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If I Were Starting All Over Again

I’ll admit I kind of lucked into my situation. I started investing in stocks in early 2010 just as the financial crisis was ending and the broader economy started to roar back. The worst appeared to be behind us and gray skies were clearing. Obviously, in hindsight I didn’t know the stock market was about to begin an epic bull run that seen the Dow Jones Industrial Average index climb from 10,500 points in March 2010 to the 16,491.31 level we see today. I would have never thought we’d see 6,000 points added in such a short period of time, but that’s what happened.
To be honest, however, I wish we were still looking at Dow Jones 11,000 or so right now. Sure, my portfolio might not be sitting at a value of over $160,000 like it is today, but the value of my portfolio really has nothing to do with my ability to achieve financial independence. Rather, it’s the passive income it produces via the individual investments in high-quality companies that reward me as a loyal shareholder with rising dividend payments. And so a cheaper stock market would allow my limited capital to buy more shares, and thus more dividend income.
But such is life. The Dow Jones isn’t 11,000 points, and we have to work with the hand we’re dealt.
Now, while I’m not just starting out today, I’m still actively investing just like someone who is starting out for the very first time. So I’m in the trenches with you guys here. And while my earlier investments have done quite well in terms of capital gains, we don’t invest in the past; we invest current capital in stocks today based on anticipated future performance.
However, if I were doing it all over again, this is what I would do:

Focus On Frugality

I would first and foremost focus on savings. I’ve said before that the power of savings has a lot more to do with your likelihood of reaching financial independence than your investment performance. Frugality should be your best friend. The broader stock market’s general lack of value has nothing to do with your ability to save at least half of your net income, right? Right.
So remember that your portfolio is an engine. The gasoline is fresh capital. And this fresh capital doesn’t appear out of thin air. It’s attained via your savings. The larger the spread between your income and expenses, the better. And while some people would have you focus on making more money, I think it’s easier to focus on the expense side of the ledger. At least at first. How quickly could you go out and make an extra $500? That might require a part-time job or some serious overtime at work. However, cutting $500 out of your expenses would likely be fairly simple. Notice I said simple, not easy.
The key is to save at least half of your net income. If you’re netting $6,000 per month, this would probably be easy if you have any desire at all to save and put yourself in a position of power when it comes to claiming your time. However, netting only $2,000 per month might make this more difficult. Difficult, but not impossible.
When I first started this journey more than four years ago it wasn’t easy to take a hard look at what I was spending my money on and just start slashing expenses. But would you rather have cable television or financial freedom? A big house or 10 years of time? These are tough choices, but I’ll tell you what I did, because if I were starting out all over again I’d do it the same exact way.
The first thing I did was move to Florida from Michigan. I was jobless and broke, and found myself worth less as a 27 year-old man than I was as a baby. The move was meant to accomplish many different goals: Avoid state income tax so I could keep more of my money, live near wonderful beaches for free entertainment, get out of a cold, depressing climate that required expensive heating of housing during the winter, and hopefully make the idea of living without a car realistic due to living in a climate that was friendly to the idea of being car-free. I’m not saying you should move to another state, but it might be worthwhile to question whether the situation you currently find yourself in is optimal for accomplishing your goals.

Forget The Latte

Once I was in Florida and was gainfully employed, I focused on the Big Three – housing, transportation, and food. These three expense categories suck up most of Americans’ money. So before you start wondering if the gas station around the corner is $0.02 cheaper than the one you currently use, it might make sense to take a look at whether the place you live in is too big or too much money, the car you drive too new and expensive, and the food you’re eating too large in portions and/or cost.
So I first sold my car. Yeah, I was frightened to get around Southwest Florida without a ride. I mean this isn’t New York City where I have a subway at my disposal. But you know what was more frightening? Working at a car dealership until I was 70 years old. So I drove that puppy down to a local Carmax and sold it for a fair price. I had to pay a little money out of pocket to zero out the lien on it – yeah, I had a loan on a used, depreciating asset – but getting rid of that albatross set everything else in motion for me. I was spending about $450 or so per month back then for auto related expenses like the car payment, insurance, gas, and maintenance. That $450 savings meant I needed to save up $154,000 less factoring in a 3.5% portfolio yield. So I figured this one move meant I was more than $150k wealthier. You can argue the math, but the psychological benefit was priceless.
I then decided to start eating like a college kid. I remember when I was 20 years old and spending what seemed like peanuts on food. That’s probably because I was eating peanuts. But seriously, I was spending very little on food back then. How was that possible? Well, because the only time I ate at restaurants was when I was working at them. I ate a lot of sandwiches back then. Macaroni and cheese and I were also well acquainted. And I ate my fair share of cheap pizza. Look, I didn’t say I ate healthy. I did, however, eat cheaply. And so I revamped my entire food budget, and was able to actually get it all the way down to $114 for an entire month at one point. This was the result of a lot of PB&J and ramen noodles. I worked out religiously to counter the effects of a diet that could have been improved, and I don’t regret any of it. Although I’m eating slightly healthier these days, eating like a college student for short bursts can have a major impact on your belief of what’s possible. Not interested in sandwiches? You don’t have to be. Get a slow cooker and get skilled at batch cooking – chicken, rice, and a few vegetables go a long way on the cheap.
Then I moved. I convinced my girlfriend we were spending too much on rent (we were) as I evoked the power of the Rent Is Too Damn High political party, and we packed everything up and moved just down the road to a cheaper apartment that was located on the bus line. The apartment we were living in at the time was about two miles away from the closest bus stop and so I had to get up pretty early to ride my bike down to the stop, chain the bike up, and wait for the bus. No problem, but if we could save money and live right in front of the bus stop, why not? So we did. And we still currently live in that apartment. It’s two bedrooms (her young son lives with us) and we pay $925/month, of which I pay half. So I’m spending $462.50 in rent every month. Not too shabby. Could be improved, but could be a lot worse. However, I cringe when I read about people spending $2,000/month on a mortgage or $1,500 for rent. Look, a home is just some walls to protect you from the elements. I understand how people get attached to a home because you raise your kids there and you associate memories with it, but if the roof over your head is costing more than 15% of your net income before factoring in utilities you should probably consider moving.
I made other moves like cutting cable, but really the bulk of my ability to save more than half of my net income for the past four years was in reducing the costs of housing, transportation, and food as much as possible. And I said earlier, these were simple moves, but not easy. It’s simple to say move. However, it’s difficult to actually pack up and move somewhere else. It was simple to realize that my car was sucking up too much of my free cash flow which could be better used to invest in appreciating assets. However, it was much harder to actually sell it and get around town by bus or scooter. But as I asked recently, what’s the bigger sacrifice: living below your means or working for most of your life? Only you can answer that question.

Invest Early And Often

So now that I have my expenses under control, I have some free cash flow to invest. Now that I have capital to work with it’s time to get busy, right? Well, it’s tough right now due to the aforementioned expensive stock market. However, as I’ve talked about before you must realize that the stock market is just like any other store or market: there’s expensive and cheaply priced merchandise alike within the store. Leave the pricey stuff on the mannequins near the front door to others. You’ll want to circle the clearance rack in the back with the other value investors.
So what I’d want to do is first learn a system that works for me on how to analyze and value stocks. I’vewritten about my system in the past, and that’s what I use. You may find something different works for you. The key is to stay consistent with it and be open to learning and changing as you grow as an investor. I’m certainly a different investor than I was four years ago, and I’m sure I’ll be different four years from now. For reading material, I highly recommend the resources I put together on my Getting Started page.
If I were starting all over again, I’d be investing at least once per month with as much capital as possible. I’ve tried in the past to invest at least $1,400 per month because my brokerage, Scottrade, charges $7.00 per trade. At $1,400 per purchase, I’m paying .5% in commissions, which I consider pretty reasonable. However, I’ve invested less when less was all I had. The key is to stay consistent, and invest as early and often as possible. Letting the stock market tell you when to invest is a sucker’s game. If I would havelistened to the noise that told me a stock market crash was imminent, I would have stopped investing when the Dow Jones hit 14,000 – and we see how that would have treated me. Instead, I’ve racked up 70 Recent Buy articles – and that’s just since the blog went live in March 2011.

Portfolio Construction And Diversification

Since I’m just starting out with a portfolio worth $0, I’m going to be constructing it from the ground up. As such, I’m going to want to start diversifying with every new purchase. So my first month’s purchase might be in the energy sector; next month it might be a consumer stock. However, when just starting out this isn’t imperative. It’s not nearly as important to have a $10,000 portfolio widely diversified as it is a $100,000 portfolio. Diversification will come with time, so focus on value first. However, if I’m able to find value in multiple sectors then I’m going to diversify across these sectors as much as possible as I build the portfolio from the ground up.
Once I have a valuation system set up and I have capital to invest with, I’m going to want to have some type of entry criteria for my investments. After all, there are thousands of stocks that are available for investment in the stock market. But since I’m looking to attain financial independence via passive dividend income, right away I can eliminate any stocks that don’t pay a dividend. And since I’m going to need a respectable amount of dividend income off of my portfolio with which to live, I can also eliminate stocks that yield too little to have an effect on my passive income. My quantitative entry criteria if I were starting all over again would be the same as it was four years ago: I’m going to typically look for stocks that have a P/E ratio of less than 20, a yield of more than 2.5%, at least five years of dividend growth, a dividend growth rate higher than inflation by at least a point or two so that my purchasing power increases over time, and an acceptable level of leverage. I’ll make exceptions from time to time, especially if the growth rate makes up for a low yield, but I typically try to stay within the bounds I set for myself.
One thing I don’t regret looking back on my investments is not targeting higher-yield stocks more often. Typically speaking, higher yield equates to higher risk. And since I work incredibly hard for every dollar that hits my wallet I take risk quite seriously. I remember when my blog went live back in 2011 there were many people stopping by and questioning why I wasn’t investing in mREITs that were routinely yielding 15% or so back then. Well, I felt the payouts were unsustainable and the business structure complex. Of course, many of these stocks have collapsed as the payouts have been slashed.
So starting out all over again, I’m going to focus on fundamentals. I want to know how a company makes money. How will they continue to make money? Do customers enjoy their products and/or services? Is the dividend payout sustainable? Is the record of dividend growth respectable and likely to continue? What’s the debt load? If a company passes muster, then I want to look at the stock. Is the stock attractively valued? Is the yield acceptable? What’s the stock’s valuation today compared to what it typically is over the last five or so years? If the company looks good, the stock passes my entry criteria, and I have room for the investment in my portfolio based on diversification, then I’m going to buy the stock.

Attractively Priced Stocks Today

Scanning the stock market, there’s not a ton of value out there. However, if I were starting out all over again right now I can easily tell you where my capital is going to go. I’m going to list some high-quality stocks here that have attractive valuations against their historical norms and/or the broader market as a whole, a solid blended yield, acceptable debt levels, lengthy dividend growth records, strong likelihood of continued dividend growth, and wide diversification across industries. Basically, this is a mini portfolio that could easily get one started.
Aflac Incorporated (AFL) 
This supplemental life and health insurance company is one of my largest holdings. If I were starting all over again I’d look to build a position right now. The current P/E ratio is 9.53, which is lower than its five-year average of 11. The yield of 2.41% is attractive considering the 10-year dividend growth rate is 16.8%. Assuming a static P/E ratio, one’s total return would be the sum of the yield and the dividend growth rate. So even if Aflac grows its dividend at half its 10-year average going forward you’re looking at a total return of somewhere around 10%, which should be more than acceptable to most long-term investors. And 31 consecutive years of dividend growth gives me a lot of confidence that AFL will continue to raise their dividend.
Philip Morris International Inc. (PM)
The world’s largest publicly traded tobacco company should be a long-term winner. With a P/E ratio of16.62 and an entry yield of 4.38%, you’re looking at historical norms in an expensive broader market. And I consider that a win. Philip Morris is one of my larger personal investments and that’s because I think for the next 5-10 years we should see dividend growth in the upper single-digits, which when combined with a yield above 4% you’re looking at 10% total returns or better. And although regulation and excise taxes are always a concern, PM is widely diversified between numerous countries across the world and as such is able to mitigate these effects.
American Realty Capital Properties Inc. (ARCP)
The world’s largest (notice a trend?) net lease real estate investment trust is currently offering investors a startling yield of 7.63% on shares at today’s price. I recently added to my position with this company because I can’t see how owning physical real estate and being able to rent it out at attractive rates isn’t an attractive proposition over the long haul. Furthermore, the trust doesn’t even need to raise the payout that much in order for one to attain an attractive total return. The yield alone, if able to be maintained, allows for a pretty solid investment. However, continued acquisitions means the growth may be much higher than inflation for the short term. ARCP has been aggressively increasing their payout over the last couple years, and management appears to be interested in rewarding shareholders with rising dividend income. And with a P/AFFO of 15.4, shares appear to be fairly cheap here.
Kinder Morgan Inc. (KMI)
One of my favorite energy companies, Kinder Morgan owns more than 80,000 miles of pipelines and 180 terminals. Like railroads, Kinder Morgan has a huge economic moat in its pipelines as these don’t get built overnight. Shares currently yield 5.02% and management is intent on growing the payout by at least 8% per year for the foreseeable future. Obviously, one doesn’t have to be a genius to see how this should be a pretty lucrative investment over the long haul as the U.S. continues to gain energy independence, build out its infrastructure, and natural gas gains traction and usage in applications across many industries.
Johnson & Johnson (JNJ)
I’m of the opinion that one can almost never go wrong investing with Johnson & Johnson as long as the stock isn’t grossly overvalued. And with a P/E ratio of 19.23 right now, I think one could argue that the healthcare giant’s stock is pretty close to fairly valued. And you could do worse than investing in this company at a fair price. A spectacular balance sheet, 52 years of dividend growth, and diversification across multiple products and countries means this is an excellent cornerstone stock. And as it’s currentlymy largest investment, I stand by my belief. An entry yield of 2.78% isn’t bad, and is backed by a 10-year dividend growth rate of 10.8%.


I’ve had some readers ask me what I would do and where I would invest if I were starting out all over again, and this is my answer. I’d do everything exactly the same way as I did it. I’d focus on living as frugally as possible so that my free cash flow was as large as possible. I’d then leverage the savings into the most attractively valued high-quality stocks I could find, while focusing on portfolio diversification and commission fees. I’d let the power of compounding work for me as I invest consistently, no matter what the stock market is doing. And, finally, I’d focus on fundamentals over stock prices, and I’d start with the five stocks I listed at the end.
Full Disclosure: Long AFL, PM, ARCP, KMI, and JNJ.

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