Hi there, welcome to my blog MyFinancialShape, where I document the journey of our family of four towards Financial Independence. My wife and I work hard to achieve that goal by the end of 2024. On my blog I cover various investment and personal finance topics whereas the focus is set on ways to generate passive income, mainly through dividend growth investing.
Since 2009, I have been building a diversified investment portfolio consisting of over seventy dividend paying stocks. I share with my readers these cash flows on a monthly basis and in this YouTube film I want to cover the money streams I received over the years from 2009 to 2020.
I hope, this gives some valuable insights on how a dividend share portfolio can be built up and which cash revenues can realistically be expected over the medium and long run.
Disclaimer You are responsible for your own investment and financial decisions. This article and this YouTube Video are not, and should not be regarded as investment advice or as a recommendation regarding any particular security or course of action.
If someone wants to illustrate Warren Buffet’s quote that the stock market in the short term is a popularity contest, but a weighing machine over the long run, then the stock price dynamics of software and cloud giant Microsoft gives the perfect case study. It’s also a great example to show, what long term investing really means: we are talking about sticking to shares of a wonderful business not just for some years, but for decades.
Just look at the last twenty years.
From 2001 to 2011, after the so-called “dot-com bubble” burst and tech company stocks have been out of favor for a long time stretch, Microsoft shares were flat for years.
But just look then at the stock price dynmics from 2011 to 2021, the stock price litterally went parabolic, shooting up from around USD 25 per share to over USD 300 in a matter of just ten years.
But I am not talking here about huge book gains a long oriented investor could have capture here. Even better, Microsoft started paying dividends in 2003 and has been hiking them annually in the high single digit rate. Microsoft – by the way like Apple – is a so-called Dividend Challenger, belonging to a group of companies that have consistently increased their shareholder distribution for more than eight years. My guess would be, that Microsoft will be able to continue that dividend hike streak for many years.
Microsoft is one of the very few Tripple A businesses in the world. Microsoft’s outstanging debt of around USD 64 Bn looks huge at first sight, but when putting into relation to the company’s USD 132 B available cash and equivalents and in particular comparing it with Microsoft normalized annual Free Cash Flow of over 30 Bn, then the leverrage level not only is very well manageable but it looks modest.
Microsoft together with Amazon and Apple belongs to the world’s largest and most successful technology companies. Just think about that: how many businesses have had such an impact on the way we work and communicate as Microsoft did?
For sevaral decades, Microsoft has been a major force in driving the secular trend towards digitalization.
And Microsoft has transformed itself.
Whats extremely interesting is the fact that Microsoft has been able to shift most of its products towards the higher-profit monthly subscription model. The company is so extremely dominant in the business area and many applications in the medical, legal, and other professional fields outright require the use of Microsoft Office and other Microsoft services kind of as a default mode of communicating information.
But there has been even more dynamic, beyond the “money printing model” of Microsoft. For decades, profits came from licensing its software and operating systems. But today, it’s so much more. Over the years Microsoft expanded and diversified and today has following three business segments:
Productivity & Business Processes,
Intelligent Cloud and
More Personal Computing.
In each of its operating segments Microsoft is in a leading position with stable growth in revenues. Microsoft clearly has many levers for further growth and increasing profit margins.
From 2001 on, Microsoft has been able to generate unleveraged earning returns of over 35 % each year. That shows what a compounding machine Microsoft is. That company is three times more profitable than the average fortune 500 company.
Microsoft is so dominant in various areas and has shown again and again its ability to scale up its position. The rating agency Fitch brings it to the point in its latest commentary on the company:
Now, coming back to Microsoft’s stock price, it looks that the dynamic has gone a bit ahead of itself. I mean for decades the Price Earnings Ratio has been below 20. Since mid 2020, amid the COVID-19 pandemic, that has changed significantly. We are looking at siginificantly higher multiples, with a PE-Ratio of over 35. Now we have to bear in mind that growth to the top- and bottom line of the company has even increased and we are looking at a much more diversified company than for instance a decade ago.
The stock market provides a great mechanism, bringing together supply and demand in an efficient way. The stock market has to serve long term oriented investors, showing them from time to time attractive entry prices.
And who knows, the popularity of a stock can alter, and share price levels come downs to a more moderate level. Well, that will be then a good time for me to consider even taking a larger stake at that wonderful business.
Disclaimer You are responsible for your own investment and financial decisions. This article is not, and should not be regarded as investment advice or as a recommendation regarding any particular security or course of action.
There are some specific characteristics of that industry an investor should know beforehand.
The auto sector is
extremely capital intense
very cyclical,
strongly regulated and
highly dependent on leverage.
Furthermore, the car industry is under a constant threat of technological disruptions. As you might be well aware, there is a megatrend going on, the world’s transition to sustainable energy and electrification of transportation.
Taking exposure to the Chinese electric car market
As said, electrification of automobiles is a huge megatrend and China has the largest and one of the fastest growing market.
Tesla is still the the world-leader in electric-vehicles (EV) but Chinese manufacturers are gaining momentum such as XPeng, BYD (Build Your Dream, a company where Berkshire Hathaway as a stake in) and Nio.
Besides the fact that Nio has an incredible strong home market, what I like in particular about that company is the fact that it’s targeting the higher margin luxury car segment and has worked hard to build a differientated product as well as securing a loyal customer brand. Nio is the more established company compared to XPeng and in the medium and long run it could show very good profitability.
Currently, Nio is investing heavily into research and development, marketing and in particular into its global expansion. Nio’s product rollout in Europe in particular Norway is an interesting one. We are talking about one of the richest countries in the world and Norway has the highest reat of EV adoption.
Nio shows a solid balance sheet, a strong brand and ambitious but realistic growth plans. So, in March 2021, amid a stock market correction in many tech businesses, I pulled the trigger to buy shares of Nio in the amount of roughly USD 1’000 to make a nice addition to my Tech Portfolio.
What about you, fellow reader, have you invested into electric car makers such as Tesla and/or Nio?
Disclaimer You are responsible for your own investment and financial decisions. This article is not, and should not be regarded as investment advice or as a recommendation regarding any particular security or course of action.
I have linked to the bullet points above articles resp. webstites on these Cryptos to provide some background information on their their applications, practical use, investment case etc.
Currently, I have roughly USD 4’000 invested in these four Crypto Positions.
If you put that amount into context to our other investments, it represents a small percentage.
So, Cryptos are hugely volatile and there is a significant speculative element inherently given, when taking a stake in that kind of asset. On the other hand, Bitcoin, Ethereum, Cardano and Ripple are connected with important applications which have huge potential to completely transform our economy and the way we interact.
I’ll keep you updated on how my new crypto investment portfolio has developed and how the positions have performed since they have been acquired.
What about you? Are you invested in Cryptos as well? Have you made any moves lately?
Thanks for sharing in the commentary section below.
Disclaimer You are responsible for your own investment and financial decisions. This article is not, and should not be regarded as investment advice or as a recommendation regarding any particular security or course of action.
or a great deal of luck in life (e.g. a windfall which would put these people financially in a positon so that they can leave their job).
Over the last decade, I have been extremely interested in personal finance in general and in the topic Financial Independence Early Retirement (FIRE) in particular.
By the way, I am referring here to a household’s wellbeing in general. Not everyone wants to achieve Financial Independence.
But in case you want to become financially independent in 10 to 20 years, that’s perfectly possible. Yes, the higher your wealth and/or your salary is, the easier it might be.
But here’s the catch: I high income could also make it even harder.
On MyFinancialShape I often write about establishing an ever growing passive income stream by investing into dividend paying stocks such as Nestlé, The Coca Cola Company, PepsiCo etc. I document our monthly cash flow streams from our investment portfolios. I write about some of the best long term dividend stocks, about dividend reinvestments and on taking advantage of the compound effect to accumulate substantial wealth over time.
But in essence, when we are talking about achieveing Financial Independence, it really just boils down to the Savings Rate.
A positive Jaws Ratio reduces risks, enhances profitability and flexibility
Mister Money Mustache wrote a brilliant article with the title Frugality as a Muscle. I highly recommend his blog in general and to have a look at that article in particular.
Here’s your “workout to gain financial muscles” that I would recommend:
know all your cost positons;
write them down, track them month by month in an excel sheet;
group the positions into fixed costs blocks (such as insurances, rent etc.) on one side and discretionary spendings (such as holidays etc.) on the other side;
analyse all cost positons and assess whether you could optimise them without significant disadvantages (these are the low hanging fruits);
discretionary spendings often can be influenced immediately but make sure you are cutting costs for things that don’t mean much to you;
get creative, many spendings positons could be altered quite easily (e.g. insurance shopping, improving costs by comparing, negotiationg, changing);
But always keep in mind: it’s absolutely important to remain motivated and enjoy the path toward Financial Independence as its a long term goal
tackle in particular the fixed costs because once they are streamlined, there is a recurring benefit. Fixed costs are always to the detriment of a household’s financial flexibility, as it takes most often six to 12 months to have an influence on them.
And here’s another point: if you can change your total costs faster than your income dynamic, then you are so much better off than litterally anybody you know.
And here comes the Jaws Ratio Concept which can have a life-changing effect.
I wrote an article How to use Jaws Ratio to improve finances some years ago. On how that concept – which originially has been used in the context of corporate finance and security analysis – could (and should) be applied in personal finance to optimise a household’s financial position over time. If you haven’t read that article, I would definitively recommend to have a look at it.
Jaws Ratio = Income Growth Rate – Expense Growth Rate
The Jaws Ratio can either be positive or negative depending on whether the income increase surpasses the expense increase or not. A positive result means that income grew stronger than expenses and therefore profitability increased.
I know people that got a pay rise, got promotions year after year which led to fast growing income. The savings rate was shooting up. But make no mistake: an increasing savings rate does not necessarily mean that your personal finances are healthy.
Here’s the flipside these people are often confronted with: if spendings have been climbing at a faster pace than income, then the household is in a very risky position.
As we all know, cash income streams can abruptly change, they can plummet dramatically or even stop completely. Just think of losing your job.
But costs always remain. It’s pretty tough cutting spendings in a matter of a few weeks, but it is completely feasible doing so over the medium and long run. As said, frugality is like a muscle which can and should be trained.
My wife and I have been applying the concept of Jaws Ratio for years. For instance, we reduced our work pensa from 100 % to 80 % while still keeping a more or less unchanged savings rate.
That was possible because we managed to slash our costs by more than the reduction of our work incomes. A 20 % salary drop should be accompanied by measures that lower the cost basis by at least 20 % which results in a Positive Jaws Ratio.
A Positive Jaws Ratio signifies
improved profitability of the household,
more flexibility and
also a lower risk profile.
But in contrast, when costs climbe faster than cash income streams that results in a Negative Jaws Ratio. It’s then vital to detect such a development at a relatively early stake and take measures. That’s why, the Jaws Ratio Concept really is so essential.
So, just track for each year, whether your income has been moving in line with your spendings. If that’s the case, put the process forward, make sure you always have a Positive Jaws Ratio and you are are seeing your journey towards gaining financial flexibility put on autopilot.
