A few years ago I shared the story of one small investment of a beginner income investor I met at the beginning of my own dividend journey. This story shows that anyone can start learning investing, no matter what age, level of money they can set aside. All that truly matters is having the right attitude that you can achieve anything you set your mind to, through hard work, persistence, patience and determination. Of course, the most important thing about dividend investing is to get started.
You do not need a lot of money to get started with dividend investing. One should never despise the days of small beginnings, and think that they need a large pike of cash before starting dividend investing. If you start slowly, even with a $10 investment, you are years ahead of most other individuals. Unless you are drowning in debt, you do not have any excuse to avoid investing in some of the strongest dividend paying blue chips today. With brokerages like Loyal3, it is possible to purchase shares in companies like Coca-Cola (KO), McDonald’s (MCD) or Wal-Mart (WMT) with as little as $10, commission free. Of course, you should increase the amounts you put to work for you as your level of income increases over time. Otherwise, you would need to spend a higher amount of time working prior to accumulating a sufficient nest egg.
So back in May 2008, my young friend opened an account with Sharebuilder with $40 that he had to his name. He paid a steep $4 commission, but managed to purchase 1.4196 shares of Realty Income (O) at 25.36/share. Being a poor college student, he was low on cash so he took advantage of a brokerage deal at Sharebuilder. As part of the deal, he received a $50 cash bonus for opening an account and making one investment. So after he made the investment, he essentially started playing with the house’s money, as he had no funds at risk after the rebate.
The next smartest thing this investor accomplished was selecting the "reinvest dividends" button at Sharebuilder. This meant that the first distribution of 20 cents that he received was immediately reinvested at a fractional share of Realty Income (O). That was 0.0084 shares to be exact. His latest distribution was 36 cents, which purchased 0.0093 shares. All in all, the investor’s number of shares has risen to 1.968 shares by January 2014.
He selected Realty Income because he liked the fact that it was a dividend achiever, which had raised distributions for 14 years in a row. The payout ratio was adequate, and there was possibility of further dividends growth down the road fueled by acquisitions and rent increases over time.
The beauty of dividend reinvestment is that it forces the investor to allocate cash back into the same security that paid it, through thick and thin. This eliminates emotion out of investing, and enables the investor to buy when prices are low, without second guessing themselves.
The power of compounding is further magnified, when distributions are received monthly, rather than quarterly or annually. That way, distributions are put to work for you much faster, and you end up taking of advantage of time in the market to a fuller extent.
The other advantage was that dividend payments were increased regularly between 2008 and 2014, which further turbocharged the compounding process. This was a rarity among REITs, many of which had to cut or eliminate distributions to shareholders during the Financial Crisis. The monthly dividend was increased from $0.137375/share in May 2008 to $0.1821667/share by December 2013 for Realty Income.
The high dividend yield from Realty Income of 6.50% in 2008 was also helpful in reaching to 11% yield on cost in 6 years. If you start with a high dividend initially, which is sustainable, and you reinvest this growing distribution monthly, you are turbocharging your dividend income growth exponentially. If you earn $65 on a $1000 investment, and you reinvest dividends at 6% without any growth, your dividend income is destined to double in 12 years, using the rule of 72.
However, the important thing is to not just focus on yield alone, but on the growth of the dividend payments. This is because during retirement, you will need to spend all of that dividend income on daily expenditures. Therefore, having your dividends increase above the rate of inflation is absolutely essential for you to maintain your standard of living. As a result, in my portfolio I have some high yielding stocks with lower growth, and some low yielding stocks with high dividend growth rates. However, the majority of my portfolio is in companies in the sweet spot, which have average yields ( around 3%) and average dividend growth rates ( around 7%). Long-term investing is a marathon, not a sprint, so you need to search for assets that will provide high inflation adjusted growth for 2 - 3 decades in the future at the minimum.
The other lesson to learn is that this investment was not diversified at all. If our investor had put their money in American Capital Strategies (ACAS) in 2008, rather than Realty Income, they would not have benefited from the power of compounding. This is because American Capital Strategies eliminated distributions in 2008. Therefore, it is important to spread risk between at least 30 – 40 quality securities that have dividend growth potential. That way, if one or two of them cut or eliminate dividends, your overall portfolio income will not decline, but might even increase due to the dividend growth from the remaining components.
The lessons that this young investor learned, after watching a small amount of money compound for years, were worth every single penny. Based on the experience, the investor has been ultimately able to apply lessons learned in his investing for his future goals. As he got jobs after college, and earned promotions, he was able to put increasing amounts of funds to work. It would likely take him at least 2 decades before his dividend income becomes substantial enough for his level of spending, but luckily he is on the right plan to success.
Investing $40 is not much different than investing $40,000 or $400,000, if you have the right attitude and you focus on learning the correct process for achieving your goals. The difference is that you can easily replace $40, but $40,000 or $400,000 would take a long period of time to replace. Therefore, you need to spend the time and learn the right lessons early on, and then use this knowledge as your means increase over time. If you learn how to avoid doing dumb things to your portfolio, you would have dramatically increased your chances of achieving your goals one day.
Full Disclosure: Long O, MCD, WMT, KO
Relevant Articles:
- Reinvesting Dividends Pays Off
- Do not despise the days of small beginnings
- How to buy dividend stocks with as little as $10
- Margin of Safety in Dividends
- Six lessons I learned from the financial crisis
Friday, February 28, 2014
Wednesday, February 26, 2014
Do not focus only on income for retirement planning
Over the past 85 years US stocks have delivered a total return of 9% - 10%/year. Dividends have contributed approximately 35% - 40% of average annual returns per year during the period. The remainder has come from capital gains. As dividend stocks are equities after all, investors who focus only on the dividend might be missing out on total returns over time. In my investing I focus on companies that have a balance between dividend payments and growing the business. I prefer when the companies I own reinvest a portion of profits in the business in order to maintain and expand the enterprise. This hopefully leads to higher earnings per share over time, which provides the cash to pay higher dividends. The combination of higher earnings per share and dividends leads to higher share prices over time. This is of course an overgeneralization, but in most of the situations companies that exhibit these traits and manage to effectively deploy earnings per share into more earnings per share growth which will increase shareholders’ wealth over time.
Investors should also mostly ignore companies that pay high dividends and do so because of an asset depletion strategy. Certain trusts in the US, like oil and gas pay high distributions, but a large portion of these distributions is a return of capital. Your claim to the company’s assets decreases with each dividend check. To maintain level of dividend income, one needs to reinvest a portion of distributions. If you have to reinvest 62.50% of distributions from a company yielding 8% simply to maintain the stability of dividend income, you might be better off in a 3% dividend achiever or a dividend champion. The dividend achiever might not pay a high yield today, but future distributions would more than likely rise above the rate of inflation. With oil and gas royalty trusts, the distributions are expected to decrease over time, until the wells run dry. Thus, the high yield stock of today has a double whammy, as it will provide a decreasing stream of income that losses purchasing power every year and would likely lead to a stock price that is close to zero eventually.
Other investors tend to focus on option strategies such as covered calls in order to augment their returns. Unfortunately the generous premiums come from the fact that these strategies and the funds that employ them tend to limit their upside. Unfortunately there is no free lunch on Wall Street.
The types of companies I focus on include those with proven track records of growing distributions which also have the capability to grow earnings over time. For example, a few companies such as Coca-Cola (KO), McDonald’s (MCD) and Chevron (CVX) come to mind as great examples of companies to hold for the long-term.
With the rise in the middle-class population in the world over the next few decades, I expect that more people will drink Coke products. For example, consumers in China only have approximately 38 servings of Coca-Cola products per year, whereas the typical US consumer has approximately 400 annually. Check my analysis of Coca-Cola for more information about the company.
I also expect the rising middle-class consumer to be as time-starved as their developed country peers. Therefore, I would not be surprised if the convenience of fast-food companies such as McDonald’s (MCD) becomes a daily treat for these consumers. Check my analysis of McDonald's for more information about the company.
The rise in the middle class will also increase demand for natural resources such as oil and gas, as more people would need to drive to their places of work on congested highways. With improvement of technologies, companies like Chevron (CVX) would be able to recover a higher percentage of carbons from their wells. In addition, they would be able to leverage new technologies in order to increase success rate in their exploration wells, even if these projects take place in inhospitable environments such as the deep seas or arctic circles. Check my analysis of Chevron for more information about the company.
Full Disclosure: Long KO, MCD, CVX
Relevant Articles:
- The number one reason why i don't chase high-yield stocks
- Dividend Investors – Do not forget about capital gains
- Dividend Champions - The Best List for Dividend Investors
- Dividend income is more stable than capital gains
- Dividend Growth Investing is a Perfect Strategy for Young Investors
Investors should also mostly ignore companies that pay high dividends and do so because of an asset depletion strategy. Certain trusts in the US, like oil and gas pay high distributions, but a large portion of these distributions is a return of capital. Your claim to the company’s assets decreases with each dividend check. To maintain level of dividend income, one needs to reinvest a portion of distributions. If you have to reinvest 62.50% of distributions from a company yielding 8% simply to maintain the stability of dividend income, you might be better off in a 3% dividend achiever or a dividend champion. The dividend achiever might not pay a high yield today, but future distributions would more than likely rise above the rate of inflation. With oil and gas royalty trusts, the distributions are expected to decrease over time, until the wells run dry. Thus, the high yield stock of today has a double whammy, as it will provide a decreasing stream of income that losses purchasing power every year and would likely lead to a stock price that is close to zero eventually.
Other investors tend to focus on option strategies such as covered calls in order to augment their returns. Unfortunately the generous premiums come from the fact that these strategies and the funds that employ them tend to limit their upside. Unfortunately there is no free lunch on Wall Street.
The types of companies I focus on include those with proven track records of growing distributions which also have the capability to grow earnings over time. For example, a few companies such as Coca-Cola (KO), McDonald’s (MCD) and Chevron (CVX) come to mind as great examples of companies to hold for the long-term.
With the rise in the middle-class population in the world over the next few decades, I expect that more people will drink Coke products. For example, consumers in China only have approximately 38 servings of Coca-Cola products per year, whereas the typical US consumer has approximately 400 annually. Check my analysis of Coca-Cola for more information about the company.
I also expect the rising middle-class consumer to be as time-starved as their developed country peers. Therefore, I would not be surprised if the convenience of fast-food companies such as McDonald’s (MCD) becomes a daily treat for these consumers. Check my analysis of McDonald's for more information about the company.
The rise in the middle class will also increase demand for natural resources such as oil and gas, as more people would need to drive to their places of work on congested highways. With improvement of technologies, companies like Chevron (CVX) would be able to recover a higher percentage of carbons from their wells. In addition, they would be able to leverage new technologies in order to increase success rate in their exploration wells, even if these projects take place in inhospitable environments such as the deep seas or arctic circles. Check my analysis of Chevron for more information about the company.
Full Disclosure: Long KO, MCD, CVX
Relevant Articles:
- The number one reason why i don't chase high-yield stocks
- Dividend Investors – Do not forget about capital gains
- Dividend Champions - The Best List for Dividend Investors
- Dividend income is more stable than capital gains
- Dividend Growth Investing is a Perfect Strategy for Young Investors
Tuesday, February 25, 2014
Five World Class Dividend Stocks to Buy During the Next Bear Market
In a previous article I discussed several compounding machines that are currently attractively priced. In this article, I will discuss a few world class companies, which have wide moats, pricing power, and strong brands, that would likely keep growing for years to come. Unfortunately, investors have realized how awesome these companies are, which is why they are overvalued today.
I do not blindly purchase companies, just because I find them to have strong qualitative characteristics. I also want to purchase them at attractive valuations, which provide me with some margin of safety in case my investment thesis is incorrect, and growth does slow down. I am monitoring these companies closely, in order to be quick to capitalize on any significant weakness in stock prices. Companies do not grow in a straight line, and often face roadblocks on their way to greatness. Sometimes the declines are company specific, while other times the declines are based on the overall economic cycle. The companies I am waiting for declines in include:
McCormick & Company (MKC), Incorporated engages in the manufacture, marketing, and distribution of spices, seasoning mixes, condiments, and other flavorful products to retail outlets, food manufacturers, and foodservice businesses. This dividend champion has rewarded shareholders with a dividend increase for 28 years in a row. Over the past decade, earnings per share have increased by 9.20%/year, while dividends were raised by 11.40%/year. Currently, the stock is trading at 22.70 times earnings and yields a very sustainable 2.30%. I initiated a small position in the company at the beginning of the month during the dip, in order to be able to better monitor the progress. Check my analysis of McCormick for more information.
Colgate-Palmolive Company (CL), together with its subsidiaries, manufactures and markets consumer products worldwide. This dividend champion has rewarded shareholders with a dividend increase for 51 years in a row. Over the past decade, earnings per share have increased by 8.90%/year, while dividends were raised by 11.40%/year. Currently, the stock is trading at 25.90 times earnings and yields a very sustainable 2.20%. I have built my position in the company between 2008 and 2012. Check my analysis of Colgate-Palmolive for more information.
Automatic Data Processing, Inc. (ADP), together with its subsidiaries, provides technology-based outsourcing solutions to employers and vehicle retailers and manufacturers worldwide. This dividend champion has rewarded shareholders with a dividend increase for 39 years in a row. Over the past decade, earnings per share have increased by 4.90%/year, while dividends were raised by 13.70%/year. Currently, the stock is trading at 26.10 times earnings and yields a very sustainable 2.50%. I have built my position in the company between 2008 and 2012. Check my analysis of ADP for more information.
Brown-Forman Corporation (BF.B) engages in the manufacturing, bottling, importing, exporting, marketing, and selling alcoholic beverages. This dividend champion has rewarded shareholders with a dividend increase for 30 years in a row. Over the past decade, earnings per share have increased by 10.30%/year, while dividends were raised by 10.20%/year. Currently, the stock is trading at 28.40 times earnings and yields a very sustainable 1.60%. I purchased a small position in the company back in 2010. Check my analysis of Brown-Forman for more information.
The Hershey Company (HSY), together with its subsidiaries, engages in manufacturing, marketing, selling, and distributing various chocolate and confectionery products, pantry items, and gum and mint refreshment products worldwide. This dividend paying company has rewarded shareholders with a dividend increase for 5 years in a row. Over the past decade, earnings per share have increased by 7.10%/year, while dividends were raised by 15.30%/year. The company froze dividends in 2009, which ended its 33 year streak of consecutive dividend increases. Currently, the stock is trading at 29.80 times earnings and yields a very sustainable 1.60%.
I do not blindly purchase companies, just because I find them to have strong qualitative characteristics. I also want to purchase them at attractive valuations, which provide me with some margin of safety in case my investment thesis is incorrect, and growth does slow down. I am monitoring these companies closely, in order to be quick to capitalize on any significant weakness in stock prices. Companies do not grow in a straight line, and often face roadblocks on their way to greatness. Sometimes the declines are company specific, while other times the declines are based on the overall economic cycle. The companies I am waiting for declines in include:
McCormick & Company (MKC), Incorporated engages in the manufacture, marketing, and distribution of spices, seasoning mixes, condiments, and other flavorful products to retail outlets, food manufacturers, and foodservice businesses. This dividend champion has rewarded shareholders with a dividend increase for 28 years in a row. Over the past decade, earnings per share have increased by 9.20%/year, while dividends were raised by 11.40%/year. Currently, the stock is trading at 22.70 times earnings and yields a very sustainable 2.30%. I initiated a small position in the company at the beginning of the month during the dip, in order to be able to better monitor the progress. Check my analysis of McCormick for more information.
Colgate-Palmolive Company (CL), together with its subsidiaries, manufactures and markets consumer products worldwide. This dividend champion has rewarded shareholders with a dividend increase for 51 years in a row. Over the past decade, earnings per share have increased by 8.90%/year, while dividends were raised by 11.40%/year. Currently, the stock is trading at 25.90 times earnings and yields a very sustainable 2.20%. I have built my position in the company between 2008 and 2012. Check my analysis of Colgate-Palmolive for more information.
Automatic Data Processing, Inc. (ADP), together with its subsidiaries, provides technology-based outsourcing solutions to employers and vehicle retailers and manufacturers worldwide. This dividend champion has rewarded shareholders with a dividend increase for 39 years in a row. Over the past decade, earnings per share have increased by 4.90%/year, while dividends were raised by 13.70%/year. Currently, the stock is trading at 26.10 times earnings and yields a very sustainable 2.50%. I have built my position in the company between 2008 and 2012. Check my analysis of ADP for more information.
Brown-Forman Corporation (BF.B) engages in the manufacturing, bottling, importing, exporting, marketing, and selling alcoholic beverages. This dividend champion has rewarded shareholders with a dividend increase for 30 years in a row. Over the past decade, earnings per share have increased by 10.30%/year, while dividends were raised by 10.20%/year. Currently, the stock is trading at 28.40 times earnings and yields a very sustainable 1.60%. I purchased a small position in the company back in 2010. Check my analysis of Brown-Forman for more information.
The Hershey Company (HSY), together with its subsidiaries, engages in manufacturing, marketing, selling, and distributing various chocolate and confectionery products, pantry items, and gum and mint refreshment products worldwide. This dividend paying company has rewarded shareholders with a dividend increase for 5 years in a row. Over the past decade, earnings per share have increased by 7.10%/year, while dividends were raised by 15.30%/year. The company froze dividends in 2009, which ended its 33 year streak of consecutive dividend increases. Currently, the stock is trading at 29.80 times earnings and yields a very sustainable 1.60%.
While I might sometimes deviate from my entry rules and buy companies that have raised dividends for less than 10 years in a row or have current yields below 2.50%, I try to avoid paying more than 20 times earnings. This is in an effort to avoid overpaying for future growth, that might not materialize. Therefore, the companies listed in the article will most likely be available below 20 times earnings only during the next bear market. The other hurdle that these firms have to clear is whether other companies are priced even better during the next bear market.
Full Disclosure: Long MKC, ADP, CL, BF.B
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Monday, February 24, 2014
Five Dividend Growth Companies Boosting Cash Payouts
The goal of every dividend investor is to build a portfolio of quality income producing companies, which provide enough in income for them to live off of. It is also very important to focus on those companies that can afford to increase dividends over time, in order to maintain the purchasing power of your income. In order to achieve that, investors go through a lot of screening, analyzing companies in detail, and waiting for the right valuations, in order to build that portfolio brick by brick. Once purchased, it is also of utmost importance to keep monitoring the companies you own for major developments such as earnings releases, merger and acquisitions and dividend increases. This monitoring process could also help you identify hidden dividend gems, before they hit the lists of dividend achievers or dividend champions.
The following companies managed to raise dividends in the past week. These included either companies I own, or companies whose progress I am actively monitoring:
The Coca-Cola Company (KO), a beverage company, engages in the manufacture, marketing, and sale of nonalcoholic beverages worldwide. This dividend king approved its 52nd consecutive annual dividend increase, after hiking quarterly distributions by 9% to 30.50 cents/share. Over the past decade, Coca-Cola has managed to increase dividends by 9.80%/year. Currently, the stock is close to the top of my acceptable valuation range at 19.30 times earnings and a current yield of 3.30%. Despite headwinds the company seems to be facing, it seems investors overreacted to its forward guidance, where currency fluctuations were expected to shave off 7% of earnings per share. I generally see currency fluctuations as a wash, and I also do not think one should focus only on revenues, but on earnings per share. Hence, I will keep holding on to my stock, and might add another big chunk in early 2015, if my naked puts get exercised. Check my analysis of Coca-Cola.
Wal-Mart Stores, Inc. (WMT) operates retail stores in various formats worldwide. The company disappointed investors last week it’s the slowest rate of dividend increases ever as it boosted distributions by 2% to 48 cents/share. In contrast, over the past five years, Wal-Mart has managed to increase dividends by 14.20%/year on average. This was nevertheless the 41st consecutive annual dividend increase for this dividend champion. While the latest increase was disappointing, I am maintaining a wait and see attitude with the company and would continue holding on to my shares. However, I do not plan on adding more to the stock and would be deploying dividends elsewhere. Currently, the stock is cheap at 14 times earnings and yields 2.60%. Check my analysis of Wal-Mart.
Genuine Parts Company (GPC) distributes automotive replacement parts, industrial replacement parts, office products, and electrical/electronic materials in the United States, Puerto Rico, the Dominican Republic, Mexico, and Canada. The company raised its quarterly dividend by 7% to 57.50 cents/share. This marked the 58th consecutive annual dividend increase for this dividend king. Over the past decade, Genuine Parts Company has manage to increase dividends by 6.20%/year. Currently, the stock is close to the top of my acceptable valuation of 19.60 times earnings and yields 2.70%. I might considering initiating a position in the company, unless of course there aren’t better values at the time I have investable cash. Check my analysis of Genuine Parts Company.
NextEra Energy, Inc. (NEE), through its subsidiaries, engages in the generation, transmission, distribution, and sale of electric energy in the United States and Canada. The company raised its quarterly distributions by 9.80% to 72.50 cents/share. This marked the 20th consecutive year of dividend increases for this dividend achiever. Over the past decade, NextEra has managed to increase dividends by 8.20%/year. Currently the shares are trading at 17.40 times forward earnings with an yield 3.10%, which is not attractive valuation for an utility. Check my analysis of NextEra.
AbbVie Inc. (ABBV), a research-based biopharmaceutical company, engages in the discovery, development, manufacture, and sale of pharmaceutical products worldwide. The company increased its quarterly dividends by 5% to 42 cents/share. The company was formed after Abbott Laboratories split into two firms – AbbVie and Abbott Laboratories. Prior to the split, the original Abbott Labs had managed to raise dividends for 40 years in a row. After the split, I decided to hold on to both companies, and have been satisfied with the results so far. Currently, Abbvie is priced at the top of my acceptable valuation range of 19.90 times earnings although it yields 3.30%. However, I am not interested in adding more there, because of the patent cliff that drug Humira faces later this decade. Check my analysis of the split for more information.
Full Disclosure: Long KO, WMT, ABBV, ABT
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The following companies managed to raise dividends in the past week. These included either companies I own, or companies whose progress I am actively monitoring:
The Coca-Cola Company (KO), a beverage company, engages in the manufacture, marketing, and sale of nonalcoholic beverages worldwide. This dividend king approved its 52nd consecutive annual dividend increase, after hiking quarterly distributions by 9% to 30.50 cents/share. Over the past decade, Coca-Cola has managed to increase dividends by 9.80%/year. Currently, the stock is close to the top of my acceptable valuation range at 19.30 times earnings and a current yield of 3.30%. Despite headwinds the company seems to be facing, it seems investors overreacted to its forward guidance, where currency fluctuations were expected to shave off 7% of earnings per share. I generally see currency fluctuations as a wash, and I also do not think one should focus only on revenues, but on earnings per share. Hence, I will keep holding on to my stock, and might add another big chunk in early 2015, if my naked puts get exercised. Check my analysis of Coca-Cola.
Wal-Mart Stores, Inc. (WMT) operates retail stores in various formats worldwide. The company disappointed investors last week it’s the slowest rate of dividend increases ever as it boosted distributions by 2% to 48 cents/share. In contrast, over the past five years, Wal-Mart has managed to increase dividends by 14.20%/year on average. This was nevertheless the 41st consecutive annual dividend increase for this dividend champion. While the latest increase was disappointing, I am maintaining a wait and see attitude with the company and would continue holding on to my shares. However, I do not plan on adding more to the stock and would be deploying dividends elsewhere. Currently, the stock is cheap at 14 times earnings and yields 2.60%. Check my analysis of Wal-Mart.
Genuine Parts Company (GPC) distributes automotive replacement parts, industrial replacement parts, office products, and electrical/electronic materials in the United States, Puerto Rico, the Dominican Republic, Mexico, and Canada. The company raised its quarterly dividend by 7% to 57.50 cents/share. This marked the 58th consecutive annual dividend increase for this dividend king. Over the past decade, Genuine Parts Company has manage to increase dividends by 6.20%/year. Currently, the stock is close to the top of my acceptable valuation of 19.60 times earnings and yields 2.70%. I might considering initiating a position in the company, unless of course there aren’t better values at the time I have investable cash. Check my analysis of Genuine Parts Company.
NextEra Energy, Inc. (NEE), through its subsidiaries, engages in the generation, transmission, distribution, and sale of electric energy in the United States and Canada. The company raised its quarterly distributions by 9.80% to 72.50 cents/share. This marked the 20th consecutive year of dividend increases for this dividend achiever. Over the past decade, NextEra has managed to increase dividends by 8.20%/year. Currently the shares are trading at 17.40 times forward earnings with an yield 3.10%, which is not attractive valuation for an utility. Check my analysis of NextEra.
AbbVie Inc. (ABBV), a research-based biopharmaceutical company, engages in the discovery, development, manufacture, and sale of pharmaceutical products worldwide. The company increased its quarterly dividends by 5% to 42 cents/share. The company was formed after Abbott Laboratories split into two firms – AbbVie and Abbott Laboratories. Prior to the split, the original Abbott Labs had managed to raise dividends for 40 years in a row. After the split, I decided to hold on to both companies, and have been satisfied with the results so far. Currently, Abbvie is priced at the top of my acceptable valuation range of 19.90 times earnings although it yields 3.30%. However, I am not interested in adding more there, because of the patent cliff that drug Humira faces later this decade. Check my analysis of the split for more information.
Full Disclosure: Long KO, WMT, ABBV, ABT
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- Dividend Growth Investor Article Archive
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Friday, February 21, 2014
Colgate-Palmolive (CL) Dividend Stock Analysis
Colgate-Palmolive Company, together with its subsidiaries, manufactures and markets consumer products worldwide. The company operates in two segments: Oral, Personal and Home Care; and Pet Nutrition. This dividend king has paid dividends since 1895 and has increased them for 50 years in a row.
The company’s latest dividend increase was announced in March 2013 when the Board of Directors approved a 9.70% increase in the quarterly annual dividend to 34 cents /share. The company’s peer group includes Procter & Gamble (PG), Clorox (CLX), and Kimberly Clark (KMB).
Over the past decade this dividend growth stock has delivered an annualized total return of 12.60% to its shareholders.
The company has managed to deliver a 9% average increase in annual EPS over the past decade. Colgate-Palmolive is expected to earn $2.83 per share in 2013 and $3.09 per share in 2014. In comparison, the company earned $2.58/share in 2012.
In addition, between 2004 and 2013, the number of shares decreased from 1135 million to 937 million.
Colgate generates over 80% of its sales from outside of the US. The growing emerging markets in Latin America and Asia and the rising middle class in these markets could present an excellent opportunity for Colgate Palmolive. Latin America accounts for one third of sales, while Asia/Africa accounts for over one fifth of sales. The issue with overexposure to Latin America is that the continent has been prone to currency devaluations, which could impact profitability. Another issue could come from rising commodity costs, which could pressure margins and profitability despite expectations for rising volumes. Given the strong brand names of many of Colgate’s products however, the company could mitigate this by passing on cost increases to consumers.
The toothpaste market is characterized by high penetration by branded products, as few people are going to save a few cents and put an unknown paste for their teeth. In addition there is brand loyalty, which results in recurring revenue streams from millions of customers worldwide. The company also has wide global reach, and large scale of operations. The strong brands, customer loyalty and global scale of operations are indicative of a wide moat by this company.
In 2012, Colgate-Palmolive initiated a four year Global Growth and Efficiency Program, in an effort to simplify and standardize work processes, reduce structural costs, and increase sales globally. The company is expected to spend anywhere between $1.1 to $1.25 billion through 2016, with annual benefits expected in the $365-$435 million annually. These benefits will be reinvested in items such as new products and in brand building. As a result of the program, 6% of global workforce will be laid off by 2016.
In general, earnings per share will increase through emerging market sales growth, share buybacks, cost restructurings. I can foresee sales to grow by 5 – 6 %year, which could easily translate into earnings per share growth of 9- 10% for the foreseeable future.
The annual dividend payment has increased by 11.40% per year over the past decade, which is higher than the growth in EPS. This was accomplished through the expansion of the dividend payout ratio. Future growth will be limited by any growth in earnings per share.
An 11% growth in distributions translates into the dividend payment doubling every six and a half years on average. Since 1985, Colgate-Palmolive has been able to double dividends every seven years on average.
The dividend payout ratio increased from 37% in 2003 to almost 47% in 2012. A lower payout is always a plus, since it leaves room for consistent dividend growth minimizing the impact of short-term fluctuations in earnings.
The company enjoys really high returns on equity, which is common for most high quality dividend payers that do not require a lot of equity to operate the business. Rather than focus on absolute values for this indicator, I generally want to see at least a stable return on equity over time.
Currently, the stock is overvalued, as it trades at a P/E of 22.60 and yields only 2.10%. I am analyzing the company because I believe it is quality dividend growth stock, which will be a very good addition to my portfolio on dips below $55-$56.
Full Disclosure: Long CLX, PG, KMB, CL
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- Five Dividend Paying Companies Boosting Shareholders' Distributions
The company’s latest dividend increase was announced in March 2013 when the Board of Directors approved a 9.70% increase in the quarterly annual dividend to 34 cents /share. The company’s peer group includes Procter & Gamble (PG), Clorox (CLX), and Kimberly Clark (KMB).
Over the past decade this dividend growth stock has delivered an annualized total return of 12.60% to its shareholders.
The company has managed to deliver a 9% average increase in annual EPS over the past decade. Colgate-Palmolive is expected to earn $2.83 per share in 2013 and $3.09 per share in 2014. In comparison, the company earned $2.58/share in 2012.
In addition, between 2004 and 2013, the number of shares decreased from 1135 million to 937 million.
Colgate generates over 80% of its sales from outside of the US. The growing emerging markets in Latin America and Asia and the rising middle class in these markets could present an excellent opportunity for Colgate Palmolive. Latin America accounts for one third of sales, while Asia/Africa accounts for over one fifth of sales. The issue with overexposure to Latin America is that the continent has been prone to currency devaluations, which could impact profitability. Another issue could come from rising commodity costs, which could pressure margins and profitability despite expectations for rising volumes. Given the strong brand names of many of Colgate’s products however, the company could mitigate this by passing on cost increases to consumers.
The toothpaste market is characterized by high penetration by branded products, as few people are going to save a few cents and put an unknown paste for their teeth. In addition there is brand loyalty, which results in recurring revenue streams from millions of customers worldwide. The company also has wide global reach, and large scale of operations. The strong brands, customer loyalty and global scale of operations are indicative of a wide moat by this company.
In 2012, Colgate-Palmolive initiated a four year Global Growth and Efficiency Program, in an effort to simplify and standardize work processes, reduce structural costs, and increase sales globally. The company is expected to spend anywhere between $1.1 to $1.25 billion through 2016, with annual benefits expected in the $365-$435 million annually. These benefits will be reinvested in items such as new products and in brand building. As a result of the program, 6% of global workforce will be laid off by 2016.
In general, earnings per share will increase through emerging market sales growth, share buybacks, cost restructurings. I can foresee sales to grow by 5 – 6 %year, which could easily translate into earnings per share growth of 9- 10% for the foreseeable future.
The annual dividend payment has increased by 11.40% per year over the past decade, which is higher than the growth in EPS. This was accomplished through the expansion of the dividend payout ratio. Future growth will be limited by any growth in earnings per share.
An 11% growth in distributions translates into the dividend payment doubling every six and a half years on average. Since 1985, Colgate-Palmolive has been able to double dividends every seven years on average.
The dividend payout ratio increased from 37% in 2003 to almost 47% in 2012. A lower payout is always a plus, since it leaves room for consistent dividend growth minimizing the impact of short-term fluctuations in earnings.
The company enjoys really high returns on equity, which is common for most high quality dividend payers that do not require a lot of equity to operate the business. Rather than focus on absolute values for this indicator, I generally want to see at least a stable return on equity over time.
Currently, the stock is overvalued, as it trades at a P/E of 22.60 and yields only 2.10%. I am analyzing the company because I believe it is quality dividend growth stock, which will be a very good addition to my portfolio on dips below $55-$56.
Full Disclosure: Long CLX, PG, KMB, CL
Relevant Articles:
- How to read my stock analysis report
- The Dividend Kings List for 2014
- Why Dividend Growth Stocks Rock?
- Price is what you pay, value is what you get
- Why do I keep talking about the same companies all the time
- Five Dividend Paying Companies Boosting Shareholders' Distributions
Wednesday, February 19, 2014
Types of dividend growth stocks
Throughout my experience as a dividend growth investor, I have identified three types of dividend growth stocks. Each type of equities comes with a distinct set of yield and growth characteristics, which the enterprising dividend investor can use to their advantage. In my dividend portfolio, I own all types of equities, in order to benefit from long-term growth and also to add some sustainable high income in case growth doesn't turn out as expected.
The three types include:
The first type includes high yielding stocks, which typically grow distributions more slowly. Most companies in this category include utilities, telecom, real estate investment trusts and many master limited partnerships. Many of these companies are natural monopolies over a certain activity such as electricity transmission in a particular area. There could be government regulation which ensures the monopoly status in a particular region, but also limits the amount of profits and returns on capital that companies could enjoy. Others, as in the case of REITs, have properties which are already established, and would take a lot of effort from competitors to replicate that success. After all, the chances of a competitor building a new mall next to an established one are very low, as it takes time to build something and might be impractical to engage in a price war to compete for customers when you have steep upfront costs to foot. These companies generate stable streams of earnings, which do not grow quickly, but are dependable. This results in fewer dividend cuts during recessions. Because of their slow growth, such companies typically yield more than the market. Examples of companies in the first type include:
Realty Income (O) has regularly raised distributions for 20 years in a row. The company has managed to increase dividends by 6%/year over the past decade.Yield: 5.30% (analysis)
Kinder Morgan Partners (KMP) has regularly raised distributions for 18 years in a row. The partnership has managed to increase dividends by 7.40%/year over the past decade.Yield: 6.80% (analysis)
AT&T (T) has managed to increase dividend for 30 consecutive years. Over the past decade, the company has managed to boost dividends by 4.90%/year.Yield: 5% (analysis)
The second type includes companies in the sweet spot. These are dividend stalwarts, which generate strong earnings growth, and have average or above average yields. Some of these companies tend to satisfy everyday consumer needs for medicine, cosmetics, toiletries, food, gas etc. They tend to have strong brand names and wide moats which help these companies to charge a premium price to customers. The perceived qualities of these everyday products or services, make them a preferred choice for customers, who might be willing to go out of their way in order to find what they are looking for. For example, consumers would prefer Tylenol to its generic version. Others loyally purchase Gillette shaving products on a regular basis, without hesitation. These repeatable purchases, multiplied by millions of consumers worldwide, lead to a diversified stream of revenues for the companies that sell those produtcs. These companies also invest billions in research to identify new product or services solutions for their customers, identify efficiencies to increase profitability and expand organically or through acquisitions. Examples of the companies that will provide current yield with dividend growth include:
Coca-Cola (KO) has boosted distributions for 51 years in a row. The company has managed to increase dividends by 9.80%/year over the past decade.Yield: 3% (analysis)
Johnson & Johnson (JNJ) has regularly raised dividends for 51 years in a row. The company has managed to increase dividends by 10.80%/year over the past decade.Yield: 2.90% (analysis)
Wal-Mart Stores (WMT) has managed to increase dividend for 39 consecutive years. Over the past decade, the company has managed to boost dividends by 18%/year.Yield: 2.50% (analysis)
McDonald's (MCD) has boosted distributions for 38 years in a row. The company has managed to increase dividends by 22.80%/year over the past decade.Yield: 3.40% (analysis)
The third type of dividend growth stocks includes companies with strong earnings and dividend growth, which tend to have below average yields. These are the companies that are in a growth stage, and they tend to reinvest most of their earnings back into growing the business. Such companies have the potential to deliver high total returns over time, and the rapid dividend growth from a low base could deliver double or even triple digit yields on cost after a couple decades. Some of these stocks are typically richly priced, which is why the best time to purchase them is during market declines. Investors have to closely monitor these companies, in order to make sure that future growth can materialize. Otherwise, if growth slows down, shares that are trading at higher multiples could fall pretty quickly, even if earnings are still increasing. Some of the companies on my dividend growth wish list include:
Family Dollar (FDO) has boosted distributions for 38 years in a row. The company has managed to increase dividends by 13.60%/year over the past decade.Yield: 1.70% (analysis)
Casey's General Stores (CASY) has managed to increase dividend for 14 consecutive years. Over the past decade, the company has managed to boost dividends by 19.10%/year.Yield: 1.10% (analysis)
Yum! Brands (YUM) has boosted distributions for 10 years in a row. The company has managed to increase dividends by 15.10%/year over the past five years.Yield: 2% (analysis)
Full Disclosure: Long O, KMR, KO, JNJ, WMT, MCD, FDO, CASY, YUM
Relevant Articles:
- Dividend yield or dividend growth?
- Are High Dividend Stocks worth it?
- The Sweet Spot of Dividend Investing
- Seven wide-moat dividends stocks to consider
- Five Things to Look For in a Real Estate Investment Trust
The three types include:
The first type includes high yielding stocks, which typically grow distributions more slowly. Most companies in this category include utilities, telecom, real estate investment trusts and many master limited partnerships. Many of these companies are natural monopolies over a certain activity such as electricity transmission in a particular area. There could be government regulation which ensures the monopoly status in a particular region, but also limits the amount of profits and returns on capital that companies could enjoy. Others, as in the case of REITs, have properties which are already established, and would take a lot of effort from competitors to replicate that success. After all, the chances of a competitor building a new mall next to an established one are very low, as it takes time to build something and might be impractical to engage in a price war to compete for customers when you have steep upfront costs to foot. These companies generate stable streams of earnings, which do not grow quickly, but are dependable. This results in fewer dividend cuts during recessions. Because of their slow growth, such companies typically yield more than the market. Examples of companies in the first type include:
Realty Income (O) has regularly raised distributions for 20 years in a row. The company has managed to increase dividends by 6%/year over the past decade.Yield: 5.30% (analysis)
Kinder Morgan Partners (KMP) has regularly raised distributions for 18 years in a row. The partnership has managed to increase dividends by 7.40%/year over the past decade.Yield: 6.80% (analysis)
AT&T (T) has managed to increase dividend for 30 consecutive years. Over the past decade, the company has managed to boost dividends by 4.90%/year.Yield: 5% (analysis)
The second type includes companies in the sweet spot. These are dividend stalwarts, which generate strong earnings growth, and have average or above average yields. Some of these companies tend to satisfy everyday consumer needs for medicine, cosmetics, toiletries, food, gas etc. They tend to have strong brand names and wide moats which help these companies to charge a premium price to customers. The perceived qualities of these everyday products or services, make them a preferred choice for customers, who might be willing to go out of their way in order to find what they are looking for. For example, consumers would prefer Tylenol to its generic version. Others loyally purchase Gillette shaving products on a regular basis, without hesitation. These repeatable purchases, multiplied by millions of consumers worldwide, lead to a diversified stream of revenues for the companies that sell those produtcs. These companies also invest billions in research to identify new product or services solutions for their customers, identify efficiencies to increase profitability and expand organically or through acquisitions. Examples of the companies that will provide current yield with dividend growth include:
Coca-Cola (KO) has boosted distributions for 51 years in a row. The company has managed to increase dividends by 9.80%/year over the past decade.Yield: 3% (analysis)
Johnson & Johnson (JNJ) has regularly raised dividends for 51 years in a row. The company has managed to increase dividends by 10.80%/year over the past decade.Yield: 2.90% (analysis)
Wal-Mart Stores (WMT) has managed to increase dividend for 39 consecutive years. Over the past decade, the company has managed to boost dividends by 18%/year.Yield: 2.50% (analysis)
McDonald's (MCD) has boosted distributions for 38 years in a row. The company has managed to increase dividends by 22.80%/year over the past decade.Yield: 3.40% (analysis)
The third type of dividend growth stocks includes companies with strong earnings and dividend growth, which tend to have below average yields. These are the companies that are in a growth stage, and they tend to reinvest most of their earnings back into growing the business. Such companies have the potential to deliver high total returns over time, and the rapid dividend growth from a low base could deliver double or even triple digit yields on cost after a couple decades. Some of these stocks are typically richly priced, which is why the best time to purchase them is during market declines. Investors have to closely monitor these companies, in order to make sure that future growth can materialize. Otherwise, if growth slows down, shares that are trading at higher multiples could fall pretty quickly, even if earnings are still increasing. Some of the companies on my dividend growth wish list include:
Family Dollar (FDO) has boosted distributions for 38 years in a row. The company has managed to increase dividends by 13.60%/year over the past decade.Yield: 1.70% (analysis)
Casey's General Stores (CASY) has managed to increase dividend for 14 consecutive years. Over the past decade, the company has managed to boost dividends by 19.10%/year.Yield: 1.10% (analysis)
Yum! Brands (YUM) has boosted distributions for 10 years in a row. The company has managed to increase dividends by 15.10%/year over the past five years.Yield: 2% (analysis)
Full Disclosure: Long O, KMR, KO, JNJ, WMT, MCD, FDO, CASY, YUM
Relevant Articles:
- Dividend yield or dividend growth?
- Are High Dividend Stocks worth it?
- The Sweet Spot of Dividend Investing
- Seven wide-moat dividends stocks to consider
- Five Things to Look For in a Real Estate Investment Trust
Tuesday, February 18, 2014
How to find long term dividend stock ideas
One of the easiest ways to find long-term dividend stock ideas is the list of dividend champions, that David Fish maintains and updates every single month. The list includes 106 companies which have managed to boost dividends for at least 25 years in a row. This is not a small accomplishment, given the fact that the past quarter century included several wars, a few bubbles bursting, several recessions, the collapse of the Soviet Union, and the economic rise of emerging markets such as China, India, Russia and Brazil. Thus, the list of companies which have been able to reward their patient shareholders with a dividend hike for 25 years in a row, is a good start for the search of dividend stock ideas.
The next step in the process would be to apply a quantitative screen against that list of companies, in order to weed out those firms that are overvalued, and those who are at risk of falling on hard times. I usually look for companies that sell below 20 times earnings, and have a minimum yield of 2.50% today. In addition, I look for a dividend payout ratio below 60%, plus a minimum of a 6% in annual dividend growth over the preceding decade. I also apply that criteria in order to narrow down the list of dividend champions to a more manageable level.
When I apply my screening criteria on the list of dividend champions, I come up with the following list of companies for further research.
The next step in the process is to evaluate each and every company on that list. When I analyze individual companies, I look at trends in earnings, revenues, dividends, payout ratios and ability to deploy cash successfully. Next, I also try to understand how companies earn their money, and whether they possess a durable competitive advantage, that would allow them to keep earning money for the next 20 – 30 years. In order to determine that, you need to look for competitive advantages or as Buffett calls them “wide moats”. I also try to determine any catalysts for future earnings growth. It is very important to understand that rising earnings are the fuel that will make future dividend increases possible. As you can see, there are a few companies on my list for further analysis, which I have not posted here yet. I am diligently working my way through the list.
I believe that if you patiently follow the above process every month, and put money to work consistently, you will be able to build yourself a diversified dividend portfolio that will pay your monthly expenses. Reaching your dividend crossover point will be dependent on the amount of money you can put to work, the types of companies you manage to put your money in and the amount of time you can let compounding work in your favor.
The most important thing for you to do is to keep learning more about investments, companies, and business, in order to be able to keep up with changes. Keeping an open and inquiring mind is the winning attitude that will pay big dividends for you down the road.
Relevant Articles:
- Dividend Champions - The Best List for Dividend Investors
- Dividend Champions Index – Five Year Total Return Performance
- How to read my stock analysis reports
- The work required to have an opinion
- Diversified Dividend Portfolios – Don’t forget about quality
The next step in the process would be to apply a quantitative screen against that list of companies, in order to weed out those firms that are overvalued, and those who are at risk of falling on hard times. I usually look for companies that sell below 20 times earnings, and have a minimum yield of 2.50% today. In addition, I look for a dividend payout ratio below 60%, plus a minimum of a 6% in annual dividend growth over the preceding decade. I also apply that criteria in order to narrow down the list of dividend champions to a more manageable level.
When I apply my screening criteria on the list of dividend champions, I come up with the following list of companies for further research.
SYMBOL
|
Name
|
P/E
|
YIELD
|
DPR
|
10 yr DG
|
PRICE
|
Analysis
|
(ORI)
|
Old Republic International
|
9.8
|
4.70%
|
45.86%
|
7.26%
|
15.39
|
|
(CVX
|
Chevron Corp.
|
10.23
|
3.50%
|
36.07%
|
10.55%
|
113.48
|
|
(EFSI
|
Eagle Financial Services
|
11
|
3.60%
|
34.29%
|
7.32%
|
23.1
|
|
(XOM
|
ExxonMobil Corp.
|
12.77
|
2.70%
|
34.19%
|
9.64%
|
94.11
|
|
(HP
|
Helmerich & Payne Inc.
|
13.13
|
2.80%
|
36.23%
|
23.31%
|
90.59
|
|
(TMP
|
Tompkins Financial Corp.
|
13.56
|
3.40%
|
46.24%
|
6.25%
|
46.92
|
|
(TGT
|
Target Corp.
|
15.01
|
3.10%
|
45.99%
|
19.78%
|
56.06
|
|
(CINF
|
Cincinnati Financial
|
15.06
|
3.70%
|
56.41%
|
6.41%
|
47
|
|
(WEYS
|
Weyco Group Inc.
|
15.07
|
2.80%
|
42.35%
|
14.55%
|
25.66
|
|
(UGI
|
UGI Corp.
|
17.01
|
2.60%
|
43.97%
|
6.94%
|
43.66
|
|
(MCD
|
McDonald's Corp.
|
17.26
|
3.40%
|
58.38%
|
22.80%
|
95.78
|
|
(PEP
|
PepsiCo Inc.
|
18.08
|
2.90%
|
52.55%
|
13.71%
|
78.09
|
|
(BMS
|
Bemis Company
|
19.15
|
2.80%
|
52.94%
|
6.39%
|
39.06
|
|
(JNJ
|
Johnson & Johnson
|
19.3
|
2.80%
|
54.89%
|
10.84%
|
92.76
|
|
(MMM
|
3M Company
|
19.66
|
2.60%
|
50.89%
|
6.76%
|
132.12
|
|
(KMB)
|
Kimberly-Clark Corp.
|
19.93
|
2.90%
|
58.59%
|
9.16%
|
110.24
|
The next step in the process is to evaluate each and every company on that list. When I analyze individual companies, I look at trends in earnings, revenues, dividends, payout ratios and ability to deploy cash successfully. Next, I also try to understand how companies earn their money, and whether they possess a durable competitive advantage, that would allow them to keep earning money for the next 20 – 30 years. In order to determine that, you need to look for competitive advantages or as Buffett calls them “wide moats”. I also try to determine any catalysts for future earnings growth. It is very important to understand that rising earnings are the fuel that will make future dividend increases possible. As you can see, there are a few companies on my list for further analysis, which I have not posted here yet. I am diligently working my way through the list.
I believe that if you patiently follow the above process every month, and put money to work consistently, you will be able to build yourself a diversified dividend portfolio that will pay your monthly expenses. Reaching your dividend crossover point will be dependent on the amount of money you can put to work, the types of companies you manage to put your money in and the amount of time you can let compounding work in your favor.
The most important thing for you to do is to keep learning more about investments, companies, and business, in order to be able to keep up with changes. Keeping an open and inquiring mind is the winning attitude that will pay big dividends for you down the road.
Relevant Articles:
- Dividend Champions - The Best List for Dividend Investors
- Dividend Champions Index – Five Year Total Return Performance
- How to read my stock analysis reports
- The work required to have an opinion
- Diversified Dividend Portfolios – Don’t forget about quality