Welcome to the Investing for Beginners podcast, in today’s show Andrew and I discuss the following topics:
- DRIPPING stocks, when to start and when to stop
- Investing in REITs and some ideas of items to look for in the financials such as debt, and other metrics
- How dollar cost averaging works, the mechanics and some ideas behind adding money and different allocations.
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All right, folks, welcome to the Investing for Beginners podcast. Tonight is episode 185, Andrew and I got some really good listener questions over the last couple of weeks, and we’re going to take a stab at answering a few of them here on the year. So I will go ahead and read the first question, and then Andrew and I will go ahead and do our little give and take. So the first question is regarding Andrew’s favorite topic, dividends. So he says, I am currently using drip to reinvest my dividends. I would love to live off a dividend income at some point in the future; it seems like a fantasy at this point, but who knows? Is there a point in time when successful stop doing drip and withdraw dividends as income into their bank account? Is there a rule form that people use to keep dripping a certain percentage of dividends and keep a certain percentage for themselves?
I’m fully aware that I’m probably getting ahead of myself to think that I could live off the dividend income, but I might force a scenario into this someday if I keep saying it out loud. So I like that idea. So, Andrew, what are your thoughts on his great question here.
I love it. Speak it into existence. I don’t know if there’s a particular rule of thumb. The way I would look at it is if you, if you take the returns from the stock market. So if we say over a very long period, stocks have tended to return around 10% a year. So if we say like three to 4% of that is dividends, we’re left six to 7% per year. So if you have a pile of cash and it’s not a pile of cash, we’ll say it’s a pile of these stocks.
And you’re trying to figure out if you can stop dripping them, which means reinvesting them back into those stocks. If you’re happy with that, that group of equities growing at that rate, then I see no problem with stopping the drip. You know, if your portfolio gets to a point where you’re happy at it, maybe sustaining or keeping up with inflation, then maybe you can take the dividends and spend those and live. You’re living the dream at that point. You have to keep in mind that yes, you know, the stock market is I can give you a perfect 10% a year. Yes, you might have to deal with some stock market crashes, some bear markets where things will get a little tight. But if, at the end of the day, if, if you’re able to take the dividends and it’s not, it’s not going to hinder your retirement plans, your long-term plans, then I think that’s probably a good spot.
And it’s going to come down to risk tolerance. If, if somebody wants to have a little bit more margin there just in case their stocks end up not doing as well as they thought, or if somebody wants to be a little bit more aggressive and, and, you know, live life a little bit on the faster lane than you can do that too. But that’s kind of the way I would think about it. If, if the money does not, if you’re not trying to necessarily maximize your compounding because your essentially your, your entire portfolio is at a place where you are mostly on track, if not already there to where you need to be, to have a, a long and prosperous retirement, financial freedom rest of your life; however, you want to term it, then that’s a point where taking off dividends and not reinvesting them and enjoying them, it will probably be the same, whether you enjoy them or reinvest them. So it makes for a good healthy kind of place in mind to make that leap.
Yeah, that’s a great answer. I know that when I was reading through this question, I thought about what he was talking about and, you know, honestly, I had never heard anybody ask the question that way. And so I, I, I thought about what would I do? How would I handle this? And something that kind of came to mind when I was thinking about this was something that Charlie Munger had said. He said the first rule of compounding is never to interrupt it unnecessarily. So I, you know, I think that’s one thing that I guess I was thinking about. So, but I think all the points that Andrew made were great, you know, the closer you get to retirement or whatever the goal is that you have, you’re going to start to know when you’re at the right place to do what you need to do.
And I think what Andrew was suggesting as far as splitting up, the portfolio and having different portions of it continue, and maybe using some of it as your income, those are all going to be great options. And, you know, if you’re younger and you set this up correctly, it’s something that you can, you could do as you get closer to retirement. But I like what Charlie was, was recommending and, you know, I’m a big fan of the power of compounding. So if I could not interrupt it until I have to, then that’s what I’m going to partake of. But I listen to what Andrew said, that that was great advice. All right. Well,
Move on to the next question. So the next question is from Angie Angie was asking, so she’s a new investor and a subscriber to our e-letter, and she’s been binge listening to the podcast. So she can’t express her appreciation that she found all the resources, and investing is something that she is always intimidated by. Still, the explanations and examples that both Dave and I provide are easy to understand the thorough she’s curly dripping all for dividend stocks, way to go, and wanted to take a stab at applying some of your investing strategies and evaluating a high yield dividend stock. So she picked out a company called NHI, which is national health investors, which is a REIT as she’s taking some of our advice, and she’s done some research on her own, and she’s used some of the metrics and suggestions from Andrew’s seven steps book, and she wanted to get our views and thoughts on NHI. She said it looks like a good buy except for a high price to cash ratio. As she said, I know you suggested weighing each calculation’s totality when deciding whether to invest in a particular company. She asked if we would mind sitting in some light on what we thought of NHI. So Andrew thought this would be a really good idea to talk a little bit about this company. So he had some insights he wanted to share with us.
Yeah, let’s just do, let’s look at the company real quick. And, and let me point out some things that kind of pop up in my head and can give you food for thought. Maybe you can apply it when you’re looking at other companies you want to invest in. So full disclosure, I have a different re in my portfolio, which I recommended in the letter. And so I guess in a way, my opinion on this is kind of impartial because I have a pretty good reallocation as it is. I’m always interested in looking at new businesses. That’ll be fun just going on there in their annual report and looking at how they describe their business. They talk about how they do senior housing and medical facility investments. So they have 238 facilities and 34 States. And so, some of those are senior housing.
Some of those are skilled nursing. There are three hospitals and two medical offices. So being are and just to back backup for a second re stands for real estate investment trust, this is a special type of vehicle where it’s still a company. You can still invest in it and buy stocks buy shares of it in the stock market. But the way that they grow is different from a normal type of business. So if you take a business-like Disney, for example, the way they have grown over time is that they earned a profit. They took those profits; they reinvested it in the business for these real estate investment trusts. They do take some of those profits and reinvest in the business, but they have to give most of their earnings back in the dividend because of the way they’re structured. And then, to grow the business, they have to add debt and issue shares.
And so it dilutes the shareholders and the ads that so neither of those things are generally things you want to hear when you’re a shareholder, but in the world of REITs and the way that there are some advantages to these such as the fact that they get into these assets. And they have claims on this land that, that appreciates over time. And so, you know, if you think of other types of businesses going back to Disney, if they want to grow, let’s say they want to open the new Disneyland in Minnesota or something. It would be very expensive for them to throw all that railing together, make their various rollercoasters, and prop up these big parking lots and all of the very expensive things you have to do to grow that revenue. And then, over time, that stuff deteriorates.
And then if you contrast that to a REIT, they’re going to buy a piece of property, some land, and it’s going to, maybe they pay a million dollars for it today. Maybe in 10 years, it’s worth 20. I’ve lost track of my numbers. Did I say a million? Let’s, let’s make a realistic, say it goes up to 2 million. So, you know, the value of that land increases, and that continues to increase as they add more and more properties. It’s a very different scenario, not to say one’s necessarily better than the other. Still, because of the restrictions, because of how their businesses grow, you have to look at them differently. And so, in the case of a REIT like this, especially because they have to grow with that, you have to look at their debt and make sure it’s reasonable.
You’re not going to be able to use a regular, that equity ratio on it. Because, as I said, the way the business model works is different. So they’re going to have a lot higher growth in revenues than a regular business, but they also have higher debt growth. Hopefully, that’s simple and makes sense. So when I look at this company, NHI, they showed their debt ratios were improving from year to year to year. So from 2017, 2018, 2019, that ratio decreased, and they disclosed it in their annual report. That’s good. That’s something you want to see. I wanted to check that COVID a lot of REITs have been affected by COVID for obvious reasons. When people can’t pay their rent, that’s going to be problematic. As in the case of NHI, they recently reported they collected 93.9% of the rent.
They call it contractual cash for January. So that, so in the sense of how their business model is holding up through the pandemic, they are, most of their tenants appear to be just fine based on that number, what I wanted to point out about this. So that looks good. They seem to have decent growth. I would look at FFO, which is fun from operations. That’s their version of free cash flow. What I, what, what I wanted to point out with this company, though, was that if you’re scrolling through the annual report, one of the things they closed here is they have four major customers. And so those are four different operators. They list them on here, and they say out of each of these four customers, makeup at least 10% of our total revenues and over 58% collectively. So when more than half of your revenues are coming from four customers, those four customers are going to have a lot of leverage on you, particularly if they know that they have this advantage over you.
And so not to say that it’s the worst thing in the world, but it’s something to keep in mind that you have the risk of. If one of these tenants leaves, we’re going to have huge problems with our business. And number two, when it comes to negotiating rents or whatever needs to be negotiated between customers or suppliers, they’re going to have more leverage. And so it’s going to be harder to squeeze profits out of those kinds of transactions. So, those are the things that stood out to me. If you kind of put a blindfold on and pick any REIT right now, they are all very cheap, but you do have to be careful with the debt situation. And you have to look for things like this. And when I look at what makes this different from some of the others that we’ve looked at, this is one of those things that popped out at me that said, okay, this is a little bit riskier that you won’t necessarily see as a financial metric or a financial number, but it just kind of shows how it’s important to do some research.
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Yeah, that’s fantastic advice and guidance. And the idea about the for customers is spot-on; that’s a great insight. One, a couple of other things that I wanted to, I guess, kind of tag on a little bit of what Andrew was saying. So all the different ideas that he was talking about with the, and the way that the
Rates grow, and everything is spot on. And that’s exactly what we need to think about when we’re thinking about looking at REITs, and a big portion of something to consider when you’re thinking about rates is the type of business that it’s in, well as the collection of rents. Because as Andrew said, it looks like NHI is collecting 97% of the rents, which is awesome, especially with the COVID year that we’ve just gone through. There are other REITs that have been spanked. Simon property group, in particular, comes to mind. They’re one of the big mall REITs. And as we all know, the malls have been primarily shut down throughout most of the country. And so they have struggled mightily to collect rents. I think they’ve improved recently, but I know I was looking at that particular company around the springtime.
And at that time, I believe they were collecting 65, 70% of their rent. So it was, it was, it was a struggle. So the other thing you have to think about with REITs is the debt, like Andrew was saying, and it’s not just about the total amount of debt. One of the things that I like to look at with that is also the debt schedule. So there is a, you will find that in the notes section of the quarterly and the annual report. And you’ll be able to determine from those they’ll list out when the debt is coming due. And a reason why that’s important to know is generally they that’s. One of the big ways that rates will grow is by using debt to buy properties and buy land and produce other places to collect rent from. But a lot of it has to do with when the debt is coming due.
So generally, most of the debt that they’re doing is it’s called they’re called equity raises, and not equity raises they’re, they’re issuing bonds. I’m sorry, they’re issuing bonds to raise money. So, in other words, they’re issuing debt of their own company’s debt that they’re trying to collect money so that they can go out and buy these properties. Now they have different desk schedules. Sometimes, they may have a bond issuing that may not mature for 15 years, which means that they will pay interest on that money. And then they will pay it back in 15 years, or they may stagger the payments. It depends on how the company’s structured as well, as well as their cash flow. So one of the things to think about when you’re looking at rates is when the debt will come due? So there’s been some rates that I’ve been looking at off and on over the last year or so that I bought one as well.
And the fat pitch portfolio that I manage. And one of the things that I liked about that particular REIT was they had very, very little debt coming due over the next two or three years, which gives them a good window to go through this tough period that the whole country is going through and build up some, some reserves in other words, and help them if they were going to struggle in the future, which they’re not, it’s a great company. They’ve been around for a long time, and they got some great management, and they know their stuff. But one of the things that I noticed when I was looking at their financials was that their debt was not; they were not going to have any debt payments scheduled for the next three years. And that was a big, big bonus. So those are some things that you can notice when you’re looking through the financials.
The other thing that you want to look at is what kind of, what kind of leases do they offer their customers? And in this particular case, the NHI has triple net leases, which is probably the best kind of lease that you can get. That’s the most advantageous for not only the renter but the rentee as well. So it works out well for everybody. So NHI, I think there’s, there’s, some things that look good. And then there’s, I guess, a couple of things that are, maybe give you a little bit of pause. So I hope that helps answer Angie’s questions. Do you have anything else you wanted to tag on with that, sir?
I would just say with what you were talking about, the debt schedule, if we were to invert that. So if we had a company that had a bunch of debt coming, do you have to think not only is that obviously kind of risky, but at the same token, if they’re going to have to pay back a bunch of debt, they’re not going to have a lot of money left over to reinvest in new properties to get similar levels of growth. So maybe the growth you saw over the last five years will not materialize over the next five years because they’ve used up all of that growth and now got to pay back some of that debt. So you can look at it both on the negative side and then on the positive side in general. Yeah. Looking at that debt schedule and trying to make that advantageous for you when you’re buying the company can work out well.
That’s a very good point. So thank you for adding that. All right. Let’s move on to the last question. So we have a question here. So it says, hi, Dave, I hope you’re doing well. I’m taking you up on the hit reply in case of any questions, suggestions; I’m the newer investor and Andrew’s podcast and a new subscriber to the investing newsletter. So I had a dollar question cost averaging, and I was hoping you direct me to where I could read slash hear more about it. This might be a very basic read, stupid question. There are no stupid questions. So I apologize in advance. If that’s the case, it’s about how a dollar-cost averaging works. I understand the concept of dollar-cost averaging, but I’m not sure I understand the actual mechanics of implementing it. Let me elaborate a little bit more. Let’s assume a dollar-cost averaging, and I’m sending $250 out of each paycheck to my brokerage account.
And I hold, say, seven positions in my portfolio. How does that $250 get distributed to purchase the shares of the positions I hold? Is that something that the brokerage account lets me set? Does it go to purchases some shares in all the positions equally, or is it weighted in some way or goes to buy shares of a few positions one month and shares of others next month? Also, a bonus question. How’s it work if I’d like to add more positions to my portfolio? That’s a great question. Thank you. A seam, Andrew, what are your thoughts on?
To get the technical part of it out of the way I know with 401ks, if you are to set up an automatic transfer, it will usually invest for you. So if you say, I want my 401k to have 75% stock market, 25% bonds, and then you just set an auto transfer into that auto-deposit. Then you don’t have to do anything. And that’s going to give you that 75, 25%. Now, when you have individual stocks in your brokerage account, there’s, there’s no way that I’ve seen where you can do that. And so you might have an automatic transfer going into your brokerage account, but at that point, you’re going to have to log in to your brokerage account and decide where you want to allocate those funds. What stocks you want to add to What new stock positions you want to take.
So, Dave, I’d be curious to hear, maybe in your shoes, how would you think about dollar-cost averaging new positions with the portfolio you managed now? If somebody was coming in new to that, how would you recommend they do that?
Ooh, that’s a good question. So here’s how I guess I would look at this. It depends; it’s going to; I’m going to qualify it a little bit. It’s going to depend on where the other positions are in the portfolio versus the new position you have. So kind of the way the 401ks work generally is when there’s money invested in a 401k, a lot of times they will put it in the position that is the most undervalued or underweighted depending on how you have the portfolio set up. Like Andrew was suggesting a moment ago, if you have a 75, 25 allocation, 75% in stocks, and 25% in bonds. For example, if you put a hundred dollars in the portfolio, then the 401k would most likely put $75 in stocks and $25 in bonds without going into the different maybe positions you have in that mixture.
Let’s say that the $75 you’re going to put in the stock part of it, then maybe part of that would go towards the most undervalued or most underweighted companies. So if you have seven stocks and you want to split them evenly between those, we’ll say, let’s make it easy math, let’s say it’s 10. So let’s say you have ten positions and you want to add the money equally. If you have a hundred dollars, you would put $10 towards these positions that may or may not be feasible. But the other way to do it, let’s say that three of the positions have done well. And they’ve gotten great returns, and they’ve grown to a bigger portion of the portfolio. And you will, you want to add more money, the best way to do that would be to add to the underweighted ones.
Other stocks, these other seven stocks of that ten that are underweighted, aren’t as big of positions, in other words. So instead of them all being 10%, maybe the three or 45%, and now the other ones are now only 55%. And you want to bring that weeding up. Then you would add money to those portions of the portfolio to try to fill out the waiting, to make sure that they’re all kind of equally weighted. You can look at another thing you can look at the ones you feel may have the best potential to grow the most or are the cheapest. That’s what I would do. I would look at the ones that are the cheapest. So if I have a portfolio that’s built up as I do, and I am putting money into the account as I do, then what I do is look for the things that I think are the cheapest and still have the most room to grow.
As a value investor, I generally try to buy companies that are on sale and then wait for them to go up in price. And when they do, that’s how I earn my returns. So by scouring the internet and the stock market, trying to find those great deals. So when I do that, I’m looking for a company or two that I feel is the best prospect to grow further. Now, if I have other companies that maybe are closer to where I think they’re valued, I may add a little bit, but I may not add as much. And so by doing that by continually adding to the ones that are undervalued and as they start to grow, that starts to build up your portfolio. And once those stocks it, and they will hit, it’s going to be big; that’s when you get really big returns.
And that’s when somebody like a Warren buffet has really, that’s where he’s made his bread and butter are by finding some of those undervalued ones. And then really putting a lot of emphasis on those stocks. And when they pop, then that’s when he gets these monstrous returns. And so that’s, that’s kind of how I approach it. I look at either waiting. I am so thinking about how the portfolio is constructed and how I want to do that. I also try to add money to companies that I feel like are still have room to grow. If you want to add a new position, then instead of adding to those other seven positions that he has in his portfolio, you add money to that new position. Or you could add some money to that position and a little bit, but then you keep doing it every month until you get it to where you want it to be. So that’s really, I guess, in essence, how I look At it; what are your thoughts on that, Andrew?
Those are all great ideas. I like them a lot. If I and I only had seven stocks in my portfolio, I would probably be looking to get that higher. I like a range of 15 to 20 stocks generally, but you know, to have stocks where each position is making up somewhere around 5% of your portfolio, anywhere between five to 10 that’s, that’s a good kind of, that’s a good place to be when it comes to diversification. And so it’s kind of something that I’ve always, I’ve always thought about and talked about is just, you know, if you’re, if you’re looking at stocks every month, it makes sense to me to put the most money into your best ideas every month. And that’s generally what I’ve done and what I recommend to subscribers. And one thing to keep in mind when your dollar-cost averaging into positions that you’ve had in the past and maybe haven’t done as well.
And maybe they’re down in price is to make sure before you’re allocating to those checks to see if things have changed. So I have positions in my portfolio that have gone down that I’ve decided not to add to not because I want to sell the position necessarily or not because I don’t feel good about the company, but because it’s not presenting as good of results as maybe it did when I first bought it. And so you want to adjust on that too, based on how comfortable you are, how confident you are about the stock, and then how they’re doing lately. And if it’s aligning with how you thought things were supposed to go over the longterm. So, you know, we know companies will stumble, and they won’t perform. Like we expect them to all the time. That doesn’t mean we need to sell them at on their first trip up.
But if it does keep you a little bit weary, then maybe you do hold off on adding to a position that’s not doing as well. But if, if, if it’s, if you can have confidence and you have this circle of competence that tells you that. Yeah, I know. Not that I know, but I have; I’m feeling pretty good about it in 10 years, just completely forgetting about the short-term turbulence. Then that’s like Dave said, those are the opportunities when, when the stocks are beaten down, and you have a lot of research and expertise that tells you that this company is really in an advantageous position. That’s just in the short term stumbling block with the share price. You lock in on those types of deals, and that’s where you can make a lot of money. And that’s where value investing can pay off, but you have to have the conviction, and you have to have the confidence, which comes from the knowledge and the research of knowing when a company is a good buy for the very term. Hopefully, out of all those options, one of those kinds of sticks applies to people’s situations out there when they’re looking to dollar cost average.
Yeah, that’s, that’s a great point. The last thing I guess I wanted to, I guess, commend everybody is the dollar cost averaging is beneficial for you because it’s going to help build your portfolio. Still, it also helps set a pattern a habit. And the more that you can set a habit like that of continually adding money to your investment account, as you get older, that’s going to benefit you more and more, especially for those of you out there that are much younger than me, please, by all means, start, start now. And even if you only put in a little bit, it’s going to add up the power of compounding is one of the greatest forces known to man, and it will benefit you in the long run.
And if you can set that habit and set that pattern early and young, even if you’re older like me and you set that pattern, it’s; still, it’s going to benefit you. And you’re going to; you’re going to thank yourself, you know, 20, 30, 40 years from now, you’re going to look back and think, thank you so much for doing this because it will pay off. You have to be consistent and patient in all the things that Andrew and I have talked about through the years, doing the podcast, they still hold and still work, and it still will benefit you. So I encourage you to continue down the path you guys are going in. If you haven’t started start, if you are doing it, you know, keep it up. You’re doing great.
All right, folks, we’ll that is going to wrap up our conversation for this evening. I wanted to thank everybody for sending us those great questions and for taking the time to write to us. Those were fantastic. So those are good questions. You guys are getting better and better every time. So keep it up. We appreciate it. So without any further ado, I’m going to go ahead and sign us off. You guys, go out there and invest with a margin of safety emphasis on safety. Have a great week. We’ll talk to you all next week.
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