HCP Inc (HCP) A High Yield REIT Play on Healthcare

HCP, Inc. (HCP) is an independent hybrid real estate investment trust. The fund invests in real estate markets of the United States. It primarily invests in properties serving the healthcare industry including sectors of healthcare such as senior housing, life science, medical office, hospital and skilled nursing.

HCP is a dividend champion which has increased dividends for 30 years in a row. The latest dividend increase was in January 2015 , when the board of directors increased the distribution by 3.87% to 56.50 cents/share.

Over the past decade, FFO/share has increased from $1.64 in 2003 to an expected $3.10 in 2014. This comes out to an annual FFO increase of 5.90%/year on average.

The company operates under 5 segments. Senior housing contributes 37% of revenues in 2013, while Post-Acute/Skilled properties contributes 31% of revenues. The Life Science and Medical Office Segments contributed 14% and 13% respectively, while the remaining 5% is generated from Hospital properties. I also like to look at the tenant diversification, in order to determine if revenues are overly dependent on a single customer. Based on the 2013 annual report, the four largest customers were HCR Manor Care with 29% of revenues, Emeritus Corporation with 13% of total revenues, Brookdale Senior Living with 8% and Sunrise Senior Living with 5%. The leases often provide for either fixed increases in base rents or indexed escalators, based on the Consumer Price Index or other measures, and/or additional rent based on increases in the tenants’ operating revenues. Most of our the leases require the tenant to pay a share of property operating costs such as real estate taxes, insurance and utilities. Substantially all of HCP’s senior housing, life
science, post-acute/skilled nursing and hospital leases require the operator or tenant to pay all of the property operating costs or reimburse us for all such costs. The statistic to use is same-store growth, which has consistently been above 3% since 2009, and ranged between a low of 3.10% in 2013 to a high of 4.80% in 2010.

FFO/share growth has definitely been helped out by the low cost of debt, which has also been decreasing throughout its life as a public company since 1985. The nice thing about its debt profile is that almost all of liabilities are with fixed interest rates. Approximately half of the debt matures by 2018, which would mean that it would have to be refinanced at the rates available at the moment. The risk of course is if those rates start going up, it could leave less money for acquisitions and growing distributions.

Another factor that has helped FFO/share growth is the acquisition of properties, as well as strategic debt investments it has made. As the population ages in the US, the demand for health care services is only expected to increase. The percentage of senior citizen population is estimated to increase over the next 30 – 40 years, as is the growth in healthcare services. Therefore, a company like HCP should be able to enjoy stable occupancy in its medical properties, and recurring rents from that diversified portfolio that grow over time.

Over the past decade, dividends per share have increased from $1.66 in 2003 to $2.18 in 2014. This comes out to an annual dividend increase of 2.70%/year on average. The company offers a drip discount of 1% for those shareholders who elect to reinvest distributions back into more HCP shares. As a REIT, the company is required by law to distribute at least 90% of its taxable income. Since it is not taxed at the entity level, most distributions are not eligible for the preferential qualified dividend tax rates. Instead, a large portion of distributions are usually taxed under the ordinary income tax rates. The percentage allocations by tax source vary each year however. For example, in 2013, approximately 86% of the distribution was treated as ordinary income for tax purposes, while 7% was treated as capital gains income and the remainder was treated as a return of capital, which is nontaxable but reduces shareholders’ basis in the stock.

The reason behind the slower dividend growth relative to the higher FFO growth is due to the steady decrease in the FFO payout ratio over the past decade. Back in 2003, this indicator stood at 99%, which was certainly unsustainable. However as of 2014 it stands at 70%. The company also has another indicator called Funds Available for Distribution, which stood at $2.52/share in 2013. Therefore the dividend is well covered, and also has potential for growth at close to the rate of inflation for the foreseeable future.

HCP is an investment for those who need current income today, which will at least match the rate of inflation. I believe that the income stream is defensible, which means that dividends are secure, and are very likely to continue growing at least by the historical rate of annual inflation of around 3% over the next decade. As a result, the lower the entry price paid by the investor, the better the chances for higher returns, especially since the majority (approximately 60%) of long-term returns for REIT investors come from their distributions. The shares currently yield less than 5% and are selling for a forward price/FFO ratio of 15.40. I recently initiated a small position in HCP Inc. However, I would like to build a position in this REIT at an entry yield of 5 - 5.50% or higher.

Relevant Articles:

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My Dividend Goals for 2015 and after

Early each year, I try to discuss what my goals for the next few years are. However, I really do not like to set financial goals. Rather, I try to behave in a way that fosters wealth building.  This helps me stay on task an accomplish those goals, better than simply setting up goals. This essentially means always spending less than what I earn, always questioning expenses, and continuously monitoring ways to cut expenses and stretch my dollar, without sacrificing quality of life. I also do not like to set goals, because things change, and I learn more about different opportunities along the way. If I adhere strictly to my goals, I will achieve them, but I might be worse off overall. Therefore, it is important to have some flexibility and focus on the best opportunities available, rather than adhering to specific goals for specific goals sake. What I am saying might seem confusing at first. What I am trying to say is that I try to make it a habit to follow a few common sense guidelines all the time, and have found that I have been better overall. If you spend less than what you earn, and invest the different, you will be better off overall financially. That's why you never hear people who enjoy working out 3 - 5 times per week set goals to lose 10 pounds in 2015 - they don't have to because they have the habit to not have to set goals. If those people got into the mindset of consciously trying to be healthy by avoiding overeating and spending some time on a little regular physical activity, they would be successful without really setting specific goals.

For example, between 2007/2008 and 2012, I put most of my money in taxable accounts. My dividend income was growing exponentially, I was reinvesting it back into more dividend paying stocks. I was able to achieve that by constantly saving money and also by focusing on growing income. As I made more money from job, dividends and other sources however, I noticed that I was paying way too much in taxes. Those dollars were lost forever to the tax-person, and were hard earned dollars which would never compound for me. As a result, I made a decision to max out my tax-deferred accounts in early 2013. Those accounts include:

- Pre-tax 401 (k), where each dollar deferred results in immediate savings of 30% (Fed and State)
- Pre-tax SEP IRA, where each dollar deferred also results in immediate savings of 30%
- Roth IRA, where each dollar earned will compound tax-free and be tax-free upon distribution when I become 59 ½ years old
- Health Savings Account, where each dollar deferred results in immediate savings of over 37.60% ( defers Federal, State and FICA taxes)

I have calculated, that if I wanted to save $100,000 in taxable accounts, I would have to put $10,000/year for 10 years ( I am only looking at contributions, and ignoring compounding in order to make comparison easy and straightforward). If I implemented tax-deferred accounts such as 401 (k) and Roth IRA, I would be able to save something like $3,000/year on taxes. Those savings come from maxing out the 401 (k) at $10,000 at a 30% tax rate ( Federal and State). Those tax savings could be put in a Roth IRA, and compound tax-free. Therefore, by using only taxable accounts, you can contribute up to $100,000 over a ten year period if all else is equal. By using a smart strategy of tax-deferred contributions and immediate tax savings today, the investor will be able to save $130,000, which will compound tax-free until they get to be age 70 ½ years old. Therefore, by utilizing tax-deferred accounts, the second investor is essentially speeding up their accumulation process, and brings their financial independence/retirement date closer by 3 years for every 10 years of saving. Since your lifetime is limited, any shortcut that can shave off spending time at a job you might not enjoy 100% could be worth it.

Most of the funds in the SEP IRA, regular IRA’s and Roth IRA’s are invested in individual dividend paying stocks. The money in the 401 (k) is invested in index funds, since this is the only option available. As I change jobs however, I plan to rollover that money into IRA’s, and select individual dividend paying stocks available at attractive valuations.

With that being said, I am deferring an awful lot of money in tax-deferred accounts mentioned above. Therefore, I am essentially starving my taxable accounts from fresh capital. To grow that dividend income in taxable accounts, I am essentially relying on organic dividend growth and selective dividend reinvestment. My assumptions for historical organic dividend growth are approximately 6% - 7%/year, while the assumptions for dividend yield at reinvestment is somewhere between 3% - 4%. This is why I expect them to generate income growth of approximately 10%/year. In 2014, I was able to cover approximately 66% of my target monthly expenses with dividend income from my portfolio. My estimate for 2015 is to have my dividend income cover approximately 73% – 75% of expenses.

As I have mentioned earlier, if everything works as planned, I will be able to cover my expenses from taxable dividend income sometime around 2018. This of course assumes that I do not spend much time on the unemployment line. Unfortunately, most employers these days are streamlining operations in an effort to achieve profitability for their investors, which means mass rounds of layoffs for employees, and increased level of stress and responsibility for those lucky souls who are left to man the fort. The dividend income generated by tax-deferred accounts is not counted in the income replacement goal by 2018. That money is essentially a buffer, that will be used just in case something unexpected happens. Since the probability of me using that tax-deferred money ever is moderate to low, it is being stashed in a way that it will compound tax-free for several decades. This is one of my tools in my quest to have margin of safety in financial independence.

My plan also assumes that there are investment opportunities out there available at good prices. If there aren't any quality dividend growth companies available at decent prices, I might have to end up building up a cash reserve. I do not want to pressure myself to make buy decisions, when the opportunities are simply not there. I would not want to pressure myself to buy companies of poor quality or companies at overvalued prices, merely to achieve a goal.  In another example, if I find myself short of my objective, I might feel pressured to chase high yielding stocks. This could lead to me reaching my dividend income goal on time ( or early), but might expose me to excess risks, which could derail long-term dividend income growth for my dividend portfolio. The point is not only to reach the dividend crossover point around 2018, but to have this income stream grow above the rate of inflation for the subsequent 30 - 40 - 50 years. I am not interested in reaching a goal for the goal's sake, but rather to achieve an investment objective in a sustainable matter.

The types of companies I might add to in 2015, if their valuations are right and things do not change:

Baxter International Inc. (BAX) develops, manufactures, and markets products for people with hemophilia, immune disorders, infectious diseases, kidney diseases, trauma, and other chronic and acute medical conditions. The company has raised dividends for 8 years in a row. In the past decade, the company has managed to boost dividends by 13.20%/year. Currently, the stock is selling for 14.80 times earnings and yields 2.90%. Check my analysis of Baxter.

Diageo plc (DEO) manufactures and distributes premium drinks such as Johnnie Walker, Crown Royal, Buchanan’s, J&B, Baileys, Smirnoff, Captain Morgan, Guinness, Shui Jing Fang, and Yenì Raki.. The company has raised dividends for 15 years in a row. In the past decade, the company has managed to boost dividends by 5.80%/year. Currently, the stock is selling for times earnings and yields 2.70%. Check my analysis of Diageo.

Exxon Mobil Corporation (XOM) explores and produces for crude oil and natural gas. The company has raised dividends for 32 years in a row. In the past decade, the company has managed to boost dividends by 9.80%/year. Currently, this dividend champion is selling for 12.50 times earnings and yields 3%. Check my analysis of Exxon Mobil.

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 operates through Personal Care, Foods, Refreshment, and Home Care segments. The company has raised dividends for 19 years in a row. In the past decade, the company has managed to boost dividends by 7.50%/year. Currently, this international dividend achiever is selling for 21.30 times earnings and yields 3.50%. Check my analysis of Unilever.

United Technologies Corporation (UTX) provides technology products and services to the building systems and aerospace industries worldwide. The company has raised dividends for 21 years in a row. In the past decade, the company has managed to boost dividends by 12.90%/year. Currently, this dividend achiever is selling for 17.70 times earnings and yields 2%. Check my analysis of United Technologies.

I do expect to keep earning money in some capacity (1099 or W2) after 2018 however. Therefore, it is very likely that this dividend income will be reinvested, while I live off that salary income. This is why it was important for me to defer any excess income in tax-deferred accounts. Plus, if I ever find myself at the age of 70 and still have money in a 401 (k) plan that I have not rolled over to a Roth IRA, I might have to find a job in order to avoid required minimum distributions. I would only have to ensure I do not own more than 5% of that employer, and that I roll over my 401 (k) into that employer plan. There are a lot moving parts to my plans, and since tax laws and investment opportunities are subject to change, I would have to keep up-to-date on them. For some this sounds like an insurmountable task - for me it sounds like a stimulating challenge to keep my mind sharp and benefit in the process. I do believe that continuously acquiring more knowledge is the key to achieving and sustaining financial success.

The goal of this post was not to brag about myself. Rather, it was to provide ideas to readers that dividend investing is just one tool in the wealth building process. I have done well with picking individual dividend paying stocks, as evidenced by the fact that I am on track to cover approximately 73% – 75% of expenses with dividend income alone. However, investors should not dismiss other opportunities available to them, simply because they might not fit in a certain model. I considered myself a solely as a dividend growth investor for a few years, and only put the bare minimum in 401 (k) to get the tiny match, and ignored Roth IRA’s. As a result, I am worse off, because of all the excess taxes I have been paying, which reduced the amount of capital I have at my disposal for compounding.

Just like companies continuously streamline their operations, and cut unnecessary costs, I also want to challenge you to review your largest expense items and look for ways to reduce them. My main expense item was taxes, which I have cut to the bone right now. The other major expense item is housing, which is a major expense item for most households in the US. So while I do not really look at formal goals, I have the mindset to continuously try to improve investment process, eliminate unnecessary expenses, and increase income in a sustainable way.

Housing is another opportunity I have continuously dismissed since starting this site in 2008. I have never owned a house/apartment. The more I think about it, the more I realize that I have been throwing money out the window by renting all those years. Of course, since I have changed jobs every 2 – 3 years, and changed cities and states in the process, it always made sense to rent. However, if I were to settle in one place for say a decade, it might make sense to buy a condo/house that is slightly larger than the places I have been renting ( but not a McMansion). Since I am not handy at all however ( as evidenced by the poor design layout of this website), owning a house sounds like a money and time pit right now. But were I to stay in one place for 10 years, it might be worth it to capitalize my expenses for housing. Everyone needs a place to stay, which is why capitalizing an expense might not fit with initial goals, but would make me better off overall.

So to summarize, the most important thing someone can do is have the mindset that is conducive of achieving the life they want to live. If you consciously live your life in a way that fosters health, wealth and quality relationships on a daily basis, you will achieve a lot more than merely setting goals or New Year's resolutions. Goals can be helpful for many, but it is more important to have the plan to accomplish something by having the mindset of accomplishing it. It is good to have goals, but do not blindly follow them for goals sake, and do not take actions merely to check a goal off the list, while potentially hurting your situation by limiting yourself too narrowly.

Full Disclosure: I own UL, DEO, UTX, XOM, BAX

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How to never run out of money in retirement

Here is the simple answer: live off dividends

Here is the longer answer –when you live off the income that your portfolio produces, the chance that you will ever run out of money is greatly reduced. If you have to sell portions of your portfolio and thus rely on finding someone else to sell at higher prices than you bought, then you have a higher chance of outliving your money.

It is very easy to monetize a pile of cash, and convert it into a neat dividend machine, which will deposit cold hard cash into your brokerage account regularly. You can then use that cash to either spend or to reinvest into more dividend paying stocks, paying even more cash.

As I discussed earlier, there are largely two types of dividend growth investor investors. The first group are those who have been putting money mostly in dividend growth stocks regularly, reinvested dividends, and maintained their portfolios. The second group include those who are trying to convert a nest egg accumulated over a lifetime of hard work, or an inheritance or another pile of cash received recently as a lump-sum. Those are the ones who want to learn how to pensionize their assets, and live off that pile, while also minimizing the risk of loss to the minimum.

General Mills (GIS) Dividend Stock Analysis

General Mills, Inc. (GIS) manufactures and markets branded consumer foods in the United States and internationally. This dividend achiever has managed to increase distributions to its shareholders for 11 years in a row.

The most recent dividend increase was in March 2014, when the Board of Directors approved an 8% increase in the quarterly dividend to 41 cents/share.

The company’s largest competitors include Nestle (NSRGY), Kellogg (K) and Danone (DANOY).

Over the past decade this dividend growth stock has delivered an annualized total return of 11.40% to its shareholders. Future returns will be dependent on growth in earnings and dividend yields obtained by shareholders.

The company has managed to deliver a 7.50% average increase in annual EPS over the past decade. General Mills is expected to earn $3.01 per share in 2015 and $3.22 per share in 2016. In comparison, the company earned $2.83/share in 2014.

The company has utilized share buybacks in order to reduce the number of shares outstanding from 818 million in 2005 to 632 million in 2014.

General Mills has a portfolio of strong brands, as well as the scale of operations to make products and sell them efficiently. In addition, the company is trying to maintain an innovative approach and either develop in house or acquire products in growth niches. Consumer tastes tend to slowly evolve over time, which is why companies like General Mills that try to stay innovative and capture major trends in tastes and deliver profits. Continued product innovation is the key to capturing future growth. That being said, the bread and butter of consumer products companies are its established brands, where a large portion of consumers engage in repetitive purchases, that create repetitive cashflows, which make investing in consumer staples such a steady and profitable endeavor. While things do change over time, the change is much slower than that in the technology field, which makes it easier for companies to react, adapt and profit to the changing environment. Having a steady marketing budget also helps to maintain the broad appeal of the company’s products.

Earnings per share could increase from new product offerings, strategic acquisitions, international expansion and streamlining of operations. A constant focus on operations, eliminating unnecessary costs, improving margins and reducing negative effects of input costs are something that should help the company accomplish its targets. The company is able to expand its distribution network on a global basis, invest in innovation and in its strong brands. Having a portfolio of stable food brands generates recurring excess cash flows. Those excess cash flows are not necessary for expansion of the business. Therefore they result in the ability for the company to shower shareholders with more cash every year through regular dividend payments and increases.


The annual dividend payment has increased by 10.90% per year over the past decade, which is much higher than the growth in EPS. Future growth in dividends will be much lower than that however, likely around 7% - 8% annually, and will be limited by the growth in earnings per share.

A 7.50% growth in distributions translates into the dividend payment doubling every nine and a half years on average. If we check the dividend history, going as far back as 1987, we could see that General Mills has managed to double dividends almost every nine years on average.

In the past decade, the dividend payout ratio has increased from 40.30% in 2005 to 54.80% by 2014. A lower payout is always a plus, since it leaves room for consistent dividend growth minimizing the impact of short-term fluctuations in earnings.

General Mills has also managed to generate a high return on equity, which also increased from 22.50% in 2005 to 27.60% in 2014. I generally like seeing a high return on equity, which is also relatively stable over time.

Currently, General Mills is attractively valued at 17.80 times forward earnings and yields 3.10%. I am slowly building my position in the stock, and have been doing so this year. I have also sold some long-dated puts on the company, which have 50/50 odds of being exercised.

Full Disclosure: Long GIS, NSRGY and K

Rising Earnings – The Source of Future Dividend Growth

Successful dividend investors understand that a steadily rising dividend payment only tells half of the story. Most dividend paying companies that have been able to consistently raise distributions for at least one decade have enjoyed a steady pattern of earnings during that period of time.

As a dividend growth investor, my goal is to find attractively valued stocks that consistently grow their dividends. I run screens on the list of dividend champions and contenders using my secret entry criteria, and then look at the list company by company. Not surprisingly, I look for a record of increasing dividends. But I look for much more than that in a company.

In a previous article I discussed the three stages that dividend growth companies generally exist in. My goal is to focus on those in the second stage, although I might occasionally select a company from the first phase. However, I try to buy not just companies that have a record of raising dividends, but those that have decent odds of continuing that streak for the next 20 – 30 years. Not every company will achieve that, but for those that do, they would generate the bulk of portfolio dividend growth. The hidden source of dividend growth potential is expected earnings growth.

Seven Dividend Stocks Boosting Distributions this week

I check the list of dividend increases every single week, in order to monitor companies I own, as well as uncover hidden dividend gems. There were several companies which announced increases to their quarterly dividends in the past week:

Omega Healthcare Investors, Inc. (OHI) is a real estate investment firm which invests in healthcare facilities, primarily in long-term healthcare facilities. The REIT raised its quarterly dividend to 53 cents/share, which is an increase of 8.20% over the same distribution paid in the same time last year. This marked the 13th consecutive dividend increase for this dividend achiever. In the past decade, the company has manage to raise dividends by 10.90%/year. Currently, the stock is selling for times 15.40 FFO and yields 4.90%. Check my analysis of Omega Healthcare Investors.

ONEOK, Inc. (OKE) operates as the general partner of ONEOK Partners, L.P. (OKS) which does the gathering, processing, storage and transportation of natural gas in the U.S. and owns one of the nation's premier natural gas liquids (NGL) systems. ONEOK Inc raised its quarterly dividend to 60.50 cents/share, while the partnership raised its quarterly distributions to 79 cents/unit. The increase over the same time last year is 51% for the general partner and 8.20% for the limited partner. The ten year dividend growth is 18.70%/year for ONEOK Inc and 6.50%/year for ONEOK Partners. ONEOK Inc yields 5.70% while ONEOK Partners yields 8%. Check my analysis of ONEOK Partners. I recently sold my limited partner interest for those of the general partner. I had a small remaining position in ONEOK Partners which I converted to Williams companies (WMB) last week.

Consolidated Edison, Inc. (ED) is engaged in regulated electric, gas, and steam delivery businesses in the United States. This dividend champion raised its quarterly distribution by 3.20% to 65 cents/share. This marked the 41st consecutive dividend increase for Con Edison, which is the oldest continuously listed stock on the NYSE – been listed since 1824.The ten year dividend growth rate is 1.10%/year. Currently, the stock is selling at 17.90 times earnings and yields 3.80%. I used to own Con Edison, but grew dissatisfied by the low growth and ended up disposing my position there. Check my analysis of Con Edison I posted on Seeking Alpha.

Fastenal Company (FAST), together with its subsidiaries, operates as a wholesaler and retailer of industrial and construction supplies in the United States, Canada, and internationally. The company raised its quarterly dividend by 12% to 28 cents/share. This marked the 16th consecutive dividend increase for this dividend achiever. In the past decade, the company has manage to raise dividends by 25.90%/year. Currently, the stock is selling for 26.50 times earnings and yields 2.60%. I plan on adding this company on my list for further research.

Linear Technology Corporation (LLTC), together with its subsidiaries, designs, manufactures, and markets a line of analog integrated circuits (ICs) worldwide. The company raised its quarterly dividend by 11.10% to 30 cents/share. This marked the 23rd consecutive dividend increase for this dividend achiever. In the past decade, the company has manage to raise dividends by 12.90%/year. Currently, the stock is selling for 21.40 times earnings and yields 2.70%. I plan on adding this company on my list for further research.

BlackRock, Inc. (BLK) is a publicly owned investment manager. The company raised its quarterly dividend by 13% to $2.18/share. This marked the sixth consecutive annual dividend increase for Blackrock. While this dividend contender kept dividends unchanged in 2009, it nevertheless has managed to achieve a ten year dividend growth rate of 22.70%/year. The stock currently sells for 17 times earnings and yields 2.50%. I am going to add Blackrock on my list for further research.

Full Disclosure: Long OKE, WMB and OHI

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7 Years Dividend Growth Investor

Today marks the seventh year of me posting on Dividend Growth Investor website. I have posted different things on the site, but the overall theme has been to discuss investments, investment strategies, and thoughts on how to improve my dividend investing. The goal at the beginning, and right now and in the future is to build a portfolio of sustainable dividend growth stocks, which will produce enough in dividend income to cover my expenses every month. This is financial independence in a nutshell.

So why do I keep writing about dividend investing to the tune of seven consecutive years?

1) Make myself do the work to form an opinion. When you write things down, it is much easier to focus your thoughts and examine your thesis.
2) Share experiences and connect with like-minded individuals
3) Pass it forward – there is so much misinformation on internet about investing – I wanted to pass it forward and share the knowledge with others, same way I learned in the first place.

The thing that attracted me to dividend investing is that fact that I realized I would need a consistent return if I wanted to rely exclusively on investment income in FI/Retirement. When I earn dividends, I am reasonably certain about the amount and timing of dividend payments generated from my diversified portfolio. Hence I was instantly hooked once I learned about Dividend Growth Investing. However, I never really discussed that I had spent previously 9 years searching for the perfect strategy that delivers consistent returns to live off a nest egg. In the process, I found 100 ways of how NOT to make money, and only one of how to make money consistently - Dividend Growth Investing.

I don't mean to shamelessly self-promote myself but the truth my friends is that there are only two bloggers who have been writing continuously about dividend investing and documenting their strategy for over 7 years. That includes myself, and my friend Dividends4life. While the number of dividend investing sites has mushroomed, I have also witnessed the death of tens of other sites dedicated to dividend investing. Few have the dedication, patience and willingness to work hard for extended periods of time in setting up an income stream whose biggest fruits will be generated years down the road. Also, having the discipline to stick to one strategy, and not abandon it altogether are the cornerstones of investment success. Too bad few investors realize that they should find a strategy that works for them in realizing their own investment goals and objectives, while taking into consideration their knowledge and actual tolerance to pain. I know for a fact that when I start deviating too much from my strategy, I make mistakes. Hence, discipline has been key for my success toward potentially achieving my goals.

I believe that the skills that helped me continue writing my site for seven years are the same skills that have helped become successful as a dividend investor. With dividend investing, success is all about saving as much money as possible, and then investing that money in quality blue chip dividend growth stocks available at attractive valuations. The dividends generated by those companies are then plowed back into shares of more dividend paying companies, which pay more dividends on their part that gets put to use into more dividend paying companies etc. You get the picture.

The other item of equal importance is the fact that I was willing to sit through thick and thin on most of my investments, without selling too quickly. I say most, because I have done the mistake of thinking I was smart and trying to outsmart everyone else by replacing one company for another. In 9 out of 10 cases, I would have been better off simply doing nothing. Patience is an essential skill in dividend investing, and the need to act at all times is actually counterproductive. Successful dividend investing requires patience.

I have built my portfolio with quality dividend paying companies, which I will be happy to hold even if they closed the stock market for 10 years. In fact, in the event that I die or became incapacitated, my portfolio could simply exist in its current form, and just spit out dividends every month to the person/entity that gets ownership to it. That person could be your one year old kid/nephew/niece or your 90 year old grandma who doesn’t know the difference between preferred stock and livestock. I won’t go as far as saying that your cat or dog will be fine if they inherited that portfolio to live off the dividends however, because this in my opinion is plain crazy. But then, who am I to tell you what to do with your money?

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Target (TGT): The Underdog Dividend Champion To Consider On Further Weakness

Target Corporation (TGT) operates general merchandise stores in the United States and Canada. Target is a dividend champion, which has paid dividends since and raised them every year for 47 years in a row.

The most recent dividend increase was in June 2014, when the Board of Directors approved a 20.90% increase in the quarterly dividend to 52 cents/share.

The company’s largest competitors include Wal-Mart (WMT), Costco (COST) and Amazon (AMZN).

Over the past decade this dividend growth stock has delivered an annualized total return of 4.80% to its shareholders. Future returns will be dependent on growth in earnings and dividend yields obtained by shareholders.

Two Dividend Stocks I Purchased in 2015

I kicked off the year with investments in two companies. Those are existing positions, which I am adding to. The companies include:

ConocoPhillips (COP), which explores for, develops, and produces crude oil, bitumen, natural gas, liquefied natural gas, and natural gas liquids worldwide. This dividend achiever has managed to increase dividends for 14 years in a row. It sells for 11.60 times earnings. Earnings per share for 2014 are expected at $5.62. For 2015, earnings per share are expected to go down to $3.72. This is down from an expected $6.34/share that Wall Street analysts were predicting just 90 days ago. At that 2015 rate dividend growth will likely stall. You might want to check my analysis of ConocoPhillips (COP).

I think the effects of sharp drop in oil have not been felt yet across the investment community. Many investors seem to believe that this is a short term event. In reality, I see a lot of players under pressure - from Oil producer states to unconventional exploration and production companies. The interesting thing about cyclical companies is that they appear cheapest near the top, but most expensive when things are closer to the cyclical bottom.

I see companies slashing capital spending, and a few flow-through entities cutting dividends, but I have not seen anyone go bankrupt yet. The magnitude of the oil collapse reminds me a little bit of the housing crisis, which spread through the economy and affected different sectors. This was preceded by a long boom and stories of boom towns, people who made a lot of money quickly, etc. I think the real risk is that oil fell by 50% from highs, yet stock prices on Exxon Mobil (XOM), Conoco Phillips (COP) and Chevron (CVX) are not down by as much. I think many are expecting a quick snapback up in oil prices. Therefore, many could probably be surprised negatively in the short-term (12 months from now). I am prepared for slow and gradual decreases in share prices, which would be great for an investor like me who has a set amount of fund to deploy to work every month, rather than invest a lump sum.

As I mentioned in the articles before, I am planning to slowly buying up shares in Exxon Mobil (XOM), Conoco Phillips (COP) and even Chevron (CVX). Companies like Chevron and Exxon Mobil are the ones that will survive drops to $40/barrel, and will benefit since they will be able to acquire reserves at a discount.

Conoco Phillips could benefit as well, although further sustained declines in commodity pricing below $50 could put the dividend in risk territory. I believe Conoco Phillips management is good at capital allocation, and runs the company for shareholders (as evidenced by sale of Lukoil (LUKOY) stake in 2011, and other projects while returning billions to stakeholders through share buybacks and dividends and spin-offs). I doubt they will cut the dividend, but it is likely dividend growth will be zero or very low for a few years if prices stay low for extended periods of time. I am planning to slowly buy things this year, and dollar cost average my way. ExxonMobil is probably going to be the next purchase in February and then possibly Chevron in March or April. Again, this is not a timing call. I simply have some amount to invest every month, and I like diversification, hence I buy stock over time. I don’t have $1 million sitting on my checking account, waiting to be deployed at once. But as I mentioned before, while prices are down, that doesn't mean they can’t go lower from here. Hence I am also buying companies with more durable earning streams throughout different phases of the economic cycle.

One example is Diageo plc (DEO), which manufactures and distributes premium drinks. This international dividend achiever has managed to boost distributions for 15 years in a row. It has a ten year dividend growth of 5.80%/year in its base currency the British Pound. Diageo owns a portfolio of strong brands, with wide consumer appeal, which are usually number one or two in their respective categories. A few include Smirnoff, Johnnie Walker, Guinness, Baileys, and Captain Morgan. The company also has a wide distribution network on a global scale, which might be difficult for a competitor to replicate. Diageo is the largest spirits company in the world, which provides it with the advantage of scale, relative to its competitors. The stock is attractively valued at 17.40 times forward earnings and has a current dividend yield of 2.80%. I would be even more excited if the stock drops further, since I have room in my portfolio for more of this quality company. Check my analysis of Diageo.


Full Disclosure: Long COP, CVX, XOM and DEO

Relevant Articles:

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How to invest a lump sum

Imagine that you are able to receive a lump sum today, due to an event such as a sale of a business, cashing out of a pension, inheritance or winning the lottery. After you rejoice a little, you start asking yourself what to do with the money. I keep asking myself the same question quite frequently, and think my way through this “problem”.

If I received a lump-sum payment today, I would approach it differently, depending on the level of experience I have, the time I am willing to commit to investing per week, and the level and effort of continuing investing education I am willing to commit myself to. For sake of comparison, lets imagine that I am about to receive $1 million tomorrow.

The easiest option is to build a portfolio consisting entirely of mutual funds, covering indices such as S&P 500, US Total Market Index or a World Total Market Index. This would be in a situation where I didn’t know much about investing, didn’t have the time nor inclination to spend too much time on it, or decided it would have been too big of a hassle for me to pick stocks individually. I would basically put the money in a ladder of Certificates of Deposit first, and have an equal amount of those CD’s expire every month for 24 – 36 months. That way, I am mentally removing the pressure of having to invest all money at once, and I am also removing the opportunity to invest most of the money in my cousin’s business idea of a social network for cats (Catbook anyone?). As an equal amount of money is available each month, I will have it invested in the mix of stock funds. The purpose of dollar cost averaging is to avoid putting all the money at once, in order to avoid the risk of putting the money at the highest prices. By investing an equal amount each month, I am increasing chances that I will get decent prices for stocks I buy, and avoid overpaying. I will also miss out if prices keep going straight up for those 24 – 36 months, but that would be a risk worth taking, since it would also mean I would not put all money right before a major correction. The conventional way of this portfolio is to sell a portion each year to cover expenses. This could work in most situations, unless of course the stock market is down right when you start withdrawing or if the stock market is flat for the majority of time.

The other option I would take if I were willing to put the time and effort into it would be to invest the money in dividend paying stocks directly. I would still start with a CD ladder however, and put equal amounts into attractively valued dividend paying stocks every month for 24- 36 months. I would start by screening the list of dividend champions and dividend achievers every month, identify companies for further research, and put an equal amount of funds into the ten most promising ideas every single month. I would rinse and repeat every single month for 24 – 36 months. Over time, I should be able to gain some sort of understanding behind a large portion of those dividend champions, through regular reading and research about these companies. As the knowledge of each company is accumulated, it would be much easier to act. This process could take a lot of time at first, since it would require spending time researching whether the companies that met a basic entry screen are worth my money. After that however, additional follow-ups on each company should not take that much time each year on average. My goal would be to have a portfolio consisting of at least 40 different dividend paying stocks, representative of as many sectors as possible. That doesn’t mean owning utilities just so you own utilities. It means buying into companies selling at attractive valuation, but also making sure that I do not concentrate too much in a particular sector such as financials for example.

I would also build a portfolio around the three different types of dividend growth companies I have previously identified. The biggest mistake to avoid is focusing only on current dividend yield, without doing much additional work about its sustainability, potential for growth, understanding of the business etc.

Living off dividend income is pretty easy, once a portfolio is set up. When I receive dividend checks directly deposited in my brokerage account, this is cold hard cash I can do whatever I want with. I do not have to stress over whether we are about to enter a bear market, and I would run out of money simply because prices are depressed. I would receive cash dividends, which will get increased above the rate of inflation over time. I would likely accumulate all dividends for a three month period, then spend it equally over the next three monhts. If there is anything left over, I would reinvest it into more dividend paying stocks.

I have chosen of course to focus on selecting individual dividend paying stocks. It is cheaper in the long run to build a portfolio of dividend paying stocks, and rarely sell them. I only sell when dividend is cut or eliminated or when stocks are acquired for cash. I also try to outguess valuations from time to time, but my results have proven that I should not do that. In majority of situations, I am better off just sitting out there, doing nothing. This is the most difficult thing to do in investing.

My portfolio is generating dividends every month, quarter and year. The holdings I own tend to increase those dividends over time, maintaining purchasing power of income, and making my shares more valuable. While stock prices fluctuate from year to year, dividend income is always positive, it is more stable, and thus it is better tool to use when designing a portfolio to live off of. Plus, even the cheapest mutual funds that cost say 0.10% per year are more expensive on a portfolio worth $1 million, since they result in $1000 in annual costs. With brokers such as Interactive Brokers, I would have to make 1000 investments at $1/trade in order to reach the same costs per year. In addition, I would be able to hold on to most stocks and only buy shares in companies which I find properly valued, and possessing the characteristics I am focusing on. I could also avoid selling shares and incurring taxable expenses merely because an index committee decides to remove companies from their lists.

I like the fact that the companies I own provide me with fresh cash in a regular, predictable patterns. This is similar to what my experience is when working – receiving a paycheck at an equal intervals of time. With dividend stocks, I do the work upfront in selection at proper valuation, and then receive the cash for years if not decades to come.

In summary, it makes sense to spread out the investment of a lump sum received in order to reduce investment risks, and reduce the impact of mistakes. The investor who manages a considerable amount of funds should have the goal of preserving wealth first, so that it can last for decades. This will be achieved by spreading purchases over time, diversifying the portfolio in at least 40 individual securities from a variety of sectors, continuing their quest for investment knowledge and requiring quality and attractive prices in the types of investments they purchase.

Relevant Articles:

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Robinhood Brokerage Review

Robinhood is a new broker, who lets customers purchase US stocks for no commission. Yes, that is true, customers pay no commissions when they purchase stocks using Robinhood. Unlike Loyal3, which also offers zero stock commissions, Robinhood offers access to almost all US traded stocks and the executions are real-time. With Loyal3, one has to wait for 2 – 3 business days before the investment is executed. However, Loyal3 is open to everyone right now, and has a lot of quality companies that allow purchases of fractional shares. All one has to do is have $10 to invest. Robinhood brokerage on the other hand is only available for a select number of customers today, doesn’t allow purchases of fractional shares, but executes trades right away. If this broker gets more established, I would put it on my list of best brokers for dividend investors.

There are several appealing factors behind Robinhood:

- Zero commissions on US Stocks
- No account minimums
- No Inactivity Fees
- No Deposit/Withdrawal fees
- Trades are executed right away at good prices
- Investor assets under $500,000 are insured by the SIPC

The items I don’t like are:

- Only available for a limited number of people
- Has not existed long enough
- Only available using an app
- Does not allow opening IRA accounts
- Does not allow automatic dividend reinvestment
- Does not allow purchasing fractional shares

The service is not available for everyone yet, but will be launched sometime in early 2015. Currently, there are several hundred thousand customers who are in their waiting list. I was one of those users, but I moved up by signing up early, sending out invited, and sharing the information using social media. Thus, once the service becomes more widely available, I believe it could provide much lower fees to many beginning investors. To me, it would be much nicer to be able to allocate $2,000 - $3,000 into shares of 10 – 15 companies every month without paying commissions, rather than be limited to 2 – 3 investments for that month. Long-time readers know that I do not want to pay more than 0.50% in commissions on my purchase amount, and I also rarely sell.

So I signed up and last month was approved for trading. The email stated that I had to sign up within 72 hours of receipt, otherwise they would put me in the back of their waiting list. I opened the account, went to the usual forms of identification ( address, Social Security number etc), and then had to link my bank account information. I decided to put $100 in the application. Robinhood is SIPC insured, meaning that I am safe for amounts under $500,000 there, but it still a new broker. Therefore, I am not going to trust a material amount of money with it, until they prove to me that they are worthy of my dollars. After all, zero costs are fine, but it is also important that their system doesn’t crash when I want to make investments. It is also important that they keep my money secure, so that the chances of a hack attack are reduced. After I signed up, and account was approved, they prompted me to download their app on my smartphone.

The trades are executed only through a smartphone. While the sign up for the account was on my computer, the trading interface is only through that app on the phone. I know that this will be a very appealing feature for many younger readers, who can trade on the go. With commissions at zero, many investors will probably start investing more actively, which is usually a recipe for disaster for 90% of investors out there. I am relatively young myself (or at least consider myself that way), but I do not want to just be limited to an application on my phone when it comes to investments. Plus, if the app crashed or is being updated, I would not be able to make investments. For a buy and hold investor such as myself, I can afford to wait for a few days or minutes. But still, if I do not have access to a website where I can download statements ( the costs of a website shouldn’t be that high relative to that for an app), I am not going to invest much there. I cannot take that chance.

So how can a broker offer zero dollar trades? I believe that this broker will earn money by routing orders to exchanges that pay them fractions of a penny for order traffic. The broker will also earn money by potentially matching high frequency traders with your orders. The high frequency crowd essentially front-runs individual investors to earn a fraction of a penny per share, multiple times per day. As a long-term buy and hold investor, I do not care whether I buy Coca-Cola (KO) at $37/share or $37.01/share. The only thing that matters to me is that I do not pay more than 20 times earnings for Coca-Cola and that the earnings per share can grow over time, in order to justify valuation and generate more dividend growth in the future.

Another way that brokers earn money is by charging margin interest rates to their clients. Many like Schwab for example charge anywhere from 6% - 8% for margin loans (buying shares with borrowed money). Given the fact that money is so cheap today, this is a nice profit for the broker. The other way that brokers earn money is by lending out your shares to short-sellers, who pay them a short rebate. If Robinhood can somehow gain scale, and attract a lot of investors that trade often, they should do pretty well for themselves, once their fixed costs are met. In the  business, a brokerage must meet steep regulation hurdles and costs, in order to handle client money.

The idea of zero commissions is very appealing nevertheless. If I were starting out today, and didn’t have a lot of money yet, I would use this application to build out a portfolio. I would watch out for other fees however. For example, it costs $50 to trade listed foreign stocks. It also costs $10 to make trades over the phone. Transferring securities out is another way where you will get hit by fees – there is a $75 outgoing ACAT transfer fee.

The idea of zero commission stock trades is not new. When I was first starting out with dividend investing, I used Zecco, which used to offer zero commission stock trades to investors. First they offered 40 free trades per month, then it was decreased to 10 trades/month. After that, the broker required a $2,500 minimum amount invested in order to be eligible for the free commissions, followed by an increase to $25,000, and then abolishing the free stock trades. Despite the increasing level of hoops however, for someone like me in the accumulation phase, it was helpful to be buying my first shares without incurring much in transaction costs. There are other companies like Wells Fargo and Merrill Edge which supposedly offer free trades every month to their customers. The problem is that there are just too many hoops to jump through. In the case of Merrill Edge, I have to have tens of thousands of dollars in a Bank of America account in order to qualify. The opportunity cost of $25,000 sitting in cash is higher than the $1 commission I pay at Interactive Brokers today.

I am going to keep a small amount of cash in Robinhood to test their platform. I bought a couple shares there, and the process was quick and efficient. Plus the prices I paid were fair. It was nice that I didn’t have to pay any commissions. Given the fact that this is a fairly new broker, that is untested, I am not going to put more than a few hundred bucks there. I have been using my broker Interactive Brokers as the main broker vehicle since the middle of 2014. I know that I pay $1/trade, which is more than $0/trade. In addition, for investors with less than $100,000 in assets there, Interactive assesses a $10 monthly fee. However I like the fact that my orders are directly executed on an exchange and that neither my broker nor a high frequency trader is trading against me on the order. I also like the fact that Interactive has been around for many years, is profitable, and very unlikely to go under and have my assets frozen for a period of time. I still keep under the SIPC limits there of course. It is very nice that I can buy shares cheaply at Interactive Brokers, and then transfer them to another broker that could have otherwise charged me $7 - $10/trade. It is also nice that Interactive Brokers charges around 1.50% on margin interest.

Either way, I am going to monitor Robinhood closely. In the future, once the broker becomes more established, I could start doing a more significant level of business there. Until then, I will keep my investing elsewhere.

Relevant Articles:

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The dumbest argument against dividend paying stocks

One of the dumbest arguments against dividend growth investing is showing a single investment that failed, and thus implying that the strategy is not good. An opponent of dividend growth investing would usually use a company like Eastman Kodak (KODK), General Motors (GM), or one of the major banks like Citigroup (C) as an example of type of stocks that investors believed to be buy and hold forever.

There are several logical flaws with this argument.

The first issue stems from the fact that only some of the banks used in this argument have ever been dividend growth stocks at the time of their demise. General Motors, which was one of the bluest of blue chips for decades, had never been a dividend growth stocks, because of the cyclical nature of its distributions. Eastman Kodak was a dividend achiever once, having raised dividends for 14 years in a row through 1975, when the Board of Directors elected to freeze distributions. This was over 37 years before the company declared bankruptcy. Since 1975, the company had raised dividends off and on, but never for more than five consecutive years in a row. After the company cut dividends in 2003 however, no objective dividend investor should have held on to the stock.

Dividend Kings List for 2015

The dividend kings index includes companies which have managed to increase dividends for over fifty consecutive years. A company that regularly raises dividends to the tune of fifty years in a row is the type of company that every serious dividend growth investor should study. None of those companies are automatic purchases however. The important thing is to learn the type of business those companies are in, and what factors might have helped them achieve the dividend success. By gathering little bits and pieces of wisdom along the way, the dividend investor greatly increases their knowledge of business. Knowledge is like compound interest – it builds and accumulates over time.

The companies in the 2015 dividend kings list include:

Name	Symbol	Yrs Div Gro	10-yr Div Gro	Fwd P/E	Yield	10 year EPS	Analysis
American States Water	AWR	60	5.62%	25.8	2.20%	15.23%
Dover Corp.	DOV	59	9.79%	15.6	2.20%	15.23%
Northwest Natural Gas	NWN	59	3.69%	22.2	3.70%	3.42%
Genuine Parts Co.	GPC	58	6.23%	23.1	2.20%	8.04%	Analysis of GPC
Parker-Hannifin Corp.	PH	58	13.39%	16.2	2%	19.89%
Procter & Gamble Co.	PG	58	10.59%	20.8	2.80%	8.04%	Analysis of PG
Emerson Electric	EMR	57	7.71%	15.6	3%	9.61%	Analysis of EMR
3M Company	MMM	56	6.76%	21.9	2.10%	8.33%	Analysis of MMM
Cincinnati Financial	CINF	54	6.41%	19.8	3.40%	4.04%
Vectren Corp.	VVC	54	2.53%	20.1	3.30%	0.56%
Coca-Cola Company	KO	52	9.79%	20.7	2.90%	9.89%	Analysis of KO
Johnson & Johnson	JNJ	52	10.84%	17.5	2.70%	7.20%	Analysis of JNJ
Lowe's Companies	LOW	52	29.19%	25.4	1.40%	6.32%	Analysis of LOW
Colgate-Palmolive Co.	CL	51	11.45%	23.6	2.10%	6.82%	Analysis of CL
Lancaster Colony Corp.	LANC	51	6.92%	24.4	2%	2.04%
Nordson Corp.	NDSN	51	8.11%	18.5	1.10%	20.00%

It is very interesting that the dividend kings returned 14.10% in 2014 and 30.70%. In comparison, the S&P 500 returned 13.50% in 2014 and 32.305 in 2013.

There was one company that was taken from the list in 2014. Diebold (DBD) had managed to grow dividends for 60 years in a row. Unfortunately, the company failed to increase distributions in 2014, which violated the long history of consistent dividend growth. If Diebold starts growing dividends again 2015, it would take it until 2075, before it achieves the same level of accomplishment. Given the fact that earnings per share didn’t grow at all in the past decade, but followed an erratic pattern, I am not surprised that the dividend was left unchanged. Rising earnings per share are the essential fuel behind future dividend growth.

There were no additions in 2014 to the list. Based on my analysis of dividend streaks, it looks like there won’t be an addition until sometime in 2016, when Hormel Foods (HRL) and Tootsie Roll Industries (TR) reach dividend king status. Currently, each of those two companies has managed to grow dividends for 48 years in a row.

I believe the valuations are a little overstretched right now for many of the companies on the list. The only companies which meet my entry screen of valuation, growth and dividend sustainability include Johnson & Johnson and Emerson Electric. If I were willing to reduce the entry yield to 2%, I could add Dover and Parker Hannifin on the list for further research.

Other companies like Cincinati Financial (CINF) have decelerated their rate of dividend growth, which is slower than the ten year average. Coca-Cola (KO) is a great company I am holding on to, but the problem I am seeing is that it has been unable to grow earnings per share for several years in a row. Without earnings growth, dividends will not grow over time and the intrinsic value of the business cannot grow either. For certain companies like Colgate-Palmolive (CL), valuations are a little high above 25 times earnings. I also find it hard to justify purchasing a utility which has increased dividends by 3%/year at an entry yield below 4%. Investors who overpay even for the most stable companies with the widest of moats might be in for some poor returns in the first decade of their investment. Hopefully we would see a sustained correction in 2015, which will correct the excess we are seeing. Let's wait and circle back in early 2016 on that.

Full Disclosure: Long KO, JNJ, PG, LOW, CL, MMM, EMR,

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