In my investing, I try to put money to work every single month. I am extremely lucky that I have never had any material amount of debt, that I have been able to save large portions of income, and allocate them into dividend growth stocks. Every time I purchase shares in a company, I view it as a seed I plant, which will one day bear fruit for me. I will use this fruit picked from the tree in my retirement to live off of. I do not believe cutting the tree down, in order to buy fruit with the proceeds, to be the most sustainable retirement plan. There are three types of “seeds” I plant in my dividend portfolio, which are based on three different types of dividend yield and dividend growth trade-offs.
I usually purchase shares in companies I like slowly, over time. If my target allocation is $10,000/company, and I buy $1000 at a time, it might take me several years of purchases in order to reach this size. Add in the fact that there are usually 15 – 20 companies I find attractive at a time, and you can see that building a position takes time. I buy slowly because I want to be able to deploy more funds in good quality companies if they sell-off. When I purchase shares at lower prices, this means I am able to buy more future dividend income for a lower price today. I would love to see lower prices on the companies I bought this week.
Speaking of which, I initiated positions in the following two companies after Memorial Day:
The TJX Companies, Inc. (TJX) operates as an off-price apparel and home fashions retailer in the United States and internationally. It operates through four segments: Marmaxx, HomeGoods, TJX Canada, and TJX Europe. TJX Companies is a dividend achiever, which has raised dividends for 18 years in a row. The company has managed to deliver a 17.10% average increase in annual EPS over the past decade. The annual dividend payment has increased by 25.30% per year over the past decade, which is much higher than the growth in EPS. Despite the fact that I typically require a higher initial yield, I like the growth story and the growth prospects behind this company. This is why I initiated a small position in the stock at around 20 times forward earnings and a dividend yield of 1.30%. Check my analysis of TJX Companies for more details.
Ross Stores, Inc. (ROST), together with its subsidiaries, operates off-price retail apparel and home fashion stores under the Ross Dress for Less and dds DISCOUNTS brand names in the United States. It primarily offers apparel, accessories, footwear, and home fashions. Ross Stores is a dividend achiever, which has raised dividends for 21 years in a row. The company has managed to deliver a 22.80% average increase in annual EPS over the past decade. The annual dividend payment has increased by 25% per year over the past decade, which is much higher than the growth in EPS. I believe that Ross Stores is slightly riskier than TJX, since it doesn’t’ have the scale and depth of connections. However, it has more opportunities for growth due to lower number of locations domestically and the fact that there are no international locations as of yet. In addition, it is a more likely takeover candidate than a TJX. I initiated a position at 19.50 times forward earnings and a yield of 1%. Check my analysis of Ross Stores for more details.
The companies I bought above are examples of the low yield and high dividend growth type of company I invest in. I am hopeful that those seeds will turn into mighty oaks in the future. I would not be hesitant to add up to those small positions if they start decreasing in prices. As usual, my holding period will be forever, unless dividends are cut, there is material deterioration in the business, or shares become terribly overvalued relative to their prospects. The other risk that most long-term dividend investors have suffered from is when a quality company you own is acquired by someone else. The premium price is bittersweet, because it usually discounts the business relative to profits it could have generated for the patient investor.
Full Disclosure: Long ROST and TJX
Relevant Articles:
- Ross Stores (ROST) Dividend Stock Analysis
- TJX Companies (TJX) Dividend Stock Analysis
- Types of dividend growth stocks
- The Tradeoff between Dividend Yield and Dividend Growth
- Lower Entry Prices Mean Locking Higher Yields Today
Thursday, May 28, 2015
Friday, May 22, 2015
TJX Companies (TJX) Dividend Stock Analysis
The TJX Companies, Inc. (TJX) operates as an off-price apparel and home fashions retailer in the United States and internationally. It operates through four segments: Marmaxx, HomeGoods, TJX Canada, and TJX Europe. TJX Companies is a dividend achiever, which has raised dividends for 18
years in a row.
The most recent dividend increase was in March 2015, when the Board of Directors approved a 20% increase in the quarterly dividend to 21 cents/share.
The company’s largest competitors include Ross Stores (ROST), Kohl’s (KSS) and Target (TGT).
Over the past decade this dividend growth stock has delivered an annualized total return of 20.40% to its shareholders. Future returns will be dependent on growth in earnings and starting dividend yields obtained by shareholders.
The company has managed to deliver a 17.10% average increase in annual EPS over the past decade. TJX Companies is expected to earn $3.30 per share in 2016 and $3.71 per share in 2017. In comparison, the company earned $3.15/share in 2015.
Earnings per share have also been aided by share buybacks. The number of shares outstanding has decreased from 983 million in 2006 to 704 million by 2015. I like the fact that management is focused on delivering excess cashflow and then sharing that cashflow with shareholders in the form of higher dividends and share buybacks. While I would prefer special dividends to buybacks, I will take what I can.
Future growth in earnings per share will be driven by opening new stores, increasing same store sales, increasing margins, lowering costs and repurchasing shares.
I like the fact that TJX has a better scale in number of stores, purchasing agents and contacts, relative to its close rivals. This could translate into better bargaining power with suppliers, lower prices and high margins. The company has 900 buyers and 17000 vendors it works with.
The company sells branded quality fashion at discounted prices. It has a wide demographic reach and global sourcing capabilities. The type of company like TJX can prosper even during a difficult economic conditions, since it offers discounted branded fashion products to consumers.
Same store sales will be increased by attracting more traffic, expanding e-commerce, and continuing to provide a great assortment of great values on fashion, brands and quality. Loyalty programs and increase in marketing can result in retention of customers and attracting new ones to the stores. Maintaining a low inventory turnover rate of less than 2 months can also help in reducing markdowns and ensuring that a fresh new inventory assortment is available for repeat customers.
The company has 3389 stores as of fiscal year 2015. This includes 2094 TJ Maxx or Marshal’s stores, 487 Homegoods, 368 TJX Canada and 440 TJX Europe. TJX Companies expects that the number of stores under its umbrella could eventually reach 5475. The projections include 3000 TJ Maxx or Marshal’s stores, 1000 Homegoods, 500 TJX Canada and 975 TJX Europe. The company is opening its first stores in Austria and The Netherlans in 2015. While store saturation in the US is a potential risk, international expansion could bring a source of growth for years ahead. As international operations expand their scale, this could aid operating margins and profits. The downside to international operations is that a larger portion of TJX profits will be impacted to short-term fluctuations in the US dollar.
TJX Companies is also focusing on expanding its e-commerce platforms such as tjmaxx.com and sierratradingpost.com in the US and tkmaxx.com in the UK. Further sales growth could be obtained by leveraging the brick and mortar and online platforms. An example includes allowing customers to shop online and pick up items in stores.
I really like the fact that TJX Companies is dedicated to sharing excess cashflows with shareholders in the form of share buybacks and dividends. I would actually prefer more dividends to buybacks, but would take what I can get.
The annual dividend payment has increased by 25.30% per year over the past decade, which is much higher than the growth in EPS. Future growth in dividends will likely exceed growth in earnings per share given that the payout ratio has room for expansion.
A 25% growth in distributions translates into the dividend payment doubling almost every three years on average. If we check the dividend history, going as far back as 1997, we could see that TJX Companies has managed to double dividends almost every three and a half years on average.
In the past decade, the dividend payout ratio has increased from 12.70% in 2006 to 21.30% in 2015. A lower payout is always a plus, since it leaves room for consistent dividend growth minimizing the impact of short-term fluctuations in earnings.
TJX Companies has also managed to grow return on equity from 37.90% in 2006 to 52.20% in 2015. I generally like seeing a high return on equity, which is also relatively stable or rising over time.
Currently, TJX Companies is overvalued at 20.60 times forward earnings and yields 1.20%. Despite the fact that I typically require a higher initial yield, I like the growth story and the growth prospects behind this company. I may consider initiating a small position in the stock on dips below $66/share.
Full Disclosure: None
Relevant Articles:
- Ross Stores (ROST) Dividend Stock Analysis
- The Value of Dividend Growth
- The work required to have an opinion
- The Value of Dividend Growth
- The Pareto Principle in dividend investing
years in a row.
The most recent dividend increase was in March 2015, when the Board of Directors approved a 20% increase in the quarterly dividend to 21 cents/share.
The company’s largest competitors include Ross Stores (ROST), Kohl’s (KSS) and Target (TGT).
Over the past decade this dividend growth stock has delivered an annualized total return of 20.40% to its shareholders. Future returns will be dependent on growth in earnings and starting dividend yields obtained by shareholders.
The company has managed to deliver a 17.10% average increase in annual EPS over the past decade. TJX Companies is expected to earn $3.30 per share in 2016 and $3.71 per share in 2017. In comparison, the company earned $3.15/share in 2015.
Earnings per share have also been aided by share buybacks. The number of shares outstanding has decreased from 983 million in 2006 to 704 million by 2015. I like the fact that management is focused on delivering excess cashflow and then sharing that cashflow with shareholders in the form of higher dividends and share buybacks. While I would prefer special dividends to buybacks, I will take what I can.
Future growth in earnings per share will be driven by opening new stores, increasing same store sales, increasing margins, lowering costs and repurchasing shares.
I like the fact that TJX has a better scale in number of stores, purchasing agents and contacts, relative to its close rivals. This could translate into better bargaining power with suppliers, lower prices and high margins. The company has 900 buyers and 17000 vendors it works with.
The company sells branded quality fashion at discounted prices. It has a wide demographic reach and global sourcing capabilities. The type of company like TJX can prosper even during a difficult economic conditions, since it offers discounted branded fashion products to consumers.
Same store sales will be increased by attracting more traffic, expanding e-commerce, and continuing to provide a great assortment of great values on fashion, brands and quality. Loyalty programs and increase in marketing can result in retention of customers and attracting new ones to the stores. Maintaining a low inventory turnover rate of less than 2 months can also help in reducing markdowns and ensuring that a fresh new inventory assortment is available for repeat customers.
The company has 3389 stores as of fiscal year 2015. This includes 2094 TJ Maxx or Marshal’s stores, 487 Homegoods, 368 TJX Canada and 440 TJX Europe. TJX Companies expects that the number of stores under its umbrella could eventually reach 5475. The projections include 3000 TJ Maxx or Marshal’s stores, 1000 Homegoods, 500 TJX Canada and 975 TJX Europe. The company is opening its first stores in Austria and The Netherlans in 2015. While store saturation in the US is a potential risk, international expansion could bring a source of growth for years ahead. As international operations expand their scale, this could aid operating margins and profits. The downside to international operations is that a larger portion of TJX profits will be impacted to short-term fluctuations in the US dollar.
TJX Companies is also focusing on expanding its e-commerce platforms such as tjmaxx.com and sierratradingpost.com in the US and tkmaxx.com in the UK. Further sales growth could be obtained by leveraging the brick and mortar and online platforms. An example includes allowing customers to shop online and pick up items in stores.
I really like the fact that TJX Companies is dedicated to sharing excess cashflows with shareholders in the form of share buybacks and dividends. I would actually prefer more dividends to buybacks, but would take what I can get.
The annual dividend payment has increased by 25.30% per year over the past decade, which is much higher than the growth in EPS. Future growth in dividends will likely exceed growth in earnings per share given that the payout ratio has room for expansion.
In the past decade, the dividend payout ratio has increased from 12.70% in 2006 to 21.30% in 2015. A lower payout is always a plus, since it leaves room for consistent dividend growth minimizing the impact of short-term fluctuations in earnings.
TJX Companies has also managed to grow return on equity from 37.90% in 2006 to 52.20% in 2015. I generally like seeing a high return on equity, which is also relatively stable or rising over time.
Currently, TJX Companies is overvalued at 20.60 times forward earnings and yields 1.20%. Despite the fact that I typically require a higher initial yield, I like the growth story and the growth prospects behind this company. I may consider initiating a small position in the stock on dips below $66/share.
Full Disclosure: None
Relevant Articles:
- Ross Stores (ROST) Dividend Stock Analysis
- The Value of Dividend Growth
- The work required to have an opinion
- The Value of Dividend Growth
- The Pareto Principle in dividend investing
Wednesday, May 20, 2015
Front Loading Savings for a Successful Dividend Retirement
My favorite saying is that "The best time to plant a tree is 20 years ago. The second best time is today." This is why I am carefully planting each dollar seed into carefully chosen portfolio of quality dividend growth stocks available at attractive valuations. I then enjoy the increase in dividends per share from those companies, and further magnify the compounding process by reinvesting the dollars into more dividend paying companies. Thus, I am creating a positive loop, that keeps on delivering results for me.
The power of compounding is said to be one of the 8th wonders of the world. A dollar that compounds at 10%/year today turns into $1.61 in 5 years, $2.59 in 10 years and $17.45 in 30 years and $117.39 in 50 years.
This is why it is extremely important to start investing as early as possible, even if that happens during a time when you are not able to save too much due to low income. Focusing on the stream of dividend checks coming every month, quarter or year has also helped think a long-term business owner, rather than worry about meaningless stock price fluctuations.
Imagine that you started a job in 2003, and then saved 40% of your income every year. Your initial amounts invested look paltry, and the gains look pale compared to the amount you put to work. Many investors get discouraged at the initial steps, because the initial results are not visible.
The table above assumes a net income of $36,000 per year after taxes, and annual raises of 3%/year. It also assumes 40% of income is invested in the S&P 500 index fund. It is easier to make the calculations using historical returns on S&P 500, as a proxy for returns on diversified stock portfolios as a whole. If the index funds are sold at the end of 2019 and the money in is invested in dividend paying stocks yielding 3%, they would generate $23,055 in annual dividend income.
The portfolio value alone could sustain the person for 22 years. That is indeed a very solid emergency fund to have.
After 17 years of saving as much as possible, and investing the proceeds, the power of compounding starts becoming extremely obvious. It is obvious that around that time the power of compounding starts doing the heavy lifting for your money. This is the point at which the amount of wealth and passive income starts increasing exponentially, without really much further fuel on your part (savings placed into investments). This is the point at which the invest gains start becoming noticeable and close to exceeding contributions. The knowledge gained from the first dividend investments I made, is easily applicable whether I manage a $10,000 or a $10 million portfolio. That’s why one should never despise the days of small beginnings. Even a few hundred dollars invested per month in quality securities for several years, can produce a handsome perpetual income machine.
This is essentially the reason why I have had an intense focus on saving as much as possible ever since I managed to get a decent amount of income in 2007. I decided that deferring gratification for a decade will provide much more benefits throughout my lifetime, than spending it foolishly on trophy cars, expensive vacations etc. After 13 years into this experiment, I am able to see rapid increases in dividend income, net worth and ability to generate income. A couple of years ago, the amount of my investment income exceeded my expenses. I am not saying this to brag however. I am saying this to prove that it is possible for an ordinary person to achieve financial independence if they have the ability to save a large portion of income, continuously look for ways to increase income and decrease expenses, invest money conservatively, and continuously trying to improve themselves.
I do not talk about anything else other than selecting dividend growth stocks. However, the investing part of my life is a subset of who I am. I am extremely frugal, drive a reliable old car, and have tried to cut on big items like housing and taxes. I have also tried to earn more money at work by switching positions, getting professional certifications and expanding my education. Unfortunately, this has also resulted in increased responsibilities, and the requirement to work more than 40 hours per week.
By saving a lot however, I created a base of assets, that will produce an ever increasing stream of dividend income for decades into the future, which will pay for expenses, and ultimately go to causes and family members that deserve it. The dollars I save early in life, and invest prudently, will generate a lot of dividends and capital gains for me over my lifetime, because the power of compounding will do the heavy lifting for me. This is why investing early is important.
Relevant Articles:
- Taxable versus Tax-Deferred Accounts for Dividend Investors
- How to accumulate your nest egg
- The importance of investing for retirement as early as possible
- Let dividends do the heavy lifting for your retirement
- Dividend Investing Is Not As Risky As It Is Portrayed
The power of compounding is said to be one of the 8th wonders of the world. A dollar that compounds at 10%/year today turns into $1.61 in 5 years, $2.59 in 10 years and $17.45 in 30 years and $117.39 in 50 years.
This is why it is extremely important to start investing as early as possible, even if that happens during a time when you are not able to save too much due to low income. Focusing on the stream of dividend checks coming every month, quarter or year has also helped think a long-term business owner, rather than worry about meaningless stock price fluctuations.
Imagine that you started a job in 2003, and then saved 40% of your income every year. Your initial amounts invested look paltry, and the gains look pale compared to the amount you put to work. Many investors get discouraged at the initial steps, because the initial results are not visible.
|
Year
|
Net Earnings
|
Savings
|
Expenses
|
Portfolio Value
|
|
2003
|
$36,000.00
|
$14,400.00
|
$21,600.00
|
$ 14,400.00
|
|
2004
|
$37,080.00
|
$14,832.00
|
$22,248.00
|
$ 30,772.53
|
|
2005
|
$38,192.40
|
$15,276.96
|
$22,915.44
|
$ 47,516.74
|
|
2006
|
$39,338.17
|
$15,735.27
|
$ 23,602.90
|
$ 70,766.35
|
|
2007
|
$40,518.32
|
$16,207.33
|
$ 24,310.99
|
$ 90,635.02
|
|
2008
|
$41,733.87
|
$16,693.55
|
$ 25,040.32
|
$ 73,819.72
|
|
2009
|
$42,985.88
|
$17,194.35
|
$ 25,791.53
|
$ 110,720.51
|
|
2010
|
$44,275.46
|
$17,710.18
|
$ 26,565.28
|
$ 145,116.73
|
|
2011
|
$45,603.72
|
$18,241.49
|
$ 27,362.23
|
$ 165,949.03
|
|
2012
|
$46,971.83
|
$18,788.73
|
$ 28,183.10
|
$ 211,130.16
|
|
2013
|
$48,380.99
|
$19,352.40
|
$ 29,028.59
|
$ 299,156.26
|
|
2014
|
$49,832.42
|
$19,932.97
|
$ 29,899.45
|
$ 359,336.45
|
|
2015
|
$51,327.39
|
$20,530.96
|
$ 30,796.44
|
$ 384,146.36
|
|
2016
|
$52,867.21
|
$21,146.89
|
$ 31,720.33
|
$ 451,407.26
|
|
2017
|
$54,453.23
|
$21,781.29
|
$ 32,671.94
|
$ 571,596.10
|
|
2018
|
$56,086.83
|
$22,434.73
|
$ 33,652.10
|
$ 567,519.66
|
|
2019
|
$57,769.43
|
$23,107.77
|
$34,661.66
|
$ 768,513.12
|
The table above assumes a net income of $36,000 per year after taxes, and annual raises of 3%/year. It also assumes 40% of income is invested in the S&P 500 index fund. It is easier to make the calculations using historical returns on S&P 500, as a proxy for returns on diversified stock portfolios as a whole. If the index funds are sold at the end of 2019 and the money in is invested in dividend paying stocks yielding 3%, they would generate $23,055 in annual dividend income.
The portfolio value alone could sustain the person for 22 years. That is indeed a very solid emergency fund to have.
After 17 years of saving as much as possible, and investing the proceeds, the power of compounding starts becoming extremely obvious. It is obvious that around that time the power of compounding starts doing the heavy lifting for your money. This is the point at which the amount of wealth and passive income starts increasing exponentially, without really much further fuel on your part (savings placed into investments). This is the point at which the invest gains start becoming noticeable and close to exceeding contributions. The knowledge gained from the first dividend investments I made, is easily applicable whether I manage a $10,000 or a $10 million portfolio. That’s why one should never despise the days of small beginnings. Even a few hundred dollars invested per month in quality securities for several years, can produce a handsome perpetual income machine.
This is essentially the reason why I have had an intense focus on saving as much as possible ever since I managed to get a decent amount of income in 2007. I decided that deferring gratification for a decade will provide much more benefits throughout my lifetime, than spending it foolishly on trophy cars, expensive vacations etc. After 13 years into this experiment, I am able to see rapid increases in dividend income, net worth and ability to generate income. A couple of years ago, the amount of my investment income exceeded my expenses. I am not saying this to brag however. I am saying this to prove that it is possible for an ordinary person to achieve financial independence if they have the ability to save a large portion of income, continuously look for ways to increase income and decrease expenses, invest money conservatively, and continuously trying to improve themselves.
I do not talk about anything else other than selecting dividend growth stocks. However, the investing part of my life is a subset of who I am. I am extremely frugal, drive a reliable old car, and have tried to cut on big items like housing and taxes. I have also tried to earn more money at work by switching positions, getting professional certifications and expanding my education. Unfortunately, this has also resulted in increased responsibilities, and the requirement to work more than 40 hours per week.
By saving a lot however, I created a base of assets, that will produce an ever increasing stream of dividend income for decades into the future, which will pay for expenses, and ultimately go to causes and family members that deserve it. The dollars I save early in life, and invest prudently, will generate a lot of dividends and capital gains for me over my lifetime, because the power of compounding will do the heavy lifting for me. This is why investing early is important.
Relevant Articles:
- Taxable versus Tax-Deferred Accounts for Dividend Investors
- How to accumulate your nest egg
- The importance of investing for retirement as early as possible
- Let dividends do the heavy lifting for your retirement
- Dividend Investing Is Not As Risky As It Is Portrayed
Monday, May 18, 2015
Four Companies Growing Future Yields With Increased Dividends
I try to assemble my dividend portfolio by mixing three distinct types of dividend growth stocks. The first group consists of higher yielding companies which have lower dividend growth expectations. The second group includes companies in the sweet spot, which have average yields anywhere around 2.50% - 4% and average to above average dividend growth. The third group includes companies which have lower current yields, but offer the possibility of high dividend growth. When combining expected dividend growth with current yields, I determine the type of company I am reviewing, and also decide whether it is worth pursuing at some point in the future. I uncover those companies by screening the list of dividend champions or by reviewing the list of dividend increases for the week. I also use my process of reviewing recent dividend increases to monitor the performance of any companies I already own.
There were five companies last week I decided to review briefly in this blog post. I focused on the companies with at least a ten year streak of dividend growth and the right mix between dividend yield and dividend growth:
The Clorox Company (CLX) manufactures and markets consumer and professional products worldwide. The company operates in four segments: Cleaning, Household, Lifestyle, and International. The company raised its quarterly dividend by 4% to 77 cents/share. This marked the 38th consecutive annual dividend increase for this dividend champion. The current rate of dividend increase is lower than the ten year average raise of 10.40%/year. The company had a disappointing dividend raise in 2014 as well. The last time it had two years of dividend growth below 4%/year was in 2005 and 2006. Subsequently, the dividend is up by 165% since 2005. The stock is overvalued at 24.20 times forward earnings and yields 2.90%. Given the low recent growth, and overvaluation, I would not consider adding to my position in the company. I last analyzed Clorox in early 2014. I would refresh it after full year earnings are released in the latter part of 2015.
The Southern Company (SO), together with its subsidiaries, operates as a public electric utility company. It is involved in the generation, transmission, and distribution of electricity through coal, nuclear, oil and gas, and hydro resources in the states of Alabama, Georgia, Florida, and Mississippi. The company raised its quarterly dividend by 3.30% to 54.25 cents/share. This marked the 16th consecutive annual dividend increase for this dividend achiever. The latest dividend increase was slightly lower than the ten year average dividend growth of 3.90%/year. The high current yield compensates for the slow rate of dividend growth however. The stock is attractively valued at 15.40 times forward earnings and yields 5%. I will add the stock to my list for further research.
FactSet Research Systems Inc. (FDS) provides integrated financial information and analytical applications to investment community in the United States, Europe, and the Asia Pacific. The company raised its quarterly dividend by 12.80% to 44 cents/share.This marked the 17th consecutive annual dividend increase for this dividend achiever. The latest dividend increase was slightly lower than the ten year average dividend growth of 23.80%/year. The stock is overvalued at 29.50 times earnings and yields 1.10%. This is the type of company in the initial stage of dividend growth that can deliver high future yields on cost for patient dividend investors. I will monitor the situation, but would like to acquire the stock at 20 times earnings or less. It is on my list to post an analysis on in the foreseeable future.
Franklin Electric Co., Inc. (FELE), together with its subsidiaries, designs, manufactures, and distributes water and fuel pumping systems worldwide. It operates in two segments, Water Systems and Fueling Systems. The company raised its quarterly dividend by 8.30 to 9.75 cents/share. This marked the 23rd consecutive annual dividend increase for this dividend achiever. The latest dividend increase was in line with the ten year average dividend growth rate of 8.40%/year. The stock is fully valued at 19.80 times earnings and yields a low 1.10%. I have heard interesting things about the company, which is why I am adding it to my list for further research.
Full Disclosure: Long CLX
Relevant Articles:
- Types of dividend growth stocks
- Three stages of dividend growth
- Clorox (CLX) Delivers a Disappointing Dividend Increase
- How to read my weekly dividend increase reports
- Do not despise the days of small beginnings
There were five companies last week I decided to review briefly in this blog post. I focused on the companies with at least a ten year streak of dividend growth and the right mix between dividend yield and dividend growth:
The Clorox Company (CLX) manufactures and markets consumer and professional products worldwide. The company operates in four segments: Cleaning, Household, Lifestyle, and International. The company raised its quarterly dividend by 4% to 77 cents/share. This marked the 38th consecutive annual dividend increase for this dividend champion. The current rate of dividend increase is lower than the ten year average raise of 10.40%/year. The company had a disappointing dividend raise in 2014 as well. The last time it had two years of dividend growth below 4%/year was in 2005 and 2006. Subsequently, the dividend is up by 165% since 2005. The stock is overvalued at 24.20 times forward earnings and yields 2.90%. Given the low recent growth, and overvaluation, I would not consider adding to my position in the company. I last analyzed Clorox in early 2014. I would refresh it after full year earnings are released in the latter part of 2015.
The Southern Company (SO), together with its subsidiaries, operates as a public electric utility company. It is involved in the generation, transmission, and distribution of electricity through coal, nuclear, oil and gas, and hydro resources in the states of Alabama, Georgia, Florida, and Mississippi. The company raised its quarterly dividend by 3.30% to 54.25 cents/share. This marked the 16th consecutive annual dividend increase for this dividend achiever. The latest dividend increase was slightly lower than the ten year average dividend growth of 3.90%/year. The high current yield compensates for the slow rate of dividend growth however. The stock is attractively valued at 15.40 times forward earnings and yields 5%. I will add the stock to my list for further research.
FactSet Research Systems Inc. (FDS) provides integrated financial information and analytical applications to investment community in the United States, Europe, and the Asia Pacific. The company raised its quarterly dividend by 12.80% to 44 cents/share.This marked the 17th consecutive annual dividend increase for this dividend achiever. The latest dividend increase was slightly lower than the ten year average dividend growth of 23.80%/year. The stock is overvalued at 29.50 times earnings and yields 1.10%. This is the type of company in the initial stage of dividend growth that can deliver high future yields on cost for patient dividend investors. I will monitor the situation, but would like to acquire the stock at 20 times earnings or less. It is on my list to post an analysis on in the foreseeable future.
Franklin Electric Co., Inc. (FELE), together with its subsidiaries, designs, manufactures, and distributes water and fuel pumping systems worldwide. It operates in two segments, Water Systems and Fueling Systems. The company raised its quarterly dividend by 8.30 to 9.75 cents/share. This marked the 23rd consecutive annual dividend increase for this dividend achiever. The latest dividend increase was in line with the ten year average dividend growth rate of 8.40%/year. The stock is fully valued at 19.80 times earnings and yields a low 1.10%. I have heard interesting things about the company, which is why I am adding it to my list for further research.
Full Disclosure: Long CLX
Relevant Articles:
- Types of dividend growth stocks
- Three stages of dividend growth
- Clorox (CLX) Delivers a Disappointing Dividend Increase
- How to read my weekly dividend increase reports
- Do not despise the days of small beginnings
Thursday, May 14, 2015
Three REITs I Picked Last Week
After scooping up some shares in 3M (MMM) last week, I didn’t expect to make more purchases this month. After all, April is usually an expensive month due to the amount of taxes I have to pay. June is also another expensive month, due to estimated taxes I have to pay on non-salary income I generate. In addition, I try to do most of the work towards maxing out 401 (k) early in the year. I leave room to max-out a quarter to third or so for the latter part of the year.
This week however I saw some weakness in a few REITs I have been monitoring. When I first discussed REITs in late 2014, I expressed my hope for declines in stock prices, similar to what we saw in 2013. Luckily, my hopes are starting to materialize. There is fear that interest rates will rise, which will reduce FFO/share, since cost of capital to acquire new properties will be higher. While interest rates will likely increase at some point in the future, I strongly doubt this will happen in the US in the near-term, especially when Europe and Japan are essentially flooding their economies with QE type stimulus.
I added to my positions in the following real estate investment trusts (REITs):
Omega Healthcare Investors, Inc. (OHI) is a real estate investment trust that invests in healthcare facilities, primarily in long-term healthcare facilities. This REIT has managed to boost distributions for 13 years in a row. The ten year dividend growth rate is 10.90%/year. Omega Healthcare Investors currently sells for 12.70 times funds from operations (FFO) and yields 6%. On a side note, Yahoo Finance shows the yield as 2%. This is incorrect - the quarterly dividend is 54 cents/share, but the last dividend that OHI paid was prorated for 1 month. I last analyzed Omega Healthcare Investors in 2013, and am working on refreshing my review. Please stay tuned.
W. P. Carey Inc. (WPC) is a real estate investment trust which invests in commercial properties that are generally triple-net leased to single corporate tenants including office, warehouse, industrial, logistics, retail, hotel, R&D, and self-storage properties. The company leases those properties back under long-term sale-lease back agreements. . This REIT has managed to boost distributions for 18 years in a row. The ten year dividend growth rate is 7.50%/year. W. P. Carey currently sells for 13.40 times FFO and yields 5.90%. Check my analysis of W.P. Carey for more details.
HCP, Inc. (HCP) is an independent hybrid real estate investment trust which invests in properties serving the healthcare industry including sectors of healthcare such as senior housing, life science, medical office, hospital and skilled nursing. The fund also invests in mezzanine loans and other debt instruments. . This REIT has managed to boost distributions for 30 years in a row. The ten year dividend growth rate is 2.70%/year. HCP currently sells for 13.10 times FFO and yields 5.70%. Check my analysis of HCP for more details. Despite issues with the company’s largest tenant, I think the dividend is safe and can grow over time. However, this one requires closer monitoring than the other two mentioned above.
I am not afraid of rising interest rates. Rising interest will increase the cost of capital, but they also signify the fact that business activity is better. If there is more business, companies hire more, need more space and probably will be able to afford higher lease payments. This is where examining the debt maturities of companies you are interested in investing could make sense. I know for a fact that a large portion of debt issued by companies is longer term in nature. When you sell a 10 year bond to finance a real estate purchase at a fixed rate, or when you get a 30 year mortgage, your interest rate is largely fixed. Therefore, you do not need to worry about interest rates increasing for the length of that loan term. In addition, I expect interest rates to increase gradually, which would allow companies to adapt when they need to access credit markets again.
Full Disclosure: Long OHI, WPC, HCP
Relevant Articles:
- Four Dependable Dividend Stocks I Bought Last Week
- Six Dividend Investments I Made Last Week
- Five Things to Look For in a Real Estate Investment Trust
- Are we in a REIT bubble?
- Four High Yield REITs for current income
This week however I saw some weakness in a few REITs I have been monitoring. When I first discussed REITs in late 2014, I expressed my hope for declines in stock prices, similar to what we saw in 2013. Luckily, my hopes are starting to materialize. There is fear that interest rates will rise, which will reduce FFO/share, since cost of capital to acquire new properties will be higher. While interest rates will likely increase at some point in the future, I strongly doubt this will happen in the US in the near-term, especially when Europe and Japan are essentially flooding their economies with QE type stimulus.
I added to my positions in the following real estate investment trusts (REITs):
Omega Healthcare Investors, Inc. (OHI) is a real estate investment trust that invests in healthcare facilities, primarily in long-term healthcare facilities. This REIT has managed to boost distributions for 13 years in a row. The ten year dividend growth rate is 10.90%/year. Omega Healthcare Investors currently sells for 12.70 times funds from operations (FFO) and yields 6%. On a side note, Yahoo Finance shows the yield as 2%. This is incorrect - the quarterly dividend is 54 cents/share, but the last dividend that OHI paid was prorated for 1 month. I last analyzed Omega Healthcare Investors in 2013, and am working on refreshing my review. Please stay tuned.
W. P. Carey Inc. (WPC) is a real estate investment trust which invests in commercial properties that are generally triple-net leased to single corporate tenants including office, warehouse, industrial, logistics, retail, hotel, R&D, and self-storage properties. The company leases those properties back under long-term sale-lease back agreements. . This REIT has managed to boost distributions for 18 years in a row. The ten year dividend growth rate is 7.50%/year. W. P. Carey currently sells for 13.40 times FFO and yields 5.90%. Check my analysis of W.P. Carey for more details.
HCP, Inc. (HCP) is an independent hybrid real estate investment trust which invests in properties serving the healthcare industry including sectors of healthcare such as senior housing, life science, medical office, hospital and skilled nursing. The fund also invests in mezzanine loans and other debt instruments. . This REIT has managed to boost distributions for 30 years in a row. The ten year dividend growth rate is 2.70%/year. HCP currently sells for 13.10 times FFO and yields 5.70%. Check my analysis of HCP for more details. Despite issues with the company’s largest tenant, I think the dividend is safe and can grow over time. However, this one requires closer monitoring than the other two mentioned above.
I am not afraid of rising interest rates. Rising interest will increase the cost of capital, but they also signify the fact that business activity is better. If there is more business, companies hire more, need more space and probably will be able to afford higher lease payments. This is where examining the debt maturities of companies you are interested in investing could make sense. I know for a fact that a large portion of debt issued by companies is longer term in nature. When you sell a 10 year bond to finance a real estate purchase at a fixed rate, or when you get a 30 year mortgage, your interest rate is largely fixed. Therefore, you do not need to worry about interest rates increasing for the length of that loan term. In addition, I expect interest rates to increase gradually, which would allow companies to adapt when they need to access credit markets again.
Full Disclosure: Long OHI, WPC, HCP
Relevant Articles:
- Four Dependable Dividend Stocks I Bought Last Week
- Six Dividend Investments I Made Last Week
- Five Things to Look For in a Real Estate Investment Trust
- Are we in a REIT bubble?
- Four High Yield REITs for current income
Wednesday, May 13, 2015
Tradeking – Best Broker For New Dividend Investors
Update: I believe that Robinhood is a better alternative for investors than Ally Investing
As many of you know, I have several brokerage accounts. In an earlier article I discussed that I do this, in order to protect my capital in the event that a broker I use fails. It would be unfortunate to be a financially independent person, but have my assets frozen for a few weeks, especially when I need that income to live off. As a result, my favorite exercise is to open a brokerage account, fill it up with $100,000 or so, and then use the dividends and new cash to open another brokerage account.
One of the brokers I have been using for the past 8 years is Tradeking. I think it is a good broker for new dividend investors, who are just starting out. The interface is user friendly, and the customer service is good. In addition, it has one of the lowest commission and other costs for new investors.
The nice thing about Tradeking is that it is also offering a $200 cash bonus for new investors who fulfill the following easy requirements:
1) Must be a new customer who opens an account by December 31, 2015
2) Must fund the new account with at least $3,000 within 30 days of opening
3) Must make at least 3 trades within 90 days of account opening
4) You must use the following link here
This is limited time offer, so you have to act fast if you qualify. After you meet all three requirements, you will earn a $200 cash bonus, deposited approximately 10 days after qualifying. This sounds like a very good return on investment on that $3,000. When I was building up my asset base, I frequently used bank and brokerage account bonuses to get “free money”. Even a couple hundred dollars invested wisely, could compound into a couple hundred in dividend income in the future. If you make 2 investments/month, this cash bonus is equivalent to receiving "free trades" for almost 2 years.
The account opening process is easy and straightforward. You need to add name, social security number, address and use one of the many funding options to fund your account. I use ACH, which allows me to link to my bank account.
Tradeking offers a low commission of $4.95/trade. This is one of the lowest commissions available to investors. With Schwab you pay $8.95/trade, with Scottrade - $7, while Sharebuilder or Merrill Edge charge $6.95 for a real-time trade. I prefer Loyal3, since it does not charge anything for an investment. However, the executions with Loyal3 are not placed in real time, and your investment choices are limited to 60 companies or so. With Tradeking, your executions are instantaneous, and you can invest in almost any stock listed on the NYSE or NASDAQ. In addition, you can buy ETFs or Mutual Funds. Your investments are SIPC insured up to $500,000. The company offers security, and I especially like the fact that they fill in schedule D for you at tax time.
These days, I do most of my investing using Interactive Brokers, which charges me 35 cents/trade. However, it requires a $10,000 minimum deposit and it charges you $10/month if your account balance is less than $100,000 or you spend less than $10 for commissions in that month. In addition, they cater mostly to the needs of more experienced investors. I know for a fact that some investors have found Interactive Brokers to be more confusing.
This is why I believe Tradeking is a better broker for those who are just getting started. Their customer service is top notch, and they have a lot of educational material available. In addition, you can reach customer service reps by phone, secure email or chat. In my interactions, I have found them to be helpful in ultimately resolving my queries.
TradeKing has received 4 out of 5 stars in Barron's 12th (March 2007), 13th (March 2008), 14th (March 2009), 15th (March 2010), 16th (March 2011), 17th (March 2012), and 18th (March 2013), 19th (March 2014), and 20th (2015) annual rankings of the Best Online Brokers based on Trade Technology, Usability, Mobile, Range of Offerings, Research Amenities, Portfolio Analysis & Reports, Customer Service & Education, and Costs. So you can say their customer service is on a good level, especially if you have a lot of questions.
Tradeking offers dividend reinvestment, or DRIPs for one or all securities you own. There is no cost associate with that service, and fractional shares are permitted. There are extra fees if you want to trade options – 65 cents per contract in addition to the commission of $4.95/trade. In addition, there is an inactivity fee of $50/year for those whose account value drops below $2,500. If you make one trade however, this fee is waived. The list of other fees is competitive, and pretty straightforward. They also offer IRA’s, without any annual fees as well. However, this $200 cash bonus offer is not available for new IRA accounts.
Overall, by opening an account with $3,000 and making 3 investments, you will be able to earn a cash bonus of $200. This turns out to a return of over 6%, which is not bad. This of course is on top of the returns you will already generate from dividend stocks. I have learned never to despite the days of small beginnings. Again, this limited time offer will expire at the end of December 2015, so you have to act fast if you qualify. You can start by clicking on the banner below or by clicking on this link.
Full Disclosure: I will earn an affiliate commission for each customer that signs up for using Tradeking.
Relevant Articles:
- How to buy dividend stocks with as little as $10
- Best Brokerage Accounts for Dividend Investors
- Robinhood Brokerage Review
- Stress Testing Your Dividend Portfolio
As many of you know, I have several brokerage accounts. In an earlier article I discussed that I do this, in order to protect my capital in the event that a broker I use fails. It would be unfortunate to be a financially independent person, but have my assets frozen for a few weeks, especially when I need that income to live off. As a result, my favorite exercise is to open a brokerage account, fill it up with $100,000 or so, and then use the dividends and new cash to open another brokerage account.
One of the brokers I have been using for the past 8 years is Tradeking. I think it is a good broker for new dividend investors, who are just starting out. The interface is user friendly, and the customer service is good. In addition, it has one of the lowest commission and other costs for new investors.
The nice thing about Tradeking is that it is also offering a $200 cash bonus for new investors who fulfill the following easy requirements:
1) Must be a new customer who opens an account by December 31, 2015
2) Must fund the new account with at least $3,000 within 30 days of opening
3) Must make at least 3 trades within 90 days of account opening
4) You must use the following link here
This is limited time offer, so you have to act fast if you qualify. After you meet all three requirements, you will earn a $200 cash bonus, deposited approximately 10 days after qualifying. This sounds like a very good return on investment on that $3,000. When I was building up my asset base, I frequently used bank and brokerage account bonuses to get “free money”. Even a couple hundred dollars invested wisely, could compound into a couple hundred in dividend income in the future. If you make 2 investments/month, this cash bonus is equivalent to receiving "free trades" for almost 2 years.
The account opening process is easy and straightforward. You need to add name, social security number, address and use one of the many funding options to fund your account. I use ACH, which allows me to link to my bank account.
Tradeking offers a low commission of $4.95/trade. This is one of the lowest commissions available to investors. With Schwab you pay $8.95/trade, with Scottrade - $7, while Sharebuilder or Merrill Edge charge $6.95 for a real-time trade. I prefer Loyal3, since it does not charge anything for an investment. However, the executions with Loyal3 are not placed in real time, and your investment choices are limited to 60 companies or so. With Tradeking, your executions are instantaneous, and you can invest in almost any stock listed on the NYSE or NASDAQ. In addition, you can buy ETFs or Mutual Funds. Your investments are SIPC insured up to $500,000. The company offers security, and I especially like the fact that they fill in schedule D for you at tax time.
These days, I do most of my investing using Interactive Brokers, which charges me 35 cents/trade. However, it requires a $10,000 minimum deposit and it charges you $10/month if your account balance is less than $100,000 or you spend less than $10 for commissions in that month. In addition, they cater mostly to the needs of more experienced investors. I know for a fact that some investors have found Interactive Brokers to be more confusing.
This is why I believe Tradeking is a better broker for those who are just getting started. Their customer service is top notch, and they have a lot of educational material available. In addition, you can reach customer service reps by phone, secure email or chat. In my interactions, I have found them to be helpful in ultimately resolving my queries.
TradeKing has received 4 out of 5 stars in Barron's 12th (March 2007), 13th (March 2008), 14th (March 2009), 15th (March 2010), 16th (March 2011), 17th (March 2012), and 18th (March 2013), 19th (March 2014), and 20th (2015) annual rankings of the Best Online Brokers based on Trade Technology, Usability, Mobile, Range of Offerings, Research Amenities, Portfolio Analysis & Reports, Customer Service & Education, and Costs. So you can say their customer service is on a good level, especially if you have a lot of questions.
Tradeking offers dividend reinvestment, or DRIPs for one or all securities you own. There is no cost associate with that service, and fractional shares are permitted. There are extra fees if you want to trade options – 65 cents per contract in addition to the commission of $4.95/trade. In addition, there is an inactivity fee of $50/year for those whose account value drops below $2,500. If you make one trade however, this fee is waived. The list of other fees is competitive, and pretty straightforward. They also offer IRA’s, without any annual fees as well. However, this $200 cash bonus offer is not available for new IRA accounts.
Overall, by opening an account with $3,000 and making 3 investments, you will be able to earn a cash bonus of $200. This turns out to a return of over 6%, which is not bad. This of course is on top of the returns you will already generate from dividend stocks. I have learned never to despite the days of small beginnings. Again, this limited time offer will expire at the end of December 2015, so you have to act fast if you qualify. You can start by clicking on the banner below or by clicking on this link.
Full Disclosure: I will earn an affiliate commission for each customer that signs up for using Tradeking.
Relevant Articles:
- How to buy dividend stocks with as little as $10
- Best Brokerage Accounts for Dividend Investors
- Robinhood Brokerage Review
- Stress Testing Your Dividend Portfolio
Monday, May 11, 2015
Dividend Stocks Rewarding Patient Investors With a Raise
My goal is generate a sufficient stream of dividends that exceeds my expenses. In order to achieve that, I try to identify companies that have a track record of consistent dividend increases for further analysis. My analysis tries to determine if there is a margin of safety in the dividend and that this dividend is supported by earnings. I generally want a company where earnings and dividends grow hand in hand, though I am also aware that this is dependent on the stage the company is in. It is also helpful to determine if earnings can continue growing over time. When earnings are growing, a company can afford to grow dividends easily, and will get more valuable to investors in the process. The next important step in the process is purchasing that right quality company at the right price. Even the best dividend stock is not worth overpaying for. This process has helped me since I started my dividend investing journey in 2008.
The best positive confirmation that my analysis is working is when a company I own keeps increasing dividends years after I have purchased it. I monitor those dividend increases weekly for companies I own and companies I monitor. A few companies to note include:
PepsiCo, Inc. (PEP) operates as a food and beverage company worldwide. The company raised its quarterly dividend by 7.30% to 70.25 cents/share. This marked the 44th consecutive annual dividend increase for this dividend champion. In the past decade, PepsiCo has managed to boost its dividends by 12.50%/year. The stock is overvalued at 21.40 times earnings and yields 2.90%. Check my analysis of PepsiCo.
Occidental Petroleum Corporation (OXY) engages in the acquisition, exploration, and development of oil and gas properties in the United States and internationally. The company operates in three segments: Oil and Gas; Chemical; and Midstream, Marketing and Other. The company raised its quarterly dividend by 4.20% to 75 cents/share. This marked the 13th consecutive annual dividend increase for this dividend achiever . In the past decade, Occidental Petroleum has managed to boost its dividends by 17.70%/year. The stock is overvalued at 70 times forward 2015 earnings of $1.11/share and yields 3.80%. Check my analysis of Occidental Petroleum.
Cardinal Health, Inc. (CAH), a healthcare services company, provides pharmaceutical and medical products and services in the United States and internationally. The company operates in two segments, Pharmaceutical and Medical. The company raised its quarterly dividend by 13% to 38.70 cents/share. This marked the 19th consecutive annual dividend increase for this dividend achiever. In the past decade, Cardinal Health has managed to boost its dividends by 31.10%/year. The stock is fully valued at 19.80 times earnings and yields 1.80%. When I analyzed the company in 2010, I didn’t like what I saw, because earnings per share had been flat for several years. It is good to evaluate mistakes of omission, in order to improve method for stock selection.
Buckeye Partners, L.P. (BPL) owns and operates liquid petroleum products pipeline systems in the United States. The master limited partnership operates through four segments: Pipelines & Terminals, Global Marine Terminals, Merchant Services, and Development & Logistics. The partnership raised its quarterly distribution to $1.15/unit. Buckeye Partners has raised distributions for 20 consecutive years. The MLP is selling for 18.10 times 2014 distributable cash flow per unit and yields 5.60%. I will add it to my list for further research, though the distribution coverage seems thin.
Spectra Energy Partners, LP, (SEP) through its subsidiaries, engages in the transportation of natural gas through interstate pipeline systems, and the storage of natural gas in underground facilities in the United States. The partnership raised its quarterly distribution to 60.125 cents/unit. Spectra Energy Partners has raised distributions for 8 consecutive years. The MLP is selling for 14.50 times 2014 distributable cash flow per unit and yields 4.50%. I would add this MLP to my list for further research.
Full Disclosure: Long PEP
Relevant Articles:
- How to read my weekly dividend increase reports
- The Importance of Consecutive Dividend Increases in Stock Selection
- Margin of Safety in Dividends
- Margin of Safety in Financial Independence
- How to monitor your dividend investments
The best positive confirmation that my analysis is working is when a company I own keeps increasing dividends years after I have purchased it. I monitor those dividend increases weekly for companies I own and companies I monitor. A few companies to note include:
PepsiCo, Inc. (PEP) operates as a food and beverage company worldwide. The company raised its quarterly dividend by 7.30% to 70.25 cents/share. This marked the 44th consecutive annual dividend increase for this dividend champion. In the past decade, PepsiCo has managed to boost its dividends by 12.50%/year. The stock is overvalued at 21.40 times earnings and yields 2.90%. Check my analysis of PepsiCo.
Occidental Petroleum Corporation (OXY) engages in the acquisition, exploration, and development of oil and gas properties in the United States and internationally. The company operates in three segments: Oil and Gas; Chemical; and Midstream, Marketing and Other. The company raised its quarterly dividend by 4.20% to 75 cents/share. This marked the 13th consecutive annual dividend increase for this dividend achiever . In the past decade, Occidental Petroleum has managed to boost its dividends by 17.70%/year. The stock is overvalued at 70 times forward 2015 earnings of $1.11/share and yields 3.80%. Check my analysis of Occidental Petroleum.
Cardinal Health, Inc. (CAH), a healthcare services company, provides pharmaceutical and medical products and services in the United States and internationally. The company operates in two segments, Pharmaceutical and Medical. The company raised its quarterly dividend by 13% to 38.70 cents/share. This marked the 19th consecutive annual dividend increase for this dividend achiever. In the past decade, Cardinal Health has managed to boost its dividends by 31.10%/year. The stock is fully valued at 19.80 times earnings and yields 1.80%. When I analyzed the company in 2010, I didn’t like what I saw, because earnings per share had been flat for several years. It is good to evaluate mistakes of omission, in order to improve method for stock selection.
Buckeye Partners, L.P. (BPL) owns and operates liquid petroleum products pipeline systems in the United States. The master limited partnership operates through four segments: Pipelines & Terminals, Global Marine Terminals, Merchant Services, and Development & Logistics. The partnership raised its quarterly distribution to $1.15/unit. Buckeye Partners has raised distributions for 20 consecutive years. The MLP is selling for 18.10 times 2014 distributable cash flow per unit and yields 5.60%. I will add it to my list for further research, though the distribution coverage seems thin.
Spectra Energy Partners, LP, (SEP) through its subsidiaries, engages in the transportation of natural gas through interstate pipeline systems, and the storage of natural gas in underground facilities in the United States. The partnership raised its quarterly distribution to 60.125 cents/unit. Spectra Energy Partners has raised distributions for 8 consecutive years. The MLP is selling for 14.50 times 2014 distributable cash flow per unit and yields 4.50%. I would add this MLP to my list for further research.
Full Disclosure: Long PEP
Relevant Articles:
- How to read my weekly dividend increase reports
- The Importance of Consecutive Dividend Increases in Stock Selection
- Margin of Safety in Dividends
- Margin of Safety in Financial Independence
- How to monitor your dividend investments
Friday, May 8, 2015
3M Company (MMM) Dividend Stock Analysis 2015
3M Company operates as a diversified technology company worldwide. 3M Company is a dividend king, which has raised dividends for 56 years in a row.
The most recent dividend increase was in December 2014, when the Board of Directors approved a 19.90% increase in the quarterly dividend to $1.025/share.
The company’s largest competitors include General Electric (GE), Siemens (SIEGY) and ABB (ABB).
Over the past decade this dividend growth stock has delivered an annualized total return of 9.50% to its shareholders. Future returns will be dependent on growth in earnings and starting dividend yields obtained by shareholders.
The company has managed to deliver a 7.10% average increase in annual EPS over the past decade. 3M is expected to earn $7.94 per share in 2015 and $8.78 per share in 2016. In comparison, the company earned $7.49/share in 2014.
Earnings per share have also been aided by share buybacks. The number of shares outstanding has decreased from 777 million in 2005 to 649 million by 2015. 3M expects to spend somewhere in the range of $17 billion to $22 billion on share repurchases through 2017.
The strength of 3M’s business model is largely driven by three key strategic levers: active portfolio management, investing in innovation, and business transformation. Management believes that these levers, combined with more aggressive capital deployment, will drive enhanced value creation.
The company’s financial objectives through 2017 include 9 – 11% growth in earnings per share, fueled by 4 – 6% annual revenue growth. In addition, 3M expects to make 5 – 10 billion in acquisitions over the next 3 - 4 years.
The company generates 35% of revenues from emerging markets, which could increase to 40 – 45% by 2017, driven by strong growth in developing economies of the world. In fact, emerging market revenues are expected to increase by 8 – 12% over the next four years, versus a more modest 2 – 4% growth for developed markets.
The company spends over 5% of revenues on R&D, and has been able to discover innovative products to bolster its bottom line. 3M expects to increase R&D expense to 6% of revenues by 2017. 3M keeps careful track of new product development, using a measure called the New Product Vitality Index (NPVI), which quantifies the percentage of 3M’s sales from products that were introduced during the past five years. In 2013, the NPVI was 33%. The company is trying to increase this index to 37% by 2017. 3M allows it engineers to spend 15% of their time on their own projects, which has resulted in a lot of innovation.
The annual dividend payment has increased by 9% per year over the past decade, which is higher than the growth in EPS. Future rates of growth in dividends will be limited to the rate of growth in earnings per share.
A 9% growth in distributions translates into the dividend payment doubling almost every eight years on average. If we check the dividend history, going as far back as 1973, we could see that 3M Company has managed to double dividends almost every eight and a half years on average.
In the past decade, the dividend payout ratio has increased from 40.40% in 2005 to 45.70% in 2015. A lower payout is always a plus, since it leaves room for consistent dividend growth minimizing the impact of short-term fluctuations in earnings.
3M has also managed to maintain a high return on equity over the past decade. During out study period, this indicator ranged between a high of from 37.70% in 2007 to a low of 26.60% in 2013, while ending little changed for the decade. I generally like seeing a high return on equity, which is also relatively stable or rising over time.
Currently, 3M is close to fully valued at 19.70 times forward earnings and a current yield of 2.60%. Last week, I added a little to my position in 3M. I would be excited to increase my exposure to this quality company on further dips in the stock price.
Full Disclosure: Long MMM and GE
Relevant Articles:
- How to find long term dividend stock ideas
- Dividend Investing for Financial Independence
- Dividend Kings List for 2015
- 39 Dividend Champions for Further Research
- Will the dividend grow?
The most recent dividend increase was in December 2014, when the Board of Directors approved a 19.90% increase in the quarterly dividend to $1.025/share.
The company’s largest competitors include General Electric (GE), Siemens (SIEGY) and ABB (ABB).
Over the past decade this dividend growth stock has delivered an annualized total return of 9.50% to its shareholders. Future returns will be dependent on growth in earnings and starting dividend yields obtained by shareholders.
The company has managed to deliver a 7.10% average increase in annual EPS over the past decade. 3M is expected to earn $7.94 per share in 2015 and $8.78 per share in 2016. In comparison, the company earned $7.49/share in 2014.
Earnings per share have also been aided by share buybacks. The number of shares outstanding has decreased from 777 million in 2005 to 649 million by 2015. 3M expects to spend somewhere in the range of $17 billion to $22 billion on share repurchases through 2017.
The strength of 3M’s business model is largely driven by three key strategic levers: active portfolio management, investing in innovation, and business transformation. Management believes that these levers, combined with more aggressive capital deployment, will drive enhanced value creation.
The company’s financial objectives through 2017 include 9 – 11% growth in earnings per share, fueled by 4 – 6% annual revenue growth. In addition, 3M expects to make 5 – 10 billion in acquisitions over the next 3 - 4 years.
The company generates 35% of revenues from emerging markets, which could increase to 40 – 45% by 2017, driven by strong growth in developing economies of the world. In fact, emerging market revenues are expected to increase by 8 – 12% over the next four years, versus a more modest 2 – 4% growth for developed markets.
The company spends over 5% of revenues on R&D, and has been able to discover innovative products to bolster its bottom line. 3M expects to increase R&D expense to 6% of revenues by 2017. 3M keeps careful track of new product development, using a measure called the New Product Vitality Index (NPVI), which quantifies the percentage of 3M’s sales from products that were introduced during the past five years. In 2013, the NPVI was 33%. The company is trying to increase this index to 37% by 2017. 3M allows it engineers to spend 15% of their time on their own projects, which has resulted in a lot of innovation.
The annual dividend payment has increased by 9% per year over the past decade, which is higher than the growth in EPS. Future rates of growth in dividends will be limited to the rate of growth in earnings per share.
A 9% growth in distributions translates into the dividend payment doubling almost every eight years on average. If we check the dividend history, going as far back as 1973, we could see that 3M Company has managed to double dividends almost every eight and a half years on average.
In the past decade, the dividend payout ratio has increased from 40.40% in 2005 to 45.70% in 2015. A lower payout is always a plus, since it leaves room for consistent dividend growth minimizing the impact of short-term fluctuations in earnings.
3M has also managed to maintain a high return on equity over the past decade. During out study period, this indicator ranged between a high of from 37.70% in 2007 to a low of 26.60% in 2013, while ending little changed for the decade. I generally like seeing a high return on equity, which is also relatively stable or rising over time.
Currently, 3M is close to fully valued at 19.70 times forward earnings and a current yield of 2.60%. Last week, I added a little to my position in 3M. I would be excited to increase my exposure to this quality company on further dips in the stock price.
Full Disclosure: Long MMM and GE
Relevant Articles:
- How to find long term dividend stock ideas
- Dividend Investing for Financial Independence
- Dividend Kings List for 2015
- 39 Dividend Champions for Further Research
- Will the dividend grow?
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