Dividend Investing Primer.

Daily Plan 2.19.25

Hey traders-

This post is going to be on a little different cadence than what we normally are used to. I want to use this post to articulate my thoughts on an ideal portfolio construction for the average person. This outlines some of the concepts I use for myself, as an instance. In particular, I am going to do a deeper dive on some of the common fallacies of Dividend investors as well as outline some advantages of a strategy like dividend investing.

This is going to be a longer post for serious income oriented readers and if you want to get to the levels for tomorrow you can skip to the last section.

Before going any further, I want to put a disclaimer first that none of these concepts may apply to you or any one else, but they make sense to me personally. A key thing to wrap your head around when it comes to the markets is that it is a game like no other game. This is an unstructured game with very few rules, if any. The market can do anything at any time. There is no formal beginning and no formal end.

You have tens of millions of participants in the market. For sake of brevity and organization I group them into 3 broad groups- 1) those seeking capital gains 2) those seeking capital protection & income and 3) speculators and hedgers.

In this newsletter, for a large majority of times we talk about #1 and #3 above. That is bread and butter. This is what has given us stocks like PLTR at 6, SMCI at 18 dollars, NVDA at 110, INTEL at 19 bucks in recent months and so on. We don’t spend a lot of time talking about capital protection and income.

The main reason for this is time frames above anything else. If you are a younger reader, capital protection when you are in your 20s, or even 30s can be counter productive for most. If I am employed with a job I love, if I enjoy doing what I do and I am reasonably confident that I can continue to do what I do for 20-30 years or more, I want to focus on capital appreciation rather than income. Capital protection strategies inherently will offer slower growth of capital the way they are deigned.

However, when I am in a phase of life when I am ready to be more hands off, may be I am retiring next 5 years, I want to shift my focus on the capital that I already have and protecting significant downside and instead rely on steady income from my capital.

This is the whole spiel of a lot of these dividend investing type strategies. However the more I dig into it, the more I find that some of these strategies are not without significant risk. I also note that most dividend investing from retail perspective is focused on a very narrow set of options which are really your value type stocks or synthetic options. The pond is larger than that.

For example, a very common fallacy of dividend investing is that higher the dividends, better it is. This could not be farther from truth. Well lemme put it this way- this could or could not be the case, but mostly it is a trap. When Walgreens was at 40 bucks, I think it paid 7% in dividends. Today it pays 9% in dividends but the stock sits at 11. If you liked WBA for its dividends at 40, then you must love it at $10! However for anyone who bought this at 40, will now need atleast a decade of dividends to recover the capital lost in stock deprecation assuming it does not go to insolvency first.

The other common dividend fallacy is that the dividends are a bonus. They are not. Every time you get paid a dividend, the stock you own drops a little. You have to look at the dividend investing in terms of total returns (dividends plus capital returned).

The third main fallacy or rather pitfall of standard dividends is taxation. A lot of unscrupulous dividend firms like the brand new ones copying leaders will return your capital back to you every quarter or every month and call it a dividend. These dividends they claim are treated more fairly under tax rules, with a 60 to 40 long term to short term gains mix. This is often not the case. Read your 1099 carefully. Always consult a competent CPA. These dividends could be taxed as return on capital and may burn you on tax day.

So, with all these potential pitfalls and traps, are dividends a really bad idea to be avoided at all costs?

No.

From my personal perspective, dividends have a place in my portfolio but I will definitely not plough all of my portfolio in dividends. I will also construct my portfolio little differently than run of the mill dividend investing experts.

For one, I will always have 10 to 20% of my capital set aside for more “speculative” trades. This could be anything. This could be day trades, 0DTE options, this could be futures, this could be investing in “risky” stocks like SMCI at 18 when everyone said it is headed to bankruptcy. This is purely speculative part of my account- you could say this is a start up for me, a risky endeavor where I could loose all my money without decimating my account. High risk, high reward.

Then I want to have a large pie of my portfolio in solid growth companies. These companies have a strong MOAT, they are growing revenues and earnings by 15% or more year over year, preferably for last 5 years. I can do it because at this stage in my life, I don’t need this money any time soon. I have atleast a 30+ year of time horizon. In this sort of part of my portfolio, I am aiming for results similar to stellar growth stocks like META, NVDA, PLTR, AAPL, TSLA etc.

Now where these dividend plays come into picture is that I have a part of my account now dedicated to income generation. When I am younger this is a smaller pie. As I get close to my desired financial goals, in terms of my account size, this pie gets larger so one day it can pay off all my bills as I sleep. Remember, regardless of what dividend strategy you pick, its growth will be lesser than that of the leading growth stocks. Another way to think of a good dividend strategy is that it is like owning a rental property without the hassle of tenants, without the worry of ever increasing property taxes, and without the hassle of maintenance and repairs.

If you are with me thus far, think of your money as a tool. It is a tool to make your life easier, not to make it even harder than what it is right now. Do you really wanna lay sleepless all night thinking what that 100 contract 0DTE lotto is gonna do to your account if market drops 3% tomorrow? I don’t. I don’t like that kind of stress.

Personally I will figure out how much passive income do I want? Do I want to pay off my rent every month. Do I want my dividends to pay off my property taxes each year? You get the gist.

Once I have that number, let us say my property taxes are $2000 a month, I now need to figure out how much of my account I need to allocate to the income/dividend strategies.

A lot of dividend gurus will profess their love for SCHD. So let us use SCHD as an example to pay me this $2000 each month. Rough math, at 3.5% yield or so, we are looking at about $700000 invested in SCHD to bring me home $2000 each month. A quarter million dollars. I do think however that an ETF like SCHD is better than me going out there and finding individual dividend companies. I let them do all the work, they include momentum and filter out bad fundamental companies and in return I pay them 30 bucks a year on a 100K investment. Not a bad deal.

What are some other options out there?

The internet experts also vouch for the likes of JEPI and JEPQ as great income producing candidates. Let us take example of JEPQ.

At 10% yields, we are looking at about $250000 invested in JEPQ to earn me $2000 a month. Essentially I have invested just over 200 Grand in JEPQ, and I am earning 2000 a month for doing nothing. Sounds like a great deal to me. A lot better than SCHD, yes?

But is it?

The downside of any of these ETFs is two fold. One, they have a 20 times higher fees than SCHD. Second, once the general market turns, they will take it on the chin. They will loose a lot, but in case of JEPQ, on paper, it will lose less than Nasdaq. But more than SPX.

Based on the feedback I got from folks, and other resources, some of these products have a black box which is harder to understand. This is their MO, their key ingredient which makes them competitive.

These type of ETFs have been around only a handful of years, so I don’t know how they will perform in a proper bear market. But for what it is worth, if I have a 10-20% of my portfolio in such strategies, let us say Nasdaq drops 30% tomorrow, and these ETFs are down 20%, personally, I am ok with it. Since my goal is income generation from this part of my account. And that income will go up, higher the volatility goes due to how these ETFs are constructed. Now as the market bounces from lows, these type of ETFs will not capture the entire upside. Let us say we have a proper 50% bear market in next few years, then these ETFs could take even longer to recover their pre bear market peaks. These are all downsides as well as upsides of such assets which I need to be cognizant of as an investor. So I am sharing my views on what I have learned thus far.

While the retail loves SCHD and the likes of JEPQ, JEPI, it shies away from some other similar ETFs which are lower cost, theoretically have much lower risk, but the institutions love them. These are your bank loans, aka credit markets for companies which are deemed too risky for banks to lend to. I touched upon one such name from Blackstone in my weekly newsletter which pays 10% and has no fees. There are countless other examples, for instance SRLN is one of the most liquid ETFs out there for these type of loans.

So on paper, these are “Secured first lien loans” . This means two things. One, the loan is actually secured against collateral by the debtor. So if you default, the lender can sell off your assets to recoup the loses.

The other aspect of this is that the lender is first in line to get their loans back in case of a default. Think of it this way- if you are a shareholder of WBA (Walgreens), you are the last in line. You are in the last row in a crowded 12 hour flight sitting right next to the lavatory in case of a default. If you own WBA bonds, you are in business class. But if you are a first lien secured lender to WBA, you are upfront in the first class cabin. So in theory, in case of default, these loans literally are the most secure form of investment in that company.

On the bond side of the house, the money markets, though not strictly a bond, is still paying 4.25% and is almost risk free. Some of these corporate high yield bonds like SPHY are very liquid and have a decent track record going back more than 10 years. Their yields are almost equal if not more to some of these equity high yielding ETFs.

If I am investing 10% of my account to dividend strategy, I include each one of these asset types in it, not just a value stock heavy SCHD, or a growth heavy covered call like JEPQ or bonds and credit. May be sprinkle in some REIT like O 0.00%↑

Generally in such an environment where we are with inflation higher for longer, potentially economy still far from 2008 like distress, credit and higher yielding corporate bonds can also be an offset against an equity bear market which may hit the equity ETFs and SCHD the hardest. If you take a combination of SCHD, JEPQ, JEPI, bonds and secured credit, the average yield can be around 6-7% which is almost double that of a strategy only employing SCHD. So for the same example above, where I need $2000 a month to pay for some of my expenses, this strategy will need about $275 K invested to give me about $2000 each month.

A 275K rental property that pays me 2000 a month without having to deal with noisy tenants? Sign me up.

A Dividend investor

Again, at end of the day, this is an example and my personal take on how I view all this hype about these dividend income strategies. So next time you want to splurge on a 100K car that will depreciate 60% in less than 5 years, consider that 100K invested in a high yield mix of assets can potentially pay you $700 every month. While you sleep. Doing nothing.

May be you can use this 700 a month to experiment and perfect your 0DTE strategies and then turn this 700 into 7000 on that 50 cent 0DTE that goes to 5 dollars! You do 10 of these this year, on Christmas you gift yourself a brand new BMW, paid in cash rather than paying the bank 10% in interest. The possibilities are endless. Until this happens, consider driving a Toyota. Do anything it takes to earn 10% yield, rather than pay the big banks 10%! They don’t even like us.

Some food for thought there.

Levels for tomorrow

As far as the levels go for tomorrow, this market is holding these weekly levels remarkably well. On top of that there was really not much to read into the tape from today other than that last hour massive ripper from orderflow support.

You are now balancing at top of the range with a handful of points from all time highs.

If you are super bearish here, you like to see this market give up the weekly support level near 6100-6105. We are at time of this post trading 6144.

Scenario 1: Unless we begin to see some trades below 6106, this market I think is gearing to head higher into 6200s and could be supported if dipped into 6100.

Scenario 2: My edge case tomorrow will be below 6100. If you are wanting to see some sell off down into 6062-6063, you want to see us give up 6100 and then stay below it.

~ tic

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