Monday, February 8, 2016

Five Dividend Growth Stocks Rewarding Investors With Higher Dividends

Most of my money is invested in a portfolio of companies that have a track record of regular dividend increases. I have found that dividend payments in a diversified portfolio of equities is more stable than capital gains. This is why I have chosen to live off dividends in retirement. A cash dividend is a return on investment that is tangible and provides the investor with the positive reinforcement to keep holding onto that position. When you get paid to hold on to a stock every 90 days, and that payment goes up every year, it is much easier to ignore stock market fluctuations, and instead focus on fundamentals. After all, that cash dividend is a reminder that those quotes on your brokerage statement are real businesses.

One of my favorite things to look at is the list of dividend increases. I use it to check whether any companies I own are boosting dividends. I also use it to check for hidden dividend stars I may want to put on the list for further research. In this article, I have isolated those companies that raised dividneds in the past week by more than a token amount, which yielded at least 1%, and had managed to increase dividends for at least years in a row. The companies include:

3M Company (MMM) operates as a diversified technology company worldwide. The company raised its quarterly dividend by 8.40% to $1.11/share. This dividend king has managed to increase dividends for 58 years in a row. Over the past decade, it has managed to boost dividends by 9.30%/year. It sells for 18.70 times forward earnings and yields 2.90%. I believe that the company is attractively valued at the moment, though if prices fall down further, it could be an even better value. Check my analysis of 3M for more details.

Thursday, February 4, 2016

ConocoPhillips Cuts Dividends - What Should a Dividend Investor Do?

ConocoPhillips (COP) just announced that it is cutting its quarterly dividend from 74 to 25 cents/share. This comes after management constantly reiterated that the dividend is a priority. Unfortunately, when a company is selling a commodity whose price can fluctuate greatly, and you have very high capital expenditure costs, they cannot really do much other than cut the dividend to conserve resources. This environment is tough on ConocoPhillips, because they are a pure exploration and production play, and have no downstream operations ( refining and marketing) like the big integrated companies such as Exxon Mobil (XOM) and Chevron (CVX). If ConocoPhillips still had Phillips 66 (PSX), it would have been able to weather the storm in oil prices a little easier.
It is also unfortunate that I was right to question the sustainability of the dividend payment from ConocoPhillips in my earlier assessments from 2015.

As I have said before, a dividend cut is an indication that my original thesis is incorrect. When faced with facts that I was wrong, I change my position and I sell. As a dividend growth investor, my goal is to live off the dividends generated from my portfolio in retirement. This is why I favor investing in companies that pay stable and rising dividends throughout the economic cycle. If a company proves me wrong by cutting dividends, this shows that this company is not exhibiting the qualities I look for in an investment.

Wednesday, February 3, 2016

Concentrated versus Diversified Dividend Investing

Some of the best investors in the world, Charlie Munger and Warren Buffett, have been able to make it by having a concentrated portfolio of securities. Their thinking is that investors who are willing to work hard at investing game should concentrate their bets in their best ideas. It is difficult to argue with the results from those two investing titans. It makes sense that if you really know what you are doing, you should concentrate your portfolio in just a few companies, because the effect on the portfolio will be much more pronounced. For example, if you were smart enough to identify Wal-Mart (WMT) at the time it became a dividend achiever in 1984 - 1985, your portfolio would have done much better if you put a higher weighting to this retailer.

For the know something or know nothing investor however, their advice has been to diversify extensively. Today I am going to discuss why I decided to diversify extensively. This is because I acknowledge that I am not Buffett. I also acknowledge that forecasting the future is difficult, since things can change no matter how much research and conviction behind that research I have.

As I explained in an article a while ago, the number of companies in my portfolio has been increasing rapidly since late 2012 and early 2013. Many readers ask me why I don’t simply sell off a portion of those positions and concentrate my portfolio in my best 15 – 20 ideas. In addition to my response , which is still relevant, I will try to add a more honest twist to it.

Monday, February 1, 2016

The importance of multiple income streams

It is nice to have a diversified income stream. While many seem to look for a focused method, I look for a diversified method of generating income. The more diversified, the better.

One of my primary income streams today is my employee salary. This is the main and only income stream for majority of people in the US. The problem is, I generate it from one employer, so if they don’t like me, this stream will end. So I am at the mercy of the employer at some level. The goal is to diversify away from relying 100% on this stream.

The second income stream is the dividends from my income portfolio. I am not dependent on any one company for this income stream. In fact, I believe that if one holds at least 30 – 40 dividend paying companies, they should not be worried if one or two of them simply stopped paying dividends. Of course, the portfolio would likely be built slowly and over time, and should be representative of as many sectors as possible. If you have half of your portfolio in a single sector such as energy, or financials or consumer staples, you are way too concentrated however. You want to avoid risks that will take down a whole sector during a crisis, or a change. An example was the dividend cuts to banks during the financial crisis. Many expect a lot of dividend cuts in the energy sector today. Whether those fears are overblown, or not, remains to be seen.

Friday, January 29, 2016

How did I do in January?

To be honest, I didn’t do much investing wise in January. Of course, I didn't panic and I stayed the course. Per my earlier article I shared with you, I proceeded according to plan:

1) I maxed out 401 (k) and HSA
2) I reinvested the dividends in my tax-deferred accounts ( Roth IRA, SEP IRA, Rollover IRA)
3) I bought a CD as part of my CD ladder
4) Transferred all taxable dividends to checking, in order to spend them

So far I am finding that living off dividends and side income is a little challenging, though I expected that to a certain extent. This is because I am not taking advantage of low prices on dividend stocks ( though I am taking advantage of automatic purchases of stock mutual funds and dividend reinvestments). It is also difficult because my cash flows are uneven on a month to month basis. I have come to realize that cash is king indeed.

For example, assume that my portfolio consists of 10,000 shares of Coca-Cola and 1,000 shares of McDonald’s. Under current dividend rates, this portfolio will generate $3,300 in dividends in April, July, October and December, and $890 in dividends every March, June, September and December. This leaves the months of January, February, May, August and November without any cash.  This is where having approximately two months worth of expenses in savings is helpful - to smooth out short term bumps in cashflow.

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