get surprised if the strongest among them come out even stronger after the crisis.

Technology is unstoppable

I have this year so far only added money to my speculative portfolio which has several technology titles in it that either benefit from the pandemic, or which are simply not relevant to the pandemic at all. And while my income portfolio shows a -29% performance, my speculative tech portfolio is already back up with double-digits and +25% in market value.

Some people are wondering why the technology sector keeps rising despite the harsh reality that we experience across the globe right now. But in fact, it’s not surprising. Technology will be moving forward no matter what, and being invested in a few solid technology-focused companies will probably serve as a great diversification to any portfolio for the foreseeable future to come.

Keep investing

So yes, I keep investing. I am currently not adding money to my dividend income portfolio, but plan to do so around October. August and September look still awfully bleak and we might see more bankruptcies, more unemployment, and more suffering. But the longer it will be going on, the closer we will get to a solution. I am, however, putting money into my speculative portfolio.

History has taught us, that after every crisis the market recovers. As a young investor, you should therefore not hesitate. Whether you go in with an ETF or individual stocks. Crisis or not, keep investing regularly, and diligently, and as we get closer to a solution to this awful pandemic, your efforts and trust in the market will very likely plan out according to similar events of the past and reward you in the long run.

There are of course no guarantees, but what is guaranteed these days anyway?

Panic has never been a good adviser

The coronavirus is now officially a pandemic. A serious threat not only to human lives but also to the world economy, to our health system, and yes, even to our financial system.

As the virus spreads further, entire countries are closing borders, schools are closing doors, events get canceled, elections move online. People get scared to go for a beer to their local pub. Even the premiere of the new James Bond movie has been postponed!

So the ultimate outcome, and changes to our lives, possibly to the world, it’s all very uncertain. And nowhere is this uncertainty better reflected than in the stock market. Having crashed almost on a scale comparable to the financial crisis of 2008, we can see the negative sentiment of investors on full display.

Where do we go from here?

After three weeks of markets being basically in free-fall, the last Friday showed something of a possible turn around. After the US-President decided to declare a national emergency and at least showed something more of seriousness about the situation, confidence seemed to return to the markets and stocks recovered some of their losses.

But is this enough to start a full-scale recovery? In my humble opinion, it’s still way too early to even think about it. Not only does the response from the White House lack enough credibility to be trusted and to trigger a sustainable recovery. Even more importantly we will need to see some real numbers before the full impact of the crisis can be assessed. What numbers am I talking about?

  • Lost revenues
  • Lost jobs
  • Recovery costs
  • Updated annual forecasts (for everything)
  • Dividend payouts and dividend cuts
  • Repercussions on globalization as a system
  • Political repercussions

That’s a lot of data to digest and I don’t dare to predict how long the evaluation of it may take. And I am not alone there. Markets tend to react quickly to possible opportunities because there are plenty of speculative traders who are willing to take a risk to bet on the direction which they consider more plausible. But more than often these emotional and non-data driven speculations go wrong. It’s a 50:50 bet.

Don’t panic. Analyze. Invest.

Therefore, I wouldn’t be surprised to see some additional bad weeks ahead of us. The short spike-up which we observed on Friday could turn out to have been only a short-sighted flare of hope from some speculative investors betting on a turnaround, ahead of having done the required due-diligence and analyzing some real numbers.

For us private investors it’s a challenging time. First of all, we got to keep a cool head. Panic doesn’t help. As my personal portfolio has lost over 30% in value, I haven’t lost any sleep about it.

First of all, the loss is not real until I actually sell the shares. Until then, it’s only a loss on paper. And do I have any reason to sell my shares? I don’t think so. All the stocks in my portfolio have been bought for a reason. While the dividend payments might get cut or even fully canceled for a year, as long as the business itself doesn’t face an existential threat, I don’t worry.

Secondly, markets go up and down. That’s what they do. We had an 11-year run-up and it might be time for a turn-around. Will this turn-around last forever? Very unlikely. Bull-markets are followed by bear-markets and vice-versa. Do I, or my generation (I am from Gen X), need to worry? Very unlikely. I have still plenty of time ahead of me and will almost certainly see more recessions – and more recoveries.

Lastly, I am an optimist, and what I see is a great opportunity to continue building up my retirement portfolio. Even if we should have now entered a bear market and a possible recession. All I see is companies and businesses, learning to adapt, getting more efficient, improving their resilience and tweaking their operational proficiency, to come out even stronger once this bear market will be over.

So don’t panic. Analyze. Invest.

What would you do…

… if you wouldn’t need to work anymore? If you wouldn’t need to worry about food, shelter, and health, what would make you get out of bed every single day?

As the election in the US is drawing closer, I have spent some nights learning about some of the presidential candidates. The person who is standing out of the crowd for me: Andrew Yang. And even though I don’t think that he will be successful in the current campaign, I believe that his time is yet to come.

His MATH campaign (Make America Think Harder) is clearly not aiming at the people who are currently in power and who will remain so for a few more years – probably. Politics in America are old, white, and corporate. But times will change. All those who cling to power now have a very short candle of life left to burn. Once they’re gone, the change will come.

But politics aside, I want you to think about what would happen if the concept of a universal income for citizens would become reality. How would your day look like?

The Freedom dividend

This concept, also known as a universal income, is not a new idea. Without getting into details, let’s just assume that it’s feasible and you and your partner suddenly start receiving 1.000$ each on your bank account. Unconditionally, on every first day of each month.

That’s 2.000$ for the household a month. 24.000 $ a year. It’s not enough for a “perfect” life, but it’s probably enough to let you stop worrying about food, shelter and to some degree, about health. How would this change your life?

Critics are easy to point out that people would just stop working, stop doing anything for that matter. To a point, this is probably true. People would probably stop doing jobs that pay less than that. For example, service staff in restaurants or coffee shops who don’t even get paid by the hour but rely solely on tips might reconsider their life choices. Employees who get their lives sucked out by unscrupulous managers (*cough*A-m-azon*cough*) might be OK to sacrifice 100$ or 200$ a month to get their life back.

But we all need a purpose in our lives. And while many people think that rich people, those who could afford to hang out on a beach in Bali or the Bahamas all day, are living the dream relaxing and spending money all day long, nothing could be further from the truth. Most rich people work actually quite a lot. The difference is though, that they work on things that they are passionate about. Because they can afford to do so.

Don’t wait for Andrew Yang

The truth is that many skills, many qualities of the past, have disappeared over the years as they proved to be not profitable enough to provide an income for people who practiced them. Artists, handicrafts, social workers, volunteers. The list is long. Some of them were meant to go and nobody will miss them. Others are dearly missed and needed.

So while we wait for this concept to get embraced by nations who can afford it, there is another option to take matters into our own hands and to get the freedom dividend anyway: By investing, and generating passive income.

The freedom dividend is exactly that. A dividend. And you don’t need to wait for Andrew Yang to get it. All you need to do is to start investing in dividend-paying stocks. And while you build up your savings and your passive income, whether Andrew Yang will be successful or not, will not hinder you from achieving the target of getting some freedom back through regular dividend payments straight to your bank account.

Once you get that, you might find your passion in some jobs which are dearly missed and needed, but which are not being pursued by anyone due to low profits and lack of interest from large corporations. The term “retirement” might just then receive a completely new meaning for you and for others…

Monthly Dividends

Looking forward to the year ahead, I have summarized my expected dividend payments and put it together in a nice, motivational format. What do I mean by that? Being a numbers guy, I crunched the numbers. Let me summarize the highlights:

On average, I will receive 8 dividend payments per month. 3 of those are coming from monthly dividend-paying companies. 5 are from quarterly, semi-annual or annually paying corporations.

This also means that, on average, I receive a dividend payment every 4 days. In reality though, due to the payment structure of most companies, it’s rather every 2 weeks.

The total expected dividend growth for the year 2020 is anywhere between 15% (conservative assumption) to 40% (optimistic assumption). I put the pessimistic one in my budget first, better to be positively surprised later.

My annual yield on the currently invested amount will come up to 4,53% – after taxes. This might go down if I add more capital to the portfolio, and it will increase if my dividend estimates should move higher than expected. As I do have some plans to balance my portfolio and to do some adjustments, I am pretty confident that my dividend yield might reach over 5% by the end of 2020.

Compounding interests and monthly dividends

Now, in the 4th year of investing, I start to see and feel the power of compound interests. It’s just growing. Some shares rise, some fall. But the more I diversify, the more the portfolio can balance and bounce in the right direction.

And then, all paid-out dividends are being re-invested and create just more income.

This becomes especially obvious with companies that pay monthly dividends. These few cents, that come up on top every few months when I re-invest into an existing or in a new position, really start adding up.

By 2021, and with adding 3 more monthly dividend payers, I should receive a dividend payment every 3 days. Every single one of these dividends will be, on average, a double-digit one, enough to potentially cover all my regular daily and monthly expenses. Even without living too frugally.

Not enough yet to cover the rent, but enough for everything else.
A major step closer to FIRE.

The markets are not ready to stop

Of course, this is also due to the fact that we have a robust economy and the Wall Street party didn’t stop yet. Most experts out there and I, don’t think that there is a high risk of recession in the US at the moment.

But at the same time, I am hesitant to deploy more cash into US-Dollar-based companies. There are just too many uncertainties with the impeachment, the drama with Iran and the rising tensions with China and Russia to keep a very high level of confidence.

So instead, and with the exception of the 3 monthly dividend payers, I will go for European stocks. Mainly the UK and the Netherlands, as many of them pay quarterly dividends. Regarding the UK, I have the suspicion that BREXIT might turn out not as bad as expected, which would push the British Pound back on track. The UK also doesn’t have a withholding tax on dividends, which is a great bonus.

The Netherlands charge me a 15% withholding tax, but it’s still moderate and given the highly innovative nature and sharp business acumen of this small but scenic country, I see some opportunities to invest there.

The 3 monthly dividend payers that I am looking at are by the way the following ones:

  • STAG Industrial (STAG)
  • Gladstone Commercial Corporation (GOOD)
  • Realty Income (O)

Disclosure: This article may feel, sound and be interpreted as financial advice, but it’s not. Investors are required to do their own due diligence, and accept risks that are associated with stocks and market investments.

Why investing in Pharma makes sense

Today, let me dive a little into the topic of income-investment and why I believe that every income-focused investor should have some pharma stocks in his or her portfolio.

As my readers know, my goal is to escape the rat race with the help of investments in the stock market. With my eyes targeting financial independence, having a passive stream of income is crucial. One way to get it is to invest in dividend-paying companies. The strategy is called income-investing and it is a reliable strategy of building up passive income, large enough to be able paying bills (and more) once the decision to retire has been made.

When it comes to income-investing ideas, how to pick a stock, and what one needs to be aware of, the pharma industry emerges quickly as a good direction to look at.

Profits for years to come

My personal portfolio contains shares of two pharmaceutical companies: AbbVie (ABBV) and GlaxoSmithKline (GSK). They are not THE biggest in the industry, but large enough to reward their shareholders with frequent dividends for many years now. And chances are good that this won’t change anytime soon.

Big Pharma is a term that is being used in a mostly negative manner. Overcharging customers, abusing their power, and either way, health should be free for all, shouldn’t it? Maybe. Maybe not. But what is pretty certain is that this industry has a tremendous cash-flow that is only increasing with a growing and ageing population.

People get sick. It’s how humans work. We get sick, we get better. For most of the time anyway. But the part of getting better for most of the time involves medications, treatments, surgeries, vaccines, anti-biotics, hospital stays. It’s a never-ending battle that will always require someone to develop, produce and distribute all those essential products that help us to have a long and healthy life.

They can do what no one else can

Some people may think that supporting Big Pharma can’t be the only way to get things done. Some smaller companies should be able to pull it off as well, right? Research, development, production, distribution. Well, the bad news is, that smaller companies simply can’t do all this. And even if they try to share the work process with other companies, chances are that they either fail or can’t make enough profit for a sustainable contribution.

There was a recent story about a company called Achaogen that comes to my mind. The company was working on a new type of antibiotics. The scientists and researchers were looking for a way to develop a new type of antibiotics, as the currently widely available versions are becoming increasingly less effective. They were largely successful in the beginning but failed after a very short time in operation. The business was just not profitable enough to sustain.

This case highlights the need for some for really large economies of scale, cross-incentives among products, and distribution scale that a small company simply can’t sustain. And we are talking only about antibiotics. How about those much larger and even more cost-intensive projects. Cancer, HIV, dementia. There are so many challenges in front of us. They require the right people, with the right education and research experience, the right equipment, sufficient funding, the right connections for distribution and the stamina to dive through ups and downs of the world without going bankrupt.

Bill Gates, for example, is working closely with many companies including GlaxoSmithKline through his Gates Foundation. When asked about the reason for this collaboration instead of just using his immense wealth to simply find solutions on his own, he said it very simply: These companies can do things that no one else can do.

This is a powerful statement for any investor out there. It says that, to a large part, there are not many alternatives. That’s a big moat to cross and perfect protection for any long-term investor.

The risks are limited

Unsurprisingly, AbbVie and GlaxoSmithKline are both considered to be rewarding long-term investments for income investors not only by me but by pretty much every analyst out there. The combination of the long-term focus, available resources, knowledge and power of distribution, together with a reliable and stable cash-flow give pharma companies excellent risk/reward ratios.

Some analysts point out that the big cash-cows might at some point disappear, especially when cheaper alternatives come to market. When patents run out. When the competition catches up. These concerns are legit. It will happen. But unlike some electronic toys or tools, health is a different story with plenty of areas that are still under development and which are almost impossible to copy in a simple and cost-efficient process. The electronic cycle for product improvement is only roughly 1 year and has very limited regulations in place. Health related products take 10-15 years to develop and are subjected to heavy approval processes and regulations. This will always keep the competition at pace, even if some profit margins might occasionally suffer or take a blow.

Disclosure: I own all stocks mentioned in this article.

Dividends are everyones friends

I am a strong promoter of companies that benefit shareholders by distributing dividends. While many companies refuse to do so in order to keep the cash for future investments, I believe that since a shareholder carries risk in regards to the companies success, he or she should also reap a reward from his investment and participate in the companies profits.

There is obviously no guarantee for any company to generate profits for a lifetime, but there are companies that have paid dividends and rewarded their shareholders in a very reliable manner.

Dividend Kings and Dividend Aristocrats

The terms Dividend Kings and Dividend Aristocrats are being associated with companies that have not only distributed dividends for 50 or 25 years respectively without a single interruption. They also have never lowered the dividend payout but increased it every single year.

For investors who are looking for a regular income to receive out of their investments, these are the stocks that might be the most attractive ones to look at, as they earned a status that promises a relatively secure financial future. A promise of paying out dividends for as long as one stays invested.

Compounding dividends

This is not only tempting for retirement investors who are looking to secure their nest egg while continue generating a steady cash-flow. It is even more interesting to young investors who possess two important traits: Time and patience. The magic words that come into play here are “compounding dividends”.

Stocks that generate regularly increasing income do not only secure a return on your investment. But given enough time, they might easily outgrow it by ridiculous amounts. How is this possible?

For these companies, revenue and profit growth lead to dividend increases. If a company can grow its dividend by 10% year on year, it will almost double it’s dividend payouts within 6 years.

So for example, if you buy now shares of AT&T (the biggest telecom provider in the US) which yield 5.8% at the time of writing this article, and AT&T would increase its dividend by 10% year on year, then over the next 6 years your return on investment would grow year on year and reach a return of over 11% by 2025. This would look like this:

2019 = 5.80 %
2020 = 6.38 %
2021 = 7.02 %
2022 = 7.72 %
2023 = 8.49 %
2024 = 9.34 %
2025 = 10.27 %
2026 = 11.30 %

The power of time and patience

So just imagine how this will play out if you keep holding the stock for another 30 years. At some point, your yield on investment might actually outgrow your initial investment. Every. Single. Year. Ridiculous? Crazy? Impossible? Not at all. Let me bring up the greatest investor of all times: Mr Warren Buffet.

One of the largest investments in his lifetime was to put money into Coca Cola. Not only did the value of the company shares appreciate over his lifetime but so did the dividends. From what I was reading, his annual dividends on Coca Cola offer a yield on cost of anything between 40-55% – depending on which source you follow.

Just think of it: You put 100.000$ in a company and given enough time it will return to you between 40.000-55.000$ – every single year. And not only that, but it keeps growing and you don’t need to lift a finger.

The astonishing thing is that Coca Cola and AT&T are not the only examples out there. As of the time of writing, the 2019 list of Dividends Kings has these companies on it:

  • Amer. States Water(AWR)
  • Dover (DOV)
  • Northwest Nat. (NWN)
  • Emerson Electric (EMR)
  • Genuine Parts (GPC)
  • Procter & Gamble (PG)
  • Parker Hannifin (PH)
  • 3M (MMM)
  • Cincinnati Fin. (CINF)
  • Johnson &Johnson (JNJ)
  • Coca-Cola (KO)
  • Lancaster Colony (LANC)
  • Lowe’s (LOW)
  • Colgate-Palmolive (CL)
  • Nordson (NDSN)
  • F & M Bank (FMCB)
  • Tootsie Roll Industries (TR)
  • Hormel Foods (HRL)
  • ABM Industries (ABM)
  • California Water Services (CWT)
  • Federal Realty Inv. Trust (FRT)
  • Stepan (SCL)
  • SJW Group (SJW)
  • Stanley Black & Decker (SWK)
  • Target (TGT)
  • Commerce Bancshares (CHSH)

Personally, I haven’t bought a single Dividend King stock yet. I have two current Dividend Aristocrats in my portfolio, namely AT&T (T) and AbbVie (ABBV). And I am purchasing stocks that I expect to become a Dividend Aristocrat at some point in the future. Apple (AAPL) is such a company as is Starbucks (SBUX) which I also both owe.

Over the next two years, I am planning to purchase several of the official Dividend Aristocrats and to add them to my portfolio. I am currently looking at 3M, Coca Cola,  and Target and will probably purchase some shares within this or during the first quarter of the next year.

I am not entirely focused on dividends only, but having a good mix of shares that offer great potential for growth as well as companies that will secure me a steady cash-flow and grow it year on year is a pretty great combination. Dividends can be an investor’s best friend as they create exactly what every FIRE aspirant is looking for: A steadily growing passive income.

Disclosure: I own shares of AT&T, AbbVie, Apple and Starbucks.