Wednesday, May 1, 2013

Twenty Dividend Stocks I Recently Purchased for my IRA Rollover

As I mentioned in an earlier article, I am ramping up my contributions to a 401 (k) plan, in order to reduce current tax liabilities and enjoy tax free compounding of gains. However, I already had an old 401 (k), which was eligible for a rollover. In early April I cashed out the index funds in it, and rolled the money over into an IRA. After that I decided to equally allocate the money in twenty individual dividend stocks. The money was immediately available for me to invest in the very next morning. This is a different account from the IRA I used to lower my current tax liabilities.

I had identified a list of stocks to purchase, and decided to buy them throughout the day and be done with it immediately. I read many blogs, newspapers, financial websites, and only saw negative sentiment toward the stock market. This is a strong sentiment indicator that the market will continue going up from here. This is why it is best to purchase stocks that look fairly valued today rather than wait, and purchase them when they get more expensive. My review of dollar cost averaging identified that putting money to work as soon as possible might be a better solution than waiting to allocate the funds. Of course, since i went from 100% invested in stock mutual funds to 100% invested in dividend stocks, this should have minimal effect on me.

Over the past four years, I keep hearing the same information that stocks are overvalued and that we are going to see some sort of hyperinflation. Lucky for me, I only pay attention to company fundamentals. I should know better, since economists as a group are known for having forecast nine out of the past five recessions. I also keep looking at the number of perma bears, who have been consistently bearish on stocks and the economy for the past 20-25 years. At one point they will be right for a few years, but then, even a broken clock is right two times per day.

Markets can easily go higher from here, given the fact that everyone is expecting corrections. However, I am not a market timer, which is why I reinvested almost all of the money immediately into the following 20 stocks:


The one thing I care about is purchasing great businesses at fair prices. My analysis of these businesses has shown that each of them should be able to generate higher earnings to pay me a rising stream of dividends for years to come. Even if stock prices fell by 50%, the dividend income would most likely hardly change. Because I do not plan on adding any money in this particular IRA account, I have set up the distributions to be reinvested automatically.

You might have also noticed that I am holding an MLP in an IRA. However, for the two years since I owned Oneok Partners (OKS), the UBTI has never been even in positive territory. This is why I doubt I would have any taxable issues with this MLP in my rollover IRA.

Full Disclosure: I have a position in ADM, AFL, APD, CVX, DLR, FDO, JNJ, KMI, KO, MCD, MDT, MMM, MO, OKS, PG, PM, UTX, VOD, WMT

Relevant Articles:

Six Dividend Paying Stocks I Purchased for my IRA
The Hyperinflation Scam
Reinvesting Dividends Pays Off
MLPs for tax-deferred accounts
Dollar Cost Averaging
- Carnival of Wealth, Native American Edition

12 comments:

  1. Would you mind commenting on your choice of KO and JNJ? I agree both are outstanding companies, but they seem to violate your "fair valuation" criteria of PE of 20 or less.

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  2. It seems to me that most everything is inflated. These days, the bargains are gone and the best we can probably hope for is "fair value".

    My wife and I have our Roth accounts at about 20% cash. Until some kind correction occurs, it's going to stay at that level. At the end of every quarter we are using accumulating dividends to make small purchases, but I don't feel comfortable letting our cash level go below 20% right now.

    ReplyDelete
  3. Of all these quality stocks, which ones would you get first or right now?

    I really enjoy your blogs and get quite a bit of information from them. My husband & I have recently invested in several dividend stocks based on your analyses. However, I always struggle with the timing of when to get specific stocks.

    ReplyDelete
  4. Anon,

    KO is trading at 19 times forward earnings. JNJ is trading at 16 times forward earnings. I would rather buy an outstanding company at a fair price, than a mediocre one at a low price.

    TheHawk,

    Having a cash position is up to each investor to determine. I agree that it is getting tougher to find good stocks to buy, but I still see good opportunities for capital deployment. I am considering building up my cash position to 1 - 2 years living expenses. I have been meaning to do that for the past 3 years however. If a correction comes, thats great. If not, that's fine too.

    Second Anonymous,

    Unfortunately, I cannot give you individual advice as I am not your financial adviser and do not know your financial situation. I would advise that you only invest in companies you feel comfortable investing in. On this site I write only about things I do, and most of the times the stock analyses represent just high level summaries of my ideas.

    The 20 stocks I purchased were bought in April.. And haven't really moved as much as a whole.

    ReplyDelete
  5. That's a great list. I wish I could buy all these stocks the same day.

    Also, I must say that I agree with you that trying to wait for a "good" time to buy stocks is a losing proposition. The market is simply unpredictable. I prefer to have my money working for me as fast as possible in dividend stocks I've determiend to be fairly valued. When you wait for a "good" entry point, you leave dividend payments on the table.

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  6. "KO is trading at 19 times forward earnings. JNJ is trading at 16 times forward earnings. I would rather buy an outstanding company at a fair price, than a mediocre one at a low price."

    That's exactly what people said during the tech bubble in 1999 and 2000. Buying KO today versus where it was in March (or throughout 2012), you just prepaid the next 5 years of dividends.

    ReplyDelete
  7. Second AnonymousMay 2, 2013 at 9:45 AM

    Of course I take full responsibility in determining which stocks to purchase but I was just wondering of the ones listed, if you do have any preferences - eg. ranking? or if there were specific price points when you choose to initiate a position or wait?

    ReplyDelete
  8. Hi, DGI:

    do you think these 20 stocks are at fair prices now?

    thanks

    ReplyDelete
  9. I currently find all companies to be fair valued. If I were doing the rollover today, I would probably still buy same stocks, but might add AMP as well.

    Third anonymous, buying KO at 20 times earnings is very different than the bubble years of 1999- 2000. I would advise you to check the data in the following post:

    http://www.dividendgrowthinvestor.com/2013/04/opportunity-costs-for-dividend-investors.html

    Best Regards and good luck in your investing.

    ReplyDelete
  10. DGI,

    Man, what an awesome buy list there. Fantastic list of companies. Although it's tough to find bargains right now, it's good to know that you can sleep well at night even if the market were to be shut down for the next 10 years. Almost every single one of these businesses have a very high likelihood of not only still being in business in a decade, but being significantly more profitable than they are today.

    Good stuff!

    Best wishes.

    ReplyDelete
  11. I have been doing 401K/Simple IRA investing for a while now in similar( large overlap) stocks. Looking forward, my concern is how i will withdraw it in 10 years. $10k invested now, yielding $300 in cash flow dividends could easily be worth $20K yielding $600 per year in 10 years. What is your plan for starting distributions? Will you have to sell off your investment and incur tax liability or is there a way to keep distributions matching the dividend?

    ReplyDelete
  12. DM,

    I try not to time the market. In hindsight, I should have purchased OKS yesterday, rather than last month. I always put my money in fairly priced stocks. For example, I assume in 30 yrs, KO will trade at 250 - 300/share. In 30 years, assuming the stocks work out, it won't matter if I bought at 35 or at 45.

    Latest Anon,

    Check the link at the top of the post, where I discuss how I will withdraw money from IRa and 401K plans. My situation is different than you though. I already have a little over half of my monthly expenses covered by dividends in taxable brokerage accounts. Which is why I can afford to start maxing out tax deferred accounts today to minimize taxes.

    ReplyDelete

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