Friday, October 31, 2008
It seems to me that out of 38 holdings in BRK-A’s portfolio 12 companies are dividend aristocrats, one is a dividend champion and three are dividend achievers. Only 5 of his holdings do not play any dividends at all. One of its holdings’ business purpose (CDCO.ob) is limited to the orderly runoff or sale of its remaining assets. Based off current dividend payments for the stocks in his portfolio, Berkshire Hathaway makes $1.65 billion in dividend income per year. You could open the spreadsheet from this link as well.
I am not at all surprised that the Oracle of Omaha has almost half of his portfolio in good quality dividend growers. Most companies that have managed to increase their dividends for long periods of time are ones that have wide moats as well as excellent competitive advantages in the marketplace. Having these qualities leads to rising earnings which tend to support a steady pace of increase in dividends.
On a cautious note however, I would do my own homework before investing in any stocks that Berkshire Hathaway owns. Some of his holdings like Bank of America (BAC) recently cut their payments by 50% which prompted a massive drop in the stock.
This article was included on Fierce Financial Tips: The Carnival of Personal Finance #178, Struwwelpeter Edition
- Warren Buffet - The richest investor in the World
- Why do I like Dividend Aristocrats?
- Dividend Conspiracies
- Bank of America (BAC) Dividend Analysis
- Cincinnati Financial – An insurance stock to own
Thursday, October 30, 2008
Nucor Corporation is a dividend aristocrat as well as a component of the S&P 500 index. It has been increasing its dividends for the past 34 consecutive years. From the end of 1998 up until October 2008 this dividend growth stock has delivered an annual average total return of 14.70 % to its shareholders. This year however the stock is down about 40% as the commodity boom seems to have dried up the demand for materials, including steel, across the globe.
Annual dividend payments have increased by an average of 39.70% annually over the past 10 years, which is much higher than the growth in EPS. Nucor’s last quarterly payment of $0.52/share consisted of $0.32 of regular dividend and $0.20/share in supplemental dividends.
A 40% growth in dividends translates into the dividend payment doubling almost every 2 years. If we look at historical data, going as far back as 1973, NUE has actually managed to double its dividend payment every four years on average. The last major dividend raise was between 2005 and 2006 when dividends increased by a whooping 475% in one year, helped by increased demand for metals worldwide. After this major move total dividends paid have actually decreased by 15% mainly because of a decrease in the supplemental dividends.
Investors should proceed with caution in the future as such dividend growth rates are definitely unsustainable given the recent collapse in commodities prices and talk about deflation and depression.
Full Disclosure: None
Wednesday, October 29, 2008
S&P didn’t help either as it lowered its dividend growth forecast for the S&P 500 dividends to a little over 1% from the 2007 dividend rate of $27.73. Furthermore S&P maintained a cautious outlook for dividend growth in general in 2009, since some of the recent dividend cuts by financials won’t be felt until next year.
The current crisis will most probably result in a halt to the strong dividend growth experienced by S&P 500 companies over the past 30 years. It would be interesting to see whether the dividend growth would plateau like it did during the 2000-2002 bear market or it would reverse as many companies across all industries are affected by the slowdown.
Tuesday, October 28, 2008
Buffett had a nice discussion on his arbitrage experience with Arcata Corp in the 1980’s in his 1988 letter to shareholders.
To evaluate arbitrage situations you must answer four questions:
(1) How likely is it that the promised event will indeed occur?
(2) How long will your money be tied up?
(3) What chance is there that something still better will transpire - a competing takeover bid, for example?
(4) What will happen if the event does not take place because of anti-trust action, financing glitches, etc.?
This leads us to the potential acquisition of Constellation Energy by Berkshire’s MidAmerican Holdings. George from Fat Pitch Financials was the first to alert his readers on this opportunity. The merger has already been announced in September at a price of $26.50/share in cash. In addition, MidAmerican provided an immediate $1 billion cash infusion to Constellation Energy through the purchase of preferred equity. The definitive agreement has been approved by both companies’ boards of directors and is subject to, among other things, shareholder and customary federal and state regulatory approvals.
The transaction is expected to close within nine months from September 19th announcement date. The agreement expires nine months after its execution but may be extended by either company for up to three months.
If the deal does not materialize for some reason or another the stock could easily drop precipitously, as the company might face a drop in its debt ratings and loss of confidence from its trading partners. I do believe however that if the deal with Midamerican were to be canceled, EDF might still step in and make a competing offer, but the terms might not be as good for CEG’s shareholders. EDF did offer $35/share previously, but Constellation’s board rejected the offer and chose Berkshire’s MidAmerican Holdings offer instead. Given the ample liquidity that Berkshire Hathaway has at the moment I do believe that the merger has a higher chance of occurring.
I would be considering purchasing CEG on dips below $23.50. One definitely has to be nimble with this position however; therefore I would look into exiting some or all of my positions in CEG on spikes above $25.50. This is highly speculative position, which is geared towards absolute performance. CEG currently pays a quarterly dividend of $0.4775/share, which makes up for an annual yield of 8.20%.
For updates on Constellation and MidAmerican check out this website. In addition to that check the PRELIMINARY PROXY STATEMENT AMENDMENT filed with the SEC from this link.
Full Disclosure: I am long CEG
- Constellation Energy Group (CEG) merger arbitrage opportunity
- Dangers of the Greedy Limit Order
- Berkshire Hathaway Historical Total Return Performance
- Buffett's Berkshire Hathaway Stock Portfolio Holdings
- Warren Buffet - The richest investor in the World
Monday, October 27, 2008
Despite all the doom and gloom there were several notable dividend increases over the past week.
Microchip Technology (MCHP), a leading provider of microcontroller and analog semiconductors, announced an increase in the dividend to 33.9 cents per share. Microchip initiated quarterly cash dividend payments in the third quarter of fiscal year 2003 and has increased the cash dividend by 9.4% from the dividend level one year ago. The stock currently yields a whooping 6.30%. I doubt that future dividend raises could increase at the same rate, given the high payout ratio, unless of course earnings could triple by the end of the next decade.
Aflac's (AFL) announced that its Board has approved a 16.70% increase in its quarterly dividend from $0.24 to $0.28 per common share effective first quarter of 2009. Aflac is a dividend aristocrat which has increased its dividends for 26 consecutive years. The stock currently yields 2.60%.
Eaton Vance Corp. (EV) announced that its Board has approved a 3% increase in its quarterly dividend from $0.15 to $0.155 per common share. The company is a member of the dividend achievers index having increased its dividends for over 2 decades. The stock currently yields 3.40%.
Goodrich Corporation (GR)announced that its Board approved an 11% increase in its quarterly dividend from $0.225 to $0.25 per common share. Despite this raise and last years double digit dividend increase, the company only has two years of back to back dividend increases over the past decade. The stock currently yields 2.90%.
Airgas, Inc (ARG) announced that its Board approved an 33% increase in its quarterly dividend from $0.12 to $0.16 per common share. The company has paid dividends since 2003 and the new rate is over five times the quarterly dividend payments in 2003. The stock currently yields 1.60%.
As always, the dividend increases list led me to put AFL and EV on my list for further research.
Friday, October 24, 2008
Warren Buffett, the student of the now famous father or value investing Ben Graham, is the greatest stock investor of our times. He has built his flagship company, Berkshire Hathaway from a small mill to a diversified conglomerate with a total market cap of 175 billion dollars. His company holds a wide portfolio of over 30 individual stocks traded on US exchanges in addition to many private companies like Nebraska Furniture Mart and Geico. Despite the fact that it is generally not recommended to follow guru’s advice blindly without doing your homework, researchers have proven the fact that mimicking Berkshire Hathaway’s stock portfolio would have yielded tremendous gains over the past 30 years.
Below you could find Berkshire Hathaway’s stock holdings as of 6/30/2008. You could open the spreadsheet from this link as well.
This article originally appeared on The DIV-Net one week ago. It also appeared on 37th Carnival of Money Hacks: Wonders of the World.
Wednesday, October 22, 2008
The indexes are:
- The S&P Dividend Aristocrats Index which measures the performance of S&P 500 index constituents that have followed a policy of consistently increasing dividends every year for at least 25 consecutive years. You could view the current list of components of the Dividend Aristocrats index from this page. This index is reviewed every December, thus I expect several companies which cut their payments to shareholders in 2008 to be booted out of the index in two months.
- The S&P High Yield Dividend Aristocrats Index is tracking the performance of the 50 highest yielding Dividend Aristocrats in the S&P 500 index. You could view the current components of this index on this page. This index is the only dividend aristocrats’ index that can actually be bought and sold through an ETF. The ticker of the High-Yield Dividend Aristocrats ETF is SDY.
- The S&P Europe 350 Dividend Aristocrats index tracks the performance of the stocks in the S&P Europe 350 Index which have increased their dividend payments for over 10 consecutive years. The current list of constituents could be found here.
- The S&P/TSX Canadian Dividend Aristocrats list tracks the performance of the S&P/Citigroup Broad Market Index of Canadian equities which have increased their dividends for at least seven consecutive years. You could access the constituents list from here.
The power of the dividend aristocrats has been evident in a turbulent year like 2008 so far. Below you could find the year to date performance of three out of the four indexes mentioned above: (Source S&P)
S&P Dividend Aristocrats Index -20.69%
S&P High Yield Dividend Aristocrats Index -21.92%
S&P Europe 350 Dividend Aristocrats index -34.93%
In comparison the S&P 500 index has lost 34.84% of its value since the beginning of the year as of October 17, while the S&P Europe 350 Index has lost 38.49%.
This goes to prove that the dividend aristocrat indexes have shown once again that dividend investors get the best of both worlds – rising dividend income as well as better price returns over time as compared to broad market indexes. This of course is not a one year phenomenon - the S&P Dividend Aristocrats Index has outperformed the S&P 500 over 50% of the time since its launch in 1989.
- Why do I like Dividend Aristocrats?
- Long term returns of S&P high-yield aristocrats
- Historical changes of the S&P Dividend Aristocrats
- Current Aging of the Dividend Aristocrats
Tuesday, October 21, 2008
Check the table below for historical performance of BRK-A share values at year end since 1976.
If Buffett is truly buying american stocks, then the logical step of following his advice is let him do all the work by purchasing Berkshire Hathaway A or B shares.
Full Disclosure: None
- Warren Buffett's Berkshire Hathaway Stock Portfolio Holdings
- Warren Buffet - The richest investor in the World
- Attractive Dividend Stocks in the buy zone
- Top 20 one day percent decreases in Dow Jones
Monday, October 20, 2008
Now that you are familiar with Dividend Growth Investor, let’s take a look at this week’s Festival of Stock participants. If you are a blogger and you are looking to get your name out there, check out the Festival of Stocks schedule and ask George to sign you up to host this famous festival.
As for this edition there were 19 submitters that made the cut. Here are this week’s entries:
Sandy Naidu presents Warren Buffet?s Advice posted at Future Nest Egg.
Andy presents The Crashes of 2008 - Year End Predictions posted at $aving to Invest.
Lee Hall presents The Bailout: the Winners and the Losers posted at Cheap Lee Dot Com.
Adam Freedman presents The Temptations of the Stock Market posted at The Investor's Journal.
Will presents Recession, Panicking Investors, Stock Market Freefall… What Is Warren Buffett Doing? posted at Your Finish Rich Plan.
Benjamin presents Are World Financial Markets Still "Perfect"? posted at Trees Full of Money.
Marcus presents Stock Market Education For Beginners - Learning From Your Mistakes posted at Stock Market Investing For Beginners.
D4L presents Stock Analysis: Intel Corporation (INTC) Attractively Priced posted at Dividends4Life.
Steve Alexander presents Quick Take - Take Two Interactive (TTWO) posted at MagicDiligence - The Best Magic Formula Stocks.
David presents How Your Portfolio Performance Compared With the Averages Determine the Risk You Are Taking posted at Investing School.
Contrarian Profits presents 4 Ways to Play the Coming Stock Market Rally posted at Contrarian Profits.
Enoch Ko presents Security Analysis: Chapter 1: The Scope and Limitations of Security Analysis. The Concept of Intrinsic Value posted at The Wealth Accumulator.
Michael Cintolo presents A Word on Long-Term Optimism posted at The Iconoclast Investor.
Jae Jun presents Update: Puget Energy (PSD) Arbitrage posted at Old School Value.
Mark presents Many NCAV's Stein Mart SMRT, Superior Uniform SGC, SPAR, USU posted at Stock Pursuit.
MBB presents How To Become A Millionaire and Get Rich In 10 Steps posted at Money Blue Book Finance Blog.
Leon Gettler presents Hedge fund implosion posted at Sox First.
Super Saver presents Bottoming of the Stock Market is Testing my Patience posted at My Wealth Builder.
James Cullen presents "Surveying the Rubble" posted at College Analysts.
That concludes this edition of the Festival of Stocks. Submit your blog article to the next edition of Festival of Stocks using our carnival submission form. Past posts and future hosts can be found on our Festival of Stocks index page for those of you interested in reviewing the archives.
Next week’s Festival of Stocks will be at The Div-Net. The hosting schedule is booking up quick for the end of 2008. If you are interested in hosting a future edition of the Festival of Stocks, please visit the schedule to find a free slot. Then contact George with the name of your site, blog URL, email address, and the date your prefer to host.
Free Credit Report from Quizzle
Sunday, October 19, 2008
Despite all the record volatility and record price whipsaws up and down, there were several stocks that showed enough confidence in their future earnings ability to declare modest dividend increases.
PPG Industries (PPG) declared a regular quarterly dividend of 53 cents a share, an almost 2% increase over PPG’s prior quarterly dividend of 52 cents a share. PPG Industries is a dividend aristocrat as well as a component of the S&P 500 index. It has been increasing its dividends for the past 36 consecutive years. PPG currently yields 4.70 %
VF Corporation (VFC) Board of Directors declared a quarterly cash dividend of $.59 per share, an increase of $.01. It is a dividend aristocrat as well as a component of the S&P 500 index. It has been increasing its dividends for the past 34 consecutive years. VFC currently yields 4.20%.
Kinder Morgan Energy Partners, L.P. (KMP) increased its quarterly cash distribution per common unit from $0.99 to $1.02. Kinder Morgan Energy Partners, L.P. owns and manages energy transportation and storage assets in North America. The partnership currently yields 8.70%.
Of these three stocks, only KMP looks promising in terms of dividend growth. Check out my analysis of the stock for your reference.
Full Disclosure: Long KMR
- V.F. Corporation (VFC) Dividend Analysis
- PPG Industries (PPG) Dividend Stock Analysis
- BB&T Corporation (BBT) Stock Dividend Analysis
- Chevron Corporation (CVX) Dividend Stock Analysis
Friday, October 17, 2008
PHG is an international dividend achiever. It has been increasing its dividends for the past six consecutive years. From the end of 1999 up until early September 2008 this dividend stock has delivered an annual average total return of 8.20 % to its shareholders. The stock has lost about 56% of its value so far in 2008.
Disclosure: I do not own shares of PHG
Thursday, October 16, 2008
I seldom discuss personal finance matters on this blog. I do believe however that one needs to have an emergency fund covering at least nine to twelve months worth of living expenses before they become an aspiring dividend investor. This emergency fund is most likely to be invested in fixed income instruments such as Certificates of Deposits, savings accounts or even money market or bond funds. I believe that asset allocation should be viewed in the context of an individual’s total net worth, as opposed to only focusing on the brokerage/retirement accounts that one owns. Thus I believe that investors who have more than 15 years before retirement and have an emergency fund covering nine to twelve months would have an above average fixed income allocation if they also held fixed income instruments in their portfolios.
Once you have your emergency fund set up, the next step in your personal finance journey is to take full advantage of any “free money” opportunities available to you including purchasing company stock at a discount or contributing to your company retirement account at least to get the maximum company match to your contributions.
Only after that would I consider investing in dividend stocks. A good amount to start dividend investing is $10,000. If you start with less than $10,000 your expenses would eat up a large portion of your profits. Expenses could range from stock commissions, extra expenses for tax filing since your situation would become a little more complicated. Tracking your cost and dividend income for tax purposes would be a huge burden and not cost effective at all if you have a small amount of funds to invest. Another expense could be an annual expense that some brokers like Zecco or Sharebuilder charge you if you open an individual stock retirement account.
If you plan on contributing several hundred per month however, you could definitely start investing with a smaller amount of initial capital as long as you stick to your schedule. One positive for this type of strategy is that you get to dollar cost average into your favorite dividend stocks which should decrease your risk somewhat.
And to answer the last question, yes I still believe it is a great time to start or keep investing in dividend stocks. Chances are that every dollar that you put in stocks today would generate one dollar in dividend income in three to four decades if you reinvest your dividends. In addition to that I also believe that bear markets are an ideal way to start accumulating assets in many good quality dividend names at bargain prices.
This post appeared on the Carnival of Personal Finance - Financial Armageddon Edition!
- Unlimited Free Trades at Zecco in October!
- Back test Results of one Rule of Thumb
- Diversification and portfolio allocation
- My Dividend Growth Plan - Strategy
Wednesday, October 15, 2008
BBT is a dividend aristocrat as well as a component of the S&P 500 index. It has been increasing its dividends for the past 37 consecutive years. From the end of 1999 up until September 2008 this dividend stock has delivered an annual average total return of 3.60 % to its shareholders. The stock has gained about 12% so far in 2008.
Disclosure: I do not own shares of BBT
- Nordic American Tanker (NAT) Dividend Stock Analysis.
- Toronto-Dominion Bank (TD) Dividend Stock Analysis
- Archer Daniels Midland (ADM) Dividend Stock Analysis.
- UDR Dividend Stock Analysis
- Free Magazines
Tuesday, October 14, 2008
While most all of them are free of charge, they will normally ask you a few questions before approving you for your selections, so be ready to answer a short couple of questions about yourself. Browse through the list of free magazines, white papers, downloads and podcasts to find the titles and editions that best match your skills and interests; topics include accounting, education, automotive, electronics, construction, internet, medicine, banking, financial planning, multi-media and trading. You just have to fill in the application form completely and submit it in order to be approved for them.
Most of these magazines are ad-supported, so they do need you to sign up to increase readership. I do get a commission if you do sign up however. I hope you’ll find that useful - let me know if you have any questions about the service!
It has taken S&P 500 about 5.2 years on average to recover from to above its bear market highs since 1929. If we check the same parameter starting in 1956 the average recovery time from a bear market comes out to 2.8 years on average.
I think that now is a perfect time to start looking for bargains and then dollar cost average in them. I would then consider ignoring most pundits out there who claim that this time it is different and that the world is coming to an end and instead focus on companies which have survived many recessions and bear markets while increasing their earnings and dividends to shareholders for many years. One great list to start with is the dividend aristocrats maintained by Standard and Poors.
I selected the following dividend aristocrat stocks which fit these criteria:
1. P/E ratio is under 20
2. Dividend Payout Ratio is under 50%
3. Dividend yield is at least 2%
4. 5 year dividend growth rate is at least 6%
I came out with the following list. You could also open the list from this link.
It is in times when gurus claim that fundamentals don’t matter any more when the astute investor will find great value stocks with decent moats at fire sale prices. Sometimes the market brings you fat pitches and it’s up to you to swing or not. As a dividend value investor however I am perfectly ok if the stock market unchanged or lower for several months or even years as I am certain that most dividend aristocrats will keep paying dividends and even better- increase them. Thus I will continue getting a return on my investment no matter what.
Full Disclosure: Long JNJ, PG, ADM, ADP, EMR, FDO, GWW, JNJ, MHP, MMM, MTB , PEP, PG, SHW, STT, XOM
- Average Durations of Previous Bear Markets
- Why do I like Dividend Aristocrats?
- Dollar Cost Averaging
- My Dividend Growth Plan - Strategy
Monday, October 13, 2008
Last week there were several companies which announced increases in their annual dividend payments to shareholders:
United Technologies Corp. (UTX) announced a 20.3 percent quarterly dividend increase to 38.5 cents per common share. CEO Louis Chenevert said, "In today's tough economic environment, UTC's balanced portfolio, global footprint, and seasoned executive team continue to deliver solid results. This dividend increase, consistent with our pattern over many years, reflects our confidence in sustained earnings growth. UTC's liquidity and free cash flow remain strong."
UTX has been increasing its dividends for the past 14 consecutive years. Annual dividend payments have increased over the past 10 years by an average of 14.20% annually, which is the same as the growth in EPS. This dividend achiever currently yields 3.20% based off its new dividend rate. I think that this company is a steal at this moment. I will be looking to add to my position there.
TEPPCO Partners, L.P. (TPP) declared a third quarter cash distribution of $0.725 per unit. I analyzed this partnership several months ago and liked what I saw. The stock has lost a little less than 50% since then. Annual dividend distributions have increased over the past 10 years by an average of 5.90% annually, which is slightly above the growth in EPS. The partnership managed to increase its distributions to unit holders for a second time in 2008. This dividend achiever currently yields 13.60%.
Kinder Morgan Energy Partners, L.P. (KMP) announced it expects to increase its quarterly cash distribution per common unit next week to $1.02 ($4.08 annualized) from $0.99 ($3.96 annualized). This will represent an increase of 16 percent over the third quarter 2007 quarterly distribution of $0.88 ($3.52 annualized). KMP is another partnership that I like. You could purchase either KMP or KMR, which is the management company that owns and operates KMP. KMR distributes additional shares to unit holders as opposed to dividends. Both KMR and KMP currently yield between 9.00% and 9.80%.
RPM International Inc. (RPM) declared a regular quarterly cash dividend of $0.20 per share. This payment represents a 5.3% increase over the $0.19 quarterly cash dividend paid at this time last year. This high-yield aristocrat currently yields 5.70%. I would have added to RPM but unfortunately the current dividend exceeds the company’s average 10 year earnings per share. In addition to that the P/E ratio is about 36 right now.
Teekay Corporation (TK) has approved a 15% increase in the Company's quarterly cash dividend from $0.275 to $0.31625 per common share, This international dividend achiever has almost tripled its quarterly payment to shareholders since 2003. In addition to that the company’s Board of Directors authorized the repurchase of $200 million of its common stock. This amount represents approximately 14 percent of the Company's total market capitalization as of October 6, 2008. This dividend stock currently yields 6.2%.
Acme United Corporation (ACU) declared a cash dividend of 5 cents per share on its outstanding common stock which represents an increase of 25%. The company follows an interesting pattern of increasing its dividends every 6 quarters, which it has followed since 2004. This stock currently yields 2.10%.
Apogee Enterprises, Inc. (APOG) announced that its Board has approved a 10% increase in its quarterly dividend from $0.074 to $0.0815 per common share. This designer and developer of glass products, services, and systems has increased its dividends for over 20 years by an average of 7.2% per annum. This company yields 2.90% at the moment.
Triangle Capital Corporation (TCAP) declared a cash dividend of $0.38 per share. The new payment represents a 40.7% increase over the dividend paid this time last year. This is the Company's seventh consecutive quarterly dividend since its initial public offering in February, 2007. Triangle Capital Corporation is a public investment firm specializing in buyouts, change of control transactions, acquisitions, growth financing, and recapitalizations in lower middle market companies. This stock currently yields 14.80%.
Full Disclosure: I am long RPM, KMR, TPP, UTX
- Kinder Morgan Energy Partners (KMP) Dividend Analysis.
- TEPPCO Partners (TPP) Dividend Analysis
- RPM Dividend Analysis
- Why do I like Dividend Achievers
Friday, October 10, 2008
One of the components of every stock analysis I have done at my blog has always been to show the effects of dividend reinvestment over a ten year period of time. The results are truly amazing as the dividend income with reinvestment almost always outpaces the dividend income without reinvestment.
The main pro of re-investing your dividends is that you get the power of compounding in your favor. You are essentially getting “free shares” by investing the total dividend income into more stock. If you have also picked a solid stock that tends to increase the payments to stockholders every year you are essentially turbo charging your portfolio for the long run and should expect to receive even faster annual dividend raises.
Another reason for re-investing dividends is that one could dollar cost average their dividend income into more stock by spreading their purchases over a period of time, which also decreases risk.
The past decade was definitely a good time to be re-investing your dividends in Realty Income (O).
One con for dividend reinvestment is that you still get taxed on the income that you receive. Another thing that the investor holding stocks in a taxable account should do is keep a very through bookkeeping of their activities in order to efficiently file their tax returns for the year.
One of the major reasons why people are hesitant to do dividend reinvestment however could be that instead of purchasing new assets or enjoying their dividends, they are adding onto a single investment which could go bankrupt. Chances are your company might fail leaving you with a lot of shares which are trading at or close to zero, even after years of diligent reinvesting of dividends. Check out FRE, FNM and LEH for reference. With hindsight, investors in those former financial behemoths would have been better off putting their money in US long bonds.
Even if the company doesn’t fail, it could still eliminate its payments to shareholders, which leaves the investor without the dividend income that they were relying onto. GM, which has always been touted as a great barometer for the overall US economy is a recent example of this scenario (remember the saying “As goes GM so does the nation”).
So what should investors do about dividend reinvestment?
I believe that as long as the dividend investor holds a diversified portfolio of income producing instruments, they should be able to weather any industry specific related storms successfully and without losing all of their dividend income in the worst case scenario. The best strategy for this type of person would be to take maximum advantage of the power of compounding and re-invest their dividends.
On the other hand however, if you plan on living off your investments, you might want to hold off dividend re-investment and enjoy your money working for you.
I believe that the question of whether to re-invest your dividends or not is mostly a question of how diversified your portfolio is and when do you plan to use the dividend income that is generated by it.
Wednesday, October 8, 2008
REP is an international dividend achiever. It has been increasing its dividends for the past five consecutive years. From the end of 1999 up until September 2008 this dividend stock has delivered an annual average total return of 7.70 % to its shareholders. The stock has lost about 16% of its value so far in 2008.
Disclosure: I do not own shares of REP
Tuesday, October 7, 2008
The average performance one year after a large one day percentage drop was 6.46% (without accounting for dividends).
- Average Durations of Previous Bear Markets
- Dow 370,000
- The ultimate passive investment strategy
- "Determining Withdrawal Rates Using Historical Data"
Monday, October 6, 2008
There was some negative dividend news from S&P that there were 138 dividend cuts or suspensions in the third quarter while 346 issues increased their payments to shareholders. Most of the dividend cuts were in the financial sector. Standard and poors reported the following:
“It was the worst September for dividends since we started keeping dividend records in 1956,” says Howard Silverblatt, Senior Index Analyst at Standard & Poor’s. “During the second quarter, companies were nervous and cautious. The third quarter, however, saw many companies deciding to take action, and that action took $22.5 billion out of the pockets of investors.”
There were some bright spots however as the number of dividend increases were almost three times the number of dividend cuts or omissions.
Last week there were several companies which declared increases in their dividend payments to shareholders.
CLARCOR Inc. (CLC) Board of Directors declared an increase in the regular quarterly dividend from $0.08 per share to $0.09 per share. This increase raises the annual rate from $0.32 per share to $0.36 per share, a 12.5% increase and the 25th consecutive annual increase. The stock currently yields about 1%.
DENTSPLY International Inc. (XRAY) declared a quarterly cash dividend of $0.05 per share of common stock, an indicated annual rate of $0.20 per share. This represents approximately an eleven percent (11%) increase in the existing dividend. This dividend achiever currently yields about 0.50%.
Northwest Natural Gas Company (NWN) has increased the quarterly dividend on the company's common stock by 5.3% to 39.5 cents per share. This marked the 53rd consecutive year of dividend increases. NWN is a dividend champion that yields about 3% right now and trades at less than 20 times earnings. I plan on researching this stock further.
Speedway Motorsports (TRK) has increased the annual dividend on the company's common stock by a little over 1% to 34 cents per share. This is the seventh consecutive year that Speedway Motorsports has increased cash dividends to its stockholders. The stock currently yields 1.80%.
MFA Mortgage Investments, Inc. (MFA) announced a 10% increase in its quarterly dividend to $0.22 per share for the third quarter of 2008. Despite the fact that this stock has paid dividends for over ten years, the quarterly payments are pretty volatile from month to month. MFA's primary focus is high quality, higher coupon hybrid and adjustable-rate MBS assets. At June 30, 2008, approximately 99% of MFA's assets consisted of MBS issued or guaranteed by an agency of the U.S. government or a federally chartered corporation, other MBS rated "AAA" by Standard & Poor's Corporation, MBS-related receivables and cash. The stock currently yields over 15%.
I have found that screening the dividend news could provide you with some gems for further research. One such gem could be NWN. Furthermore with so many negative news concerning the stock market and dividend cuts in the financial sector it pays to know that there actually are companies which are confident enough in their ability to generate stable revenues and earnings which would support dividend increases.
Full Disclosures: None
Friday, October 3, 2008
The abbreviation DRIP stands for dividend reinvestment plans. Drips are a nice low cost way to purchase dividend stocks and build a stock portfolio. These programs allow investors to purchase shares in two ways either through reinvesting dividends or with optional cash payments that can be sent to the companies you want to invest in. One benefit of drips is that they allow dividend reinvestment in partial shares. Another benefit of other drips is that some allow reinvesting your dividends by purchasing shares at a discount to the market price. Two such companies that I am aware of that do this are ACAS and NNN. Below you can also check my analysis of ACAS and NNN.
One of the issues with drips is that in order to participate in the DRIP you must already have purchased one share of the company stock. Some companies have overcome that hurdle for shareholders by letting people make a direct purchase in their stock. Stocks like GE or XOM are good examples of direct purchase plans with reinvestment plans.
Another problem with drips however is that you do not have the execution speed like you do when you purchase shares through a broker. If you want to buy or sell shares at the current market price, you can’t do it. In addition to that, despite the fact most drip plans allow charge low or no fees for purchasing additional shares or reinvesting your dividends, most drips have high initial set-up fees.
Another issue that I have with drips is availability. Not all companies offer drips, so you might have to use a stock broker after all.
From a tax perspective drip Investors must track their cost of shares to be used to calculate capital gains tax when shares are sold. In addition to that very few dividend reinvestment plans allow you to hold stocks in an IRA DRIP, which allows for a tax free compounding of your dividends. Examples of non-taxable dividend reinvestment plans include XOM, which offers both traditional and ROTH IRA dividend reinvestment plans.
From a diversification perspective a drip investor has to enroll in as many plans as the number of individual companies he or she plans to invest in. This would a be very inefficient way to keep track of your investments.
The main positive of drips is the fact that one can start with a small amount of money, typically enough to buy one share of stock. DRIPs also allow novice investors to dollar cost average small amounts of money each month without getting killed on the brokerage commissions. The automatic dividend reinvestment comes in handy as if allows you to simply set up your drip with a company and then its all automatically invested into additional shares, while you take full advantage of the power of compounding.
So what is a good alternative to dividend reinvestment plans?
Most brokers allow you to purchase stock in any company that is traded on the NYSE, NASDAQ, AMEX and the OTC markets by charging you a small commission for that. After that however most brokerages do not charge any additional fees if you decide to reinvest your dividends. Some brokers like Sharebuilder allow you to reinvest your dividend by purchasing fractional shares, which accelerates the power of compounding in your favor. In addition to that, I would prefer having my entire dividend portfolio concentrated in one or two places as opposed to having it spread out among thirty different reinvestment plans. Most brokers also keep much more detailed information of your transactions activity in one place, compared to drip plans, which definitely helps during tax time.
And last but not least it is much easier to open a retirement account at a stock broker for a small fee, without being limited to the small number of drips inside an IRA out there.
DivGuy and Get Rich Slowly have both published some insightful articles on DRIPs. Check them out.
- Why dividends?
- Why dividends matter?
- My Dividend Growth Plan - Strategy
- When to sell your dividend stocks? Part 2
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