Shareholder Letter

To my wife and kids:

We ended 2022 with a 45.3% expense-coverage ratio according to the generally accepted projected annual dividend income principles (PADI). This is an increase of 9.7% compared to last year.

We should be really proud of that because it means that we are able to pay the following bills from our dividend income going forward:

But as you could probably guess already, this looks pretty much the same as last year.

The reason for that is simple: the interest rate on our mortgage increased from 2.6% to 10% in a single year (almost 4-fold!). This is really a lot and it has impacted our overall expense register.

A lot of this has to do with what’s going on in the world. The war in Ukraine has probably been the biggest catalyst, but let’s also not underestimate the effect of the Covid lockdowns and worldwide reopenings. This has created a strong shockwave in global demand and it crippled many supply chains around the world.

There are several more reasons, but I’ll not go into it much deeper for the sake of simplicity.

However, we are now experiencing a record level of inflation as a result. Almost everything became more expensive and in Poland on average by 17%.

Action was required, so Central Banks decided to raise interest rates quite aggressively to fight these levels of inflation. It’s their task to create economic stability and therefore they often aim for a 2% inflation rate depending on the country you live in.

However, the raise in interest rates typically hurts asset owners in the short term (i.e. owners of a house or stocks). Unfortunately, we can’t lock our mortgage rate long-term (i.e. 20 years) with a bank in Poland so it impacted us a lot this year.

10% mortgage rate is a lot and it directly triggers the question: should we pay down our mortgage? But to sum it up, for now, we have decided to not pay it down.

Luckily we have been supported by the government as a mitigation to fight the impact of inflation to everyday citizens. One of their programs allows us to take a “mortgage vacation” and this has had a positive impact on our expenditures this year.

Nevertheless, I generally believe that the new cost levels are there to stay. For this reason, we have raised our target FIRE value by 14%.

In reality, this means that we will probably have to delay our target early retirement day by at least 1 year.

But don’t worry, I know that we both like our jobs so it’s really not a crime to continue working. We are financially very secure and it has given us already a lot in terms of optionality: i.e. vacations, art & entertainment, time with friends.

Hence, this year has shown us that life is really good and I would like to thank you for that 🙏

The family jewels

Our family jewels are the minority stakes we own in our subsidiaries as part of our dividend growth portfolio (aka Freedom Fund).

It has been a very tough year for them because many of them have been hit by inflation as well. On the other hand, it’s amazing to see how some have performed this year.

Strong stewardship by excellent management is something best observed in times like these and I start to appreciate that even more as the years pass by.

Especially our holdings in energy companies have done really well. All of them saw a record of cash coming in which enabled them to pay down a lot of their debts. In particular, Shell, Exxon Mobil, and Chevron have very strong balance sheets right now. This should set them up well for continued mid to high single-digit dividend growth.

Having said that, Energy companies were a bit on their own though. The majority of our family jewels have been working very diligently to find cost savings and to find opportunities to pass on inflation to their customers.

Good examples of that are Ahold Delhaize, PepsiCo, and Allianz.

Ah, and let’s not forget about our pharma subsidiaries!

Pharma operates in a very specific business which is by nature anti-cyclical. Patients don’t have the option to opt out of an illness. They always require treatment so the main focus of our pharma holdings is to develop new drugs and improve accessibility to those drugs.

That’s why I’m particularly fond of AbbVie. The company continues to deliver on its new products to offset its Humira patent cliff. At the same time, they are putting a lot of focus on paying down their debt which they took on after the Allergan acquisition. In my opinion, Richard Gonzalez is proving to be an excellent CEO for our subsidiary.

Some family jewels need patience

Unfortunately, not all family jewels had a good year, and generally, that’s OK. Performance hardly ever goes up in a straight line and sometimes our subsidiaries need some time to rediscover their path to growth.

Examples of these are Intel and Omega Healthcare. They seem to have the right plans in place followed by strong management and improving execution.

To us, the most important is that our incentives stay aligned, i.e. a growing dividend over time.

An example of how poor management impacts us

There was one subsidiary in particular that broke its commitment of a growing dividend over time and that’s Castellum SE.

This is really unfortunate because its underlying business (Nordic Real Estate, i.e. office space) was doing really well. However, in this case, we can clearly talk about poor management.

Effectively, CEO Rutger Arnhult had a large debt exposure with his private business M2 Asset Management. He then got a margin call and this forced him to sell a large stake from Castellum to Roger Akelius so that he could save his private business. Power shifted and a full dividend cut has been proposed for 2023.

Needless to say, we don’t want this kind of drama in our subsidiaries so we sold our position as soon as we found out about the proposed dividend cut.

In hindsight there are two learnings that I’m taking away from this:

1. Always listen to my gutfeel, always!
2. Understand what management’s entire dealings are to ensure they are fully committed to our subsidiary.

In the first case, I already got a feeling that we are dealing with a primadonna after reading Rutger Arnhult’s first shareholder letter right after he got appointed. It left me the impression that it’s all about him and that shareholders come second or even third.

And I wasn’t alone in this, because I learned afterward that there was strong opposition at the time that he got appointed.

Secondly, I should’ve done better due diligence on him as a person and his incentives. At least we would’ve known that he had more business dealings which could create a conflict of interest.

But well, it is like it is.

Luckily our portfolio is already diversified and strong enough to offset the impact of one or two mistakes.

Family jewels under supervision

I would also like to mention that the following subsidiaries are under close monitoring. They are struggling to find growth and it has yet to be seen if management is able to get their businesses back on track. Their plans are vague and some denialism is visible.

1. Bayer AG – When will they get the RoundUp settlements behind them so that they can get back to business? Will we see a dividend hike this year?
2. Danone SA – Will the new CEO find its path back to growth? It’s starting to take a bit too long (2 years now). Will we see a dividend hike this year?
3. 3M Corp. – Will they be able to resolve the PFAS and Earplug settlements? What will be the impact on the overall future of their business?

New family jewels

I would also like to take the opportunity to welcome several new subsidiaries to our family jewels:

• T Rowe Price Group
• Target Corp
• Texas Instruments
• Starbucks
• HP Inc
• Viatris
• Ambra S.A.
• CIBUS Nordic Real Estate
• DCC Plc.
• Defama
• ASML
• ASR Nederland

All of you have been carefully selected and we are looking forward to fruitful cooperation.

As of the time of this writing, we have a stake in 47 subsidiaries of which 44 pay dividends.

Quality is the ultimate Holy Grail

In last year’s annual report, I wrote a reflection on the free market paradox and why it’s so hard to buy high-quality dividend growth stocks in a zero-interest rate environment.

Luckily, we are in a higher-interest environment right now!

As a result, many stock prices have come down quite significantly. Yet, high-quality dividend growth stocks like L’Oreal still feel a limited impact from that.

Yes, their share price dropped by 19%, but they are still trading at a 35 Price-to-Earnings which is in my opinion still far too expensive.

Why then, you may ask, are high-quality dividend stocks so important to us (aka the Holy Grail)?

Firstly, high-quality dividend stocks are often established companies with a track record of steady growth. As a result, they often spot clean balance sheets, are number 1 or 2 in their markets, have a strong moat and possess strong pricing power. That’s why they often have more potential for long-term business growth and price appreciation (when bought at a fair price) compared to lower-quality stocks.

Secondly, strong business growth often leads to strong free cash flow which enables sustainable high-single to double-digit dividend growth. We need this to build a sustainable snowball that may outpace future inflation numbers. This is important to us if we want to enjoy a worry free early retirement.

Luckily, some opportunities presented themselves and we were quick enough to pull out the elephant gun. One particular example is Texas Instruments.

This subsidiary has high-quality written all over it and to me, it’s an example of a cash flow machine. Did you know that they have a compounded historical annual cash flow growth of 14%?

As you can see, the result in dividend growth speaks for itself:

Texas Instrument was not the only one. Other high-quality subsidiaries that presented opportunities last year were: Target Corp, T Rowe Price, DCC Plc, ASML, and ASR Nederland.

However, in my opinion, it was still too limited and we continue to have a portfolio that is underweight in high-quality and overweight in value stocks.

Hence, let’s cross our fingers that more opportunities will present themselves in 2023. In the end, we are not investing in a stock market, but a market of stocks.

In conclusion

Writing a shareholder letter for us as a family requires a strong look in the mirror. At least once a year we should ask ourselves: are we doing the right things and are we doing them right?

My conclusion is that we are still doing the right things. Our target towards Financial Independence and Early Retirement has significantly improved again, even though we will have to delay it by a year.

However, we are not doing everything right yet. As much as I would like to say it differently, investing continues to be a journey.

Over time, I’ve learned that it is more about psychology than that it’s about being a genius. It’s more about understanding myself and my personal character than anything else.

As an example, I’m frugal in mindset and conservative when it comes to spending money. That’s why I’m often looking for discounts and I’m avoiding for instance buying the newest iPhone. You know me, a Samsung phone will just do fine as well.

However, this is not always the best mindset when investing in stocks. Over time I have continued to develop my appreciation for buying high-quality stocks at a fair price.

Does this ring anyone’s bell? Yes, I feel like I’m on a similar learning curve as the Oracle of Omaha.

But having said that, our dividend investment strategy is designed to be fool-proof. It allows for a mistake here and there as long as the majority is doing just fine.

This is evidenced by our PADI growth which has been amazing again. Almost 10% growth in expense-ratio coverage year-over-year, even after adjusting our target FIRE numbers, is something I could’ve never imagined when we started.

Hence, as concluded last year, a dollar-cost-averaging strategy is silver, and the compounding on steroids by reinvesting dividends continues to be gold.

Yours Truly,

January 4th, 2023

European Dividend Growth Investor
Executive Director of our Freedom Fund

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Dividend Growth Performance Overview

Let’s start by going through all the performance metrics in the upcoming paragraphs. As explained last year, all these metrics are closely linked to our dividend growth investment strategy.

This means that we continue to focus on the spin wheel that we have created for ourselves at the start of our journey.

Hence, it’s not about total returns or benchmarks to popular indexes like the S&P 500. These are all irrelevant to us because we are investing for passive income.

Enough of that, let’s get started!

Reminder: our strategy is to invest about half our income in dividend growth stocks at an average yield on cost of 3.25% and a compounded annual dividend growth rate of 6%. This should allow us to reach the FIRE milestone after 15 to 17 years.

Savings Rate

The savings rate continues to be the most important metric at this stage at our journey. Compounding needs time and there are limited things we can do in the short term.

But what we have a large influence on is the savings rate. This is something we have mostly under our entire control provided that we stay safe and healthy.

This even applies in a time with extraordinary inflation rates as we are experiencing right now.

And the good news is, we did an amazing job again! We were able to hit a 51.2% savings rate in 2022. All of this has been directly invested into the stock market to make sure we leave no opportunity untouched to benefit from the compounding effect.

Honestly, I’m really blown away by this number, because it was definitely not easy.

First of all, aforementioned expenses like our mortgage have quadrupled, energy bills have risen significantly and almost everything else grew by 17% compared to last year.

Secondly, we decided to take every opportunity to enjoy life. That’s why we went several times on vacation, our kids went to multiple (summer)camps and we spend quite some money on tickets to enjoy music and art (remember Ed Sheeran?).

It was definitely worth it and I would mark 2022 as one of the best years of my life.

But how did it come that we were still able to reach a ~50% savings rate?

Well, that’s easy to explain! Like I always say, it’s more important to focus on the income side of things than on the expense side. Focusing mostly on expenses triggers us into a mindset of scarcity. Focusing mostly on income triggers a mindset of abundance.

Hence, this year I had the fortune to receive a strong annual bonus and besides that, I was able to get a promotion. Put these two together and we had strong income growth.

There is a catch though because this might be hard to maintain in 2023. As an example, I’m not counting on such a bonus again this year. Expectations have risen at work since my promotion and it will take some time for me to learn and adjust.

That’s why I keep my fingers crossed that overall inflation numbers start to drop so that we can get a bit more of our costs under control again.

Absolute Dividend Growth

Let’s now have a look at the actual dividend growth performance of the portfolio and the increase of our projected annual dividend income (PADI).

At this stage of my journey, increasing dividend income is still a function of multiple actions

• Investing my monthly savings from income (see savings rate)
• Deploying additional cash available on saving accounts
• Reinvesting dividends received (aka DRIP)
• Organic dividend growth from subsidiaries hiking the dividends

What I like most about these are the latter two bullets because this is what we call the magic of compound interest. Over time this has become much more impactful and it’s true that I really started to feel this once I hit the 100.000 portfolio threshold.

Having said this, let’s not wait for you any longer because the result is simply mindblowing.

This year, our dividends paid in cash on our brokerage account have grown by a whopping 56% compared to 2021 (after the withholding of dividend tax).

This to me guys is pure chart porn!

But to be fair, a large part of this can be contributed to an aggressive buying spree in 2022. The stock market offered a lot of opportunities at better yield-on-costs than the previous years. Add on top of that a favorable dollar exchange rate and Bingo, we’ve got a new record year on dividend income growth.

This success also means that our PADI has grown by 43.75%. This is slightly lower than our actual dividend income growth and this has a lot to do with the inconsistent dividend payments from both BPH and Rio Tinto. These are not dividend growers, but they generally pay a high dividend yield. Last year we experienced record dividend income from them which we can’t account for going forward.

Nevertheless, a ~44% growth in projected dividend income is something that I would definitely have signed up for at the start of the year and it far exceeded our own expectations. Even after adjusting for favorable currency effects.

Hence, we can be really proud of this achievement.

But before we move on, let’s also briefly look at where all this dividend income is coming from. Hence, distribution of our PADI per subsidiary in the portfolio can be seen in the below picture.

What this tells us is that we have the following top 5 subsidiaries that contribute the most to our annual dividend income:

• Shell
• BASF
• AbbVie
• Exxon Mobil
• Omega Healthcare Investors

These 5 subsidiaries together account for 31% of our entire dividend income. This is a significant decrease from last year’s 38% which is a good thing. It simply means that we reduced single-stock risk by further diversification of our dividend growth portfolio.

Sector-wise we are also pretty well diversified, but over time I would prefer to see a slight decrease in the Materials sector and a further increase in more defensive sectors like consumer staples, health care, and information technology.

Organic Dividend Growth

At a certain moment in time, our savings rate becomes less important, and year-over-year dividend growth should pull us forward. To me, this is the ultimate state in which our income will be passively compounding.

That’s why it’s also very important for us to look a level deeper and understand the true results of our organic dividend growth.

Without further ado, in 2022 we achieved 4.38% organic dividend income growth if we don’t take currency effects into consideration. If we include those, then our organic dividend growth was 8.91%.

As a reminder, our strategy is to grow our dividends organically by 6% annually at a 3.25% yield on cost. This is the second year in a row that we were not able to achieve that threshold.

However, we shouldn’t currently be worried by this, because this is largely driven by two large positions with no dividend income growth. These are Omega Healthcare Investors and Unilever.

Omega Healthcare Investors is a high-yield subsidiary paying us an ~8% dividend yield which compensates more than enough for the 3.25% starting yield.

Unilever is rather going through some struggles right now to find its path back to growth. Also in their case, we were able to build our position at a favorable yield on cost above the 3.25% threshold.

To be honest, I’m slightly optimistic about them. Recently they made some management changes after our dear colleague Nelson Peltz joined the board of Unilever. If you don’t know him, he has an outstanding track record of getting consumer staples back on track. Most notably with his recent work at Procter & Gamble, Unilever’s biggest competitor.

Having said that, remember that in 2022 we started to take the opportunity to add higher-quality stocks to our portfolio after our conclusions in the 2021 annual report. As referred to earlier, we made a decent start, but it simply takes time to see the material impact of this.

That’s why I’m also optimistic that this number will improve in the upcoming years. Time is on our side and further diversification into high-quality dividend stocks will get us there.

Stock purchases and sales

This year was a record year with regards to purchases, but also sales. The overall stock market declined by about 20% to 30% depending on which index you track. Good for us, because this gave us ample opportunities to be aggressive in the stock market and get more bang for our buck.

We also sold a bit more of our subsidiaries this year. This is mostly a result of improved discipline after taking learnings from past mistakes into account.

That’s why we were quick to sell Castellum after their proposed dividend cut and Philips NV while they continue to struggle with their litigation cases. Last but not least, we finally got rid of the last skeleton in our portfolio by selling our last General Electric shares.

Without further ado, these are the transactions we made in 2022 to further strengthen our portfolio:

As you can see, these were a lot of transactions and all as part of a dollar-cost-averaging strategy. The top 5 subsidiaries to which we deployed the most cash this year were:

• HP Inc.
• BASF SE
• T Rowe Price Group
• Viatris
• DCC Plc

I’m really happy with our HP inc holding. The company has been extremely generous with rewarding shareholders at a shareholder yield of about 12% (dividends + buybacks). Though, I do expect this to come down a bit in the upcoming years due to a reduction in buybacks.

The only thing I wished for was to buy more Texas Instruments. We only initiated a position in the second half of 2022 so we still have some time at the start of 2023 when the opportunities present themselves.

All in all, it was a good year to initiate new positions and to add to our existing subsidiaries.

Portfolio Yield on Cost

The third pillar of our dividend growth strategy is the yield on cost at the time of acquisition. This should be around 3.25% and unlike last year, we’ve easily beaten it!

As mentioned before, stock prices dropped significantly and this allowed us to achieve a 4.53% yield on cost at the time of acquisition.

This, among other aspects, had a significant impact on our Portfolio yield. It grew from 3.2% at the end of 2021 to 3.7% at the end of 2022. Actually, it would be 3.86% if we would exclude Alphabet, Alibaba, and Meta Platforms from our calculations.

All I can say is that the snowball heavily improved this year and that we could only wish for another year like this. Buying higher-quality dividend growth stocks at these levels should serve us well.

Portfolio Price Appreciation

Honestly, this is the least interesting metric for me. However, I’m including this for our audience, because over the year we are getting a lot of questions about this.

Having said that, our portfolio grew relatively well. The total value of our portfolio grew by 21.89% year over year.

However, this was mainly a result of net new cash invested in our subsidiaries.

Let’s therefore also have a look at the positions we had at the end of 2021 and compare those with the stock prices on 31 December 2022.

If we do this, then the net share price appreciation of our portfolio was 1.15% (this includes currency impact). This is an amazing result and as mentioned in the shareholder letter, mainly driven by our subsidiaries in the energy and pharma sector.

For what its worth, if we compare this to the S&P500, then our portfolio outperformed the index by 20.59%

But as mentioned before, benchmarking to such an index really doesn’t make sense to us. The main thing we should benchmark our portfolio against is our own dividend growth investment strategy. That’s our actual plan and being able to deliver on that plan is of utmost importance.

Dividend Portfolio Performance Conclusion

2022 was an outstanding year in terms of performance. 2 out of 3 metrics hit the mark and the underlying strength on the 3rd one is improving. I cross my fingers that we will finally hit it next year.

Historical overview since the inception of our annual reports:

Nerd Statistics

eDGI Family Balance Sheet

Like the last 2 years, I would also like to share some other interesting statistics with you. Everything you read so far was all about our dividend growth portfolio. However, there are still other metrics that generally impact our FIRE journey.

A first example of this is our Shareholder Equity (net worth) on our personal balance sheet. In 2022, this grew overall by 8.4%.

This number is something that shows the true power of our discipline and our focus on wealth growth. Both the stock market and the housing market experienced a tough year, but a conservative approach to both of these seems to add a protection layer to our wealth.

Having said that, this resulted in an improving debt-to-equity ratio of 11.17% compared to 12.7% last year. In other words, we have a pristine balance sheet that is comparable to some of our best subsidiaries, i.e. Microsoft.

Actually, did you know that we could technically be financially independent already if we would sell our house and invested everything back into passive income-generating assets (i.e. dividend growth stocks)?

Yes, this includes the rent we would need to pay as it currently compares to our monthly mortgage payment. How cool is this, right?

FUN Portfolio Metrics

Our portfolio has been growing quite significantly this year as you could read in this report. As an example, we can add a new record to our list, because we received 150 dividend payments this year! This is on average almost a dividend payment every second day!

This year Thursday was the favorite day to receive a dividend payment compared to Tuesday last year. Actually, I prefer Thursdays, because it feels like receiving pocket money just before the weekend starts.

Another interesting portfolio statistic is that 15.5% of cash deployed into the stock market came from reinvesting dividends. This is more than the 12% from 2021 while we heavily increased the level of cash we invested in 2022.

Blog & Social Media Performance

To be honest, it’s not all about the money for us. A large component is also the ability to follow our passions and realize our dreams. Of course, money enables a lot of this but only up to a certain point.

Having said that, one of my biggest passion is definitely anything dividend growth investing related. Other big passions of mine are spending time with my wife and kids and playing football with my teammates.

However, another passion that I only discovered during the pandemic is sharing my investing-related knowledge. I tell you, if you would’ve asked me this back in 2019 then I would’ve officially declared you crazy.

But here I am writing to you, 3 years later. It just tells me that we have so many hidden passions that we simply need to discover. Having an open mind and the courage to experiment is probably all we need.

But how many of us are actually doing this?

Are you the kind of parent that forbids their kid to jump in a puddle of water afraid that we will need to clean their clothes afterward? Or are you the kind of parent that allows them to do this and actually nurtures their curiosity to figure out how nature works?

It really makes you think right?

Anyway, all I’m trying to say is that we should never forget to live our life. Memories are created now, and you can’t borrow them from the future.

That being said, let’s have a look into my key metrics for the different social media channels which are focused on audience growth.

Honestly, these numbers continue to amaze me! The growth on Twitter and the Facebook Dividend Talk group is simply amazing. Those two channels are truly life-enriching because I really enjoy the direct interaction with you.

I am also really proud of the growth of YouTube because it’s not an easy platform to build an audience. Firstly, there is so much competition going on by youngsters that are way more tech-savvy than I am. Secondly, I decided to stay anonymous, so it’s a tad harder to build a connection with the viewers. Thirdly, I am not able to publish every Sunday in a consistent manner, because life events will always be a higher priority than content creation.

Nevertheless, having 6000+ subscribers and more than 2000 views per video is something I’m very happy with.

Last but not least, my blog is still doing just fine. I significantly reduced the amount of content compared to 2020 and 2021 due to my shift to YouTube, but the average views still increased by a slight 7%.

This tells me that it’s running very well and I would like to double down on this going forward. Hence, expect at least 2 to 3 new articles per month going forward compared to the 1 right now. Though, some of these will be rather short updates on some of our subsidiaries or just some thoughts that are pondering in my head.

Having said that, this community and audience growth would not have been possible without you. That’s why I would like to thank you wholeheartedly and I am looking forward to our continued engagement in 2023.

Final Thoughts

Dear Reader, especially my wife and kids,

I was really looking forward to writing this year’s annual report. So many great things happened this year, both on the investing and on the private side. I would really like to thank you for that 🙏

As you could read, not everything went according to plan, but at the bottom line we really improved. If I could sign up for another such a year then I would do that immediately.

Having said that, let’s take some of our learnings into account. As an example, we will spend even more effort on improving our allocations to high-quality subsidiaries. If we do just that, then I’m confident that 2023 will be even better.

To conclude, if I would rate our performance for 2022 then I would give us a 7.5. Slightly better than last year, but leaving still enough room to improve.

I think that this is a promising feeling going into the new year.

Like always, wishing you all lots of good health, wealth, and memorable moments in 2023.

Yours Truly,

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 2022 annual report of our freedom fund.

Feel free to share your thoughts with us in the comment section below. Like last year, 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.

And if you are new to this blog, then feel free to sign-up via the widget below so that you will never miss an upcoming blog post or video. You will also receive two goodies:

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Having said that, I’m looking forward to another year full of engagement!

Yours Truly,

European Dividend Growth Investor