In 2022, eleven of the families that we work with sold their dental practices. In total they deposited (or will be on closing) over $60,000,000 into their investment accounts with our firm. As you can see, that’s an average of over $5,000,000 per family.
The goal for most of these dentists is to live off the dividends of their portfolio - and not to ever eat into their hard earned capital. To illustrate how that will work we will use the historic cash flows of our Live Off Your Dividends platform (started in 2013).
As you can see from the chart above, if they had invested the $5,000,000 in our firm’s dividend platform at the inception in 2013, by the end of 2021, the dividend income from the portfolio would have more than doubled from $190K to $390.6K. Furthermore, if they had lived solely from the dividends, the capital would have appreciated to $8.9M.
How we do it
To live off your dividends, we invest in a portfolio of high quality companies that pay a stable and growing dividend income stream, sufficient to fund our client’s lifestyle. As the dividend income covers their spending needs, the capital invested in the underlying stocks can continue to grow.
Our process starts with quantitative models, which reduce our investible universe to a more manageable level by screening for size, growth rates, debt levels and profits. The next step is where the rubber hits the road, using a“4-M” analysis. This stands for Macro, Management, Margin and Moat. Each factor is an important part of the investment process and, when put together, form our thesis for what a high-quality company should look like.
Whenever possible, we want to be investing in businesses and industries that have the “wind at their back”. To that end, we look for investment themes that will benefit certain sectors of the economy more than others. These themes must have a degree of predictability and staying power.
How a company is run is arguably the most important factor in our analysis. Businesses are only as good as the people who lead and operate them. The best new widget, smartphone app, oil well or gold mine can quickly be ruined by bad management. For this reason, we study the people in key positions at the companies we invest in, looking not just at their resumes and past successes, but also how they treat shareholders and their capital.
This topic is shorthand for profitability. Different business sectors within the economy have different levels of profit, but by owning the businesses that consistently generate above average returns within their peer group is a great way of identifying high quality companies. To this end, we are not looking for the company with the absolute highest return on a year-by-year basis, we are looking for those companies that consistently are at the higher end.
The idea of an economic moat is one that has been popularized by world famous investor Warren Buffett. Just as the moat around a castle defended it from enemies and rivals in medieval times, an economic moat is a key attribute(s) that protects a business from competitors, new entrants, and technological advances. In an era of technological disruption, owning companies with strong and wide moats are more important than ever for investors.
Dividends are also more tax-efficient than other types of passive income. For example, $150,000 in dividend income nets out to $140,000 after-tax, a full $20,000 more than the same amount earned as rental income.
Finally, the benefit of investing in companies with growing dividends is that we expect the passive income stream to grow over time, providing our investors with protection from inflation. In short, the “Live Off Your Dividend” platform attempts to provide a growing and tax-efficient income stream while continuing to grow your savings.
In an era of technological disruption, owning companies with strong and wide moats are more important than ever for investors.
To learn more, visit our website www.mcnultygroup.ca or sign up for our monthly videos at firstname.lastname@example.org.
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Mark McNulty is a Senior Wealth Manager with McNulty Group of Raymond James Ltd., a firm responsible for managing $500 million of retirement savings for Ontario dentists. In addition to writing two books on retirement planning for dentists, Mark is the creator of the new video series, “How smart dentists sell their practices and win in retirement”. In 2021 Mark was recognized by The Globe and Mail as one of Canada’s top wealth managers. For more information, visit www.mcnultygroup.ca