My journey to becoming a dividend growth investor was a very long and arduous one. I have been following the stock market for years, but didn’t really gain an understanding of it, until a few years ago. The following books helped me to learn about investing from people who are practicing it and are successful at it. I then used the lessons from these books to craft my own dividend growth strategy, that is unique to my investment goals and objectives of living off dividends in retirement. The books that shaped me as an investor include ( in no particular order):
Stocks for the Long Run : The Definitive Guide to Financial Market Returns and Long-Term Investment Strategies, by Prof Jeremy Siegel
The Ultimate Dividend Playbook: Income, Insight and Independence for Today's Investor, by Josh Peters
The Dividend Rich Investor: Building Wealth With High-Quality, Dividend-Paying Stocks, by Joseph Tigue
The Single Best Investment: Creating Wealth with Dividend Growth by Lowell Miller
One Up On Wall Street : How To Use What You Already Know To Make Money In The Market
Beating the Street, by Peter Lynch
Stop Working : Here's How You Can!: Using the Strategy of Canada's Youngest Retiree, by Derek Foster (Check my review of the book)
The Snowball: Warren Buffett and the Business of Life, by Alice Schroeder
Common Stocks and Uncommon Profits (Revised Edition), by Philip Fisher
The Intelligent Investor: A Book of Practical Counsel by Graham, Benjamin
Damn Right! Behind the Scenes with Berkshire Hathaway Billionaire Charlie Munger, by Janet Lowe
In the future, I plan on posting my reviews of these books to my site. Please check the post as it would likely expand over time, and would also include links to my book reviews.
Personal Finance Focused Books
Cashing in on the American Dream: How to Retire at 35, by Paul Terhorst
Rich Dad Poor Dad, by Robert Kiyosaki
Your Money or Your Life: Transforming Your Relationship with Money and Achieving Financial Independence, by Joe Dominguez
In addition, I would also encourage you to check the Warren Buffett investing resource page, which includes links to his shareholder and partner letters, plus notes from Berkshire’s shareholder meetings.
Saturday, November 30, 2013
Tuesday, November 26, 2013
Why Warren Buffett purchased Exxon Mobil stock?
I have spent the last year, learning as much as possible about Warren Buffett and his right hand man Charlie Munger. There is plenty of information from both super investors to keep you occupied full-time for months if not years.
The most interesting insight is that if you pay attention to these two investment legends, you can gain a lot of insight about what is going on inside their heads. In addition, by many of their statements, Buffett and Munger can sometimes inadvertently divulge or give away what they think about certain companies, and what they are looking to buy or sell.
For example Charlie discussed US energy independence in a 2013 conference, and some of his statements were widely quoted. While I found his comments to be very weird at the time, I believe Charlie Munger was probably instrumental in the purchase of Exxon Mobil stock in 2013.
Even I succumbed to the frenzy, and dedicated a whole article on the topic. I did not agree with some of his ideas, but concluded that maybe his ideas mean that he is interested in oil as an investment. It seems now that the speech by Munger was definitely inspired by all the research he and Warren had done on the topic of investing in oil. If they spent months researching investments in the oil and gas space, it is not surprise that Munger had oil in his head to talk about. As usual, hindsight is always 20/20 however.
I also previously discussed why the so called peak oil is nonsense. This is because technology is improving, and the ability to discover and tap oil reserves is also improving. Furthermore, as the price of oil and gas increases over time, energy companies would have a higher incentive to explore for energy in areas that are more expensive. In my article I discussed how the estimated reserves of oil and gas left on earth have been increasing over the past several decades.
Another fact that could have shown Berkshire’s intentions that it is researching Exxon Mobil for possible accumulation, is Warren Buffett’s discussion on gold and how he could buy 16 Exxon Mobils and all farmland if he were to own and subsequently sell all the gold in the world. This discussion was listed in the 2011 Letters to Shareholders.
Some of Buffett’s largest buys like Wells Fargo (WFC), Burlington Northern Santa Fe, International Business Machines (IBM), Heinz and now Exxon Mobil (XOM) are truly long-term buy and hold selections. These are core positions, which would likely not be sold for many decades. These are blue chip companies, who will produce an increasing stream of dividends for decades to come to Berkshire Hathaway shareholders. These are the slow and steady type of companies, whose customers repeatedly use their products or services. If you believe the US economy and the World economy are going to be larger 20 -30 years from now, these would be the companies to buy and forget. Once you acquire a shares in a great company at attractive valuations, you can simply afford to sit back and enjoy the dividend checks coming your way for decades. I believe that investing in those companies is one way for Buffett to invest Berkshire’s money for the next generation after him. It is similar to your grandfather leaving his grandson/granddaughter a pile of stock certificates, that would pay for great granddaughters/grandsons college educations. I have analyzed Exxon Mobil before, and have also concluded that it was a sound long-term investment. This is why I have been adding it to my Roth IRA this year.
Essentially, the central idea for buying Exxon Mobil is that oil is a finite resource, which cannot be recovered once it is used up. The easiest oil has already been discovered, leaving oil and gas deposits that are more costly to produce. The world is likely to keep needing carbon energy like oil and gas for several decades, even if renewable energy sources from the sun, wind and water can eventually satisfy worldwide energy demand. This could likely occur in a few decades. Even if that were to happen however, humanity would still need substances like oil, because it is used up in everything that our modern civilization is based upon – plastics, pharmaceuticals, chemicals, etc. Unlike gold however, which is mined and could be reused, once you have used up oil, it is gone forever. You could recycle some of the plastics and other compounds from oil however, but not everything.
Prices for oil and gas will likely increase over time. However, this won’t be a linear and straightforward increase. This would make existing reserves of oil companies like Exxon Mobil more valuable, and its technical know-how of how to successfully explore for and tap reserves, provide it with a competitive advantage in the field. Mostly large companies will be able to succeed in major exploration and production developments in difficult to explore for regions. Their massive scale, access to cheap capital, and experience, will help them overcome the challenges of drilling in inhospitable terrains such as deep seas, and places in the North that have been frozen for millions of years.
Rising prices will likely result in higher profits over time, which would surely result in higher stock prices and higher dividends per share. The company has proven that it is a steward of shareholder capital, as it has managed to increase dividends for 31 years in a row. Over the past decade, Exxon Mobil has managed to also raise dividends at a rate of 9%/year, while also repurchased one third of outstanding shares. As I have mentioned before, Charlie Munger likes carnivores, which are companies that consistently repurchase their shares. IBM and Exxon Mobil are companies with some of the most consistent share repurchases, which didn't stop even during the financial crisis.
If you compare Exxon to the other major energy companies in the world, it is not the cheapest one on the list.
Currently, Exxon Mobil is trading at 12.40 times earnings and yields 2.60%. It is not the best value, based on this table. However, it is the company with the longest streak of consecutive dividend increases. You can probably look equally as well with any of the companies listed above. I am going to speculate why he didn't buy each company, based on information I have gathered from Buffett over the past decade. The likes of Total have withholding taxes, and some uncertainty over increasing taxes for French companies. BP was probably excluded, because of the negative environmental effects of the 2010 oil spill. Buffett probably doesn't want to be associated with this. I am not sure why Royal Dutch was excluded, although it could be due to a scandal a few years ago that had to do with the company overstating reserves. We all know that Buffett wants to deal with able and honest management, and therefore a history of mismanagement of such proportions could be a red flag. This could be a red flag, even if the company has gotten rid of all the people responsible for inflating the company's oil and gas reserves. I would say that Lukoil looks the cheapest, and probably has more room to grow. However, Russia has an image of a very corrupt country, with memories of the government expropriation and bankrupting of Yukos in the mid 2000's still fresh in many investor's memories. For example, during the 2004 Berkshire meeting, Buffett discussed that he had to decide between buying shares of Yukos or Petrochina (PTR). Ultimately, he purchased shares of Petrochina, because he thought that the risk there was lower. I didn't list Petrochina in the table, but with a P/E of 10.37 and yield of 3.90%, although I would not be surprised if Buffett revisits this trade as well.
Interestingly enough, I sold Exxon in late 2012 and replaced it with ConocoPhillips (COP). I guess COP does not have the scale of Exxon, and does not have any Refining & Marketing operations, which were spun-off in 2012. However, it seems to have a very shareholder friendly management, despite the fact that it doesn't have a lengthy history of dividend increases like Exxon.
As for Chevron, it is one of my largest portfolio positions ( top 3), and I am not sure why Buffett would pick Exxon over it. However, I realize that I am biased on that issue. It could be due to the trial in Ecuador, where Chevron has been ordered to pay billions of dollars in fines for damages. However, I have some doubts about the integrity of the trial against Chevron. Check my analysis of Chevron.
I think Buffett likes the valuation, the economics of the business, and the massive scale of the company. In addition, he likes the high amount of cash flows generated, which allow it to return so much in the form of dividends and share buybacks to shareholders. Furthermore, the company is one of the largest in the world, and therefore, further buying by the Oracle of Omaha is not going to materially impact the stock price. The company is also US based, and therefore all earnings and dividends are not going to be subject to foreign withholding taxes, or add increased uncertainty over foreign governments. Last but not least, the company has proven that it can boost dividends to shareholders, consistently buy back stock, and also effectively deploy cash to replace reserves used. With a shareholder friendly management culture like that, it is no wonder the Oracle of Omaha chose the stock.
Full Disclosure: Long XOM, IBM, WFC, CVX, BP, RDS.B, COP
Relevant Articles:
- Check the Complete Article Archive
- Dividends versus Share Buybacks/Stock repurchases
- Warren Buffett Investing Resource Page
- Charles Munger: A Lesson on Elementary, Worldly Wisdom as it Relates to Investment Management and Business
- How to Generate Energy Dividends Despite the Peak Oil Non Sense
The most interesting insight is that if you pay attention to these two investment legends, you can gain a lot of insight about what is going on inside their heads. In addition, by many of their statements, Buffett and Munger can sometimes inadvertently divulge or give away what they think about certain companies, and what they are looking to buy or sell.
For example Charlie discussed US energy independence in a 2013 conference, and some of his statements were widely quoted. While I found his comments to be very weird at the time, I believe Charlie Munger was probably instrumental in the purchase of Exxon Mobil stock in 2013.
Even I succumbed to the frenzy, and dedicated a whole article on the topic. I did not agree with some of his ideas, but concluded that maybe his ideas mean that he is interested in oil as an investment. It seems now that the speech by Munger was definitely inspired by all the research he and Warren had done on the topic of investing in oil. If they spent months researching investments in the oil and gas space, it is not surprise that Munger had oil in his head to talk about. As usual, hindsight is always 20/20 however.
I also previously discussed why the so called peak oil is nonsense. This is because technology is improving, and the ability to discover and tap oil reserves is also improving. Furthermore, as the price of oil and gas increases over time, energy companies would have a higher incentive to explore for energy in areas that are more expensive. In my article I discussed how the estimated reserves of oil and gas left on earth have been increasing over the past several decades.
Another fact that could have shown Berkshire’s intentions that it is researching Exxon Mobil for possible accumulation, is Warren Buffett’s discussion on gold and how he could buy 16 Exxon Mobils and all farmland if he were to own and subsequently sell all the gold in the world. This discussion was listed in the 2011 Letters to Shareholders.
Some of Buffett’s largest buys like Wells Fargo (WFC), Burlington Northern Santa Fe, International Business Machines (IBM), Heinz and now Exxon Mobil (XOM) are truly long-term buy and hold selections. These are core positions, which would likely not be sold for many decades. These are blue chip companies, who will produce an increasing stream of dividends for decades to come to Berkshire Hathaway shareholders. These are the slow and steady type of companies, whose customers repeatedly use their products or services. If you believe the US economy and the World economy are going to be larger 20 -30 years from now, these would be the companies to buy and forget. Once you acquire a shares in a great company at attractive valuations, you can simply afford to sit back and enjoy the dividend checks coming your way for decades. I believe that investing in those companies is one way for Buffett to invest Berkshire’s money for the next generation after him. It is similar to your grandfather leaving his grandson/granddaughter a pile of stock certificates, that would pay for great granddaughters/grandsons college educations. I have analyzed Exxon Mobil before, and have also concluded that it was a sound long-term investment. This is why I have been adding it to my Roth IRA this year.
Essentially, the central idea for buying Exxon Mobil is that oil is a finite resource, which cannot be recovered once it is used up. The easiest oil has already been discovered, leaving oil and gas deposits that are more costly to produce. The world is likely to keep needing carbon energy like oil and gas for several decades, even if renewable energy sources from the sun, wind and water can eventually satisfy worldwide energy demand. This could likely occur in a few decades. Even if that were to happen however, humanity would still need substances like oil, because it is used up in everything that our modern civilization is based upon – plastics, pharmaceuticals, chemicals, etc. Unlike gold however, which is mined and could be reused, once you have used up oil, it is gone forever. You could recycle some of the plastics and other compounds from oil however, but not everything.
Prices for oil and gas will likely increase over time. However, this won’t be a linear and straightforward increase. This would make existing reserves of oil companies like Exxon Mobil more valuable, and its technical know-how of how to successfully explore for and tap reserves, provide it with a competitive advantage in the field. Mostly large companies will be able to succeed in major exploration and production developments in difficult to explore for regions. Their massive scale, access to cheap capital, and experience, will help them overcome the challenges of drilling in inhospitable terrains such as deep seas, and places in the North that have been frozen for millions of years.
Rising prices will likely result in higher profits over time, which would surely result in higher stock prices and higher dividends per share. The company has proven that it is a steward of shareholder capital, as it has managed to increase dividends for 31 years in a row. Over the past decade, Exxon Mobil has managed to also raise dividends at a rate of 9%/year, while also repurchased one third of outstanding shares. As I have mentioned before, Charlie Munger likes carnivores, which are companies that consistently repurchase their shares. IBM and Exxon Mobil are companies with some of the most consistent share repurchases, which didn't stop even during the financial crisis.
If you compare Exxon to the other major energy companies in the world, it is not the cheapest one on the list.
Interestingly enough, I sold Exxon in late 2012 and replaced it with ConocoPhillips (COP). I guess COP does not have the scale of Exxon, and does not have any Refining & Marketing operations, which were spun-off in 2012. However, it seems to have a very shareholder friendly management, despite the fact that it doesn't have a lengthy history of dividend increases like Exxon.
As for Chevron, it is one of my largest portfolio positions ( top 3), and I am not sure why Buffett would pick Exxon over it. However, I realize that I am biased on that issue. It could be due to the trial in Ecuador, where Chevron has been ordered to pay billions of dollars in fines for damages. However, I have some doubts about the integrity of the trial against Chevron. Check my analysis of Chevron.
I think Buffett likes the valuation, the economics of the business, and the massive scale of the company. In addition, he likes the high amount of cash flows generated, which allow it to return so much in the form of dividends and share buybacks to shareholders. Furthermore, the company is one of the largest in the world, and therefore, further buying by the Oracle of Omaha is not going to materially impact the stock price. The company is also US based, and therefore all earnings and dividends are not going to be subject to foreign withholding taxes, or add increased uncertainty over foreign governments. Last but not least, the company has proven that it can boost dividends to shareholders, consistently buy back stock, and also effectively deploy cash to replace reserves used. With a shareholder friendly management culture like that, it is no wonder the Oracle of Omaha chose the stock.
Full Disclosure: Long XOM, IBM, WFC, CVX, BP, RDS.B, COP
Relevant Articles:
- Check the Complete Article Archive
- Dividends versus Share Buybacks/Stock repurchases
- Warren Buffett Investing Resource Page
- Charles Munger: A Lesson on Elementary, Worldly Wisdom as it Relates to Investment Management and Business
- How to Generate Energy Dividends Despite the Peak Oil Non Sense
Monday, November 25, 2013
These Dividend Growth Stocks Increased Distributions to Shareholders
There were many companies that increased dividends in the past week. I skimmed the list, and narrowed it down by eliminating any company yielding less than 2% and only having a minimal dividend growth below the historical rate of inflation. The list is further narrowed down by removing any company that has not raised distributions for at least five years in a row.
This meant that companies like Brown-Forman (BF.B), which raised dividends by 13.80% to 29 cents/share, were excluded, because they yielded 1.50%. As a holder of Brown-Forman stock I am happy with that, despite the fact that shares are currently overvalued at 25.60 times forward earnings. Given the steady increase in distributions for 30 years in a row however, this dividend champion is a hold, but not a buy at these prices.
The companies that met the criteria included:
National Bankshares, Inc. (NKSH) operates as the bank holding company for the National Bank of Blacksburg, which provides a range of retail and commercial banking services to individuals, businesses, non-profits, and local governments. The bank raised its semi-annual dividend to 58 cents/share. This marked the 15 consecutive annual dividend increase for this dividend achiever. Over the past decade, National Bankshares has managed to boost dividends by 8.50%/year. The stock is attractively valued at 14.60 times earnings and yields 3.20%. I analyzed National Bankshares last year, but never really did anything about it. While the stock is a buy, I found other shares in the past 18 months which seemed better places for my money.
Lancaster Colony Corporation (LANC) manufactures and markets consumer products focusing primarily on specialty foods for the retail and foodservice markets in the United States. The company boosted its quarterly dividend by 10% to 44 cents/share. This marked the 52nd consecutive annual dividend increase for this dividend king. Over the past decade, Lancaster Colony has managed to boost dividends by 6.70%/year. The stock looks pricey at 21.40 times forward earnings, and at a current yield of 2.10%. I would need to add it to my list for further research.
The Williams Companies, Inc. (WMB) operates as an energy infrastructure company. The company raised quarterly distribution by 3.75% to 38 cents/share. Williams has raised dividends for 11 years in a row. Since 2011, this dividend achiever has actually managed to boost distributions every single quarter. As a result, the new dividend is 16.90% above the dividend paid in Q4 2012. The really interesting part is that Williams Companies (WMB) expects to hike dividends to $1.75/share in 2014 and $2.11/share by 2015. Over the past decade, Williams has raised dividends by 11%/year. The stock yields 4.30%, and seems to sell for 43 times earnings. I would need to put the company on my list for further research, although I have a hunch that the high P/E is because of its interest in Williams Partners (WPZ).
The Laclede Group, Inc. (LG), through its subsidiaries, engages in the retail distribution, sale, and marketing of natural gas. The company raised its quarterly dividend by 3.50% to 44 cents/share. This marked the eleventh consecutive annual dividend increase for this dividend achiever. Over the past decade, Laclede has managed to boost distributions by only 2.20%/year. The stock yields 3.75% and trades at 17.90 times earnings. Given the metrics out there, I would say this stock is probably a decent hold, although future dividend hikes would likely be limited to compensate for inflation.
To summarize, by focusing on the weekly list of companies that increase dividends, one would be able to monitor their holdings and also uncover opportunities that their regular screens might have overlooked. I am definitely interested to learn how Lancaster Colony has managed to raise dividends for over half a century, and whether it can continue this streak. I am also going to research more on Williams Companies, given the high yield and high expected dividend growth.
Full Disclosure: Lon g BF-B
Relevant Articles:
- Check the Complete Article Archive
- Dividend Achievers Offer Income Growth and Capital Appreciation Potential
- Dividend Champions - The Best List for Dividend Investors
- What is Dividend Growth Investing?
- Dividend Investing – Science versus Intuition
This meant that companies like Brown-Forman (BF.B), which raised dividends by 13.80% to 29 cents/share, were excluded, because they yielded 1.50%. As a holder of Brown-Forman stock I am happy with that, despite the fact that shares are currently overvalued at 25.60 times forward earnings. Given the steady increase in distributions for 30 years in a row however, this dividend champion is a hold, but not a buy at these prices.
The companies that met the criteria included:
National Bankshares, Inc. (NKSH) operates as the bank holding company for the National Bank of Blacksburg, which provides a range of retail and commercial banking services to individuals, businesses, non-profits, and local governments. The bank raised its semi-annual dividend to 58 cents/share. This marked the 15 consecutive annual dividend increase for this dividend achiever. Over the past decade, National Bankshares has managed to boost dividends by 8.50%/year. The stock is attractively valued at 14.60 times earnings and yields 3.20%. I analyzed National Bankshares last year, but never really did anything about it. While the stock is a buy, I found other shares in the past 18 months which seemed better places for my money.
Lancaster Colony Corporation (LANC) manufactures and markets consumer products focusing primarily on specialty foods for the retail and foodservice markets in the United States. The company boosted its quarterly dividend by 10% to 44 cents/share. This marked the 52nd consecutive annual dividend increase for this dividend king. Over the past decade, Lancaster Colony has managed to boost dividends by 6.70%/year. The stock looks pricey at 21.40 times forward earnings, and at a current yield of 2.10%. I would need to add it to my list for further research.
The Williams Companies, Inc. (WMB) operates as an energy infrastructure company. The company raised quarterly distribution by 3.75% to 38 cents/share. Williams has raised dividends for 11 years in a row. Since 2011, this dividend achiever has actually managed to boost distributions every single quarter. As a result, the new dividend is 16.90% above the dividend paid in Q4 2012. The really interesting part is that Williams Companies (WMB) expects to hike dividends to $1.75/share in 2014 and $2.11/share by 2015. Over the past decade, Williams has raised dividends by 11%/year. The stock yields 4.30%, and seems to sell for 43 times earnings. I would need to put the company on my list for further research, although I have a hunch that the high P/E is because of its interest in Williams Partners (WPZ).
The Laclede Group, Inc. (LG), through its subsidiaries, engages in the retail distribution, sale, and marketing of natural gas. The company raised its quarterly dividend by 3.50% to 44 cents/share. This marked the eleventh consecutive annual dividend increase for this dividend achiever. Over the past decade, Laclede has managed to boost distributions by only 2.20%/year. The stock yields 3.75% and trades at 17.90 times earnings. Given the metrics out there, I would say this stock is probably a decent hold, although future dividend hikes would likely be limited to compensate for inflation.
To summarize, by focusing on the weekly list of companies that increase dividends, one would be able to monitor their holdings and also uncover opportunities that their regular screens might have overlooked. I am definitely interested to learn how Lancaster Colony has managed to raise dividends for over half a century, and whether it can continue this streak. I am also going to research more on Williams Companies, given the high yield and high expected dividend growth.
Full Disclosure: Lon g BF-B
Relevant Articles:
- Check the Complete Article Archive
- Dividend Achievers Offer Income Growth and Capital Appreciation Potential
- Dividend Champions - The Best List for Dividend Investors
- What is Dividend Growth Investing?
- Dividend Investing – Science versus Intuition
Friday, November 22, 2013
What to do about those rising stock prices?
In the past week, I have dipped into my savings pool, and have also dipped into my margin by buying more Target (TGT). I was also thinking of buying more Exxon Mobil (XOM) and General Mills (GIS), but I stopped myself. Given the fact that Warren Buffett announced he had amassed a large position in Exxon Mobil, it was a good idea to just wait for the initial euphoria to calm down a little.
I realized that I need to replenish my savings pool, which should have 3 – 6 months of savings in cash. I also need to plan for my SEP IRA contribution in 2014, plus any estimated taxes I would owe for 2013. The SEP IRA is part of my plan to cut tax expenses as much as I can. As part of this tax minimization strategy, I am also funding a Roth each year. My funding for 2013 is complete, and I just finished up building the allocation for 2013 this week.
As a result, I should really not make much in terms of stock investments at least until early 2014. I have a put on Coca-Cola (KO) that I sold a few months, which could result in some cash outlay if exercised in January 2014.
I still am finding some value, like in the case of Target, Exxon Mobil and General Mills, where I would like to build out a decent sized position. I guess I would have to wait, which could probably mean that I face an above average risk of missing out if they keep going higher. Incidentally, my top two holdings are also attractively valued at the moment - Kinder Morgan Inc (KMI) and Philip Morris International (PM). Unfortunately, I have too much allocated to them already, which means I would have to hold off on adding to my positions there.
Target Corporation (TGT) operates general merchandise stores in the United States. This dividend champion has rewarded shareholders with higher dividends for 46 years in a row. Over the past decade, Target has managed to raise dividends by 18.60%/year. Currently, the stock is attractively valued at 16 times earnings and yields 2.60%. Check my analysis of Target for more details.
Exxon Mobil Corporation (XOM) engages in the exploration and production of crude oil and natural gas, and manufacture of petroleum products. This dividend champion has rewarded shareholders with higher dividends for 31 years in a row. Over the past decade, Exxon Mobil has managed to raise dividends by 9%/year. In addition, Exxon Mobil is one of the largest and most consistent share buyback programs in Corporate America. Between 2003 and 2013, the number of shares decreased from 6.66 billion to 4.64 billion. Currently, the stock is attractively valued at 12.50 times earnings and yields 2.60%. If you can wait until you get slightly better entry prices after the enthusiasm from Warren Buffett's recent purchase wanes, you might get better entry yields at 2.80% or so ( equivalent to a $90/share price). Check my analysis of Exxon Mobil for more details.
General Mills, Inc. (GIS) produces and markets branded consumer foods in the United States and internationally. This dividend achiever has rewarded shareholders with higher dividends for 10 years in a row. Over the past decade, General Mills has managed to raise dividends by 8.70%/year. Currently, the stock is attractively valued at 17.50 times forward earnings and yields 3%. Check my analysis of General Mills for more details.
The relentless rise in stock prices since 2009 have conditioned me to think that prices would only keep going up. As a result, I am, fearful that if I do not put money in stocks as soon as possible and keep cash instead, I am going to miss out. In reality, I need to step back for a couple months, and reassess the situation as an impartial observer.
This is not a call on the general levels in stock prices, as I do not know where they are going. It is mostly an observation which is specific to my own situation. I need to have cash on hand, since emergencies happen. Of course, I might still wake up one day and buy something if I find a compelling value, like I did with IBM last month.
If stock prices declined by 20% in the next month, I would likely be unable to participate fully in purchasing cheaper securities. However, if these stocks kept steady from there or falling further, I would be able to get a higher number of shares using the money I receive from various sources each month ( salary and dividends to name a few). Therefore, I do not believe I need a 30% allocation to fixed income or cash, merely as a tool to buy shares in case they drop in values. My disciplined strategy of buying stocks every month works wonderfully on the way down. It also works on the way up as well, as long as there is value to be uncovered.
My portfolio allocation is entirely in common stocks, with less than 1% in fixed income equivalents like CD’s. I definitely need to have some fixed income allocation, but current yields are making this a foolish proposition. There is absolutely no place to go if you have cash, other than investing in businesses and real estate, which pay distributions to income starved investors. That being said, having some cash on hand can be helpful in case of emergencies. Luckily, all of my investments generate cash flow, which is deposited into my central cash account. As a result, if I did absolutely nothing for 1 year, my cash from dividend payments would increase to 3 – 3.5% of portfolio value by end of 2014.
In conclusion, I plan on accumulating some cash in my accounts, in order to work on rebuilding emergency funds, saving up the amount for 2013 Sep IRA, and potentially buying up options that could be exercised. This means I might not buy more stocks in December and maybe even January, unless i see some compelling values. The great thing about being a dividend investor in quality companies is that you can afford to sit on your portfolio and do absolutely nothing, while it pumps out cold hard cash into your account every week, month, quarter, year.
Full Disclosure: Long TGT, XOM, GIS
Relevant Articles:
- Check the Complete Article Archive
- S&P Dividend Aristocrats Index – An Incomplete List for Dividend Investors
- Dividend Aristocrats List
- My Retirement Strategy for Tax-Free Income
- How to invest when the market is at all time highs?
I realized that I need to replenish my savings pool, which should have 3 – 6 months of savings in cash. I also need to plan for my SEP IRA contribution in 2014, plus any estimated taxes I would owe for 2013. The SEP IRA is part of my plan to cut tax expenses as much as I can. As part of this tax minimization strategy, I am also funding a Roth each year. My funding for 2013 is complete, and I just finished up building the allocation for 2013 this week.
As a result, I should really not make much in terms of stock investments at least until early 2014. I have a put on Coca-Cola (KO) that I sold a few months, which could result in some cash outlay if exercised in January 2014.
I still am finding some value, like in the case of Target, Exxon Mobil and General Mills, where I would like to build out a decent sized position. I guess I would have to wait, which could probably mean that I face an above average risk of missing out if they keep going higher. Incidentally, my top two holdings are also attractively valued at the moment - Kinder Morgan Inc (KMI) and Philip Morris International (PM). Unfortunately, I have too much allocated to them already, which means I would have to hold off on adding to my positions there.
Target Corporation (TGT) operates general merchandise stores in the United States. This dividend champion has rewarded shareholders with higher dividends for 46 years in a row. Over the past decade, Target has managed to raise dividends by 18.60%/year. Currently, the stock is attractively valued at 16 times earnings and yields 2.60%. Check my analysis of Target for more details.
Exxon Mobil Corporation (XOM) engages in the exploration and production of crude oil and natural gas, and manufacture of petroleum products. This dividend champion has rewarded shareholders with higher dividends for 31 years in a row. Over the past decade, Exxon Mobil has managed to raise dividends by 9%/year. In addition, Exxon Mobil is one of the largest and most consistent share buyback programs in Corporate America. Between 2003 and 2013, the number of shares decreased from 6.66 billion to 4.64 billion. Currently, the stock is attractively valued at 12.50 times earnings and yields 2.60%. If you can wait until you get slightly better entry prices after the enthusiasm from Warren Buffett's recent purchase wanes, you might get better entry yields at 2.80% or so ( equivalent to a $90/share price). Check my analysis of Exxon Mobil for more details.
General Mills, Inc. (GIS) produces and markets branded consumer foods in the United States and internationally. This dividend achiever has rewarded shareholders with higher dividends for 10 years in a row. Over the past decade, General Mills has managed to raise dividends by 8.70%/year. Currently, the stock is attractively valued at 17.50 times forward earnings and yields 3%. Check my analysis of General Mills for more details.
The relentless rise in stock prices since 2009 have conditioned me to think that prices would only keep going up. As a result, I am, fearful that if I do not put money in stocks as soon as possible and keep cash instead, I am going to miss out. In reality, I need to step back for a couple months, and reassess the situation as an impartial observer.
This is not a call on the general levels in stock prices, as I do not know where they are going. It is mostly an observation which is specific to my own situation. I need to have cash on hand, since emergencies happen. Of course, I might still wake up one day and buy something if I find a compelling value, like I did with IBM last month.
If stock prices declined by 20% in the next month, I would likely be unable to participate fully in purchasing cheaper securities. However, if these stocks kept steady from there or falling further, I would be able to get a higher number of shares using the money I receive from various sources each month ( salary and dividends to name a few). Therefore, I do not believe I need a 30% allocation to fixed income or cash, merely as a tool to buy shares in case they drop in values. My disciplined strategy of buying stocks every month works wonderfully on the way down. It also works on the way up as well, as long as there is value to be uncovered.
My portfolio allocation is entirely in common stocks, with less than 1% in fixed income equivalents like CD’s. I definitely need to have some fixed income allocation, but current yields are making this a foolish proposition. There is absolutely no place to go if you have cash, other than investing in businesses and real estate, which pay distributions to income starved investors. That being said, having some cash on hand can be helpful in case of emergencies. Luckily, all of my investments generate cash flow, which is deposited into my central cash account. As a result, if I did absolutely nothing for 1 year, my cash from dividend payments would increase to 3 – 3.5% of portfolio value by end of 2014.
In conclusion, I plan on accumulating some cash in my accounts, in order to work on rebuilding emergency funds, saving up the amount for 2013 Sep IRA, and potentially buying up options that could be exercised. This means I might not buy more stocks in December and maybe even January, unless i see some compelling values. The great thing about being a dividend investor in quality companies is that you can afford to sit on your portfolio and do absolutely nothing, while it pumps out cold hard cash into your account every week, month, quarter, year.
Full Disclosure: Long TGT, XOM, GIS
Relevant Articles:
- Check the Complete Article Archive
- S&P Dividend Aristocrats Index – An Incomplete List for Dividend Investors
- Dividend Aristocrats List
- My Retirement Strategy for Tax-Free Income
- How to invest when the market is at all time highs?
Wednesday, November 20, 2013
International Dividend Stocks – Pros and Cons
Investors are always told to diversify. Diversification is the tool to protect investors from the unknown risks at the time of purchase. In my dividend portfolio, I always try to be diversified, meaning that I hold at least 30 - 40 individual securities representative of as many sectors that make sense. For some reason however, my portfolio only has a few companies traded internationally, which account for about 9% of its value.
International exposure is helpful, because different economies run on different market cycles. For example, if the economy in the US is stagnating, Asian countries might benefit from rise in economic output. In addition, some countries might benefit from increase in number of middle class consumers, which could bode well for earnings and stock prices and dividends.
By limiting themselves to only US companies, US investors might miss on international success stories that could benefit returns. With the increase in globalization, it is possible for a company to start small in one country, but then expand internationally. This could lead to increased profits, and hopefully dividends and stock prices. By increasing the pool of companies to look at, investors increase their chances of finding the next dividend gem for their portfolios.
Another positive fact of international dividend investing is diversifying away from the US dollar. By purchasing foreign assets, US investors will be receiving dividends denominated in Swiss francs, UK pounds, Canadian Dollars and others. This could be viewed as a positive by investors who believe that the US dollar will gradually lose purchasing power relative to these currencies over the long term.
While there are certain advantages to holding international dividend stocks, there are also a few disadvantages.
The first disadvantage includes that foreign stocks pay irregular dividends. Most pay distributions only once per year. Others pay dividends twice per year, by paying an interim and a final dividend. Often the interim dividend is 30%-40% of the total annual distribution, with the final dividend accounting for 60% - 70% of the annual distribution. British based telecom giant Vodafone Group (VOD) is a prime example of this. For 2013, the company paid an interim dividend of 3.27 pence/share, while for the final dividend the company paid 6.92 pence/share, or a total of 10.19 pence/share. This is why calculating the dividend yield could be tricky on a company like Vodafone, especially given that the new interim dividend has recently been increased to 3.53 pence/share.
Other companies like global food giant Nestle (NSRGY) pay dividends once per year, and withhold 15% for US residents. Check my analysis of Nestle.
Another disadvantage of foreign dividend stocks is the fact that few international companies follow a managed dividend policy like US companies. Most US corporations pay a stable and rising dividend, and avoid cutting distributions at all costs. Most foreign companies tend to pay a fluctuating dividend, which could vary greatly from year to year. This variability is caused by the fact that most foreign companies tend to target a certain dividend payout ratio. Since earnings per share fluctuate, so do dividend payments to shareholders of these non-US based companies. Investors also need to be careful in following dividend trends in the local currency, rather than the US dollar converted amounts. For example, for Unliever, it seems like distributions are declared in Euros, and then translated into pounds for PLC holders and dollars for ADR's traded on US markets. Therefore, anyone who followed the dividend trends in pounds or dollars, would be focusing on noise. Focus on the dividend trends in Euro's for Unilever.
Another disadvantage of owning foreign dividend stocks includes steep withholding taxes on distributions. These are typically withheld at source and could vary country by country. These taxes on dividend incomes charged to US investors could vary from 15% to as much as 25%. Investors can usually deduct taxes withheld fully if they are within 15%, using IRS form 1116. US investors who receive foreign dividends in retirement accounts however are still taxed on distributions receive, and cannot get them back. UK is one of the few countries which does not withhold taxes on dividend income paid to US investors. There are several companies which are headquartered in the UK and in another country such as the Netherlands or Australia. As a result, whenever you have a choice between the UK and the other country shares, always select the UK listed one.
Unilever is a prime example of this situation. There are two ADRs trading on NYSE. The Netherland based Unilever N.V. trades under ticker (UN). The UK based Unilever PLC trades under ticker (UL). Investors in both stocks get exactly the same dividends. The only difference is that investors in Unilever NV (UN) are subject to a 15% withholding tax, whereas investors in Unilever PLC (UL) are not. US investors still need to pay taxes on international dividends received however, if paid in taxable accounts.
In addition, some countries do not levy withholding taxes on dividends that are received in retirement accounts, such as Roth IRA's for example. The prime example includes Canada, which usually withholds 15% from dividends paid to US residents at source. However, if you placed those securities in retirement account, Canada would not tax these dividends.
Investors in international equities also need to be aware of the fact that these companies are likely not following US GAAP accounting rules. The whole world seems to have adopted IFRS, albeit it doesn’t seem to have a very consistent implementation. It seems as if each country has managed to implement its own version of IFRS. In addition, investors purchasing foreign shares on international exchanges might find it difficult to open brokerage accounts, wire funds in and out and need to be aware of taxation of dividends and capital gains. For example, Chinese markets are mostly closed to US investors. This means that you cannot go and purchase any Chinese stock that you wish. Other countries have currency controls in place, and might limit the amount of funds you can convert back to US dollars.
In conclusion, while there might be some benefit to receiving international dividends, there are also a lot of cons that investors need to be aware of. In general, I try to purchase US multinationals with long histories of dividend increases, which also have global operations. I have found that a large portion of US dividend companies revenues are derived from international operations, in some cases more than 50%. As a result, I do not have to deal with currency volatility, foreign withholding tax rates, setting up brokerage accounts in 20 different countries and international accounting rules.
For example, when I looked at the ten largest components of the S&P 500 index, I found out that they generate approximately 50% of their revenues from outside the US in 2012. This is significant, and it should probably make you think twice before using measures such as comparing current market capitalization to US GDP to past values of this indicator, as a tool that has any relevant predictive value.
Full Disclosure: Long UL, VOD, NSRGY, XOM, JNJ, CVX, PG, WFC
Relevant Articles:
- Check the Complete Article Archive
- International Over Diversification
- Four International Dividend Stocks to Consider
- Best International Dividend Stocks
- International Dividend Achievers for diversification
International exposure is helpful, because different economies run on different market cycles. For example, if the economy in the US is stagnating, Asian countries might benefit from rise in economic output. In addition, some countries might benefit from increase in number of middle class consumers, which could bode well for earnings and stock prices and dividends.
By limiting themselves to only US companies, US investors might miss on international success stories that could benefit returns. With the increase in globalization, it is possible for a company to start small in one country, but then expand internationally. This could lead to increased profits, and hopefully dividends and stock prices. By increasing the pool of companies to look at, investors increase their chances of finding the next dividend gem for their portfolios.
Another positive fact of international dividend investing is diversifying away from the US dollar. By purchasing foreign assets, US investors will be receiving dividends denominated in Swiss francs, UK pounds, Canadian Dollars and others. This could be viewed as a positive by investors who believe that the US dollar will gradually lose purchasing power relative to these currencies over the long term.
While there are certain advantages to holding international dividend stocks, there are also a few disadvantages.
The first disadvantage includes that foreign stocks pay irregular dividends. Most pay distributions only once per year. Others pay dividends twice per year, by paying an interim and a final dividend. Often the interim dividend is 30%-40% of the total annual distribution, with the final dividend accounting for 60% - 70% of the annual distribution. British based telecom giant Vodafone Group (VOD) is a prime example of this. For 2013, the company paid an interim dividend of 3.27 pence/share, while for the final dividend the company paid 6.92 pence/share, or a total of 10.19 pence/share. This is why calculating the dividend yield could be tricky on a company like Vodafone, especially given that the new interim dividend has recently been increased to 3.53 pence/share.
Other companies like global food giant Nestle (NSRGY) pay dividends once per year, and withhold 15% for US residents. Check my analysis of Nestle.
Another disadvantage of foreign dividend stocks is the fact that few international companies follow a managed dividend policy like US companies. Most US corporations pay a stable and rising dividend, and avoid cutting distributions at all costs. Most foreign companies tend to pay a fluctuating dividend, which could vary greatly from year to year. This variability is caused by the fact that most foreign companies tend to target a certain dividend payout ratio. Since earnings per share fluctuate, so do dividend payments to shareholders of these non-US based companies. Investors also need to be careful in following dividend trends in the local currency, rather than the US dollar converted amounts. For example, for Unliever, it seems like distributions are declared in Euros, and then translated into pounds for PLC holders and dollars for ADR's traded on US markets. Therefore, anyone who followed the dividend trends in pounds or dollars, would be focusing on noise. Focus on the dividend trends in Euro's for Unilever.
Another disadvantage of owning foreign dividend stocks includes steep withholding taxes on distributions. These are typically withheld at source and could vary country by country. These taxes on dividend incomes charged to US investors could vary from 15% to as much as 25%. Investors can usually deduct taxes withheld fully if they are within 15%, using IRS form 1116. US investors who receive foreign dividends in retirement accounts however are still taxed on distributions receive, and cannot get them back. UK is one of the few countries which does not withhold taxes on dividend income paid to US investors. There are several companies which are headquartered in the UK and in another country such as the Netherlands or Australia. As a result, whenever you have a choice between the UK and the other country shares, always select the UK listed one.
Unilever is a prime example of this situation. There are two ADRs trading on NYSE. The Netherland based Unilever N.V. trades under ticker (UN). The UK based Unilever PLC trades under ticker (UL). Investors in both stocks get exactly the same dividends. The only difference is that investors in Unilever NV (UN) are subject to a 15% withholding tax, whereas investors in Unilever PLC (UL) are not. US investors still need to pay taxes on international dividends received however, if paid in taxable accounts.
In addition, some countries do not levy withholding taxes on dividends that are received in retirement accounts, such as Roth IRA's for example. The prime example includes Canada, which usually withholds 15% from dividends paid to US residents at source. However, if you placed those securities in retirement account, Canada would not tax these dividends.
Investors in international equities also need to be aware of the fact that these companies are likely not following US GAAP accounting rules. The whole world seems to have adopted IFRS, albeit it doesn’t seem to have a very consistent implementation. It seems as if each country has managed to implement its own version of IFRS. In addition, investors purchasing foreign shares on international exchanges might find it difficult to open brokerage accounts, wire funds in and out and need to be aware of taxation of dividends and capital gains. For example, Chinese markets are mostly closed to US investors. This means that you cannot go and purchase any Chinese stock that you wish. Other countries have currency controls in place, and might limit the amount of funds you can convert back to US dollars.
In conclusion, while there might be some benefit to receiving international dividends, there are also a lot of cons that investors need to be aware of. In general, I try to purchase US multinationals with long histories of dividend increases, which also have global operations. I have found that a large portion of US dividend companies revenues are derived from international operations, in some cases more than 50%. As a result, I do not have to deal with currency volatility, foreign withholding tax rates, setting up brokerage accounts in 20 different countries and international accounting rules.
For example, when I looked at the ten largest components of the S&P 500 index, I found out that they generate approximately 50% of their revenues from outside the US in 2012. This is significant, and it should probably make you think twice before using measures such as comparing current market capitalization to US GDP to past values of this indicator, as a tool that has any relevant predictive value.
Full Disclosure: Long UL, VOD, NSRGY, XOM, JNJ, CVX, PG, WFC
Relevant Articles:
- Check the Complete Article Archive
- International Over Diversification
- Four International Dividend Stocks to Consider
- Best International Dividend Stocks
- International Dividend Achievers for diversification
Tuesday, November 19, 2013
Dividend Investing Is Not As Risky As It Is Portrayed Out To Be
There is always some risk in any decision you make in life. There are also risks in putting your hard earned money in companies who regularly increase distributions. Investing in dividend paying stocks could potentially result in the risk of permanent capital and income loss.
However, the reality for the average dividend paying stock is less than grim. This is because for the price of dividend paying stock, an investor receives a junior claim to the assets of a company, along with their proportionate share of profits until the end of the world. In simple words, the most you can lose with dividend paying stocks is the amount of funds you put “at risk”. However, as a dividend investor, you would likely receive dividend checks for years to come in most situations. These checks are essentially serving up as rebates on your cost, and ultimately reduce the cash amount you have put at risk in that particular investment. At the same time you still have your investment, meaning that you are essentially having your cake and eating it too. You can also use this cash that was distributed to you to acquire other income generating investments of your choice, or to spend it as you wish. Therefore, while the risk is limited, your reward is unlimited.
For example, if I purchased shares of Realty Income (O) today, I would have to pay $40/share. I would generate a yield of 5.50%, given the current annualized dividend of $2.182/share. The dividend is paid monthly at a rate of $0.1818542/share. This means that every single month, I would receive a rebate for my investment, equivalent to slightly less than half a percent.
If I simply let that money accumulate in my brokerage account for ten year, I would end up with a share of Realty Income plus approximately $21.82 in cash. This example means that by the mere act of doing nothing other than recognizing a quality asset that pays me to hold it, I would end up recovering more than half of my purchase price, without losing my share of any future claims against from asset. Yes, please read that last sentence again - I would have not only recovered half of my initial investment in the company by November 2023, but I would still own the claims to my share of future rent checks until Judgment Day.
Of course, if history is any guide, Realty Income would likely keep increasing dividends at a rate of 3% - 4%/year over the next decade. This means that the cash I receive over that period of time would be slightly more than $21.82/share.
If the dividend remained stagnant, after 18 years I would have received dividend rebates which are equivalent to the amount I paid for the shares in the first place. The stock price might go down to $20 or up to $80/share but I would not care about these stock price fluctuations even for a single second. This is as long as the underlying fundamentals are strong, and the company manages to generate sufficient stream of free cash flow from thousands of properties in the US in order to keep showering me with cash on a monthly basis.
Of course, the drawback of my analysis is the fact that $1 today has a greater purchasing power in comparison to a dollar ten or twenty years from now. However, if a company like Realty Income can manage to boost distributions over time and match the rate of inflation, if can provide a 100% return of investment in less than 18 years (while still owning that investment, and being able to allocate those dividends received elsewhere, therefore earning more dividend checks etc).
Another item to consider with long-range forecasts is their fallibility. However, if you find a company which can reasonably be expected to deliver growth over the next 20 years, holding on to this stock could be a very rewarding endeavor. This growth could materialize due to catalysts known today, such as demographics, health or other factors. For example, Coca-Cola (KO) is expected to earn $2.10/share in 2013. The company pays an annualized dividend of $1.12/share, which this dividend king has raised for 51 years in a row. If Coca-Cola manages to grow dividends by 7%/year over the next 2 decades, one could reasonably expect a dividend payment of approximately $4 - $4.50/share by 2033. If earnings per share followed a similar trajectory, Coke can reasonably be expected to earn $8 - $9/share by 2033. By applying a P/E range of 15 to 20 times earnings, this could translate into a stock price of anywhere from $120 to $180/share by 2033, as well as cumulative dividends of almost $50. Growth for Coca-Cola will likely be generated from the rapid increase in number of middle-class consumers in developing countries in the world, which would quench their thirst with one of the several hundred branded drinks that Coca-Cola Company offers.
Therefore, while an investor in Coca-Cola would have likely recovered their purchase price today exclusively from dividends alone, they should also not forget about the potential of capital gains. In the case of Coca-Cola, if my amateurish projections turn out to be closer to reality, investors could end up with a gain in net worth that exceeds the amount recovered through dividends.
All of the examples above do not take into effect the powerful nature of compounding. For example, let’s assume that you invested $100 today and earned a total return of 10%/year for 25 years. At the end of the period you would essentially generate as much in total returns in a year as the amount you initially invested.
Another risk with my analysis comes in the case of corporate failure. It would be much safer to generate your dividend income from many dividend paying companies, as opposed to just a few. That way, if one of these companies cuts or eliminates distributions when it falls on hard times, your overall dividend income would not be at a great risk. If you build an adequately diversified portfolio of at least 30 individual securities, chances are that the dividend income from this portfolio is much safer than the income from your day job. This is because if you are relying on just one company for income in your day job, but thirty or more companies for income with dividend investing.
Therefore, investors need to be very careful in their stock selection processes. For example, I learned from Warren Buffett to try and guesstimate 20 years into the future and try to decide if I believe the business I am investing in will still be around. It would be much easier to decide that companies like Nestle (NSRGY), Coca-Cola (KO) or General Mills (GIS) will be around in 20 years, because their products are characterized by repeated sales to customers, predictability of cashflows and pricing power. I cannot tell you however whether Apple (AAPL) or Samsung will be around in 20 years. After all, Blackberry (BBRY) went from being an $80 billion company in 2008 and the leader in smartphones, to a former shell of itself within five years.
Full Discllosure: Long O, KO, GIS, NSRGY
Relevant Articles:
- Check the Complete Article Archive
- Undervalued Dividend Stocks I purchased in the past week
- How to define risk in dividend paying stocks?
- No Risk Stock Market Investing
- Warren Buffett Investing Resource Page
However, the reality for the average dividend paying stock is less than grim. This is because for the price of dividend paying stock, an investor receives a junior claim to the assets of a company, along with their proportionate share of profits until the end of the world. In simple words, the most you can lose with dividend paying stocks is the amount of funds you put “at risk”. However, as a dividend investor, you would likely receive dividend checks for years to come in most situations. These checks are essentially serving up as rebates on your cost, and ultimately reduce the cash amount you have put at risk in that particular investment. At the same time you still have your investment, meaning that you are essentially having your cake and eating it too. You can also use this cash that was distributed to you to acquire other income generating investments of your choice, or to spend it as you wish. Therefore, while the risk is limited, your reward is unlimited.
For example, if I purchased shares of Realty Income (O) today, I would have to pay $40/share. I would generate a yield of 5.50%, given the current annualized dividend of $2.182/share. The dividend is paid monthly at a rate of $0.1818542/share. This means that every single month, I would receive a rebate for my investment, equivalent to slightly less than half a percent.
If I simply let that money accumulate in my brokerage account for ten year, I would end up with a share of Realty Income plus approximately $21.82 in cash. This example means that by the mere act of doing nothing other than recognizing a quality asset that pays me to hold it, I would end up recovering more than half of my purchase price, without losing my share of any future claims against from asset. Yes, please read that last sentence again - I would have not only recovered half of my initial investment in the company by November 2023, but I would still own the claims to my share of future rent checks until Judgment Day.
Of course, if history is any guide, Realty Income would likely keep increasing dividends at a rate of 3% - 4%/year over the next decade. This means that the cash I receive over that period of time would be slightly more than $21.82/share.
If the dividend remained stagnant, after 18 years I would have received dividend rebates which are equivalent to the amount I paid for the shares in the first place. The stock price might go down to $20 or up to $80/share but I would not care about these stock price fluctuations even for a single second. This is as long as the underlying fundamentals are strong, and the company manages to generate sufficient stream of free cash flow from thousands of properties in the US in order to keep showering me with cash on a monthly basis.
Of course, the drawback of my analysis is the fact that $1 today has a greater purchasing power in comparison to a dollar ten or twenty years from now. However, if a company like Realty Income can manage to boost distributions over time and match the rate of inflation, if can provide a 100% return of investment in less than 18 years (while still owning that investment, and being able to allocate those dividends received elsewhere, therefore earning more dividend checks etc).
Another item to consider with long-range forecasts is their fallibility. However, if you find a company which can reasonably be expected to deliver growth over the next 20 years, holding on to this stock could be a very rewarding endeavor. This growth could materialize due to catalysts known today, such as demographics, health or other factors. For example, Coca-Cola (KO) is expected to earn $2.10/share in 2013. The company pays an annualized dividend of $1.12/share, which this dividend king has raised for 51 years in a row. If Coca-Cola manages to grow dividends by 7%/year over the next 2 decades, one could reasonably expect a dividend payment of approximately $4 - $4.50/share by 2033. If earnings per share followed a similar trajectory, Coke can reasonably be expected to earn $8 - $9/share by 2033. By applying a P/E range of 15 to 20 times earnings, this could translate into a stock price of anywhere from $120 to $180/share by 2033, as well as cumulative dividends of almost $50. Growth for Coca-Cola will likely be generated from the rapid increase in number of middle-class consumers in developing countries in the world, which would quench their thirst with one of the several hundred branded drinks that Coca-Cola Company offers.
Therefore, while an investor in Coca-Cola would have likely recovered their purchase price today exclusively from dividends alone, they should also not forget about the potential of capital gains. In the case of Coca-Cola, if my amateurish projections turn out to be closer to reality, investors could end up with a gain in net worth that exceeds the amount recovered through dividends.
All of the examples above do not take into effect the powerful nature of compounding. For example, let’s assume that you invested $100 today and earned a total return of 10%/year for 25 years. At the end of the period you would essentially generate as much in total returns in a year as the amount you initially invested.
Another risk with my analysis comes in the case of corporate failure. It would be much safer to generate your dividend income from many dividend paying companies, as opposed to just a few. That way, if one of these companies cuts or eliminates distributions when it falls on hard times, your overall dividend income would not be at a great risk. If you build an adequately diversified portfolio of at least 30 individual securities, chances are that the dividend income from this portfolio is much safer than the income from your day job. This is because if you are relying on just one company for income in your day job, but thirty or more companies for income with dividend investing.
Therefore, investors need to be very careful in their stock selection processes. For example, I learned from Warren Buffett to try and guesstimate 20 years into the future and try to decide if I believe the business I am investing in will still be around. It would be much easier to decide that companies like Nestle (NSRGY), Coca-Cola (KO) or General Mills (GIS) will be around in 20 years, because their products are characterized by repeated sales to customers, predictability of cashflows and pricing power. I cannot tell you however whether Apple (AAPL) or Samsung will be around in 20 years. After all, Blackberry (BBRY) went from being an $80 billion company in 2008 and the leader in smartphones, to a former shell of itself within five years.
Full Discllosure: Long O, KO, GIS, NSRGY
Relevant Articles:
- Check the Complete Article Archive
- Undervalued Dividend Stocks I purchased in the past week
- How to define risk in dividend paying stocks?
- No Risk Stock Market Investing
- Warren Buffett Investing Resource Page
Monday, November 18, 2013
How to read my weekly dividend increase reports
As part of my process for uncovering undiscovered dividend gems, I focus on the list of companies that have increased their dividends. I usually look at the list of dividend increases for the week, and try to outline certain basic pieces of information such as amount of new dividend payment, percentage increase in distribution as well as what the new yield is going to be. After I obtain this information, I dive into valuation and trends in earnings per share and dividends per share. In addition, I check length of dividend increases, and rate of dividend increases over the past decade. There are two resources I use to check dividend increases:
Street Insider
WSJ Online
Whenever I review dividend stocks on my site however, I always try to analyze the information at a high level and reach out a conclusion on what to do next. Sometimes however, the conclusions I reach might need a little bit of extra information to be deciphered. Below, I have added a few short outcomes for my high level reviews of dividend increases.
1) Add subject to availability of funds
This is the highest review rating that I would assign to a stock. This means that I find the stock to be attractively valued at the moment and to have excellent future growth prospects. It also means that I have already analyzed the stock. This future growth would likely boost earnings, dividends and share prices. Unfortunately, I have a limited amount of funds to allocate each month. As a result I end up purchasing somewhere between one to three individuals securities per month. As a result, even if I find a stock attractively valued, I would not purchase it if there are other stocks that are cheaper at the moment.
2) Add on dips
This includes situations where I find the company to have excellent growth prospects for earnings and distributions, but the valuation is a little too rich for my taste. I have a strict entry criteria where I would never ever pay more than 20 times earnings for a company’s stock. In addition, I typically try to invest in companies which yield at least 2.50%. Sometimes a stock might yield more than 2.50%, but trade at more than 20 times earnings or yield less than 2.50% and trade at less than 20 times earnings. I typically require that both the P/E be below 20 and the yield be above 2.50%. Sometimes simply by waiting, a company could increase dividends, which would take the stock to my entry criteria. Wal-Mart (WMT) was such example in 2011- 2012. I monitor the shares every week, and would consider initiating or adding a position once the entry price is hit.
For example, in the past week, Automatic Data Processing raised its quarterly dividend by 10.30% to 48 cents/share. This marked the 39th consecutive annual dividend increase for this dividend champion. Over the past decade, ADP has managed to boost distributions by 13.10%/year. The new yields is 2.50%, but unfortunately it trades at above 20 times earnings. Therefore, I would consider buying it at prices below $63/share, which corresponds to a P/E of 20 times forward earnings of $3.15/share. The company has strong competitive advantages in dealing with small and mid-sized businesses, and should benefit if interest rates increase, as it's float would generate more cash. Check my analysis of ADP for more information about the company.
3) Research
This view covers situations where I find a company which is attractively priced, and has raised distributions for at least ten consecutive years. However, I might not have researched the company in detail yet. I typically like to see not only good valuation, long history of dividend increases and a ten year dividend growth above the rate of inflation, but also good earnings prospects. I like to get a feel of the company’s business, and determine whether the company can sustain future earnings and dividend increases. I try to be a disciplined investor, which is why I require to analyze a company in detail, before initiate a position in it. In addition, if I haven’t analyzed a stock that I already own for about one year, I would likely also put it on my list for further research.
For example, Sysco recently increased dividends by 3.60% to 29 cents/share. I owned Sysco (SYY) for several years, until I decided to pull the plug a couple years ago, since I saw earnings plateaued since reaching a high of $1.81/share in 2008. This meant that most of the dividend growth was running on fumes, meaning through expansion of the dividend payout ratio, which is never desirable. Last time I analyzed the stock in 2011, I still had hopes management can turn the ship around, and increase earnings per share. Shortly after they announced another pathetic dividend increase, I realized dividend growth might be going on borrowed time. I would need to do a more detailed research on the company, and determine if it can increase earnings.
4) Monitor
I usually add a stock on the list for further monitoring if the company has not raised dividends for ten years in a row or if it is too far away from my entry criteria. For example, a company that has raised distributions for 6 years probably has approximately three to four years before I could add it to my portfolio. As a result, I will monitor the rate of dividend increases, and if it gets closer to becoming a dividend achiever, I might add it to my list for further research. Another scenario includes situations where a company yields only 1% or so, and as a result it would not make sense to analyze it or put it on my list to purchase on dips, because it would require a 60% decrease in share price to even get there. A case in point is Costco (COST), which yields 1% and has only raised distributions for ten years in a row. Another company I am actively monitoring is Becton Dickinson (BDX), which yields slightly less than 2%, but has a relatively low P/E ratio of 17.50 times forward earnings and plenty of growth ahead.
5) Hold
I typically tend to avoid the remaining companies that have boosted distributions. I place them under a hold rating, but this is similar to do not touch. Some stocks could move from that hold category into stocks that should be researched. Other stocks could also move from being darlings to being just holds. The world of dividend investing is an ever evolving one, which is why investors need to keep their eyes close to the pulse of the market by following weekly dividend increases.
An example of such a stock is MDU Resources (MDU), which recently increased quarterly dividends by 2.90% to 17.75 cents/share. This marked the 23rd consecutive annual dividend increase for this dividend achiever. Unfortunately, over the past decade the dividend has been increased by 4.90%/year and the current yield is only 2.30%. The companies in this position are decent holds for current income, especially if you bought it at lower prices. However, you might also consider whether you might get better dividend growth and yield prospects elsewhere.
Full Disclosure: Long WMT and ADP
Relevant Articles:
- Check the Complete Article Archive
- How to Uncover Hidden Dividend Gems
- The Tradeoff between Dividend Yield and Dividend Growth
- A long streak of dividend growth is an indication of a business with exceptional fundamentals
- Three stages of dividend growth
Street Insider
WSJ Online
Whenever I review dividend stocks on my site however, I always try to analyze the information at a high level and reach out a conclusion on what to do next. Sometimes however, the conclusions I reach might need a little bit of extra information to be deciphered. Below, I have added a few short outcomes for my high level reviews of dividend increases.
1) Add subject to availability of funds
This is the highest review rating that I would assign to a stock. This means that I find the stock to be attractively valued at the moment and to have excellent future growth prospects. It also means that I have already analyzed the stock. This future growth would likely boost earnings, dividends and share prices. Unfortunately, I have a limited amount of funds to allocate each month. As a result I end up purchasing somewhere between one to three individuals securities per month. As a result, even if I find a stock attractively valued, I would not purchase it if there are other stocks that are cheaper at the moment.
2) Add on dips
This includes situations where I find the company to have excellent growth prospects for earnings and distributions, but the valuation is a little too rich for my taste. I have a strict entry criteria where I would never ever pay more than 20 times earnings for a company’s stock. In addition, I typically try to invest in companies which yield at least 2.50%. Sometimes a stock might yield more than 2.50%, but trade at more than 20 times earnings or yield less than 2.50% and trade at less than 20 times earnings. I typically require that both the P/E be below 20 and the yield be above 2.50%. Sometimes simply by waiting, a company could increase dividends, which would take the stock to my entry criteria. Wal-Mart (WMT) was such example in 2011- 2012. I monitor the shares every week, and would consider initiating or adding a position once the entry price is hit.
For example, in the past week, Automatic Data Processing raised its quarterly dividend by 10.30% to 48 cents/share. This marked the 39th consecutive annual dividend increase for this dividend champion. Over the past decade, ADP has managed to boost distributions by 13.10%/year. The new yields is 2.50%, but unfortunately it trades at above 20 times earnings. Therefore, I would consider buying it at prices below $63/share, which corresponds to a P/E of 20 times forward earnings of $3.15/share. The company has strong competitive advantages in dealing with small and mid-sized businesses, and should benefit if interest rates increase, as it's float would generate more cash. Check my analysis of ADP for more information about the company.
3) Research
This view covers situations where I find a company which is attractively priced, and has raised distributions for at least ten consecutive years. However, I might not have researched the company in detail yet. I typically like to see not only good valuation, long history of dividend increases and a ten year dividend growth above the rate of inflation, but also good earnings prospects. I like to get a feel of the company’s business, and determine whether the company can sustain future earnings and dividend increases. I try to be a disciplined investor, which is why I require to analyze a company in detail, before initiate a position in it. In addition, if I haven’t analyzed a stock that I already own for about one year, I would likely also put it on my list for further research.
For example, Sysco recently increased dividends by 3.60% to 29 cents/share. I owned Sysco (SYY) for several years, until I decided to pull the plug a couple years ago, since I saw earnings plateaued since reaching a high of $1.81/share in 2008. This meant that most of the dividend growth was running on fumes, meaning through expansion of the dividend payout ratio, which is never desirable. Last time I analyzed the stock in 2011, I still had hopes management can turn the ship around, and increase earnings per share. Shortly after they announced another pathetic dividend increase, I realized dividend growth might be going on borrowed time. I would need to do a more detailed research on the company, and determine if it can increase earnings.
4) Monitor
I usually add a stock on the list for further monitoring if the company has not raised dividends for ten years in a row or if it is too far away from my entry criteria. For example, a company that has raised distributions for 6 years probably has approximately three to four years before I could add it to my portfolio. As a result, I will monitor the rate of dividend increases, and if it gets closer to becoming a dividend achiever, I might add it to my list for further research. Another scenario includes situations where a company yields only 1% or so, and as a result it would not make sense to analyze it or put it on my list to purchase on dips, because it would require a 60% decrease in share price to even get there. A case in point is Costco (COST), which yields 1% and has only raised distributions for ten years in a row. Another company I am actively monitoring is Becton Dickinson (BDX), which yields slightly less than 2%, but has a relatively low P/E ratio of 17.50 times forward earnings and plenty of growth ahead.
5) Hold
I typically tend to avoid the remaining companies that have boosted distributions. I place them under a hold rating, but this is similar to do not touch. Some stocks could move from that hold category into stocks that should be researched. Other stocks could also move from being darlings to being just holds. The world of dividend investing is an ever evolving one, which is why investors need to keep their eyes close to the pulse of the market by following weekly dividend increases.
An example of such a stock is MDU Resources (MDU), which recently increased quarterly dividends by 2.90% to 17.75 cents/share. This marked the 23rd consecutive annual dividend increase for this dividend achiever. Unfortunately, over the past decade the dividend has been increased by 4.90%/year and the current yield is only 2.30%. The companies in this position are decent holds for current income, especially if you bought it at lower prices. However, you might also consider whether you might get better dividend growth and yield prospects elsewhere.
Full Disclosure: Long WMT and ADP
Relevant Articles:
- Check the Complete Article Archive
- How to Uncover Hidden Dividend Gems
- The Tradeoff between Dividend Yield and Dividend Growth
- A long streak of dividend growth is an indication of a business with exceptional fundamentals
- Three stages of dividend growth
Saturday, November 16, 2013
Warren Buffett Investing Resource Page
I am a big fan of Warren Buffett, who is the best investor who ever lived. I have studied everything about the Oracle of Omaha that I could get my hands on over the past few years. I also wanted to share the resources I have used to gain knowledge about the investing habits of Warren Buffett. I have organized them into articles I have written about him, books about him, resources such as letters to shareholders, speeches by this super investor, as well as articles from him.
Dividend Growth Investor Articles on Warren Buffett
Books About Warren Buffett
The Snowball: Warren Buffett and the Business of Life
Of Permanent Value: The Story of Warren Buffett/A Trilogy/2010 Edition/Three-volume set
Buffett: The Making of an American Capitalist
Berkshire Hathaway Letters to Shareholders
Tap Dancing to Work: Warren Buffett on Practically Everything, 1966-2012: A Fortune Magazine Book
Berkshire Hathaway Resources
Berkshire Hathaway Letters to Shareholders since 1977
Buffett Partnership Letters
2015 Berkshire Hathaway Meeting Notes (Value Walk)
2014 Berkshire Hathaway Meeting Notes (RBCPA)
2013 Berkshire Hathaway Meeting Notes (CSInvesting)
2012 Berkshire Hathaway Meeting Notes (Cove Street Capital)
2011 Berkshire Hathaway Meeting Notes (Innoculated Investor)
2010 Berkshire Hathaway Meeting Notes (Innoculated Investor)
2009 Berkshire Hathaway Meeting Notes (J.V. Bruni & Co)
2008 Berkshire Hathaway Meeting Notes (Max Capital)
2007 Berkshire Hathaway Meeting Notes (Tilson Funds)
2006 Berkshire Hathaway Meeting Notes (Value Investor Insight)
2005 Berkshire Hathaway Meeting Notes (Tilson Funds)
2004 Berkshire Hathaway Meeting Notes (Graham & Doddsville)
2003 Berkshire Hathaway Meeting Notes (Tilson Funds)
2002 Berkshire Hathaway Meeting Notes (Tilson Funds)
2001 Berkshire Hathaway Meeting Notes (Tilson Funds)
2000 Berkshire Hathaway Meeting Notes (The Street)
1999 Berkshire Hathaway Meeting Notes (Motley Fool)
1998 Berkshire Hathaway Meeting Notes (Geocities)
1996 Berkshire Hathaway Meeting Notes ( Burgundy Asset Management)
1994 Berkshire Hathaway Meeting Notes ( Burgundy Asset Management)
Speeches by Warren Buffett
Buffett's Lecture at Notre Dame in 1991 (source)
Buffett's Lecture at the University of Nebraska in 1994
Buffett's Talk with University of Florida Students in 1998
Buffett's Speech at Columbia University in 2002
Lecture with Wharton Students in 2003 and in 2004
Buffett's Lecture with Vanderbilt Students in 2005
The source of those lectures was Tilson Funds.
Dividend Growth Investor Articles on Warren Buffett
- The One Lesson About Warren Buffett's Success That No One Wants To Hear
- What would happen to Berkshire Hathaway after Warren Buffett is gone?
- How Ordinary Investors Can Generate Float Like Buffett
- How to Invest Like Warren Buffett
- Why Warren Buffett likes Investing in Bank Stocks
- What Attracted Warren Buffett to IBM?
- Warren Buffett is now working for me
- The Warren Buffett Argument Against Paying Dividends
- Why Warren Buffett purchased Exxon Mobil stock?
- How Warren Buffett built his fortune
- Warren Buffett on Dividends: Ideas from his 2013 Letter to Shareholders
- What does Buffett see in Heinz (HNZ)?
- Warren Buffett’s Dividend Stock Strategy
- Build your own Berkshire with dividend paying stocks
- Should you follow Buffett’s latest investments?
- Warren Buffett – A Closet Dividend Investor
- Seven dividend aristocrats that Buffett owns
- Buffett the dividend investor
- Berkshire Hathaway’s portfolio changes for 2Q 2009
- Buffett Partnership Letters
- Myths about Warren Buffett
- Warren Buffett’s Berkshire Hathaway Portfolio Changes
- What I learned from Warren Buffett’s Most Recent Letter to Shareholders
- Should you follow Warren Buffett’s latest moves?
- Warren Buffett – The Ultimate Dividend Investor
- Berkshire Hathaway Historical Total Return Performance
- Warren Buffet - The richest investor in the World
Books About Warren Buffett
The Snowball: Warren Buffett and the Business of Life
Of Permanent Value: The Story of Warren Buffett/A Trilogy/2010 Edition/Three-volume set
Buffett: The Making of an American Capitalist
Berkshire Hathaway Letters to Shareholders
Tap Dancing to Work: Warren Buffett on Practically Everything, 1966-2012: A Fortune Magazine Book
Berkshire Hathaway Resources
Berkshire Hathaway Letters to Shareholders since 1977
Buffett Partnership Letters
2015 Berkshire Hathaway Meeting Notes (Value Walk)
2014 Berkshire Hathaway Meeting Notes (RBCPA)
2013 Berkshire Hathaway Meeting Notes (CSInvesting)
2012 Berkshire Hathaway Meeting Notes (Cove Street Capital)
2011 Berkshire Hathaway Meeting Notes (Innoculated Investor)
2010 Berkshire Hathaway Meeting Notes (Innoculated Investor)
2009 Berkshire Hathaway Meeting Notes (J.V. Bruni & Co)
2008 Berkshire Hathaway Meeting Notes (Max Capital)
2007 Berkshire Hathaway Meeting Notes (Tilson Funds)
2006 Berkshire Hathaway Meeting Notes (Value Investor Insight)
2005 Berkshire Hathaway Meeting Notes (Tilson Funds)
2004 Berkshire Hathaway Meeting Notes (Graham & Doddsville)
2003 Berkshire Hathaway Meeting Notes (Tilson Funds)
2002 Berkshire Hathaway Meeting Notes (Tilson Funds)
2001 Berkshire Hathaway Meeting Notes (Tilson Funds)
2000 Berkshire Hathaway Meeting Notes (The Street)
1999 Berkshire Hathaway Meeting Notes (Motley Fool)
1998 Berkshire Hathaway Meeting Notes (Geocities)
1996 Berkshire Hathaway Meeting Notes ( Burgundy Asset Management)
1994 Berkshire Hathaway Meeting Notes ( Burgundy Asset Management)
Speeches by Warren Buffett
Buffett's Lecture at Notre Dame in 1991 (source)
Buffett's Lecture at the University of Nebraska in 1994
Buffett's Talk with University of Florida Students in 1998
Buffett's Speech at Columbia University in 2002
Lecture with Wharton Students in 2003 and in 2004
Buffett's Lecture with Vanderbilt Students in 2005
The source of those lectures was Tilson Funds.
Friday, November 15, 2013
What is Dividend Growth Investing?
Dividend growth investing is a strategy that focuses on companies which regularly raise dividends. The strategy focuses on growth in dividends over a longer period of time that usually exceeds ten years. The typical dividend growth stock does not yield a lot today, but can generate very high yields on cost, that will definitely trump even some of the highest yielding stocks today.
The important tool that makes dividend growth investing is growth in earnings per share. Growth in earnings per share enables companies to increase dividends over time in a sustainable matter. A company that grows dividends for a period of time without corresponding earnings growth will eventually run out of room to boost distributions. I call these dividend stocks on autopilot, and try to avoid them whenever possible. I typically look for the annual rates of increase in dividends and earnings per share to be similar within a certain range.
As a result, dividend growth investors focus on the catalysts that can generate a higher net income for the corporations whose stock they are purchasing. Companies can earn more by selling more, increasing prices, streamlining operations, expanding in new markets, selling new products or acquiring and merging with other companies. Mergers and acquisitions can only lead to higher earnings per share if they result in synergies. We want growth in earnings per share after all, not just a growth in overall net income.
There is not a one size fits all approach, which is why some time needs to be spent learning about the company and determining where the growth will come from. For many consumer staples such as Coca-Cola (KO) or Procter & Gamble (PG), future growth will be positively correlated with the expansion in the number of middle class consumers in emerging markets of Asia, Latin America, Africa and Eastern Europe. Strong pricing power of companies like Coca-Cola (KO) and Phillip Morris International (PM) can also allow them to pass on cost increases to consumers, while increasing their profits. For other companies such as 3M (MMM), future growth could arise from a culture that focuses on innovation and bringing new products to market in order to generate growth.
Imagine a company which yields 2.50% today, but can grow earnings and distributions by 10%/year. The stock trades at $100 today, earns $5/share and pays a $2.50 dividend. The stock will probably yield around 2% - 3% over the course of an year, and would be usually ignored by investors who simply look at current yields. In approximately 14-15 years however, this company would likely still yield somewhere between 2% - 3%. However, the stock would be earning close to $20/share and probably paying about $10/share in annual dividends. It would not be unreasonable to assume that the stock could be valued at $400/share. The investor, who had the vision to acquire this stock when it traded at $100/share, is now generating an yield on cost of 10%. If they reinvested dividends along the way, they would likely be earnings much more in dividend income. The rising dividend income also provides protection against inflation over time.
A few important things to note are related to entry price, diversification, and dividend reinvestment.
Having a strategy that provides a maximum entry price to pay for a stock helps in being a disciplined investor, who avoids getting carried away. I try to never pay more than 20 times earnings for a stock. At the end of the day, if you overpay by purchasing a company like Coca-Cola (KO) or Wal-Mart (WMT) at 30 times earnings, you might end up regretting the investment for a long time. You would likely receive a small yield as well. If you had the fortitude of selecting a great company with solid fundamentals and a rising earnings tide, it would eventually “bail you” out, as earnings growth would compress the P/E ratio. This would make the stock compelling again. However, if for some reason the company stops growing, it might be dead money for a long period of time. Hopefully some of your other investments deliver better returns if that were the case.
This leads me to the next point on diversification. Dividend growth investors need to absolutely build a portfolio consisting of at least 30 individual securities, which come from as many industries that make sense. Investors who own less than 30 positions, and are heavily focused on a sector or two are just asking for trouble. A diversified portfolio of over 30 stocks provides a fail-safe mechanism to protect the portfolio income against a few bad apples. It can also protect investors against a wave of dividend cuts in a given sector. Investors in the financial sector experienced dividend cuts and eliminations across the board during the 2007 – 2009 financial crisis. Not every company in the financial sector cut dividends however, and the carnage was mostly focused there.
The good part about the strategy is that investors receive cash in their brokerage accounts from their dividend paying stocks. This allows them to have the necessary resources available for opportunities present during recessions for example. Not all sectors are attractive to invest in at all times. This is why building your exposure at the most attractive stocks across a variety of sectors over time is an effective way to deploy dividends received and new capital put to work.
Full Disclosure: Long KO, PM, WMT, PM, MMM
Relevant Articles:
- Check the Complete Article Archive
- Buy and hold dividend investing is not dead
- Reinvest Dividends Selectively
- Dividend investing timeframes- what's your holding period?
- How much money do you really need to retire with dividend paying stocks?
The important tool that makes dividend growth investing is growth in earnings per share. Growth in earnings per share enables companies to increase dividends over time in a sustainable matter. A company that grows dividends for a period of time without corresponding earnings growth will eventually run out of room to boost distributions. I call these dividend stocks on autopilot, and try to avoid them whenever possible. I typically look for the annual rates of increase in dividends and earnings per share to be similar within a certain range.
As a result, dividend growth investors focus on the catalysts that can generate a higher net income for the corporations whose stock they are purchasing. Companies can earn more by selling more, increasing prices, streamlining operations, expanding in new markets, selling new products or acquiring and merging with other companies. Mergers and acquisitions can only lead to higher earnings per share if they result in synergies. We want growth in earnings per share after all, not just a growth in overall net income.
There is not a one size fits all approach, which is why some time needs to be spent learning about the company and determining where the growth will come from. For many consumer staples such as Coca-Cola (KO) or Procter & Gamble (PG), future growth will be positively correlated with the expansion in the number of middle class consumers in emerging markets of Asia, Latin America, Africa and Eastern Europe. Strong pricing power of companies like Coca-Cola (KO) and Phillip Morris International (PM) can also allow them to pass on cost increases to consumers, while increasing their profits. For other companies such as 3M (MMM), future growth could arise from a culture that focuses on innovation and bringing new products to market in order to generate growth.
Imagine a company which yields 2.50% today, but can grow earnings and distributions by 10%/year. The stock trades at $100 today, earns $5/share and pays a $2.50 dividend. The stock will probably yield around 2% - 3% over the course of an year, and would be usually ignored by investors who simply look at current yields. In approximately 14-15 years however, this company would likely still yield somewhere between 2% - 3%. However, the stock would be earning close to $20/share and probably paying about $10/share in annual dividends. It would not be unreasonable to assume that the stock could be valued at $400/share. The investor, who had the vision to acquire this stock when it traded at $100/share, is now generating an yield on cost of 10%. If they reinvested dividends along the way, they would likely be earnings much more in dividend income. The rising dividend income also provides protection against inflation over time.
A few important things to note are related to entry price, diversification, and dividend reinvestment.
Having a strategy that provides a maximum entry price to pay for a stock helps in being a disciplined investor, who avoids getting carried away. I try to never pay more than 20 times earnings for a stock. At the end of the day, if you overpay by purchasing a company like Coca-Cola (KO) or Wal-Mart (WMT) at 30 times earnings, you might end up regretting the investment for a long time. You would likely receive a small yield as well. If you had the fortitude of selecting a great company with solid fundamentals and a rising earnings tide, it would eventually “bail you” out, as earnings growth would compress the P/E ratio. This would make the stock compelling again. However, if for some reason the company stops growing, it might be dead money for a long period of time. Hopefully some of your other investments deliver better returns if that were the case.
This leads me to the next point on diversification. Dividend growth investors need to absolutely build a portfolio consisting of at least 30 individual securities, which come from as many industries that make sense. Investors who own less than 30 positions, and are heavily focused on a sector or two are just asking for trouble. A diversified portfolio of over 30 stocks provides a fail-safe mechanism to protect the portfolio income against a few bad apples. It can also protect investors against a wave of dividend cuts in a given sector. Investors in the financial sector experienced dividend cuts and eliminations across the board during the 2007 – 2009 financial crisis. Not every company in the financial sector cut dividends however, and the carnage was mostly focused there.
The good part about the strategy is that investors receive cash in their brokerage accounts from their dividend paying stocks. This allows them to have the necessary resources available for opportunities present during recessions for example. Not all sectors are attractive to invest in at all times. This is why building your exposure at the most attractive stocks across a variety of sectors over time is an effective way to deploy dividends received and new capital put to work.
Full Disclosure: Long KO, PM, WMT, PM, MMM
Relevant Articles:
- Check the Complete Article Archive
- Buy and hold dividend investing is not dead
- Reinvest Dividends Selectively
- Dividend investing timeframes- what's your holding period?
- How much money do you really need to retire with dividend paying stocks?
Wednesday, November 13, 2013
Dividend Stocks Are Not a Bubble, but Many Technology High-Fliers Are Dangerously Overhyped
So far, 2013 has been a great year for investors. Stock prices are rising left and right, many participants are flush with cash, and there are few alternatives to equities at the moment.
The rising tide has left many of the usual suspects I bought over the past five – six years slightly overvalued. I am referring to the likes of Colgate –Palmolive (CL), or Automatic Data Processing (ADP), which trade above 20 times earnings. Other steady-eddies like Coca-Cola (KO) and Procter & Gamble (PG) are trading at slightly less than 20 times earnings. This is not going unnoticed however. Several times so far this year, someone is coming to attack the viability of dividend investing as a strategy, mostly due to that overvaluation. These Neanderthals proclaim the death of dividend investing all the time. In general, I think these people should be ignored, as they are dangerous to your wealth building process.
All the while these self-proclaimed gurus talk about the so called bubble in dividend investing; they are failing to recognize the real threat to investors today. This threat is simply there, in plain sight, for anyone to see. Yet, everyone seems to be focusing on the so called bubble in dividend stocks. I don’t get it how you can call Coca-Cola at 19 times earnings a bubble, when Facebook (FB) is trading at a P/E ratio of 50 times expected earnings. I guess in the modern world, a company that has an established distribution network, a loyal customer base, pricing power, a diversity of products and a culture of dealing with over 100 years’ worth of challenges, is no match for a young technology company that offers a product that might not even be there 15 years from now. On the other hand, I am pretty sure people would still be brushing their teeth, drinking liquids and shaving.
What the gurus are missing, is the sky-high valuations on a certain set of over-hyped companies. Many of these companies are justifying their valuation based on extremely optimistic projections going many years into the future. The thing that makes those projections highly doubtful is that these companies have untested business models, and are subject to rapid paradigm shifts in consumer demands. It is very difficult to make projections on sales, revenues and profits ten years into the future on new concepts. This smells more like speculation, rather than sound investing. Even if you have a great idea that would make the world a much better place, it would still not be enough for early investors to make a reasonable return on their investment. If you massively overpay for future growth, you might end up without much of a return for a long period of time.
A few of these over-hyped companies include:
Tesla Motors (TSLA), which is supposed to revolutionize the automotive industry. We have the buzz word of a visionary entrepreneurial CEO with a proven track record, the fact that a company selling a few thousand cars per month has a market cap that is half to a third of more established General Motors (GM) and the lack of profits. It is true that the company has a lot of potential, but in order for the valuation to make sense, it must sell a lot of cars. Even if Tesla cars become widespread in the world in ten years, this still does not present a guarantee of profits and stock price gains for investors who buy today. Even if Tesla sells 500,000 cars annually by 2023, this could still not be enough to justify the lofty valuation of today. Tesla has a market cap of 16.5 billion, while GM has a 50.5 billion dollar capitalization. In 2012, GM delivered 9.3 million vehicles, while Tesla will have 21,000 vehicles delivered in 2013. The company is expected to reach 500,000 vehicles in the future. While the company is great, I doubt that current valuations make sense for investors.
Amazon.com (AMZN) is an awesome company, whose services I use very often. The company is trading at a P/E of a few hundred times earnings, and has managed to grow revenues through scaling operations, expanding into new sexy businesses such as the cloud, and disrupting the retail business. However, the company is almost 20 years old, yet still behaves like a start-up. I remember the first time everyone said that profits don’t matter in the late 1990s. I also remember the early 2000s, which were brutal for the former technology darlings. Many did go under, including the likes of Pets.com and Webvan. I think that Amazon would likely be there in 20 years, however I do not know if simply growing revenues is a viable business model that can reward shareholders in the long-run. At the end of the day, the goal for a business is not to grow revenues to the sky and be a disruptive force in as many industries as possible, but to make money for the shareholders. Between 1995 and 2012, the company has earned a total of $1.9 billion dollars. Currently, the market capitalization of Amazon is 160 billion dollars. While the company is great, current valuations do not make sense for investors.
Twitter (TWTR) recently had a widely successful Initial Public Offering (IPO). The company has not yet made a profit, but at least it is generating some revenues. Just a few short years ago, Twitter didn’t even know how to monetize its wide number of users. I use Twitter, but in all seriousness, I find it very obnoxious, and pretty spammy. Of course, I do not care about the Kardashians or Jersey Shore, so maybe I just don’t “get it“. However, when a company whose business trades at 24 times expected revenues in 2014, it could take a lot of luck for this investment to work out for investors. The company’s market capitalization is $22.70 billion and analysts expect it to have revenues of $1.15 billion by 2014. In 2012, the company lost $79 million on revenues of $317 million. Current valuations do not make sense for investors in Twitter.
I understand that all of these companies can justify their lofty valuations today, if they keep growing revenues and eye-balls at a fast pace for several years to come. However, this type of valuation method assumes perfection, and we all know how in a world of ever changing technology and rapid shifts in consumer technology tastes, todays darling could become tomorrow pariah. Just look at MySpace.
If the stock prices turn lower from here, the biggest losers are going to be the investors in the three companies mentioned above.
You can call me old-fashioned, but the types of companies I find attractive enough today to buy and hold for 20 years include:
The Coca-Cola Company (KO), a beverage company, engages in the manufacture, marketing, and sale of nonalcoholic beverages worldwide. The company has rewarded shareholders with dividend increases for 51 years in a row. Over the past decade, Coca-Cola has managed to hike dividends by 9.80%/year. Currently, the stock is trading at 19 times earnings and yields 2.80%. Check my analysis of Coca-Cola for more details.
Chevron Corporation (CVX), through its subsidiaries, engages in petroleum, chemicals, mining, power generation, and energy operations worldwide. The company has rewarded shareholders with dividend increases for 26 years in a row. Over the past decade, Chevron has managed to hike dividends by 9.60%/year. Currently, the stock is trading at 10 times earnings and yields 3.40%. Check my analysis of Chevron for more details.
Target Corporation (TGT) operates general merchandise stores in the United States. The company has rewarded shareholders with dividend increases for 46 years in a row. Over the past decade, Target has managed to hike dividends by 18.60%/year. Currently, the stock is trading at 15.70 times earnings and yields 2.70%. Check my analysis of Target for more details.
Philip Morris International Inc. (PM), through its subsidiaries, manufactures and sells cigarettes and other tobacco products. The company has rewarded shareholders with dividend increases for years in a row. Since the spin-off from its parent Altria in 2008, Philip Morris International has managed to hike dividends by 13%/year. Currently, the stock is trading at 17 times earnings and yields 4.20%. Check my analysis of Philip Morris International for more details.
I believe that the key to investing success is not how much a company will supposedly benefit society, but rather determine what their competitive advantage is and how durable that moat really is. After that, if you manage to purchase such a company at a fair price, and you hold at least 30 such companies in your dividend portfolio, you should do quite well for yourself in the long-run.
Full Disclosure: Long KO, CVX, TGT, CL, ADP, PM
Relevant Articles:
- Buy and hold dividend investing is not dead
- Dividend Investing in times of a Social Media Bubbles
- How to invest when the market is at all time highs?
- Common Misconceptions about Dividend Growth Investing
- Frequently Asked Questions (FAQ) About Dividend Investing
The rising tide has left many of the usual suspects I bought over the past five – six years slightly overvalued. I am referring to the likes of Colgate –Palmolive (CL), or Automatic Data Processing (ADP), which trade above 20 times earnings. Other steady-eddies like Coca-Cola (KO) and Procter & Gamble (PG) are trading at slightly less than 20 times earnings. This is not going unnoticed however. Several times so far this year, someone is coming to attack the viability of dividend investing as a strategy, mostly due to that overvaluation. These Neanderthals proclaim the death of dividend investing all the time. In general, I think these people should be ignored, as they are dangerous to your wealth building process.
All the while these self-proclaimed gurus talk about the so called bubble in dividend investing; they are failing to recognize the real threat to investors today. This threat is simply there, in plain sight, for anyone to see. Yet, everyone seems to be focusing on the so called bubble in dividend stocks. I don’t get it how you can call Coca-Cola at 19 times earnings a bubble, when Facebook (FB) is trading at a P/E ratio of 50 times expected earnings. I guess in the modern world, a company that has an established distribution network, a loyal customer base, pricing power, a diversity of products and a culture of dealing with over 100 years’ worth of challenges, is no match for a young technology company that offers a product that might not even be there 15 years from now. On the other hand, I am pretty sure people would still be brushing their teeth, drinking liquids and shaving.
What the gurus are missing, is the sky-high valuations on a certain set of over-hyped companies. Many of these companies are justifying their valuation based on extremely optimistic projections going many years into the future. The thing that makes those projections highly doubtful is that these companies have untested business models, and are subject to rapid paradigm shifts in consumer demands. It is very difficult to make projections on sales, revenues and profits ten years into the future on new concepts. This smells more like speculation, rather than sound investing. Even if you have a great idea that would make the world a much better place, it would still not be enough for early investors to make a reasonable return on their investment. If you massively overpay for future growth, you might end up without much of a return for a long period of time.
A few of these over-hyped companies include:
Tesla Motors (TSLA), which is supposed to revolutionize the automotive industry. We have the buzz word of a visionary entrepreneurial CEO with a proven track record, the fact that a company selling a few thousand cars per month has a market cap that is half to a third of more established General Motors (GM) and the lack of profits. It is true that the company has a lot of potential, but in order for the valuation to make sense, it must sell a lot of cars. Even if Tesla cars become widespread in the world in ten years, this still does not present a guarantee of profits and stock price gains for investors who buy today. Even if Tesla sells 500,000 cars annually by 2023, this could still not be enough to justify the lofty valuation of today. Tesla has a market cap of 16.5 billion, while GM has a 50.5 billion dollar capitalization. In 2012, GM delivered 9.3 million vehicles, while Tesla will have 21,000 vehicles delivered in 2013. The company is expected to reach 500,000 vehicles in the future. While the company is great, I doubt that current valuations make sense for investors.
Amazon.com (AMZN) is an awesome company, whose services I use very often. The company is trading at a P/E of a few hundred times earnings, and has managed to grow revenues through scaling operations, expanding into new sexy businesses such as the cloud, and disrupting the retail business. However, the company is almost 20 years old, yet still behaves like a start-up. I remember the first time everyone said that profits don’t matter in the late 1990s. I also remember the early 2000s, which were brutal for the former technology darlings. Many did go under, including the likes of Pets.com and Webvan. I think that Amazon would likely be there in 20 years, however I do not know if simply growing revenues is a viable business model that can reward shareholders in the long-run. At the end of the day, the goal for a business is not to grow revenues to the sky and be a disruptive force in as many industries as possible, but to make money for the shareholders. Between 1995 and 2012, the company has earned a total of $1.9 billion dollars. Currently, the market capitalization of Amazon is 160 billion dollars. While the company is great, current valuations do not make sense for investors.
Twitter (TWTR) recently had a widely successful Initial Public Offering (IPO). The company has not yet made a profit, but at least it is generating some revenues. Just a few short years ago, Twitter didn’t even know how to monetize its wide number of users. I use Twitter, but in all seriousness, I find it very obnoxious, and pretty spammy. Of course, I do not care about the Kardashians or Jersey Shore, so maybe I just don’t “get it“. However, when a company whose business trades at 24 times expected revenues in 2014, it could take a lot of luck for this investment to work out for investors. The company’s market capitalization is $22.70 billion and analysts expect it to have revenues of $1.15 billion by 2014. In 2012, the company lost $79 million on revenues of $317 million. Current valuations do not make sense for investors in Twitter.
I understand that all of these companies can justify their lofty valuations today, if they keep growing revenues and eye-balls at a fast pace for several years to come. However, this type of valuation method assumes perfection, and we all know how in a world of ever changing technology and rapid shifts in consumer technology tastes, todays darling could become tomorrow pariah. Just look at MySpace.
If the stock prices turn lower from here, the biggest losers are going to be the investors in the three companies mentioned above.
You can call me old-fashioned, but the types of companies I find attractive enough today to buy and hold for 20 years include:
The Coca-Cola Company (KO), a beverage company, engages in the manufacture, marketing, and sale of nonalcoholic beverages worldwide. The company has rewarded shareholders with dividend increases for 51 years in a row. Over the past decade, Coca-Cola has managed to hike dividends by 9.80%/year. Currently, the stock is trading at 19 times earnings and yields 2.80%. Check my analysis of Coca-Cola for more details.
Chevron Corporation (CVX), through its subsidiaries, engages in petroleum, chemicals, mining, power generation, and energy operations worldwide. The company has rewarded shareholders with dividend increases for 26 years in a row. Over the past decade, Chevron has managed to hike dividends by 9.60%/year. Currently, the stock is trading at 10 times earnings and yields 3.40%. Check my analysis of Chevron for more details.
Target Corporation (TGT) operates general merchandise stores in the United States. The company has rewarded shareholders with dividend increases for 46 years in a row. Over the past decade, Target has managed to hike dividends by 18.60%/year. Currently, the stock is trading at 15.70 times earnings and yields 2.70%. Check my analysis of Target for more details.
Philip Morris International Inc. (PM), through its subsidiaries, manufactures and sells cigarettes and other tobacco products. The company has rewarded shareholders with dividend increases for years in a row. Since the spin-off from its parent Altria in 2008, Philip Morris International has managed to hike dividends by 13%/year. Currently, the stock is trading at 17 times earnings and yields 4.20%. Check my analysis of Philip Morris International for more details.
I believe that the key to investing success is not how much a company will supposedly benefit society, but rather determine what their competitive advantage is and how durable that moat really is. After that, if you manage to purchase such a company at a fair price, and you hold at least 30 such companies in your dividend portfolio, you should do quite well for yourself in the long-run.
Full Disclosure: Long KO, CVX, TGT, CL, ADP, PM
Relevant Articles:
- Buy and hold dividend investing is not dead
- Dividend Investing in times of a Social Media Bubbles
- How to invest when the market is at all time highs?
- Common Misconceptions about Dividend Growth Investing
- Frequently Asked Questions (FAQ) About Dividend Investing
Monday, November 11, 2013
How to buy dividend stocks with as little as $10
Update 1/7/2016: The credit card option is no longer available. You can only purchase shares using your linked checking account.
Many Americans use credit cards for a lot of their everyday purchases. In fact, many Americans have a problem with too much plastic. As a result, people in the US save a very small amount of their incomes. At the same time, a lot of individuals have a problem with debt.
On the other scale, you have beginning dividend investors, who cannot put more than a few hundred dollars per month in quality dividend stocks. Many investors are put off investing, because they believe they need a lot of money to start investing. With commissions at even the best brokers run anywhere between $5 - $10 per transaction, many investors rightly know that they need a lot of money coming each month before they can consider investing in dividend paying stocks. They are somewhat right, since a $5 commission on a $200 investment is equivalent to 2.50%, which is prohibitively high. A $10 commission on a $200 investment corresponds to an even worse 5%.
The options for this investor are to either purchase commission free ETF’s or mutual funds, use dividend reinvestment plans (DRIPs) or find a low or zero commission way to acquire stock. When I was first starting out, the best broker for me was Zecco, because it provided free trades every month. Now unfortunately there are almost no such options.
However, I recently stumbled upon Loyal3, which lets you purchase shares of some of the best stocks in the world for no cost. In fact, you can purchase shares in some of your favorite dividend stocks with as little as $10 with no costs whatsoever. Even better, you can use your credit card to purchase shares directly from the companies you are investing in with no cost and earn credit card rewards in the process. Selling you shares is commission free as well, and all costs so far have been bore by the companies themselves. The companies benefit by creating a truly loyal and long-term shareholder base, and get capital to invest in their businesses. If the stock you are buying costs more than $10/share, it is not a problem, since Loyal3 allows you to buy partial shares.
With Loyal3, you can essentially buy shares in your favorite stocks with as little as $10, which democratizes the investing process. This way, even the 99% have a chance of making money from the economic success of some of America’s greatest companies. One of the downsides behind this investing scheme is that there are only a limited number of 50 or so companies which have signed up to offer shares directly to stockholders.
Using the following list, you can see that there are several prominent dividend paying stocks there. A few notable examples include McDonald's (MCD), Coca-Cola (KO), PepsiCo (PEP), Unilever (UL), Target (TGT) and Wal-Mart (WMT).
One downside is that Loyal3 is a start-up, and therefore it is not an established broker. Therefore, this opportunity could be of a limited time whose purpose is to attract customers, before initiating a monthly fee or a small commission. Of course, once you own the stock, you can always transfer securities elsewhere, and close your Loyal3 account.
While I like that you can buy stock in companies with as little as $10 per investment with a credit card, you can only do this if you set up a monthly investment plan. If you are not good at managing your personal finances, it is possible to rack up quite an amount of credit card debt from those monthly recurring transactions if you say forget about it and do not track your credit card statements. Of course, if I had the choice of having a credit card debt from shopping for clothes or buying stocks, I would choose stocks any time. Therefore, you should be careful not to overextend yourself. However, since I monitor my accounts daily, I would never buy anything that will jeopardize my personal finances. Of course, if you use your checking account, you can make a one time investment at any time in a given month. You are only limited to buying up to $2,500 per stock in a given company per month ( for both credit and checking accounts).
The other thing to look for when you buy shares is execution speed and price. You do not want to “save” $5 on a commission, only to get horrible execution price from your broker. For example, if you had $200 and a share of IBM cost $190, you should end up with one share of IBM and $10 with a commission free broker. If your execution price is $195, it is quite possible that your broker is compensating for the lack of commission by making you pay inflated prices for stocks you are buying. With Loyal3, the shares are purchased at prices that approximate the market price within a few pennies/share, which is reasonable. In addition, the shares are put in your account soon after purchase.
Actually, the website says that “You will receive the actual share price (market price) of stock bought on your behalf on the day your purchase is executed". You will receive a link to your trade confirmation shortly after the shares are purchased in the open market. Based on 10 transactions I made with the site, I can attest that prices were very similar to market prices at time of purchase confirmation.
For example, I had set up my account to automatically purchase shares of Unilever (UL)on the 7th day of the month, using my credit card. The credit card was charged on October 7, and the stock was purchased at $37.68/share. The number of shares was posted to the account within a couple of business days.
Selling is really easy as well. It took approximately 3 businesses days when selling a stock, before you can get the money in your Loyal3 account. Per the company, you will receive the actual price (market price) of shares sold through the LOYAL3 platform on your behalf on the day your sale is executed.
Another thing to look for when evaluating brokers is to make sure that they are SIPC insured. This protects the investors for an amount up to $500,000, if the broker failed. Loyal3 is SIPC insured, so you should be ok if your investment there are worth less than $500 thousand.
The company does not automatically reinvests dividends for you into more shares. This does not speed up the compounding process for you. If you earn enough in dividends however, you can easily allocate the cash to your best idea available at Loyal3.
I would also want to see them have more information about investing in general. I think that most of the people using Loyal3 would likely be new to investments, and therefore an education section there would be helpful.
I have bought shares in the following companies in this account over the past month:
McDonald'’s Corporation (MCD) franchises and operates McDonald's restaurants in the United States, Europe, the Asia/Pacific, the Middle East, Africa, Canada, and Latin America. This dividend champion has consistently raised distributions for 38 years in a row. Over the past decade, it has managed to boost dividends by 28.40%/year. Currently, the stock is trading at 17.50 times earnings and yields 3.30%. Check my analysis of McDonald's for more details.
Target Corporation (TGT) operates general merchandise stores in the United States. This dividend champion has consistently raised distributions for 46 years in a row. Over the past decade, it has managed to boost dividends by 18.60%/year. Currently, the stock is trading at 15.60 times earnings and yields 2.70%. Check my analysis of Target for more details.
Wal-Mart Stores, Inc. (WMT) operates retail stores in various formats worldwide. This dividend champion has consistently raised distributions for 39 years in a row. Over the past decade, the company has managed to boost dividends by 18.10%/year. Currently, the stock is trading at 15.10 times earnings and yields 2.40%. Check my analysis of Wal-Mart for more details.
Dr Pepper Snapple Group, Inc. (DPS) operates as a brand owner, manufacturer, and distributor of non-alcoholic beverages in the United States, Canada, Mexico, and the Caribbean. This dividend stock initiated dividends in 2009 and has been raising them annually ever since. Currently, the stock is trading at 15.30 times earnings and yields 3.20%. Check my analysis of Dr Pepper for more details.
The Coca-Cola Company (KO), a beverage company, engages in the manufacture, marketing, and sale of nonalcoholic beverages worldwide. This dividend champion has consistently raised distributions for 51 years in a row. Over the past decade, the company as managed to boost dividends by 9.80%/year. Currently, the stock is trading at 19 times forward earnings and yields 2.80%. Check my analysis of Coca-Cola for more details.
Unilever PLC (UL) operates as a fast-moving consumer goods company in Asia, Africa, the Middle East, Turkey, Europe, and the Americas. This international dividend achiever has consistently raised distributions for 14 years in a row. Over the past decade, Unilever has managed to boost dividends by 9.90%/year. Currently, the stock is trading at 18.70 times earnings and yields 3.70%. Check my analysis of Unilever for more details.
Kellogg Company (K), together with its subsidiaries, manufactures and markets ready-to-eat cereal and convenience food products primarily in North America, Europe, Latin America, and the Asia Pacific. This dividend stock has managed to raise distributions for nine years in a row. Over the past decade, the company has managed to boost dividends by 5.60%/year. Currently, the stock is trading at 16.50 times forward earnings and yields 3%.
Overall, I am excited about Loyal3, and highly recommend it to anyone just starting out. If you already have a brokerage account, it might still make sense to acquire stock directly through Loyal3, assuming you find great companies available at attractive prices at that site, since there are no commissions.
This platform is very intuitive, easy to set up, and would satisfy the needs for most long-term dividend investors. If you need instant liquidity and instant gratification, plus streaming quotes and the ability to day-trade stocks, sell calls and puts on them, then this is not the platform for you. However, it is time in the market, not timing the market, that truly has determined the success of some of the most successful dividend investors of all time. Patience is a very lucrative virtue in the world of dividend investing for the long run.
Full Disclosure: Long IBM, MCD, TGT, WMT, K, DPS, KO, UL
Relevant Articles:
- Check the Complete Article Archive
- Do not despise the days of small beginnings
- Ten Dividend Paying Stocks I purchased in September
- Using DRIPs for faster compounding of dividends
- Why Investors Should Look Beyond Typical Dividend Growth Screens
This article was featured on the Carnival of Wealth
Many Americans use credit cards for a lot of their everyday purchases. In fact, many Americans have a problem with too much plastic. As a result, people in the US save a very small amount of their incomes. At the same time, a lot of individuals have a problem with debt.
On the other scale, you have beginning dividend investors, who cannot put more than a few hundred dollars per month in quality dividend stocks. Many investors are put off investing, because they believe they need a lot of money to start investing. With commissions at even the best brokers run anywhere between $5 - $10 per transaction, many investors rightly know that they need a lot of money coming each month before they can consider investing in dividend paying stocks. They are somewhat right, since a $5 commission on a $200 investment is equivalent to 2.50%, which is prohibitively high. A $10 commission on a $200 investment corresponds to an even worse 5%.
The options for this investor are to either purchase commission free ETF’s or mutual funds, use dividend reinvestment plans (DRIPs) or find a low or zero commission way to acquire stock. When I was first starting out, the best broker for me was Zecco, because it provided free trades every month. Now unfortunately there are almost no such options.
However, I recently stumbled upon Loyal3, which lets you purchase shares of some of the best stocks in the world for no cost. In fact, you can purchase shares in some of your favorite dividend stocks with as little as $10 with no costs whatsoever. Even better, you can use your credit card to purchase shares directly from the companies you are investing in with no cost and earn credit card rewards in the process. Selling you shares is commission free as well, and all costs so far have been bore by the companies themselves. The companies benefit by creating a truly loyal and long-term shareholder base, and get capital to invest in their businesses. If the stock you are buying costs more than $10/share, it is not a problem, since Loyal3 allows you to buy partial shares.
With Loyal3, you can essentially buy shares in your favorite stocks with as little as $10, which democratizes the investing process. This way, even the 99% have a chance of making money from the economic success of some of America’s greatest companies. One of the downsides behind this investing scheme is that there are only a limited number of 50 or so companies which have signed up to offer shares directly to stockholders.
Using the following list, you can see that there are several prominent dividend paying stocks there. A few notable examples include McDonald's (MCD), Coca-Cola (KO), PepsiCo (PEP), Unilever (UL), Target (TGT) and Wal-Mart (WMT).
One downside is that Loyal3 is a start-up, and therefore it is not an established broker. Therefore, this opportunity could be of a limited time whose purpose is to attract customers, before initiating a monthly fee or a small commission. Of course, once you own the stock, you can always transfer securities elsewhere, and close your Loyal3 account.
While I like that you can buy stock in companies with as little as $10 per investment with a credit card, you can only do this if you set up a monthly investment plan. If you are not good at managing your personal finances, it is possible to rack up quite an amount of credit card debt from those monthly recurring transactions if you say forget about it and do not track your credit card statements. Of course, if I had the choice of having a credit card debt from shopping for clothes or buying stocks, I would choose stocks any time. Therefore, you should be careful not to overextend yourself. However, since I monitor my accounts daily, I would never buy anything that will jeopardize my personal finances. Of course, if you use your checking account, you can make a one time investment at any time in a given month. You are only limited to buying up to $2,500 per stock in a given company per month ( for both credit and checking accounts).
The other thing to look for when you buy shares is execution speed and price. You do not want to “save” $5 on a commission, only to get horrible execution price from your broker. For example, if you had $200 and a share of IBM cost $190, you should end up with one share of IBM and $10 with a commission free broker. If your execution price is $195, it is quite possible that your broker is compensating for the lack of commission by making you pay inflated prices for stocks you are buying. With Loyal3, the shares are purchased at prices that approximate the market price within a few pennies/share, which is reasonable. In addition, the shares are put in your account soon after purchase.
Actually, the website says that “You will receive the actual share price (market price) of stock bought on your behalf on the day your purchase is executed". You will receive a link to your trade confirmation shortly after the shares are purchased in the open market. Based on 10 transactions I made with the site, I can attest that prices were very similar to market prices at time of purchase confirmation.
For example, I had set up my account to automatically purchase shares of Unilever (UL)on the 7th day of the month, using my credit card. The credit card was charged on October 7, and the stock was purchased at $37.68/share. The number of shares was posted to the account within a couple of business days.
Selling is really easy as well. It took approximately 3 businesses days when selling a stock, before you can get the money in your Loyal3 account. Per the company, you will receive the actual price (market price) of shares sold through the LOYAL3 platform on your behalf on the day your sale is executed.
Another thing to look for when evaluating brokers is to make sure that they are SIPC insured. This protects the investors for an amount up to $500,000, if the broker failed. Loyal3 is SIPC insured, so you should be ok if your investment there are worth less than $500 thousand.
The company does not automatically reinvests dividends for you into more shares. This does not speed up the compounding process for you. If you earn enough in dividends however, you can easily allocate the cash to your best idea available at Loyal3.
I would also want to see them have more information about investing in general. I think that most of the people using Loyal3 would likely be new to investments, and therefore an education section there would be helpful.
I have bought shares in the following companies in this account over the past month:
McDonald'’s Corporation (MCD) franchises and operates McDonald's restaurants in the United States, Europe, the Asia/Pacific, the Middle East, Africa, Canada, and Latin America. This dividend champion has consistently raised distributions for 38 years in a row. Over the past decade, it has managed to boost dividends by 28.40%/year. Currently, the stock is trading at 17.50 times earnings and yields 3.30%. Check my analysis of McDonald's for more details.
Target Corporation (TGT) operates general merchandise stores in the United States. This dividend champion has consistently raised distributions for 46 years in a row. Over the past decade, it has managed to boost dividends by 18.60%/year. Currently, the stock is trading at 15.60 times earnings and yields 2.70%. Check my analysis of Target for more details.
Wal-Mart Stores, Inc. (WMT) operates retail stores in various formats worldwide. This dividend champion has consistently raised distributions for 39 years in a row. Over the past decade, the company has managed to boost dividends by 18.10%/year. Currently, the stock is trading at 15.10 times earnings and yields 2.40%. Check my analysis of Wal-Mart for more details.
Dr Pepper Snapple Group, Inc. (DPS) operates as a brand owner, manufacturer, and distributor of non-alcoholic beverages in the United States, Canada, Mexico, and the Caribbean. This dividend stock initiated dividends in 2009 and has been raising them annually ever since. Currently, the stock is trading at 15.30 times earnings and yields 3.20%. Check my analysis of Dr Pepper for more details.
The Coca-Cola Company (KO), a beverage company, engages in the manufacture, marketing, and sale of nonalcoholic beverages worldwide. This dividend champion has consistently raised distributions for 51 years in a row. Over the past decade, the company as managed to boost dividends by 9.80%/year. Currently, the stock is trading at 19 times forward earnings and yields 2.80%. Check my analysis of Coca-Cola for more details.
Unilever PLC (UL) operates as a fast-moving consumer goods company in Asia, Africa, the Middle East, Turkey, Europe, and the Americas. This international dividend achiever has consistently raised distributions for 14 years in a row. Over the past decade, Unilever has managed to boost dividends by 9.90%/year. Currently, the stock is trading at 18.70 times earnings and yields 3.70%. Check my analysis of Unilever for more details.
Kellogg Company (K), together with its subsidiaries, manufactures and markets ready-to-eat cereal and convenience food products primarily in North America, Europe, Latin America, and the Asia Pacific. This dividend stock has managed to raise distributions for nine years in a row. Over the past decade, the company has managed to boost dividends by 5.60%/year. Currently, the stock is trading at 16.50 times forward earnings and yields 3%.
Overall, I am excited about Loyal3, and highly recommend it to anyone just starting out. If you already have a brokerage account, it might still make sense to acquire stock directly through Loyal3, assuming you find great companies available at attractive prices at that site, since there are no commissions.
This platform is very intuitive, easy to set up, and would satisfy the needs for most long-term dividend investors. If you need instant liquidity and instant gratification, plus streaming quotes and the ability to day-trade stocks, sell calls and puts on them, then this is not the platform for you. However, it is time in the market, not timing the market, that truly has determined the success of some of the most successful dividend investors of all time. Patience is a very lucrative virtue in the world of dividend investing for the long run.
Full Disclosure: Long IBM, MCD, TGT, WMT, K, DPS, KO, UL
Relevant Articles:
- Check the Complete Article Archive
- Do not despise the days of small beginnings
- Ten Dividend Paying Stocks I purchased in September
- Using DRIPs for faster compounding of dividends
- Why Investors Should Look Beyond Typical Dividend Growth Screens
This article was featured on the Carnival of Wealth