In January 2009, I found myself without a job. But I wasn’t worried.
I had graduated school in 2007 with $2,000 in cash, which I promptly spent on a used car that drained all my money away. I then found a job, and saved up approximately 70% of my paychecks. I put enough money to get the company match on the 401 (k), and put the remainder in Certificates of Deposit. Yields on those CD’s back then were over 5%/year. I had no idea where to invest the money, so I was researching it furiously. Inflation was running high, and the first cracks of the housing bubble had started to appear.
I knew stocks went up 10%/year. The problem was that they didn’t go up every year. Sometimes, stock prices went nowhere for extended periods of time, as they did between 2000 – 2012, or 1966 – 1982. I also knew I didn’t want to spend my whole life working at a job if I didn’t want to.
So I needed a source of cash that was passive in nature, and is relatively stable in the amount and timing. Interest income seemed fine, except for it was heavily taxed as ordinary income and seemed to be losing purchasing power over time. I knew that if I didn’t want to work at some point in time, it would be helpful to have income producing assets, which will generate income to live off. I was very lucky that I sometimes had downtime at my work, so I could research things. This is when I read a lot of studies on long-term performance of US stocks. I also found a lot of blogs, many of which I still read today.
This is when I discovered the beauty of dividend investing. One of the sites called Dividends4Life I still read today. The rest are gone now. As I kept learning about dividend investing, something clicked – this was the strategy I was looking for. This strategy could provide me with a growing amount of cash income every year, which would protect its purchasing power from inflation. This strategy also involved purchasing diversified portfolio of solid blue chip stocks, with solid competitive advantages, solid records of earnings and dividend growth, and attractive valuations. I would only spend the income, and not touch principle in order to avoid dipping into my nest egg and running out of money. I didn’t want to run out of money in case something bad happened. Having a margin of safety is something that was introduced by Benjamin Graham. I try to incorporate the concept of Margin of Safety in dividend sustainability, living off a portfolio, financial independence, savings and investing.
[drizzle]And bad things were happening all over the world. The economy was tanking, the market was tanking, CEOs had no idea what was going on. Luckily the next Great Depression was averted. I meticulously saved money in my CD’s, and my 401 (k). I sensed I was going to be out of a job soon, so I figured out an exit plan. I was also lucky that my company offered a stock purchase plan, where I could buy shares at a discount a few times per year, and then immediately sell them for a guaranteed gain. Every little bit counts.
As I learned more about dividend investing, I decided that it would be easier to start a site and document my progress. In reality, this was a journal that would make me do the hard work, write down my strategy, and write down an objective analysis of each company I was thinking of investing in. This was going to make me honest with myself. Too often I would find out about a company everyone loved, and I would convince myself it was a great company. However, after looking at the numbers, I could not make myself buy that company. Examples include Bank of America (BAC) and US Bank (USB). Unfortunately, I did buy American Capital Strategies (ACAS).
As my CD’s started maturing, I started putting the money in dividend paying stocks. I was lucky that I had a disciplined approach that relied on objective data analysis and was somewhat devoid of biases. It is important to form an opinion only after you have done the work to form it. I was also lucky that I had an above average allocation to certificates of deposit between early 2008 to late 2009, so I could take advantage of the low prices as the majority of those CD’s were maturing in 2008 and 2009. I realize that having an above average allocation to fixed income before the crash was luck – such “timing” will be unlikely to be repeated during the next stock market crash. Lucky for me, I have not fallen for the trap of trying to call the top for the past 8 years.
Somehow, in the process, Seeking Alpha started republishing some of my articles, and I gained a large readership. My site also started generating a little bit of cash too. That was pretty cool.
So in January 2009, I was not worried when I was out of a job. Everyone was telling me that I should get a job right away, in order to avoid becoming a failure. However, while I went on a few interviews, I was taking my time. I could afford to do that because my side business income and my dividend and interest income were covering my expenses. Using the low standards of today, I could have called myself financially independent at the age of 24. My side business income kept increasing, and it was covering my expenses. While you may think that my expenses are low today, they were actually even lower back then.
Unfortunately, if you have a net worth of $200,000 and annual expenses of $25,000 – $30,000/year you are not really financially independent. The reality is that at this stage, you need to beef up your portfolio. In order to generate enough investment income to pay for your expenses however, you would need something like $800,000 invested in dividend paying stocks yielding 3% – 4%.
Initially, I was having a blast being in charge of my own time, and doing what I liked doing – researching stocks, writing about investing and investing my money in dividend stocks as my CD’s matured.
My net worth was covering something like 4 – 5 years worth of my low expenses at the time however. And I was saving some money, and reinvesting those dividends.
However, I had a very low margin of safety in case something went wrong. Any time I wrote an article that flopped, I felt uneasy. I wrote a few articles where I said something correctly, but many readers were not happy. They told me they were not going to listen to me anymore. That is pretty brutal. I read those comments any time someone tells me they are going to stop reading me, and any time they tell me I