RPF0096-Dividend_Mantra

00:00:00.000 | From a net worth of less than zero at the age of 27 to financially independent at the age of 40

00:00:07.000 | on a salary that never exceeds $70,000 a year?

00:00:12.000 | Is it possible?

00:00:14.000 | Well, he's not there yet, but he is a third of the way there, and he's on track following the plan.

00:00:21.000 | Welcome to the Radical Personal Finance Podcast.

00:00:39.000 | My name is Joshua Sheets, and I'm your host.

00:00:41.000 | Today is Wednesday, November 5, 2014, and this is episode 96 of the show.

00:00:47.000 | Today I have an interview for you with Jason Thieber, founder of DividendMantra.com.

00:00:54.000 | Jason's well on his way to financial independence, and he is pursuing a strategy of dividend growth stock investing.

00:01:01.000 | He has a lot to say about dividends. I think you'll benefit and learn a lot.

00:01:10.000 | One of the things I love about finance, what has always intrigued me and interested me about finance,

00:01:14.000 | is that there are so many different ways to achieve financial independence.

00:01:19.000 | I love just the variety.

00:01:21.000 | There are people who have achieved financial independence in entrepreneurship, in investing, just in so many different ways.

00:01:28.000 | Some of them are just incredibly wacky and far out, and some of them are relatively mainstream and proven and time-tested and time-worn.

00:01:36.000 | Today we're going to get a chance to talk with Jason about dividend investing.

00:01:41.000 | Dividend investing is a well-proven path to financial independence.

00:01:45.000 | There's nothing about dividend investing that you cannot do yourself.

00:01:49.000 | Jason is a great resource. He was suggested to me by a previous interviewee on the show.

00:01:55.000 | Wow, this is a really great interview. I think you're going to learn a lot.

00:01:58.000 | We're going to talk about his personal story from waking up deeply in debt and not making any progress.

00:02:04.000 | What were the factors that woke him up and then helped him develop an investment plan?

00:02:09.000 | How has he gone on to become, if not an expert, at least a knowledgeable individual around dividend investing?

00:02:16.000 | I think many of you will be interested and learn from this approach and from this basic information on dividend growth stock investing.

00:02:24.000 | I hope that you enjoy it. It's a great interview.

00:02:27.000 | Jason is a really good guy. He writes a lot on his website, but he doesn't hold back anything on today's show.

00:02:33.000 | I hope that you enjoy this interview, and I'll be back at the end to wrap up the show.

00:02:37.000 | [intro]

00:02:39.000 | Jason, welcome to the Radical Personal Finance podcast. I appreciate you making time to be with us today.

00:02:44.000 | Sure, thanks. I'm glad to be here.

00:02:46.000 | I am excited because I have gotten a lot of questions about dividend investing on the show, but I am not a dividend investor.

00:02:54.000 | Although I'm probably qualified to answer maybe some of the questions in a technical sense,

00:02:59.000 | I thought that this would be a good way to introduce the subject for those who are interested.

00:03:05.000 | Where I'd love to start is share with me a little bit about your story surrounding money,

00:03:13.000 | and especially if there were any transitions in your life and how maybe you became interested in investing as a discipline and something that was appropriate for you.

00:03:23.000 | My story starts out a number of years ago. I was 27 years old and I found myself lost at sea, basically.

00:03:35.000 | I was floating out in life and the ups and downs of life. I felt like a cork in the ocean.

00:03:41.000 | I had no real control over my destiny. I was working a lot of hours. I was working in the auto industry as a service advisor at a car dealership.

00:03:50.000 | I was making okay money. I've never made a lot of money. I've never made over 70 grand a year in my entire life.

00:03:59.000 | When I was 27, I was making around 30 grand a year or so in the auto industry.

00:04:05.000 | I kind of had an epiphany, if you will. I was in Michigan at the time where I was born and raised.

00:04:14.000 | I was born and raised in Detroit. I kind of had an epiphany around this time where I discovered that I was actually worth less as a 27-year-old man than I was as a baby.

00:04:26.000 | As a 3-month-old baby, I can't walk. I can't talk. I can't feed myself. I have no control over my bodily movement, and yet I was worth $0.

00:04:39.000 | I had no income. I had no expenses. I had no assets, no liabilities. So there was nothing on the balance sheet. I had no balance sheet.

00:04:46.000 | At 27 years old, I was worth about negative $19,000 or so, after you factor in the student loans I took out to go to college and the amount of assets I had,

00:04:56.000 | which were really nothing other than just a little bit of cash I had in the bank.

00:05:00.000 | 27 years into my life, probably a third or maybe a quarter of my life lived, I was worth a negative amount of money, which was really horrible.

00:05:10.000 | So I kind of decided to get my act in gear. I moved down to Florida for a number of reasons.

00:05:15.000 | At this time, this was 2009, the economy obviously was horrible, and Metro Detroit was kind of the epicenter of some of these issues with the auto industry and everything else.

00:05:25.000 | And I happened to be working in the auto industry in 2009, so you can't write it any better than that.

00:05:30.000 | So the place of employment I was working at the time fired me, along with a number of people, were let go.

00:05:37.000 | And so I actually ended up moving to Florida for a number of reasons.

00:05:41.000 | Specifically, or more to the point, the economy down there was better at the time due to tourism.

00:05:47.000 | They weren't heavily concentrated on the auto industry and manufacturing.

00:05:50.000 | So their economy in general was better, their unemployment rate wasn't quite as bad.

00:05:55.000 | And in addition to that, I kind of started getting some gears moving in my head around this time about what I wanted in life and where I was really going.

00:06:04.000 | And so I figured out that, hey, I've got to start kind of living below my means.

00:06:08.000 | I have to start creating some kind of gap between my income and expenses to where I can take that capital and start to do something with it.

00:06:14.000 | Or else I'm never going to get out of this hole.

00:06:17.000 | I've got to start digging my way out here, and I need a shovel, and that shovel is capital.

00:06:22.000 | So Florida offered me a number of opportunities.

00:06:25.000 | It had a great climate, so I kind of had an idea in my head, hey, maybe it's possible to kind of get rid of my car for a while, live car-free.

00:06:32.000 | That was a huge chunk of my expenses.

00:06:35.000 | And I started to kind of think of things as the big three, so housing, transportation, and food.

00:06:40.000 | And so transportation was one of them.

00:06:42.000 | Florida offered a great climate to be able to bicycle and maybe get around by bus.

00:06:47.000 | It's easier to wait for a bus when it's not 20 degrees outside and there's 8 inches of snow.

00:06:51.000 | So 75 to 80 degree weather, palm trees around.

00:06:55.000 | I don't mind waiting for 15 minutes.

00:06:56.000 | The bus is a little late, right?

00:06:57.000 | Sure.

00:06:58.000 | So that was obviously another thing.

00:07:00.000 | Free entertainment.

00:07:01.000 | The beaches down here are free.

00:07:02.000 | It's free to go out there, enjoy some of nature's best.

00:07:05.000 | So that was also another aspect of it.

00:07:07.000 | But at any rate, that was around the time I started kind of figuring out what I was doing, and that was kind of a big change in my life.

00:07:14.000 | Also, one last point.

00:07:16.000 | Florida doesn't have any state income taxes.

00:07:19.000 | Michigan's state income tax at the time was 4.35.

00:07:21.000 | I think it's been reduced now to 4.25.

00:07:23.000 | Oh, that makes a difference.

00:07:25.000 | Well, yeah, it's something.

00:07:28.000 | Although I wasn't making a lot of money, it's something that if I figured out if I could keep a little more of what I make, it's a couple hundred bucks here and there.

00:07:36.000 | What I meant was not the difference between Michigan and Florida.

00:07:39.000 | Yes, 4% is a difference.

00:07:42.000 | What I meant was the difference between 4.35% and 4.25%.

00:07:47.000 | That's going to stimulate the economy.

00:07:49.000 | Oh, yeah.

00:07:50.000 | Well, the governor will let you know all about that.

00:07:52.000 | Hey, I reduced it.

00:07:53.000 | I reduced it down to 4.35, 4.25.

00:07:55.000 | So please elect me again, right?

00:07:57.000 | Right.

00:07:58.000 | Of course, that came many years after I left, after they started to kind of bounce back just a little bit.

00:08:04.000 | But yeah, right, exactly.

00:08:05.000 | I can never figure out why people don't pay more attention to state income tax.

00:08:09.000 | So I'm born and raised in Florida.

00:08:11.000 | I live in West Palm Beach.

00:08:13.000 | What part of Florida are you in now?

00:08:16.000 | I live in Sarasota.

00:08:18.000 | Okay, so I live in West Palm Beach, and I've never understood, like, why don't people consider the state?

00:08:24.000 | And especially, I think it's happening more and more, but there are a number of very nice states that have no state income tax.

00:08:30.000 | And everyone's worried about how to increase their raise.

00:08:33.000 | Well, if Michigan--or increase their income, there's a 4.5% increase in income right there, and that matters.

00:08:40.000 | It does.

00:08:41.000 | It does.

00:08:42.000 | And people think that there's no free lunch in life, and I agree with that to a point.

00:08:48.000 | But I'll tell you this is just personal, and this is just anecdotal.

00:08:51.000 | But when I moved to Florida, the auto dealership that I eventually found a job at, first of all, paid substantially more than the one that I was working at in Michigan.

00:09:01.000 | So, oh, well, you don't pay the taxes, but you'll make less money.

00:09:04.000 | Or, oh, well, you don't pay the state income taxes, but you'll get on the sales tax.

00:09:07.000 | That's not really true.

00:09:08.000 | And just a quick point on that, Michigan's sales tax and Florida's sales tax are the same.

00:09:13.000 | Now, there's an additional county tax in certain counties here in Florida, but the 6% is the same.

00:09:18.000 | So there is kind of a free lunch there.

00:09:20.000 | Property taxes, in addition, are very similar in Michigan and Florida.

00:09:23.000 | So it's really just an immediate raise.

00:09:26.000 | I mean, people argue that point, and, oh, it depends on your situation and everything else, and I agree with that.

00:09:30.000 | I mean, it's obviously not easy to move halfway across the United States to get a slight boost in your taxes.

00:09:37.000 | I understand that.

00:09:38.000 | But I was young, and I had an opportunity there, and Michigan was and to a degree is dying.

00:09:44.000 | So Florida offered a lot of opportunities that I really wouldn't have had up there.

00:09:49.000 | Right.

00:09:50.000 | And then just looking at depending on the industry, I mean, if I were going to sell Mercedes, you're going to sell a lot more Mercedes.

00:09:59.000 | And West Palm Beach or Palm Beach Gardens, Florida, than you are in Michigan.

00:10:03.000 | And if you're going to sell cars, you're going to make more money doing that in an environment where almost all the rich people I know maintain residence in Florida.

00:10:13.000 | There's a reason why we've got Palm Beach Island and Jupiter Island and Miami.

00:10:17.000 | I mean, there's more wealth down here because of the tax benefits, and the wealth drives the economy.

00:10:22.000 | So I don't know.

00:10:24.000 | It makes sense to me, but somehow we often--yeah, I get it.

00:10:27.000 | I don't want to leave, so I don't want to move somewhere else.

00:10:30.000 | But I understand why it's hard for people to consider it, but you really can.

00:10:34.000 | It's such a valuable, easy form of geo-arbitrage.

00:10:39.000 | Right, and to another point of the arbitrage, there's wealth arbitrage there as well.

00:10:45.000 | So like I said, I started making more money right out of the gate, and that was because of your point there.

00:10:50.000 | There's certainly just more wealth in Sarasota and in West Palm Beach than there is outside Metro Detroit, Michigan.

00:10:56.000 | It's just a fact.

00:10:58.000 | I mean, there are certain bubbles there in certain suburbs of Metro Detroit, like Bloomfield Hills and West Bloomfield and Birmingham and whatnot.

00:11:04.000 | But in terms of the overall wealth and in terms of my personal experience working in the same exact industry, the same exact type of cars,

00:11:13.000 | there was a substantial difference in terms of traffic and everything else.

00:11:17.000 | And so that was a form of arbitrage for me.

00:11:19.000 | I said, hey, if I can simultaneously increase my income by working in a place where there's more wealth and more action coming my way,

00:11:25.000 | while simultaneously also decreasing my taxes and my expenses by, you know, A, factoring out state income taxes,

00:11:32.000 | and B, getting rid of my car and maybe living somewhere cheaper and everything else, that created this huge gap for me.

00:11:38.000 | And that's really what happened.

00:11:41.000 | How did you go about, once you decided, okay, I need to build some margin, I'm going to make some of these decisions,

00:11:46.000 | when did that lead into a wealth plan, thinking through your investment portfolio and how to control that?

00:11:53.000 | That was early 2010.

00:11:55.000 | So in, what, June 2009, I moved to Florida.

00:11:58.000 | And it was about a six-month period there towards the latter half of 2009 that I started to create that gap.

00:12:07.000 | And so the income slowly started coming in, the expenses slowly started coming down, and so I started to build up cash.

00:12:12.000 | When I moved to Florida, I had basically no cash.

00:12:14.000 | I had nothing to my name.

00:12:17.000 | And right about early 2010, I started, I looked at my checking account, and I had around $7,000 or $8,000 in it at the time,

00:12:24.000 | which was, to me, a lot of money.

00:12:26.000 | To a lot of people, it's a lot of money.

00:12:28.000 | And so all of a sudden, I had some money to play with.

00:12:30.000 | It was like, you know, if you give somebody $1,000 and tell them to go to the mall, hey, have fun, I was like, whoa, I have some money.

00:12:36.000 | I can start doing something with this.

00:12:38.000 | And up until that time, I started reading books like Your Money or Your Life.

00:12:42.000 | I started reading about Warren Buffett and certain successful investors out there and kind of what they did and how they went about their kind of plan.

00:12:50.000 | And so I started having some ideas in my head.

00:12:53.000 | And basically what I do is I just kind of jumped in.

00:12:56.000 | I read quite a bit.

00:12:57.000 | I didn't go into it without any knowledge at all.

00:13:00.000 | But I opened a brokerage account in early 2010.

00:13:03.000 | I transferred over $5,000 from the checking account over to the brokerage account, and I started investing.

00:13:09.000 | I started reading about companies through annual reports, going to investor relations sites.

00:13:16.000 | And I looked at guys like Warren Buffett.

00:13:19.000 | I mean, you can go back to his earlier life and look at some of the investments he made.

00:13:22.000 | And he calls them cigar butts, which were companies that were worth more on paper than what he was buying them for.

00:13:27.000 | So even if they went out of business, he would still make money.

00:13:31.000 | And it was kind of a form of arbitrage, if you will.

00:13:33.000 | But the more successful portion of Warren, because like 99 percent of Warren's wealth was built after his 50th birthday.

00:13:41.000 | A lot of people don't know that.

00:13:42.000 | So, you know, when you really look at the effect of compounding and really where Warren's kind of wealth really started to take off was where he started to invest in high-quality businesses,

00:13:51.000 | businesses that have economic moats, competitive advantages, you know, have excellent balance sheets, you know,

00:13:58.000 | that are able to generate increasing top line and bottom line growth year after year after year.

00:14:04.000 | So we're talking about companies with brand name products or some type of advantage in their industry.

00:14:08.000 | So I started to look at that and I started to look around at products that people are buying every single day.

00:14:13.000 | And, you know, no matter what's going on with the economy, people are going to brush their teeth.

00:14:18.000 | They're going to, you know, they're going to buy their shampoo and their soap.

00:14:20.000 | They're going to have to put gas in their car.

00:14:23.000 | You know, tobacco is another, you know, that's maybe a little bit controversial, but, you know, tobacco, alcohol, products like this, people buy these products no matter what's going on with the general economy.

00:14:35.000 | So I started to kind of look at that just from a common sense approach.

00:14:38.000 | You don't need to read any investment books to really understand that.

00:14:41.000 | And I started to invest in those businesses like Coca-Cola and Pepsi and, you know, Johnson & Johnson, companies that produce products and provide services that are ubiquitous that people need all around the world no matter what's going on.

00:14:55.000 | And I just kind of started getting my feet wet and away it went from there.

00:14:59.000 | What makes you think that you can do this?

00:15:02.000 | Do what? Invest?

00:15:05.000 | Considering the fact that you're just a dude working at a car dealership and you're dealing with the most aggressively dealt with business, the financial business, what makes you think that you can figure out how to successfully invest on your own?

00:15:23.000 | Seems a little arrogant to me, huh?

00:15:25.000 | Yeah, right. Well, yeah, you got to have some confidence.

00:15:27.000 | I mean, certainly when I started telling people about my plan, you know, this was, you know, of course, look at my background.

00:15:32.000 | I grew up in Detroit and, you know, not only did I grow up in Detroit but I grew up in basically just a drug house.

00:15:38.000 | My dad left us when we were young.

00:15:40.000 | My mom ended up giving us up for legal guardianship.

00:15:43.000 | So, you know, there was a real rough background there.

00:15:45.000 | And, yeah, I was working at a car dealership.

00:15:47.000 | I, you know, I didn't have any background or education in finances or investing or anything else.

00:15:52.000 | So when I started talking to people about this, they were like, "Yeah, right, you know, this is a guy who doesn't know anything about money.

00:15:59.000 | He racked up student loan debt, dropped out of college.

00:16:01.000 | I even had an inheritance when I was 21 and I completely blew it."

00:16:05.000 | So, you know, my track record with money was horrible.

00:16:09.000 | So, you know, people were laughing at me and probably can't blame them.

00:16:12.000 | But, you know, there's a vision there.

00:16:15.000 | You have to really want it.

00:16:18.000 | When we're talking about financial dependence, when we're talking about saving, you know, savings isn't everything.

00:16:21.000 | You know, savings isn't just something you do for one month and you say, "Okay, yeah, I saved money this month.

00:16:24.000 | Great. Now I can go back to what I was doing."

00:16:26.000 | There's a consistent approach to it.

00:16:28.000 | You know, you have to be diligent with it.

00:16:30.000 | And so by the time I started investing, there was already about a six-month process there where I started really creating a gap.

00:16:37.000 | I started to kind of focus and hone in on what I was doing.

00:16:40.000 | I started to become more clear about what I wanted in life and I wanted it.

00:16:43.000 | And you have to really want it and you have to do what's necessary to get it.

00:16:48.000 | And when I talk about it, I'm talking about financial dependence.

00:16:51.000 | I'm talking about freedom.

00:16:52.000 | I'm talking about the ability to do really whatever you want in life without regard to, you know, money, money, money, money, money.

00:16:59.000 | That's all people want to talk about.

00:17:01.000 | You got to start thinking in terms of time, in terms of what you really desire out of life.

00:17:05.000 | And, you know, really what I started to figure out there when I started to create that gap between income and expenses,

00:17:11.000 | once I started to kind of drop things out and live more frugally, was that not only does money not buy you happiness,

00:17:18.000 | but living below your means actually generates happiness within itself.

00:17:22.000 | It's not just a means to an end.

00:17:24.000 | It's a lifestyle.

00:17:25.000 | And it's actually a lifestyle that generates a lot of happiness because of that control you have all of a sudden over your own destiny.

00:17:30.000 | You know, when I talked about earlier when I was kind of floating like a cork in the ocean,

00:17:33.000 | it's kind of depressing to think that, you know, what am I doing?

00:17:37.000 | I have no control over what's happening.

00:17:39.000 | I have no control over my future.

00:17:40.000 | And that's really -- that's kind of a downer, right?

00:17:42.000 | I mean, you're totally depressed and you're -- you know, you have all this debt and you feel like you can't do anything about it.

00:17:47.000 | Once you kind of develop this vision around what you want -- and that's something that an individual has to do.

00:17:53.000 | I can talk all day about what I did.

00:17:54.000 | But in the end, you have to really want it for yourself.

00:17:57.000 | You have to say, I want this freedom and I'm going to do what's necessary to get it.

00:18:02.000 | And as far as the investing side of it is, like I said, these companies aren't really difficult to understand.

00:18:08.000 | You know, you don't need a finance degree.

00:18:10.000 | You don't need prior education to understand how Coca-Cola makes money.

00:18:14.000 | They sell, you know, concentrates and syrups and they sell all kinds of beverages to billions of people all around the world.

00:18:20.000 | You know, juices, waters, you know, obviously carbonated soft drinks and whatnot.

00:18:24.000 | And then you've got your Procter & Gamble that sell, you know, detergents and soaps and toothpaste and batteries and everything else that people need.

00:18:32.000 | So, you know, when you're talking about it like that, it's not like we're -- it's not like I'm talking about investing in merger and acquisition arbitrage or something like that.

00:18:40.000 | I'm talking about just basically investing in long-term, you know, investments.

00:18:44.000 | You know, these are companies that I don't trade in and out of the market.

00:18:47.000 | I don't need to be on it every day.

00:18:49.000 | I was able to go to work and work from 7:30 to 6 or 7:30 to 7 and then work Saturdays and do my, you know, 50-, 60-hour week routine.

00:18:57.000 | And I was able to leave the investments, just kind of do what they do.

00:19:00.000 | And that in itself is really a wonderful learning lesson.

00:19:03.000 | People think that when you invest in a stock market, you've got to watch it every single day or you've got to look at the stocks and watch them go up and down.

00:19:08.000 | It's just like owning a house.

00:19:10.000 | You know, it's just like owning any other major asset in your life.

00:19:12.000 | You don't go to Zillow.com and look at what your house value is every single day.

00:19:17.000 | And then if it's up 2% a day, you think about selling and moving.

00:19:20.000 | It's not like that.

00:19:21.000 | It's the same thing with investing in businesses.

00:19:22.000 | These aren't just stocks or pieces of paper that, you know, trade up and down.

00:19:25.000 | These are actual businesses that are selling real products to real people.

00:19:28.000 | So, that learning lesson was, hey, I can go to the dealership and make my money and earn the capital I need to continue investing.

00:19:35.000 | And these businesses are just going to work for me.

00:19:37.000 | I don't need to worry about them.

00:19:38.000 | I don't need to babysit them.

00:19:39.000 | These are companies with millions of employees, you know, in aggregate working for me as an owner.

00:19:45.000 | So, I can let them do what they do.

00:19:47.000 | I can let them sell products and sell services.

00:19:49.000 | And I can go do my own thing and continue to make money.

00:19:52.000 | That's a great answer.

00:19:53.000 | I was trying to bait you a little bit.

00:19:55.000 | But I like, I mean, you brought out such an important point.

00:20:00.000 | If you don't have a burning desire to do something, you're not going to be able to figure out, you know, how to build the belief in your ability.

00:20:09.000 | But if you have a clear desire, then you can figure it out.

00:20:12.000 | And maybe there will be some starts and stops and some fumbles and some stutters.

00:20:16.000 | But if you can develop a vision about what you're trying to accomplish, you'll figure out a way to get there.

00:20:23.000 | And the background doesn't matter.

00:20:25.000 | The key is that all of us can learn our way out of any problem that we face.

00:20:29.000 | We really can.

00:20:30.000 | And whether it's learning how to simply deal with a problem or whether it's learning how to fix the problem such that it no longer exists, we can learn our way through it if we have a clear vision.

00:20:42.000 | Right.

00:20:43.000 | Did you -- your whole site is about dividends.

00:20:46.000 | And so as I understand it, your strategy is to purchase dividend-paying companies and focus on that as -- and focus on the amount of dividends that they're paying you as a major metric for your success.

00:20:59.000 | Right.

00:21:00.000 | Did you go through a process of considering various investment alternatives and then this is what you landed on?

00:21:07.000 | Share with me that learning process.

00:21:10.000 | Yep. Yeah.

00:21:11.000 | So that dates back about five or so years ago.

00:21:13.000 | That was late 2009, early 2010.

00:21:16.000 | And I was reading a number of books.

00:21:18.000 | The first book I read was Your Money or Your Life.

00:21:20.000 | And that's -- first of all, that's a fantastic book.

00:21:22.000 | I recommend that to anybody who is just kind of starting out and trying to kind of -- they got the gears working in their head but the light bulb hasn't quite lit up quite yet.

00:21:30.000 | So that's a great book.

00:21:32.000 | And that kind of formed the framework, if you will, of trying to get out of debt and become financially independent.

00:21:38.000 | As far as investing specifically in dividends, yes, I started to read books.

00:21:41.000 | The first strategy that I looked into is index investing.

00:21:46.000 | So just putting away capital every single month and putting it into an S&P 500 fund or a total market fund and then maybe diversifying that with a bond fund or a real estate fund, what have you, two or three funds and then you just set it and forget it kind of thing.

00:22:00.000 | And I looked into that and that seemed like a very viable strategy.

00:22:04.000 | And, in fact, if I wasn't doing what I am doing, if I weren't doing this, then I would definitely just index invest.

00:22:12.000 | That's all I would do.

00:22:13.000 | I would just maybe open an S&P 500 fund, maybe a bond fund when interest rates rise, and that's it.

00:22:18.000 | It's very simple, very easy.

00:22:19.000 | Anybody can do that.

00:22:20.000 | And low fees, you also collect a little bit of income via the yield that these funds yield.

00:22:27.000 | But the problem with that strategy for me and what eventually led me to dividend growth investing is that the income that index funds provide are typically very low.

00:22:40.000 | The S&P 500 yield is like around 1.8 percent right now.

00:22:44.000 | So if you're looking to live solely off of the income your portfolio generates, 1.8 percent, that's going to require a pretty substantial capital base in which to just live off that income.

00:22:57.000 | So at that point, you're either doing one of two things.

00:23:00.000 | You're either working for a very long time to build up the capital necessary, the principal necessary to invest such a low yield or, excuse me, withdraw such a low yield, or B, you're -- what was my point there?

00:23:14.000 | Invading principal.

00:23:16.000 | Or, B, you're withdrawing some of the principal down, excuse me, which leads me to the 4 percent safe withdrawal rule.

00:23:22.000 | There was a study done a while ago called the Trinity Study.

00:23:25.000 | It's since been updated where basically what they recommend is withdrawing no more than 4 percent to create a sustainable withdrawal rate over the course of a 30-year retirement.

00:23:34.000 | And I wrote an article on that not long ago.

00:23:36.000 | The problem with the 4 percent withdrawal rate, which is assuming, again, you're withdrawing basically the gap between the yield of the index and the 4 percent, which would be, what, about 2.2 percent right now.

00:23:48.000 | The problem with that is that there is a failure rate in there.

00:23:52.000 | People think that you can just withdraw 4 percent and just for inflation for the rest of your life and forget it.

00:23:56.000 | But there are failures in that model.

00:23:59.000 | So you have to kind of ask yourself, am I okay with a slight percentage of failure?

00:24:04.000 | Am I okay with a 3 or 5 or 10 or 20 percent failure rate, depending on how aggressive I am and what percentage I have to stocks and bonds?

00:24:12.000 | So I kind of ask myself that question, especially when I'm talking about retiring by 40.

00:24:18.000 | That's my whole goal in life is to retire by 40 years old or to become financially independent by 40 years old.

00:24:23.000 | And the Trinity Study, when they talk about the 4 percent withdrawal rate, it was done over a 30-year period.

00:24:27.000 | So that puts me about 70 years old.

00:24:29.000 | I hope to live longer than that.

00:24:31.000 | I don't know.

00:24:32.000 | I'm not guaranteed anything, but I hope to live longer than that.

00:24:35.000 | So when you start modeling that out even further, the numbers become even more unclear.

00:24:40.000 | So I ask myself, do I want -- am I okay with any type of failure at all?

00:24:48.000 | And I wasn't.

00:24:49.000 | So that eventually led me to dividend investing through a number of different ways.

00:24:53.000 | But again, kind of talking back to Warren Buffett, when I started looking at Warren Buffett and what he started doing as he got older and once he started to really generate some serious wealth for himself and Berkshire Hathaway, was he started investing in companies that are high-quality companies.

00:25:08.000 | And what I happened to find was this isn't always true, but when you look at the majority of high-quality companies, Fortune 500 companies or basically the top 40 or 50 companies in the world -- and again, I'm talking about companies that are worth $100 billion, $200 billion, $300 billion, $400 billion -- almost all of them pay dividends, and they typically increase their dividends year after year after year to shareholders because shareholders are the owners of the company.

00:25:31.000 | These are publicly traded companies.

00:25:33.000 | So as shareholders, we cumulatively own the company.

00:25:37.000 | So I started to look at that, and I started to say, wow, these companies all pay dividends.

00:25:42.000 | And I started to look at the yields of these companies, and these yields were far in excess of what these index funds offered.

00:25:49.000 | So we're talking about yields of 2.5%, 3%, 4%, 4.5%.

00:25:53.000 | So I started to look at that and say, wow, if I'm getting 3% or 4% in dividends on my portfolio, that means that, A, I'll need a lot less capital in order to live off my portfolio because we just doubled the yield of the portfolio, and, B, I won't have to work nearly as long, and, C, the principle itself that the underlying equity in these companies, I don't need to withdraw.

00:26:18.000 | I can just let that continue to grow and grow and grow.

00:26:20.000 | So if I own 100 or 200 or 300 shares of Johnson & Johnson, I can just live off the dividends that Johnson & Johnson provides me as an owner and let those 200, 300, 400 shares grow and grow and grow over time and let the dividend income organically grow by itself.

00:26:32.000 | I don't need to sell shares in order to live.

00:26:34.000 | And that's kind of the eureka moment for me.

00:26:37.000 | That's what happened.

00:26:38.000 | I started to look at that, and I said, wow, index investing seems great.

00:26:41.000 | You're basically going to get market rate returns minus the very tiny fees that the index funds charge you, but you're basically getting the market.

00:26:49.000 | But the income that they can organically generate for you via just the yield, frankly, is just not enough for most people.

00:26:56.000 | So you're going to have to sell off assets.

00:26:58.000 | And whether you're comfortable with slowly withdrawing your assets over time and introducing even a very small percentage or even a small failure rate in there, it's just something you have to ask yourself if you're comfortable.

00:27:11.000 | So that's what really led me to dividend growth investing.

00:27:13.000 | I started to look at the organic income my portfolio can provide or generate.

00:27:18.000 | And if I can live solely off that, what I look at it as or what I've kind of compared it to is a tree.

00:27:23.000 | My portfolio is a tree, and each branch off that tree is a stock, is a position, is a company I'm invested in.

00:27:29.000 | And my portfolio right now has 51 branches or 51 companies I'm invested in.

00:27:34.000 | So we're talking about Coca-Cola, Johnson & Johnson, Procter & Gamble, ExxonMobil, Unilever, all these businesses.

00:27:40.000 | And every branch produces fruit every quarter or month or semi-annually or annually, depending on the dividend schedule of these companies.

00:27:48.000 | And all I do is I pluck the fruit, and then that branch grows more fruit the next quarter or the next six months or whatever.

00:27:55.000 | Now, right now what I'm doing is I'm taking that fruit and growing more branches with it.

00:27:59.000 | I'm reinvesting that dividend income and growing the tree and growing the branches.

00:28:03.000 | But eventually I'm going to just pluck that fruit and live off of it.

00:28:06.000 | That's what's going to sustain my life.

00:28:08.000 | Now, the other strategy, index investing, you're cutting off little portions of that branch, those branches off the tree.

00:28:16.000 | And what you're hoping is that the branches grow faster than you can cut them down.

00:28:20.000 | Whether or not they do that, I don't know.

00:28:22.000 | When the Trinity study came out, it used the last, the historical stock market as a proxy for the future.

00:28:28.000 | Whether or not the future acts anything like the past, I don't know.

00:28:30.000 | Again, even using the past, there were some failure rates in there, and we don't know what's going to happen over the next 50, 60 years.

00:28:36.000 | But I do know that the odds are very good that Coca-Cola is going to continue to sell beverages all around the world.

00:28:42.000 | People have to drink something to sustain life.

00:28:44.000 | You can argue that water out of your tap is free, but water has been free for a long time now.

00:28:49.000 | People continue to buy Powerade and orange juice and Coke and everything else that they sell.

00:28:54.000 | So the odds are good that these companies are continuing to grow and sell more products and sell more services over time.

00:29:00.000 | And with that, their dividends are also going to continue to grow.

00:29:02.000 | So that's kind of what's happening.

00:29:04.000 | And speaking of growing dividends, the fruit I was talking about, not only do I pluck it off the branches, but the dividend income, the fruit actually grows over time.

00:29:13.000 | Like Johnson & Johnson, for instance, they've been growing their dividends for over 50 years.

00:29:18.000 | So for the last five decades, that fruit got bigger and bigger and bigger.

00:29:22.000 | So it started out as maybe a grape and is now a grapefruit.

00:29:25.000 | So that stuff grows all by itself.

00:29:27.000 | So the inflation protection is built right in.

00:29:29.000 | With the Trinity study and with the 4% rule, something important to note is that when they're talking about with Germany,

00:29:33.000 | when they're talking about withdrawing 4% of your portfolio, they're also adjusting it for inflation.

00:29:37.000 | So you have to manually withdraw or cut down those branches more and more and more every year just to keep up with inflation because everything gets more expensive over time, you know, due to the fiat currency and everything else.

00:29:48.000 | So, you know, you're cutting off just a little more of that branch every single year, and you're hoping that branch just grows a little bit more to kind of make up for that.

00:29:55.000 | Again, whether or not that happens, I don't know.

00:29:57.000 | But I do know that these companies grow their dividends year after year after year.

00:30:01.000 | And your inflation protection is built right in because many of the companies that I invest in and that I discuss on the site, typically grow their dividends well in excess of inflation.

00:30:09.000 | You're typically on the rate of, you know, rates of 7% to 10% a year, whereas inflation is averaged around, you know, 3% or so over the long term.

00:30:18.000 | One of the things I – one of the most powerful aspects I think of dividend investing is that I think it adjusts your thinking from the thinking of a trader to the thinking of an owner.

00:30:31.000 | And there's something powerful about receiving income and just simply having your income without spending your principal.

00:30:40.000 | And there are objections to this, which we'll go to after a little bit.

00:30:44.000 | But it's powerful to actually gain money off of it.

00:30:47.000 | In my own personal portfolio, I realized this a few years ago that I had always been diligently investing, but I had always been diligently investing in retirement accounts because that was what I was taught to do, put money in retirement accounts.

00:30:59.000 | And I realized I've never experienced the joy of going out and spending money from an investment.

00:31:05.000 | Like here I am.

00:31:08.000 | I'm 29 years old, and I've been investing since I was 18.

00:31:12.000 | And in 11 years, I have – up until I made this change, so this was a few years ago, basically in almost a decade I had never experienced the joy of getting a check from my investments and going and buying something with it because all the money was locked in a retirement account.

00:31:29.000 | And so I actually recognized I need that emotional connection to my money because that quarterly statement comes in and it shows how much the dividends were, but I can't spend it.

00:31:40.000 | So I went and I changed some shares of a mutual fund that I owned outside of a retirement account, and I switched the dividends from automatic reinvestment into coming into my checking account.

00:31:54.000 | And then when the money came in, I purposely went out and spent it so that I could enjoy the benefit of actually – like this is the whole point of investing is to have income that we can spend.

00:32:05.000 | But we never – like all the money is locked away in some stupid 401(k), so we invest, invest, invest, invest, invest, and the only connection we have with our investments is the number that's printed on the bottom of the brokerage statement every quarter.

00:32:18.000 | And then that just completely destroys most of us, our ability to emotionally be stable with regard to market fluctuations, whereas if you're just focusing on that quarterly dividend check, whether or not Johnson & Johnson's share price increases or decreases by 10 or 15 percent per quarter in one random quarter, that's not going to dramatically affect the dividend that they send out.

00:32:43.000 | Yeah, absolutely, absolutely. And right, what I was talking about there was kind of more on the macro level of looking at investing, but right, I've talked a lot about how dividends themselves are very tangible, that's actual cash money you can touch.

00:32:56.000 | And I invest all my income in a taxable portfolio, so I don't have a 401(k), I don't have an IRA or anything like that. It's all in a taxable account.

00:33:08.000 | Explain why you choose to do that.

00:33:10.000 | Well, a number of reasons. When I was still working in the auto industry, I've recently moved from working in the auto industry to writing full-time, so that was a move I made very recently.

00:33:20.000 | But when I was still working in the auto industry, the 401(k) that my employer offered, it didn't offer a match, and the funds that they offered were really horrible.

00:33:27.000 | They were very high in fees. I didn't have access to a Vanguard S&P 500 fund with a .05 percent annual fee or anything like that. These were typically funds with half a percent fees or percent fees on them, and I didn't get a match on top of it.

00:33:42.000 | And another thing is I'm looking to retire and live off my dividend income very early in life, so my situation isn't necessarily applicable to everybody else out there or even very many people at all.

00:33:53.000 | I'm trying to live off my dividend income by 40 years old, so to invest a substantial portion of my assets in a 401(k) that won't be really able to be accessed until 59 and a half years old really won't cut it for me.

00:34:07.000 | So I need all my capital. I need all my firepower going into the taxable accounts so that I can withdraw it early in life.

00:34:14.000 | Another point on dividends is that they're tax-efficient. On qualified dividends, which are the substantial portion of the companies that I invest in, any company that pays qualified dividends, you pay 0 percent taxes on those up until the point where you cross over the 25 percent marginal income tax bracket.

00:34:36.000 | So if you're making, say, $30,000 a year in dividend income, and if that dividend income is qualified, you pay 0 percent taxes on that. So you're basically walking around with $30,000 tax-free, which if you compare that to W-2 income would be substantially more than that after you factor out Social Security and FICA and Medicare and you factor out your federal income tax and everything else.

00:34:59.000 | And again, Florida, you have no state income tax at all. So basically it's just 0 percent. Now, there are certain investments like real estate investment trusts and things like that that don't pay qualified dividends that you do pay taxes on.

00:35:10.000 | But I keep that around 5 percent or so in my portfolio. So it's a very small number if you're looking at it from the total number. $30,000 if you're paying $300 or $400 a year in taxes, it's just peanuts.

00:35:22.000 | So that's why I do what I do. But getting back to your point about dividends themselves, they're very tangible. And one thing I really like about the strategy is that I'm able to actually see financial dependence come in like a ship.

00:35:34.000 | I can actually see it come to shore. I can look at my dividend income month after month after month, and I see it growing and growing and growing and growing.

00:35:42.000 | And I can see that if you're looking at it on a chart, like your Money or Your Life recommend what they call a wall chart. And they recommend you plot your passive income down at the bottom.

00:35:50.000 | You start out at zero, then it's $20 and $50 a month, and it grows and grows and grows. And you can see that number start to rise against your expenses.

00:35:59.000 | And eventually when the passive income exceeds your expenses, that's what they call the crossover point or when you can actually start living off your passive income.

00:36:05.000 | But that's one thing I really love about dividends. It's tangible. It's cash money. It's real income that's hitting my account every single month.

00:36:12.000 | And my account's taxable. So if I want, I'm earning around almost $500 a month in dividend income right now.

00:36:18.000 | So if I want, I can actually start withdrawing that cash and use it for whatever I want. It's real money that comes in my way that I can do whatever I want with.

00:36:24.000 | So it's just like income I earn from anything else in life, be it a job or be it a hobby or be it selling something on Craigslist or whatever.

00:36:31.000 | So that's real cash that's coming my way. And like I said, right now I'm reinvesting that and growing the portfolio.

00:36:37.000 | But eventually it's just money coming my way. So people look at dividends for some reason as, oh, but it's – you look at your return on investment and blah, blah, blah, blah.

00:36:47.000 | Sure, that's all fine and dandy. But a separate point is that it's real cash. You don't need to sell anything. You don't need to do anything.

00:36:55.000 | And not only that, but it bypasses the stock market. Like I said earlier, people like to look at the stock market and like to look at the ups and downs of it and, oh, no, it's down.

00:37:03.000 | Oh, yes, it's up. But the dividend income stays very, very steady, and it's typically just slowly up and up and up.

00:37:10.000 | And it's tangible money, whereas these stock charts aren't really tangible. It's just numbers floating out there in the world.

00:37:17.000 | The dividend income is real money. And like I said, it comes directly from the companies. Stock prices go up and down.

00:37:21.000 | Companies don't really have a lot to do with stock prices. Coca-Cola has very little to – has very little control over their stock price.

00:37:28.000 | That has to do with supply and demand of their stock and traders and all these computers that are set up to do trading in microseconds.

00:37:37.000 | But Coca-Cola, the company, has control over their fundamentals, over their sales, over their earnings, over their balance sheet.

00:37:45.000 | And they also have control over how much dividend income they pay the owners.

00:37:48.000 | So the dividends bypass the stock market. You don't really have to look at the ups and downs of the stock market because it's cash money coming directly from Coca-Cola to shareholders.

00:37:56.000 | And one other thing I love about dividends, I kind of think like an owner.

00:38:00.000 | When I own equity in a company, I look at myself like an owner because as a shareholder, that's exactly what you are.

00:38:06.000 | Stocks aren't just pieces of paper to just trade around. You're actually owning equity in a real company selling real products and services.

00:38:13.000 | So I look at it like I would own my – and I often compare it to like a pizza shop.

00:38:18.000 | So if I own Papa Jason's Pizza Shop and I have these employees working for me and creating wealth for me, do I not want to get paid?

00:38:28.000 | Would I not want to collect a check from that business? Would I not want to collect income so that I can live off of it?

00:38:33.000 | I would, right? I mean, anybody would. If you own your own business, you want to collect a check. You don't want to work for free.

00:38:38.000 | So that's the dividend income. Coca-Cola is saying, hey, you're an owner in this company. This is your cut of the profits.

00:38:45.000 | And just like anybody who would own a private business of their own, they would obviously want to cut their profits.

00:38:50.000 | And that's where dividends come in. So people who invest in stocks that don't pay dividends and say they're better, maybe you feel that way, maybe not, whatever.

00:38:58.000 | But that's real income coming your way. And that's your right as an owner of a business. That's your right to collect that check.

00:39:06.000 | And that's where the dividends come in. It's your paycheck. But yeah, dividends are very tangible. That's one thing I love about them.

00:39:12.000 | And I'm able to actually report on my dividend income every single month and I report on my income and expenses every single month.

00:39:18.000 | And the dividend income has slowly increased to the point now where it's covering about a third of my expenses now.

00:39:23.000 | So I can actually say with confidence I'm about 33 percent financially independent right now.

00:39:28.000 | So I'm about a third of the way there because I can actually see that cash money coming in and that's real cash against real expenses.

00:39:35.000 | That's exciting because you've done that. Your portfolio is what, about $200,000 now?

00:39:41.000 | Yeah.

00:39:42.000 | And so you've done that in, when did you move to Florida? You said 2009, so five years?

00:39:46.000 | Yeah, well I started investing in March of 2010. So it's been a little over four years now.

00:39:51.000 | So that's amazing, man. You said you never made more than $70,000 working at the car dealership.

00:39:56.000 | And then to go from a zero net worth to a $200,000 plus net worth and to be a third of the way towards your expenses, that's fantastic.

00:40:04.000 | You're doing awesome.

00:40:06.000 | Yeah, and that's really to the point of it all is that I'm nobody special.

00:40:10.000 | I didn't have any training, I don't have any inside connections, I didn't grow up with somebody that taught me these things.

00:40:19.000 | When I went to college I originally studied secondary education and my very last semester in college I didn't really know what I wanted out of life.

00:40:26.000 | Like a lot of people that go into college at 18 years old, you don't know what you want.

00:40:31.000 | So I was switching around majors a lot. My very last semester I studied accounting and it seemed interesting to me.

00:40:37.000 | I looked at the numbers, I started looking at balance sheets and income statements and that stuff all seemed very interesting to me.

00:40:42.000 | But I didn't really apply it until a number of years later.

00:40:44.000 | But other than that, other than a quick course in accounting in college, I don't have any training in this.

00:40:49.000 | So if I can do it, if I can work at a car dealership and work in the service department and write up repair orders and tell people what their cars need for repairs,

00:40:57.000 | which couldn't be further away from investing in stocks in the stock market, then anybody can do it.

00:41:02.000 | All you need is just a desire and you need obviously a little bit of capital.

00:41:06.000 | With the abundance here in first world countries like the United States, there's absolutely no reason why people shouldn't be able to save at least 20 or 30 or 40% of their net income.

00:41:18.000 | I mean if you don't make very much money.

00:41:20.000 | It's just really, if we're being honest, it's just almost downright silly what we spend money on and how much money we spend.

00:41:25.000 | If you look at it on the global scale of what, if you were to look at the global GDP and what the average person globally makes and spends, I mean we're almost just getting silly at this point.

00:41:35.000 | A lot of stuff is practically free really when you think about it.

00:41:39.000 | So yeah, it's very easy to create kind of that gap or that spread between income and expenses.

00:41:44.000 | Once you have a little bit of capital and you have the desire to do it, regardless of what strategy you use, if you want to use an index investing strategy, then that's fine.

00:41:51.000 | But the key is to have the desire and the consistency and the persistence and the patience and everything else that's necessary.

00:41:57.000 | You've got to work hard. You've got a little bit of luck.

00:42:00.000 | They say successes where hard work and luck intersect and that's very true.

00:42:04.000 | But you've got to work hard at it and that's what I did.

00:42:06.000 | For years and years and years, I clocked in at 7.30. I didn't leave until 6 or 7 o'clock at night.

00:42:12.000 | I worked Saturdays and then on top of it I also started my blog and wrote about all this stuff for years on end.

00:42:18.000 | So I was basically getting up at around 6.30 and I was working until almost 10.30 at night.

00:42:22.000 | So it wasn't like this all magically happened for me.

00:42:24.000 | It was an incredible amount of hard work that I had to put in to do it.

00:42:28.000 | But the rewards are obviously extremely worth it because if I'm able to at 40 years old go from being worth less than a baby at 27 and at 40, be able to live completely off the dividend income my portfolio generates for myself,

00:42:42.000 | then that's pretty substantial. That's something to be proud of. But it really speaks well to the point that if I can do it, anybody can do it.

00:42:49.000 | If I can do this with my background, then there's no reason why anybody else can't do it.

00:42:53.000 | Do you automatically reinvest dividends into the companies or do you have them all funneled into a central account?

00:43:00.000 | Right. So they call that DRIPPING, Dividend Reinvestment Program, where you automatically reinvest dividends back into the stocks that paid them.

00:43:08.000 | I don't do that. I let the dividends just kind of accumulate in the portfolio and then I reinvest them manually.

00:43:13.000 | And that's kind of because, like I said earlier, I look at dividends just like income from anything else.

00:43:19.000 | The dividend income that hits my portfolio, it doesn't matter which company paid it to me.

00:43:23.000 | The dollar amount is what matters and the capital, the power of that capital, the ability for me to compound that capital is really what I look at.

00:43:31.000 | So if Coca-Cola paid me a dividend and Coca-Cola's stock just really isn't attractive right now on a valuation basis,

00:43:38.000 | if I feel like, you know, I think I can get a better deal in the market than Coca-Cola's stock right now,

00:43:43.000 | or let's say like Johnson & Johnson, that's my biggest position by dollar weight.

00:43:47.000 | I have about $10,000, $300, $400 invested in Johnson & Johnson.

00:43:52.000 | And maybe, you know, I don't know if I want to have more invested in Johnson. That's a pretty big position for me.

00:43:57.000 | Maybe I want to kind of start to kind of diversify a little bit and round out some other positions around Johnson & Johnson.

00:44:04.000 | So there's a number of reasons to do it and not to do it, but I look at it just as capital.

00:44:08.000 | So I don't think you need to just automatically reinvest dividends with the company that paid them.

00:44:13.000 | The businesses are paying you, who's an owner.

00:44:16.000 | It'd be like my pizza shop. You know, if I'm able to generate income from Papa Jason's Pizza Shop,

00:44:21.000 | does that mean I automatically need to invest every single dollar back into the pizza shop? No.

00:44:25.000 | I can take that money and invest it into a new business or invest it into a rental property or do whatever I want with it.

00:44:30.000 | It's simply capital that provides you more firepower, more money to do what you're already doing.

00:44:36.000 | So, you know, people can say reinvestment, and that's an easier way to do it.

00:44:39.000 | My way certainly takes a little more time, but I'm investing every single month anyway.

00:44:43.000 | I'm funneling thousands of dollars to my brokerage account regardless of what dividends got paid to me.

00:44:49.000 | So I'm simply tacking on that dividend income onto what's already, you know, being funneled in.

00:44:54.000 | So, you know, you could look at it like, you know, I've already got a ship going out to sea,

00:44:57.000 | and I'm just adding a couple extra passengers is all I'm doing.

00:45:00.000 | So, you know, there's stowaways, I guess, but that's how I look at it.

00:45:05.000 | I look at it just as capital. I don't need to reinvest it back into the business that paid it.

00:45:08.000 | I can reinvest it. I can deploy it however I want.

00:45:11.000 | I like the benefits of that from--this is actually a disagreement that my wife and I have with each other,

00:45:17.000 | but I like the idea of having all income from all sources no matter what going into one central account

00:45:25.000 | and then all of the money in that account going to whatever the financial priorities are at any one specific time.

00:45:32.000 | We have this psychological--I'll call it a problem. My wife would say it's not, but I'll call it a problem.

00:45:40.000 | We have the psychological problem of viewing sources--different sources of income as different.

00:45:44.000 | So, for example, if somebody gives us $100 as a gift, then we say, "Well, that $100, I'm supposed to go and spend it,"

00:45:52.000 | because it was free money. But the reality is that $100 should be simply going to whatever the next financial goal is on the list.

00:46:00.000 | So if your next financial goal was to go and buy a new lens for your camera, then you should go spend the $100 on that.

00:46:07.000 | If the next financial goal was to pay that $100 toward your credit card debt or to buy--you're looking at shares of Johnson & Johnson

00:46:20.000 | and you're saying, "Hey, I think these are attractively priced right now," then that $100 should go towards that.

00:46:26.000 | We really, I think, have a psychological problem of viewing money differently depending on the source.

00:46:31.000 | But the reality is that the entire goal of investing is to create cash flow. That is the goal, because cash flow is what funds life.

00:46:39.000 | And so every dollar should be treated the same, in my opinion, whether it's gift income, whether it's earned income from a wage job,

00:46:48.000 | whether it's business profits from a side business, no matter what.

00:46:53.000 | Because then we can accurately assess all of the opportunities that we have by just simply saying, "Hey, I'm choosing to purchase shares of Coca-Cola.

00:47:03.000 | Is that a more attractive business for me to own, or is it more attractive for me to open a Subway franchise in my local shopping plaza?"

00:47:11.000 | That should be the decision criteria.

00:47:14.000 | I made this mistake earlier, I think, because I always used to view them as differently.

00:47:18.000 | And then I recognized, "This is a problem," and I've tried to ignore the source of income and just focus on all the income going to one spot,

00:47:26.000 | and then what's the next financial priority in my life.

00:47:29.000 | Exactly. Cash flow is cash flow. I look at cash, I'm cash agnostic.

00:47:35.000 | I don't care if my aunt gave me $100 or if Coca-Cola sent me $100 or if I earned $100 from my job.

00:47:45.000 | $100 is $100 is $100. It's cash money, it's cash flow, and that cash flow can be used to grow your cash flow.

00:47:51.000 | It can be used to reinvest or what have you to grow that cash flow.

00:47:55.000 | And what you want to do is you want to grow it in the best manner possible or in the greatest opportunity available to you at that time.

00:48:01.000 | Not all opportunities are the same.

00:48:03.000 | In the stock markets, there's thousands of stocks out there in the stock market, and not all opportunities are created equal at any given time.

00:48:09.000 | So every single opportunity that I have for my cash flow competes with every other opportunity available at that time.

00:48:19.000 | So Coca-Cola, just because Coca-Cola paid me a dividend doesn't mean I need to reinvest it back into Coca-Cola because Coca-Cola is competing for my capital.

00:48:25.000 | I look at it like I'm forming a basketball squad, right, and Coca-Cola is one of the players I can draft.

00:48:30.000 | "Hey, Coca-Cola, I love you in my portfolio right now, but you're slumping the last four or five games.

00:48:35.000 | I'm going to go ahead and draft this guy for this game."

00:48:38.000 | So every opportunity competes with every other opportunity, and there's thousands of opportunities out there.

00:48:43.000 | In dividend growth stocks alone, there's around 550 stocks that have increased their dividends over the last five consecutive years out of all the U.S.-listed stocks out there.

00:48:52.000 | So you're talking about 550 stocks right there.

00:48:55.000 | So to think that you need to automatically reinvest every dividend with every company that paid it just to me is -- you know, that's a great way to do it, and it's very simple and very easy and everything, and it kind of closes the book right there.

00:49:05.000 | But really, if you're talking about opportunities and you're talking about creating more wealth and increasing your cash flow at a more advantageous rate,

00:49:12.000 | then you want to make sure that you're deploying that cash flow in the best opportunities available to you at that time.

00:49:19.000 | Where can you buy cash for the lowest cost?

00:49:22.000 | Exactly, exactly.

00:49:23.000 | With security.

00:49:24.000 | How do you approach your analysis from the perspective of valuation?

00:49:29.000 | What have you learned, and how would you approach a new investment decision?

00:49:33.000 | Well, right, so valuing stocks and valuing businesses and everything, that's kind of something that's pretty subjective.

00:49:39.000 | But how I do it -- and I've grown as an investor.

00:49:42.000 | I've learned a lot over the years.

00:49:43.000 | When I first started, I didn't know nearly as much as I know now.

00:49:46.000 | But where I'm at in this particular time, what I do is I start by looking at annual reports, and I start by compiling numbers.

00:49:52.000 | And what I tend to do is I look at 10 years of numbers.

00:49:55.000 | I look at 10 years of revenue, 10 years of net income, 10 years of earnings per share, 10 years of dividends.

00:50:01.000 | And I look at growth rates.

00:50:02.000 | I look at what a company is able to do over a 10-year period, and I generally try to use that as a proxy for the long term.

00:50:09.000 | So what I start doing is I start looking at compound annual growth rates, and I try to look for companies that are growing earnings,

00:50:17.000 | at least in the high single digits, if not somewhere in the double digits.

00:50:20.000 | But, you know, 7, 8% a year is pretty solid because if a company is able to grow earnings by 7, 8% a year,

00:50:26.000 | then the odds are also good that it's able to grow its dividend by 7 or 8% a year.

00:50:30.000 | You know, you combine that in with a 2% or 3% yield, and you're looking at pretty attractive total returns.

00:50:35.000 | So I start by looking at the annual reports.

00:50:37.000 | I start by compiling numbers.

00:50:38.000 | I also look at items when we're talking about fundamental or quantitative analysis.

00:50:44.000 | You know, these are just pure numbers.

00:50:45.000 | I look at return on equity.

00:50:47.000 | I look at, you know, margin.

00:50:48.000 | I look at return on invested capital.

00:50:50.000 | I also look at the balance sheet.

00:50:52.000 | I like to invest in companies that are conservative in terms of how they manage their money.

00:50:56.000 | You know, just like you wouldn't want to maybe date somebody who's $100,000 in debt,

00:51:02.000 | you might not want to invest in a company that's deeply in debt either, you know,

00:51:05.000 | because every dollar that they're paying in interest is one less dollar they can pay to you as an owner in that business.

00:51:11.000 | So I like to invest in companies that are relatively conservative on the balance sheet.

00:51:15.000 | I look at debt to equity.

00:51:17.000 | I look at interest coverage ratios, you know, how much of their earnings are going towards interest expenses and whatnot.

00:51:23.000 | And then I also like to look at the qualitative analysis, which is really just as important.

00:51:26.000 | People look at the numbers and then that's it.

00:51:28.000 | I see a lot of people that make that mistake, especially young investors.

00:51:32.000 | They look at just the numbers and say, oh, this company grew by 7% a year over the last 10 years.

00:51:36.000 | Boom, I'm investing.

00:51:37.000 | But, you know, again, you have to kind of think, okay, this is what happened over the last 10 years,

00:51:42.000 | but we're not investing in what was.

00:51:44.000 | We're investing in what's going to be.

00:51:46.000 | You know, like Wayne Gretzky would say, you know, you want to skate to where the puck's going, not to where it is.

00:51:49.000 | So I look at the qualitative side.

00:51:51.000 | I look at, you know, what competitive advantages a company has.

00:51:54.000 | You know, what are the odds that this company will be able to grow at that continued rate?

00:51:57.000 | You know, what are the recent analysis reports on the company?

00:52:00.000 | What are some of the recent investor presentations all about?

00:52:03.000 | You know, are new products coming out?

00:52:05.000 | Is the company continuing to invest in the business through research and development?

00:52:09.000 | Are, you know, are there barriers to entry in terms of its market?

00:52:14.000 | Like railroads are a good example.

00:52:17.000 | All the railroads that are built in this country are all that's ever going to be built.

00:52:20.000 | You know, you can't just form a new railroad and get right a passenger right away across the United States.

00:52:25.000 | You know, so Norfolk Southern and Union Pacific and CSX and these railroads,

00:52:29.000 | there's huge competitive advantages there because that's it.

00:52:32.000 | The competition that's in place is already in play.

00:52:35.000 | So it's like Monopoly.

00:52:36.000 | You know, you own three or four railroads and you're locked in.

00:52:38.000 | So, you know, I look at competitive advantages like that.

00:52:41.000 | Do they have brand name products?

00:52:43.000 | Are they generally able to grow prices in excess or at least in line with input costs, you know, rises?

00:52:49.000 | So, you know, you look at inflation.

00:52:51.000 | Is this company going to be able to grow over the rate of inflation?

00:52:53.000 | So I do a qualitative analysis, and that's also extremely subjective because I may think, you know,

00:52:58.000 | a company has more competitive advantages than you may think they have.

00:53:01.000 | And that's where, you know, investing differs, and that's kind of the fun, and that's what makes the market.

00:53:05.000 | Everybody, you know, for every buyer there's a seller.

00:53:07.000 | So but that's how I do it.

00:53:09.000 | I look at annual reports.

00:53:10.000 | I look at what is the company doing.

00:53:12.000 | Do they take investors seriously?

00:53:14.000 | You know, you'll notice a lot of different language in annual reports,

00:53:18.000 | and the annual reports are basically a gateway, or I look at it like just a view into the thought process behind a company.

00:53:24.000 | So when they start using words like "shareholders" and "business owners" and "returning capital to owners" and "long-term,"

00:53:32.000 | when they start using words like that, that's what gets me kind of, you know, kind of hyped up,

00:53:36.000 | and I get pretty jazzed up when I start reading stuff like that.

00:53:39.000 | When you start reading stuff about what happened this year, what happened last year, and problems and excuses and things like that,

00:53:46.000 | and it's the weather, and we start reading stuff like that, sometimes that can be kind of bad news, but that's where I take it.

00:53:52.000 | I look at the numbers, and I also look at the qualitative side.

00:53:55.000 | And actually, speaking of dating, I compared analyzing companies to analyzing or looking at a potential partner, a life partner,

00:54:03.000 | and they're very similar.

00:54:05.000 | So just like you would look at dating someone, you might look at how much income they make, right?

00:54:09.000 | You hate to be superficial about it, but that's something that certainly goes into the thought process of whether you want to date somebody or marry somebody.

00:54:15.000 | So you might look at how much debt they have and how much money they make, and are they able to cover their half of the bills?

00:54:21.000 | Are they responsible with the money?

00:54:23.000 | Did you meet them and they have $200,000 in debt due to credit card bills, and they have a bunch of excuses as to why they got to that point?

00:54:29.000 | So you look at the fundamental side of their life, you know?

00:54:32.000 | But you also, just as importantly, look at the qualitative side of their personality.

00:54:35.000 | So you look at, you know, are they honest? Are they kind? Are they loving? Are they generous?

00:54:40.000 | So that's kind of just like I look at companies.

00:54:43.000 | I look at companies on the number side, on the fundamental side, and I look at them on the qualitative side as well, and they kind of go hand in hand.

00:54:49.000 | Generally, companies that are fundamentally excellent tend to also be qualitatively excellent and vice versa.

00:54:55.000 | But that's kind of where I look at it.

00:54:57.000 | Do you track your returns on your portfolio and do you compare them to a benchmark?

00:55:03.000 | I used to. The last time I compared my portfolio to the S&P 500 was back in, I think, early, gosh, early 2013 or late 2012.

00:55:13.000 | It was quite a while ago.

00:55:15.000 | And a couple of reasons why I stopped doing that, and I wrote a lengthy post a while back on why I don't compare myself to the S&P 500.

00:55:23.000 | But first of all, I was beating the S&P 500 by a very slim margin, which is really unimportant and doesn't matter at all to my long-term goals.

00:55:32.000 | The reason why I don't compare my portfolio to the S&P 500 is because it's just noise to me.

00:55:37.000 | It's just a way to distract me from what I'm really after.

00:55:40.000 | Again, as I stated earlier, the dividend income rising against my expenses, the ability for my portfolio to generate cash flow and the ability for me to compound my income into future growing cash flow is what really will determine my ability to retire by 40 and live off my dividend income.

00:55:54.000 | My ability to beat a benchmark, a really arbitrary benchmark like the S&P 500 index, is really unimportant and doesn't matter at all to my goals.

00:56:05.000 | For instance, let's say I compared myself to the S&P 500 index, right, and over the last couple of years I was beating it.

00:56:12.000 | But over this year, let's say this year I don't beat it.

00:56:14.000 | Let's say this year I trail it by 2 or 3 percent, and next year I trail it by 2 percent.

00:56:18.000 | Do I then abandon everything I've been doing for the last five or six years?

00:56:21.000 | And so somebody might look at my portfolio and say, "Oh man, wow, the dividend income you're generating, you're right on pace.

00:56:27.000 | You're 33 percent there, you're about a third of the way in your journey at 32 years old, you've got eight years left, and you're going to be there, man.

00:56:33.000 | I mean, at 40 you should be able to generate enough dividend income to live off of it."

00:56:37.000 | But hold up, wait, wait.

00:56:39.000 | I see that you're trailing the S&P 500 index by 2 percent this year.

00:56:42.000 | Whoa, whoa, whoa, whoa, whoa.

00:56:44.000 | You've got to abandon everything.

00:56:46.000 | You're not on track now.

00:56:48.000 | You won't be able to live off your cash flow.

00:56:50.000 | You've got to invest in the S&P 500 index or you've got to change everything here.

00:56:55.000 | So doing that, allowing yourself to compare yourself, in my opinion, is just a bad idea.

00:57:01.000 | And comparing yourself to the S&P 500 index, the S&P 500 index is just the 500 largest companies in the United States.

00:57:08.000 | What makes that any more of an appropriate benchmark than, let's say, the Vanguard Dividend Appreciation Index or the Vanguard Wellington Index or the Dow Jones?

00:57:19.000 | Or the NASDAQ or any other index out there?

00:57:22.000 | We just kind of arbitrarily choose what we want to compare ourselves to, and the S&P 500 index is a well-known bellwether for the overall stock market.

00:57:29.000 | I get that.

00:57:30.000 | I'm not ignorant.

00:57:32.000 | But at the same time, comparing yourself to the S&P 500 index to me would be just the same as comparing yourself to somebody else, another investor.

00:57:39.000 | "Oh, well, I didn't quite return what he returned, so I need to abandon everything I'm doing, and now I need to change everything."

00:57:45.000 | As long as you have goals set up that are realistic and that are time-based and everything else and that are appropriate for your income level and your means and what you're really looking to get out of life,

00:57:59.000 | and as long as your plan works for those goals, for your independent goals, that's what matters.

00:58:04.000 | Comparing yourself to others or comparing yourself to benchmarks, to me, that just gets in the way of what you're really trying to do.

00:58:10.000 | So I don't compare myself.

00:58:12.000 | I do find that my portfolio tends to somewhat lag on days when the stock market goes up by quite a bit, and I tend to find that it also does better when the stock market goes down by quite a bit.

00:58:24.000 | And that's because many of the stocks that I invest in have low what they call betas.

00:58:28.000 | They have low beta.

00:58:30.000 | Beta is a measure of volatility.

00:58:32.000 | So if the stock market is 1, many of the companies I invest in have betas of anywhere from like 0.4 to 0.8.

00:58:38.000 | So they just fluctuate less than the overall market.

00:58:41.000 | So when it's up more, they go up by less.

00:58:43.000 | When the stock market is way down, they go down by less.

00:58:46.000 | So really what that does, that creates kind of a smoother result.

00:58:49.000 | So if the stock market is up by 1% today, my portfolio might only be up by 0.7%, but if it's down by a percent, it might only be down by 0.7%.

00:58:58.000 | So it creates kind of a smoother result, which some investors may like that.

00:59:03.000 | But again, I don't really compare myself to that.

00:59:07.000 | To compare yourself to a benchmark and then think that you need to abandon everything you've been doing, even though you might be completely on track for what you're after in life, would be a huge mistake in my view.

00:59:18.000 | Do you invest through a brokerage account or directly with the company through their investor relations department?

00:59:25.000 | I use a brokerage account.

00:59:26.000 | I personally use Scottrade right now.

00:59:29.000 | When I first started investing back in early 2010, it was an attractive choice.

00:59:34.000 | There's some cheaper brokerages that have come out in the last few years, but Scottrade's well capitalized.

00:59:40.000 | They've been around for a long, long time.

00:59:42.000 | They're covered by the SIPC and everything else.

00:59:45.000 | So I invest with Scottrade.

00:59:47.000 | They offer $7 commission trades, which is pretty attractive.

00:59:51.000 | If you compare that to 10 or 20 years ago, you were paying quite a bit more to invest in stocks.

00:59:55.000 | I don't invest directly through companies like through some type of computer share or something else.

01:00:01.000 | I invest in a brokerage.

01:00:02.000 | It's a safe and easy way to do it.

01:00:05.000 | It's convenient.

01:00:06.000 | I can access all my investments in one central spot, and I can do what I want with it from there.

01:00:13.000 | There's an argument in the dividend growth investing world about whether or not a company should pay dividends or whether the company should be responsible for investing those profits.

01:00:33.000 | In essence, there are many permutations of the argument, but some company leaders, I guess probably the most famous ones would have been Steve Jobs.

01:00:42.000 | Steve Jobs with Apple and then also Warren Buffett, but for different reasons.

01:00:48.000 | But Steve Jobs would often make the claim in my memory that if I can't invest the money better than you can, then why on earth am I running this company?

01:00:58.000 | If you just sell shares, but I'm not going to send you the money when I've got all these incredible investment opportunities.

01:01:04.000 | And that's always made a lot of sense to me.

01:01:06.000 | Why would I bother to hire somebody to -- the reason I'm investing in a company is because I want them to identify the market opportunities.

01:01:15.000 | And now when they send me the dividend, now I have to take and go and figure out where am I going to allocate that money and find someone else.

01:01:22.000 | Why would that person not just simply focus on here's the best use of the investment?

01:01:26.000 | And then the second example, so that was what Steve Jobs always argued, which is why prior to his death, to my knowledge, I don't think Apple ever paid a dividend.

01:01:33.000 | And didn't they start recently?

01:01:36.000 | Didn't they pay a dividend finally?

01:01:37.000 | Right, okay.

01:01:38.000 | And then Berkshire Hathaway, Warren Buffett would talk about that from a similar perspective and then also he would talk about it from the perspective of tax efficiency model.

01:01:46.000 | And there are some major tax drawbacks from the company's perspective that the managers will often choose not to pay dividends or to reduce dividends or to return value to the owner in some other way.

01:02:01.000 | Whether that's through a stock buyback, increasing the shares, whether that's through other mechanisms.

01:02:07.000 | So I'd like you to comment on those two issues, please.

01:02:10.000 | Sure, right.

01:02:11.000 | So again, dividends, everything in life has upside and downside benefits and drawbacks.

01:02:19.000 | And certainly those are some of the drawbacks of dividends, specifically the tax point because the corporation has to pay taxes at the corporate level before sending you the dividends.

01:02:26.000 | So there is a slight drag there in terms of return.

01:02:29.000 | But a couple points specifically to Steve Jobs and Warren Buffett, interestingly enough.

01:02:33.000 | When you talk about returning value to shareholders and when we talk about companies like Coca-Cola, Coca-Cola doesn't return all their retained earnings because part of the retained earnings are what they keep.

01:02:46.000 | But they don't return all the cash flow to shareholders in terms of dividends.

01:02:51.000 | Part of that cash is used for dividends.

01:02:53.000 | They pay out around 50, 60 percent.

01:02:56.000 | I don't know the number off the top of my head, but around 50 percent, 50 or 60 percent of their earnings in the form of a cash dividend shareholders.

01:03:02.000 | The other cash is used for a variety of other reasons.

01:03:06.000 | They're still investing in the business.

01:03:07.000 | Just because a company pays a dividend doesn't mean they're not still growing and doesn't mean they're not still trying to actively grow the business.

01:03:14.000 | Coca-Cola, for instance, recently invested in Green Mountain Coffee Roasters.

01:03:20.000 | They also recently invested in Monster Energy by buying equity stakes and forming joint ventures.

01:03:25.000 | So they're still growing the business.

01:03:27.000 | The dividend is basically just a company saying, hey, we just are drowning in cash here.

01:03:33.000 | We have way too much money.

01:03:35.000 | And the growth opportunities that we see in our particular market are somewhat limited to the amount relative to the cash we have.

01:03:42.000 | So, therefore, we're going to give you guys some of this so we don't waste it.

01:03:45.000 | And we're going to keep the rest that we know we can continue to grow the company with.

01:03:48.000 | And share buybacks are another way for companies to return cash flow to or return value to shareholders.

01:03:54.000 | And a number of the companies that I invest in, almost all of them do share buybacks.

01:03:57.000 | Johnson & Johnson, IBM, for instance, one of the larger examples of that.

01:04:01.000 | Coca-Cola, they all return a ton of value to shareholders in the form of share buybacks.

01:04:06.000 | So it's a combination of them.

01:04:07.000 | You can argue maybe one's better than the other.

01:04:09.000 | I like my cash.

01:04:11.000 | Like I said earlier.

01:04:12.000 | Now, going back to my earlier example with the pizza shop.

01:04:14.000 | If I own Jason's Pizza Shop and I retained all the earnings, and let's say ten investors came in, you know, pop a Jason's and said, hey, Jason, we want to invest in your company.

01:04:24.000 | Here's equity.

01:04:25.000 | Here's cash for equity.

01:04:27.000 | But we want to return on our investment in the form of a cash dividend.

01:04:30.000 | We want money back.

01:04:31.000 | Because, you know, you could say the company's doing great.

01:04:33.000 | But, you know, cash tells me what I need to know.

01:04:38.000 | Cash is a proof in the pudding.

01:04:39.000 | Cash says, hey, you are making money, and this is the cash to prove it, right?

01:04:42.000 | So over time I could continue to grow and grow and grow Papa John's.

01:04:46.000 | But at some point there will just be too many Papa -- excuse me, Papa Jason's, not Papa John's.

01:04:50.000 | There will be so many Papa Jason's to the point where I just can't continue to grow the company at an attractive rate for these investors, and I'll have to return cash back to them.

01:04:58.000 | And the same thing with Coca-Cola.

01:04:59.000 | People often stop buying and say, well, if I was Coca-Cola, I'd just stop paying a dividend outright and just grow the company.

01:05:05.000 | To me that's saying management is poor.

01:05:07.000 | You know, management is saying, hey, you know, we can't grow this company anymore.

01:05:10.000 | And, of course, those arguments, again, are ignoring the fact that Coca-Cola is still growing the business.

01:05:14.000 | They're still using that capital for investing.

01:05:17.000 | They're still buying back shares.

01:05:18.000 | But my response to those people would be, okay, well, let me sit you in the chairman's seat.

01:05:23.000 | And where do you go with that money then?

01:05:25.000 | If dividends are such a bad idea, then what is the alternative?

01:05:29.000 | Where does Coca-Cola go with this money?

01:05:30.000 | You know, the dividend is basically, in my view, a way for management to stay prudent with capital.

01:05:36.000 | The less capital, you know, Coca-Cola's management has, the more useful or the better they can use that available capital and get a good rate of return on it.

01:05:48.000 | So when you're talking about return on equity, if you increase the equity side of the equation, there's a question there as to whether they can get a solid return on that, you know, to compensate for the increased return in the form of the additional retained earnings they're taking on because they're not paying a dividend anymore.

01:06:05.000 | And where do they go with that money?

01:06:06.000 | Where do they go with that capital?

01:06:07.000 | Johnson & Johnson's another good example.

01:06:09.000 | When you're talking about a company that's worth $200 billion or $300 billion, the opportunities for growth are just somewhat limited.

01:06:17.000 | You know, these companies are taking in revenue that are competing with countries.

01:06:21.000 | You know, their revenue is on par with countries out there in the world.

01:06:25.000 | So where do they grow?

01:06:27.000 | What attractive measures do they have?

01:06:29.000 | I mean, other than just acquiring other companies outright and just growing and growing and growing, there's limits to attractive growth there.

01:06:35.000 | And so the dividend is basically saying, hey, shareholders, we have enough money already over here.

01:06:40.000 | We're just drowning in cash.

01:06:41.000 | Here's a paycheck for you.

01:06:43.000 | You know, you own this company.

01:06:45.000 | And we're saying that we can grow the remaining amount of capital with an attractive rate.

01:06:48.000 | But if we were to have all this capital, we wouldn't be able to grow it at an attractive rate.

01:06:52.000 | And Apple's a good example of that.

01:06:53.000 | While Steve Jobs is still alive, Apple is growing substantially.

01:06:56.000 | You know, they were a much smaller company than they are today.

01:06:58.000 | They're like a $600 billion company now.

01:07:00.000 | You know, they weren't that way 10, 15 years ago.

01:07:03.000 | They grew at just an exponential rate.

01:07:05.000 | And certainly you can make an argument, too, as to why Steve Jobs is so famous in the first place.

01:07:10.000 | He was just an excellent manager and a visionary.

01:07:12.000 | Not every company has a Steve Jobs helming, you know, the ship.

01:07:16.000 | So Steve Jobs had a great point.

01:07:18.000 | He's saying, hey, guys, there's a lot of innovation here going on, and we have a huge research and development department.

01:07:23.000 | We're generating some fantastic products that are going to make us a ton of money.

01:07:27.000 | We need all the capital available to us.

01:07:29.000 | And that's great.

01:07:30.000 | You know, there are some companies out there, especially in the technology field,

01:07:32.000 | which is why I don't have a lot of investments in technology, that need a lot of their capital,

01:07:37.000 | because technology changes all the time.

01:07:38.000 | There's a ton of research and development in it.

01:07:40.000 | And, you know, they need to grow.

01:07:42.000 | They need to compete and everything else.

01:07:44.000 | You know, comparing that to a company, again, like Coca-Cola, they don't need to grow all that much.

01:07:48.000 | They don't need to innovate all that much.

01:07:50.000 | You know, orange juice hasn't changed in 50 years.

01:07:53.000 | Coca-Cola hasn't changed in a very long time.

01:07:56.000 | The amount of research and development necessary for Coca-Cola, it's just a low -- it's just not a capital-intensive business.

01:08:02.000 | So for Coca-Cola to start taking all that money and try to grow with it, you know, you can make an argument maybe they could,

01:08:10.000 | but I would make an argument that they can't, and that's why they're returning that capital.

01:08:13.000 | Management is basically saying there's not a lot of innovation necessary here.

01:08:17.000 | We're in a dominant position.

01:08:18.000 | We've got our brand power.

01:08:19.000 | We're going to keep some money aside for marketing.

01:08:21.000 | We're going to keep some money aside for a little bit of innovation,

01:08:23.000 | develop some carbonated soft drinks that, you know, aren't so high in calories.

01:08:26.000 | You know, we're acquiring equity in new, exciting businesses, but all this capital, all these billions of dollars sitting over here, we just don't need it.

01:08:34.000 | And so, you know, do you want them incinerating it or do you want them returning it to you as shareholders?

01:08:38.000 | I'd prefer the latter scenario.

01:08:40.000 | And, again, speaking to Warren Buffett, that's another good example.

01:08:45.000 | Again, Warren Buffett is probably so famous because he's such an excellent capital allocator.

01:08:49.000 | Does every business have a Warren Buffett holding the ship?

01:08:52.000 | I would make an argument that they don't.

01:08:54.000 | Warren Buffett is a specific case.

01:08:55.000 | However, speaking more to Warren Buffett, I prefer to invest like Warren Buffett does and not as how -- it's kind of a case of do as I say, not as I do, right?

01:09:04.000 | So Warren Buffett invests in Coca-Cola.

01:09:06.000 | He invests in companies like ExxonMobil.

01:09:08.000 | Almost the entire portfolio that he -- that's public, that's Berkshire's, you know, $100 billion plus investment portfolio, almost every single company on there pays and grows dividends.

01:09:19.000 | So he's collecting that cash flow, that capital, and he's just an excellent capital allocator.

01:09:24.000 | He's just, you know, kind of a god among us, right?

01:09:26.000 | But he's taking that capital and allocating it in the best way he sees fit.

01:09:30.000 | You know, so he's saying, hey, guys, I don't want to pay a dividend because I can allocate this capital, but I want to collect a dividend so that I can allocate that capital.

01:09:37.000 | So it's kind of an interesting scenario there.

01:09:40.000 | Again, I wouldn't prefer to compare myself to Warren Buffett because I'm not running a $300 billion company with massive insurance operations and a fully-owned locomotive company and everything else.

01:09:51.000 | But if you're looking at it from the individual standpoint on a micro level, you know, you have to ask yourself, you know, do you want cash flow or do you not want cash flow?

01:09:59.000 | And what's the best way to get that cash flow?

01:10:01.000 | Again, I view dividends as the best way to get that cash flow because what I was talking about earlier, it bypasses the market.

01:10:08.000 | It's a very tax-efficient way to collect income.

01:10:10.000 | And again, you don't need to sell any equity.

01:10:12.000 | But, you know, with Steve Jobs and Warren Buffett and all these other companies that don't pay dividends, you know, those are a couple of great examples.

01:10:20.000 | But there's also a lot of companies out there that don't pay dividends and aren't able to grow earnings and everything else.

01:10:24.000 | You know, like Amazon is a great example.

01:10:26.000 | I think they just had a horrible quarter.

01:10:28.000 | They're, you know, they're very – they're not profitable.

01:10:30.000 | So, you know, as a business owner, you've got to say, OK, well, Amazon is not paying a dividend and, you know, they're not increasing profits.

01:10:37.000 | So where are we going here?

01:10:38.000 | What exactly is happening here?

01:10:40.000 | They came out with a phone.

01:10:41.000 | They tried to innovate.

01:10:42.000 | It was a dud.

01:10:43.000 | So, you know, there's examples on either side of the coin.

01:10:45.000 | But, you know, I look at it as you've got to look at the type of company you're talking about, too.

01:10:50.000 | You've got to look at mature companies versus companies that are just starting out.

01:10:54.000 | A company that's very new, you know, probably needs a lot more capital versus a company that's worth $200 or $300 billion and doesn't have the type of growth opportunities a young company had.

01:11:02.000 | And you've also got to look at who's helming the ship.

01:11:04.000 | You've got to look at what kind of industry they're in.

01:11:06.000 | Again, technology is an industry where, you know, it's hard to pay out rising dividends every single year because of the competition, because of innovation, because you need research and development.

01:11:16.000 | And, again, that's why I don't have a lot of investments in the technology field.

01:11:19.000 | But when we're talking about companies like Colgate and Procter & Gamble, there's just only so many growth opportunities they have.

01:11:25.000 | They need to go somewhere with that cash.

01:11:27.000 | And so if you were to allow management to not pay dividends, say, hey, management of Procter & Gamble, you know, hey, you know, hey, Indra Nooyi of Pepsi, you know, I don't want you to pay me a dividend anymore.

01:11:39.000 | I just want you to grow all that cash.

01:11:40.000 | And so you've got to rely on Indra and the board of directors to go somewhere with that cash.

01:11:44.000 | But where do they go?

01:11:45.000 | You know, how many more lines of chips can they possibly come out with?

01:11:48.000 | How many more lines of beverages can they come out with before they start just acquiring companies that are completely unrelated to their business or they just start making poor decisions?

01:11:55.000 | So it's just the same as you or I.

01:11:58.000 | Like if you have $5,000 to your name, if you earn $5,000 a month, right, you have to be pretty careful with that money.

01:12:06.000 | You have to be pretty careful with your capital allocation decisions.

01:12:09.000 | You have to be very prudent with the type of home you live in, with the type of car you drive, and you have to create a gap between income and expenses in order to become financially independent.

01:12:20.000 | Now, if you raise your income level to $20,000 a month, all of a sudden you don't have to be very careful anymore.

01:12:25.000 | You can go out to restaurants every single day.

01:12:28.000 | You can live in a much nicer house.

01:12:30.000 | And so all of a sudden the decision-making process there becomes quite a bit looser.

01:12:34.000 | So that's kind of where I look at it.

01:12:36.000 | Yeah, we've lost very much, even in people who pay attention to investments and to financial topics, we've really lost a lot of the traditional conversations around companies and types of companies.

01:12:49.000 | So there's been a massive transition from the ownership of individual companies to the ownership of mutual funds and investing through mutual funds.

01:12:57.000 | And so traditionally this is why you would get into why we have the term blue chip.

01:13:02.000 | A blue chip company was a large, established, stable company, likely a dividend payer that you could count on for income.

01:13:09.000 | You didn't go to a blue chip to say, "Where's going to be my 600% possible rate of return with this massive new technology that's coming out?"

01:13:18.000 | Blue chip was where you went when you wanted safety, security, and income.

01:13:22.000 | And it makes all the sense in the world that a Coca-Cola, is there some innovative thing that they can do?

01:13:32.000 | Probably, but it's probably more incremental and it's probably more just simply buying something, buying a business that has been proven.

01:13:41.000 | Like, for example, didn't McDonald's buy Chipotle?

01:13:44.000 | I can't remember that.

01:13:47.000 | I was just thinking of that as an example and I'm not familiar with the facts on it.

01:13:52.000 | But it's more likely that a larger company will use its cash to buy some innovative company that they see has a lot of potential, like in the two Coca-Cola examples you mentioned.

01:14:01.000 | Yeah, exactly. They're bolt-on acquisitions.

01:14:03.000 | Right. And that can be major growth, but it's more suited for a company that's stable.

01:14:10.000 | However, if you were growing Papa Jason's Pizza, or if you were growing, like you mentioned, a restaurant franchise that was new, you would need to capitalize on the market.

01:14:22.000 | So it doesn't make sense for you to be paying dividends out when you've got a massive growth opportunity if you reinvest in the business.

01:14:28.000 | So we've just lost in our common culture because there's been this transition away from investing in individual stocks.

01:14:34.000 | And now we primarily invest through mutual funds.

01:14:38.000 | A lot of us have lost this ability to speak intelligently the language of investing and the language of these companies.

01:14:44.000 | Right, right. Yeah, exactly.

01:14:47.000 | Companies like that, you know, McDonald's had Chipotle at one point and they eventually allowed them to become an independent company, much to their chagrin, I'm sure.

01:14:56.000 | But yeah, Coca-Cola, exactly. Those were two bolt-on, not really full acquisitions.

01:15:01.000 | They just bought equity in these two businesses and they have a right to increase them at a later date.

01:15:06.000 | But yeah, I mean, there's limited growth.

01:15:09.000 | To paint everything with a real broad brush like that, no dividend, all dividend, you know, all retained earnings, no retained earnings and this and that, it's really just, in my opinion, just not the right way to look at it.

01:15:24.000 | You know, some companies are probably better off not paying a dividend.

01:15:27.000 | As you state, a very small company is growing at a very attractive rate and needs all the capital they can possibly get their hands on to take advantage of the market they're in.

01:15:35.000 | Yeah, I mean, obviously, but again, you're not talking about a blue chip at that point.

01:15:38.000 | You're not talking about a company that's stable and established and has built up 20 or 30 years of dividend increases.

01:15:43.000 | And it's not that kind of company that you might be able to sleep well at night and wake up in the morning and know that they're still going to be completely intact.

01:15:49.000 | You know, this might be a company that, you know, might make a wrong move or might make a decision that, you know, I don't know or might crash and burn because they're trying to grow too quickly and they take on too much leverage and everything else.

01:15:59.000 | So the companies that I prescribe and the companies that I put my money where my mouth is and personally invest in are companies that I can sleep well at night owning.

01:16:07.000 | I can sleep well at night knowing that Procter & Gamble is still going to be doing their thing.

01:16:10.000 | And obviously I have some investments in there that kind of spice things up as well.

01:16:13.000 | I have an investment in a very tiny food company based out of California named Armanino Foods.

01:16:18.000 | They do some, like, organic meatballs and sauces, pasta sauces and things like that.

01:16:22.000 | And they're a tiny company. I think they're like $60 million.

01:16:24.000 | But even this tiny little company pays a dividend and grows it every single year while still growing at double-digit rates.

01:16:29.000 | So, you know, the investment that – or excuse me, the point that, you know, even all tiny companies can't pay a dividend and can't grow a dividend really is incorrect in my view.

01:16:38.000 | It just depends on the management. It depends on the company. It depends on the market.

01:16:41.000 | In many ways, you could simplistically just simply view a dividend as keeping management accountable for actually making money.

01:16:47.000 | And this – you have – again, Amazon is a fascinating example of an investment case study is they don't actually make money.

01:16:56.000 | Like they're not actually profitable.

01:16:58.000 | And so just because they do a lot of business doesn't mean that the owners are actually making money.

01:17:03.000 | And this is a very interesting – I'm enjoying watching it because it's a fun case study to watch develop as time goes forward.

01:17:13.000 | It fascinates me.

01:17:14.000 | I'd like to close with one question and I'll give you two ways that you could answer it.

01:17:21.000 | I think about this a lot with respect to my son.

01:17:24.000 | With respect to my son.

01:17:26.000 | I have a one-year-old son and I think about how to teach him about investing.

01:17:29.000 | And I probably will use – I'm keeping my eye out for some brands that will – I don't like to allow a lot of the brands that many people would have in their house into my house.

01:17:40.000 | I don't – we don't – I don't like the marketing influence.

01:17:43.000 | We don't eat a lot of processed foods and things like that.

01:17:46.000 | And I don't like many of the media brands.

01:17:48.000 | So I keep a lot of those things out of my house.

01:17:51.000 | But I keep an eye out for – I'm trying to keep an eye out for some companies that he will probably become brand aware of.

01:17:58.000 | And then I will probably – I'm trying to – I want to use dividends as a – because of the tangible nature of the cash flow to teach him the topic of investing.

01:18:10.000 | And so I'm kind of keeping my eye out for that.

01:18:12.000 | So how would you – if you were going back, knowing what you now know, what path would you take to learn more about financial independence and dividend investing?

01:18:25.000 | And, again, you can answer it either or both towards teaching a young person, middle school or something like that.

01:18:32.000 | And then also towards an adult who's trying to follow a similar path to yours.

01:18:37.000 | Well, that's difficult.

01:18:40.000 | I mean I guess I'm kind of in the position where I am teaching others through my writing and through blogging and everything else.

01:18:46.000 | And it's the audience that I've been able to kind of recruit or generate or what have you has been wonderful.

01:18:54.000 | I mean a lot of people that stop by the site are incredible people, very, very kind, very generous.

01:18:59.000 | And they're also thankful for kind of me showing what this path looks like in real time.

01:19:05.000 | Because a lot of personal finance experts in the world, they kind of say, "Oh, this is what I did 20 years ago," or "This is what I did 30 years ago."

01:19:10.000 | And they're talking about things that already happened whereas I'm showing everything in real time.

01:19:14.000 | And I think that's where the value of my writing and the blog and my journey and everything else really is at, is showing everything in real time.

01:19:24.000 | If I were to go back and teach somebody how to do everything from the beginning, it would be hard, I guess, to kind of paint a broad brush and teach a large swath of people all at one time.

01:19:34.000 | But it's really just getting down to the fundamental basis of what you want out of life.

01:19:39.000 | And regardless of how you invest your free capital, again, whether that be in an index investing or mutual funds or your dividend growth stocks or what have you,

01:19:49.000 | the real main point is wanting more out of life than just working the 9 to 5 till 65 kind of routine and kind of running endlessly on this rat wheel.

01:20:01.000 | And not seeing that there's more to life out there.

01:20:04.000 | One of the things that I really love is the famous allegory of the cave by Plato.

01:20:09.000 | Right where you have these people sitting in a cave and they're chained up and they're looking at shadow puppets or shadow figures on the wall.

01:20:17.000 | And to them, that's life.

01:20:19.000 | They see this as life and they're really technically being controlled by chains, which you could make that jump in a number of different ways.

01:20:26.000 | Chains of death and things like that.

01:20:28.000 | But they're sitting on this cave floor and they're looking at these puppet figures on the wall because there's a fire behind them and these people behind them are making these hand puppets and everything else.

01:20:38.000 | And to them, that's life.

01:20:40.000 | To them, that's everything.

01:20:42.000 | And then you've got somebody who escapes from the cave and they walk out into the real world and they're blinded by the light and everything else at first.

01:20:47.000 | But after a while, they see, wow, there's a lot more out here than just these dancing flame figures on the wall.

01:20:54.000 | And that's kind of what I would talk about if I were to teach somebody.

01:20:58.000 | It's to say, hey, if you're comfortable with working 9 to 5 until you're 65 and if you're comfortable with the big house and the big car and everything else, more power to you, my friend.

01:21:06.000 | But I want you to really ask yourself, are you happy with that?

01:21:09.000 | Are you really happy every morning you hit that alarm clock and you march down to the office?

01:21:13.000 | Are you really happy with the way your life is right now?

01:21:17.000 | Because the scientists have already done all the hard work for us.

01:21:19.000 | They've already discovered that through countless studies that once you get to a certain income level, call it $50,000 or so a year, the incremental increases in money don't also result in corresponding incremental increases in happiness.

01:21:32.000 | So you've got to start looking at money in a new way.

01:21:35.000 | And I look at money as money allows me to buy time.

01:21:38.000 | They say time is money.

01:21:40.000 | I say money is time.

01:21:41.000 | Time is time.

01:21:42.000 | Time is life.

01:21:43.000 | Time is everything.

01:21:44.000 | Without time, you have nothing.

01:21:45.000 | Without time, you're basically not alive anymore.

01:21:47.000 | It doesn't matter how much money you had.

01:21:49.000 | So when you really want to think about where you want to be in life and when you think about success and everything else, I look at success, I look at happiness as autonomy, as freedom, as the ability to create for myself, as the ability to do what I want, when I want, set my own schedule.

01:22:10.000 | But money itself, objects and things like that that we consume ourselves with are not the driving factor behind happiness.

01:22:19.000 | So I think people really need to take a step back and really think about what do they really want out of life.

01:22:25.000 | And when I think about all the happiest memories I've ever had in my life, it was never buying a brand new car, it was never getting a new place to live, it was never that shopping trip at the mall or whatever.

01:22:40.000 | It was the times I had with people that I care about.

01:22:43.000 | It was intimate moments I had with people that I love.

01:22:47.000 | It was time.

01:22:50.000 | It was memories.

01:22:51.000 | It was experiences.

01:22:52.000 | It wasn't stuff.

01:22:54.000 | So when you kind of start thinking about that, when you kind of have that paradigm shift in terms of what life is all about and what money can truly be used for, then you can kind of get on the bandwagon or you can kind of get on that investing train of starting to put capital to use for you.

01:23:11.000 | And instead of working for money, have money work for you.

01:23:15.000 | There's a wide variety of ways you can get money to work for you.

01:23:19.000 | I prescribe one way that I feel is really wonderful, but you can go about it in any way you choose.

01:23:24.000 | But really the heart of my message isn't just dividend investing.

01:23:28.000 | The heart of my message is to be happy and to attain happiness.

01:23:33.000 | And I think true happiness is attained through true freedom, where you're not running on a wheel all day long and you're not clocking in and clocking out when somebody tells you to.

01:23:42.000 | You're not eating when somebody else tells you to.

01:23:44.000 | You take a week vacation when somebody tells you and you go to some all-inclusive resort where you're not experiencing the local culture.

01:23:50.000 | You're just trying to get away from the office for a little while.

01:23:53.000 | True happiness is living your life on your terms, irrespective of money.

01:23:59.000 | And that's kind of really what I try to talk about.

01:24:02.000 | Time is the only non-renewable resource and money is a very renewable resource.

01:24:09.000 | Exactly.

01:24:10.000 | There's plenty of it floating around.

01:24:11.000 | Jason, thank you for coming on.

01:24:13.000 | I think this has been one of the better interviews and I think more pithy interviews that I've done in a while.

01:24:21.000 | And I really appreciate you giving the audience some insight and encouragement and inspiration.

01:24:27.000 | I think it's an incredibly valuable resource and I appreciate you making the time for it.

01:24:31.000 | Sure, I appreciate it as well.

01:24:33.000 | Pretty cool to see that an ordinary guy can make it happen, right?

01:24:39.000 | I'm telling you, finance is simple. Not easy, but it's simple.

01:24:43.000 | There are really very few secrets to becoming financially independent.

01:24:50.000 | It's just a matter of hard work, thrift, industriousness, wise investing.

01:24:54.000 | And there's just some very simple things that need to be followed on a consistent basis.

01:24:59.000 | And if you'll follow them, I think you can make excellent progress.

01:25:02.000 | I hope that you learned and enjoyed this very practical information on dividend growth stock investing.

01:25:07.000 | It's an excellent strategy for financial planning and for financial independence.

01:25:12.000 | It's a well-worn, time-proven strategy that anybody really can follow.

01:25:16.000 | So I hope that you found this information educational and enlightening as always.

01:25:21.000 | That's it for today's show.

01:25:23.000 | Tomorrow I'm going to be releasing an interview that I have done with Chris from eatthefinancialelephant.com,

01:25:28.000 | another man and his wife and his family who are pursuing financial independence.

01:25:33.000 | They're right on the path to doing so.

01:25:36.000 | And I think they've got another very accessible story that I think is inspiring.

01:25:42.000 | He's going to share some of the lessons that he's learned, some of the things he's done well,

01:25:45.000 | and also some of the mistakes that he's made and some of the things that he hasn't done well.

01:25:49.000 | I hope you like these interviews.

01:25:50.000 | I'm trying to really strike a balance between interviewing experts

01:25:54.000 | and also interviewing people who don't hold themselves out to be experts.

01:25:59.000 | I get so annoyed at just hearing experts all the time because sometimes experts are unrelatable.

01:26:04.000 | If they can share some valuable information, that's helpful, but sometimes it's unrelatable.

01:26:08.000 | So I'm trying to bring you a diverse body of interviews on diverse topics from diverse people.

01:26:13.000 | If you are interested in coming on the show, shoot me an email, joshua@radicalpersonalfinance.com.

01:26:18.000 | I'm happy to have individual lay people who are right on the path, people who are learning,

01:26:22.000 | people who are knowledgeable.

01:26:23.000 | I'm willing to consider all types of people to bring on the show.

01:26:27.000 | So that's tomorrow's show.

01:26:28.000 | Friday I'll be doing a Q&A show.

01:26:30.000 | I've received a few questions.

01:26:31.000 | Call in those questions on the voicemail line on the website if you'd like me to answer your question on a Friday Q&A show.

01:26:37.000 | Next week we will be releasing some more interviews, and on Monday I think I'm going to be continuing the education series.

01:26:43.000 | And then on Tuesday, episode 100, I plan to roll out a membership portion of this site, of this program.

01:26:50.000 | It will all be voluntary.

01:26:52.000 | In case you haven't figured that out, voluntarism is a big deal to me.

01:26:55.000 | So the show will continue to be here for free.

01:26:58.000 | But if you're benefiting from the show and you're enjoying the show and you would like to support me financially,

01:27:03.000 | I'm going to roll out a win-win-win program that will be a win for all of us.

01:27:07.000 | And I'll describe the details of that.

01:27:09.000 | It will be slow in starting, but that's going to be the primary plan that I have to grow the show over time.

01:27:15.000 | So check back for that on Tuesday, episode 100.

01:27:18.000 | And have a great day, everybody.

01:27:21.000 | [Music]

01:27:39.000 | Thank you for listening to today's show.

01:27:41.000 | This show is intended to provide entertainment, education, and financial enlightenment.

01:27:49.000 | Your situation is unique, and I cannot deliver any actionable advice without knowing anything about you.

01:27:57.000 | This show is not, and is not intended to be any form of financial advice.

01:28:05.000 | Please, develop a team of professional advisors who you find to be caring, competent, and trustworthy.

01:28:15.000 | And consult them, because they are the ones who can understand your specific needs, your specific goals,

01:28:22.000 | and provide specific answers to your questions.

01:28:26.000 | Hold them accountable for your results.

01:28:29.000 | I've done my absolute best to be clear and accurate in today's show, but I'm one person, and I make mistakes.

01:28:36.000 | If you spot a mistake in something I've said, please come by the show page and comment, so we can all learn together.

01:28:42.000 | Until tomorrow, thanks for being here.

01:28:45.000 | The holidays start here at Ralph's, with a variety of options to celebrate traditions old and new.

01:28:51.000 | Whether you're making a traditional roasted turkey, or spicy turkey tacos, your go-to shrimp cocktail, or your first Cajun risotto,

01:28:59.000 | Ralph's has all the freshest ingredients to embrace your traditions.

01:29:03.000 | Ralph's, fresh for everyone.

01:29:05.000 | We've locked in low prices to help you save big store-wide.

01:29:08.000 | Look for the locked in low prices tags and enjoy extra savings throughout the store.

01:29:12.000 | Ralph's, fresh for everyone.

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