Several years ago, I opened a stock brokerage account at a reputable firm. I deposited a few thousand and then, as a natural result of exploring other interests, I let it roost.
Month after month a statement from the broker would show up in my inbox. In it, the only activity would be the broker’s collection of monthly administration fees and the interest earned on the account balance.
The interest earned would offset the fees by a modest margin, fostering steady growth on the original deposit. This is normal of interest earning accounts that carry a decent positive balance; after all, the interest would compound monthly whilst the fees were generally fixed over long intervals.
With increased curiosity, I closely watched this mundane trend of income from a financial asset (when held in generous sums) running, almost in leaps and bounds, further ahead of its fixed costs.
Mundane as the trend was, it lead to my belief that its likely, in the long-term, my spending costs will be surpassed by income earned from the corporations wherefrom those costs originate, provided I own sufficient dividend earning shares and the corporations have some measure of financial soundness.
In other words, if chunks of my monthly budget is used to buy from a chosen corporation, shouldn’t I (where viable) try to own as many shares of that corporation as possible so that at some point the income renders my buying cost-free, so to speak?
Approaching it more broadly, if I generally spend in a particular industry, shouldn’t I have exposure to some of the corporations in that industry, for the cited outcome?
Convinced I was on to something, I got carried away…If I considered myself poor, wouldn’t this, in the long-term, bring an end to my poverty, or at least break the cycle for my family and the generations to come?
The latter notion may be somewhat far-fetched but I fantasised about the possibility and tranquillity of absolute financial freedom and its quietening effect.
After buying shares and earning dividends from the corporations of our patronage, the Nkuna Groceries Project www.nkunagroceries.co.za seeks to discover the point at which we’ll deem our historic grocery purchases, cost-free. It’s a public experiment and a practical response to the questions I’ve been asking myself.
The project is virtually a journey of a thousand miles and, to accommodate our shoestring budget and any interested persons, we started at the laughable first step.
There are two project-owners, the principal and the assistant. Each invests up to 20% (total 40%) of our past grocery spend in the shares of grocery corporations at which we buy from.
Shares are purchased from time to time as grocery bills accumulate: We pick dividend payers that demonstrate some level of good health.
The nature of the project drives the grocer into an unofficial, but unavoidable ‘cash-back’ policy with the customer as a result of the cash dividend.
For interest’s sake, if I wanted an immediate 100% ‘cash-back’ on the latest dividend from Pick n Pay Stores Ltd (a corporation we own) the point of cost-free purchases would roughly be at the convergence of these figures…
Our Groceries Costs: R26 419.85, from May 2016 to May 2017
Latest Dividend per Share: R1.464, final dividend with a record date of 9 June 2017
Estimated After-Tax Dividend per Share: R1.171
Minimum Number of Shares Required: 22 562
Share Price (close): R60.75, day before last day of trade in order to earn dividend
Minimum Cost of Shares excl. Fees and Charges: R1 370 641.50
Estimated Dividend: R26 420.10
We, unfortunately, didn’t have R1.37 million disposable to buy the requisite number of shares to achieve instant gratification as far as cost-free groceries (using this method) are concerned; we must, therefore, endure the long haul.
Since dividends come after a period of inflationary corrosion, it would make sense to buy more shares to achieve inflation-adjusted cost-free purchases.
The chart below shows the project’s gross totals since inception in May 2016 to June 2017.
Things are still embryonic and although it seems an impossible feat looking at current figures, I expect a single financial period’s inflation-adjusted Dividends Earned (bar) to wipe-out total Groceries Costs (bar) at some point in a generation or two, if not sooner.
Until then, any Dividends Earned (bar) are referred to as unofficial partial cash-backs, as seen with the latest scanty pre-tax dividend of R51.63; an insignificant cash-back against the total Groceries Costs (bar) of R26 990.87.
The recorded dividend is not adjusted for inflation and, at the moment, it’s completely consumed by brokerage costs.
I make no mention of capital growth from rising share prices; this, together with adequate Dividends Earned (bar), would raise the Portfolio Value (bar) above our capital Contributions (bar) at the broker. After transaction fees and charges, a liquidation of all our 32 shares now, would result in a loss based on the difference between Contributions (bar) and Portfolio Value (bar).
It’s all good and well if share prices rise, but our generational outlook silences the noise of price fluctuations. Plummeting or “bargain basement prices” are more favourable for our downward cost averaging. Besides, this is largely a contest between costs and dividends.
We do, however, only intend to sell shares for a princely profit.
I admit, I wouldn’t off load my other holdings to make way for this operation. This is nothing more than a calculated manoeuvre in my investing playbook.
As a value investor at heart, this assignment forces me to buy shares outside my criteria of comfort. In times of adversity, these shares may fold, therefore, this operation will always be the bridesmaid never the bride.
There is, however, and you may have sensed, this stern capitalist thought hidden between the lines: Why should I contribute to the other’s wealth by circulating my money – of my potential future wealth – for the other’s short-term wares that carry limited long-term benefit for me?
I want to deal with this thought in more detail later.
Vongani is a passionate self-taught value investor at large who owns a proprietary investing company, Nkuna Equity (Pty) Ltd. He graduated from advertising school with a diploma in copywriting, but never used his qualification in industry. Instead, his fascination with the stock market lead him to join commodities trading companies such as Trafigura where he learned more about the commodities and financial markets over and above his own informal learning initiatives. He created the Nkuna Groceries Project that seeks to promote one’s investing habits by taking advantage of one’s spending habits.