Monday, October 28, 2013

Nine Dividend Paying Stocks I Accumulated in the Past Month

My 2013 Roth IRA experiment continued on, with the purchase of nine additional dividend paying stocks. With this experiment, I am trying to prove that it is possible to create a diversified dividend portfolio even if you only had a few thousand dollars to invest, by holding great businesses for the long term. I am also proving a point that almost anyone can start investing in dividend paying stocks, and not have to pay high commissions in the process. With my Sharebuilder account, I am going to essentially end up paying slightly less than 0.50% of total contributions. ($24 in commissions to invest $5,500). Another goal for this experiment is that investors who are just starting out should not be discouraged from investing and should not despise the days of small beginnings.

While the original ten securities were purchased in one transaction in early September, for the second month I tried to space it out a few times a week. The goal of building a portfolio is to build it over time and slowly. It should not matter if you are investing $5.5 million or $5,500 – the principle of accumulating attractive dividend paying stocks over time, and building a portfolio of quality companies is the same in both situations.

The companies I invested in over the past month include:

Kinder Morgan, Inc. (KMI) owns and operates energy transportation and storage assets in the United States and Canada. The company was beaten down by negative comments from an analyst whose motives seem highly questionable. I viewed this as an opportunity to acquire shares in a business that owns general partner interests and holds units in two master limited partnerships – Kinder Morgan Energy Partners (KMP) and El Paso Pipeline Partners (EPB). Because of the general partner arrangement, I expect Kinder Morgan Inc to be able to grow dividends by 9 – 10%/year for the foreseeable future. Add in to that the high current yield of 4.60% and the fact that its CEO has almost all of their net worth in the stock, and I think I have a winner.

Altria Group, Inc. (MO), through its subsidiaries, engages in the manufacture and sale of cigarettes, smokeless products, and wine in the United States and internationally. I found this domestic tobacco stocks to be cheap at 16.60 times earnings and yielding 5.40%. The company has been able to grow dividends by 10.60%/year since it spun-off Phillip Morris International (PM) in 2008. While number of smokers declines every year, the prices per pack increase. This leads to growing profits in an industry that squeezes out efficiencies and cannot spend money to advertise its products. Hence it is tough for new entrants into the market, leading to hefty returns for shareholders. Check my analysis of Altria for more details.

International Business Machines Corporation (IBM) provides information technology (IT) products and services worldwide. The company was much cheaper at times earnings than competitors like Accenture (ACN) although its yield is low at about 2%. This dividend achiever has managed to boost distributions for years in a row. The good client relationships are generating rising profits, which are expected to reach $20/share by 2015. I bought the stock twice for the ROTH portfolio.In addition, I also added to my existing IBM position in taxable accounts. One was before the dip two weeks ago, and the other time was after it. Check my analysis of IBM for more details.

BP p.l.c. (BP) provides fuel for transportation, energy for heat and light, lubricants to engines, and petrochemicals products. is one of the most underloved oil companies out there. It is trading at a forward P/E of 9.70 and with one of the highest current yields of 5%. The company has only raised dividends since the cut in 2010, and everyone is scared that the Gulf of Mexico incident in 2010 might bankrupt it. I think those fears are irrational, and I also initiated a position in my taxable accounts as well.

Vodafone Group Public Limited Company (VOD) provides mobile telecommunication services worldwide. Vodafone is selling its 45% stake in Verizon Wireless to Verizon for $130 billion. Currently, Vodafones entire market capitalization is approximately $170 billion. While investors will receive some cash consideration and stock in Verizon wireless after the sale is completed in 2014, I believe that the remaining business for Vodafone is still very undervalued. Given the status of a dividend achiever, attractive valuation at 14.50 times earnings, and the high yield of 5.60%, I like the company. I also believe that the company has a lot of potential. Once Europe gets it mess together, Vodafone might really shine in your portfolio. Check my analysis of Vodafone.

General Mills, Inc. (GIS) produces and markets branded consumer foods in the United States and internationally. I initiated a position in General Mills, which had good valuation at the time. I like the revenue and earnings stability of food companies, and the almost complete lack of exposure to the cyclical whims of the economy. Companies like General Mills have strong brands that consumers purchase repeatedly throughout the course of the year. It is not surprising that even if the economy does not do well, people still need to eat. This dividend achiever has raised distributions for a decade, yields 3.10% and trades at 17.20 forward earnings. Check my analysis of General Mills.

I also bought shares in Kellogg (K) for the Roth IRA portfolio, using the same logic that I used for General Mills. Food staples usually grow at a steady rate, have quality brands, and manage to reward shareholders with rising dividends over time. I was particularly attracted by Kellogg, because the earnings figures in most financial databases do not show the true earnings power of the company. My Yahoo finance screen shows that Kellogg is trading at 23.90 times earnings. Therefore, a lot of investors are likely ignoring this stock, because they think it is too expensive. However, the company is expected to earn $3.77/share in 2013. At current prices, this translates to a P/E of 16.60.

Unilever PLC (UL) operates as a fast-moving consumer goods company in Asia, Africa, the Middle East, Turkey, Europe, and the Americas. I used the dip early in the month to acquire some more consumer staples in the Roth Portfolio. Unilever is a good candidate for a long-term buy and forget holding, because of the broad diversity of staples it offers on a global scale. I like the steady growth in earnings, distributions, although I would prefer P/E ratios below 16- 17 for companies like Unilever. This international dividend achiever has rewarded shareholders with rising dividends for 14 years in a row. When looking at international stocks, one needs to look at dividend growth in local currency, not US dollars. The company is under the radar, as David Fish has erroneously removed it from his list, probably because of his focus on US dollar dividends, not in their value in Euros. Currently, it trades at a P/E of 19 and yields 3.50%. Check my analysis of Unilever.

Clorox (CLX)is the purchase in the Roth, which is the most questionable one. I like the company a lot, its history of raising dividends for 36 years in a row, and the ten year dividend growth at 11.30%/year. Unfortunately, the stock is trading at the very high points of the acceptable entry valuation I am willing to pay for a dividend paying stock. I would much rather pay 15 times earnings for this stock, like I did when I accumulated my position in the company in taxable accounts over the past five years. However, I believe that a quality business like Clorox can churn out an ever rising stream of earnings, that would result in rising dividends to me for decades to come. The stock is trading at 19.40 times forward earnings, and yields 3.30%. Check my analysis of Clorox.

I plan on doing a few more trades by the end of November, after which I won’t make any contributions to this account until sometime in 2014.

This is just an illustration of what one can do even with small amounts of money. It is not a recommendation to buy these stocks however. I also invest my funds in slightly different lots, typically at $2,000/position these days. However, when I started building my dividend portfolios, my position size was $100/stock. If I can cover 50 – 60% of expenses with dividend paying stocks, so can you!

Full Disclosure: Long all companies listed in this article. (except ACN and EPB)

Relevant Articles:

Ten Dividend Paying Stocks I purchased in September
Two dividend payers I recently purchased for my taxable accounts
Undervalued Dividend Stocks I purchased in the past week
My Retirement Strategy for Tax-Free Income
Check the Complete Article Archive

8 comments:

  1. DGI,
    I have held Altria for about fifteen years and add on dips. The results are outstanding. They have done nothing but make money for me. Often their diversification is overlooked. Their investment in SBMRY around '2002 yields much in the way of dividends for Altria and their share of that company has increased in value by about $18B since they acquired it. They are proceeding full speed into alternative tobacco products, including e-cigs, some being test-marketed outside the U.S. from my understanding. SBMRY in particular, is a dividend growth stock itself. And, the Yahoo data on SBMRY is incomplete or incorrect, so research is needed. I have been considering adding SBMRY to my DG portfolio, but need a lesson on the related taxes first, and a little $$ to spend on it.

    Take care,
    A

    ReplyDelete
  2. K and GIS were nice pickups at the beginning of October. Been eyeing BP for a while now. Will start doing research on KMI. Thanks for the article. Some nice picks to look into.

    ReplyDelete
  3. Great article!
    Re: kinder morgan, there is a great article in this weeks' economist about MLPs as a structure and KM specically: http://www.economist.com/news/leaders/21588365-response-red-tape-and-high-taxes-corporate-america-mutating-subterranean-capitalist

    one of the key elements about MLPs is of course that they are forced to pay all profit as dividends. but that can sometimes mean they require more capital to be raised.

    ReplyDelete
  4. @DividendStoxApp - Incorrect. REITs are required to pay the majority of their earnings as distributions (90%, to maintain their tax status). MLP are limited in what types of assets they own and there is no requirements to pay out the profits (not in cash at least, though they do spit out the income on a k-1). You can see examples such as EPD, which has a greater than 1.3 coverage ratio (of dcf to distributions) or the various MLPs that have suspended their distributions for a time.

    However, you are sort of touching on a valid point, that due to the unique tax attributions and assets of MLPs, they are different than other types of securities (specifically div stock). As a result of the assets, they usually do issue a mixture of debt and equity to fund future expansions, which in turn grow the dcf (generally, assuming management does it right, and no, not all management teams do).

    ReplyDelete
  5. DGI,

    Thanks for linking to the GIS post. I've been looking at it as a food company since my Heinz holdings were bought out. Nice to see it not at 52 week highs. Great brands.

    -RBD

    ReplyDelete
  6. DGI -great post as usual.

    QUESTION: KMI's P/E seems extremely high for your <20 P/E cut off. Did you feel it was worthing bending that rules based on future prospects or are you no longer applying that rule in general? Thanks

    ReplyDelete
  7. I just added BP as well. I agree with the irrational fear driving its price down. Good time to bite.

    ReplyDelete
  8. Last Anon,

    I still look for PE below 20. However, for some entities this is a limitation. It is best to evaluate companies one by one, and take into account various factors.

    For KMI, I look at the cash available to pay distributions.

    http://phx.corporate-ir.net/phoenix.zhtml?c=93621&p=irol-newsArticle&ID=1865232&highlight=

    Good luck!

    ReplyDelete

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