Dividend Mapping: Stupid or brilliant?
Just 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
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:
- Food – could be done in a number of ways, but for my example, we’ll just ignore this for now.
- Seattle PUD $50 – Not traded
- Seattle City Light $50 – Not traded
- Gas bill – PG&E $50 – PG&E Corporation (NYSE:PCG)
- Comcast $32 – Comcast Corporation (NASDAQ: CMCSA)
- AirVoice Wireless $10 – Not traded
- Allstate Insurance (Car, Life, Homeowner’s) $420 – The Allstate Corporation (NYSE: ALL)
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!