Monday, September 15, 2014

High Yield Companies for Current Income

I monitor my portfolio holdings quite regularly, looking for material events concerning the companies I hold. As a dividend investor, the best news is when a company I hold raises dividends. This is a confirmation that the analysis I had done in the first place was valid, and that the decision to purchase a stock in a company after that painstaking process is indeed paying higher dividends. Rising dividends are important, because they ensure that the purchasing power of my income is at the very least maintained if I were to drop out of the rat race and retire tomorrow.

With dividend investing, success is very tangible, one dividend check at a time. Dividends represent money I earn without having to be physically present at a location or answer to a boss. Thus, with each dividend check I am getting one step closer to retirement.

Two of my holdings raised their dividends in the past week. Those include:

Philip Morris International Inc. (PM), through its subsidiaries, manufactures and sells cigarettes and other tobacco products. The company raised its quarterly dividend by 6.40% to $1/share. This was the slowest dividend increase since PMI was spun-off from Altria (MO) in 2008. The company is facing some headwinds worldwide, but despite those is still able to generate strong cashflows to pay increasing dividends and repurchase shares. I would probably have to lower my earnings and dividend growth expectations to 6% - 7%/year for the foreseeable future. However, a 6%-7% annual growth in dividends from a company yielding almost 4.80% is a pretty good achievement. The shares are still attractively valued at 16.30 time forward earnings. Check my analysis of PMI.

Realty Income Corporation (O) is a publicly traded real estate investment trust. The REIT increased its monthly dividend slightly to $0.1831/share. This was less than 1% higher than the monthly amount paid at the same time in the preceding year. Realty Income has managed to increase dividends by 6%/year over the past decade. This dividend achiever has also managed to boost distributions to its patient long-term investors for 20 years in a row. This includes a 20% increase in dividends in 2013, which is probably one of the reasons for the slow raises in 2014. Going forward, I would expect this REIT to manage to grow distributions to match or slightly exceed the rate of inflation. Since the company is already a high portion of my income portfolio, I do not plan on adding any more funds there. Check my analysis of Realty Income.

While I am not a big fan of looking for high yields  for the sake of looking for high yields, I understand that some investors who are retired need above average yields today. I believe that companies like the above mentioned could be the types of companies to research thoroughly, before you decide if they are a good fit for your portfolio or not. The two are a good fit for my portfolio, and provide quite a nice stream of growing dividend income, which is then reinvested into other attractively priced income producing assets.

As an added bonus to my readers, I am also going to mention another recent dividend increase, which is not from a high yield company. However, I believe that this company can achieve the type of dividend growth to reach high yields on cost in the future for those who manage to acquire the shares at attractive valuations. The company is Yum! Brands (YUM), which operates quick service restaurants in the United States and internationally. It operates in six segments: YUM Restaurants China, YUM Restaurants International, Taco Bell U.S., KFC U.S., Pizza Hut U.S., and YUM Restaurants India.

The company raised its quarterly dividend by 11% to 41 cents/share. This marked the tenth consecutive annual dividend increase for this dividend achiever. The stock is overvalued at 21.30 times forward earnings, but it does have potential for a lot of international growth. I hold a small position in it, and would like to add some more at 2.50% entry yields. Check my analysis of Yum.

Full Disclosure: Long PM and O, YUM

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Friday, September 12, 2014

Walgreen: A High Dividend Growth Champion To Consider

Walgreen Co. (WAG), together with its subsidiaries, operates a network of drugstores in the United States. This dividend champion company has paid a dividend since 1933 and increased it for 39 years in a row.

Over the past decade this dividend growth stock has delivered an annualized total return of 9.10% to its shareholders.

The company has managed to deliver an 8.40% average increase in annual EPS over the past decade. Walgreen is expected to earn $3.32 per share in 2014 and $3.87 per share in 2015. In comparison, the company earned $2.56/share in 2013. In the press release from Walgreen from yesterday, the company mentioned that it expects earnings per share to hit $4.25 - $4.60 by 2016.

Between 2004 and 2012 Walgreen has been able to reduce the number of shares from 1.032 billion to 880 million through consistent share buybacks. The acquisition of 45% of Alliance Boots increased number of shares outstanding to 955 million in 2013, and this figure is expected to increase further through 2015 due to the purchase of remaining interest in AB. The company’s Board of Directors also approved a new $3 billion stock buyback through 2016.

Currently Walgreen is attractively valued at 17.80 times forward earnings and a yield of 2.30%. Either way, I took advantage of the huge sell-off after Alliance Boots acquisition news and added a small number of shares to my existing position. I would be more interested in the stock on dips below $54/share.

Check the full stock analysis at Seeking Alpha

Full Disclosure: Long WAG, WMT

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Tuesday, September 9, 2014

Selling Puts: Pros and Cons for Dividend Investors

Last week, I sold some puts on British Petroleum (BP), right after the judgment that opened the door for a potential $18 more billion in liabilities stemming from that Gulf of Mexico oil spill from 2010. The stock price sold off sharply on those news, and I decided that this was an opportunity to add to my existing position. Since I am low on investable funds, I decided to sell some puts on British Petroleum. I posted this over the internet, and had a reader ask me exactly what that means. As a result of this question, I am going to try and respond to this request.

A put is an options contract, that allows the options buyer to sell a number of shares at a given price at a given date in the future. The number of shares per each options contract is 100. People buy put options in order to protect themselves from a decline in prices, and thus they want to limit their losses. Those who purchase put options are therefore either hedging their exposure, or outright trying to place a bet that prices are going to decrease. For the right to sell a number of shares at a given price into the future, the options buyer pays the options seller a premium. This is essentially the cost of the bet behind the option. The premium is essentially the price that the put options buyer pays to the put options seller.

The put options seller receives the premium, and has a few potential outcomes for him. In my case, I sold a put option on BP at a strike of $44, which expires in April 2015. I received an options premium of about $2.25/option. This means that the options buyer ( the person I sold the option to) paid $225 for the right, but not the obligation, to sell me 100 shares of British Petroleum at $44/share in April 2015.

I essentially have two potential outcomes from this transaction:

The first outcome is that shares of British Petroleum sell for more than $44/share by the time the options I sold expire in April 2015. As a result, those options contracts expire worthless, and I end up with the $225 in premium in my account. The downside in this outcome is that I missed out on all potential gains above $44/share, if the put is never exercised.

The second outcome is that shares of British Petroleum sell for less than $44/share by the time the options expire in April 2015. As a result, I would have to purchase 100 shares of BP for every options contract I sold to the buyer of the put option. If shares of British Petroleum sell for $40/share in April 2015, I would knowingly buy shares at around $4 lower than then present prices. All is not bad however since I received $2.25 per each share, which essentially lowers the cost to about $41.75/share. In addition, buying at $41.75 sure beats buying at $44 or $45/share outright. The share was selling around $45 immediately after the unfavorable court ruling.

In both first and second outcomes, I am not eligible to receive any dividends on British Petroleum, since the buyer of the put option holds those shares in their own brokerage account. If exercised under the second scenario, I would own some shares in the British oil giant, and receive those fat dividends ( assuming they are not cut or suspended). Astute readers can see that as long as the stock price is flat or up, I get to keep the premium. If the stock price is down, I get to buy shares in a company I am interested in, but at a lower price. It is a win-win for me, that slightly tilts the odds of success in my favor.

However, I used the premiums from the puts I sold to purchase shares in British Petroleum. This means that for every put contract I sold, I was able to buy 5 shares in British Petroleum. I will be earning a nice dividend check on those shares for years to come, since I rarely sell those companies that at least maintain their dividend payment. If shares sell for more than $44 in April 2015, I will have essentially earned 5 shares for every options contract I sold on BP. The nice part is that I would have earned those shares only because I have good credit with my brokerage. Even if I have to buy BP at $44, my entry price would be much better compared to buying the stock outright today. Hence, I view selling puts on stocks I want to buy either way as a type of “heads I am better off than before, tails I am even as before” strategy.

Here comes the danger in selling puts however – the possibility for wipeout risk due to overleveraging. Let’s assume that my portfolio was valued at $10,000, and I sold a put on BP with a strike of $44. If the value of BP stock decreased by 50% in April 2015, and I needed $4,400 to buy BP stock, while the value of my overall portfolio dropped by 50% through April 2015, I would be almost wiped out (assuming other shares in my portfolio also decrease by 50%). This is why it is important to be very careful when playing with leverage, which is akin to playing with fire.

I only sell puts sporadically, and only do it on companies I would like to buy outright, but whose prices are little too rich for my taste today. In addition, I make sure that the potential outlay if all puts are exercised does not exceed 25% of the account value on the stock account through which I do that options trading. Long-time readers also know that I have more than one stock brokerage account, which further reduces wipeout risk.

Full Disclosure: Long BP and short BP puts

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Check the Complete Article Archive

Monday, September 8, 2014

Two High Yield Companies Raising Dividends in the past month

In the past couple of weeks, there were two high yielding dividend growth stocks, which announced dividend hikes. I typically look for sustainable dividend payments, which can also grow over time. The companies I am about to mention, pay a large portion of earnings per share to shareholders in the form of distributions, which is why future expected growth is not going to be very high. However, for those who need high current income today, companies like those could be decent holdings in a diversified income portfolio. I hold stakes in both companies, and enjoy getting paid to own those shares. It is a very nice feeling to be paid cash dividends that grow faster than my salary, even if I decide to stay in bed and watch soap operas all day long.  With dividend investing, the big money is made by sitting, or sleeping, rather than through frenetic investment activity.

The companies raising distributions include:

Verizon Communications Inc. (VZ) provides communications, information, and entertainment products and services to consumers, businesses, and governmental agencies worldwide. The company raised its quarterly dividends by 3.80% to 55 cents/share. Verizon has managed to boost dividends for 10 years in a row. Over the past decade, Verizon has managed to increase dividends by 3%/year. Currently, this dividend achiever is attractively priced at 14.10 times forward earnings and yields 4.40%. I would expect that Verizon manages to grow dividends per share by about 3% - 4%/year in the foreseeable future. Check my analysis of Verizon.

Altria Group, Inc. (MO), through its subsidiaries, manufactures and sells cigarettes, smokeless products, and wine in the United States. The company raised its quarterly dividends by 8.30% to 52 cents/share. Altria has managed to boost dividends for 45 years in a row. Over the past five years, Altria has managed to increase dividends by 9.20%/year. Currently, this dividend champion is attractively priced at 16.90 times forward earnings and yields 4.80%. I would expect that Altria manages to grow dividends per share by about 6%/year in the foreseeable future, driven by its pricing power, strong position in the domestic tobacco market, as well as its 27% interest in SAB Miller. I will reinvest those dividends from Altria into more Altria shares. Check my analysis of Altria.

Both companies are valued properly right now for patient long-term investors, who also need income right now. For example, if we assume a 30 year investment period, and 3% annual growth in earnings per share, and require a 10% annual return, the discounted valued for Verizon is approximately $45.20/share. Using the same parameters for Altria, the discounted value comes out to $32.60/share. Those are of course very conservative expectations, although those fair values represent the value of the business to a private owner. Of course, in the case of Verizon, the future growth would likely be around 3%/year, whereas for Altria I expect that earnings per share to be closer to 5% – 6%/year for the next 30 years. The majority of growth in earnings will likely occur in the first 15 years or so, after which growth will probably get lower.Of course, I don't really do much in terms of discounted analysis, but based on what I know from analyzing both businesses, I prefer Altria to Verizon. Let's circle back in 20 years, and see if I was right.

Full Disclosure: Long VZ and MO

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Friday, September 5, 2014

McDonald’s (MCD) Dividend Stock Analysis 2014

McDonald’s Corporation (MCD) franchises and operates McDonald's restaurants in the United States, Europe, the Asia/Pacific, the Middle East, Africa, Canada, and Latin America. As of December 31, 2013, it operated 35,429 restaurants, including 28,691 franchised and 6,738 company-operated restaurants. McDonald’s is a dividend champion which has increased distributions for 38 years in a row.

Over the past decade this dividend growth stock has delivered an annualized total return of 17.90% to its shareholders.

The company has managed to deliver 16.70% average increase in annual EPS over the past decade. I expect future growth in annual earnings and dividends to be in the range of 7% - 10% per year in the next decade.

Currently, the stock is attractively valued at 16.70 times earnings and a current yield of 3.50%. There is an increasingly negative sentiment toward the company. I believe McDonald’s will overcome its problems, and reward patient shareholders who have a long-term horizon. I also find it easier to buy shares in a company when there is some known hang-up, which keeps price depressed. I would be even more excited if shares fell further from here, because this would mean more shares and more dividend income for every dollar I put to work. I have been adding to my position in the stock slowly throughout 2014.

Full Disclosure: Long MCD and YUM

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Tuesday, September 2, 2014

Should I have a minimum yield requirement?

In my entry criteria, dividend yield is the last factor used to select dividend stocks. After I screen the list of dividend champions or dividend achievers, I look at each company in detail.

First I look for growing earnings per share, and attractive entry P/E ratios. Then I check if the dividend is going up above the rate of inflation. Finally, I check if entry yield is above 2.50%.

Using my screen parameters, I sometimes end up missing companies which have low yields but high dividend growth. However, by doing so, I am somewhat protected in the case I purchase a low yield but high growth stock, which subsequently lowers distributions growth or stalls it. I want to avoid at all costs getting carried away chasing dividend growth. Chasing growth could result in overpaying for a low yielding asset that grows earnings and dividends, and my total return ends up being limited to the modest initial yield for several years. My investment philosophy is to avoid losing money, and as a result I am fine missing out on potential gains if that reduces dividend income risk. Winning dividend positions typically take care of themselves, while losing positions are typically the higher risk ones that could make you lose sleep at night.

For example, investors who purchased stock in some great blue-chip dividend payers such as Coca-Cola (KO) or Wal-Mart Stores (WMT) during the 1999 – 2000 period, saw their share prices go nowhere for over a decade. The only return they received was in the form of dividends, which were initially very low. At the same time, both companies managed to significantly increase revenues, earnings and dividends during that time period. The reason behind the lackluster performance was the fact that these stocks were very overvalued in the late 1990’s and early 2000’s. The lesson from this exercise is that even the best dividend paying stocks in the world are not worth overpaying for.

Furthermore, while I may miss out on some companies like Raven Industries (RAVN) or Franklin Resources (BEN), I am going to still be able to select stocks in the sweet spot, which generate best returns for the risk i am taking. A company like Phillip Morris International (PM) or Kinder Morgan (KMI) that provides a good starting yield of 4% which grows at 8%-10% per year, is a much better candidate that a company yielding 1 - 2%, that grows dividends at 12%. The higher initial yield provides a margin of safety for the time in the future when dividend growth stalls. This could be tomorrow, or it could be 20 years from now. The issue with high growth is that it cannot continue forever. At some point, the growth will come down to a more reasonable and sustainable level.

The negative of what I am doing is that I will surely miss out on the next McDonald's (MCD) or Johnson & Johnson (JNJ) dividend growth success story. This is because companies in the early stage of dividend growth typically have low current yields, but manage to grow distributions at a very high clip. Those are the types of companies which will generate outstanding total returns, and double-digit yields on cost for anyone fortunate enough to believe in the company, and put their money there. This is one of the reasons why I purchased Visa (V) in 2011 and recently in 2014, despite the low current yield. I also purchased Casey's (CASY) in 2011 and YUM! Brands (YUM) in 2010 and 2013, when their yields were less than 2.50%. I was betting that above average dividend growth will continue, and I also wanted to beef up my portfolio exposure to the low yield and high dividend growth investments.

In the grand scheme of things, I am starting to believe more and more that initial attractive valuation of less than 20 times earnings is helpful. If this valuation is even lower, that could be very helpful for total returns and future yields on cost as well. The other equally important thing to consider is growth of earnings per share. After all, a quality business that keeps growing over time will eventually bail out the investor who might have slightly overpaid in the beginning. However, if I overpaid for a business that pays a high yield today, but fails to grow earnings per share, chances are that the dividend will not increase above the rate of inflation, and I will end up downgrading my standard of living quite regularly. Therefore, a business which has the potential to earn more in 15 - 20 years, coupled with an attractive valuation, is the type that will deliver investment success to its shareholders. Whether this business pays a 2.50% yield or a 1.50% yield at the time of investment might not be as relevant. However, if I am wrong about my assessment of the business, I will end up losing more under the lower yield scenario, since earnings will not grow by much leading the the price to stagnate, In addition, the business will only pay a paltry yield, that does not grow by much either. Since I use my dividends from companies to buy shares in other companies, this could mean less money to be put to work in the next great dividend growth success story.

This is why evaluating each business one at a time is so important. The investor has to take into consideration valuation, growth prospects, changes in industry or competitive landscape and evaluate that against their unique set of investment opportunities and expectations. Unfortunately, investing is not as black and white as most would make you believe.

Full Disclosure: Long KMI, PM, KO, WMT, YUM, V, CASY

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Sunday, August 31, 2014

Best Dividend Investing Articles for August 2014

For your weekend reading enjoyment, I have highlighted a few interesting articles from the archives, which I find to be relevant today. The first five articles have been written and posted on this site, while the last four 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:

1) 14 Dividend Growth Stocks I Bought On the Dip Last Week

As some companies started declining in price at the beginning of August, I was able to initiate or add to positions in those securities. As I continuously screen a group of companies I am interested in based on price, it is very helpful when those get into the value territory. Overall, August was a busy month for purchases and sales of puts. Unfortunately, I won't be able to allocate more cash to stocks until some time in October. Of course, January's Roth and SEP contributions are just a few months away from there, followed by tax day. Hence, a little bit of cash accumulation might be helpful.

2) Dividend Investing for Financial Independence

I plan on living off dividends in retirement. In this article I discuss numerically, how to reach target monthly dividend income levels. For example if an investor puts $1000/month companies yielding 4% today and achieving a 6% annual dividend growth,and reinvests dividends, their portfolio will generate over $7,900 in annual dividend income in ten years. However, if our investor put away $2000/month in income stocks with the same characteristics as above, they would be achieving $7,900 in annual dividend income only after 72 months.

3) Kinder Morgan to Merge Partnerships into One Company

Kinder Morgan is simplifying its structure, by merging all limited partner interests into the parent company Kinder Morgan Inc (KMI). This move will create an energy powerhouse, which will be able to enjoy benefits of scale, unique geographic position, simplified structure, lower cost of capital and a ready currency for further acquisitions. The combined company is forecasting an increase in the annual dividend to $2/share by 2015 and then a 10% annual dividend growth through 2020. As a shareholder of KMI, I am happy. As a shareholder of KMR, I am happy as well. The unitholders of KMP and EPB will face some immediate tax hits, once the transaction closes. However, I believe that for those who buy and hold, they will do pretty well for themselves if they do not do anything for at least a decade. Now all shareholders and former partners will have the same interests as Richard Kinder, who I believe to be the Warren Buffett of Energy.

4) How to Invest Like Warren Buffett

Buffett has become a billionaire by continuously keeping an open mind for opportunities which will keep paying him for decades to come. All he has done is look for those situations where he can find a quality business, which will earn more in 15 - 20 years, has a low risk of change that will impact profitability, is managed by quality management team and is available at a good price. Of course, Buffett has also been helped immensely by the insurance float generated for Berkshire Hathaway, as well the hedge fund fees he earned in his days of the Buffett Partnership in the 1950s and 1960s. However, as an ordinary investor, I keep most of my energy focused on how I can select companies that generate a lot of cashflows to me, that I can use to then buy more stock in companies that generate more dividends for me.

5) Why Warren Buffett likes Investing in Bank Stocks

I wrote another article on Warren Buffett and why he likes investing in bank stocks. I believe that he likes their deposit float, which is essentially a very low cost of capital, which is pretty stable over time, and could be deployed by able and honest managers into lucrative projects such as mortgage or business loans. Of course, management quality is of utmost importance, which is why he has been adding to shares of Wells Fargo (WFC) in the past couple of decades.

I read a lot about companies, and also read a lot of interesting articles from all over the web. A few that I really enjoyed over the past months include:

1) Warren Buffett's $50 Billion Decision

I often get asked why do I want to "retire" early, given the fact that my "idol" Warren Buffett is 84, and is not even thinking about "retirement". The truth of the matter is that Buffett has been "retired" since 1956. This article from Forbes describes the decision that the Oracle of Omaha did for himself when he was 26 years old. Surprisingly, his retirement gave him the time to pursue his passion of learning and investing. The billions he made as a result of Buffett Partnerships and Berkshire Hathaway were a pretty nice side-gig. Retirement is about being in control of your time, and doing what you love, not about watching soap operas.

2) Weekend Reading – August 29, 2014

Dividend Mantra has compiled several interesting articles on dividend investing, in his weekly review. In addition, his "retirement" seems to be going really well, as he is making thousands of dollars writing about dividends, and he has recently been interviewed by Mint.

3) Weekly Links: August 31, 2014

My friend Dividends4Life has also compiled a list of pretty good articles on dividend investing on his website. I am surprised that not a lot of other readers know about him, given that he has written about dividend investing for over 7 - 8 years and has tracked his dividend numbers for the same period of time. He is a baby boomer who is dilligently working his way towards retirement.

4) Weekly Roundup - August 31, 2014

The Passive Income Earner also has a list of several articles on Dividend Investing. This is another site I read regularly, given that the writer is someone who has been saving and investing huge amounts to kick-start his dividend machine. I also have used his site to find other sites related to dividend investing.

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.

Full Disclosure: Long KMI, KMR, WFC, BRK.B 

Friday, August 29, 2014

Starbucks: The Next Dividend Growth Success Story

Starbucks Corporation (SBUX) operates as a roaster, marketer, and retailer of specialty coffee worldwide. The company initiated its dividend in 2010, and has been growing distributions rapidly since then. While the company has only managed to increase dividends for four years in a row, I believe that it has the potential to reach dividend achiever status, and have the growth story to become as successful for its dividend growth investors.

Currently, I find Starbucks to be overvalued at 28.70 times forward earnings and a low yield of 1.35%. Starbucks is a growth company, which will likely grow earnings per share by 12% - 15%/year over the next decade, which somewhat justifies the low yield and optimistic valuation. Unfortunately, I cannot get myself to pay more than 20 times earnings for a company, because I know that things could go wrong to derail even for the best crafted plans. If the company stumbles, or if stock markets finally decide to cool off a little bit during the next bear market, that would be the best opportunity to acquire a stake in this otherwise fine company. The third option for me would be to sell a long-dated put with a strike as far out as January 2016 with a strike of $70, earn a premium of $5, and pay an effective entry price of $65 per share if called out. If not, and the stock price explodes from here, I would at least earn some premium.

Check the complete analysis at Seeking Alpha

Full Disclosure: Long MCD and NSRGY

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Wednesday, August 27, 2014

Dividend Growth Stocks Are Still Great Acquisition Targets

Imagine that you are the CEO of a major corporation, which is sitting on a lot of cash. You are desperate to find some use for this cash, in order to justify a bigger bonus for yourself, and in order to grow the company you are managing. One of the things you can do is start a new division, invent a new product or try to expand organically. However, this is risky, since there is absolutely no guarantee that the expansion, or the new product will be a success. Another option is to acquire an existing business, which already has the products or services that customers want, is available at a good price, has a unique competitive position, and which also manages to earn a lot of profit s every year, while drowning shareholders in cash. It does seem like a lower risk proposition to acquire that business. Of course, if those managements have the discipline to pay a regular dividend to shareholders, they would have much less money for squandering, which would limit their focus to only the best ideas with the most potential for return on investment. But this is a topic of a whole other article.

The business to be acquired that I just described at a very high level is essentially what most dividend growth companies represent. A business that manages to grow dividends every year for a long time, indicates in many cases a business which manages to earn more profits over time. This is an attractive business to invest in, whether you are an acquirer or an ordinary mom and pop investor, provided valuation is not excessive. Thus, dividend growth stocks make great acquisitions.

In most cases however, shareholders would have been better off simply holding on to the companies they are owning and collecting a growing a stream of dividend checks with the passing of every single year. Unfortunately, many shareholders these days have an extremely short-term holding horizon, which is why they approve of those deals to earn a quick buck, while sacrificing future potential.

This is why I believe that even for long-term passive buy and hold dividend investors, it is highly unlikely that their portfolios will be static over a 20 – 30 year time period. A portfolio of dividend growth stocks selected in 2014 will likely look much different in 2044. Contrary to popular belief however, this is not because of a high failure rate in dividend growth stocks. The reason is because a large portion of dividend growth stocks are indeed attractive acquisition or merger partners. When you are the prettiest girl at the prom, odds are much higher that more than one person will ask you to dance with them. Same is true with those dividend growth stocks, which make excellent merger partners or great acquisitions to tap into. As for failure rates, based on historical research I have conducted, only a small portion of companies fail outright.

When I look at the dividend aristocrats list from 25 years ago, I notice that there are a lot of companies that are no longer here. As I mentioned in the earlier paragraph, this is because a large part of those companies either were acquired or merged. As a passive investor, I seldom sell. However, if the company that acquired my dividend holdings pays me cash for my stock, I will have to dispose of my shares. This is what happened with Anheuser Busch in 2008, when it was acquired for $70/share by InBev. This is also what happened to Rohm & Haas in 2009, when it was acquired by Dow Chemical (DOW). Nowadays, this is what is happening to Family Dollar Stores (FDO), which is being acquired by Dollar Tree for mostly in cash. Only a small portion of acquisition will be paid in stock, thus triggering a taxable event. Because I expected more in taxable income in 2015, that will potentially put me in a higher tax bracket, it made sense for me to sell today, as much as I don’t want to get any tax waste.

Based on my tax situation, it made more sense to sell my Family Dollar holdings in taxable accounts this year. For any tax-deferred accounts, I would simply hold on to the shares I receive, but reinvest the cash I receive in other quality companies selling at attractive valuations. Thus, I am saving on one commission, rather than sell all the stock, then buy another stock. In an essence I am holding in my retirement account, and then when the cash is paid, I can use it to buy other shares. At the same time I will probably keep the Dollar Tree shares, despite the fact that they won’t pay a dividend.

Of course, the issue with selling was that I missed out on the bidding war from Dollar General. The problem is that Dollar General’s offer, while a few dollars per share higher, was all in cash. Whoever acquires Family Dollar, will reward their shareholders tremendously, because they are paying for a great asset with cash that costs very little today. If you add in synergies expected, that deal will result in great returns for Dollar Tree or Dollar General shareholders, depending on who ends up owning Family Dollar stores.

Full Disclosure: Long FDO

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Monday, August 25, 2014

Dividend Paying Companies I recently added to my income portfolio

A few weeks ago, I mentioned that I am done purchasing dividend paying stocks for my portfolio until sometime in September. Well, I looked a closer look at the dip in prices we had, read a few articles that said that the bear market is beginning, and then decided to put more funds to work for me. This now means that I won’t be able to add funds to my dividend portfolio until October. If stock prices dip from here, but rebound by October, I would likely miss out on this opportunity. The only "savior" will be dividends in my tax-deferred accounts, which are automatically reinvested.

I added to my positions in the following companies:

Diageo plc (DEO) manufactures and distributes premium drinks. The company has managed to raise dividends for 15 years in a row. Over the past decade, the company has been able to increase dividends at a rate of 5.80%/year. Currently, this dividend achiever sells for 17.60 times forward earnings and yields 2.60%. I am trying to increase my position in this company, and would welcome further declines in this cheap spirits company. Check my analysis of Diageo.

International Business Machines Corporation (IBM) provides information technology products and services worldwide. The company has managed to raise dividends for 19 years in a row. Over the past decade, the company has been able to increase dividends at a rate of 19.40%/year. Currently, this dividend achiever sells for 10.60 times forward earnings and yields 2.30%. Buffett is one of the largest shareholders in the company, which consistently repurchases stock, boosts dividends, and focuses on repositioning to higher margin businesses. Check my analysis of IBM.

Exxon Mobil Corporation (XOM) explores and produces for crude oil and natural gas. The company has managed to raise dividends for 32 years in a row. Over the past decade, the company has been able to increase dividends at a rate of 9.60%/year. Currently, this dividend champion sells for 12.70 times forward earnings and yields 2.80%. This is another Buffett investment, that regularly buys back shares, raises dividends, and has a good strategy for strategically allocating cash and focusing only on projects with high expected return on investment. Check my analysis of Exxon Mobil.

United Technologies Corporation (UTX) provides technology products and services to the building systems and aerospace industries worldwide. The company has managed to raise dividends for 20 years in a row. Over the past decade, the company has been able to increase dividends at a rate of 14.50%/year. Currently, this dividend achiever sells for 15.90 times forward earnings and yields 2.20%. Check my analysis of United Technologies.

Visa Inc. (V), a payments technology company, operates as a retail electronic payments network worldwide.  The company has managed to raise dividends for 6 years in a row. Visa has managed to almost quadruple its quarterly dividend from 10.50 cents/share in 2008 to 40 cents/share in 2014. Currently, this company sells for 20.80 times forward earnings for 2015 and yields 0.80%. I initiated a small position in Visa back in 2011. With the most recent investment from last week, I essentially doubled my position there, although it will likely be a small portion of my portfolio due to high valuation. Check my analysis of Visa.

I also looked at my portfolio, and I identified quite a few companies where I want to keep adding funds, in order to reach a certain dollar size. I have quite a lot of work ahead of me, and quite a lot of money to save, and invest. Given that a large portion of funds is going into tax-deferred accounts that mostly offer index funds, that would require me to re-think my savings, cut expenses, and try to increase income. As I mentioned in my April Fool’s day post a year ago, I have a shopping addiction. Luckily, this is the type of addiction that pays dividends, and does not leave me with a bunch of useless stuff that is sitting in my closet, my garage or in a storage box.

I have also been selling puts on companies I want to own, but I believe them to be overpriced today. Those include Disney (DIS), a wonderful company, which I believe to be a great long-term holding. Another includes Starbucks (SBUX), another wonderful business with great growth prospects, but very high valuation. I like the aspect of getting paid money upfront, in order to purchase shares in a company at a pre-determined price in the future. The price I am willing to pay is usually lower than today’s price. If you subtract the premium received from the options, that further reduces the cost of the shares. The nice part is that I get to use that premium today, and invest it accordingly.

Full Disclosure: Long DEO, UTX, XOM, IBM, V

Relevant Articles:

Warren Buffett Investing Resource Page
14 Dividend Growth Stocks I Bought On the Dip Last Week
How to Invest Like Warren Buffett
Why Warren Buffett purchased Exxon Mobil stock?
I bought this quality dividend paying stock last week

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