IN 1995, Hayford Peirce, a science-fiction and mystery writer by avocation, sat down in a Tahitian café. He was 53 years old.
Peirce pulled out a legal pad and pen, and wrote down his list of stock investments. He had two groups: There were about a dozen high-yield but slow-growing stocks such as utilities and high-yield bonds.
The second group of stocks, seven in all, overlapped a little with the first. But these companies were comparatively high-growth, with a long history of increasing their dividends every year. All of them were well-known blue chips: Coca-Cola, General Electric, Johnson & Johnson, Kellogg, Merck, Pfizer, and Philip Morris. Philip Morris was Peirce's largest holding by far.
He predicted his high-growth portfolio would pay him about $14,000 in dividends in 1995 (the actual payout ended up being $14,267.50; the overall value of his portfolio back then was about $2 million). That would turn out to be 13.8% of his total income for the year, the rest coming from his low-growth "widows and orphans" stocks. "Let's see what would happen if we just increased this dividend payout by 10% every year for 30 years," he recalls saying to himself. Thus began his 30-year plan.
Fast-forward to 2017. It turns out, Peirce's dividend payouts have increased 8.54% annually over the past 22 years (see chart below). That's shy of his goal of 10% per annum, but it's been enough to make him a "dividend millionaire."
In aggregate, from 1995-2017, Peirce's dividends alone have paid him more than a million dollars—$1,148,079.84, to be exact.
That's $49,916.51 per year, on average.
Here's how he did it.
When Peirce eventually returned to his home in the U.S. back in 1995, he transferred his legal pad calculations to computerized spreadsheets. He's updated those spreadsheets annually for 22 years (and just completed the data entry for 2017).
His stated goal back then was to have his dividend income reach $250,000 in 2025. That would come on the back of a fairly concentrated investment portfolio. Today, it's comprised of 13 securities:
- Four common stocks: Altria, Johnson & Johnson, Philip Morris International, and Kinder Morgan.
- Eight master limited partnerships (MLPs): Alliance Resource Partners, Enbridge Energy, Energy Transfer, Enterprise Products, Hi-Crush, ONEOK Partners, Plains All American, and Suburban Propane.
- One convertible bond.
In 2017, this portfolio has paid him $86,611.76—62.2% of his total overall income from all sources. (Again, in 1995, it was just 13.8%.) Consider, too, that over the 22 years, Peirce has not added any principle to his stocks. Not bad.
Though he's unlikely to achieve his goal of $250,000 from dividend payouts in 2025, and indeed his payouts this year are lower than 2015, Peirce says his portfolio hasn't caused him any stress. "I'm old enough to have been through many cycles," he told me. "And my income [from all sources] had reached about $165,000 by 2015, which was far more than I really need."
His grounded, humble outlook on the markets seems to have allowed Peirce to stay the course and not excessively trade or churn his portfolio. When he swapped Inergy for another MLP, Hi-Crush, he said, "First it soared, and I told myself how smart I was. Then it bombed, and I told myself how stupid I was."
So it goes.
There's also his quip when I asked him what advice he'd give a 53-year-old reading about his story. "Do it just the way I did it back then, but stay away from Kinder Morgan," he joked. "Work at it harder than I did. I'm basically lazy."
His self-assessment doesn't seem quite right, though. Peirce has exhibited some of the most important traits an investor could possess:
- He made a plan. Peirce set a long-term goal—30 years! That puts him in the minority of American savers. According to the 2017 Retirement Confidence Survey, only 41% of people say they've ever even attempted to calculate how much money they will need to have saved so that they can live comfortably in retirement. Quoting the Survey, "Despite higher savings goals, workers who have done a retirement savings needs calculation are more likely to feel very confident about affording a comfortable retirement (77% at least somewhat confident vs. 52% at least somewhat confident for not doing a calculation)." Doing the math, and writing it down, matters.
- He kept score. Peirce paid attention to his portfolio, tweaking it along the way, and updating his spreadsheet annually. But—and this is key—he didn't trade or churn excessively, and therefore avoided taxes and trading costs that would dampen his investment income.
- He made his portfolio work for him. Peirce is wrapping up Year 22 of his 30-year plan, and has not wavered from the original intent—to provide sufficient income to live off of. Far from being wooed by can't-miss stocks, Peirce put his portfolio to work in service of his goals, and focused strictly on a steadily growing stream of dividend income. He's proof of Ben Graham's famous line, "Investment is most intelligent when it is most businesslike."
Of course, there's a built-in flaw to Peirce's plan. And it's his one major regret.
He'd have a lot more income today had he been able to reinvest all those dividends.
"My underlying problem has always been that I didn't have enough other independent income so that I could reinvest my dividends. If I could have done that over the past 22 years, I imagine I would be worth maybe $10 million today," Peirce said.
Let's call that the curse of the dividend millionaire.
Brian Richards owns shares of Kinder Morgan. The Motley Fool owns shares of and recommends Johnson & Johnson and Kinder Morgan. The Motley Fool recommends Alliance Resource Partners and Enterprise Products Partners. The Motley Fool has a disclosure policy.