Passive income is a stream of income that doesn't require you to work for it. Common sources of passive income are royalties (such as books or music), rental properties, and investing in stocks that pay dividends. You probably already guessed which direction I’m going, but stay with me. I tried the book writing path with my children’s book Bee the Investor; I’m still waiting for the passive income to roll in. I definitely don’t sing. I don’t think real estate is my thing because I don’t like doing home improvement projects or mowing the lawn. That leaves investing in companies that pay dividends. Now we’re talking! In fact, I can invest in companies that invest in real estate, let them fix the properties and collect the rent while I sit back and collect the dividend payments.

 

As a refresher, a dividend is when a company returns a portion of its profits to the shareholders in the form of a cash payment. The majority of companies make dividend payments on a quarterly basis. There are a few companies that pay dividends on a monthly basis. One such company is Realty Income (O). In the past you would have to wait for your dividend check to arrive in the mail. Nowadays, dividend payments are deposited electronically into your account.

 

Once the funds arrive in your account you have several options: 1) you can take the money and go out to dinner, 2) you can reinvest the money back into the company so you get a larger check next time, 3) you can invest the money into a different company. I love month ends because I like to go into all of our accounts and see how much dividend income came in. I track it all in my Google spreadsheet and post my totals for the month. My goal is to replace our current employment income with passive income. That’s how many people decide when to retire, but not me! I love what I do and don’t plan to ever retire.

 

If we are going to generate passive income, we need it to be a consistent and dependable source of income. Oh and I would also like to get pay raises each year too. The last thing we want to do is retire and have our passive income dry up or get outpaced by inflation. Look no further than an elite class of dividend paying companies called the Dividend Aristocrats. These are companies that are members of the S&P 500 (the 500 largest US-based companies) and have been paying and increasing their dividend payments consistently for 25 years. The Aristocrats are not the flashiest companies in the world, but they do provide consistent reliable dividend income. If you’re looking for dividend income, then this is a fantastic place to drop your fishing line. Here you’ll find companies like: Colgate (CL), Clorox (CLX), Procter & Gamble (PG), Coca Cola (KO), Pepsi (PEP) and Kimberly-Clark (KMB). I’ve added the full list of Dividend Aristocrats to the “Free Stuff” section of my website. Click the button below to see the full list of Dividend Aristocrats.

I prefer dividend paying companies, but I’m not an exclusive dividend investor. There are a lot of amazing companies out there that don’t pay dividends. Axon (AXON) & Chipotle (CMG) are the first to come to mind. It might be a while before we see these companies begin a dividend program because they have so many exciting opportunities to invest in. When companies like Axon and Chipotle can generate higher returns for shareholders by reinvesting their profits in the business, then I say go for it! At some point companies reach maturity and have limited opportunities to grow or they have excess cash that is sitting idle. In these situations it’s best to return the cash to shareholders and let them reinvest it themselves. Google (GOOGL) is still a growth company, but they just made the decision to start a dividend program. Their first dividend will be in September. It’s just $0.20 per share, a paltry 0.48% annual dividend yield. Chump change for sure, but I love passive income big and small. Google has a ton of cash and could easily pay a much bigger dividend, but I also want them to continue investing in their moonshot projects like self-driving cars, AI, and healthcare.

Imagine walking up to a vending machine and instead of finding a Snickers bar and a bottle of Pepsi, you find WD-40, duct tape and safety glasses. Well, these are a some of the things you might find when you walk up to a Fastenal (FAST) vending machine. Fastenal is an interesting company that I’ve been following for many years.

 

“Bob Kierlin’s (one of the company’s founders) original idea was to create self-service stores lined with fastener vending machines, but quickly pivoted to a more traditional outside sales-based service model.” They began selling very basic products (nuts and bolts), but it was a broad product line filled with every type of fastener imaginable. The Fastenal store had sales representatives that went out to call on local businesses and develop relationships. Once a customer placed an order, Fastenal delivered the order right to their place of business. Sales representatives were an integral part of the business model because they developed relationships with all the local businesses. They eventually saw that their customers had needs beyond fasteners such as electrical tape, safety gear and WD-40. Fastenal began stocking their store with whatever supplies local businesses needed and would deliver directly to their business either that day or first thing in the morning. Fastenal was so focused on servicing its customers that it began manufacturing non-standard parts to meet its customer’s needs. This was a valuable service because customers could make one call and get everything they needed from one vendor. Fastenal expanded quickly by adding local branch stores supported by distribution centers. The distribution centers allowed the local branches to stock the most frequently requested items and have the ability to get lower volume items from the distribution center overnight and deliver to their customers in the morning.

 

Today Fastenal is one of the largest industrial suppliers in the US. Their culture is deeply rooted in servicing their customers and providing supply chain expertise to its customers. The real genius of Fastenal is how they’ve integrated and partnered with their customers. Since they have expertise in supply chain management and have a very broad selection of supplies, they offer a service called “On-Site.” This is where they partner with their customer and set up a custom supply chain inside a customer’s facility. For example, take a car manufacturer. Fastenal would get space in or near the manufacturing floor. They would source all the parts, manage the inventory, and build custom parts if need be. It’s a win win. Fastenal uses their expertise in managing supply chains so the customer can focus on designing and building the best cars. Being this integrated into the customers business makes it difficult for the customer to one day switch to a new vendor.

 

Let’s get back to those Fastenal vending machines with WD-40 and safety glasses. Fastenal found that customers tend to order the same supplies over and over again. Remember the founder’s original idea of having a store lined with vending machines?  Well, they started rolling out vending machines to their customers' places of business. If they need a pair of safety glasses all they do is go to the vending machine, punch in a department code, and the safety glasses would be dispensed like a Reese's Peanut Butter Cup. The department would be billed for the safety glasses and Fastenal sales representatives would restock the vending machine when it got low on inventory.

 

Fastenal’s relentless focus on serving its customers has translated into a fantastic financial track record and a very steady business. Due to the strength of their business they are able to reinvest in the business and return a percentage of the profits to its shareholders in the form of a dividend. In fact, they have been rewarding shareholders with a growing dividend payment for 25 years making them a Dividend Aristocrat. This is another wonderful business that I’ll be putting in the Spotlight Stock Reviews rotation this fall.

 

I’ve been looking high and low for opportunities this week, but I just don’t see anything that excites me. There are a lot of companies I’m interested in, but very few trading at prices I’m interested in. I decided to let the funds continue to accumulate in the Itty Bitty Account, bringing the cash on hand to $350. It could be worse, I could be Warren Buffett sitting on $280B in cash. Warren could possibly be the most patient guy in the world. In 2008 his patience was rewarded during the financial crisis when banks and other companies lined up outside his door looking for cash infusions. Warren graciously answered the door and offered to loan them money at 10% interest plus stock options to buy their stock at ridiculously low prices if they survived and recovered. Bank of America was one such company that took his deal. Warren earned 10% on his money and once the smoke cleared he exercised his options to buy their stock for a pittance. Warren is patient like a cat waiting to pounce outside a chipmunk hole. Eventually the chipmunk emerges and the cat’s patience is rewarded.

That’s the question everyone is asking. The Federal Reserve (the governing body responsible for managing our economy) will release their decision next month on Wednesday, September 18th. The CME Group’s Fed Watch-Tool is showing a 75.5% probability of a quarter point decrease and a 24.5% probability of a half point decrease. Looks like we’ll see some kind of reduction in interest rates. The stock market has been in a holding pattern waiting for a rate cut. Generally the market responds positively to rate cuts and the market should push higher. Personally, I’m enjoying the higher interest rates on my savings. I wouldn’t mind seeing interest rates climb a little higher. It seems like we just got a respectable interest rate on our savings and now they are starting to take it away. Oh well, we’ll see what interest rates look like after the event and adjust accordingly. In the meantime, I’ve added a link to the Fed Watch-Tool on the “Free Stuff” page of the website if you want to keep tabs on the U.S. interest situation.