I am a long term buy and hold investor who focuses on dividend growth stocks
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Monday, March 31, 2014
How to identify your dividend investment goals
You have saved up some money after working hard for many years, and now you have decided to put it to work. You see hundreds of articles on investing online, and hundreds of strategies that promise you everything. You are getting information overload. How should you select your strategy?
The first goal when selecting your strategy is to determine what your desired end result should be. For most investors who want a strategy that would help them in accumulating a certain level of target monthly income, dividend investing might be the best solution. The goal should be very specific, and should incorporate as much information as possible to fit the objectives of the investor.
As a result, the goal of earning $1000/month in dividend income is more specific as accumulating a nest egg of $300,000. This is because accumulating a nest egg of $300,000 does not automatically translate into the desired target monthly income to meet expenses, and does not discuss how to pensionize this asset.
For example, my goal is to generate a sustainable level of dividend income, which maintains its purchasing power over time, at the minimum. This would be achieved by creating a diversified dividend portfolio, consisting of quality dividend growth stocks that I try to acquire at attractive valuations over time.
Your dividend investing goals should take into account things like amount you can put to work every month, the time until you retire, as well as make reasonable assumptions about investment returns (initial yield, earnings and dividend growth).
For example, if you put $1000/month in a portfolio of dividend paying stocks that yield 4% and grow distributions at 6% per year, you can expect to earn $1000 in monthly dividends in 12.5 years. If you increase your contributions to $2000/month, you will be able to generate $1000 in monthly dividend income in only eight years.
The types of dividend paying stocks, which could be part of such a portfolio could include:
Philip Morris International Inc. (PM), through its subsidiaries, manufactures and sells cigarettes and other tobacco products.The company has managed to boost distributions from 46 cents/share in 2008 to 94 cents/share presently. Currently, the stock yields a very reasonable 4.60%. Check my analysis of Philip Morris International.
Unilever PLC (UL) operates as a fast-moving consumer goods company in Asia, Africa, the Middle East, Turkey, Russia, Ukraine, Belarus, Europe, and the Americas. The company has increased dividends for at least 15 years in a row. The stock yields 3.65%. Check my analysis of Unilever.
In addition, that investment plan should discuss more issues, such as where to start your search for investment opportunities, how to analyze them, when to buy, how to manage your portfolio and when to sell. Over the next few weeks, I would discuss each one of these bullet points, and walk you through the complete dividend plan, from beginning to end.
Full Disclosure: Long PM, UL
Relevant Articles:
- My Dividend Goals for 2014 and after
- Why do I keep talking about the same companies all the time
- How to retire in 10 years with dividend stocks
- How to accumulate your nest egg
- Warren Buffett’s Dividend Stock Strategy
Sunday, March 30, 2014
How to become a successful dividend investor
There are several guidelines about becoming a successful dividend investor. They are centered around several key points I am going to be discussing in the next three weeks. I will be updating this post with links to articles on the process of becoming a successful investor.
The series of articles over the next three weeks will be a high level summary of my dividend investment plan today. If I were to start dividend investing today, I would find the collection of posts to be of tremendous value. In other words, the articles I will be posting are similar to a free course on dividend investing.
Lesson One: How to identify your dividend investment goals?
Lesson Two: Where to search for investment opportunities?
Lesson Three: When to buy dividend paying stocks?
Lesson Four: How to analyze investment opportunities?
Lesson Five: How to Manage Your Dividend Portfolio
Lesson Six: How to deal with new cash from dividend payments
Lesson Seven: How to monitor your dividend investments
Lesson Eight: When to sell your dividend stocks?
The series of articles over the next three weeks will be a high level summary of my dividend investment plan today. If I were to start dividend investing today, I would find the collection of posts to be of tremendous value. In other words, the articles I will be posting are similar to a free course on dividend investing.
Lesson One: How to identify your dividend investment goals?
Lesson Two: Where to search for investment opportunities?
Lesson Three: When to buy dividend paying stocks?
Lesson Four: How to analyze investment opportunities?
Lesson Five: How to Manage Your Dividend Portfolio
Lesson Six: How to deal with new cash from dividend payments
Lesson Seven: How to monitor your dividend investments
Lesson Eight: When to sell your dividend stocks?
Saturday, March 29, 2014
Best Income Investing Articles for March 2014
For your weekend reading enjoyment, I have highlighted a few interesting articles from the archives, which I find to be relevant today. The first five articles have been written and posted on this site, while the last five have been selected from other authors. I tend to post anywhere between three to four articles to my site every week. I usually try to write at least one or two articles that contain timeless information concerning dividend investing. This could include information about my strategy, or other pieces of information, which could be useful to dividend investors.
Below, I have highlighted a few articles posted on this site, which many readers have found interesting:
Richard Kinder: The Warren Buffett of Energy
I admire investors with skin in the game, who are fully invested in the company they manage. Richard Kinder is one such person, who has built an energy empire in the US, and continues to expand its legacy. He reminds me of Warren Buffett, only that Richard Kinder is focusing only on energy.
Why Did I Purchase This Dividend Paying Company For a Third Month in a Row?
Back in early 2014, I started dollar cost averaging in this company. I broke up my position size using Loyal3 commission free brokerage, and decided to take advantage of this opportunity. The time to purchase blue chip dividend paying companies is when there are some bad news that are widely known, which depresses prices since it scares the amateurs away. To paraphrase Buffett, when everyone is fearful, you have to be greedy.
Accenture PLC (ACN) Dividend Stock Analysis
Last week, I initiated a half position in the consulting company. I like the prospects for earnings and dividend growth, the attractive valuation and the strong brand and quality of long-term business relationships under the company's belt. In addition, this company is a cash machine, which requires very little in fixed costs in order to operate successfully and expand the business. One thing to note is the Irish Withholding tax, and the fact dividends are paid semi-annually.
Do not become a victim of fear in your dividend investing
Many investors tend to obtain their information from secondary sources, some of which try to confuse them purposefully in an effort to increase circulation. In this article, I outline the importance of thinking for yourself, after carefully examining facts, and not overly relying on other people's opinions.
I read a lot about companies, and also read a lot of interesting articles from all over the web. A few that I really enjoyed over the past months include:
20 Favorite Dividend Growth Stocks from 20 Dividend Growth Bloggers
My friend Dan Mac polled twenty dividend investing website writers for their favorite stock picks. He also was kind enough to include me in the poll. You would have to check the article out for yourself, but the most loved company seems to be Coca-Cola (KO).
Dividend Stocks vs. Dividend ETFs
My friend James over at Dividend Growth Stocks compares Dividend ETF's to Dividend Stocks. I find it very interesting that many serious dividend investors prefer to build their own portfolios, rather than choosing the pre-packaged investments available out there and having no say over portfolio distributions. One of the main reasons I am against Dividend ETFs is the fact that frequent turnover results in fluctuating income.
Selective Dividend Reinvestment Vs. DRIP
My friend Jason from Dividend Mantra wrote a very thorough article where he compares the benefits and drawbacks of automatic versus selective dividend reinvestment. The selective reinvestment works for him, because he is able to save several thousand per month, and pool those resources with his dividend income in order to purchase more dividend paying stocks. I do exactly the same thing. However, if I could only afford to invest a few hundred dollars a month, chances are that I would be dripping.
Thank you for reading Dividend Growth Investor site. I am also on Twitter, if you are interested in following me on another platform, where I post about recent trades I have made.
Richard Kinder: The Warren Buffett of Energy
I admire investors with skin in the game, who are fully invested in the company they manage. Richard Kinder is one such person, who has built an energy empire in the US, and continues to expand its legacy. He reminds me of Warren Buffett, only that Richard Kinder is focusing only on energy.
Why Did I Purchase This Dividend Paying Company For a Third Month in a Row?
Back in early 2014, I started dollar cost averaging in this company. I broke up my position size using Loyal3 commission free brokerage, and decided to take advantage of this opportunity. The time to purchase blue chip dividend paying companies is when there are some bad news that are widely known, which depresses prices since it scares the amateurs away. To paraphrase Buffett, when everyone is fearful, you have to be greedy.
Accenture PLC (ACN) Dividend Stock Analysis
Last week, I initiated a half position in the consulting company. I like the prospects for earnings and dividend growth, the attractive valuation and the strong brand and quality of long-term business relationships under the company's belt. In addition, this company is a cash machine, which requires very little in fixed costs in order to operate successfully and expand the business. One thing to note is the Irish Withholding tax, and the fact dividends are paid semi-annually.
Do not become a victim of fear in your dividend investing
Many investors tend to obtain their information from secondary sources, some of which try to confuse them purposefully in an effort to increase circulation. In this article, I outline the importance of thinking for yourself, after carefully examining facts, and not overly relying on other people's opinions.
I read a lot about companies, and also read a lot of interesting articles from all over the web. A few that I really enjoyed over the past months include:
20 Favorite Dividend Growth Stocks from 20 Dividend Growth Bloggers
My friend Dan Mac polled twenty dividend investing website writers for their favorite stock picks. He also was kind enough to include me in the poll. You would have to check the article out for yourself, but the most loved company seems to be Coca-Cola (KO).
Dividend Stocks vs. Dividend ETFs
My friend James over at Dividend Growth Stocks compares Dividend ETF's to Dividend Stocks. I find it very interesting that many serious dividend investors prefer to build their own portfolios, rather than choosing the pre-packaged investments available out there and having no say over portfolio distributions. One of the main reasons I am against Dividend ETFs is the fact that frequent turnover results in fluctuating income.
Selective Dividend Reinvestment Vs. DRIP
My friend Jason from Dividend Mantra wrote a very thorough article where he compares the benefits and drawbacks of automatic versus selective dividend reinvestment. The selective reinvestment works for him, because he is able to save several thousand per month, and pool those resources with his dividend income in order to purchase more dividend paying stocks. I do exactly the same thing. However, if I could only afford to invest a few hundred dollars a month, chances are that I would be dripping.
Thank you for reading Dividend Growth Investor site. I am also on Twitter, if you are interested in following me on another platform, where I post about recent trades I have made.
Friday, March 28, 2014
Dividend Stocks for Consistent Cash Income
I was recently away from home for a two week period. During the time, I did not have the opportunity to check email or look at my dividend stock portfolio. The first thing I did after coming back was log on to my brokerage accounts. I noticed that everything had gone smoothly and I had more in cash than before. This should hardly come as a surprise to most readers – dividend investing is a low key, low activity process. It does not involve staring at a computer screen for 8 hours a day nor does my portfolio require tinkering every day, week or month. Most of the companies I tend to purchase are held as long term investments. Heck, even if I don't do anything with my dividend for a couple of years, I highly doubt my portfolio income will be affected.
I am mostly a buy and hold dividend investor. I tend to purchase companies, which have a quality product or service that is valued by customers, and which have been able to deliver dividend increases for at least one decade. Most of these companies, such as McDonald’s (MCD) or PepsiCo (PEP) tend to remain in the same lines of business for years, as they have the expertise and know-how to keep existing activities and also continuously improve in order to stay competitive. Even five or ten years from now, both companies would still be performing essentially the same things they are doing today. These strong brands are synonymous for quality and consistency of product/service, which is why consumers are willing to pay up. This translates into strong pricing power that enables companies to remain profitable, and pass on cost increases to customers, while retaining and even increasing profitability. Most such companies also tend to sell their products on a global scale, which ensures that they are not overly dependent on a single marketplace. Because these companies tend to have a stable, predictable business models, and because they have a diversified income streams coming from countries around the world, they tend to deliver dependable earnings and thus afford to pay dependable dividends to shareholders.
By owning companies with consistent earnings, I tend to generate consistent dividends every quarter. I typically let distributions accumulate in cash and do not automatically reinvest them. However, once amount f cash reaches $1,000, I tend to initiate or add to stock positions. I only tend to reinvest dividends in companies that are currently attractively valued, and whose prospects appear bullish. In other words, if my analysis indicates that a company has a decent chance of increasing earnings and dividends over time, and it is attractively priced at the moment, I would consider allocating any excess cash I have. This excess cash could be from dividends I received, and need to reinvest, or from new contributions. I do not automatically reinvest dividends, because I do not want to invest in companies which are overvalued at the moment, even if they have great long-term prospects. The frustrations of millions of US investors over the past decade, also referred to as the lost decade for US stocks, were primarily caused by excessive valuations in 2000. Even some solid companies such as Johnson & Johnson (JNJ) or Coca-Cola (KO) were overvalued in 1999 - 2000, which led to poor total returns over the next decade, despite the fact that their underlying businesses were growing.
The positive factor for owning quality dividend growth companies is that they tend to generate solid increases in dividend income, coupled with solid total returns. Another positive is the ability to compound income and total returns over time. Companies such as Johnson & Johnson (JNJ), Phillips Morris International (PM) and Casey’s (CASY) have been able to create strategies for increasing earnings, and then executing them. This has led to higher earnings and trickled down into higher distributions. As a result, investors who meticulously reinvested distributions at attractive valuations were rewarded by the amount of reinvestment plus the increase in distribution. As a result, they had effectively managed to turbo-charge their dividend compounding. The fact that earnings are growing, also makes the underlying businesses that dividend investors have put their hard earned money in, even more valuable. As other investors realize the extra value for the dividend paying company, they tends to deliver solid capital gains in the process as well. This icing on the cake also protects the purchasing value of the investment portfolio against inflation.
Full Disclosure: Long MCD, PEP, KO, JNJ, CASY, PM
Relevant Articles:
- Buy and Hold means Buy and Monitor
- My Dividend Portfolio Holdings
- How to read my stock analysis reports
- Buy and hold dividend investing is not dead
- Check the Complete Article Archive
I am mostly a buy and hold dividend investor. I tend to purchase companies, which have a quality product or service that is valued by customers, and which have been able to deliver dividend increases for at least one decade. Most of these companies, such as McDonald’s (MCD) or PepsiCo (PEP) tend to remain in the same lines of business for years, as they have the expertise and know-how to keep existing activities and also continuously improve in order to stay competitive. Even five or ten years from now, both companies would still be performing essentially the same things they are doing today. These strong brands are synonymous for quality and consistency of product/service, which is why consumers are willing to pay up. This translates into strong pricing power that enables companies to remain profitable, and pass on cost increases to customers, while retaining and even increasing profitability. Most such companies also tend to sell their products on a global scale, which ensures that they are not overly dependent on a single marketplace. Because these companies tend to have a stable, predictable business models, and because they have a diversified income streams coming from countries around the world, they tend to deliver dependable earnings and thus afford to pay dependable dividends to shareholders.
By owning companies with consistent earnings, I tend to generate consistent dividends every quarter. I typically let distributions accumulate in cash and do not automatically reinvest them. However, once amount f cash reaches $1,000, I tend to initiate or add to stock positions. I only tend to reinvest dividends in companies that are currently attractively valued, and whose prospects appear bullish. In other words, if my analysis indicates that a company has a decent chance of increasing earnings and dividends over time, and it is attractively priced at the moment, I would consider allocating any excess cash I have. This excess cash could be from dividends I received, and need to reinvest, or from new contributions. I do not automatically reinvest dividends, because I do not want to invest in companies which are overvalued at the moment, even if they have great long-term prospects. The frustrations of millions of US investors over the past decade, also referred to as the lost decade for US stocks, were primarily caused by excessive valuations in 2000. Even some solid companies such as Johnson & Johnson (JNJ) or Coca-Cola (KO) were overvalued in 1999 - 2000, which led to poor total returns over the next decade, despite the fact that their underlying businesses were growing.
The positive factor for owning quality dividend growth companies is that they tend to generate solid increases in dividend income, coupled with solid total returns. Another positive is the ability to compound income and total returns over time. Companies such as Johnson & Johnson (JNJ), Phillips Morris International (PM) and Casey’s (CASY) have been able to create strategies for increasing earnings, and then executing them. This has led to higher earnings and trickled down into higher distributions. As a result, investors who meticulously reinvested distributions at attractive valuations were rewarded by the amount of reinvestment plus the increase in distribution. As a result, they had effectively managed to turbo-charge their dividend compounding. The fact that earnings are growing, also makes the underlying businesses that dividend investors have put their hard earned money in, even more valuable. As other investors realize the extra value for the dividend paying company, they tends to deliver solid capital gains in the process as well. This icing on the cake also protects the purchasing value of the investment portfolio against inflation.
Full Disclosure: Long MCD, PEP, KO, JNJ, CASY, PM
Relevant Articles:
- Buy and Hold means Buy and Monitor
- My Dividend Portfolio Holdings
- How to read my stock analysis reports
- Buy and hold dividend investing is not dead
- Check the Complete Article Archive
Wednesday, March 26, 2014
Four companies paying dividends for over 100 years
The world is changing at a rapid pace. Some technologies such as the internet and smartphone apps have redefined the way we work and live. Despite all the change, I keep focusing my efforts on companies which have managed to keep their status quo for years, and have a high chance of continuing their quest for higher profits in the future.
The companies I tend to focus on tend to be stodgy corporations that have strong competitive advantages that allow them to keep customers happy and protect their business from competitors. They are characterized by wide moats, or strong competitive advantages such as geographic monopolies, strong brand names, strong customer relationships, economies of scale or the ability to consistently reinvent themselves.
These companies have managed to boost distributions through two world wars, the cold war, several oil price shocks and countless recessions. Their strong business models have helped them to consistently find new ways to increase sales, pass on cost increases to consumers and gain market share, that has resulted in higher profits and dividends over the past century.
Investors should study each of these companies, in order to identify the characteristics that have enabled them to pay dividends every year for over one century. This list is by no means a complete one of course, but it includes those rare companies that have listed their complete dividend histories, spanning back over one century:
International Business Machines Corporation (IBM) provides information technology (IT) products and services worldwide. The company operates in five segments: Global Technology Services, Global Business Services, Software, Systems and Technology, and Global Financing. The company has raised dividends for 18 years in a row, and has consistently paid them since 1913. The company sells for 12.40 times earnings and yields 2%. Check my analysis of IBM.
Exxon Mobil Corporation (XOM) engages in the exploration and production of crude oil and natural gas, and manufacture of petroleum products, as well as transportation and sale of crude oil, natural gas, and petroleum products. The company has raised dividends for 31 years in a row, and has consistently paid them since 1911. The company sells for 12.70 times earnings and yields 2.70%. Check my analysis of Exxon-Mobil.
The Bank of Nova Scotia (BNS), together with its subsidiaries, offers various personal, commercial, corporate, and investment banking services in Canada and internationally. It operates through four segments: Canadian Banking, International Banking, Global Wealth Management, and Scotia Capital. The company has paid dividends since 1892, maintained its distributions dyring the crisis of 2007 -2009 and has bee boosting them again over the past few years. The company sells for 10.80 times earnings and yields 4%.
Edison International (EIX), through its subsidiaries, engages in the generation and distribution of electric power. It operates in two segments, Electric Utility and Competitive Power Generation. The company has raised dividends for 11 years in a row, and has consistently paid them since 1910. The company sells for 18.60 times earnings and yields 2.70%.
An honorable mention goes to Kellogg (K), which has paid dividends for almost 90 years in a row, and has a listing of all the payments since 1925. Kellogg has also raised dividends for 9 years in a row. The company sells for 12.50 times earnings and yields 3%.Check my analysis of Kellogg.
Full Disclosure: Long XOM, IBM, BNS, K
Relevant Articles:
- A long streak of dividend growth is an indication of a business with exceptional fundamentals
- Historical changes of the S&P Dividend Aristocrats
- Where are the original Dividend Aristocrats now?
- Dividend Champions Index – Five Year Total Return Performance
- Seven wide-moat dividends stocks to consider
The companies I tend to focus on tend to be stodgy corporations that have strong competitive advantages that allow them to keep customers happy and protect their business from competitors. They are characterized by wide moats, or strong competitive advantages such as geographic monopolies, strong brand names, strong customer relationships, economies of scale or the ability to consistently reinvent themselves.
These companies have managed to boost distributions through two world wars, the cold war, several oil price shocks and countless recessions. Their strong business models have helped them to consistently find new ways to increase sales, pass on cost increases to consumers and gain market share, that has resulted in higher profits and dividends over the past century.
Investors should study each of these companies, in order to identify the characteristics that have enabled them to pay dividends every year for over one century. This list is by no means a complete one of course, but it includes those rare companies that have listed their complete dividend histories, spanning back over one century:
International Business Machines Corporation (IBM) provides information technology (IT) products and services worldwide. The company operates in five segments: Global Technology Services, Global Business Services, Software, Systems and Technology, and Global Financing. The company has raised dividends for 18 years in a row, and has consistently paid them since 1913. The company sells for 12.40 times earnings and yields 2%. Check my analysis of IBM.
Exxon Mobil Corporation (XOM) engages in the exploration and production of crude oil and natural gas, and manufacture of petroleum products, as well as transportation and sale of crude oil, natural gas, and petroleum products. The company has raised dividends for 31 years in a row, and has consistently paid them since 1911. The company sells for 12.70 times earnings and yields 2.70%. Check my analysis of Exxon-Mobil.
The Bank of Nova Scotia (BNS), together with its subsidiaries, offers various personal, commercial, corporate, and investment banking services in Canada and internationally. It operates through four segments: Canadian Banking, International Banking, Global Wealth Management, and Scotia Capital. The company has paid dividends since 1892, maintained its distributions dyring the crisis of 2007 -2009 and has bee boosting them again over the past few years. The company sells for 10.80 times earnings and yields 4%.
Edison International (EIX), through its subsidiaries, engages in the generation and distribution of electric power. It operates in two segments, Electric Utility and Competitive Power Generation. The company has raised dividends for 11 years in a row, and has consistently paid them since 1910. The company sells for 18.60 times earnings and yields 2.70%.
An honorable mention goes to Kellogg (K), which has paid dividends for almost 90 years in a row, and has a listing of all the payments since 1925. Kellogg has also raised dividends for 9 years in a row. The company sells for 12.50 times earnings and yields 3%.Check my analysis of Kellogg.
Full Disclosure: Long XOM, IBM, BNS, K
Relevant Articles:
- A long streak of dividend growth is an indication of a business with exceptional fundamentals
- Historical changes of the S&P Dividend Aristocrats
- Where are the original Dividend Aristocrats now?
- Dividend Champions Index – Five Year Total Return Performance
- Seven wide-moat dividends stocks to consider
Tuesday, March 25, 2014
Should dividend investors invest in index funds?
Index funds are perfect for most people who don’t want to bother about managing their finances and retirement. If your goal is to accumulate a certain amount of net worth in the future, and do not want to spend any time learning about investing, index funds could be your best solution. Therefore, index funds are great for 80% - 90% of the population out there, particularly if coupled with the tax advantages of 401 (k), Roth and Regular IRA’s etc. I own index funds in my 401 (K), because I cannot buy anything else there.
However, if your goal is to generate income in retirement, index funds might not be most optimal use of your resources. If your goal is to generate a positive stream of income that is not dependent on market fluctuations and grows faster than inflation (dividends), then index funds like the S&P 500 might not be for you. Dividend investing is probably practiced by less than five percent of the investing population, although it should be higher. Of course, do not take my word for that, as this percentage might be even lower than that. But this article is written for the dividend investor, who is willing to do some work, and not let their retirement in the hands of Wall Street.
With dividend growth investing, you put a portfolio of 30 - 40 equally weighted individual securities, from as many sectors that make sense, which are attractively valued at the moment. After screening for your entry criteria, you construct your portfolio, and sit on it, while receiving a rising stream of dividend income. You monitor your portfolio regularly, and only sell after a dividend cut or a crazy overvaluation. I have been doing this since 2008, and have experienced one cut in 2008, two in 2009, one in 2010 and none between 2011 and 2014. The proceeds from the sale of the stock which cut dividends is put to work in another company that fits your entry criteria. Typically, dividends are either spent or reinvested into more quality dividend paying stocks in the accumulation phase, in order to compound capital faster. The reason why relying on dividend income for retirement is superior to index investing is because dividends are more stable than capital gains, and are always positive. Therefore, if stock prices fall and stay down, the dividend payments will provide positive reinforcement to the investor, who would be motivated to keep holding and ignore market fluctuations. Otherwise, investors could panic during a market correction, and probably sell at the worst time possible. In fact, many investors do sell at the worst times possible. It is very difficult for the ordinary uninformed investor to see their portfolio being down 30% - 40% - 50%, and them losing several years worth of contributions in one bad year for stocks. Therefore, a lot of investors sell in order to stop the pain and stop their nest egg from dwindling down even further.
In addition, with dividend stocks, you are a buy and hold investor with a long-term view. You are not switching money from one company to another. Therefore, you are reducing reinvestment risk due to transactions, and have a much lower chance of generating lower returns that come out of frequent portfolio churning.
One reason against index funds, is that they include a lot of companies which do not pay ANY dividends. Therefore, the yields on index funds are very low, and not sufficient to live off of today. That’s why in order to live off this nest egg in retirement, you need to sell of a chunk of it every single year. This leaves you with a shrinking asset base, which is relying on continued growth in prices. Without the increase in stock prices, you are shrinking your asset base even further. If you retired at the end of 1999, you would have experienced stagnating stock prices, and as a result, you would have “eaten” more than half of your portfolio by now. I would not want to face the stress of eating into my capital when I retire. If I have $1,000,000, and I sell $40,000 worth of securities each year, I would be out of money in 25 years, assuming no inflation and no stock price growth. If the first five or ten years produce no increase in stock prices, then I face a high risk of running out of money. The last few years of living in such conditions would likely be horrible, as I would be counting every penny twice, and stressing over, while counting the days until I have to get a Wal-Mart job as a greeter out of necessity. The thing is that noone can tell you in advance whether the year you retire with index funds will be similar to 1972 or to 2000.
There are many flaws with index funds, particularly those on S&P 500, which make them poor choices for the enterprising dividend investor. The first is that there is a lot of turnover every single year, which is not good for wealth building. In fact, the turnover is approximately 3% – 5% per year on average. This means that every year anywhere between 15 and more than 25 companies are added and replaced by the benchmark, incurring fees for the investor. Buying and selling of stocks is the reason many investors underperform their benchmarks. For indexes like S&P 500, this frequency of asset turnover has lead to underperforming a purely passive portfolio of stocks. Did you know that the original 500 stocks of S&P 500 from 1957 outperformed the S&P 500 index by 1% point for 50 years? My previous article on the topic discusses research done to prove this.
The second flaw is that index funds are weighted based on float and market capitalization. This is to serve the mutual fund industry, not the investor. If you are a big shot mutual fund, and you want to raise 100 billion from investors, you cannot follow a passive strategy that requires you to put money equally between 500 companies, because for some the total amount of stock available to purchase might be less than $200 million. Therefore, some companies are ignored, at the expense of focusing on the biggest. In reality, the equal weighted S&P 500 has done better than the market cap weighted S&P 500 over the past decade.
The third flaw is that I do not know what criteria the index committee uses to include stocks in the S&P 500. Sometimes, they (just like any normal investor) follow the crowd into irrational exuberance and doing stupid things. For example, back in 1999, a lot of old economy stocks were thrown out of the index, and substituted for red hot technology stocks such as Yahoo! I would let you figure out for yourself how that worked out. The other sin of the S&P index committee is that it didn’t include Warren Buffett’s Berkshire Hathaway in the index until 2010. With my strategy, I can select the securities that fit my criteria, and live or die by their performance, as I am the one in charge of capital allocation in the family.
The fourth flaw with index investing that they are not a magic panacea for sure stock market profits. An investor who doesn’t know anything about investing, and is passively saving in index funds, can still lose money. They can lose money if they panic at the wrong times such as in 2008 – 2009 and sell everything. They can also lose money if they put money to work without taking valuation into account. The ordinary investor can find a way lose money even with idiot-proof index funds. In fact, according to Morningstar, most investors in the Vanguard 500 index fund have underperformed the index by 2% per year over the past 15 years. The investor also needs to focus on valuation at the time of investment. You should not just blindly put your money in the market to work, without taking valuation into account. For anyone who bought S&P 500 index funds in the late 1990s, they were simply chasing market returns. This was not a smart decision, and the subsequent decade of low returns proved that ignoring entry valuation at the time of investment is not a good strategy.
The other thing is that while index funds have rock bottom expenses, they could still add up over time. For example, if you have a portfolio worth $100,000, you will end up paying $100/year in management fees. If your portfolio is worth $500,000, you will be paying $500/year for life.
In contrast, if you built a portfolio of 40 individual dividend paying stocks, and paid a $5/commission for each trade, you would pay $200 in total. If you never sell, you would never have to incur commission expenses again. Therefore, with a $100K portfolio, you are better off cost wise in 2 years. For the larger portfolios you are better off in individually selected stocks on your own, rather than index funds. That is one of the reasons why people who have several million in equities always pick their own securities, rather than rely on index funds. Why pay someone else thousands of dollars in fees per year for passive investments, when you can simply create a portfolio of the largest blue chip stocks, and do nothing after that?
Over the past decade, more and more investors are beginning to embrace passive index investing strategies. I am just wondering to myself, what if everyone is in index funds one day? I wonder what the consequences and inefficiencies that could arise from this phenomenon of people believe you do not need to know what you own, as long as it is an index fund.
If at one point everyone is invested in index funds, this could create all sorts of inefficiencies in the market. For example, if a company asks shareholders to vote on certain issues that could be otherwise profitable, noone would vote, since conventional efficient market theory says all information is already priced into the stock. As a result, index fund managers might not even bother voting, as they won’t believe their vote counts. Next, since these fund managers might not vote, because they probably haven’t done any research to know enough about the companies they hold for investors in the first place. Therefore, corporate managers at those large companies would face few consequences from angry shareholders. I think that one of the reasons why CEO’s are earning such high compensations is because ownership is being delegated to mutual funds, and not individual shareholders. If Warren Buffett owned 30% of Berkshire Hathaway, and he let his son be the CEO, you could be 100% sure that he would fire Howard on the spot if he paid himself an exorbitant amount of compensation while not furthering shareholders’ interests. This is the reason why as dividend investors, it pays to have your interests aligned with management, especially when management has an ownership stake.
In conclusion, there are a few main ideas that enterprising dividend investors should take from this article.
The first idea is to buy and hold, and not engage in active trading. If you slowly built a portfolio of 30 blue chip stocks, from as many sectors that made sense, and you HELD ON, for several decades, you should do very well for yourself.
The second idea is also to educate yourself about money and investing AS MUCH AS POSSIBLE. The main idea is that you are the one responsible for your retirement future. You are the one whose retirement is at stake, and the only one who cares about succeeding. Therefore, you should be personally involved in the process, educate yourself and determine the best way to achieve your goals. Whether you end up buying dividend paying stocks, index funds, or daytrade internet stocks online, you are the person who will benefit or lose from your actions. Therefore, do not outsource your retirement goals and dreams to a third party, whose only goal is to generate a commission or annual fees from you. Take your dream in your own hands, and get at it!
Full Disclosure: Long S&P 500 Mutual Fund
Relevant Articles:
- These Books Shaped My Investing Strategy
- Warren Buffett Investing Resource Page
- Are performance comparisons to S&P 500 necessary for Dividend Growth Investors?
- Buy and hold dividend investing is not dead
- Dividend investing timeframes- what's your holding period?
However, if your goal is to generate income in retirement, index funds might not be most optimal use of your resources. If your goal is to generate a positive stream of income that is not dependent on market fluctuations and grows faster than inflation (dividends), then index funds like the S&P 500 might not be for you. Dividend investing is probably practiced by less than five percent of the investing population, although it should be higher. Of course, do not take my word for that, as this percentage might be even lower than that. But this article is written for the dividend investor, who is willing to do some work, and not let their retirement in the hands of Wall Street.
With dividend growth investing, you put a portfolio of 30 - 40 equally weighted individual securities, from as many sectors that make sense, which are attractively valued at the moment. After screening for your entry criteria, you construct your portfolio, and sit on it, while receiving a rising stream of dividend income. You monitor your portfolio regularly, and only sell after a dividend cut or a crazy overvaluation. I have been doing this since 2008, and have experienced one cut in 2008, two in 2009, one in 2010 and none between 2011 and 2014. The proceeds from the sale of the stock which cut dividends is put to work in another company that fits your entry criteria. Typically, dividends are either spent or reinvested into more quality dividend paying stocks in the accumulation phase, in order to compound capital faster. The reason why relying on dividend income for retirement is superior to index investing is because dividends are more stable than capital gains, and are always positive. Therefore, if stock prices fall and stay down, the dividend payments will provide positive reinforcement to the investor, who would be motivated to keep holding and ignore market fluctuations. Otherwise, investors could panic during a market correction, and probably sell at the worst time possible. In fact, many investors do sell at the worst times possible. It is very difficult for the ordinary uninformed investor to see their portfolio being down 30% - 40% - 50%, and them losing several years worth of contributions in one bad year for stocks. Therefore, a lot of investors sell in order to stop the pain and stop their nest egg from dwindling down even further.
In addition, with dividend stocks, you are a buy and hold investor with a long-term view. You are not switching money from one company to another. Therefore, you are reducing reinvestment risk due to transactions, and have a much lower chance of generating lower returns that come out of frequent portfolio churning.
One reason against index funds, is that they include a lot of companies which do not pay ANY dividends. Therefore, the yields on index funds are very low, and not sufficient to live off of today. That’s why in order to live off this nest egg in retirement, you need to sell of a chunk of it every single year. This leaves you with a shrinking asset base, which is relying on continued growth in prices. Without the increase in stock prices, you are shrinking your asset base even further. If you retired at the end of 1999, you would have experienced stagnating stock prices, and as a result, you would have “eaten” more than half of your portfolio by now. I would not want to face the stress of eating into my capital when I retire. If I have $1,000,000, and I sell $40,000 worth of securities each year, I would be out of money in 25 years, assuming no inflation and no stock price growth. If the first five or ten years produce no increase in stock prices, then I face a high risk of running out of money. The last few years of living in such conditions would likely be horrible, as I would be counting every penny twice, and stressing over, while counting the days until I have to get a Wal-Mart job as a greeter out of necessity. The thing is that noone can tell you in advance whether the year you retire with index funds will be similar to 1972 or to 2000.
There are many flaws with index funds, particularly those on S&P 500, which make them poor choices for the enterprising dividend investor. The first is that there is a lot of turnover every single year, which is not good for wealth building. In fact, the turnover is approximately 3% – 5% per year on average. This means that every year anywhere between 15 and more than 25 companies are added and replaced by the benchmark, incurring fees for the investor. Buying and selling of stocks is the reason many investors underperform their benchmarks. For indexes like S&P 500, this frequency of asset turnover has lead to underperforming a purely passive portfolio of stocks. Did you know that the original 500 stocks of S&P 500 from 1957 outperformed the S&P 500 index by 1% point for 50 years? My previous article on the topic discusses research done to prove this.
The second flaw is that index funds are weighted based on float and market capitalization. This is to serve the mutual fund industry, not the investor. If you are a big shot mutual fund, and you want to raise 100 billion from investors, you cannot follow a passive strategy that requires you to put money equally between 500 companies, because for some the total amount of stock available to purchase might be less than $200 million. Therefore, some companies are ignored, at the expense of focusing on the biggest. In reality, the equal weighted S&P 500 has done better than the market cap weighted S&P 500 over the past decade.
The third flaw is that I do not know what criteria the index committee uses to include stocks in the S&P 500. Sometimes, they (just like any normal investor) follow the crowd into irrational exuberance and doing stupid things. For example, back in 1999, a lot of old economy stocks were thrown out of the index, and substituted for red hot technology stocks such as Yahoo! I would let you figure out for yourself how that worked out. The other sin of the S&P index committee is that it didn’t include Warren Buffett’s Berkshire Hathaway in the index until 2010. With my strategy, I can select the securities that fit my criteria, and live or die by their performance, as I am the one in charge of capital allocation in the family.
The fourth flaw with index investing that they are not a magic panacea for sure stock market profits. An investor who doesn’t know anything about investing, and is passively saving in index funds, can still lose money. They can lose money if they panic at the wrong times such as in 2008 – 2009 and sell everything. They can also lose money if they put money to work without taking valuation into account. The ordinary investor can find a way lose money even with idiot-proof index funds. In fact, according to Morningstar, most investors in the Vanguard 500 index fund have underperformed the index by 2% per year over the past 15 years. The investor also needs to focus on valuation at the time of investment. You should not just blindly put your money in the market to work, without taking valuation into account. For anyone who bought S&P 500 index funds in the late 1990s, they were simply chasing market returns. This was not a smart decision, and the subsequent decade of low returns proved that ignoring entry valuation at the time of investment is not a good strategy.
The other thing is that while index funds have rock bottom expenses, they could still add up over time. For example, if you have a portfolio worth $100,000, you will end up paying $100/year in management fees. If your portfolio is worth $500,000, you will be paying $500/year for life.
In contrast, if you built a portfolio of 40 individual dividend paying stocks, and paid a $5/commission for each trade, you would pay $200 in total. If you never sell, you would never have to incur commission expenses again. Therefore, with a $100K portfolio, you are better off cost wise in 2 years. For the larger portfolios you are better off in individually selected stocks on your own, rather than index funds. That is one of the reasons why people who have several million in equities always pick their own securities, rather than rely on index funds. Why pay someone else thousands of dollars in fees per year for passive investments, when you can simply create a portfolio of the largest blue chip stocks, and do nothing after that?
Over the past decade, more and more investors are beginning to embrace passive index investing strategies. I am just wondering to myself, what if everyone is in index funds one day? I wonder what the consequences and inefficiencies that could arise from this phenomenon of people believe you do not need to know what you own, as long as it is an index fund.
If at one point everyone is invested in index funds, this could create all sorts of inefficiencies in the market. For example, if a company asks shareholders to vote on certain issues that could be otherwise profitable, noone would vote, since conventional efficient market theory says all information is already priced into the stock. As a result, index fund managers might not even bother voting, as they won’t believe their vote counts. Next, since these fund managers might not vote, because they probably haven’t done any research to know enough about the companies they hold for investors in the first place. Therefore, corporate managers at those large companies would face few consequences from angry shareholders. I think that one of the reasons why CEO’s are earning such high compensations is because ownership is being delegated to mutual funds, and not individual shareholders. If Warren Buffett owned 30% of Berkshire Hathaway, and he let his son be the CEO, you could be 100% sure that he would fire Howard on the spot if he paid himself an exorbitant amount of compensation while not furthering shareholders’ interests. This is the reason why as dividend investors, it pays to have your interests aligned with management, especially when management has an ownership stake.
In conclusion, there are a few main ideas that enterprising dividend investors should take from this article.
The first idea is to buy and hold, and not engage in active trading. If you slowly built a portfolio of 30 blue chip stocks, from as many sectors that made sense, and you HELD ON, for several decades, you should do very well for yourself.
The second idea is also to educate yourself about money and investing AS MUCH AS POSSIBLE. The main idea is that you are the one responsible for your retirement future. You are the one whose retirement is at stake, and the only one who cares about succeeding. Therefore, you should be personally involved in the process, educate yourself and determine the best way to achieve your goals. Whether you end up buying dividend paying stocks, index funds, or daytrade internet stocks online, you are the person who will benefit or lose from your actions. Therefore, do not outsource your retirement goals and dreams to a third party, whose only goal is to generate a commission or annual fees from you. Take your dream in your own hands, and get at it!
Full Disclosure: Long S&P 500 Mutual Fund
Relevant Articles:
- These Books Shaped My Investing Strategy
- Warren Buffett Investing Resource Page
- Are performance comparisons to S&P 500 necessary for Dividend Growth Investors?
- Buy and hold dividend investing is not dead
- Dividend investing timeframes- what's your holding period?
Monday, March 24, 2014
Three Attractive Dividend Paying Companies to Consider
I review dividend increases every week. I review all of them, but focus on those that have raised at least for a decade, and have at least a minimum yield, before I take the time to research them any further.
The following companies that managed to raise dividends in the past week met the minimum yield and length of consecutive increases:
Air Products and Chemicals, Inc. (APD) provides atmospheric gases, process and specialty gases, performance materials, equipment, and services worldwide. The company operates through four segments: Merchant Gases, Tonnage Gases, Electronics and Performance Materials, and Equipment and Energy. Last week, the Board of directors raised quarterly dividends by 8.50% to 77 cents/share. This marked the 32nd consecutive annual dividend increase for this dividend champion. Over the past decade, Air Products and Chemicals has managed to increase dividends by 12.20%/year.
The company has managed to increase earnings per share from $2.64 in 2004 to $4.73 by 2013. The company is expected to earn $5.78/share in 2014 and $6.41/share in 2015.
The time to buy this company was in early 2013. Currently, this dividend champion is overvalued at 25.80 times earnings, and yields 2.50%. I would be more interested in the company when it sells below 20 times earnings, provided I don’t find even better values in comparison. Check my analysis of Air Products and Chemicals.
W. P. Carey Inc (WPC) invests in the real estate markets across the globe. This real estate investment trust (REIT) also provides long-term sale-leaseback and build-to-suit financing for companies. Last week, the REIT approved a hike in the quarterly dividend to 89.50 cents/share. The current payment is 9.10% higher than the one paid in the same time last year. W.P. Carey has managed to increase dividends for 16 years in a row. In the past decade, W.P. Carey has managed to increase dividends by 6.30%/year.
The REIT has adjusted Funds from Operations (AFFO) of $4.22/share in 2013, and expects $4.40 to $4.65 per diluted share for the 2014 full year. The REIT generated $2.81/share in 2004.
This dividend achiever currently yields 5.80%. I need to add it to my list for further research, in order to decide if it’s worthy of my investment dollars.
Raytheon Company (RTN) develops integrated products, services, and solutions in the areas of sensing; effects; command, control, communications, and intelligence; mission support; and cyber and information security worldwide. It operates in four segments: Integrated Defense Systems; Intelligence, Information, and Services; Missile Systems; and Space and Airborne Systems. Last week, the Board of directors raised quarterly dividends by 9.10% to 60 cents/share. This marked the 10th consecutive annual dividend increase for the company. Over the past decade, Raytheon has managed to increase dividends by 10.40%/year.
The company has managed to increase earnings per share from $0.99 in 2004 to $5.84 by 2013. The company is expected to earn $6.94/share in 2014 and $7.82/share in 2015.
Currently, this dividend achiever is attractively valued at 16.20 times earnings, and yields 2.50%. I need to add Raytheon to my list of companies for further research.
These are not buy recommendations, but ideas for further research. Investors should start their research by focusing on quantitative factors like earnings per share, revenues, and dividends per share trends. In addition, investors should also pay attention to qualitative factors that would ensure that the business model stays intact, and the business would generate more profits over time to pay for the future dividend increases. Finally, investors should also make sure that they are not overpaying for the companies they want to purchase, in order to allocate their capital to the most promising future streams of income.
Full Disclosure: Long APD
Relevant Articles:
- How to read my weekly dividend increase reports
- Twenty Dividend Stocks I Recently Purchased for my IRA
- Sixteen Great Dividend Champions on Sale
- Five Things to Look For in a Real Estate Investment Trust
- The work required to have an opinion
The following companies that managed to raise dividends in the past week met the minimum yield and length of consecutive increases:
Air Products and Chemicals, Inc. (APD) provides atmospheric gases, process and specialty gases, performance materials, equipment, and services worldwide. The company operates through four segments: Merchant Gases, Tonnage Gases, Electronics and Performance Materials, and Equipment and Energy. Last week, the Board of directors raised quarterly dividends by 8.50% to 77 cents/share. This marked the 32nd consecutive annual dividend increase for this dividend champion. Over the past decade, Air Products and Chemicals has managed to increase dividends by 12.20%/year.
The company has managed to increase earnings per share from $2.64 in 2004 to $4.73 by 2013. The company is expected to earn $5.78/share in 2014 and $6.41/share in 2015.
The time to buy this company was in early 2013. Currently, this dividend champion is overvalued at 25.80 times earnings, and yields 2.50%. I would be more interested in the company when it sells below 20 times earnings, provided I don’t find even better values in comparison. Check my analysis of Air Products and Chemicals.
W. P. Carey Inc (WPC) invests in the real estate markets across the globe. This real estate investment trust (REIT) also provides long-term sale-leaseback and build-to-suit financing for companies. Last week, the REIT approved a hike in the quarterly dividend to 89.50 cents/share. The current payment is 9.10% higher than the one paid in the same time last year. W.P. Carey has managed to increase dividends for 16 years in a row. In the past decade, W.P. Carey has managed to increase dividends by 6.30%/year.
The REIT has adjusted Funds from Operations (AFFO) of $4.22/share in 2013, and expects $4.40 to $4.65 per diluted share for the 2014 full year. The REIT generated $2.81/share in 2004.
This dividend achiever currently yields 5.80%. I need to add it to my list for further research, in order to decide if it’s worthy of my investment dollars.
Raytheon Company (RTN) develops integrated products, services, and solutions in the areas of sensing; effects; command, control, communications, and intelligence; mission support; and cyber and information security worldwide. It operates in four segments: Integrated Defense Systems; Intelligence, Information, and Services; Missile Systems; and Space and Airborne Systems. Last week, the Board of directors raised quarterly dividends by 9.10% to 60 cents/share. This marked the 10th consecutive annual dividend increase for the company. Over the past decade, Raytheon has managed to increase dividends by 10.40%/year.
The company has managed to increase earnings per share from $0.99 in 2004 to $5.84 by 2013. The company is expected to earn $6.94/share in 2014 and $7.82/share in 2015.
Currently, this dividend achiever is attractively valued at 16.20 times earnings, and yields 2.50%. I need to add Raytheon to my list of companies for further research.
These are not buy recommendations, but ideas for further research. Investors should start their research by focusing on quantitative factors like earnings per share, revenues, and dividends per share trends. In addition, investors should also pay attention to qualitative factors that would ensure that the business model stays intact, and the business would generate more profits over time to pay for the future dividend increases. Finally, investors should also make sure that they are not overpaying for the companies they want to purchase, in order to allocate their capital to the most promising future streams of income.
Full Disclosure: Long APD
Relevant Articles:
- How to read my weekly dividend increase reports
- Twenty Dividend Stocks I Recently Purchased for my IRA
- Sixteen Great Dividend Champions on Sale
- Five Things to Look For in a Real Estate Investment Trust
- The work required to have an opinion
Wednesday, March 19, 2014
Why Did I Purchase This Dividend Paying Company For a Third Month in a Row?
I added to my position in Target (TGT) for the third month in a row, using my no cost brokerage Loyal3. Basically, I am evenly spreading my equal dollar purchases in the stock every month throughout 2014, rather than making two or three larger purchases. By now you probably also know that Target is a dividend champion which has managed to increase dividends for 46 years in a row. The company sells for 14.40 - 15.50 times forward earnings for 2014. The forward earnings range is $3.85 - $4.15/share.
Everyone is familiar with issues in Canada and the credit card breaches, so I am not going to keep repeating those. This has made many investors nervous about the company. Many seem to be going to the extreme, and projecting the recent news about the retailer onto the future. This is called recency bias, and is quite common among investors. It could also prove costly to you down the road.
It is very fun to watch the behavior of investors during tumultuous periods. During the declines in stock prices between 2008 and 2009, many investors were forecasting the end of the world. Few took advantage of the cheap prices at which many high quality companies were selling for. Now Target has stumbled, and the weak hands are forecasting the actual demise of the company. When investors become emotional about a topic, they can get greedy or fearful, which leads them to make ridiculous forecasts based on those irrational emotions.
In reality, Target’s operations are doing just fine. The company can still achieve some growth in the US, but international is really the place to go. Management has previously stumbled before on big initiatives, but they have always seemed to learn from them. This is a short-term issue, and years from now, investors would look at 2014 with regret that they failed to capitalize on the weakness in stock prices. I would say that the company will likely achieve its goal of $8/share in earnings by 2018. This is a year later than what was originally planned a couple months ago. If you demand perfect precision in growth, then chances are investing in the stock market is not for you. Of course, it is tough to be a long-term investor, when you get scary headlines every day. Unfortunately, this is what separates winners from losers in the long-term investing game.
Of course, it is quite possible that growth for Target slows down over the next few years. This could lead to a slowdown of dividend growth. However, I am hopeful that management will learn from the Canada expansion, and use those lessons when they decide to expand to other countries as well. In addition, the common sense approach is that credit card breaches have happened before, and will happen again. Either way, this is not something that will kill a retailer. At least it didn't kill T.J. Maxx in 2007.Of course, if they fail to show confidence in the business, and do not increase dividends in 2014, then I would stop adding funds to the stock. If they cut the dividend, I will be out the door a second after the announcement. While I am optimistic for the company, I also know when to cut my losses and move on. In addition, I keep a very diversified portfolio of dividend paying stocks, which mitigates the negative effects of dividend cuts stemming from onebad apple.
Either way, many investors I have been interacting with have given me 100 reasons why Target is a poor investment today. Either way, I do my own analysis, which is why I try not to get influenced by others.
One of the risks to retailers is that a portion of shoppers will convert their spending online. This is already happening to a certain degree, and has produced “winners” like Amazon.com. The thing is that online sales growth could be an opportunity to reach out to new and existing customers for the likes of Wal-Mart (WMT) and Target. However, I do not believe that consumers will do all of their retail business online. There are certain categories, where customers are always going to prefer the convenience of going to a retail location, and selecting their items to buy right away. For example, if you want to purchase clothes, you need to try them on. It is much easier to buy a TV or a book online, since you are getting the same level of product experience online or offline. If you bought a book, you know it will “fit” your needs, which is why it won’t matter how you bought it. The only difference is how long are you willing to wait before receiving the book.
The thing is that online shopping has been around for over 17- 18 years now, and it has not eliminated the need for brick and mortar retailers. While having exposure to online and offline channels could only help, I am not so sure that people will be buying everything online in the future. If you think so, then ask yourself why didn’t the mail order catalog result in the obsolescence of the retail store decades ago?
Of course, the major question I ask myself is “ Do I see Target around in 20 years?”. For me the question is yes, and thus I would keep sticking to my plan.
Full Disclosure: Long TGT, WMT
Relevant Articles:
- How to think like a long term dividend investor
- Do not become a victim of fear in your dividend investing
- Emotionless Dividend Investing
- Target Corporation (TGT) - A high growth, attractively valued dividend company
- Two Dividend Machines I Purchased Last Week
Everyone is familiar with issues in Canada and the credit card breaches, so I am not going to keep repeating those. This has made many investors nervous about the company. Many seem to be going to the extreme, and projecting the recent news about the retailer onto the future. This is called recency bias, and is quite common among investors. It could also prove costly to you down the road.
It is very fun to watch the behavior of investors during tumultuous periods. During the declines in stock prices between 2008 and 2009, many investors were forecasting the end of the world. Few took advantage of the cheap prices at which many high quality companies were selling for. Now Target has stumbled, and the weak hands are forecasting the actual demise of the company. When investors become emotional about a topic, they can get greedy or fearful, which leads them to make ridiculous forecasts based on those irrational emotions.
In reality, Target’s operations are doing just fine. The company can still achieve some growth in the US, but international is really the place to go. Management has previously stumbled before on big initiatives, but they have always seemed to learn from them. This is a short-term issue, and years from now, investors would look at 2014 with regret that they failed to capitalize on the weakness in stock prices. I would say that the company will likely achieve its goal of $8/share in earnings by 2018. This is a year later than what was originally planned a couple months ago. If you demand perfect precision in growth, then chances are investing in the stock market is not for you. Of course, it is tough to be a long-term investor, when you get scary headlines every day. Unfortunately, this is what separates winners from losers in the long-term investing game.
Of course, it is quite possible that growth for Target slows down over the next few years. This could lead to a slowdown of dividend growth. However, I am hopeful that management will learn from the Canada expansion, and use those lessons when they decide to expand to other countries as well. In addition, the common sense approach is that credit card breaches have happened before, and will happen again. Either way, this is not something that will kill a retailer. At least it didn't kill T.J. Maxx in 2007.Of course, if they fail to show confidence in the business, and do not increase dividends in 2014, then I would stop adding funds to the stock. If they cut the dividend, I will be out the door a second after the announcement. While I am optimistic for the company, I also know when to cut my losses and move on. In addition, I keep a very diversified portfolio of dividend paying stocks, which mitigates the negative effects of dividend cuts stemming from onebad apple.
Either way, many investors I have been interacting with have given me 100 reasons why Target is a poor investment today. Either way, I do my own analysis, which is why I try not to get influenced by others.
One of the risks to retailers is that a portion of shoppers will convert their spending online. This is already happening to a certain degree, and has produced “winners” like Amazon.com. The thing is that online sales growth could be an opportunity to reach out to new and existing customers for the likes of Wal-Mart (WMT) and Target. However, I do not believe that consumers will do all of their retail business online. There are certain categories, where customers are always going to prefer the convenience of going to a retail location, and selecting their items to buy right away. For example, if you want to purchase clothes, you need to try them on. It is much easier to buy a TV or a book online, since you are getting the same level of product experience online or offline. If you bought a book, you know it will “fit” your needs, which is why it won’t matter how you bought it. The only difference is how long are you willing to wait before receiving the book.
The thing is that online shopping has been around for over 17- 18 years now, and it has not eliminated the need for brick and mortar retailers. While having exposure to online and offline channels could only help, I am not so sure that people will be buying everything online in the future. If you think so, then ask yourself why didn’t the mail order catalog result in the obsolescence of the retail store decades ago?
Of course, the major question I ask myself is “ Do I see Target around in 20 years?”. For me the question is yes, and thus I would keep sticking to my plan.
Full Disclosure: Long TGT, WMT
Relevant Articles:
- How to think like a long term dividend investor
- Do not become a victim of fear in your dividend investing
- Emotionless Dividend Investing
- Target Corporation (TGT) - A high growth, attractively valued dividend company
- Two Dividend Machines I Purchased Last Week
Tuesday, March 18, 2014
Richard Kinder: The Warren Buffett of Energy
Warren Buffett is the most successful investor in the world. If someone had put $10,000 in his partnership in 1956 and stayed with him, approximately 57 years later their stake would be worth almost $1 billion. I have been on a mission to learn as much as possible about this successful investor, and hopefully implement some of those lessons to improve my own investing. In the process of my reviews, I noticed some striking similarities between Warren Buffett and Richard Kinder, who is the CEO of Kinder Morgan Inc (KMI).
I have owned Kinder Morgan Management LLC (KMR) for a little over 5 years, and Kinder Morgan Inc (KMI) for over 3 years now. In my research of the Kinder Morgan Companies, I have uncovered striking similarities between the founder and main shareholder of Kinder Morgan and investing legend Warren Buffett. Of course, correlation is different from causation, but never the less I think it pays to pay attention to certain traits of successful CEO’s. I believe these characteristics could pay dividends for shareholders for years to come.
The first striking characteristic is that both men have the majority of their net worth in the stock of the companies they manage as CEO’s. Buffett has a 21.40% economic interest in Berkshire Hathaway, while Richard Kinder owns 23.30% of Kinder Morgan Inc. I really like to see when CEO’s have most of their net worth in the company they manage, because this shows that their interests are aligned with the interests of ordinary shareholders. What can I say, I admire investors with skin in the game.
In addition, both men take nominal salaries from the companies they manage, compared to other CEO’s. Warren Buffett earns a $100,000 annual salary from Berkshire Hathaway (BRK.B), while Richard Kinder earns a mind-boggling $1/year. Of course, they are not relying on these salaries, which are pitiful compared to the gargantuan packages that executives earn these days. Buffett has approximately 1% of his net worth in various investments, which earn him a high enough dividend income to pay a lower tax rate than his secretary. Richard Kinder on the other hand derives most of his income from dividends paid by Kinder Morgan Inc to shareholders. With over 240 million Kinder Morgan Inc (KMI) shares, Richard Kinder makes approximately $400 million in annual dividend income. You can bet that he would do anything within his control to ensure that his stream of dividends increases over time, and that his stake becomes more valuable. Because qualified dividend income has preferential tax treatment, Richard Kinder would not pay more than 23.80%.
Both Buffett and Kinder seem to be focusing their best efforts on activities they like, which are also within their circles of competence. Buffett has been a student of business and investing for almost his entire life. Richard Kinder has had a career in law, followed by working at Enron until 1996. At one time, he was one of the most likely to succeed Ken Lay to the CEO position at Enron. Unfortunately for Enron, the company did not promote Richard Kinder, which is why he left in 1996 and started his journey as the Buffett of Energy. He purchased pipeline assets from Enron, and started acquiring more pipelines and other energy gathering assets in order to gain scale. In addition, he took advantage of the master limited partnership structure for tax purposes, which was not common at the time.
The thing that really strikes a resemblance between the early days of the Buffett partnership and Richard Kinder is the smart use of leverage. For example, Warren Buffett earned as a performance fee a quarter of all partnership returns above 6% in a given year. He then plowed most of those fees back into the partnership as limited ownership stakes. Because Buffett’s investment partnership routinely made more than 6%/year, he ended up collecting millions in fees, while allowed him to end up with a high net worth by the time he wound the partnership down in 1970. Richard Kinder on the other hand owns a large stake in the general partner of Kinder Morgan Energy Partners (KMP) and El Paso Pipeline Partners (EPB). The general partner earns incentive distribution rights, which essentially allow them to a greater share of incremental growth in cash flows from the limited partnerships. In addition, the general partner also owns portions of the limited partners.
Either way, my highest portfolio position is Kinder Morgan Inc (KMI), as it offers a high current yield, plus solid dividend growth. I also own a pretty size-able chunk of Kinder Morgan Management LLC (KMR), where instead of distributions I receive more shares. This is also a great way to gain exposure to MLPs in a tax-deferred account, particularly if you are afraid of the UBTI. Therefore, the growing distributions are automatically reinvested, thus further turbocharging the compounding effect there. Once I retire however, I would likely convert those shares into partnership units of KMP, so that I can live off the income. Hopefully the spread between KMR and KMP narrows by then. Otherwise, if you are a long-term investor who wants to purchase KMP units, but don’t need the cash for years, I would strongly suggest KMR instead.
Full Disclosure: Long KMI, KMR, BRK/B
Relevant Articles:
- The Importance of Corporate Governance for Successful Dividend Investing
- Your best ideas might already be in your circle of competence
- I admire Investors with Skin in the Game
- Do not become a victim of fear in your dividend investing
- Warren Buffett Investing Resource Page
- Buffett Partnership Letters
I have owned Kinder Morgan Management LLC (KMR) for a little over 5 years, and Kinder Morgan Inc (KMI) for over 3 years now. In my research of the Kinder Morgan Companies, I have uncovered striking similarities between the founder and main shareholder of Kinder Morgan and investing legend Warren Buffett. Of course, correlation is different from causation, but never the less I think it pays to pay attention to certain traits of successful CEO’s. I believe these characteristics could pay dividends for shareholders for years to come.
The first striking characteristic is that both men have the majority of their net worth in the stock of the companies they manage as CEO’s. Buffett has a 21.40% economic interest in Berkshire Hathaway, while Richard Kinder owns 23.30% of Kinder Morgan Inc. I really like to see when CEO’s have most of their net worth in the company they manage, because this shows that their interests are aligned with the interests of ordinary shareholders. What can I say, I admire investors with skin in the game.
In addition, both men take nominal salaries from the companies they manage, compared to other CEO’s. Warren Buffett earns a $100,000 annual salary from Berkshire Hathaway (BRK.B), while Richard Kinder earns a mind-boggling $1/year. Of course, they are not relying on these salaries, which are pitiful compared to the gargantuan packages that executives earn these days. Buffett has approximately 1% of his net worth in various investments, which earn him a high enough dividend income to pay a lower tax rate than his secretary. Richard Kinder on the other hand derives most of his income from dividends paid by Kinder Morgan Inc to shareholders. With over 240 million Kinder Morgan Inc (KMI) shares, Richard Kinder makes approximately $400 million in annual dividend income. You can bet that he would do anything within his control to ensure that his stream of dividends increases over time, and that his stake becomes more valuable. Because qualified dividend income has preferential tax treatment, Richard Kinder would not pay more than 23.80%.
Both Buffett and Kinder seem to be focusing their best efforts on activities they like, which are also within their circles of competence. Buffett has been a student of business and investing for almost his entire life. Richard Kinder has had a career in law, followed by working at Enron until 1996. At one time, he was one of the most likely to succeed Ken Lay to the CEO position at Enron. Unfortunately for Enron, the company did not promote Richard Kinder, which is why he left in 1996 and started his journey as the Buffett of Energy. He purchased pipeline assets from Enron, and started acquiring more pipelines and other energy gathering assets in order to gain scale. In addition, he took advantage of the master limited partnership structure for tax purposes, which was not common at the time.
The thing that really strikes a resemblance between the early days of the Buffett partnership and Richard Kinder is the smart use of leverage. For example, Warren Buffett earned as a performance fee a quarter of all partnership returns above 6% in a given year. He then plowed most of those fees back into the partnership as limited ownership stakes. Because Buffett’s investment partnership routinely made more than 6%/year, he ended up collecting millions in fees, while allowed him to end up with a high net worth by the time he wound the partnership down in 1970. Richard Kinder on the other hand owns a large stake in the general partner of Kinder Morgan Energy Partners (KMP) and El Paso Pipeline Partners (EPB). The general partner earns incentive distribution rights, which essentially allow them to a greater share of incremental growth in cash flows from the limited partnerships. In addition, the general partner also owns portions of the limited partners.
Either way, my highest portfolio position is Kinder Morgan Inc (KMI), as it offers a high current yield, plus solid dividend growth. I also own a pretty size-able chunk of Kinder Morgan Management LLC (KMR), where instead of distributions I receive more shares. This is also a great way to gain exposure to MLPs in a tax-deferred account, particularly if you are afraid of the UBTI. Therefore, the growing distributions are automatically reinvested, thus further turbocharging the compounding effect there. Once I retire however, I would likely convert those shares into partnership units of KMP, so that I can live off the income. Hopefully the spread between KMR and KMP narrows by then. Otherwise, if you are a long-term investor who wants to purchase KMP units, but don’t need the cash for years, I would strongly suggest KMR instead.
Full Disclosure: Long KMI, KMR, BRK/B
Relevant Articles:
- The Importance of Corporate Governance for Successful Dividend Investing
- Your best ideas might already be in your circle of competence
- I admire Investors with Skin in the Game
- Do not become a victim of fear in your dividend investing
- Warren Buffett Investing Resource Page
- Buffett Partnership Letters
Monday, March 17, 2014
Colgate Palmolive Delivers a Disappointing Dividend Increase
Colgate-Palmolive Company (CL), together with its subsidiaries, manufactures and markets consumer products worldwide. The company operates in two segments: Oral, Personal and Home Care; and Pet Nutrition. In the past week, the company approved a 5.90% increase in its quarterly dividends to 36 cents/share. This marked the 51st consecutive annual dividend increase for this dividend champion.
When I last analyzed the company several weeks ago, I found it to be overvalued. At this stage, I would be reluctant to add to my position in the stock, unless of course it declines from here. It is selling for 26.80 times earnings, and yields 2.30% based on the new dividend.
The latest dividend increase is the slowest since 1980, when the company increased distributions by a mere 3.67%. The company also raised distributions by a mere 6.90% in 2012, but this was followed by a 9.70% increase in the following year.
I obtained the data for the table below from Yahoo! Finance. It shows dividend payments in the year they were increased, and the percentage increase from the previous payment.
On a completely unrelated note, did you know that an investment in 1985 would be generating an yield on cost of 99% today? I used Yahoo! Finance data again, but double checked the yields against my manuals from the time, because the 1985 current yields seemed a little high. However, it seems like Colgate was yielding a lot at the time, but you also need to remember that long-term Treasuries yielded close to 10% as well. That definitely shows that picking a company with a high current yield that can grow distributions over time at a double digit rate can result in some tremendous compounding of income and invested capital.
The company earned $2.38/share in 2013, and is expected to earn $3.01 in 2014 and $3.32 in 2015. However, I believe that dividend increases are decisions by the Board of Directors, which show their expectations for profit growth in the next 1 – 2 years. The decrease in dividend growth shows that management does not expect double digit earnings increases in the near term. I do think that this is a temporary situation however, and the Board will increase distributions by close to 8-9%/year over the next 5 – 10 years. The company still has strong competitive advantages, pricing power and a portfolio of branded products, which consumers buy regularly for decades.
That being said, I would hold on to my existing Colgate – Palmolive shares but would probably allocate my dividends elsewhere, where I can find better values for my money.
Full Disclosure: Long CL
Relevant Articles:
- How to read my weekly dividend increase reports
- Colgate-Palmolive (CL) Dividend Stock Analysis
- Seven wide-moat dividends stocks to consider
- Dividend Champions - The Best List for Dividend Investors
- Strong Brands Grow Dividends
When I last analyzed the company several weeks ago, I found it to be overvalued. At this stage, I would be reluctant to add to my position in the stock, unless of course it declines from here. It is selling for 26.80 times earnings, and yields 2.30% based on the new dividend.
The latest dividend increase is the slowest since 1980, when the company increased distributions by a mere 3.67%. The company also raised distributions by a mere 6.90% in 2012, but this was followed by a 9.70% increase in the following year.
Year
|
Quarterly
Dividend
|
Raise
|
2014
|
$ 0.3600
|
5.88%
|
2013
|
$
0.3400
|
9.68%
|
2012
|
$
0.3100
|
6.90%
|
2011
|
$
0.2900
|
9.43%
|
2010
|
$
0.2650
|
20.45%
|
2009
|
$
0.2200
|
10.00%
|
2008
|
$
0.2000
|
11.11%
|
2007
|
$
0.1800
|
12.50%
|
2006
|
$
0.1600
|
10.34%
|
2005
|
$
0.1450
|
20.83%
|
2003
|
$
0.1200
|
33.33%
|
2001
|
$
0.0900
|
13.92%
|
1999
|
$
0.0790
|
14.91%
|
1997
|
$
0.06875
|
17.02%
|
1995
|
$
0.05875
|
14.63%
|
1994
|
$
0.05125
|
13.89%
|
1993
|
$
0.04500
|
16.13%
|
1992
|
$
0.03875
|
16.96%
|
1991
|
$
0.03313
|
17.77%
|
1989
|
$
0.02813
|
21.67%
|
1987
|
$
0.02312
|
8.80%
|
1985
|
$
0.02125
|
6.25%
|
1983
|
$
0.02000
|
6.67%
|
1981
|
$
0.01875
|
7.14%
|
1980
|
$
0.01750
|
3.67%
|
1979
|
$
0.01688
|
8.07%
|
1977
|
$
0.01562
|
13.60%
|
I obtained the data for the table below from Yahoo! Finance. It shows dividend payments in the year they were increased, and the percentage increase from the previous payment.
On a completely unrelated note, did you know that an investment in 1985 would be generating an yield on cost of 99% today? I used Yahoo! Finance data again, but double checked the yields against my manuals from the time, because the 1985 current yields seemed a little high. However, it seems like Colgate was yielding a lot at the time, but you also need to remember that long-term Treasuries yielded close to 10% as well. That definitely shows that picking a company with a high current yield that can grow distributions over time at a double digit rate can result in some tremendous compounding of income and invested capital.
|
Year
|
DPS
|
Price
|
Yield
|
YOC
|
|
2014
|
$ 1.420
|
$ 63.380
|
2.24%
|
99.17%
|
|
2013
|
$ 1.330
|
$ 65.210
|
2.04%
|
92.89%
|
|
2012
|
$ 1.220
|
$ 52.270
|
2.33%
|
85.20%
|
|
2011
|
$ 1.135
|
$ 46.195
|
2.46%
|
79.27%
|
|
2010
|
$ 1.015
|
$ 40.185
|
2.53%
|
70.89%
|
|
2009
|
$ 0.860
|
$ 41.075
|
2.09%
|
60.06%
|
|
2008
|
$ 0.780
|
$ 34.270
|
2.28%
|
54.47%
|
|
2007
|
$ 0.700
|
$ 38.980
|
1.80%
|
48.89%
|
|
2006
|
$ 0.625
|
$ 32.620
|
1.92%
|
43.65%
|
|
2005
|
$ 0.555
|
$ 27.425
|
2.02%
|
38.76%
|
|
2004
|
$ 0.480
|
$ 25.580
|
1.88%
|
33.52%
|
|
2003
|
$ 0.450
|
$ 25.025
|
1.80%
|
31.43%
|
|
2002
|
$ 0.360
|
$ 26.215
|
1.37%
|
25.14%
|
|
2001
|
$ 0.338
|
$ 28.875
|
1.17%
|
23.61%
|
|
2000
|
$ 0.316
|
$ 32.275
|
0.98%
|
22.07%
|
|
1999
|
$ 0.296
|
$ 32.415
|
0.91%
|
20.64%
|
|
1998
|
$ 0.275
|
$ 22.878
|
1.20%
|
19.21%
|
|
1997
|
$ 0.265
|
$ 17.870
|
1.48%
|
18.51%
|
|
1996
|
$ 0.235
|
$ 11.021
|
2.13%
|
16.41%
|
|
1995
|
$ 0.220
|
$ 8.196
|
2.68%
|
15.36%
|
|
1994
|
$ 0.1925
|
$ 7.199
|
2.67%
|
13.44%
|
|
1993
|
$ 0.1675
|
$ 6.898
|
2.43%
|
11.70%
|
|
1992
|
$ 0.1438
|
$ 6.019
|
2.39%
|
10.04%
|
|
1991
|
$ 0.1275
|
$ 5.160
|
2.47%
|
8.91%
|
|
1990
|
$ 0.1125
|
$ 3.794
|
2.97%
|
7.86%
|
|
1989
|
$ 0.0975
|
$ 3.176
|
3.07%
|
6.81%
|
|
1988
|
$ 0.0925
|
$ 2.282
|
4.05%
|
6.46%
|
|
1987
|
$ 0.0869
|
$ 1.8400
|
4.72%
|
6.07%
|
|
1986
|
$ 0.0850
|
$ 1.8550
|
4.58%
|
5.94%
|
|
1985
|
$ 0.0813
|
$ 1.4319
|
5.67%
|
5.67%
|
The company earned $2.38/share in 2013, and is expected to earn $3.01 in 2014 and $3.32 in 2015. However, I believe that dividend increases are decisions by the Board of Directors, which show their expectations for profit growth in the next 1 – 2 years. The decrease in dividend growth shows that management does not expect double digit earnings increases in the near term. I do think that this is a temporary situation however, and the Board will increase distributions by close to 8-9%/year over the next 5 – 10 years. The company still has strong competitive advantages, pricing power and a portfolio of branded products, which consumers buy regularly for decades.
That being said, I would hold on to my existing Colgate – Palmolive shares but would probably allocate my dividends elsewhere, where I can find better values for my money.
Full Disclosure: Long CL
Relevant Articles:
- How to read my weekly dividend increase reports
- Colgate-Palmolive (CL) Dividend Stock Analysis
- Seven wide-moat dividends stocks to consider
- Dividend Champions - The Best List for Dividend Investors
- Strong Brands Grow Dividends