To my wife and kids:
We ended 2021 with a 35.6% expense-coverage ratio according to the generally accepted projected annual dividend income principles (PADI). In simple terms it means that we are able to pay the following bills from 2022 onwards into eternity:
|Expense type||% of total monthly expenses|
|Mortgage interest expense||12%|
This doesn’t sound like a lot at all by the sheer number of expense line items. But as I’m often emphasizing, the largest expenses are often the most essential and hardest to cover. This is common to almost everyone and it should come as no surprise that these are closely linked to the bottom level of the Maslow pyramid.
In other words, we have now reached a stage in life in which we should never have to worry again about our ability to pay for food and shelter. Just this simple reality is mind-blowing to me and it’s something that I’m really proud on.
Actually, the only things I can imagine changing this situation would be catastrophic events like an apocalypse or a war. I give those kinds of events a very low probability of happening anytime soon. Hence, let’s not worry about that right now and neither about other unforeseen events. For such we are covered by a pretty good insurance package.
Having said that, reaching this stage has not been easy. It requires a lot of capital discipline, effort and to some extent: time. This is also evidenced by the time it takes, because we are already 6.5 year on this journey and it will probably take us another 6 to 7 years to reach the point of financial independence.
Thus, I think it’s also fair to say that our journey isn’t a sprint, but a marathon.
On the other hands, let’s take a moment to pause here and to celebrate as well. A bottle of Prosecco and a non-Alcoholic bottle for the kids will be waiting for us on Saturday.
The family jewels
The family jewels can definitely be identified by our subsidiaries in which we own minority stakes as part of our dividend growth portfolio.
It’s been amazing to see how some of those subsidiaries have performed this year. Microsoft, Ahold Delhaize, Royal Dutch Shell, BHP Billiton, Siemens and Hershey have all showered us with sustainable double-digit dividend growth.
Their products are top-notch within their industry which has led to ample free cash flow available to shareholders. Most of that has been returned to us in dividends, but a lot of that as well in share buybacks. I’m very grateful for that, because it has increased our minority stakes in these companies again.
Actually, I like to think that maybe one day we could become a majority stakeholder in one of those companies due to their continued buybacks. We are not intending to sell any of those stakes, but rather to increase them when the opportunity arises again.
Hence, I would be more than happy to take a seat in the board of directors from one of those subsidiaries.
Jokes aside, I would sincerely like to thank their management and all their employees sincerely for their contributions in 2021. You have performed exceptionally well and you all deserve to share a bottle of Champaign with your beloved ones.
Unfortunately not all subsidiaries had a good year and that’s OK. Some of them are going through an extended time of transformation and/or changing market dynamics. Hence, we need to stay patient with our minority stakes in Unilever, 3M and Omega Health Care investors.
On the other hand, there have been few subsidiaries which have performed very poorly and a good example of that is AT&T. I don’t know what’s going on with John Stankey (CEO), because he continues to make multi-billion dollar mistakes.
Actually, the worst are not his mistakes in itself, but the lack of self-reflection and humility to omit his mistakes. That to me is a clear sign that John Stankey is an incompetent CEO at the helm of AT&T.
This is also the reason why I would’ve liked to see him being replaced, but unfortunately the other (majority) shareholders prefer to keep him in his seat as CEO (for now).
That’s why I couldn’t come to any other conclusion and sell our minority stake in AT&T and redeploy the capital elsewhere (luckily we got out of it with a small profit).
Having said that, there are 2 other family jewels which I’m closely monitoring and those are Bayer and Danone. They both decided to take a cut from our paycheck by decreasing the dividends available to shareholders.
Luckily our fellow shareholders at Danone were just as tired as we were about the Emmanuel Faber (CEO) so he got replaced. Antoine de Saint-Affrique is his replacement and he started in September. Let’s give him the benefit of the doubt and wait to see how shareholder friendly he will be when he announces the 2021 dividend in February.
Unfortunately Bayer CEO Werner Baumann is still struggling with the RoundUp lawsuits and settlements. He seems incapable to solve this case and I wish he would take a 3 months internship at Johnson & Johnson to learn how to deal with this. Hence, I would be fully supportive as a shareholder for such a temporary development opportunity at $JNJ.
At the same time my patience is running out. The only reason why I haven’t sold Bayer yet is due to the value it represents based on common metrics as Price-to-Free-Cash-Flow and Price-to-Earnings.
The first 2 quarters of 2022 will be essential to re-evaluate our position in Bayer. The annual results will give us better insight in the underlying strength of the business and more news regarding the progress of the settlements is to be expected.
I would also like to take the opportunity to welcome several new subsidiaries to our family jewels:
- Bristol Myers Squibb
- Chesnara Plc
- Rio Tinto
- Intel Corp
- Digital Realty Trust
- Koninklijke Philips
- Alibaba Group
All of you have been carefully selected and we are looking forward to a fruitful cooperation.
The free market paradox
Dividend growth investing to retire early continued to be very hard in 2021.
And it’s clear to me that the current economic environment is very favorable to non-cash generating assets. Investments into cryptocurrency like Bitcoin, Ethereum, Shitcoin and Dogecoin have done very well to many investors. Even if you ignore the opportunity costs of selling some of those at all-time highs in 2021.
This should come as no surprise, because in 2021 central banks continued to “print money” in the aftermath of the COVID-19 pandemic.
It’s a pity, because while the central banks are doing exactly what they are asked to do, it does have side-effects. One of those are the amount of zombie-companies (debt-loaded companies) which would’ve been bankrupt already under “normal” circumstances.
Their policies also continue to lead to very low (zero-)interest rates which in return leads to higher earnings multiples and excessive risk taking. There is simply no alternative (TINA) for money right now even with a sharply rising inflation.
That’s why I’m of the opinion that the central banks have placed a giant “PUT”-option under the stock market which prevents pure capitalism to do it’s job.
As a dividend investor we feel the pain of this, because we get on average less yield-on-cost due to the high earnings-multiples. It also pushes us into either riskier dividend stocks or dividend stocks with some fundamental problems.
Examples of these are high-yielding risky business development stocks or dividend stocks like Intel which is currently undergoing a strong business transformation due to eroding market shares.
It also effects me, because high quality dividend stocks like Nike, Microsoft, Apple, DSM, Wolters Kluwer and L’Oréal are just too expensive for my liking. I really can’t justify buying stocks with a 40+ earnings multiple and a dividend yield under 1%.
All of them would need to come significantly down (i.e. 50%) before they become interesting again as part of my dividend investment retirement plan.
Hence, what results is a dividend growth portfolio with an underweight in such high quality dividend stocks and an overweight in “value”-stocks which typically have an increased risk in their dividend-safety profile.
Unfortunately I have little influence in this and I hope that 2022 will provide some changes and opportunities to us.
But for now, let’s stay mindful that we’re not investing in a free market….
Let’s end on a positive note in this shareholder letter, because we really made major progress towards our early retirement goal.
35.6% is something to be really proud on and it feels like the only way is up from here.
I simply can’t imagine that our PADI would decrease by the end of 2022 if we continue to reinvest the dividends we receive from our subsidiaries and if we continue to deploy our monthly savings into the stock market.
In my humble opinion, a dollar-cost-averaging strategy is silver and the compounding on steroids by reinvesting dividends continues to be gold.
January 4th, 2022
European Dividend Growth Investor
Executive Director of our Freedom Fund
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Dividend Portfolio Performance Overview
2021 was a good year again in terms of my performance and I will share about the most important metrics in the upcoming paragraphs.
However, these metrics might be quite unconventional compared to metrics being used on Wall Street and even in main street. The reason for this is that most investors try to benchmark themselves with a popular index, i.e. the S&P 500.
This makes sense if your investment strategy is focused on total return. However, that’s not the case for me, because I’m focused on passive income growth via dividends. Nothing more, nothing less.
But don’t be mistaken, because benchmarking my portfolio with a dividend growth ETF neither adds value for me. The reason for that is the difference in approach.
A dividend growth ETF is a basket of dividend stocks based on certain criteria. Every time there’s a cash inflow from new clients it requires the ETF manager to buy a part or the whole basket at once.
That’s neither my approach, because I’m typically buying one or two shares a month which usually meet my criteria in terms of what I screen for in dividend stocks.
So the question remains then, how do I know whether I’m performing well? Is there something I can benchmark myself with?
Luckily the answer is Yes!
The way I can best benchmark myself the best is with the criteria I used for calculating my FIRE plan (you can do that via my dividend reinvestment calculator).
Hence, my FIRE calculation depends on 3 main assumptions which I should benchmark myself with:
- The amount of money I save and invest into DGI stocks on a monthly basis = 50% on a monthly basis (savings rate)
- Organic dividend growth = 6% on a yearly basis
- Yield on Cost when purchasing shares = average 3.25%
These are the numbers I would need to make on an annual basis to stay on track to retire early in about 6 to 7 years from now. So let’s have a look at those in the following paragraphs.
The savings rate is the most important metric in the early stages of a dividend investing strategy. I would argue that up till the first 100K in your portfolio you will experience limited benefits from the compounding effect of growing dividends.
Until that time the main dividend growth contribution comes from deploying new cash into the stock market based on favorable dividend yields.
I have passed that threshold a while ago and since then I have started to feel the power of compounding. As an example, I’m now at that stage where a 5% annual dividend growth equates to 7 months of savings of investments in dividend stocks.
Nevertheless, deploying new cash continues to be very important to my strategy.
And this is where I seem to have knocked it out of the park, because I was able to hit a 66% savings rate in 2021. I have yet to invest everything of my savings, because until now 47% ended up in the stock market. The other 19% ended up on my savings account.
I was honestly not aware of that, because I forgot that I parked my whole bonus plus something additional on my savings account early on in 2021. The goal was to spread it out over the year and somehow I forgot about that in Q3 and Q4.
Oh well, call it a luxury problem, but I’ll be more than happy to fix that mistake in the first 2 quarters of this year. Hence, you will read that I’ll increase my rate of investment in 2022 in one of my upcoming “2020 goals” post.
Having said that, a 66% savings rate is definitely a huge number to achieve. I guess the main secret to this is my focus on preventing lifestyle inflation. Besides that I was anticipating on another vacation last year, but we had to cancel this due to a personal situation.
On the other hand I had some salary increase in 2021 which further widened the gap between my cost level and my income.
If there’s just one take away from this that I would like to share with you then it’s the following: doing your utmost best at work pays-off. Eventually you will see that back in your salary and your savings rate.
Read more: 5 impactful ideas to maximize your savings
Absolute Dividend Growth
Let’s now have a look at the dividend growth component of this portfolio. After all, it’s not only the dollar-cost-averaging of my monthly savings that fuels the compounding effect.
Actually, reinvesting the received dividends creates in my opinion a true snowball on steroids. Hence, it has become a more impactful statistic now that I’m about 7 years on into the journey.
Having said that, the dividends paid to me in cash have grown with ~30% compared to 2020 (this is after the deduction of dividend withholding tax). This is more than last year when the dividends grew with ~22% compared to 2019.
As you can imagine, I’m very proud on this number. One big reason for this is the increased savings rate and an increased organic dividend growth compared to last year (more about that soon).
This success also means that my projected annual dividend income (PADI) grew with 24.63%.going forward. A distribution of my PADI per holding in the portfolio can be seen in the below picture.
What this tells me is that I have the following top 5 dividend payers which contribute the most to my yearly dividend income:
- Royal Dutch Shell
- Omega Healthcare Investors
These 5 companies together account for 38.7% of my projected annual dividend income. Hence, it’s of utmost importance for me to keep an eye on their dividend safety as it could severely impact my future returns. It’s a topic I will for sure revisit and talk about on this blog somewhere in 2022.
Organic Dividend Growth
From an organic dividend growth point of view I have yet to be satisfied. In 2021 I achieved a 4.28% organic dividend growth. This is not taking into account currency fluctuations in which case the organic dividend growth scores a %-point lower.
The main impact of this is still the aftermath of the 2020 pandemic. Several European companies decided to keep their dividend flat (i.e. Munich Re and BASF) or to cut it (Danone, Bayer and Red Electrica).
All these companies pay a dividend once a year and they already announced their dividends with the annual results just before the start of the pandemic. Hence, those commitments were already made which resulted in increased conservatism with their dividend announcements in 2021.
That’s why my thinking is that we will see improved dividends being announced in the upcoming quarter. If not, then I really have to further analyze if there has been any fundamental damage to the earnings power and dividend safety profile of some of these companies.
Let’s see and fingers crossed for the upcoming annual announcements.
To conclude, this number has to improve going forward and I have some further homework to do in this area.
Stock purchases and sales
This year was a strong year in regards to purchases, but less than last year. The pandemic gave me a perfect opportunity to double down on some opportunities by withdrawing from my war chest. Unfortunately, such opportunities did not present themselves in 2021.
Nevertheless, I was able to purchases and sell the following subsidiaries in 2021:
|05-Jan-2021||Sell||British American Tobacco||27.88|
|02-Apr-2021||Buy||Bristol Myers Squibb||62.10|
|11-May-2021||Buy||Digital Realty Trust||148.47|
|16-Jul-2021||Buy||Royal Dutch Shell||16.41|
|10-Sep-2021||Buy||Rio Tinto Plc||5200.00|
|25-Oct-2021||Buy||Bristol Myers Squibb||58.01|
|10-Nov-2021||Buy||Rio Tinto Plc||4400.00|
|29-Nov-2021||Buy||Bristol Myers Squibb||55.00|
|16-Dec-2021||Buy||Alibaba (Hong Kong index)||119.80|
These were still quite some transactions and especially if you take the ones from Alibaba into consideration. What is worth mentioning is that those were relatively small transactions as part of my dollar-cost-averaging strategy when share prices are falling. Nevertheless, by now I’m sure that I did catch a falling knife but I’m OK with that.
Alibaba is part of my 10% non-dividend portfolio focused on value and growth stocks. My goal is to make an 25% annualized return on those investments. Hence, I have patience for Alibaba and it should trade around 350 USD in the fall of 2024. Let’s see how my investment thesis will play out by that time, fingers crossed.
Other than that you can observe that I’ve predominantly been buying shares in European subsidiaries. It’s not something that I was particularly aiming for in 2021, but these companies have presented the best value to me.
This is one of the reasons why I consider focusing a bit more on American dividend growth stocks in 2022, but this is something for an upcoming post.
Portfolio Yield on Cost
The third pillar of my dividend growth strategy is the yield on cost at time of acquisition. This should be around 3.25%, but I’ve not been able to achieve this in 2021.
The reason can be brought back to my Alibaba acquisitions, but it looks much better if I exclude those. In that case I’ve been able to achieve a ~3.5% yield on cost at time of acquisition.
On the other hand I have also sold some high-yielding stocks this year: $PM, $BATS and $T. It was hard to replace those with a similar yield except for AT&T which I replaced with my investments into Chesnara Plc.
These two events are the main reason why my current portfolio yield dropped from 3.69% at the start of 2021 to 3.20% at the end of 2021.
Although, multiple expansion and earnings growth outpacing dividend growth at both Microsoft and Apple has also contributed to a decreasing portfolio yield.
All I can say that this hasn’t surprised me, because it was all a result of conscious decisions during the year. Opportunities like Alibaba don’t present themselves that often. The last time it happened to me was when Facebook got into trouble with the Cambridge Analytica scandal.
Having said that, I expect the portfolio yield to normalize again in 2022, because I do not intend to add any further stocks to my non-dividend growth portfolio.
Portfolio price appreciation
This is the least interesting statistic for me, but I decided to share it as it is an often asked question to me. Unfortunately increasing share prices often mean decreasing dividend yields.
This is especially something which makes me sad when it is solely due to earnings multiple expansion. I prefer that to happen after I have built out my position in one of the subsidiaries and not while I’m in the accumulation phase.
Having said that, the total value of the portfolio performed very well.
The total value of the portfolio grew with ~44% compared to last year. Organically the portfolio grew with 21% which is 6% below the performance of the S&P500.
But as mentioned earlier, the S&P500 is not a proper benchmark for my portfolio. Nevertheless, a 21% year-over-year organic price appreciation is something very unique. I have never experienced such a strong price appreciation across the entire dividend growth portfolio.
But as you can see, this growth is far outpacing the dividend growth in my portfolio. I would rather prefer to see that happening in lock-step and over longer periods of time they should.
I would expect that price appreciation is a result of earnings growth and normalized at a P/E multiple of 15. This is according to historical norms and that’s why they are expected to appreciate in lockstep with each other.
As a result, dividends usually also follow earnings growth and in 2021 earnings growth has outpaced dividend growth for the holdings in my portfolio. This is another reason why upcoming dividend announcements should bode well for me.
Will 2022 finally be the year where I get back to a 6% organic dividend growth? Again, let’s keep fingers crossed for it.
Dividend Portfolio Performance Conclusion
2021 was a really good year again, because 2 out of 3 main metrics hit the mark. The third one fell a little bit short but not too much.
✅ Savings Rate (66%)
✅ Yield on Cost (3.5%) – excl. $BABA
⭕ Organic Dividend Growth (4.28%)
Like last year, I wanted to also share some interesting portfolio statistics with you. They might actually be not so relevant for me, but investing should also be fun. Hence, let me present a few of these with you.
Our Shareholders Equity (net worth) grew with ~25% this year. This is a large number and mainly due to the portfolio growth and a booming housing market. As an example, the average price per square meter grew 18% in the area I live. Combine that with a 44% portfolio growth, some growth on our savings account and you’re talking about a 25% increase in net worth.
Not sure if this is sustainable and I realize that we’re living in extraordinary times (ref: the free market paradox). Having said that, we never intend to sell the house so in the end such a net worth figure is meaningless until our kids get to inherit it.
Our debt-to-equity ratio has decreased from 16.7% in 2020 to 12.7% in 2021. As mentioned before, a strong contributor to this was the increasing housing prices and the dividend growth portfolio.
We’ve not been paying down any additional debt beyond the typical monthly down payment according to our contract with the bank. We’re neither intending to do that anymore, because we feel very comfortable with our monthly mortgage payments. Especially now that the interest payments are already covered by our dividend income.
The portfolio has been quite active this year as you could read in this report. As an example, we have received 107 dividend payments this year on our account. This is on average a dividend payment every 3rd day.
Tuesday seems to be the most popular day for our subsidiaries and stock brokers to pay their dividends followed closely by Thursday. It should come as no surprise that Saturday is the least popular day of the week to receive dividend payments. I have yet to get my first payment on a Sunday.
Another interesting portfolio statistic is that 12% of the entire portfolio cash contribution has been paid by dividends that got reinvested. This is already a mind-blowing number to me and I expect this to only increase over time.
Last but not least, I seem to have a bias for investing in companies starting with the letter A, B, C or R. Together these 4 letters make up 43% of all my positions in the dividend growth portfolio. Hence, in 2022 I should consider being more inclusive to companies starting with the other letters in the alphabet.
Blog & Social Media Performance
As most of you may have noticed, I’m quite active in the dividend growth investment community. This applies to both content creation and social media engagement.
On average this costs me around 8 to 10 hours per week during the evenings and on the Sunday morning. But this is not a continuous thing, because I also took the occasional holiday and time off (i.e. in the summer and with the Christmas break).
This is not without reason, because I really need this from a creativity point of view. It makes my head clear and it gives me new thoughts and inspiration for future topics to write on and to talk about.
Still, spending such an amount of time is a lot which could’ve also been spend differently. But how many people have other hobbies (or addictions 😅) that cost a similar amount of time? I guess I’m not alone here with a strong passion for something very interesting.
Having said that, I’m doing this all out of passion for dividend growth investing. Somehow it caught me like a virus at the start of 2020 and I never knew I had it in me to blog about it.
However, it’s clear to me that I’m an amateur as well, because I’m continuously learning about how to get better in this. It’s not an easy path, because I don’t feel like I have natural talent for writing. At the same time I’m neither doing this for the money and I hope that this is visible as well.
But I must confess, most recently I did start to pay a little bit more attention to generating some advertising income. The reason for that is simple, because I’m currently spending about 100 Euro per month on keeping the blog and channel up and running.
So far it’s looking good, because the ads on both YouTube and this Blog have recently started to cover the monthly costs.
That being said, let’s have a look into my key metrics for the different social media channels which are focused on audience growth.
I don’t know how you evaluate these numbers, but to me these are really mind-blowing. Off course, there are many well known bloggers who perform far better than me, but they usually have a very nice talent for this.
Nevertheless, I feel that it’s a good result after two years of blogging and I’m very proud on this. I would also like to thank you as a reader and follower, because some of you have shared some very personal and inspiring stories with me.
And that’s also what makes blogging about this journey so unique for me. It’s not anymore just about me who’s trying to reach financial independence before the official governmental retirement date. I can really feel that we’re in it together and this gives me a lot of energy.
That’s why I’m also quite convinced that we can do this, together 💪
Request: if you are specialized in blogging and other related topics then I would be more than happy to learn from you. Topics I’d for instance love to get better in are English writing, Google Analytics and Search Engine Optimization. Could you contact me in case you feel you could be of help to me?
It’s always fun for me writing these annual reports for our little family. One of the reasons is that there are always some learnings to be made which allow me to continuously improve my process.
Sometimes these learnings are also quite confrontational. As an example, I’m really not satisfied with the long term organic annual dividend growth numbers. This is the 2nd year in a row where we didn’t hit the mark.
Luckily the savings rate is handsomely compensating for it, but it does imply a certain opportunity costs which I need to better understand. Only this understanding will allow me to improve my strategy and make better investments decisions going forward.
But to conclude, if I would rate myself for 2021 then I would give myself a 7 out of 10. It means that it’s more than good enough, but that there’s also ample room to grow in the upcoming years.
I think that this is a promising feeling to start with in the new Year.
Wishing you all lot’s of good health, wealth and memorable moments in 2022.
European Dividend Growth Investor
January 4th, 2022
Executive Director of our Freedom Fund
Dear Reader and Follower,
I truly hope that you enjoyed the eDGI 2021 annual report of our freedom fund.
Feel free to share your thoughts with us in the comment section below. My wife will be reading this as well, so any helpful comments will be more than appreciated.
As always, if you enjoyed this article then feel free to share it with your surroundings or via social media. A little more exposure will continue to help me grow this blog.
Looking forward for another year full of engagement!
European Dividend Growth Investor
Read more: 2020 annual report 👇
I’m not a certified financial planner/advisor nor a certified financial analyst nor an economist nor a CPA nor an accountant nor a lawyer. I’m not a finance professional through formal education. I’m a person who believes and takes pride in a sense of freedom, satisfaction, fulfillment and empowerment that I get from being financially competent and being conscious managing my personal money. The contents on this blog are for informational and entertainment purposes only and does not constitute financial, accounting, or legal advice. I can’t promise that the information shared on my blog is appropriate for you or anyone else. By reading this blog, you agree to hold me harmless from any ramifications, financial or otherwise, that occur to you as a result of acting on information provided on this blog.