I bought another tiny lot of Commonwealth Bank shares (ASX:CBA) this month and in this post I’ll explain why. It was a tiny lot as I’m still broke and destitute but I plan to buy shares every month, even if it’s the minimum amount allowable. The important thing for me is to have more income producing assets than I had last month and to do this every single month!
This is my long term, forever stocks portfolio that I plan to hold for 50 years unless the company changes course or I move gracefully into the afterlife (after a very long and ridiculously fulfilled life). So anything I buy will have a proven track record and will probably be still trading in 10 or 20 years time. Exclusions include companies involved in mining, oil and gas, gambling, airlines, and a lot of fad-type technology as I just don’t know if they’ll be around in 10 years time and/or they’re just too risky.
I also want solid dividend paying companies that are growing and can be relied upon as the number one goal for this portfolio is to cover all of my living expenses. So this will be a passive income stream that grows faster than inflation and can support me indefinitely. The first goal is to have a million dollars worth of quality stocks paying fully franked dividends of about 5% which would give me roughly $50,000 per year. Obviously I have plenty of work ahead of me as my portfolio currently sits at about $1,400!
How I pick Stocks for my Freedom from Slavery Fund
My Freedom From Slavery Fund is all about producing an almost completely passive income that increases over time and allows me to do whatever I choose, whenever I choose, wherever I choose, for as long as I choose. So if I never want to work another day in my life then I don’t have to, yet I would still have plenty of income to live the good life.
Which means all the stocks chosen for the Freedom Fund will be solid income earners, their dividends are increasing over time, they’ve been around for at least ten years, and the industry they’re in looks secure. If I can get a 10 percent total return each year from a company then I’m a happy man.
Why I Like the Commonwealth Bank of Australia Shares
The Commonwealth Bank has been around forever and is one of the best performing of the largest 4 banks in Australia. They stick to what they know best and they’re the best at it in their market. CBA has been around for more than 100 years and I’m guessing they’ll be around for 100 more.
I don’t concern myself with too many numbers, details, or reviews on stocks. Here’s a few things I do look at..
P/E Ratio: Price / Earnings ratio relates to the stock’s earnings and the share price. If it’s too much higher or lower than other companies in the same sector then I’ll be cautious and investigate more.
CBA’s P/E Ratio is currently 14.50, the Australian market is 17.50, and the banking sector is 13.49.
Dividend Yield and Franking: The dividend yield of a stock is the amount of profit paid out to investors each year. The franking refers to the amount of tax paid on the dividend (at the Australian company rate). So for my Freedom Fund I look for a company paying a 5% dividend each year and I like it to be 100% fully franked, which means 30 percent tax has already been paid on your dividend income. So, depending on your personal tax rate, you may or may not have to pay tax on this income.
CBA’s Dividend yield is currently 5.3% and they have 100% franking.
Growth: Basically I want everything good growing every year. Steady growth over a long period of time is what I look for. Sure there are growth companies out there growing everything at 50% a year but they can also just as quickly disappear. Here’s some growth numbers for CBA..
10yr | 5yr | 1yr | 2yr Forecast | |
---|---|---|---|---|
Sales | 4.9% | 3.9% | 2.3% | |
Cash Flow | 6.1% | 11.7% | 82.6% | |
Earnings | 5.5% | 5.2% | 2.6% | 5.1% |
Dividends | 5.5% | 5.2% | 2.1% | 1.7% |
Assets | 4.9% | 4.7% | 2.7% |
Total Shareholder return / Average Annual Rate : If a company has a negative return over a ten year period then I run from it. Ten years makes a pattern in my opinion. My aim for the Freedom Fund investments is to have a 10+ percent return, which includes capital growth and income combined.
CBA’s total annual return is: 1 year 18.9% / 3 years 5.6% / 5 years 14.1% / 10 years 10%
Conclusion
There’s much more to know about stocks but I like to keep things simple. I’m not into trading or chasing red hot tips or listening to the talking heads on TV trying to sound important. All I want is an investment with a good history and hopefully one with a great future. Steady dividend paying stocks with increasing assets and profit. Which is why I’ll be investing in CBA and reinvesting all my dividends back into it until I reach at least $100,000 worth of shares or 10 percent of my goal of a $1 million dollar share portfolio.
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