Target Corporation(NYSE:TGT) is a proven dividend aristocrat which means it has raised its dividend consecutively over the past 25 years at least (40+ years in fact). At the time of writing, its share price trades around the $59.30 handle (September 21-2017) which means its dividend yield currently is coming in at 4.18%. New investors come to this website every day and look for ideas and strategies that can help their financial situation. If the respective investor is income orientated, I believe Target is a logical choice where dividend investing can be employed especially when you consider its present valuation and strong dividend yield.
Target’s present earnings multiple is just under 12 whereas its long time average multiple is 17.6. Low valuations in proven dividend aristocrats are excellent vehicles to get that monthly passive income really moving north through the reinvesting of quarterly dividends. Why? Because the yield spikes as the the shares get cheaper. For example, Target’s shares topped out in mid 2015 at $85 a share. At that time its dividend yield was under 2.5%. So a $10,000 investment in Target shares back then would have netted $250 in yearly dividend income. This is $21 in monthly income when rounded off. Nevertheless the same $10,000 invested today would net the investor $418 in yearly income because significantly more shares could be accumulated due to the lower valuation. A sizable gain to say the least.
Nevertheless $35 a month on a $10,000 initial investment just doesn’t cut it for many and I get it. $10,000 is a sizable amount of cash for many. $35 a month in passive income is not going to change anyone’s opinion about dividend investing overnight. This is why we need to see bigger figures sooner rather than later to keep our income investor interested. By the way, let’s call our investor Tom for simplicity sake. Tom’s goal is to get his passive income from dividends from his initial $10,000 investment in Target up to $100 a month as soon as possible though aggressive dividend every quarter.
This article is more psychological than anything. Tom knows deep down dividend investing (where quarterly dividends are reinvested) works if his investment is given time. However this doesn’t mean Tom will succeed. How does he set this thing up to make sure he doesn’t quit?
Getting to a round number like $100 a month in passive income builds positive reinforcement. Positive reinforcement is why the rich get richer and the poor get poorer. When one is emotionally connected to their goal, the chances of attaining the goal are proven to be much higher. Therefore with respect to Tom, we need for him to get a few early wins in this new investing game. Why? Because to him, this dividend investing growth lark is still very much unproven in practice. This is why it is said that success is 80% psychology and 20% mechanics. We all know the mechanics work in dividend growth investing but how do we convince Tom of this which means essentially keeping his emotions out of the way.
Why do I say this? Because (especially at the outset) the minute a better opportunity comes across his desk whether it be a high flying growth stock, a business venture or whatever, that $10,000 could be withdrawn as quickly as it was wired in. That’s the power of emotions or fear of loss to put it more succinctly. Therefore with respect to Tom’s $10,000 worth of shares in Target, we need him to see progress through his own eyes, a pat on the back as you were, which will demonstrate to himself that he is doing the right thing for both himself and his family. Here is how those perceived early wins are accomplished.
Dividend Investing Works When The Stock Is Heavily Oversold Which Is What He Has Done With Target
When one buys a dividend aristocrat that is heavily oversold, the chances of the stock bouncing increases meaningfully. I accept that this is counter-intuitive for dividend portfolios as dividend based portfolios want to accumulate as much cheap shares as possible. Nevertheless new investors like Tom straight away receive positive reinforcement once he has a paper gain on his shares. This will result in him staying in the game much longer. Target shares were almost $9 a share cheaper two month ago when its earnings multiple almost dropped to single figures.
If Tom was lucky enough to buy Target anytime over the past two months, he is now sitting on a paper gain in his account. Even if he buys today, Target shares should still head north to some respect due to how oversold the stock is compared to historic valuations. I believe a rise in the price of the shares is important psychologically although it does Tom little good with respect to getting that income up
Tom Now Needs To Take Advantage Of This Momentum By Buying More Shares Monthly – (Aggressive Dividend Investing)
To go from $35 a month in dividend income to $100 a month as quickly as possible, Tom will need to start adding more capital to the $10,000 preferably on a monthly basis. When one can look at the situation objectively and break down every extra cent added, the numbers over time become clearer. For example, a $200 monthly investment on Target shares today equates to roughly $8 a year extra in passive income going on the present dividend yield. Assuming we are dealing with at least a 4% yield, those are the numbers. So Tom with 12 monthly payments of $200 ($2400 annually) is guaranteeing at least $96 in annual income which is $8 extra in monthly dividend cash flow.
So assuming all things remain equal, that initial $35 in monthly dividend income that he started out with now becomes roughly $43 ($32+$8) in monthly dividend income after year 1. Remember that positive reinforcement can be built beforehand when you know your expected numbers. With Tom knowing roughly what his income will be in the future, this gives him determination in the present which is crucial. If Tom can keep on siphoning away that $200 monthly, he can keep this dividend investing machine going indefinitely.
For example, despite Target’s recent concerns, its 12 month dividend per share annual growth rate is 7.1%. Its 3 year number is 13.7% and its 5 year number is 16.7%. Suffice to say that over the next 5 years, if Target can announce at least an 11% annualized average dividend per share growth rate, then Tom’s passive dividend income will reach roughly $100 after 60 months or so. This will only happen if he can sustain adding $200 worth of Target shares every month (or $600 per quarter to save on commissions). Those are the numbers which can be easily calculated by dividend growth calculators. This illustrates dividend investing works but there is even more..
The figures discussed above don’t mention about what the actual balance in the portfolio would have ballooned to. It wasn’t included in the exercise as income was the goal. Working out the future portfolio is tricky as we don’t know what return the actual shares will produce over the next five years. However in 2012, Target’s price to earnings ratio was trading around the same number we have at present – around the 12 mark.
Target’s share price is down over 8% over the past 5 years. I think it would be a good exercise to see what $10k invested in January 2012 ( with the regular $200 monthly savings) would have ballooned to 5 years later through dividend investing. In fact, in January of 2017, the cash balance would have reached $27,414. This equates to a total annualized return of 10.03%. Therefore investing back in 2012 over 5 years would have still generated Tom roughly $100 a month in passive cash flow 5 years later even with a negative stock return over that period. Nice..
So my question is this to any potential dividend growth investor who wants to get his or her feet wet in the markets. Do these potential numbers (whether income or portfolio balance) give you the positive reinforcement necessary to stick to your plan when the going gets tough? Many times, investors over-complicate issues. Dividend growth investing is a proven strategy. By not pulling the trigger today, you may lose another 5 years – years you can never get back.. If Tom can make it to the 60 month mark and achieve his income goal, what do you think his chances are of going another 5 years, 10, 20, etc.
This is why the rich get richer. They live off positive reinforcement which essentially means their wins fuel more wins. Therefore even if you start from a low base, work out your numbers beforehand and keep them firmly in front of you. Once you start “feeling” your small wins (which could be imagined future ones), your dividend investing career will be well on its way to success..
Starting with the end goal in mind is a great way to start you off in your dividend investing career. Many investors get faked out by the sheer amount of time they believe they need to be invested to see any type of meaningful dividend income. Its all about discipline. Can you find an extra $50 a week ? If you can, you can build that passive income stream now. Sow seeds today so you and your family will be able to reap tomorrow. Great works are performed not by strength but by perseverance. So what are you going to do ?