Durable Dividends

Getting Paid While You Wait To Generate Riches

Nick Ward

56 postsJuly 2, 2021

If you’ve followed my work over the years, this piece may end up sounding a bit like a broken record, but let me assure you, it’s a wonderful tune to have on repeat.

When I think about retail investors and their journey towards financial freedom, I think about two simple, easy, and highly effective tasks they need to perform in order to reach their financial goals…

First of all, individuals need to learn to live below their means.

I’ve said many times that the stock market is the best way for most people to generate significant wealth over time. However, to be able to participate in the markets, we need to have savings to invest.

So, making sure that we’re making the sacrifices that enable us to put aside savings to invest is the first and most important step to becoming wealthy.

Second of all, once savings are in place, it doesn’t require a rocket scientist to put them to work effectively in the market (contrary to what many professionals in the financial management industry might lead you to believe). Simply put, all you have to do to generate significant wealth, and more importantly, a reliably increasing stream of passive income that can provide a comfortable retirement, is to buy shares of blue chip dividends when they’re fairly valued (or better yet, when they’re trading with an irrational discount attached to them) and then hold them over the long-term.

The compounding process that takes place with regard to their fundamental growth over time is going to be the most powerful force available to most individuals when it comes to wealth generation.

I say all of this because I see far too many people over-trading in the market.

No one knows what is going to happen in the short-term; however, there are hordes of individuals who believe that they can speculate their way to riches.

To me, this is a fool’s errand.

And instead of gambling with my hard earned savings, I would much rather partner with a best-in-breed company as a long-term shareholder and become a direct beneficiary of their growing cash flows.

I realize that playing the long game is difficult for many investors. Patience is a virtue that doesn’t come easy to many. We all want to get rich quick (myself included); however, the risks outweigh the potential rewards when it comes to the highly speculative bets you may hear about from time to time that end up working out for traders (which to me, is just another word for gambler).

Thankfully, the dividend growth investing strategy’s primary objective – building a reliably increasing stream of passive income – not only serves as an effective vehicle along the road to financial freedom, but also as a buffer against the worst aspects of human nature with regard to fear and greed and their tendency to result in short-term thinking.

In short, when you own dividend growth stocks, you’re paid to wait for the compounding process to generate the real riches you’ll require in retirement.

A steady stream of cash flow serves as a tangible reminder that the strategy is working. When you work hard for your income, there is no better feeling than receiving passive income. When you wake up to a new dividend payment in your brokerage account and realize you literally made money while you were sleeping, it’s easy to start off the day with a wide smile.

Not only does the idea of “being paid while you wait” help investors to stay patient, avoid the temptation associated with short-term trading, and ultimately, allow the compounding process to play out over time, but it also helps to provide the confidence to buy blue chips into weakness and reap the rewards associated with mean reversion and value investing.

We all know to “buy low.” It makes a lot of sense to buy things when they’re on sale, right? However, in the market, investors sometimes begin to question themselves when they see stocks selling off.

When talking about attractive value investments, I’ve been asked the question many times: “Nick, does the market know something that we don’t?”

Sometimes, the answer here may very well be yes. But, I’ve found that in the vast majority of situations where blue chip companies sell-off and present significant discounts to perceived fair value, the move is irrational.

These are the opportunities that allow individuals to accelerate their journey towards retirement. These are get-rich-quick(er) moments. Yet, the fear associated with the unknown forces driving stocks lower can sometimes prohibit people from taking advantage of the best deals the markets provide.

Reliably increasing passive income can help to solve this problem, too.

You see, as share prices fall, dividend yields rise. So long as the underlying fundamentals that support a sustainable dividend remain in place, these rising yields should make buying shares into weakness easier.

For instance, the defense sector has been out of favor ever since the election due to fears that defense spending will be lowered by the Democratic leadership in Washington, D.C. Therefore, names like Lockheed Martin (LMT), have experienced relative weakness compared to the broader markets. For those who don’t know, LMT is my favorite name in the industry and undoubtedly a blue chip dividend growth stock, having compounded its annual dividend growth at a 16.1% rate over the last 15 years.

LMT shares are up just 7.1% year-to-date, which represents a significant underperformance when compared to the S&P 500’s 14.5% year-to-date returns.

However, even with this ~50% relatively underperformance in mind, I continue to accumulate shares of LMT because the company’s earnings continue to grow at a faster rate than its share price, resulting in a historically cheap valuation.

Not only are LMT shares trading cheaply on a valuation basis, but Lockheed’s dividend yield currently sits at 2.75%, which is more than twice as high as the S&P 500’s 1.30% yield.

Furthermore, Lockheed’s strong fundamentals point toward continued strong dividend growth prospects.

The company’s forward dividend earnings-per-share payout ratio is just 39% which signals to me that another strong dividend increase is likely when the company announces its next quarterly payment in September of 2021.

Since 2017, LMT has increased its quarterly payment by $0.20/share during the September declaration.

If this trend were to continue, we’d see the company’s annual dividend rise from $10.40/share to $11.20/share, representing a 7.7% increase.

Being that Lockheed’s earnings are expected to grow by 9% in 2021, I think this is a fair baseline when it comes to this year’s raise expectations and frankly, I wouldn’t be surprised to see management come in a bit higher than that.

An $11.20 forward annual dividend represents a 2.95% yield at today’s share prices.

In today’s market, if you give me the opportunity to buy a best-in-breed company with a sub-market multiple (LMT’s blended price-to-earnings ratio right now is just 14.8x, which is very attractive compared to the S&P 500’s 22x forward multiple) and a roughly 3% dividend yield, I’m going to be a happy camper.

Why? Because buying undervalued blue chips that pay abnormally high dividend yields is a recipe for success in the markets.

I believe that Lockheed Martin’s fair value is nearly 10% higher than the stock’s current share price. I don’t have any idea when the market will come to its senses and place a fair value multiple on LMT shares, yet I feel confident that sentiment will shift and LMT will receive a higher valuation eventually, given the strength of its fundamentals. And the best part is, I don’t have any reason to stress in the meantime because I know that I’ll be paid handsomely while I wait for the mean reversion to occur.

This is the beauty of the dividend growth investing strategy. Passive income is a panacea for financial stress and my portfolio generates it in droves.

Lockheed Martin is a holding within The Intelligent Dividend Investor portfolio as well. It’s one of 22 positions that we own which all have wonderful dividend growth track records and strong dividend growth prospects moving forward as well.

Subscribers to The Intelligent Dividend Investor gain access to my commentary regarding fair value within the portfolio and are provided clear and easy to follow data regarding attractive discounts in the dividend growth space and how to capitalize on them.

If this article resonated with you and you believe that building a dividend growth portfolio is the right path for you along the road towards financial freedom, please check us out here.

Building a safe and reliably increasing passive income is my number one priority at The Intelligent Dividend Investor. Thus far, not only has the portfolio produced market-beating performance since it was launched in early 2020, but we’ve had a perfect track record with annual dividend raises as well. For just $79.99/year, you will gain expert insights to a life changing portfolio management strategy.

Disclosure: NIcholas Ward is long LMT.

Nick Ward

56 posts

View all my Posts

Nicholas Ward is a research analyst who currently writes for Seeking Alpha, The Dividend Kings, iREIT, and Forbes Real Estate Investor. Before that, he was Founder and Editor-in-Chief of The Dividend Growth Club, as well as the Income Minded Millennial. Nicholas has also contributed to Sure Dividend, Investing Daily, and The Street, where he covered stocks in Jim Cramer's Action Alerts PLUS Portfolio.

Nicholas holds a bachelor of arts from The University of Virginia, where he studied English and studio art. Prior to transitioning into the financial industry, he managed a vineyard in the foothills of the Blue Ridge Mountains.

Dividend Growth Stock of the Week: Essential Utilities

REIT Mutual Fund	Symbol
Alpine Realty Income and Growth Fund	AIGYX, AIAGX
American Century Real Estate Fund	REAIX, REACX, AREEX, AREWX, ARYCX, AREDX
Real Estate Securities Fund	MRESX
AR Capital Real Estate Income Fund	ARIAX, ARICX, ARIPX
AssetMark Real Estate Securities Fund	AFREX
Aston/Harrison Street Real Estate Fund	AARIX, ARFCX
Baron Real Estate Fund	BREIX, BREFX
BlackRock Real Estate Securities	BIREX, BAREX, BCREX
Brookfield U.S. Listed Real Estate Fund	BRUAX, BRUCX, BRUIX, BRUYX
CGM Realty Fund	CGMRX
West Loop Realty Fund	REIIX, REIAX, REICX
Cohen & Steers Institutional Realty Shares	CSRIX
Cohen & Steers Realty Income Fund	CSEIX, CSDIX, CSBIX, CSCIX
Cohen & Steers Realty Shares	CSRSX
Columbia Real Estate Equity Fund	CREAX, CREIX, CRRVX, CRERX, CREEX, CRRFX, CREWX, CRECX, CREBX
Compass EMP REC Enhanced Volatility Weighted Fund	CWRAX, CWRIX, CWRTX, CWRCX
Davis Real Estate Fund	RPFRX, DREYX, DRECX, DREBX
Delaware Real Estate Investment Trust Portfolio II	DPRTX, DPRBX
Delaware Real Estate Investment Trust Portfolio	DPREX, DPRSX, DPRRX, DPRCX
DFA Real Estate Securities Portfolio	DFREX
Dunham Real Estate Stock Fund	DAREX, DNREX, DCREX
DWS RREEF Real Estate Securities Fund	RRRRX, RRREX, RRRAX, RRRSX, RRRBX, RRRCX
DWS RREEF Real Estate Securities Income Fund	REFAX, REFCX, REFIX, REFSX
Eaton Vance Real Estate Fund	EAREX, EIREX
EII Realty Securities Fund	EIIRX
Fidelity Advisor Real Estate Fund	FHEIX, FHEAX, FHETX, FHECX, FHEBX
Fidelity Advisor Real Estate Income Fund	FRIRX, FRIQX, FRINX, FRIOX
Fidelity Real Estate Income Fund	FRIFX
Fidelity Real Estate Investment Portfolio	FRESX
Fidelity Spartan Real Estate Index Fund	FSRNX, FRXIX, FSRVX
Fidelity Series Real Estate Equity Fund	FREDX, FREFX
Fidelity Series Real Estate Income Fund	FSREX, FSRWX
Forward Real Estate Long/Short Fund	KSRYX, FRLSX, FFSRX, KSRAX, KSRCX, KSRBX
Forward Real Estate Fund	FPREX, FFREX, KREAX, KRECX
Forward Select Income Fund	KIFYX, FSIMX, FFSLX, KIFAX, KIFBX, KIFCX
Franklin Real Estate Securities Fund	FREEX, FRLAX, FRRSX, FSERX
GMO Real Estate Fund	GMORX
Goldman Sachs Real Estate Securities Fund	GREIX, GRETX, GREAX, GRESX, GRERX, GREBX, GRECX
Great-West Real Estate Fund	MXREX
Heitman REIT Fund	OARTX, OBRTX
ING Real Estate Fund	CRARX, IREWX, IDROX, CLARX, CRWRX, CRCRX, CRBCX
INVESCO Real Estate Fund	REINX, IARFX, IARIX, IARYX, IARAX, IARRX, IARCX, AARBX
Ivy Real Estate Securities Fund	IRSAX, IREIX, IRSYX, IRSRX, IREEX, IRSCX, IRSBX
John Hancock Real Estate Securities Fund	JIREX
Johnson Realty Fund	JRLTX
J.P.Morgan Realty Income Fund	URTLX, JRIRX, URTAX, URTBX, URTCX
J.P. Morgan Security Capital U.S. Core Real Estate Securities Fund	CEEAX, CEERX, CEEFX, CEESX, CEECX
J.P. Morgan U.S. Real Estate Fund	SUSIX
Lazard U.S. Realty Equity Portfolio	LREIX, LREOX
Lazard U.S. Realty Income Portfolio	LRIIX, LRIOX
Manning & Napier Real Estate Series	MNRIX, MNREX
Morgan Stanley Institutional U.S. Real Estate Portfolio	MSUSX, MUSDX, MSULX, MURSX
Natixis AEW Real Estate Fund	NRFAX, NRFYX, NRFBX, NRFCX, NRFNX
Neuberger Berman Real Estate Fund	NBRIX, NBRFX, NREAX, NRERX, NRECX, NRREX
Nuveen Real Estate Securities Fund	FREAX, FARCX, FRSSX, FREBX, FRLCX, FREGX
Oppenheimer Real Estate Fund	OREAX, OREIX, OREYX, ORENX, OREBX, ORECX
PHOCAS Real Estate Fund	PHREX
PIMCO RealEstateRealReturn Strategy Fund	PRRSX, PETPX, PETAX, PETDX, PETCX, PETBX
Pioneer Real Estate Shares	PWREX, PYREX, PCREX, PBREX
Principal Real Estate Securities Fund	PIREX, PIRPX, PREPX, PRETX, PREJX, PRRAX, PRERX, PRENX, PRAEX, PRCEX, PRLEX
ProFunds Real Estate UltraSector ProFund	REPIX
Prudential Select Real Estate Fund	SREAX
Prudential U.S. Real Estate Fund	PJEAX, PJEZX, PJECX, PJEBX
REMS Real Estate Income 50/50 Portfolio	RREIX
REMS Real Estate Value-Opportunity Fund	HLRRX, HLPPX
Rydex Real Estate Fund	RYREX, RYHRX, RYCRX
SA Real Estate Securities Fund	SAREX
SEI Institutional Mgd Real Estate Fund	SETAX, SEIRX
Spirit of America Real Estate Income & Growth Fund	SOAAX
SSgA Clarion Real Estate Fund	SSREX
Stratton Real Estate Fund	STMDX
T.Rowe Price Real Estate Fund	TRREX, PAREX
TIAA-CREF Real Estate Securities Fund	TIREX, TRRPX, TRRSX, TCREX
Vanguard REIT Index Fund	VGSNX, VGRSX, VGSLX, VGSIX
Virtus Real Estate Securities Fund	PHRAX, PHRIX, PHRCX, PHRBX

REIT ETF	Symbol
Flex Shares	ASET
Wisdom Tree Global Ex-US	DRW
S&P 500 Equal Weight	EWRE
iShares FTSE Industrial/Office	FNIO
MSCI Real Estate Index	FREL
S&P REIT Index	FRI
First Trust S&P REIT	FRI
iShares Real Estate 50	FTY
Flexshares Global	GQRE
iShares Cohen & Streers	ICF
iShares International Developed RE	IFGL
iShares US RE	IYR
Premium Yield Equity REIT	KBWY
ETRACS Monthly Pay 2x Leverage	MORL
Market Vector Mortgage	MORT
iShares Global REIT	REET
iShares FTSE Mortgage	REM
iShares Residential	REZ
IQ US Real Estate Small Cap	ROOF
iShares FTSE NAREIT Retail	RTL
DOW Jones Global RE	RWO
SPDR Dow Jones	RWR
Schwab US REIT	SCHH
Super Dividend REIT	SRET
ProShares Ultra RE	URE
Vanguard REIT	VNQ
Vanguard Global ex-US	VNQI
iShares International Developed	WPS
Wilshire US REIT	WREI
Pacer Benchmark Data & Infrastructure RE	SRVR
Pacer Benchmark Industrial RE	INDS
Pacer Benchmark Retail RE	RTL
Hoya Capital Housing	HOMZ
NetLease Corporate RE	NETL

REIT Name	Ticker	Annual Increases/yr
Federal Realty	FRT	51
Universal Health Realty	UHT	33
National Retail Properties	NNN	29
Realty Income	O	27
Tanger Outlets	SKT	26
Urstadt Biddle	UBA	25
Essex Property Trust	ESS	25
W.P.Carey	WPC	22
National Health Investors	NHI	17
Equity Lifestyle	ELS	15
Digital Realty	DLR	15

Getting Paid While You Wait To Generate Riches

Nick Ward

56 postsJuly 2, 2021

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