Dividend Growth Machine by Nathan Winklepleck Book Summary

Dividend Growth Machine by Nathan Winklepleck

Dividend Growth Machine Book Review

Dividend Growth Machine by Nathan Winklepleck is a short and quick read.

The author sets the expectation on the time you need to invest in reading upfront – “This book will take you approximately 73 minutes to read from start to finish. I believe these could be the most valuable hour and 13 minutes of your life. Financially speaking, that is.” We see this trend in blog posts and I would love to see the authors start doing the same.

In author’s words:

This book is to introduce you to dividend growth investing as a strategy. It’s not a Ph.D. dissertation on stock selection or financial statement analysis.

If you’re already well-versed in dividend growth investing — this book isn’t for you.

Please do not buy it. Or return it if you’ve already bought it.

I read this book after The Single Best Investment by Lowell Miller which I recommend every investor to read. Most of the concepts covered in this book are covered there too. But this book is much shorter.

I recommend reading both books on Dividend Growth investing strategy.


Dividend Growth Machine Book Summary

Note: This summary is made up of my notes, thoughts and highlights of important passages while reading the book. I keep updating the summary when I revisit it, and occasionally may edit it to reduce summary length. Don’t be surprised if it has changed between visits. The author’s words are in normal font, while my interpretations are in italics.

A NOTE FROM THE AUTHOR

“The capacity to learn is a gift; the ability to learn is a skill; the willingness to learn is a choice.” – Brian Herbert

Before we start, I want to make a few promises to you:   I promise to keep it simple. Investing theories can be complicated with lots of fancy-sounding words.

I promise to be as brief as possible. I’ll keep things short and sweet.

INTRODUCTION

“Investing should be more like watching paint dry or watching grass grow. If you want excitement. Take $800 and go to Las Vegas.” – Paul Samuelson

This book will take you approximately 73 minutes to read from start to finish. I believe these could be the most valuable hour and 13 minutes of your life. Financially speaking, that is.

With this strategy, I believe you will be able to improve your future investment results by at least 1% per year. What would an additional 1% mean for you? If you invest $1,000 per month for the next 30 years, an extra 1% return is worth about $185,000. If you are starting with $500,000 today, an extra 1% would be worth $1 million in 30 years.   Since this book is only going to take you 73 minutes to read, you’re currently on track to earn at least $2,534.35 per minute. So kick back, relax, and enjoy!

From 1871 through 2016, the stock market produces a compounded return of 9.07% per year. That’s enough to grow $1 into $319,492. No typos.

The average equity investor did worse than the S&P 500 by approximately 2.9% per year.

The biggest enemy to investor returns is not fees.

Of the 2.9% underperformance, only 0.8% was directly attributable to management fees. A whopping 2.1% per year was because of their own mistakes.

At the historical inflation level of roughly 3%, investors are likely to grow their wealth at between -2.5% and -0.1% per year for ten years.

If you’re looking for investments that will double overnight, this book isn’t for you. It’s not about picking the next Facebook, Amazon, Google, or Netflix.  

This book is about investing in real companies that make real money.

In the words of Warren Buffet, “Investing is simple, but not easy.”

PART ONE Part 1: Dividends & Retirement

In the first part of the book, we’ll explore how dividend growth investing compares to traditional solutions for retirement.

1: RETIREMENT & MR. MARKET

“Mr. Market’s job is to provide you with prices; your job is to decide whether it is to your advantage to act on them. You do not have to trade with him just because he constantly begs you to.” – Benjamin Graham

One day, you’re going to get tired of working. However, your bills aren’t going to get tired of being paid. So how do you make money when you aren’t working?

The question becomes: “How much can I spend each year and not run out of money?”

Most investment advisors recommend that you sell 4% of your nest egg each year to fund expenses and increase that withdrawal rate over time to keep up with inflation.

Mr. Market wants to buy your shares of stock. Every day, he quotes you a price at which he will buy your shares of stock or sell you some of his.

You don’t have to take Mr. Market up on his offers, but he will always quote you a price. Every. Single. Day.

Most people cannot watch their nest egg fall by 50% and remain committed to their original plan. The emotional toll is too enormous.

Bonds are considered “safer” because you know what return you will get whenever you buy it.

Annuities have the same problem that bonds have – their income is fixed. While the cost of groceries is going up, your annuity check is the same year-after-year.

When you buy an annuity, your $500,000 goes to $0. Z-E-R-O. All that money goes to the insurance company. You still get the payments, but your original principal is gone.

Do you know what happens with that $500,000 check Jim and Sally mailed to the insurance company? The insurance company invests it in stocks and bonds. So you were afraid to invest the $500,000 in the markets, so you paid the insurance company to do it for you. Why not save the high fees and commission checks and invest it yourself?

2: THE AGE-BASED “SOLUTION”

“When it is obvious that the goals cannot be reached, don’t adjust the goals, adjust the action steps.” – Confucius

Most advisors tell you to start with 100 and subtract your age. That is the percentage you should invest in stocks with the rest going into bonds.

For a long time, this has been the conventional wisdom on Wall Street. However, today’s retiree’s may need more money in stocks to keep up with inflation and preserve their spending power.

If you were making a car recommendation, don’t you think you would want more information than a person’s age? You would want to know how many people would ride in the vehicle. You might need to know how they planned to use it. Many factors would influence your recommendation.

The vast majority of so-called “experts” still rely on age as the primary variable. It’s not.

What about other income sources (Social Security, pension, part-time job), future cash flow needs, expected retirement age, reliability of income, major one-time expenses, changes in lifestyle, or risk preferences?

Investing is more about your emotions than your brains.

Stocks will almost always outperform bonds over long periods of time (think 15+ years). If you have a long time horizon, bonds will likely reduce your returns.

Bottom line: The “asset allocation” strategy is all about trade-offs. As a result, it ends up being an OK solution with lukewarm results.

3: THE PERFECT RETIREMENT STRATEGY

“Do you know the only thing that gives me pleasure? It’s to see my dividends come in.” – John D. Rockefeller

The perfect investment strategy should do five things:  

  1. It should grow our wealth reliably over long periods of time (15+ years).
  2. It should minimize the volatility of our portfolio so we can sleep well at night.
  3. It should generate reliable income to pay our bills.
  4. That income should grow at least as fast as our expenses.
  5. It should be easy-to-understand and follow.

Most investment products are difficult to comprehend.

Even mutual funds or exchange-traded funds (“ETFs”) can be difficult to understand. In these products, you are not the direct owner of the underlying stocks. You merely own the vehicle that owns the stock. Make sense? No? Ok.

Bottom line: Most fund investors have no idea what they are invested in.

PART TWO Part II: The Power of Dividends

4: JOHNNY & THE LEMONADE STAND

“The prime purpose of a business corporation is to pay dividends regularly and, presumably, to increase the rate as time goes on.” – Benjamin Graham

A stock represents part ownership in a real business.

Dividends are the most reliable way that stocks make you money. As long as the business continues to earn positive profits, you will get a part of that paid out to you in cash.

The second way stocks make money for you is price appreciation.

Interest rates influence stock prices because they set the minimum level that investors require on all other risky investments.

Would you lend money to a friend that had $100,000 in debt and no job? Of course not! Why? You won’t get your money back.

Investors are willing to pay a higher price for a stock with future dividend growth.

5: THE POWER OF DIVIDEND GROWTH

“The very attention we place on rising dividends puts us squarely in the position of ‘owners’ of a company, of true investors who understand that a satisfying and reasonable return from a stock investment isn’t a gift of the market or luck or the consequence of listening to some market maven, but it is the logical and inevitable result of investing in a company that is actually doing well enough, in the real world, to both pay dividends and to increase them on a regular basis.” – Lowell Miller

If you buy shares of a company that pays a starting dividend yield of 3.3% and the dividend grows by 6% per year, you can’t lose money. The dividend income alone exceeded your original $1,000 investment.

Dividend payments get paid to you regardless of what happens to the market value of your shares.

As a dividend investor, you don’t care about stock price. It doesn’t matter.

The dividend acts like gravity. The stock price can go down in the short-term, but it can’t go down forever. The dividend payment becomes too enticing and the stock’s price must rise to keep pace.

A growing dividend puts upward pressure on a stock’s price. Over a long enough period, it’s impossible for the price not to grow with the dividend.

6: YOUR SECRET WEAPON: DIVIDEND REINVESTMENT

“A stock dividend is something tangible — it’s not an earnings projection; it’s something solid, in hand. A stock dividend is a true return on the investment. Everything else is hope and speculation.” – Richard Russell

Dividends are available to be re-invested back into more dividend paying stocks. The result is two forms of compounding: the dividends and the number of shares you own. As the number of shares you own increases, so does the future income. And the virtuous cycle compounds on top of itself until it can’t be stopped.

That’s the real genius of the dividend strategy. You don’t have to be good at picking stocks. You don’t even have to be average at it. You can be the worst stock picker on Earth and still make an impressive profit!

As a dividend investor, you would prefer that the stock market go down in value. Not up.

Dividend income and stock prices are not linked.

Picking winning tech/social media/pharma stocks is like gambling at the casino. You might hit it big once or twice, but the longer you play, the more certain you will lose.

Dividend growth investing is the opposite. The more you “play,” the better your odds. You don’t even have to pick winners before they become winners. Identify companies that are already winning. Buy them for their growing dividend income stream. You won’t triple your money overnight with these companies, but you will eventually.

Dividend growth investing takes the pressure off you to pick winning stocks.

7: CAN DIVIDENDS BEAT THE INDEX?

“I believe non-dividend stocks aren’t much more than baseball cards. They are worth what you can convince someone to pay for it.” – Mark Cuban

Ask yourself this:

What is the ultimate goal of your investment portfolio?  

If the S&P 500 index returns 15% next year and you only get 13%, will you feel like the year was a failure?  

If you collected $50,000 in dividend income last year, would you care what the S&P 500 did?

Your goal is really to replace your paycheck one day with a stream of growing dividend income.

If are deciding between a mutual fund and an index fund, you should take the index fund 99 times out of 100.

When you or your investment advisor puts your money in mutual funds, there is an additional cost of around 0.61% per year18, on average.

Sales loads can cost between 5% and 8% of your investment right up front.

By purchasing individual stocks yourself or through your advisor, you have a head start on the average person that invests in mutual funds.

When you own individual companies, you get to own the stocks directly in your investment account. When you own a mutual fund or index fund, on the other hand, you have no idea what’s in your portfolio.

Individual stocks also mean you will get paid more frequently.

After the average mutual fund fee, most investors end up with a dividend yield around 1.4%.

If given a choice between owning a little bit of all the businesses (both good and bad) or holding only the best, which would you choose? Of course, you would prefer to own more of the best businesses and less of the bad ones.

Higher quality companies that make more money will result in better investment returns over time.

I feel sorry for mutual fund managers. Not because they aren’t paid enough, but their jobs are hard.   The culture on Wall Street is to obsess over performance numbers. If a mutual fund underperforms its benchmark in any given year (even three months), investors move their money to a different fund.

Focus on short-term results forces mutual fund managers to make short-term decisions.

If you own a portfolio of individual stocks, you are free from the pressures of Wall Street.

Trading costs add up to an average of 1.44% per year23 for the average mutual fund investor. That is even more than what they pay in expense ratios and other fees!

When you invest in individual stocks, you are the direct shareholder in the company. That means you get all dividend income directly to your account.

8: ARE DIVIDENDS RIGHT FOR ME?

“Our goals can only be reached through a vehicle of a plan in which we must fervently believe, and upon which we must vigorously act. There is no other route to success.” – Pablo Picasso

Companies that have grown their dividends outperform the average stock by more than 3x.

Since a dividend investor doesn’t need to own as many bonds, they can outperform the average investor, even if they don’t do a good job of picking stocks!

Dividend growth stocks continue to increase their dividends year-after-year, usually faster than inflation. Bonds and annuities, on the other hand, have flat income.

Focusing on dividends rather than market prices helps you stick with your strategy when stock prices are down, rather than panicking and selling at the bottom like so many of your friends will do.

PART THREE Part III: Applying the Dividend Strategy

9: THE DIVIDEND KINGS

“The thing is, if you’re just oogling fat current dividend yields you are missing the more profitable boat. When it comes to dividend investing, the far smarter play is to zero in on companies that consistently increase their dividend payouts.” – Wealthifi

Just finding companies that pay dividends is not enough. The best strategy is to look for companies that not only pay a dividend but those that have a high probability of continuing to pay one in the future and grow it each and every year. Those are the companies that will build long-term wealth for you and me!

If a company can afford to grow its dividend for 10, 25, even 50 years in a row, they have to be doing something right. They have a product or products that are in high demand and will likely continue to be in demand in the future – no matter what happens to the economy, technology, or investor sentiment.

The ability to pay and grow a dividend automatically eliminates most non-quality companies.

10: HOW TO START YOUR OWN DIVIDEND PORTFOLIO

“The investor’s chief problem and even his worst enemy is likely to be himself.” – Benjamin Graham

If you have $10,000 or less to invest, you should start by purchasing some dividend-focused mutual funds or exchange-traded funds (ETFs).

As your portfolio grows larger (and so does your knowledge), you may want to start buying individual dividend stocks.

A few thoughts that I hope will help get you started.

Focus on Dividend Growth more than Dividend Yield.

Pay Attention to Payout Ratios. A company that pays out more in dividends than it brings in will eventually be forced to reduce the dividend.

Watch Out for Financial Shenanigans.

Pay Attention to Stock Prices.

Don’t try to “catch a falling knife”. A “falling knife” is a stock that has been declining in price dramatically.   Rather than buying them on the way down, it can be a good practice to put them on a “watch list” until the price starts to show some stability or upward movement.

11: SHOULD I HIRE A FINANCIAL ADVISOR?

“Unfortunately, the vast majority of those who bill themselves as financial advisors neither charge a fair price nor give good advice. More than any other market I know, the market for financial advice is ‘let the buyer beware.’” – Jim Dahle, M.D.

People think they act rationally with their money and investments, but they don’t. You don’t. And I don’t, either.

What you’re really hiring them to do is to be a coach to be there when things get difficult. When your stocks drop in value by 20%, a good advisor will help keep avoid making a bad decision.

Their most important job is to help you stick with it over time without doing something stupid.

Will your advisor add enough to your financial future to offset the cost of their services? If not, then you should manage your own money.

12: QUESTIONS TO ASK A FINANCIAL ADVISOR

“Fiduciaries disclose all fees including the fees associated with investment recommendations. They should have few or no conflicts. For any unavoidable conflicts, they disclose it in full and explain what it means.” – Jane Bryant Quinn

Before you hire a financial advisor, you need to be sure you know some detailed information on their investment strategy, financial planning offerings, fees, and past investment performance.

This list was created by Jason Zweig and published in the Wall Street Journal in 2018.  

  1. Are you always a fiduciary, and will you state that in writing?
  2. Does anybody else ever pay you to advise me and, if so, do you earn more to recommend certain products or services?
  3. Do you participate in any sales contests or award programs creating incentives to favor particular vendors?
  4. Will you itemize all your fees and expenses in writing?
  5. Are your fees negotiable?
  6. Will you consider charging by the hour or retainer instead of an annual fee based on my assets?
  7. Can you tell me about your conflicts of interest, orally and in writing?
  8. Do you earn fees as adviser to a private fund or other investments that you may recommend to clients?
  9. Do you pay referral fees to generate new clients?
  10. Do you focus solely on investment management, or do you also advise on taxes, estates and retirement, budgeting and debt management, and insurance?
  11. Do you earn fees for referring clients to specialists like estate attorneys or insurance agents?
  12. What is your investment philosophy?
  13. Do you believe in technical analysis or market timing?
  14. Do you believe you can beat the market?
  15. How often do you trade?
  16. How do you report investment performance?
  17. Which professional credentials do you have, and what are their requirements?
  18. After inflation, taxes and fees, what is a reasonable estimated return on my portfolio over the long term?
  19. Who manages your money?

Read More Like This

Recent Articles


Leave a Comment

Your email address will not be published. Required fields are marked *