Dividend Growth Investor

How to crush the market with dividend growth investing

noreply@blogger.com (D) — Wed, 19 Jun 2013 01:00:00 PDT

Dividend growth investing is the true underdog of investment strategies. It is not because the strategy fails to generate consistent returns to investors, but because it is not lucrative for the financial industry. It is also misunderstood because it focuses on dividends that grow, not simply yield. Dividend growth investing is a simple investing strategy that focuses on buying and holding quality companies at attractive valuations, which have the potential to increase earnings and dividends along the way. This is do-it-yourself type investing that relies on long-term holding and involves minimal transaction or advisory fees.

What could be simpler that selecting companies with a proven track record of increasing dividends, trading at attractive valuations, that also exhibit the potential for future earnings growth? As long as you monitor your positions, you can essentially set it and forget it and ignore the day to day noise of Wall Street. What critics of dividend growth investing fail to see is that a growing enterprise that consistently earns more, and pays more in dividends is more valuable over time. Thus, dividend growth investors can have their cake ( the dividend stock) while eating it too (receiving growing streams of dividend income).

I have several exhibits, which discuss performance of dividend growth investing over different time frames. The first exhibit below is from an independent study of returns of S&P 500 Index stocks by dividend policy, prepared by Ned Davis Research. The study shows that a $100 investment in dividend growers and initiators in 1972 turned into a cool $4,168 by the end of 2012, compared to $1,622 for an investment in S&P 500. However, the investors that put $100 in 1972 in non-dividend payers and dividend cutters & eliminators ended up with only $193 and $88 after 41 years! This chart shows you that dividend investing provides you with an edge.

The second chart shows the performance of Dividend Champions between 2007 and 2012:

This is my performance since 2007: I achieved this not because I have a magic ball, but because I have a strategy that provides me with an edge against everyone else. As a dividend growth investor, I could care less how I do relative to the market however. Performance relative to a benchmark is not an actionable item, but something that could provide confusion and make otherwise smart investors question their strategy at the worst time possible. Switching strategies at the wrong times because you lack confidence is a sure way to never amass any wealth in the stock market.

Two other investors performance that I am attaching is the one from fellow blogger Dividends4Life through March 31, 2013:

In my investing, all I care about is selecting great companies at attractive valuations, strong competitive advantages, a track record of raising dividends and the potential for earnings increases. The market can fluctuate all it wants, but by ignoring it and focusing on what matters I have been able to crush it since 2008. After all, companies like Coca-Cola (KO) and Chevron (CVX) will satisfy consumer demands for several decades to come. These companies with enduring competitive advantages are much more likely to pump out billions more in profits and afford to pay higher distributions.

Dividend growth investing is not going to outperform the market every single year, but over time it should deliver a performance that should at the very least slightly exceed S&P 500 results. No investment strategy in the world will generate consistent profits all the time, and outperform its benchmark all the time. Investors should have confidence in their approach, and not let temporary underperformance make them switch strategies. The only sure way to lose money in the stock market is to search for a strategy that makes profits all the time, and thus switching strategies often.

By focusing on quality, dividend growth investors uncover value and outperform indices over time, despite not caring about general stock market fluctuations. This is a winning strategy that can not only deliver a growing stream of dividends to live off, but also grow investors income over time.

Another reason why dividend growth investing is perfect for retired investors is because it protects from the variability of year to year returns. The problem with living off of index funds is that you risk having to sell a chunk of your portfolio when stock prices are unreasonably depressed. An index could go up by 10%/year every year on average, but this could mean going down by 50% in year one and being flat in year two. This could cause you to sell at the bottom in order to fund your living expenses, which could leave fewer dollars left to capture any upside in stock prices. It could also leave less dollars to fund your retirement. The growing dividend yield on the other hand provides a baseline that supports the living expenses of the retiree. When everyone else realizes falling stock prices could cause them to go back to work, the dividend growth retiree would care less as they will be drowning in cash from their portfolios. Not surprisingly, the rising dividends would also provide an income stream that maintains purchasing power against inflation.

Full Disclosure: Long KO and CVX

Relevant Articles:

- Check Out the complete Archive of Articles
- Dividend Growth Investing Gets No Respect
- Buy and Hold means Buy and Monitor
- The Dividend Edge
- Are performance comparisons to S&P 500 necessary for dividend investors

Dividend income is more stable than capital gains

noreply@blogger.com (D) — Tue, 18 Jun 2013 01:00:00 PDT

Over the past century stocks have delivered a 10% annual total return on average. The total return consists of price appreciation and dividend payments. The issue with average returns is that over the past century, there are only a few occasions where stocks clocked in annual returns of somewhere close to 10% in a given year. In reality, some years these returns have been much more than 10%, whereas in other years these returns have been less than 10%. As a result, investors should be warned that these 10% in annual returns are not a sure thing every year.

A large portion of the volatility in annual total returns comes from volatility in capital gains. Years of prosperity during economic booms are swiftly followed by severe market drops during recessions. Investors who sell stocks to fund their retirement face the risk of selling off stocks at low prices during bear markets, which could result in asset depletion and increases the risk of return to the workforce. As a result, relying on selling off stocks for income in retirement might be similar to cutting off the tree branch you are sitting on. For example, investors who retired in 2000 and relied only on S&P 500 index funds for retirement needs would have less than a few year’s worth of expenses left in their nest eggs by now.

On the other hand, dividend income has remained more stable than capital gains. Since 1977, the dividend income for S&P 500 has experienced declines in only 4 out of 34 years. As a result, it is no surprise that the predictable nature of dividend payment amounts is appealing to investors in retirement.

Unfortunately, yields on S&P 500 have been low since 1995, and therefore insufficient to live off of. An enterprising dividend investor however can generate a portfolio which has a better current yield, while also enjoying dividend increases along the way.

For my dividend retirement plan, I am focusing not only on the dividend, when selecting stocks however. I try to select companies that regularly pay and increase dividends, and also have the potential to increase profits over time. Rising profits supply firms with the firepower to increase dividends over time. In addition, I also focus on qualitative characteristics such as competitive advantages, strong brand names and products or services that clients are willing to pay top dollars for. Another important factor is valuation, since overpaying for even the best income stocks will surely lead to subpar returns for the first several years of the investment. Several firms that fit the profile include:

McDonald's (MCD) franchises and operates McDonald's restaurants in the United States, Europe, the Asia/Pacific, the Middle East, Africa, Canada, and Latin America. This dividend champion has raised distributions for 36 years in a row. Over the past decade, it has managed to boost dividends by 28.40%/year. Currently, the stock is attractively valued at 18.20 times earnings, yields 3.10%, and has a well covered dividend. Check my analysis of McDonald's.

Wal-Mart Stores (WMT) operates retail stores in various formats worldwide, under three major segments: Walmart U.S., Walmart International, and Sam's Club. This dividend champion has raised distributions for 39 years in a row. Over the past decade, it has managed to boost dividends by 18.10%/year. Currently, the stock is attractively valued at 14.80 times earnings, yields 2.50%, and has a well covered dividend. Check my analysis of Wal-Mart Stores.

Chevron (CVX) engages in petroleum, chemicals, mining, power generation, and energy operations worldwide. This dividend champion has raised distributions for 26 years in a row. Over the past decade, it has managed to boost dividends by 9.60%/year. Currently, the stock is attractively valued at 9.10 times earnings, yields 3.30%, and has a well covered dividend. Check my analysis of Chevron.

Kinder Morgan Partners (KMP) operates as a pipeline transportation and energy storage company in North America. This dividend achiever has raised distributions for 17 years in a row. Over the past decade, Kinder Morgan Partners has managed to boost distributions by 7.50%/year. Currently, the partnership yields 6.20%, and has a well covered distribution. Check my analysis of Kinder Morgan Partners.

Realty Income (O) is a publicly traded real estate investment trust.This dividend achiever has raised distributions for 19 years in a row. Over the past decade, it has managed to boost dividends by 4.20%/year. Currently, the trust yields 4.80%, and has a well covered dividend. I would consider adding to the stock on yields above 5%. Check my analysis of Realty Income.

Full Disclosure: Long MCD, WMT, CVX, KMR, O

Relevant Articles:

- Check Out the complete Archive of Articles
- Why I am a dividend growth investor?
- My Dividend Retirement Plan
- The case for dividend investing in retirement
- The case for dividend investing in retirement

Lower Entry Prices Mean Locking Higher Yields Today

noreply@blogger.com (D) — Mon, 17 Jun 2013 01:00:00 PDT

The beauty of dividend investing is that once an investor purchases a quality income stock, they can hold on to it for many decades, while patiently collecting cash dividends. The success of a dividend growth investor depends not only on picking the best companies in the world, but also purchasing them at the right price and holding on to them for as long as possible. With the market close to all-time highs, many dividend investors are complaining that it is difficult to find attractively valued stocks to purchase.

I have found that entry price matters when selecting companies. If you pay a cheap price for stocks, you essentially lock in a higher current yield. In this situation, your margin of safety is higher as well. The advice is usually to buy stocks when there is blood on the streets. In recent memory, the best times to acquire quality stocks on sale was during market crashes such as the ones witnessed in 2001-2002 as well as the most recent one from 2007- 2009. The truth however is that few people have large hoards of cash sitting on the sidelines, patiently waiting to be deployed only at fire-sale prices.

In reality, as an investor in the accumulation phase I have a few obstacles that a retired investor does not have too much of. I get fresh cash contributions every month that needs to be invested. If I chose to wait for perfect opportunities, the risk I am facing is that I might miss out if stocks get even more expensive afterwards. Nobody can say if dividend stocks will rise by 50% or fall by 50% over the next year. No one can even forecast within a reasonable amount of certainty if they are even going up or down. If the market goes up from here, the money in cash represents a lost opportunity.

If stock prices go down, I would buy at lower prices and earn more dividend income. However, I have found that market timing is something that cannot be consistently done by ordinary investors. If I buy now and stock prices tank, I will have more opportunities to buy at attractive prices later on. Even if the stocks I own go down in value, as long as fundamentals are sound and earnings and dividends keep growing, I should be fine eventually. During the financial crisis, shares of Johnson & Johnson (JNJ) fell from a high of $72.76 in September 2008 to a low of $46.25 by March 2009. At the quarterly dividend of 46 cents/share, the differences in dividend yield were between 3.98% in March 2009 and 2.53% in September 2008. I kept holding on to my position, and adding to it as fundamentals were sound, and the dividend was about to be increased in April 2009.

In a study on dollar cost averaging, I found it pays to invest as soon as possible. Over time, companies get more valuable as they service more customers, make more profits and sell new products and expand in new markets. It is great to avoid stocks that are very overvalued, but truth is, there are attractive opportunities even in today’s market. If you invest funds in attractive companies with bright prospects and strong competitive advantages, you are improving your odds of success.

While entry price is important, it is not the only determinant of investment success. A consistently growing company can eventually “bail out” its patient investors, even if they overpaid for it. As earnings and dividends increase, the P/E compression would render the shares more valuable. This, coupled with a higher yield and the prospects for higher dividends down the road, would increase the value of these shares. Maintaining a diversified portfolio that does not use leverage is another important factor to consider. If you are overleveraged, you can still lose your income stream as well as your nest egg during a market meltdown.
As a result, it pays to invest in recession proof stocks, which offer a product or service that customers need no matter what cycle the economy is in. A few such companies, trading at reasonable valuations today
include:

Aflac Incorporated (AFL), through its subsidiary, American Family Life Assurance Company of Columbus, provides supplemental health and life insurance products. This dividend champion has managed to boost dividends for 30 years in a row, and over the past decade has managed to boost them by 19.30%/year. Currently, the stock is trading at 9.10 times earnings and yields 2.50%. Check my analysis of Aflac.

Chevron Corporation (CVX), through its subsidiaries, engages in petroleum, chemicals, mining, power generation, and energy operations worldwide.This dividend champion has managed to boost dividends for 26 years in a row, and over the past decade has managed to boost them by 9.60%/year. Currently, the stock is trading at 9.10 times earnings and yields 3.30%. Check my analysis of Chevron.

Philip Morris International Inc. (PM), through its subsidiaries, manufactures and sells cigarettes and other tobacco products.The company has managed to boost dividends every year since becoming independent from parent Altria (MO) in 2008. The five year dividend growth rate is 13.10%/annum. Currently, the stock is trading at 17.70 times earnings and yields 3.70%. Check my analysis of Philip Morris International.

Air Products and Chemicals, Inc. (APD) provides atmospheric gases, process and specialty gases, performance materials, equipment, and services worldwide.This dividend champion has managed to boost dividends for 31 years in a row, and over the past decade has managed to boost them by 11.80%/year. Currently, the stock is trading at 17.30 times earnings and yields 3%. Check my analysis of Air Products and Chemicals.

Full Disclosure: Lon AFL, CVX, PM, MO, APD

Relevant Articles:

- Buy and hold dividend investing is not dead
- Does entry price matter to dividend investors?
- Opportunity Costs for Dividend Investors
- Dividend Investors are Getting Paid for Holding Dividend Paying Stocks
- Market Declines: An Opportunity to Acquire Quality Dividend Stocks

Carnival of Retirement - Dividend Investing Edition

noreply@blogger.com (D) — Sun, 16 Jun 2013 13:27:00 PDT

Welcome to the 74th edition of Carnival of Retirement. The articles below show a variety of opinions from various bloggers on the topic of retirement. As many of you are aware, at this site we focus on dividend growth investing as a means to an end, the end being achieving financial independence in retirement. The articles below show investing ideas and retirement ideas from other points of view, which are not necessarily limited to dividend investing.

The articles are included below:

Michael Kitces @ Nerd's Eye View writes Why Planning To Save More Tomorrow And NOT Today May Be A Better Approach - Recent research suggests that perhaps the real key to saving for retirement is not about cutting your spending today to save more, but instead to simply maintaining your current lifestyle and not increasing it in the future... which, over time, produces a more frugal lifestyle and rapidly rising savings, without giving up anything you enjoy today!

SB @ One Cent at a Time writes Planning for Retirement: Ideal Asset Allocation for your Age - Your age, or more specifically the number of years you have until you retire, is one of the main factors to consider when deciding how much you need to secure your future. This article talks about ideal retirement portfolio as per your age group.

Michelle @ Diversified Finances writes What is Financial Independence? - What is Financial Independence? This might be something that you are wondering. Different people have different meanings for this. For example, if you are younger, it might just mean financial independence from your parents, in which you start paying things on your own.

Michael @ Financial Ramblings writes Should You Invest in an IPO? - I almost titled this piece “IPOs Are for Idiots,” but ultimately decided against it. That wording is, perhaps, a bit strong. But (imho) it’s not too far from the truth.

Roger Wohlner @ The Chicago Financial Planner writes Winning The Retirement Gamble: Step 2 Where Do I Stand? - No matter whether you are a 20 something with many years to go or you are in your 50s with retirement on the horizon, it is important to periodically take stock of your resources for retirement. What have you accumulated, how much are you saving, and what other resources do you anticipate having available to fund your retirement? You need to ask: Where do I stand?

Dividend Growth Investor @ Dividend Growth Investor writes Is the Dividend Craze Over? - I buy the stock in companies, which I believe will manage to increase earnings over time, and as a result they will be able to pay me a consistently higher dividend payment. The stock prices could fluctuate, but unless we get to see crazy valuations like the ones we saw in the early 2000s it makes little sense to sell them.

Austin Fey @ Marotta On Money writes Bucket List: Financial Independence - Most people do not use all their skills at their place of work, so these other skills become hobbies. I am no exception. What I need to pursue these other dreams is financial independence, that is, decoupling my need to eat from my skill as as an artist.

Luke @ Learn Bonds writes Higher Dividend Stocks Still Seem Rather Pricey - When it comes to the overall stock market and high income investments, high dividend stocks are a poor investment relative to other stocks.

MMD @ IRA vs 401k Central writes What are the 401k Withdrawal Rules for Getting My Money Back? - Before putting too much money into your employers retirement plan, it helps to understand the 401k withdrawal rules and when you'll see your money again.

MMD @ My Money Design writes My Broker Lets Me DRIP Stocks – Why That’s Great - I recently found out that my account has a feature to DRIP stocks. This is great news because it means I'll be able to put the dividends to work and accelerate building my fortune!

Ted Jenkin @ Your Smart Money Moves writes Are You Worried About A Stock Market Crash Again? - With markets hitting all-time highs this year, many people have become concerned that we will see a repeat of dot-com bubble crash in 2000 and the recent 2008 market crash.

Irfan @ Everything About Investment writes Best Roth IRA Providers of 2013 - When selecting a Roth IRA account providers, individuals consider a lot of factors and expenses such as trading fees, transaction costs and commissions per equity trade. Here we have highlighted the best Roth Ira account providers of 2013 for you to choose from considering all the factors.

A Blinkin @ Funancials writes Housing Soars 10.9% As Inflation Remains Subdued - The leading measure of U.S. home prices showed that the national average rose 1.2% over the 1st quarter of this year. More impressive (or concerning?) is the 10.2% increase we have experienced, as a nation, over the last 12 months. A composite of 20 major metropolitan areas showed an increase of 10.9% over the last 12 months.

Tony @ We Only Do This Once writes How to Reduce Financial Stress - My finances are one of the things in my life that has the potential to stress me out the most. In my quest for a stress-free life (HA!)— enhancing my productivity, furthering my career, creating routines, etc. — I have found that addressing my finances has helped keep my overall stress to a minimum.

Matt Becker @ Mom and Dad Money writes My Personal Investment Plan - An overview of how my wife and I have implemented our personal investment plan. My hope is that this information helps you think about how to implement your own plan.

Everything Finance @ Everything Finance Blog writes 5 Golden Rules for Investing in Annuity - If you’re considering investing through annuity, what things must you consider? Here are 5 golden rules for investing in annuity.

Russ Thornton @ Wealthcare For Women writes Information Is Not Enough - An explanation of why more or better information isn't enough to help us make smart financial decisions. For example, why do some doctors smoke? Certainly they know it's not good for them. It's not about information; it's about behavior

Brent @ PersonalFinance-Tips writes 5 Best Housing Markets for the Current Boom - The housing market has definitely rebounded in 2013, with levels of optimism not seen since before the recession took hold in 2008. A study by Rasmussen says that nearly 40 percent of Americans believe their home will increase in value in the next year, and nearly 60 percent believe their home is worth more than when they bought it.

CAPI @ Creating a Passive Income writes What You Need To Know About Dollar Cost Averaging - If you aren't familiar with dollar cost averaging things can seem confusing. Read here to see what dollar cost averaging is all about - it could help.

John S @ Frugal Rules writes How to Invest in Stocks When You Do Not Know Where to Start - Investing in stocks, or anything in the market, can be overwhelming for many. The key to overcoming that fear is knowing where to start and educating yourself so that you can set up an investment portfolio that’ll help you grow your wealth and reach your long-term retirement goals.

Investor Junkie @ Investor Junkie writes Edward Jones Review - Is a Full-Service Broker Worth the Price? - Unlike many discount brokerages available online, Edward Jones is a full-service broker. So what really comes with this type of service, and is it worth paying a little more?

Don @ MoneySmartGuides writes Understanding Inflation - What exactly is inflation? It's a subject that sounds more difficult to understand than it really is.

John @ Card Hub writes Ask the Experts: How to Maximize the Impact of Charitable Donations - Despite the recent economic turmoil, Americans have continued to display an altruistic streak, donating billions of hard-earned dollars to noble causes each year. While the cynics among us will chalk that up to the accompanying tax benefits, it doesn’t really matter as long as the money is being put to good use. But that’s the crux of the issue: How can we make sure our charitable donations actually get to those who truly need the money, rather than executives’ pockets or, worse, fraudsters.

Anton Ivanov @ Dreams Cash True writes Money Saving Tips – Pay Yourself First - Saving money may seem like a big challenge, especially if you are caught up in the spending frenzy of our consumerist society. But if you cool down and think, it’s not difficult to find ways to save money. Adopting the Pay Yourself First principle is a great way to boost your savings.

Melissa @ Minting Nickels writes My Roadmap to Becoming a Better Investor - As an investor, I’m constantly looking for ways to improve myself and improve my investment returns. Last year was somewhat of a disappointment, so this year I’m gonna kick-ass Rambo style to make up for last year’s shortcomings. In the following year, here are 4 things I’m going to do to improve my investment style (and how you can mirror my improvements).

Tushar @ Start Investing Money writes Could You Invest More Cash if You Were Self Employed? - It's an interesting question isn't it? Plenty of Americans are employed with businesses of all sizes, but in recent years there have been an increasing number of self employed people carving out their own businesses as well.

Thomas @ Finance Inspired writes How to invest in private companies - Heres a quick fire lesson in Angel Investing, what it is, how to go about it and more importantly how to profit from it.

Lazy Man @ Lazy Man and Money writes A Chink in Index Funds' Armor? - I got my July 2013 edition of Money Magazine yesterday and on page 43 there is an interesting article about balancing a lopsided index fund. So Money Magazine asks the question, "Is it time for you to rethink indexing?" They quickly answer it with a no. The next thing they suggest is Vanguard FTSE All-World ex-US ETF. Their theory is that you can "cover a broad spectrum of domestic and foreign stocks" with just those two. I respectfully disagree.

Bill Fay @ The Frugal Toad writes Why You Should Start Saving for Retirement Now - Today is the day we’re going to clean out the garage, weed the garden, paint the kid’s bedroom — and start saving for retirement. Those all are chores that we know should have been done yesterday, but we think can wait until tomorrow. The garage, bedroom and garden can wait. Retirement savings can’t.

Jason Hull @ Hull Financial Planning writes What Does the Future You Think? - Studies show that if we look at images of our future selves, we save up to 30% more than we would if we didn't. Here's how to get in touch with your future self so that you don't blow all of your money today.

Jacob @ My Personal Finance Journey @ My Personal Finance Journey writes What Asset Allocation Level Should You Use for Treasury Inflation-Protected Securities (TIPS)? - This post analyzes and answers the question: “what level, if any, of your portfolio should be allocated to Treasury Inflation-Protected Securities (more commonly referred to as TIPS)?”

If you want to submit to the Carnival of Retirement next week, sign up at Blogger Carnivals.

Dividend Investing Articles to Enjoy: 6/15/2013

noreply@blogger.com (D) — Sat, 15 Jun 2013 01:00:00 PDT

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:

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 several months include:

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.

Past Editions:

General Mills (GIS) Dividend Stock Analysis

noreply@blogger.com (D) — Fri, 14 Jun 2013 01:00:00 PDT

General Mills, Inc. (GIS) manufactures and markets branded consumer foods worldwide. This dividend achiever has paid dividends since 1898, and has increased them for ten years in a row.

The company’s last dividend increase was in March 2013 when the Board of Directors approved a 15% increase in the quarterly distribution to 38 cents /share. The company’s peer group includes Heinz (HNZ), Hershey (HSY) and Kellogg (K).

Over the past decade this dividend growth stock has delivered an annualized total return of 10.30% to its shareholders.

The company has managed to deliver a 7.60% average increase in annual EPS since 2003. Analysts expect General Mills to earn $2.68 per share in 2013 and $2.91 per share in 2014. In comparison, the company earned $2.35/share in 2012. Over the next five years, analysts expect EPS to rise by 7.93%/annum. The company has also managed to consistently repurchase 1.87% of outstanding shares each year over the past decade.

The company may be able to achieve earnings growth through expanding internationally, particularly in emerging markets, introducing new products, making strategic acquisitions as well as managing its bottom line. The industry is characterized by intense competition, but stable overall revenues, which are somewhat immune from the economic cycle. The acquisition of Heinz has definitely increased interest and valuations for food companies like General Mills so far in 2013.

General Mills has a very high return on equity, which has also increased over the past decade. I generally want to see at least a stable return on equity over time. I use this indicator to assess whether management is able to put extra capital to work at sufficient returns.

The annual dividend payment has increased by 8.70% per year over the past decade, which is slightly higher than the growth in EPS.

A 9% growth in distributions translates into the dividend payment doubling almost every eight years on average. If we look at historical data, going as far back as 1986, one would notice that the company has managed to double distributions every eight and a half years on average.

The dividend payout ratio has increased from 45% in 2003 to 545 in 2012. A lower payout is always a plus, since it leaves room for consistent dividend growth minimizing the impact of short-term fluctuations in earnings.

Currently General Mills is attractively valued at 17.60 times earnings, yields 3.20% and has a sustainable distribution. I would consider initiating a position in the company subject to availability of funds.

Full Disclosure: Long K

Relevant Articles:

- Three High Yielding Dividend Machines Boosting Distributions
- What does Buffett see in Heinz (HNZ)?
- Should you sell after a dividend freeze?
- The ten year dividend growth requirement

How to Generate Energy Dividends Despite the Peak Oil Non-Sense

noreply@blogger.com (D) — Wed, 12 Jun 2013 01:00:00 PDT

Peak oil is the idea that the world has reached or is about to reach maximum production of oil either a few years ago or a few years from now. From there on we are supposedly going to experience significant declines in oil production, which would have devastating impacts on the world economy, which would need more and more oil in the future. This would be driven by the emerging economies of China and India, where hundreds of million of consumers will enter the middle class, and demand the lifestyle of your typical American Consumer. This will be bullish for companies like Coca-Cola (KO) as well as energy companies like Chevron (CVX).

I find some of the cheapest stocks in the market today to be oil companies. I own stock in the following three oil companies:

Chevron Corporation (CVX), through its subsidiaries, engages in petroleum, chemicals, mining, power generation, and energy operations worldwide. The company trades at 9.20 times earnings and yields 3.30%. This dividend champion has increased distributions for 26 years in a row and has achieved a ten year average annual dividend growth of 9.60%. Check my analysis of Chevron Corporation.

ConocoPhillips (COP) explores for, produces, transports, and markets crude oil, bitumen, natural gas, liquefied natural gas, and natural gas liquids on a worldwide basis. The company trades at 10.10 times earnings and yields 4.20%. This dividend achiever has increased distributions for 12 years in a row and has achieved a ten year average annual dividend growth of 15.10%.Check my analysis of ConocoPhillips.

Royal Dutch Shell plc (RDS.B) operates as an independent oil and gas company worldwide. The company trades at 8.20 times earnings and yields 5.30%. The company ended a 16 year streak of consecutive dividend increases in 2010 by keeping distributions flat, only to start increasing them again in 2012. Check my analysis of Royal Dutch Shell.

I also used to own Exxon Mobil (XOM), but I replaced it with ConocoPhillips. Exxon is the largest oil company in the world. It engages in the exploration and production of crude oil and natural gas, and manufacture of petroleum products. The company trades at 9.30 times earnings and yields 2.80%. Check my analysis of Exxon Mobil.

The thing to look for when evaluating energy companies is the reserve replenishment. Oil companies operate wells that will eventually run out of carbons, even if technologies are improved to a point where ALL the oil and gas in a well is pumped out. At some point, this well will stop producing income, and the company needs to move on. The reason why oil companies typically have low payout ratios is because they need to reinvest a portion of profits back into the business in order to find oil or buy assets they can develop.

I have looked at the data, and find that the idea behind peak oil is non-sense. The world is never going to run out of oil. That is, the world is never going to run out of oil during the lifetimes of anyone you meet today. The reason is that consumers will become more energy efficient, and companies will have an enormous incentive to explore and develop oil and gas fields in areas that are very difficult to drill in. The basic economic theory states that companies which see high energy prices will allocate funds at areas that are tough to explore and that make sense if oil stays at high levels for extended periods of time.

Over the past 30 years, the reserve to production ratio has remained above 40 - 50 years. This ratio shows the total amount of estimated oil reserves dividend by the total amount of annual production. If no new oil reserves were discovered ever again, and the world continues to consume oil at the same rate as today, the world would run out of oil in 50 years. It looks like oil reserves have been increasing enough to satisfy future oil demand. Therefore, it looks that for the past 30 years, the world has had anywhere between 50 -54 years’ worth of oil on its disposal. Right now, we have enough oil for the next 50+ years. I am betting ( see below how) that the world would have sufficient oil reserves for next 40 - 50 years in 2020, 2030 and 2040.

The same ratio for Natural Gas is over 60 years. The US is currently experiencing an energy renaissance particularly in such areas like Bakken Shale.

Companies are getting much better at forecasting where to drill for oil, and maximizing their chances of striking energy significantly. By using sophisticated seismic data, energy companies can obtain general reserve estimates for oil and gas wells. In addition, with improvements in technology, companies can now recover much more oil and gas out of the ground, compared to before. When the US experienced its first oil boom in the early 1900s, the primitive technology made it possible to only skim a portion of the oil in oil wells. As pressure in the oil and gas wells decreased, production fell in those wells, and they were then closed out. With improvements in technology however, it is now possible to increase the life of wells significantly, as it is much easier to get more out of each well.

One thing I do avoid is purchasing US oil and gas trusts. While they offer mouthwatering yields today, they are all destined to go to zero. This is because when these trusts were setup, their revenues are set to be generated from a fixed portfolio of assets. They cannot purchase new wells to earn revenue off of, and cannot drill for oil or gas. Even with improvements in technology, chances are that the wells you own will eventually dry up. As a result, the reason why these trusts offer such high yields is because they are essentially returning a huge portion of investor’s capital back. If investors reinvest a portion of these distributions in other oil and gas producing wells, they can extend their income stream. If investors instead spent all of their distributions, then they will not do well in a typical 30 year retirement scenario. BP Prudhoe Bay (BPT) is an example of an oil trust that will go to zero by 2025- 2030. This is the time when the oil royalties will no longer result in distributions, due to costs, declines in production, even if oil went to $200/barrel.

So what is the risk to my theory? If prices rise above a certain threshold, it might be economical for alternative energy sources such as solar and wind to be priced at par with oil and gas. However, oil would still be relevant 100 years from now even if it no longer were used for energy, because it is used in so many other aspects in everyday life such as chemicals, plastics etc.

Another risk is if the data I am using to base my assumptions is incorrect. The amount in proved reserves is simply an estimate. Actuals could turn out to be much different than estimates. In addition, just because there are proven oil reserves to last for 50 years however, there is no guarantee that all the oil will be available to be pumped out within 50 years, even if estimates were correct. On the positive side however, the reserves to production ratio does not account for undeveloped reserves. With the majority of the world's surface being under water, chances are that high enough oil and gas prices will one day incentivize exploration in the deep sea areas of the globe.Those areas could potentially provide for an almost unlimited amount of energy.

Full Disclosure: Long CVX, COP, RDS/B, KO

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Are performance comparisons to S&P 500 necessary for dividend growth investors?

noreply@blogger.com (D) — Tue, 11 Jun 2013 01:00:00 PDT

One of the questions I received recently from several readers of my site across platforms concerned my total returns performance and my benchmarks. As a long-term dividend investor, I doubt that sharing performance adds much in value.

My benchmark is S&P 500. I benchmark both my total returns and dividend income relative to this index. However, benchmarking my dividend income is more important to me than looking at my total returns relative to the market. I look at this information probably once an year, if not less often. I believe that focusing too much on comparative total return performance does not add much value to long-term dividend investors.

The stock market can value shares as it pleases, but I cannot control the price it would place on a stock or relative performance versus a basket of other stocks. I try to do the best using factors that are within my control. This includes identifying companies with strong competitive advantages and pricing power, which are able to grow earnings and pay higher dividends over time. I would then try to purchase shares in those companies at what I believe to be attractive valuations. Because my investment thesis relies on long-term momentum in earnings and dividends, I simply hold on to that security for as long as possible. One of the few factors that would make me sell include dividend cuts or an situation of extreme overvaluation relative to the underlying security’s growth prospects.

While I do not care about performance versus S&P 500, I have found that my methods for stock selections have delivered decent results since I started investing in 2008:

As a result, you can see that focusing on items such as benchmarking against S&P 500 for example, are simply items you can put on a checklist, but nothing that is purely actionable. Overall, I expect my portfolios to at least match the total returns of indices such as S&P 500. However, that would mean that I would underperform some portion of the time, and then outperform another portion of the time. I usually outperform during flat or declining markets, as well as situation where stocks as a group are up slightly. During strong up moves when growth stocks are bid up in a frenzy, dividend stocks would likely underperform.

Because I am investing for the long-term, I focus on items that could translate into more profits in one or two decades down the road. Thus, the data points I look at are usually annual fundamental results such as earnings per share, revenues, dividends, returns on equity etc. While the stock price of a company changes every nano-second, the underlying fundamentals are not materially affected that often. As a result, I only look at annual data points, although in rare situations I could look into quarterly sets of fundamental performance. This is why I refer to a period of about one or two years as simply noise. Nothing intelligent could ever come from noise, and most income investors who buy a stock today with the intention of flipping it in five months to an year are mostly kidding themselves.

One thing that intelligent investors should consider is that investment gains come unexpectedly. While it is commonly accepted that stocks have delivered a 10% annual return over the past 80 years or so, it is not commonly known that these returns are not straightforward. You don’t get 10% every year but are signing up for volatility in annual returns. You can as easily lose 50% in one year, and then recover and make 50% more. As a n investor, you need patience and if you do not have it, this could indicate that you didn't do enough due diligence or blindly followed stock tips. Of course, if there was a material change like a dividend cut, or major headwinds that’s ok. For example, neither Procter & Gamble (PG) nor Johnson & Johnson (JNJ) stock moved much between 2010 and 2012. Investors who simply held on to the stock didn’t see much in capital gains during this period. Over the past year and a half however, these companies have delivered very strong total returns. Investors who lost patience in the stock missed out on very good gains and the rising stream of dividend payments.

The other reason why I do not see much value in comparing my total returns relative to S&P 500 is because I find the index to be flawed. First of all, the components of S&P 500 index are subjectively selected by a committee, which considers certain factors such as liquidity, float and market capitalization in their inclusion decisions. If I had the requirements to only include stocks that trade at least 500,000 shares a day and have a market capitalization of $5 billion, I would have missed out on purchasing Hingham Insitutions for Savings (HIFS) at $34.90 in 2010. However, besides these factors, I do not know why they include certain companies, and exclude others. The flaws are evident if you study the history of some components in the index. For example, S&P 500 included a lot of technology companies in the late 1990s, just when they were selling at stratospheric valuations. Herd behavior such as this is destructive to long-term shareholder returns.

Another example as to why S&P 500 might not be the perfect black box to compare your results to is the fact that they didn’t include Berkshire Hathaway (BRK.B) until 2010. Berkshire had been one of the largest US companies for at least 20 years prior to that, which shows you the futility of this index. In addition, did you know that the original members of S&P 500 and their descendant companies selected in 1957 have actually outperformed the “actively managed” S&P 500 over the past 56 years? This means that truly passive buy and hold investing of the major companies without any rebalancing works better than S&P 500 itself.

If I consistently underperform over a period of 4 - 5 years, I would not worry too much, as long as I followed my common sense guidelines to constructing my portfolios. Focusing too much on comparative performance versus the S&P 500 could lead to chasing performance, which is not very smart. After all, a group of sound enterprises that are humming along will likely get ignored by the market at least several times over the next 30 – 40 years in favor of hot growth stocks. This has happened in the late 1960s with the go-go tronics boom, early 1970s with the Nifty-Fifty, early 1980s with technology stocks and the late 1990s with tech media and telecom stocks. An investor who underperformed a benchmark that included hot new issues, would face the psychological pressure that they are missing out. If they sell their portfolio to buy that index, they are essentially shooting themselves in the foot because none of the booms described above turned out well for the frenzied investors. They would have been better off sticking to tried and true dividend growth stocks like Procter & Gamble (PG) for example.

After a hot growth stock frenzy, sooner or later there will be reversion to the mean, which would translate into losses. In other words, one should stick to their strategy, know why they are following that strategy and ignore chasing performance. Chasing performance is counterproductive to your wealth. While you will underperform over short periods of time, over the long term, your dividend investment strategy would pay dividends.

One reason why mutual fund managers underperform is because they have the constant pressure to show results all the time. As a dividend investor, I do not have that pressure and I can afford to sit out periods where dividend stocks are out of style. I actually feel much more comfortable buying quality dividend stocks when no one believes in them than when everyone starts bidding up these fine companies. For example, back in November 2012 I was able to pick up some shares in McDonald’s (MCD) at $85 when there was short-term weakness in the stock.

The main reason why I purchase dividend stocks is to generate a rising stream of distributions that grows above the level of inflation and pays for my expenses. I do quite a lot of work in terms of stock selection, valuation at purchase price, portfolio monitoring in order to ensure that I can achieve this goal. This is why underperforming the S&P 500 over a short period of time does not bother me. This is because there will be fluctuations in performance depending on which sector is hot in the markets. However, the appeal of dividend investing is that your dividend return is always positive and it is more stable, which makes it ideal for someone who wants to live off their nest egg.

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Three Interesting Dividend Increases to Learn From

noreply@blogger.com (D) — Mon, 10 Jun 2013 01:00:00 PDT

In order to identify promising dividend candidates for further research, I follow a multi-dimensional approach. At least once per month, I run my dividend entry criteria screen on the dividend champions list in order to uncover attractively valued securities. I also review my portfolio, in order to determine whether I should initiate a position in a new stock or I should add to an existing position. Another method I use is to look at the weekly list of dividend increases, in order to identify up and coming dividend achiever, and also to monitor the dividend increases for my existing positions.

I identified the following dividend increases over the past week, which I found interesting.

Lowe’s Companies, Inc. (LOW) operates as a home improvement retailer. It offers products for maintenance, repair, remodeling, and home decorating. The company managed to increase dividends by 12.50% to 18 cents/share. This dividend king has managed to boost distributions for 51 consecutive years. While earnings per share have not grown above the high set in 2007, I believe that the company’s best days are ahead in the future. Lowe’s will benefit from the long-term recovery in the US housing sector, as well as expanding its presence domestically and internationally. The stock is not cheap right now at 23 time earnings and an yield of 1.70%, but it is a very good long-term hold. Check my analysis of Lowe’s.

Helmerich & Payne, Inc. (HP) engages in the contract drilling of oil and gas wells. The company raised its quarterly distributions by 233% to 50 cents/share. This dividend champion has rewarded its shareholders with growing distributions for 41 consecutive years. The company also hiked dividends back in late 2012 from 7 to 15 cents/share.

Company Chairman and CEO, Hans Helmerich commented, "We are pleased to be in position to deliver a meaningful level of yield to our shareholders while retaining a strong ability to continue to pursue growth opportunities."

High double or triple digit dividend growth rates are more of one-time events, rather than the norm in future dividend increases for companies. I have found that companies that increase dividends at a double or triple digit rates indicate a policy shift that is friendly for investors. In addition, their willingness to distribute more to investors shows confidence in the underlying business prospects over the next three to five years. When I look at situations where companies decided to boost their payout ratio, and increased dividends significantly, shareholders were much better off going forward. This includes increases in earnings, dividends and also total returns.

For example, since V.F. Corp (VFC) increased quarterly dividends from 29 to 55 cents/share in 2006, dividends are up 58% to 87 cents/share. Earnings per share are up from $4.72 in 2006 to 49.70 in 2012, while the stock price is up by 205% to $187/share.

In the case of Helmerich & Payne, the company always had a very low dividend payout ratio, because the number of drilling units in the industry in the US and around the world fluctuates a lot. However, they still managed to build the long history of dividend hikes. This dividend champion has raised distributions for 42 years in a row. If earnings continue growing, and the company starts to meaningfully increase distributions over time in the high single digits, shareholders will be well compensated for the risks they are taking. The stock looks cheap at 11.20 times earnings and yields 3.10%. I would need to look into it, analyze further over the coming few weeks.

Cracker Barrel Old Country Store, Inc. (CBRL) develops and operates the Cracker Barrel Old Country Store restaurant and retail concept in the United States. The company raised its quarterly distributions by 50% to 75 cents/share. This dividend achiever has raised distributions for 11 years ina row.

Ever since last year, when on April 26, 2012 Cracker Barrel increased quarterly dividends from 25 to 40 cents/share; the stock has been on a tear. The company has essentially tripled the dividend, and the stock has gone by 70%. Earnings per share have increased from $3.61 in 2011 to an expected range of $4.75 – $4.85 in 2013. Currently, the stock is fully valued at 20.80 times earnings and an yield of 3.10%.

At the end of the day, dividend growth investors need not only look at dividend yields but also the underlying earnings growth that fuels those distributions. If a company that has maintained a low payout ratio all of a sudden determines to share a greater portion of its already growing earnings stream, this unlocks a lot of value for shareholders and makes the asset even more appealing.

Full Disclosure: Long LOW

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Income Investing Articles for June 8, 2013

noreply@blogger.com (D) — Sat, 08 Jun 2013 01:00:00 PDT

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 several months include:

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. Tomorrow, at 2PM ET, i would have a live 30 minute Q&A on Twitter. Be sure to join me.

PepsiCo (PEP) - A great dividend stock for long-term investors

noreply@blogger.com (D) — Fri, 07 Jun 2013 01:00:00 PDT

PepsiCo, Inc. (PEP) manufactures, markets, and sells various foods, snacks, and carbonated and non-carbonated beverages worldwide. The company operates in four divisions: PepsiCo Americas Foods (PAF), PepsiCo Americas Beverages (PAB), PepsiCo Europe, and PepsiCo Asia, Middle East and Africa (AMEA). The company is a dividend aristocrat which has increased distributions for 41 years in a row. The most recent dividend increase was in February 2013, when the Board of Directors approved a 5.60% increase in the quarterly dividend to 56.75 cents/share.

PepsiCo’s largest competitors include Coca Cola (KO) and Dr Pepper Snapple Group (DPS).

Over the past decade this dividend growth stock has delivered an annualized total return of 9.60% to its loyal shareholders.

The company has managed to deliver an average increase in EPS of 7.40% per year since 2003. Earnings growth has been almost non-existent since 2009 however. Analysts expect PepsiCo to earn $4.39 per share in 2013 and $4.77 per share in 2014. This would be a nice increase from the $3.92/share the company earned in 2012. Over the past decade, PepsiCo has consistently managed to repurchase 1.10% of its outstanding shares every year, on average.

PepsiCo has recognized that carbonated drink sales are not going to grow significantly in the future, which is why it has focused on fast growing non-carbonated soft drinks. The company’s innovation in the area has been successful with the introduction of Aquafina , Gatorade and Propel, Lipton teas and Tropicana. Pepsi has also started to emphasize on health and wellness, and has worked to minimize the amount of trans fats in its snack foods. Future earnings growth could also come from synergies associated with the acquisitions of its bottlers, streamlining of operations and cost cutting. The distribution networks of the bottlers acquired could be used to push some of PepsiCo’s non-beverage products such as snacks and other foods. Earnings growth could also come from strategic acquisitions, as well as product innovations in health and wellness food and beverage section. In 2011, PepsiCo acquired the leading Russian food and beverage company Wimm-Bill-Dann (WBD), in an effort to position itself in the growing emerging market in Russia and to build its nutrition business.

PepsiCo is also undergoing a strategic initiative in order to cut costs by $3 billion through 2014. In addition, the company is heavily investing in its brands in North America, by increasing advertising budgets. The company is also increasing prices in its products in order to offset inflation costs. These price hikes could make consumers more resistant to PepsiCo’s products.

The company has a high return on equity, which has remained above 30%, with the exception of a brief decrease in 2005 and 2012. Rather than focus on absolute values for this indicator, I generally want to see at least a stable return on equity over time.

The annual dividend payment has increased by 13.60% per year since 2002. A 14% growth in distributions translates into the dividend payment doubling every five years. If we look at historical data, going as far back as 1965, we see that PepsiCo has actually managed to double its dividend every five years on average. Dividend growth has slowed down over the past few years, mostly due to flat earnings since the end of the financial crisis.

Over the past decade the dividend payout ratio has increased from 30% in 2003 to 54% in 2012.. A lower payout is always a plus, since it leaves room for consistent dividend growth minimizing the impact of short-term fluctuations in earnings.

Currently, PepsiCo is fully valued at 20.70 times earnings, yields 2.70% and has a sustainable dividend payout. In comparison Coca Cola (KO) yields 2.70% and trades at a P/E of 20.90.

Full Disclosure: Long PEP and KO

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Is the Dividend Craze Over?

noreply@blogger.com (D) — Wed, 05 Jun 2013 01:00:00 PDT

I read an article from CNN, which discussed how the dividend craze was likely over. In general, I find articles that describe short-term movements of stock prices, and then adding terms like “dividend craze” to be extremely non-productive for dividend investors. The premise of the article was that some dividend stocks like utilities and consumer staples will have poor reception by investors going forward. Others such as banks and cyclical stocks, could do better as the economy improves. As an investor in the accumulation phase, I put money to work every month, but plan to hold for a few decades. This timeframe would encompass several economic cycles. This is why I have found that the best analysis I could do, is to research quality companies that could generate shareholder wealth for several decades to come, and avoid looking for stocks that can do well only in the current cycle.

I buy the stock in companies, which I believe will manage to increase earnings over time, and as a result they will be able to pay me a consistently higher dividend payment. The stock prices could fluctuate, but unless we get to see crazy valuations like the ones we saw in the early 2000s it makes little sense to sell them. At some point on the valuation scale, it does not make sense to overpay even for the best dividend stocks in the world. The near term drop in prices was probably caused by the fact that many stocks reached the high points of their reasonable valuations. To a long-term investor, entry price does matter, but holding on to a company with improving fundamentals is just as important.

Right now, companies such as Kimberly-Clark (KMB) and Coca-Cola (KO) are slightly overvalued trading above 20 times earnings. These are great companies however, which have sticky products that consumers buy repeatedly. I expect that these companies will keep growing over the next 20 -30 years, and expand their brands globally. At the end of the day, this growth will pay higher dividends for me to live off. This is why I plan on holding on to these stocks, even if they trade slightly above fair value right now.

Of course, if they fail to deliver results and are unable to maintain dividend payments at some point over the next 20 -30 years, I would likely part ways with them. In addition, if I get to situations where companies with high yields and low growth get bid up by the market to very low current yields, it might also be a time to part ways. For example, in March 2013 I sold all of my shares of Universal Health Realty Income Trusts (UHT), because the stock yielded 4%, but was growing distributions at a paltry 1%/year.

As an investor in the accumulation phase, who has to put money to work every month, I would be more than happy to buy quality merchandise at depressed prices. Unfortunately, I doubt that things would get so dire for quality dividend paying stocks. I do agree however, that in order to be successful, one does have to focus on buying the dividend growth stocks that are attractively valued. If I had to choose between Coca-Cola (KO) at 21 times earnings and Chevron (CVX) and 10 times earnings, I would always choose Chevron. This is where I agreed with the CNN article.

The article did mention that one of the likely selling triggers behind dividend stocks over the past two weeks might have been the increase in bond yields, and the expectations of further increases in treasury yields. The article didn't discuss this but at this stage, it still doesn't make much sense to buy bonds, despite the increase in 10 years Treasury yields from 1.50% to 2.20%. This is because long-term investors today who sell dividend stocks and buy bonds yielding 2.20% will likely be sorry in one decade. I could argue that we have a Fixed Income Craze, rather than a dividend craze.

Interest rates could and probably will increase over the next decade, as they are artificially kept low by the FED. However, the increase will likely be gradual over time as it would take a few years before we see the 4%- 5% in ten year treasuries. That means that investors buying Treasuries today are essentially locking themselves up to earn only 2.20% till maturity. If inflation and interest rates increase during that time, they will be worse off in 2023 than today. On the other hand, even if you purchase Coca-Cola (KO) today, chances are that ten years from now you will earn more in dividends, as the company would have higher earnings per share. This will protect the purchasing power of your dividend dollars.

Investors should have some fixed income allocation as part of prudent portfolio management. Right now, it doesn't make sense to add to bonds, but if you purchased them anywhere prior to 2010 for example you should be doing just fine by holding on to your bonds. For your stock allocation, you should be doing just fine holding on to your equities as well, assuming you know what you bought and why you bought it in the first place.

What stocks provide investors with is the potential for rising dividend income over time, which maintains the purchasing power of dividends. Before Wall Street became the casino that it is, where hedge funds and investment banks try to outmaneuver each other in the effort to earn a fraction of a cent per transaction, investors bought stocks for the dividend income. I know that looking for perfection in investing will usually cost a lot in the long-term, which is why I would not sell Coca-Cola (KO) at 21 times earnings, and buy Wells-Fargo (WFC) instead. As a result, I plan on ignoring any mentions of dividend crazes, and hold on to my quality income stocks.

Full Disclosure: Long KMB, KO, CVX, Short WFC Puts

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Why do I analyze dividend stocks that are not buys?

noreply@blogger.com (D) — Tue, 04 Jun 2013 01:00:00 PDT

I have the terrible habit of analyzing companies that I never plan on investing into. That makes many readers furious, and possibly angry enough to stop reading my blog. While I do try to focus on the best dividend stocks in order to generate a rising dividend income for life, I sometimes focus on companies which are not good enough for me. I believe that it is great to learn all there is about the best dividend stocks, how they make money and what gives them competitive advantages. However, I have found that I learn even more about what I want to see in a successful company, by looking at companies that are not very good.

For every dividend growth investor, making money is very important. However, it is equally important that I avoid losing money whenever possible. Losing money on a few investments is bound to happen, as not every dividend stock will perform according to plan. If on average, 30% of the investments I make deliver growing income and total returns in the process, then I will be a happy camper. The rest will be either get acquired, generate slow growth or deteriorate over time and even fail. I am perfectly fine missing out the next McDonald’s (MCD), if that means that I will miss out on the next Enron or Lehman Brothers. The main idea is that in order to win, one has to learn not to lose too much. Another important factor is learning as much as possible about investing and shaping these ideas into a unique strategy that pays dividends.

This thinking was directly plagiarized from Warren Buffett’s famous quote” Rule No.1: Never lose money. Rule No.2: Never forget rule No.1.”

For example, I am not a big fan of technology companies. There are a few such as Intel (INTC) or Microsoft (MSFT), which have raised dividends over the past decade. However, I am not confident about their ability to generate growing earnings to support future dividend increases. These companies have solid competitive advantages today, but given the rapid changes in technology and computing, they could be offering an obsolete product 10 – 15 years down the road. As a rule, I tend to ignore investing in companies which I cannot reasonably foresee selling the same type of product or service in a decade or two. What is really keeping executives at Intel and Microsoft at night is the possibility that a guy is currently working in a garage, creating the next big disruptive technology that could potentially take these firms out of business. I see the risks of some guy in a garage creating the next brand of Tylenol or Gillette shaving products remote, which is why I sleep well at night.

However, I have found that companies that rely on technology to serve their customers and build relationships with them in the process can build long-lasting business relationships with them. This can lead to a strong competitive advantage. A publicly traded company typically keeps its auditors or legal firm for decades. Too bad law and accounting firms are not publicly traded. The firms also use consultants such as IBM (IBM) or Accenture (ACN), which have built a strong relationship with it. Small and Medium Sized companies utilize the service of outside payroll processors such as Automatic Data Processing (ADP) or Paychex (PAYX), which have strong competitive advantages. Companies are less likely to switch to another payroll processor, given the headaches this is associated with. As a result, ADP builds lifetime business relationships, and benefits from decreasing costs in technology and through its scale of operations.

I am also not a big fan of multi-level marketing companies. I analyzed NuSkin Enterprises (NUS) a few weeks ago, and determined that I was unable to see any competitive advantages that it held. This was despite the fact that financials looked very well at a first glance. In my early days of investing, I might have purchased a company’s stock simply because its financials looked good. As I gained more experience however, I have taken a deeper dive into the qualitative side of the business, in order to understand how the company makes money. This is important, because it helps me visualize whether the company can still make money one or two decades from now, and grow profits and dividends in the process.

I was particularly turned off by NuSkin because they had restrictions about selling its products in stores. If you are a business with a legitimate product, you want to be able to sell it in as many venues as possible. If you limit your distributors from displaying products in their stores, this is a red flag that raises questions about the products sold and makes me question the viability of the whole business model. I do like companies like Procter & Gamble (PG) however, which provide a globally diversified portfolio of products to as many customers in the world as possible. Once your consumer start shaving with Gillette products, they would likely continue doing so for decades to come. P&G continuously invests in building the brand, and innovating products to make them better and more profitable.

Full Disclosure: Long ADP, PG, MCD, IBM

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My Dividend Portfolio Looks Much Better than I Expected

noreply@blogger.com (D) — Mon, 03 Jun 2013 01:00:00 PDT

Many of my stocks reached all-time-highs over the past few months. When I purchase my stocks, I usually expect a decent current yield in the 2% – 4%, followed by a P/E of 15 – 20, and a growth in earnings and dividends that averages at least 6%/annually. So far, it has averaged 7% - 10%. As a result, short-term fluctuations in the price of a company which I purchase for say $100/share today which yields 3% and trades at a P/E of 16 would not bother me too much. I would expect such company to realistically trade at about $200/share in a decade or so, still yield approximately 3% and trade at a P/E of about 16. Over that decade, it could trade as high as 25 times earnings and as low as 10 times earnings. The only difference is that its earnings and dividends have doubled over the period. My whole premise of the idea that I won’t sell even at a 1,000% gain is based on this mental model.

Of course, in real life, things never progress in a linear fashion. If you looked at P/E ratios of companies like Wal-Mart (WMT) or Coca-Cola (KO) over the past 10 - 15 years, you would not be surprised to see them over 30 in not one, but at least several occasions. Over the past four years, most of the companies I have usually added to were the likes of Colgate-Palmolive (CL), Johnson & Johnson (JNJ) & Kimberly-Clark (KMB). Right now many of these companies look very overvalued, which is pretty scary. I actually isolated the following companies, whose P/E ratios per Yahoo! Finance exceeded 20. I then excluded MLPs, REITs for whom earnings per share and P/E ratios do not provide comparable results.

Being the lover of annual reports, and digging around data, I went through this list searching for the answer of an obvious question. The question running through my mind was whether it still made sense for me to hold on to these companies. Now, I am not a die-hard buy and hold despite everything type of investor, and a crazy valuation could lead me to sell an otherwise fantastic company. This of course depends on each particular situation. However, I do believe that taking small profits on the few amazing ideas I might be lucky enough to stumble upon in my lifetime would probably be very detrimental to my finances. I could sit-out temporary overvaluations in securities, for which future growth could compensate me well for holding on during a moderate level of craziness. Craziness for a company like Brown-Forman (BF-B) could be a P/E above 30, whereas for a company like Con Edison (ED), craziness could be anything above 18 – 20 times earnings.

However, in my studies of investing, I have learned to dig for information. Most of the information on earnings per share from sources like Yahoo! Finance might be abnormally low, because certain one-time adjustments have reduced it. My next step would be to look at analyst estimates for the current year and the next one, coupled with digging around press releases from the company, in order to evaluate whether those estimates have any merit.

Just by looking at P/E ratios, the stocks in the table look very overvalued. However, if you look at forward earnings, only a couple of those look somewhat overvalued.

For example, looking at Johnson & Johnson (JNJ), it looks terribly overvalued at 23 times earnings. However, by applying forward EPS of $5.41/share, the stock looks much more reasonably priced. While not included on this table, Kimberly-Clark (KMB) looks expensive at 21.06 times earnings and EPS of $4.60. But based on 2013 forward earnings of $5.73/share, it looks cheap at 16.90 times forward earnings. Of course, if analysts are overly optimistic on this company and actual earnings are significantly less, then Johnson & Johnson would be overpriced today.

For those companies that still look overvalued, I am going another step. I estimate what the company is going to earn in a decade, then estimate the total in dividends I will receive over the next decade and then slap a P/E multiple for this time in 2023. My estimates are conservative in regards to growth, although not as conservative in regards to multiples.

For example, Brown-Forman (BF-B) is expected to earn $2.70 in 2013. I believe that by 2023, it could easily earn $6/share and trade at a P/E of 20. In addition, I would expect that Brown-Forman would pay its shareholders approximately $20 -$25/share over the next decade. This means that investors paying $70/share today, might end up doubling their money in a decade. This translates into a return of approximately 7%/year. Those of you reading this article in 2023 would likely use this article as an example of why people should never make predictions. Either way, it is my best case based upon widely available information on consumption on liquor worldwide, historical growth rates, and assumptions for the future revenues, earnings and dividends.

For Automated Data Processing (ADP), I like the fact that it offers business services such as payroll processing to small and medium sized businesses. These businesses outsource certain functions like payroll to ADP, which benefits from scale of transactions processing, constant improvement in technology and depreciation in technology equipment prices. But most importantly, ADP benefits from building and maintain relationships with businesses, which would be less likely to switch processors just to save a few bucks. Over the past decade, EPS grew by 5%/year. If we project this growth forward, this means ADP would likely earn $4.82/share in 2023, which at a P/E of 20 translates into $96.40/share. If dividends also grow at 5%/year, this means that an investor can expect to receive $23 in dividends over the next decade. This translates into a total return of about 6%/year. Check my analysis of ADP.

I purchased Visa (V) in 2011, because I liked the story about credit card processing business, the fact that there are only two major companies in the game, and the opportunity behind growth of cashless transactions worldwide. These were the reasons why I initiated a position in the stock despite the fact that the company has only been publicly traded since 2008. I expect Visa to either double or triple earnings per share over the next decade. This could translate in EPS ranging from $15 to $20 by 2023. At a P/E of 20, this translates into $300 - $400/share. I expect dividends to increase at the high end of these projections, and triple by 2023. Thus, I wouldn’t be surprised if Visa shareholders receive about $25 in dividends over the next decade, with annual dividends reaching $4/share that year.

The return assumptions for the three stocks above, ignore dividend reinvestment, which would likely increase the annual returns slightly.

Nucor (NUE) is the odd one out, as it is a cyclical stock. The demand for steel fluctuates with the cycles in the economy, meaning that profits and revenues are highest at the peak of the cycle, and very depressed at the trough. This is why cyclical companies usually appear overvalued when their stock prices are low, and cheap when their prices are high. During the last boom, Nucor earned $5.98/share in 2008. In addition, the company kept raising its regular dividend even during the lean years after that. The thing that appeals to me is the fact that during the boom years through 2007 – 2008, Nucor paid special dividends every quarter to shareholders. Management was smart enough to realize that this boom in profits would likely be a short term event, yet they still wanted to keep the streak of dividend increases going, and reward long-term shareholders as well. This is why if you simply look at trends in dividends per share, you might see a decrease in 2008. However, the regular dividend amount was never cut, but actually increased. If the US economy keeps expanding, we might see growth in earnings per share, and a lot of special dividends from Nucor. This is the one stock where I cannot provide a ten year guidance of earnings and dividends, but would likely hold on to either way. You get a stable and slowly rising dividend payment, plus a “lottery type” opportunity for special dividends when times are really good. Check my analysis of Nucor.

As a long-term investor, my holding period is in years for some stocks that don’t work out as well, to decades for the ones that keep delivering results over and over again. As such, it was helpful for me to go over my positions above. Overall, when I looked at what seemed to be the most overvalued stocks in my portfolios, I found out that there is nothing to be scared about. Some of the valuations were high either because of one-time events depressing earnings per share, and in those situations forward earnings per share showed a more reasonable valuation. In other scenarios, I reassessed the reason as to why I held on to certain stocks, and whether it still made sense to hold on to them.

Full Disclosure: Long D,V, NUE,TFX, BF-B,K,LOW,CL, EV, ADP, JNJ, YUM, ED, KMB,

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Johnson & Johnson (JNJ) - A must own dividend stock

noreply@blogger.com (D) — Fri, 31 May 2013 01:00:00 PDT

Johnson & Johnson (JNJ) engages in the research and development, manufacture, and sale of various products in the health care field worldwide. The company operates in three segments: Consumer, Pharmaceutical, and Medical Devices and Diagnostics. This dividend aristocrat has paid uninterrupted dividends on its common stock since 1944 and increased payments to common shareholders every for 51 consecutive years. There are only fifteen companies in the US which have managed to raise distributions for more than half a century each.

The company’s last dividend increase was in April 2013, when the Board of Directors approved an 8.20% increase to 66 cents/share. Johnson & Johnson's major competitors include Pfizer (PFE), Bristol Myers Squibb (BMY) and Novartis (NVS).

Over the past decade this dividend growth stock has delivered an annualized total return of 6% to its shareholders.

The company has managed to deliver a 5.40% annual increase in EPS since 2003. Analysts expect Johnson & Johnson to earn $5.41 per share in 2013 and $5.78 per share in 2013. In comparison Johnson & Johnson earned $3.86 /share in 2012. The amount was lower due to one-time accounting charges against net income. The company has managed to consistently repurchase 1.10% of its outstanding shares on average in each year over the past decade.

Johnson & Johnson has a diversified product line across medical devices, consumer products and drugs, which should serve it well in the future. This makes the company largely immune from economic cycles. In addition, the company has strong competitive advantages due to its scale, breadth of product offerings in its global distributions channels, continued investment in R&D as well as its stable financial position. In addition to that Johnson & Johnson is expanding into new long term opportunities through strategic acquisitions. Emerging market growth and opportunities for cost restructurings should further help the company in squeezing out extra profits in the long run. Sales in drugs like Simponi, Stelara, Zytiga, Edurant, Incivek, Xaralto and Prezista should more than offset the generic erosion from older drugs which are losing their patent protection. The acquisition of Synthes, which was completed in 2012, is expected to generate significant synergies for Johnson & Johnson.

The company’s return on equity has declined from 30% to 18% over the past decade. Rather than focus on absolute values for this indicator, I generally want to see at least a stable return on equity over time.

The annual dividend payment has increased by 11.70% per year over the past decade, which is higher than to the growth in EPS.

A 12% growth in distributions translates into the dividend payment doubling every six years. If we look at historical data, going as far back as 1972 we see that Johnson & Johnson has actually managed to double its dividend every five years on average.

The dividend payout ratio has increased from 38% in 2003 to 62% in 2012. This was caused by one-time charges against net income. The payout ratio based on forward EPS is standing at 45%. A lower payout is always a plus, since it leaves room for consistent dividend growth minimizing the impact of short-term fluctuations in earnings.

Currently Johnson & Johnson is attractively valued at 14.60 times forward 2013 earnings, has a sustainable dividend payout and yields 3%. I recently added to my position in Johnson & Johnson.

Full Disclosure: Long JNJ

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How Warren Buffett made his fortune

noreply@blogger.com (D) — Wed, 29 May 2013 01:00:00 PDT

Most investors are familiar with Warren Buffet, who is the man in command at Berkshire Hathaway (BRK.B). Buffett is one of the most successful investors of all time, with a net worth placing him somewhere in the top three richest people in the world. His partner in crime was Charlie Munger, who has worked with him for the past 50 years. While most investors are familiar with the story of Berkshire Hathaway, few seem to know how exactly Buffett made his first millions, that catapulted him to Berkshire Hathaway and the companies and stocks he owns through it.

Buffett started several investment partnerships in 1956 with approximately $105,000 in investor money, after his former employer Graham-Newmann investment partnership was liquidated. Buffett had put an initial $700 of his own money, which ballooned to a stake worth $20 million by the time he liquidated his investment partnership in 1969. The assets under managed had grown to $100 million by that time. The Berkshire Hathaway (BRK.A) annual letters to investors have been inspired by Buffett’s annual and semi-annual letters to his limited partners.

Per the Buffett Partners agreement, Buffett as the General Partner received a cut of the profits. For every percentage point gain above 6% in a given year, Buffett collected 25% of the gains. The Buffett Partnership Limited (BPL) was essentially a hedge fund, which pooled investor’s money and invested them at the discretion of the fund manager. Buffett never had a losing year during the thirteen years he ran the partnership, and he also managed to add new investors along the way. In addition, he reinvested any gains he made as a general partner back into the partnership.

Buffett invested in the following types of companies at the partnership: generally undervalued securities, work-outs and control situations. Work-outs included stocks whose financial results depend on corporate actions rather than supply and demand factors created by buyers and sellers. Control situations include occasions where BPL either controlled the company or took a sufficiently large position that allowed it to influence policies of the company.

After the BPL was liquidated, Buffett received shares in Berkshire Hathaway, as well as shares in companies which ultimately merged in Berkshire. And the rest is history.

The lesson to be learned from this exercise is that in order to become rich, Warren Buffett had a scalable business model, with a substantial amount of leverage. Unfortunately, BPL was mostly a one-man operation, although the turnaround expert he employed with Dempster Mill Manufacturing company is a rare situation where he employed others. He did exchange ideas with several of his value investing friends however. Buffett’s investment model worked well when he had $100,000 in the partnership, as well as during the time that he had $100 million. The overvalued market in the late 1960’s however presented a change to his investment strategy. Buffett had leverage to make a lot of money, simply by being the general partner and earning a good cut on any earnings that the partnership generated, without much downside for himself. On the other hand, Charlie Munger made his initial million by using debt leverage to invest and build real estate.

The true genius of Buffett is his complete transformation in the 1970’s, when he started purchasing stock in companies with strong competitive advantages. He essentially held those stocks as long-term investments, and in the event where Berkshire acquired entire businesses, he delegated the whole oversight of day to day operations to skilled management. The companies he invested in the 1950’s and 1960’s represented mostly investments that were one-time producers of substantial gains for BPL. It took Buffett a lot of time to uncover those opportunities, but once they reached full valuation and he sold them, they were no longer producing any benefit for his partnership. He then had to spend more time to find more investments to allocate the now higher cash hoard. However, the companies and securities that Buffett purchased since the 1970’s for Berkshire Hathaway generate recurring cash flow streams to the company. As a result, the effort required to uncover these hidden gems resulted in cash distributions paid to the main holding company for decades. He then used these cash streams to purchase even more cash flow generating assets, which is why I believe that he is a closet dividend investor.

The genius of Buffett is that he has been able to uncover undervalued assets, over many different asset classes. Examples include his purchase of silver (SLV) in 1998, real estate investment trusts in 1999, foreign currencies such as the Euro in the early 2000's as well as selling long-dated puts on major market indices. While he has a strategy of always looking for undervalued assets, he has been able to make a fortune for Berkshire by being flexible, and avoiding following a "rigid" strategy. By training himself to spot opportunities when they arose, he has been able to constantly reinvent himself and make money in different environments.

Full Disclosure: None

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This article was included in the Carnival of Wealth

Are dividend investors concentrating too much on consumer staples?

noreply@blogger.com (D) — Tue, 28 May 2013 01:00:00 PDT

In my dividend investing I focus a lot on diversification. Proper diversification means that an investor owns at least 30 individual stocks, representative of as many of the ten Standard and Poors sectors as possible. Proper diversification also means that investors do not simply purchase stocks in order to diversify their risk however. It means to invest in a diverse number of businesses with favorable economics, which are attractively priced and which also have bright long term prospects. Proper diversification will add an extra layer of protection for an investor’s portfolio when unforeseen events such as financial crises, oil spills and lawsuits affect otherwise stable and profitable dividend paying stocks.

In the world of dividend investing, many claim to be excellent stock pickers, trying to maximize returns by betting on a concentrated portfolio of 10 – 15 stocks. After all, it is easier to find 10 great dividend stocks, than finding 30 or more of them. This sounds like a decent plan if you are already collecting a generous pension and have a decent amount of social security kicking in. Such investors could likely afford to build a concentrated dividend portfolio, and take huge risks in the process. Even if you do a fantastic research, and know the company and industry inside out, you can still lose money on a stock. In general, all the information you have about a stock is based on past data and assumptions based on it. While companies like Coca-Cola (KO) and McDonald’s (MCD) look like long-term winners for the next 30 years, I could see several scenarios where they could go to zero in the process. That being said, this does not mean that they will go to zero, but just that investors might have to regularly monitor the positions in their portfolios. I also believe that investors should not only focus on quality regardless at price. Instead, investors should focus on finding quality stocks at a reasonable price.

If I were to decide between purchasing shares of Coca-Cola (KO) trading at 22 times earnings or Chevron (CVX) at 9.50 times, I would likely choose Chevron. I will still hold on to Coca-Cola for decades, but for new money, I would choose Chevron. Some attractive companies in other sectors include:

Air Products & Chemicals (APD) is a stock in the materials sector, which has boosted dividends for 31 years in a row. This dividend champion company trades at 16.80 times earnings, and yields 3%. Check my analysis of Air Products & Chemicals.

Chevron (CVX) is a stock in the energy sector, which has boosted dividends for 26 years in a row. This dividend champion trades at 9.50 times earnings, and yields 3.20%. Check my analysis of Chevron.

United Technologies (UTX) is a stock in the industrials sector, which has boosted dividends for 19 years in a row. This dividend achiever company trades at 14.20 times earnings, and yields 2.20%. Check my analysis of United Technologies.

Aflac (AFL) is a stock in the financial sector, which has boosted dividends for 30 years in a row. This dividend champion trades at 8.70 times earnings, and yields 2.50%. Check my analysis of Aflac.

One of my favorite reasons and examples on why dividend investors should hold a diversified portfolio is the Financial Crisis of 2007 – 2009. For several decades before that, investors in stable companies such as Bank of America (BAC) collected higher dividends, while also enjoying above average dividend yields.

The current rage is all about consumer staples. While I enjoy the stable nature of many consumer staples companies such as Procter & Gamble (PG) and Coca-Cola (KO), I do not want to place all of my bets on a single sector. It is true that consumers tend to purchase Gillette razors, shaving cream, Coca-Cola drinks repeatedly and they also tend to stick to the products they use for years. However, if companies make a few wrong moves such as making the wrong acquisition and taking on too much debt, not investing enough in the business or simply if company’s products are deemed to be unhealthy for the population, they could lose money and cut the dividends.

When analyzing my portfolio, I noted that Consumer Staples accounted for 36% of it, while Energy, Financials and Healthcare accounted for 22%, 12% and 11% respectively. After that I have exposure to five sectors, which accounts for a whopping 19% of my portfolio. These sectors include Industrials, Consumer Discretionary, Information Technology, Materials and Utilities. Unlike most other dividend investors, I do not have much exposure to US telecom stocks, since I find their dividend payouts to be too high in general, and thus I do not trust the dividend yields. In addition, I doubt that long-term dividend growth will be more than 3%/year for the largest players such as Verizon (VZ) and AT&T (T). I do have exposure to Vodafone (VOD) however, which accounts for less than 0.60% of my portfolios.

Just because I am underweight Utilities does not mean that I will load up so that I increase my exposure. The stocks in my portfolio are geared towards paying a decent dividend today, with the potential for growing it over time, while potentially delivering strong total returns in the process. Most utilities pay high current yields, but have limited prospects for increasing earnings and dividends over time. In fact, many utilities are actually prone to cutting distributions to income investors.

Full Disclosure: Long KO, APD, UTX, PG, AFL, VOD, MCD, CVX

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Best Income Investing Articles for May 2013

noreply@blogger.com (D) — Sat, 25 May 2013 01:00:00 PDT

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 several months include:

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.

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Best Brokerage Accounts for Dividend Investors

noreply@blogger.com (D) — Fri, 24 May 2013 01:00:00 PDT

When I first started dividend investing, I was looking for the lowest commission possible. I ignored any other features of a stock brokerage, since I viewed the brokerage industry as one that provides a commoditized service. Back in 2008 – 2010 I was a big fan of Zecco, mostly for their free trades. Since then I have branched out to other brokers. Before I was a dividend investor, my investing was concentrated on buying mutual funds in a 401 (k).

The chart above summarizes brokers I have personally invested through since I started my site to document my dividend investing journey. In addition, the information above is not intended to be complete in any means. I have rated the brokers above based on my experience with them, with Schwab being the best, while Sogotrade having room for improvement. Sogotrade charges $5 for trades, but $3/trade if you prepay. The chart shows the commissions for each broker for stock trades, and assumes an individual investor does less than 10 trades/month. It also lists the minimum amounts an investor needs to deposit, in order to open a cash account. The next column shows whether the broker offers dividend reinvestment of partial shares. Tradeking does allow dividend reinvestment per my experience, but not for partial shares. The next to last column shows the length of time that trade history and trade statements are available to the customer. In some cases, the trade history is limited to my own experience with the broker. In other cases, this is based on information available on the broker website. The last column shows that none of the brokers had any inactivity fees at the time I wrote this article.

The story below discusses my experiences with brokers, which could be different than your experience.

I believe that brokers should offer a commission that provides value to customers and also a decent rate of return to the brokerage company itself. A low commission is typically associated with rudimentary platforms which could be very confusing to the investor. Of course, if you are an experienced investor who knows what they need and doesn’t need much hand holding, then you should do fine with simply the lowest cost broker. However, when something goes wrong, and it usually will, you will start regretting your decision.

My experience with Zecco was positive for a few years, while they were offering 10 free trades for accounts whose balance exceeded $2,500. Initially, back in 2006, Zecco offered 40 commission free trades to all customers. In 2009 Zecco changed its rules once again and only provided ten free trades to customers with account balances that exceed $25,000. In 2010, Zecco eliminated commission free trades for everyone except traders who made 25 trades/month. In the meantime, I had a few other brokerage accounts, but was considering Zecco to be my primary individual brokerage account. Then Zecco started going through platform upgrades and changed their clearing firm. In addition, Zecco never offered automatic dividend reinvestment that allowed your investments to compound. This was never an issue for me, since I like to accumulate my dividends and new funds, before I buy a security. The only problems that I had were with companies that were paying 5% stock dividends or companies like Kinder Morgan LLC (KMR) which paid distributions in fractional shares. Zecco used to provide these distributions in cash, thus creating a taxable event and negating any long-term compounding of my investments.

In the meantime, a lot of Zecco investors were unhappy with their platform, because it often crashed during periods of extreme market volatility. Back in late 2008, there were several times when I was unable to log into my Zecco account to place a trade. I was also unable to log into my Zecco account during the May 6, 2010 flash crash. I was able to log into my Schwab account however on both occasions. When Zecco upgraded platforms and changed clearing firms, this created some issues for me. Actually, this created a lot of headaches for me, because some of the shares I owned like Royal Dutch Shell (RDS/B), Brown-Forman (BF/B) and Nestle (NSRGY) were either not showing in my account, or had an incorrect symbol and the position amount was zero. It is a scary feeling to wake up and see that your equity holdings are not correct or simply not there.

A few months ago, Zecco merged with Tradeking. I was afraid that I would still have issues, but luckily this never materialized. The main issue with the merger was that I lost the ability to pull from the broker website all my historical account statements and all historical activity going back to when I first opened the account. Luckily, I keep good records, and have all of this information at my fingertips. However, it is important for long-term investors to choose a brokerage that provides you with all your account activity detail going as far back as possible. Otherwise, when you sell a stock that you have held for 20 or 30 years, figuring out your tax basis would be a nightmare. Tradeking does offer dividend reinvestment, but as I mentioned earlier, I typically reinvest dividends selectively.

As a result, I started adding all new funds to SogoTrade. I kept adding funds, until they made another change in their platform when they were purchased by Wang Investments in 2011. This change did not allow me to log in to my account for a day or two. After that, I was unable to withdraw funds easily. The process is still very cumbersome and one has to enter their account number twice, after they have logged on to the platform, in order to request an ACH transfer. In addition, changing your address is a very difficult thing to accomplish with Sogotrade. It requires you to download a form, fill it out, and then fax or email it to them. If you fax it to them, you run the risk of Sogotrade losing it, which is why it is best to email it. At $3/trade however up until early 2013, you could hardly beat them. Sogotrade does not offer fractional dividend reinvestment, but keeps all monthly statements going as far back as possible. A few weeks ago however, they raised their prices to $5/trade, although investors who pre-pay for trades could still end up paying as little as $3/trade.

For a new investor, I would consider Sharebuilder. They offer $4 trades if it is scheduled on a Tuesday. Sharebuilder provides free dividend reinvestment, fractional shares and offers historical records. Real-time trades used to cost $9.99, although this amount has decreased recently to $6.95/trade. My main problem with Sharebuilder was the fact that commissions were too high for real-time trades, and I didn’t want to be restricted to only trading on Tuesdays in order to get the low commission. Going forward however, I don’t see myself using this broker more actively, since I have invested the maximum I have set out to invest per brokerage. Sharebuilder is ideal for someone who is just starting out dividend investing however.

Since my falling out with Zecco and Sogotrade, I have been adding new funds to Schwab. I still kept the old investments in the old brokerage accounts, but since I have new money coming it, that needs to be invested every month, I had to find a reputable broker. I like Schwab because they offer everything an investor can want, including research, a wealth of information, account records, dividend reinvestment and their customer service is very good. However, you do pay a high commission for this privilege. I do like the fact that Schwab is a publicly traded company, and that I can analyze its financials and monitor it closely. With Tradeking, Zecco and Sogotrade, I have no idea whether the companies are on the verge of bankruptcy. I also have an E*TRADE account, which provides a similar level of service as Schwab, but at slightly higher commission prices. I have mitigated the high commissions at Schwab by increasing my purchase or lot size per investment. If I bought shares in $1000 increments at Tradeking or Sogotrade, I now buy stocks in $2000 increments at Schwab.

As I discussed in an earlier article, I try not to invest more than $100,000 per brokerage, in order to add an extra layer of diversification to protect me against broker failures. While brokerage accounts are insured by SIPC up to $500,000, and most brokers also carry additional umbrella insurance, I find having multiple accounts helpful in case assets are frozen due to broker collapsing. Even if your money is SIPC insured, it could still take months before the money is recovered or available. If all of your funds are concentrated in one broker, you might be in a situation where you have a sufficient dividend income to pay your expenses, but you are unable to tap it because your broker failed.

Having many brokerage accounts is not too cumbersome. As a buy and hold dividend investor, I simply add up the total dividend income at tax time. I also try to keep certain securities such as MLPs and REITs in one specific account, in order to make it easier at tax time.

To summarize, while low commissions are important, they should not be the only factor in determining which brokerage to choose. Important factors include providing sufficient data support that would be beneficial during tax time, historical records, as well as a platform that is intuitive and easy to use. Automatic dividend reinvestment is an important feature as well, as is the ability to monitor your broker financial performance. As a result, I believe that Sharebuilder and Schwab are be the best brokers for dividend investors.

Full Disclosure: Long KMR

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Not all P/E ratios are created equal

noreply@blogger.com (D) — Wed, 22 May 2013 01:00:00 PDT

My favorite companies to invest in are those that have strong competitive advantages, which allow them to have an easily distinguishable product or service. This allows companies to have pricing power. This pricing power comes from the strong brand name associated with the product, and it allows the business to earn high returns on equity, and pass on cost increases to customers. This translates into solid profitability, which enables the business to increase dividends to shareholders over time.

I try to buy stock in great businesses only at attractive valuations. For me this entails a P/E that is lower than 20, an adequate dividend yield, a history of consistent dividend growth and an adequately covered dividend. In the current market environment, most stable businesses are trading at the higher end of what I am willing to pay for. I am planning on holding on to these cash machines, as I expect them to pay much higher distributions and earn much more ten, twenty or thirty years down the road.

However, I am also considering selling a few of those businesses if they trade above 30 times earnings. Brown-Forman (BF-B), Kimberly-Clark (KMB) and Colgate-Palmolive (CL) are a few businesses that would be overvalued at 30 times earnings. Currently these businesses trade at 26.90, 22.60 and 25.50 times earnings. All of these companies have strong brand names, and solid and dependable cash flows, that will only be increasing for the next 20 – 30 years. However, as I like being prepared in deploying cash from stocks I have sold, I have been researching attractive candidates for reinvestment.

I have been able to find plenty of companies with low P/E ratios, which could be fine investments for new capital. However, I am not so certain whether many of these investments have the same characteristics as the ones I am considering selling.

Many of these companies are cyclicals. Their fortunes rise and fall with the economy. Examples include companies such as BHP Billiton (BBL), Caterpillar (CAT), Exxon Mobil (XOM). BHP Billiton trades at 16.50 times earnings, Caterpillar trades at 12.10 times earnings, while Exxon Mobil trades at 9.30 times earnings. If the economy goes through another recession like the one we experienced in 2008 – 2009, commodity prices will plummet, which would depress earnings for commodity producers. It could also negatively affect the three companies mentioned above. Another sector that is somewhat cyclical is the financial one, as recessions could lead to losses in loan portfolios, when borrowers lose their jobs during the downturn.

As a result, one cannot compare the low P/E ratio of a cyclical company such as BHP Biliton to the high P/E ratio to a consumer staple such as Procter & Gamble (PG) or Colgate-Palmolive (CL). The earnings per share of a cyclical company might fall by 50% during the next recession, whereas the earnings per share of a company like Procter & Gamble might stay flat or even increase.

For example, between 2008 and 2009, EPS for Exxon Mobil fell from $8.69/share to $3.98/share, before recovering to $9.70 by 2012. EPS for BHP Billiton fell from $5.50 to $2.11 during the same period, until reaching out $5.77 in 2012. At the same time, Procter & Gamble’s (PG) earnings went from $3.64/share to $4.26/share. From there on they decreased to $3.66 by 2012, although this could be due to one-time items.

Investors should also avoid purchasing shares in companies whose P/E ratios are low today, but which might have issues in maintaining profitability ten years down the road. For example, many technology companies such as Intel (INTC) and Microsoft (MSFT) appear cheap today at 12.10 and 16.70 times earnings. However, if Intel fails to grow earnings over the next decade, the only returns for enterprising income investors might be derived from a flat dividend. If these companies fail to adapt to the ever changing world of technology, where paradigm shifts are the norm every five years or so, their earnings stream might be much lower over time. This could even pose problems for the future stability in dividend payments.

The purpose of this exercise is not to show that Exxon Mobil, Intel and BHP Billiton are bad investments today. The purpose is to show that investors cannot compare P/E ratios in vacuum between sectors. Purchasing a stock at a low P/E ratio is a winning proposition if earnings do not fall during the lifespan of your investment, but increase over time. If earnings fall by 50%, a company that looked cheap at a P/E of 15 might become overvalued all of a sudden.

It is also important to understand the company one is purchasing, how they generate their money, do they have any advantages, and analyze the trends in earnings per share, dividends per share, revenues and Returns on Equity over the past 10 years. I am considering to slowly start accumulating cash in my portfolios as the market continues going higher. However, I might consider adding to some cyclical names such as the oil majors if markets behave like they did in 1995.

That is why selling overvalued companies like Brown-Forman (BF-B) is so tough, and i have been dragging my feet doing it. I see Brown-Forman as a company capable of earning at least $6/share in 2023, and worth $120/share then. I also believe that I would earn close to $20 - $25/share in dividends from the company over the next decade.

Full Disclosure: Long BF-B, CL, KMB,

Relevant Articles:

- Strong Brands Grow Dividends
- Replacing appreciated investments with higher yielding stocks
- Attractively valued dividend stocks to consider today
- Why would I not sell dividend stocks even after a 1000%. gain?
- Seven wide-moat dividends stocks to consider

Are we in a REIT bubble?

noreply@blogger.com (D) — Tue, 21 May 2013 01:00:00 PDT

Low rates have made investors hungry for yield. As a result, traditional higher yielding investments such as utilities and real estate investment trusts are getting bid up by investors. If this madness continues, the possibility that many investors will get burned down the road increases exponentially.

Real estate investment trusts (REIT) are required by law to distribute at least 90% of their taxable income to shareholders. The REITs I own typically distribute somewhere close to 80 – 90% of their Funds From Operations (FFO) to shareholders. FFO is a commonly accepted tool to measure profitability for REITs, and is a more accurate indicator than earnings per share. FFO adds back for certain non-cash items such as depreciation, in order to determine the amount of profits that are available. Most REITs that I follow tend to have a FFO payout ratio between 80% - 90%. I own shares of Realty Income (O), Omega Healthcare Investors (OHI), Digital Realty Trust (DLR) and American Realty Capital Properties (ARCP).

As a result, I find it safe to assume that for REITs a low yield usually shows a stock that is overvalued, whereas a higher yield usually shows an attractively valued stock. I define a low yielding REIT in the current environment as a REITs that yields somewhere close to 4% or lower. A higher yielding REIT is one that yields at least 5%. This generalization only includes REITs whose primary business is to own physical real estate.

Some investors believe that current lower than historical yields on REITs are justified by record low interest rates. For example, yields on US 30 year Treasuries are close to 3%. These investors believe that today is the new normal, as low interest rates justify REIT valuations. The mentality that the this time it’s different might be costly to your portfolio.

Investors who purchase a REIT yielding 3% are generally receiving 80 – 90% of cashflows. In contrast, an investor in a typical dividend champion such as Procter & Gamble (PG) or Johnson & Johnson (JNJ) who gets a 3% yield today also gets a 5%- 6% earnings yield.

Even in the current environment however, there are reasonably priced opportunities for investors who are on the lookout for bargains. I have been able to use the weakness in Digital Realty Trust (DLR) to acquire a decent position in the stock. In addition, the following low yielding REITs seem to have very low FFO payout ratios:

Low yields could be justified by the expectation for higher distribution growth down the road. If your REIT slashed distributions to the bone during the 2007 – 2009 recession, they could not yield much today, but could have the potential to yield twice as much in a few years. In addition, REITs in different sectors have different yields. A healthcare REIT that might be overvalued at a yield of 4%, even though a 4% yield would be considered fair for other types of REITs.

Many REITs are able to sell ten year bonds at yields as low as 3-4%. They have particularly benefited from falling interest rates in the past five years. If you re-finance debt that used to cost 6%-7% with debt that costs half of that, the FFO bottom line will be instantly improved. However, the problem that REITs might get to in a decade is if interest rates are substantially higher than interest rates today. Many investors believe that rates will go up, which could be costly to real estate trusts that want to refinance debt a decade from now.

Another risk that we might see is if REITs bid up assets they purchase to yield below 6-7 percent. If the low cost of capital drives REITs to compete aggressively for new assets to purchase, without any regards to quality or future possibilities, this could spell disaster for REIT investors. If rates increase over next decade, this could result in reductions in FFO. This could mean trouble for REIT investors one decade down the road - low property returns relative to high interest rates in 10 years. The mitigating factor here is that interest rates might increase gradually, once they start increasing in 2- 3 years. As a result, REITs will have plenty of time to adjust their debt costs. In addition, many REITs would be able to raise rents if inflation increases alongside with interest rates.

In my personal portfolio, I have replaced National Retail Properties (NNN) with American Realty Capital Properties (ARCP). Check my analysis of National Retail Properties. I used the fact that investors pushed yields on National Retail Properties below 4% to exit my position. I did not like the slow growth in FFO/share, as well as the slow growth in distributions. The slow growth over the past decade did not justify current valuations. Buying National Retail Properties was justified up until 2010, after which I simply held on and cashed the dividends along the way. In all reality, this REIT could probably go as high as yielding 3%, which translates to $52/share.

Based on FFO/share of $1.77 and annualized dividend of $1.58/share, the forward FFO payout for National Retail Properties comes out to roughly 89%, which is rather high. For American Realty Capital Properties, FFO is expected to be in the range of 91 - 95 cents/share in 2013, and $1.06 - $1.10 share by 2014. The annual dividend is 91 cents/share, which could make up for a forward FFO Payout of 95.80 - 100% in 2013. It looks high, but in reality the company just recently completed the acquisition of American Realty Capital Trust III, which will probably distort how financials look like this year.

I liked the fact that American Realty Capital Properties (ARCP) is a REIT that is trying to make strategic accretive acquisitions in order to expand and increase FFO/share. I view ARCP as a company that could potentially become the next Realty Income (O). Since this REIT has only been publicly traded for less than 2 years, it trades at a premium to more established REITs such as Realty Income (O) and National Retail Properties (NNN).

I also put Realty Income (O) on my watchlist for potential trimming of my position there. I believe that Realty Income is a fine buy at 43/share, which translates to a 5% yield. However, if it trades above 54 it is richly valued. At current valuations, I will consider selling some at the $62-$72/share zone. This is equivalent to a yield of 3% - 3.50%. In the meantime, I will be sitting tight and reinvesting my dividends in other stocks.

I do like the fact that the REIT has managed to maintain and grow distributions. I also like the diversified nature of the tenant base, and stability and quality of cash flows. I believe that Realty Income is the Coca-Cola of REITs, but at yields below 4% it looks overvalued. At yields below 3.50% I am going to start trimming my position in it. My last purchase was in 2011, when my entry yield of 5% made me afraid that I am purchasing at the top. The REIT has managed to boost FFO substantially since then, which is why a valuation in the low 40s is fair.

Full Disclosure: Long O, DLR, ARCP, OHI

Relevant Articles:

- National Retail Properties (NNN) Dividend Stock Analysis
- Five Things to Look For in a Real Estate Investment Trusts
- The Case for owning Digital Realty Trust (DLR): When Hedge Funds Don't Know What They Are Talking About
- Realty Income (O) – The Monthly Dividend Company

Clorox Hikes Dividends, but is it a buy at current levels?

noreply@blogger.com (D) — Mon, 20 May 2013 01:00:00 PDT

One aspect of dividend investing that is very appealing to me is the consistency of dividend increases for many of the dividend champions I own. I realize how I take these raises for granted, in the rare event when a stock I own freezes or cuts distributions.

Over the past week, Clorox (CLX) boosted dividends by 10.90% to 71 cents/share. This marked the 36th consecutive annual dividend increase for this dividend champion. Between 2002 and 2012, annual dividends have increased by 11.30% per year. Earnings per share increased by 11.60%/year. Check my analysis of Clorox.

The current yield increased to 3.20%, which is higher than the 2.88% which 30 year US Treasury Bonds offer right now. An investor in a company like Clorox today will likely earn much more in income over the next 30 years, compared to a 30 year US Treasury Bond. As a result, fixed income allocation might not make sense for investors who look for current income. This would be driven by increases in profits over time, which would likely also result in much higher stock prices. If we experience an annual inflation of 3% over the next 30 years, an investment in Clorox with its rising dividends would essentially provide shareholders with a source of income that is relatively protected against inflation.

It is no surprise that investors are rushing to purchase quality dividend stocks right now, which is pushing valuations to overvalued levels.

The average estimate for 2013 earnings per share for Clorox is $4.30. The estimate for 2014 is $4.63. Based on these estimates however, I would not think it is reasonable to pay more than $86/share. For those investors who have owned Clorox for several years, such as myself however, holding on to this fine consumer goods company is a very good idea that will pay dividends for a long time. In the company’s Centennial Strategy, it targets 3 – 5% revenue growth, and profits above the rate of revenue growth. Given the company’s propensity to repurchase shares, I could easily see earnings per share growth in the high single digits for the foreseeable future. Given that the international segment is only approximately 20% of sales, I see this as a growth opportunity to expand the brand further outside the US.

One concerning factor is the high dividend payout ratio of 66% for 2013. If we use 2014 forward earnings however, the dividend payout falls to 61%, which is borderline high.

Over the past 30 years, investors in Clorox have done very well. The key to success had been investing at P/E ratios below 20, and holding on the position. Selling even after gains of 1000% would have been a mistake, as the company kept earning more income and kept raising dividends. While the next 30 years might not look the same as the past 30 years, this chart illustrates the power of selecting just a few quality stocks like Clorox for your dividend portfolio and then holding them for as long as possible. The data for 2013 assumes two payments at the new rate and two dividend payments at the old rate; it also assumes forward EPS projections for 2013 fiscal year.

Full Disclosure: Long CLX

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- Dividend Champions - The Best List for Dividend Investors
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- Why would I not sell dividend stocks even after a 1000% gain

Should you invest in Wells Fargo (WFC)?

noreply@blogger.com (D) — Fri, 17 May 2013 01:00:00 PDT

In order to identify attractively valued dividend stocks, I follow a monthly screening process, where I go through the list of dividend champions and dividend achievers to look for bargains. In addition, I often stumble upon quality income stocks during my review of the dividend raises for the week or on an ad hoc basis through interactions with other dividend investors.

Some investors that I know have been purchasing Wells Fargo (WFC), which is one of the best run large banks in the country. The most prominent buyer of Wells Fargo is Warren Buffett, who has been accumulating the stock for the past four – five years in his personal portfolio and for Berkshire Hathaway (BRK.B). Buffett finds that the key competitive advantage for Wells Fargo is its low cost of funds. The bank took out 25 billion from TARP, and as a result had to slash its dividend and acquire Wachovia.

I had heard only great things about Wells Fargo, which increased my interest in the bank. As a result, I took a look at the financials over the past years.

The financial included Wachovia since 2009. The thing that I noticed was that there was no growth over past four years in revenues. The amounts from non-interest fees have held steady, while the net interest revenues have decreased slightly. Since 2009 however, expenses have decreased from $70.688 billion all the way to $57.615 billion in 2012. The main driver behind the decrease in expenses was due to decrease in the Provision for credit losses from $21.668 billion in 2009 all the way to $7.217 billion in 2012.

At the same time earnings per share increased from $1.75 in 2009 to $3.36 in 2012, while annual dividends increased from 49 cents/share to 88 cents/share. The forward annual dividend payment is $1.20/share. Wells Fargo also increased the number of shares each year since 2009 to 5.351 billion. Since the main reason behind growth has been the reduction in the Provision for credit losses, it seems that future growth would be limited, unless the company either earned more from loans or more from fees.

Actually, net interest income has been declining, while the amount of loans has been slightly up from $783 billion in 2009 to $800 billion in 2012. Securities available for sale have increased dramatically however to $235 billion, up from $173 billion in 2009. At the same time, deposits have increased from $781 billion to $946 billion. The main problem behind lending these days is that it is much tougher to loan money, and interest rates are dropping at the loan rate level. At the deposit rate level, interest rates are essentially zero. As a result, in order to compensate for the decrease in the net interest rate margins, Wells Fargo would have to ramp up its lending. With interest rates projected to be low for the next three years, increasing lending will be the only way out to profit growth in this segment, without sacrificing credit quality however.

The issue with ramping up credit right now however is that when interest rates go up in five - seven years, Wells Fargo might end up owning assets such as 30 year loans at 4% ( I made this number up), when its cost of capital is close to or above 4%.

The mitigating factor however is that the average maturity of loans is under 30 years, and also a portion of Wells Fargo’s loans are floating rate. The company will have almost $300 billion in loans mature within the next five years. Over half of these loans were floating rate ones. New loans will generate more income however.

I like the fact that the company also has a substantial amount of non interest based revenues, which account for half of Wells Fargo’s revenues. Total trust and investment fees and total mortgage activities accounted for over half of those non-interest revenues. The portion of fee income is approximately 59%, with the rest derived from mortgage origination, other, insurance and gains from trading. It is good to hear that the company is able to generate diverse income streams to fall back on. The company is able to cross-sell products to customers who enjoy their banking relationship with it.

One positive could be that the company has a record $945 billion in deposits, and has attracted over $200 billion since 2008. While not all of the funds are allocated to loans, this could be a good indicator going forward, because it means more banking relationships over time. A customer can open a checking account today, then decide to take a mortgage, open a brokerage account or do other business with Wells Fargo. The customer relationship piece is an intangible part of the business, but nevertheless could yield dividends down the road. In addition, with record low interest rates, these deposits are almost not costing anything to Wells Fargo.

Overall I like the fact that Wells Fargo is trading at 10.80 times earnings, yields over 3% and has a sustainable dividend payment. The company has a solid asset base, which will pay dividends for years. However, I am not certain where future growth will come from. The increase in the company’s profit since 2009 has been mostly due to the reduction in the provision for loan losses. At the same time revenues have been flat. Unfortunately, a company cannot grow shareholder value without growing revenues. You can only cut so much expenses. If Wells Fargo were to start loaning out more funds, it would possibly translate into more revenue, as long as borrower quality is maintained and the net interest margin does not drop from here. There is a margin of safety in today’s valuation, but until I can see revenues increasing, I am going to sit this one out on the sidelines.

At the same time, I am a big fan of the five largest Canadian banks. These companies have a dominant position in the Canadian market, and earn very good amount of fees from customers. At the same time they have been able to grow interest and non-interest income, increase number of branches and expand by buying US bank assets. Back in early 2013 I purchased shares in Bank of Montreal (BMO), Bank of Nova Scotia (BNS), Royal Bank of Canada (RY), Toronto-Dominion Bank (TD), Canadian Imperial Bank of Commerce (CM).

Of course, if Canada’s housing market softens, these big five banks would likely perform worse than the likes of Wells Fargo. The table above shows the Net Interest and Non Interest Income trends for Toronto - Dominion Bank (TD). It also shows the trends in the provision for credit losses as well. Canada adopted IFRS accounting standards recently, which is why information for prior to 2011 is under Canadian GAAP. Either way however, the trend in the three pieces of information would be similar under both accounting methods. The trend over the past few years in both interest and non-interest income for the big five Canadian banks is positive. They have been expanding domestically and internationally, which makes seeing where growth will come much easier.

Full Disclosure: Long BMO, BNS, RY, TD, CM

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- Spring Cleaning My Dividend Portfolio
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Why would I not sell dividend stocks even after a 1000% gain?

noreply@blogger.com (D) — Wed, 15 May 2013 01:00:00 PDT

In a previous article I wrote on when to sell dividend stocks, many investors were absolutely furious that I would not even think about selling after a stock I own goes up 1000% in value. The reality is that this would depend on the circumstances, but since I am a long-term investor, I expect that at least some of the stocks I purchase today would become tenbaggers over the next 30 years or so.

In order to add shares in companies to my portfolio, I go through a quantitative screening process, followed by a qualitative review of the business. The qualitative portion is the most subjective one, and is based on my experiences consulting companies, using products or discussing products with company’s clients etc. As a result, I try to enter companies which I believe would be there for at least 20 – 30 years, when their shares trade at fair prices. If they are undervalued, that makes investing in them much easier. For example, based on my prior experience I would much rather purchase an oil company like Chevron (CVX) or ConocoPhillips (COP), than an individual US oil and gas trust that will be worth zero in a few decades. I could probably write an article about that.

Dividend growth stocks follow a natural progression of slowly increasing earnings and dividends over time. They almost always look fairly valued, which is why the biggest benefit is earned by long-term holders. If I purchase a stock like Chevron today while the annual dividend is $4/share, the current yield is at 3.30%. Chances are that one decade from now, the yield would be close to 3% again. However, the dividend and the share price would have probably doubled along the way. I say probably in regards to the dividend growth, because things never progress in a linear fashion of course. Using the inputs above however of dividends doubling every decade, and stock prices yielding somewhere close to 3%, it would not be unheard of if an investor in Chevron sits on an 800% – 1000% gain in 30 years. If there isn’t a tectonic shift that would take the world off of oil and gas, chances are that this growth is a very likely scenario that would continue for several more decades.

As a result of focusing on quality companies, there are few things that can make me sell. I view myself as a part owner of a business, and as a result the business fundamentals such as returns on equity, earnings per share and dividends per share are more important than share price fluctuations.

One of the things that would make me sell is a dividend cut. My expectation is that a company would generate higher dividends over time, and thus the inability to do so is usually the last signal of deteriorating financials I am willing to take that shows trouble. I do expect to get a high yield on cost over time, although this indicator is not something i use when evaluating buy or sell decisions. If everything goes well for my investment, I would expect it to generate more dividends over time, which would increase yield on cost, which is an indicator of an increase in dividend income. This indicator always seems to confuse and anger investors for whatever reason. I would not sell a stock simply because it becomes overvalued. For a typical dividend growth stock, if it traded up to 30 times earnings it would be more of a temporary noise, especially if this is backed by serious growth.

Dividend investing is not a black and white strategy however, and as such, a P/E of 30 might cause me to sell some stocks but might lead me to hold on to other stocks. The nuances of holding on to overvalued companies that keep performing will vary for each individual situation. Even if I were to sell a stock with a P/E of 30, then I would have to pay a capital gain tax that would eat into my capital and find a security that is attractively valued. If we happen to have the stock market trading at all-time-highs, and all other quality companies are overvalued, I would have essentially shot myself in the foot.

As an individual dividend investor, I have a limited amount of time that would allow me to identify and invest in approximately 50 – 80 great stocks during my lifetime. Of those, probably 15 – 18 would perform to be once in a lifetime investments. The rest would get acquired, lose focus or outright fail. As a result, my goal is to run with the winners for as long as possible and get rid of the losers as soon as possible.

The number one reason why individual investors fail is because they tend to book small profits. At the same time they keep their losers hoping for a turnaround. Instead, they should focus on identifying quality companies, and then let fundamentals improve and simply hold on to these great ideas. It is difficult to be a long term investor when you are bombarded with stock market information everywhere you go. However if you do not embrace a long-term approach to investing, and do not see shares as ownership in real businesses, chances are dividend growth investing is not for you.

There is a lot of work involved in timing the movements of stocks, and selling a company that might be overvalued today to purchase another company. I have found that there are only so many quality dividend stocks I am willing to consider looking at. Finding the right company trading at the right price narrows the list down even further. Then there are things such as avoiding concentration to specific sectors as well as avoiding concentration in particular individual positions as well. As a result, I buy and hold on to stocks that fundamentally perform well. I could sell the stock and buy another one, but I might increase the risk that I am buying something that could be of lesser quality, despite the high price. For example, I could sell Johnson & Johnson (JNJ) today and purchase NuSkin enterprises (NUS), which have a much lower P/E. However as I mentioned in my analysis of NuSkin, I find it to be of lesser quality than a Johnson & Johnson.

As a dividend investor, I do monitor the positions I have regularly. However, from a psychological perspective I have found that a daily monitoring of my portfolio for major events might increase my chances of doing something stupid such as trading too often. In reality, as a part-owner of a business, there are not many events that would happen every day, which would materially affect the business. Again, this is more of a nuanced approach as opposed to a black and white strategy. I do want to see improving fundamentals over time, as well as catalysts that would bring more income. For example, Coca-Cola (KO) is a brand whose products would likely continue to quench the thirst of consumers, who would only drink the specific products sold by the company. I would never for example drink Pepsi, although I know some individuals who would always drink Pepsi and hate Coke. There are hundreds of millions of consumers who will be entering the middle class in developing markets in Asia, Latin America or Eastern Europe. If people in India and China eventually consume as many servings of Coke per year as Americans do, Coca-Cola will have a bright future ahead.

Back 1988, Warren Buffett began accumulating shares in Coca-Cola (KO) for his holding company Berkshire Hathaway (BRK.B). Currently, Berkshire owns 400 million shares at a cost of $3.2475/share. Berkshire’s stake has increased its value over 11 times over the past 25 years. At the same time, the company has been more valuable, as it has managed to increase profits and dividends. The stock price was overvalued in 1998, seeling as high as $45/share, and having a P/E of 48 by year end and an yield of 0.80%. EPS for 1998 were 71 cents/share. Buffett did not sell his stake, and earnings per share rose to $1.97/share by 2012. The issue was that Coca-Cola was consistently trading above 20 times earnings between 1992 -1998. Since 1995, Coca-Cola traded at a P/E of over 30 times earnings. The stock didn't become attractively valued until 2006. In hindsight, it’s easy to tell when to buy and sell. In reality, it ain’t so. Berkshire Hathaway currently is sitting on more than a 1000% gain in Coca-Cola. Chances are that it would keep on holding the stock, and since Coca-Cola regularly repurchases shares, Berkshire's stake in the company will keep increasing over time.

Buffett did sell another one of his holdings, McDonald’s (MCD) in 1999, when the stock traded around $35 - $40/share. The stock fell as low as $12/share in 2003, before reaching $100 by 2011. The dividend increased each year during the period, although McDonald’s did have some operational issues in 2002 – 2003. In effect, Buffett missed out on this great investment idea.

Full Disclosure: Long CVX, COP, MCD, KO, JNJ, PEP,

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Attractively valued dividend stocks to consider today

noreply@blogger.com (D) — Tue, 14 May 2013 01:00:00 PDT

With the stock market hitting all-time highs pretty much every day, there are not that many stocks that have low valuations today. Some of my favorite companies such as Coca-Cola (KO) are trading at over 22 times earnings, which is above what I am willing to pay for this otherwise excellent business.

As a result I focused on the list of dividend champions, and uncovered the following attractively valued companies with low p/e ratios. I tried to look for dividend champions with yields above 2%, payout ratios below 60% and P/E ratios around 16 or lower. Despite the fact that current yields on this list are low, these companies offer good values in today’s overheated market. With low dividend payout ratios and attractive dividend growth, these low valuations offer a great entry point for investors who have at least ten or twenty years to let the investment compound.

I also added Ameriprise Financial (AMP) to this list, because I was researching it for inclusion to my portfolio, despite the fact that the company has raised distributions for less than 25 years. As most of these companies yield less than 2.50%, I would monitor them and try to add on dips. For example, back in April, I initiated a position in IBM (IBM) when the stock market punished the stock below $200/share, thus locking a 2% yield for a low valuation business with excellent EPS growth potential. Early in 2013 I was able to add to positions in Yum! Brands (YUM) and Family Dollar (FDO) after investors punished the stocks as well. That is why any type of irrational weakness must be explored by the enterprising dividend investor. Despite the high P/E on Johnson & Johnson (JNJ) today, it looks like the company trades at a P/E of around 15 based on forward 2013 estimates, so it could be one company to check out. The ability to look beyond the numbers could uncover attractively valued stocks in todays market.

While I would not be adding to my positions in Coca-Cola (KO) or Colgate-Palmolive (CL) at current valuations, the 13 companies listed above will be the types of stocks to consider when adding new money to my portfolio on dips. This should be done of course only after thoroughly researching the business, and then paying an attractive entry price.

The traditional blue chip companies I have held on for so many years, such as Coca-Cola, Colgate-Palmolive and many others which have attracted my new capital contributions for the past five years are no longer making sense to buy. As a result, the overvalued markets have caused me to be more creative in uncovering successful businesses, that can deliver better performance in the future. I am willing to purchase a stock yielding 2% today, if the valuation is low at say 15 times earnings and if there are catalysts for future growth. At the end of the day, a company yielding 2%-2.50% that trades at a P/E of less 15 that grows dividends above 7%/year will be more valuable than a company yielding 3.00%, trading at a P/E of over 22 and growing at 7%.

I would try to avoid value traps during the individual analysis I perform. I would try to stay away from known problems that can be disastrous. As a result, I am avoiding technology stocks like Intel (INTC), which might not be able to grow earnings per share over the next decade per my analysis of the situation. In addition, I did not include Cardinal Health (CAH) on this list, because it has been losing customers such as Walgreens (WAG), and has contracts with CVS (CVS) up for renewal in June. That is despite the fact that Cardinal Health has raised dividends for 17 years, trades at a P/E of 13.60 and yields 2.60%

I would much rather avoid losing money, than miss out on the next hot stock. The importance is to focus on quality, which unfortunately usually lies in the eyes of the beholder. A small leak can sink a big ship. Companies which are losing customers, companies that have advantages which are not durable (such as tech companies), or companies which are cyclical are to be avoided. I am not interested in companies which look undervalued today, but whose profitability might suffer, thus making them overvalued in hindsight.

Full Disclosure: Long IBM, KO, CL, AFL, APD, CVX, MDT, UTX, WMT, WAG, AMP

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