Dividend mapping: The craziest thing I never did

Dividend Mapping: Stupid or brilliant?

dividend-mapping2Just for fun I thought I’d share an investing concept I dreamed up quite a while back. I never actually pursued the idea because it didn’t make sense on a number of levels. In fact it was pretty dumb once I thought about it a little.

Allow me to explain.

The whole concept of pretirement is built upon the idea that once passive investments generate enough money to pay for your monthly bills, you’re financially independent. Thus, you enter into a rarely discussed era of life: pretirement. As you age and become less able to work (thereby making your risk of financial problems higher), you then enter traditional retirement, adding in your Social Security, your personal retirement funds and Medicare to give you the security you need later in life.

OK, that’s straightforward enough, right?

Now let’s talk about investing. Every investor at one point or another has heard the advice about choosing stocks to invest in by looking in your own refrigerator (or looking around your own house, etc.) The idea is pretty simple: If you are a pretty typical person, then it’s fair to say that there are a lot of other people making the same buying choices as you. Therefore the companies who make the products that fill your own home are the ones you should invest in. Classically this advice has pointed investors toward companies like Proctor & Gamble, PepsiCo or General Mills.

Dividend Mapping (a term I just made up), takes this idea a little farther.

Here’s how it would work. I’ll use my own bills as an example (with some rounding to clean it up for you. Also, this is just my share of the bills. If you want the real number with both my wife and I included, just double it.)

1. Make a list of your ongoing monthly bills with the amounts you pay.

  • Food $175
  • Seattle PUD $50
  • Seattle City Light $50
  • Gas bill – PG&E $50
  • Comcast $32
  • Cell Phones $10*
  • Car Insurance $130
  • Life Insurance $45
  • Property Taxes $220
  • Homeowner’s Insurance $25

Total: $787

2. Re-jigger your list to organize it by company. So for me:

  • Food: N/A $175
  • Seattle PUD $50
  • Seattle City Light $50
  • Gas bill – PG&E $50
  • Comcast $32
  • AirVoice Wireless $10
  • Allstate Insurance (Car, Life, Homeowner’s) $420

3. Now, see if I can “map” investments to each line item:

Only three of my core bills are publicly traded, PG&E, Comcast and Allstate. Let’s ignore the rest for now and see if I can use dividend mapping to pay those bills.

  • PG&E: I need $50 of income per month, or $600 per year.
  • Comcast: I need $32 of income per month or $384 per year.
  • Allstate: I need $420 of income per month or $5,040 per year. (Actually what I need is a lower insurance bill, but that’s a story for another day, although this certainly does illustrate how buying too much house can kill you.)

OK? Now let’s dividend-map these three:

  • PG&E pays a respectable yield of 3.94%, so I’d need to own $15,000 in PG&E stock. Actually this is pretty doable.
  • Comcast pays a dividend of 1.77%, so I’d need to own $22,000 in Comcast stock. Kind of a lot of money to throw at Comcast, but possible.
  • Allstate pays a dividend of 1.95%, so I’d need to own a whopping $258,000 in Allstate stock — that’s almost as much as my entire pretirement fund. (Are you beginning to see why I never pursued this wacky idea?)

So here’s why I like this idea and why I spent so many late night hours so long ago thinking so deeply about this.

  • There’s a poetic symmetry to the concept of essentially having a company pay for its own expense. If my Comcast dividend pays for my TV and internet, I’m likely to hate them (and the bill) a lot less.
  • It makes investing, and the concept of dividend investing, easier to understand.
  • It allows (in theory, but not really in practice for the most part) you to pick off your bills one at a time. For example, I rather like the idea of suggesting to a person on a tight budget, “As soon as you accumulate $22,000 in Comcast stock, you can order cable.”
  • The companies that you send money to each month are likely pretty decent investment opportunities for the reasons explained above. And by staying on top of your dividend map mix over the years, you would adjust to changing times. For example, I just dropped AT&T as my cell phone company. Had I been dividend map investing, I would have also liquidated my AT&T stock at the same time and moved it to my new provider, if possible. In this way, you would also theoretically be following the herd, so to speak, as customers move and adjust with the marketplace.
  • Because it does take a fair amount of money to generate the income to pay for some of these bills, this concept is great for getting you focused on your monthly expenses. Suddenly saving $5 or $10 on a monthly bill matters!

Reasons this idea is terrible:

  • The main reason I never seriously pursued this concept was one of the reasons shown by my Allstate example. Because the yield is so low relatively speaking, my money could be performing better by not using this gimmick. Who cares if there is no poetic symmetry? I need to maximize my entire fund if this is going to work.
  • The other reason made clear by my Allstate example is that it could trick you into being over-allocated into certain stocks. If I put that much (impossible in my case, but you get the idea) into Allstate, I could be very vulnerable if Allstate fell into trouble.
  • This idea could trick you into buying really poor companies just because you happen to be their customer. It could be doubly painful to be paying a company money each month on top of watching their share of your portfolio collapse.
  • Not every company is public. Utilities obviously make up a big portion of the bills we all pay each month and not every company is on the stock market, especially publicly owned utilities.
  • Some line items aren’t that simple. I’m mainly thinking of food here, but there could be others. Who do I invest in to cover my food budget? The grocery store chain? The food manufacturers?
  • It leaves out some great buys. Apple has been a great growth stock in recent years, but you would have totally missed out on it if you’d only been dividend mapping. Had you moved to AT&T because of the iPhone, that could have made both of them good buys (see the variations section.)
  • Because bills do go up, you’re not necessarily keeping up with inflation unless you’re getting stock growth or leaving some dividends in to reinvest. Depending on your strategy, this could mean you’d need to keep an extra margin invested beyond what I’ve shown here. (Plus I’m leaving out taxes and fees for these examples to keep things simple.)

Variations to consider:

Like I said, even though this idea is stupid on its face, there may be some redeeming factors to some parts of the concept, such as investing in companies that you use every day. Therefore there are a few variations to think about:

  • Buying a sector vs. individual stocks. Perhaps buying a set of food stocks, mutual fund style, instead of just a single stock could bring the yields you need as well as simplicity and safety desired.
  • Buying bonds as a proxy for your utility stocks could make some sense if you were in love with the dividend mapping concept.
  • Buying a supplier to your company could be an option if your company is private or is just not investment-worthy. For example, AirVoice Wireless uses the AT&T network. Therefore I could look at how much AT&T I’d need to cover my $10/month AirVoice bill ($2,500).
  • Buying a similar company. Perhaps I could find another insurance company to substitute for my Allstate stock.
  • Keep the mapping, but forget all the perfect symmetry nonsense. Just keep it really simple and focus strictly on the investment and ignore everything else. The idea here is really about attacking one expense at a time. So maybe you start with your smallest bill. In my case, maybe it’s my $10/month cell phone bill. Let’s say I found a company that offered a yield of 5%. I take my $2,500 in hand and buy in. Now one of my bills is gone! Then I start saving for the next bill. It’s not as pretty as the pure dividend mapping, but it’s still mapping dividend income to a specific expense.

The last point is probably the best one for people just beginning to think about financial freedom. By picking your bills off one at a time in this fashion, your goals will seem more attainable than ever. Invest until your smallest bill is covered. Then invest until the second bill is covered. And so on. I’d especially love to see young people try this approach as they gradually move toward financial freedom.

So there you have it: An entire post dedicated to something I’ve never done and don’t recommend. Aren’t you glad I didn’t waste your time?

You can give me a piece of your mind in the comments! 

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30 Thoughts on “Dividend mapping: The craziest thing I never did

  1. While I am absolutely not an expert in anything investing-related, this was an interesting post to read :). It is an intriguing concept, but I think your points of how your investments would probably be better off elsewhere in most cases defeats it. It would be poetic justice that the bills are paying themselves, and I agree that it would make me hate it less, but not all companies (like your Allstate example) make it worthwhile. I do like your last few “variation” points though!
    E.M. recently posted…Frugal Birthday and “Unexpected” ExpensesMy Profile

    • Pretired Nick on July 17, 2013 at 3:49 pm said:

      Yeah, for sure! I mean this mostly as a fun mind-opener more than a serious approach. If it gets people thinking, it’s a win!

  2. Brilliant and hysterical, PN! I especially love the “poetic symmetry to the concept of essentially having a company pay for its own expense.” This may inspire me to compose a post that has to do with a concept I’ve never done and don’t recommend. I’ve probably written one and forgotten about it. A pity, no doubt.

    You could call this dividend hunting or a dividend drone or dividend scud or dividend ballistics. Dunno.

  3. I love the creativity! Certainly there’s some allocation flaws, but what if you did the same thing with index funds. Once you’ve built up x dollars in an s&p 500 index fund, you never have to pay for groceries again.
    CashRebel recently posted…Prepare For An Interview Like a ChampMy Profile

    • Pretired Nick on July 17, 2013 at 7:15 pm said:

      Thanks, Reb! Yeah, that was basically my point at the end: you could use the concept to pick off your bills one at a time until they’re all covered. But mainly, it’s just for fun.

  4. I really loved your last paragraph. I am working towards my own financial independence and think the idea of getting your bills covered off by investments is a great one. It has made me renew my ambition to own enough property for it to pay my own rent. So far I am a third of the way there. However, I stalled. But I think the idea of ticking off your bills one by one could be a way for me to get back into the game.

    • Pretired Nick on July 18, 2013 at 9:54 am said:

      Yeah, I think that makes the goals more attainable. Especially for someone just starting out investing, it can seem a lot more possible to just pick off your smallest bill first and keep working down the list.

  5. Well a good concept of dividend mapping. But the ROI for paying off bill isn’t convincing. You could better off the same money into some online business or a estore or anything which yields higher returns then you can still pay bills and get more on top of them.

  6. I do not have shares in my cable/internet/phone provider. They are the cheapest provider I can get in my area but they are not a good investment. Same for my natural gas provider. Best price and the best return is what I look for in suppliers and stocks.

    I do have shares in my bank because they pay a consistent dividend and the stock has shows consistent gains over decades. I shop there because they offer me good deals and low rates.
    Jane Savers @ Solving The Money Puzzle recently posted…A Rich Ginger, A Takeover Makes Stock Prices Jump And Money Quickies For July 17,2013My Profile

    • Pretired Nick on July 18, 2013 at 8:55 am said:

      It’s nice when it works out that a company you use is also a good investment. What I found is it rarely happens in reality.

  7. Interesting concept! So this is what you spend countless nights pondering deeply about? Well it shows you like to think outside of the box…that’s always a good thing. Definitely agree that a lot of times some divdend paying stocks may not be great ones. A lot of the growth stocks do not offer dividends.
    Andrew@LivingRichCheaply recently posted…Dealing with Financial EnvyMy Profile

    • Pretired Nick on July 18, 2013 at 8:57 am said:

      Yeah, I’m a big weirdo! I don’t think you can be a pretirement advocate and NOT be an out of the box thinker. But you can’t be crazy, either, which is why I dumped the idea immediately.

  8. I think you can still pursue this idea, but with different stocks which pay better yield. I don’t think you necessarily need the same company. Instead of Allstate, use Aflac which pays better yield, etc. It is our goal in dividend investing to replace our expenses by dividends anyway, so it actually doesn’t matter from which stocks it comes, right?
    Martin recently posted…Who owes you?My Profile

    • Pretired Nick on July 18, 2013 at 1:03 pm said:

      Yeah, exactly, so I might as well just go for raw dollars and not worry too much about the mapping part. I might try it, though, if I were just starting out as an investor.

  9. Thank goodness you didn’t waste our time with that! Ha!

    I don’t know….I still like the idea but not on such a detailed level. Finding enough in dividends between companies to handle core expenses was an easy idea for my clients to grasp. You’re right though: historically, buying and harvesting to meet goals has beaten a dividend-spending approach in most markets.
    AverageJoe recently posted…Reader Question: What’s the Fate of Bonds?My Profile

    • Pretired Nick on July 18, 2013 at 6:24 pm said:

      Yes, you’re quite right that at its core all this is is a way to break big problems into small problems. It makes them easier to grasp for sure!

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  11. I really like the concept and glad you shared it. As you said, it wouldn’t be financially safe to use this approach, but I love when people think outside of the box. Nice work Nick!
    Grayson @ Debt Roundup recently posted…Encouragement – Spread It Around!My Profile

    • Pretired Nick on July 22, 2013 at 11:41 am said:

      Thanks, Grayson. You definitely took this in the spirit intended. It’s often very helpful to try to look at things from different angles!

  12. With the possible return on your PG&E, do you think you might still try that one? It’s odd how small the return on Allstate stock is. Is that normal for an insurance company? Perhaps their large advertising budget is to blame for the low rate of return.

    I really need to get more educated on dividend stocks. Can you recommend good books or blogs on the topic? I am such a newbie in investing and I know I can do it!
    Tara recently posted…And now for some thoughts on foodMy Profile

    • Pretired Nick on July 25, 2013 at 8:26 am said:

      I don’t know. I think about doing the PG&E thing sometimes. It’s smarter to look at your overall portfolio and go with a balanced approach full of great companies. Insurance companies are typically low-risk, low-yield investments, but I haven’t taken a hard look at their details. I think most insurance companies have massive advertising budgets, which says more about how much money they’re taking from their customers than their total operating costs, in my opinion.
      I definitely don’t claim to be a dividend stock expert, but I do recommend heading over to http://www.dividendmantra.com/. DM is my go-to source for all things dividends so I recommend giving it a look.

  13. This is such a cool idea…yea, sometimes it wouldn’t work so well like with allstate, but still a cool concept. Freedom 35 actually does this! And he makes it look so pretty… http://www.freedomthirtyfiveblog.com/portfolio/hedge-fund …i thought you would be interested in seeing it 🙂

  14. Pretired Nick on August 6, 2013 at 1:33 pm said:

    Wow, that is so cool. Thanks for sharing! I had no idea anyone else had come up with a similar concept.

  15. Pingback: What is the best way to invest $100,000? | Pretired.org

  16. Okay, I am a little late to the party, but I was looking for ways to generate passive income, and came across this post. I love the premise behind the idea, but appreciate that you flushed it out enough to determine why it wouldn’t work in all cases. Definitely food for thought. I would love the companies I pay every month to pay my bills for me! Keep the great ideas coming!
    Mama Breeze recently posted…What to do with all that Free TimeMy Profile

    • Pretired Nick on November 17, 2013 at 6:44 am said:

      Thanks for saying so, Mama B! I might try some variation of this at some point. But the most important thing is to break the big goal into smaller goals and start picking them off.

  17. I tried this a couple of years ago. I bought an Ipad2 with 3G. I didn’t have an existing cell phone plan, so I bought a $20/month Ipad plan with Bell. As par of my TFSA I purchased Bell stock (BCE) that was paying about 5% dividend. It was pretty straight forward to purchase ~$5000 dollars of stock for my first TFSA contribution. I then have tried a similar approach with Canadian banks…I will never earn as much in growth or dividends than I have probably paid in interest on my mortages but I like the idea that now I am very close to mortgage free, the banks now pay me a few hundred $ per quarter in dividends.

    • Pretired Nick on November 18, 2013 at 7:22 am said:

      Awesome! Thanks for sharing that, Mark! You nailed the largest point, which is really to bite off your bills one at a time and gradually work your way to freedom. Great story!

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