Monday, June 30, 2014

I purchased this dividend machine last week

In the past week I added to my position in a dividend growth stock I have been following for one year. This dividend achiever has managed to increase dividends for 11 years in a row. What is really surprising is that the company has managed to never cut dividends over the past 115 years, which is amazing.

The company I added to was General Mills (GIS). When I last analyzed the company back in 2013, I concluded that it was a nice stock to accumulate. I have already made a few purchases over the past 12 months, but those are nowhere close to building a substantial position in a short period time. I managed to take advantage of a drop in prices last week, in order to add to my existing position in General Mills. I view the stock as one of the core group of buy and hold forever type companies. Of course, as I have mentioned before however, buy and hold is still buy and monitor. However, if the stock drops further from here and is available in the $45 - $48 range and below, that would be really neat, and I would add to my positions there.

In the past decade, the company has managed to increase dividends by 9.90%/year. Earnings per share increased by 7.40%/year. The company is expected to increase earnings per share to $3.04 in 2015 and $3.24 in 2016. Even if the company manages to increase earnings per share by 7%/year, it would double them every decade. As a result, the intrinsic value of the business should double accordingly. Of course, if you are an investor who buys an asset where earnings increase by 7%/year, and they are also paid a 3% dividend yield, this translates into a total return of roughly 10%/year. The company itself is expecting that its adjusted earnings per share in constant currency will increase at the high single digits, which in my opinion is achievable.

The company was able to raise dividends in March 2014, when the dividend was increased by 8% to 41 cents/share. The company is expecting to grow dividends with earnings over time, and views dividend growth as a key method of providing returns to long-term shareholders. This track record is a real testimony to the strong and steady cash flows which are generated by its portfolios of consumer food brands.

Earnings per share could increase from new product offerings, strategic acquisitions, international expansion and streamlining of operations. A constant focus on operations, eliminating unnecessary costs, improving margins and reducing negative effects of input costs are something that should help the company accomplish its targets. The company is able to expand its distribution network on a global basis, invest in innovation and in its strong brands. Having a portfolio of stable food brands generates recurring excess cash flows. Those excess cash flows are not necessary for expansion of the business. Therefore they result in the ability for the company to shower shareholders with more cash every year through regular dividend payments and increases.

One interesting fact about General Mills is that the company was a dividend champion until 1995, when it spun-off Darden Restaurants (DRI) to shareholders. After that, the company was able to increase dividends between 1996 and 1999, but kept them unchanged between 2000 and 2004. Ever since 2004, dividends per share have been on the increase.

Currently, this dividend achiever is attractively priced at 18.50 times earnings, and a current yield of 3.10%.

Full Fisclosure: Long GIS

Relevant Articles:

General Mills Delivers a Consistent Dividend Raise
General Mills (GIS) Dividend Stock Analysis
Buy and Hold means Buy and Monitor
Companies I am Considering for my Roth IRA
Let dividends do the heavy lifting for your retirement

Saturday, June 28, 2014

Best Dividend Investing Articles for June 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 five 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) Companies I am Considering for my Roth IRA

In this article I discuss several companies, which I am considering for my 2014 Roth IRA contribution. I already added to General Mills (GIS), by taking advantage of last week's drop in prices. Over the next month or so, I expect to be able to add to a few more companies.

2) 7 Dividend Paying Stocks I Purchased Without Paying Commissions

Loyal3 is a great service, which allows investors to purchase shares directly from companies, without charging any commissions or fees. The great attributes include ability to invest as little as $10 in each investment commission free, as well as the ability to earn credit card rewards points for certain purchases.

3) Margin of Safety in Financial Independence

I want to be able to achieve the dividend crossover point by 2018. However, I want to do it on my own terms. In this article, I discuss methods that would help me reduce the risk of running out of money in retirement.

4) What Attracted Warren Buffett to IBM?

I discuss the things Warren Buffett looks at, when he evaluates companies. I then put those reasons in the context of Buffett's investment in IBM. This is one of the companies that I plan on adding to in the coming year.

5) Dividend Growth Stocks are Compounding Machines

Compounding is one of the eight wonders of the world. I have always been amazed how otherwise large, boring, and slow growing enterprises can end up delivering outstanding returns to their shareholders. I highlight three compounding machines, for which I believe best days are still ahead of them.

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) My Dividend Growth Portfolio's 6th Birthday Report

Dave Van Knapp has been monitoring a real-life dividend growth portfolio since June 2008. The primary goal of the portfolio has been to achieve a 10% yield on cost by June 2018. The performance in terms of annual dividend growth, and total returns, has been very good over the past six years.

2) Dividends Are A Return Of Capital And A Return On Capital

Dividend Mantra discusses how dividends are both a return on investment, but also reduce the amount investors have at risk. He also uses as an example one of my favorite dividend growth stocks, which coincidentally is one of his largest positions as well.

3) The Perfect Dividend Stock

Dividends4Life talks about his approach to balance between yield and growth, when selecting dividend stocks. It is helpful to select companies with different yield and growth characteristics, when constructing a dividend portfolio, in order to reduce risk.

4) Tracking your DGI Portfolio

Blogger DivGro outlines how he tracks his dividend portfolio, using Google Docs. This is helpful in monitoring  prices, valuations, dividend information for companies someone owns in their portfolio. It could also be helpful in setting up a list of companies for further monitoring. As always however, investors need to analyze companies one at a time, in order to really understand the data, make sure it is correct, and understand the story behind the business.

5) Short Term Price Movements Are Not Indicative of Value

Passive Income Earner discusses something that unfortunately is very prevalent in many investors. Many tend to focus on short-term fluctuations, and thus end up missing out on what truly matters in order to succeed as a long-term investor. Luckily, most dividend growth investors tend to be a conservative bunch, that focuses on fundamentals, and requiring a streak of dividend growth and the business strength to support it. Dividend growth investors by definition have a longer term view, which rapidly increases their odds of success.

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 GIS and IBM

Friday, June 27, 2014

Occidental Petroleum (OXY) Dividend Stock Analysis

Occidental Petroleum Corporation is engaged in the acquisition, exploration, and development of oil and gas properties in the United States and internationally. The company operates in three segments: Oil and Gas; Chemical; and Midstream, Marketing and Other. This dividend achiever has paid dividends since 1975 and has managed to increase them for 12 years in a row.

The company’s latest dividend increase was announced in February 2014 when the Board of Directors approved a 12.50% increase in the quarterly dividend to 72 cents /share. The company’s peer group includes Exxon Mobil (XOM), Imperial Oil (IMO) and Hess (HES).

Over the past decade this dividend growth stock has delivered an annualized total return of 18.10% to its shareholders. This was due to the fact that the stock was really cheap a decade ago, coupled with the fact that earnings and dividends per share increased rapidly.


The company has managed to deliver a 13.50% average increase in annual EPS over the past decade. A large portion of the earnings growth occurred in 2004. The rest of the decade has been characterized by fluctuating earnings. Occidental Petroleum is expected to earn $7.15 per share in 2014 and $7.26 per share in 2015. In comparison, the company earned $7.34/share in 2013.

Occidental Petroleum has a record of consistent share repurchases. Between 2006 and 2014, the number of shares declined from 860 million to 801 million.

In early 2014, the company announced a few strategic initiatives, which will be catalysts for investor returns in the next five years or so. First, the company is selling off assets, and using the proceeds to buy back stock.

Second, the company is planning to spinoff its assets in California as a standalone company. Spinoffs have historically done really well for investors on average, because management is able to better focus on the underlying business after separation.

Third, the company is trying to focus on its remaining US assets and squeeze out mid to high single digit production growth. If oil and gas prices do not fall significantly from present levels, this could translate into much higher earnings per share.

Last, but not least, the company has put dividend growth as its second most important priority. The first priority is obviously maintaining production. Next priorities include growth, share repurchases and acquisitions.

The annual dividend payment has increased by 17.30% per year over the past decade, which is higher than the growth in EPS. This was mostly possible due to the expansion in the dividend payout ratio over the past decade.

A 17% growth in distributions translates into the dividend payment doubling every four years on average. If we check the dividend history, going as far back as 2005, we could see that Occidental Petroleum has actually managed to double dividends every four and a half years on average. Prior to 2002 however, the dividend was unchanged for 12 years in a row at 12.50 cents/quarter, after a very steep dividend cut in early 1991. Between 1981 and 1990, the quarterly dividend was unchanged at 31.25 cents/share. All historical data has been adjusted for stock splits. The company had also suspended dividends in 1972 – 1974. Based on the spotty dividend growth history, I am not so sure whether Occidental Petroleum has ingrained in it a culture of consistent dividend increases. If not, the past decade of consistent increases could be mostly a byproduct of the rising oil and gas prices, rather than a shift in the dividend culture.

Over the past decade, the dividend payout ratio decreased from 93% in 2004 to 27% in 2006. Since then, it has been increasing gradually to 52.50% by 2013. Based on forward earnings however, the dividend payout will decrease to 40%. A lower payout is always a plus, since it leaves room for consistent dividend growth minimizing the impact of short-term fluctuations in earnings.

The return on equity has been on a steep decline over the past decade, which to me is a warning sign. Rather than focus on absolute values for this indicator, I generally want to see at least a stable return on equity over time.

Currently, the stock is attractively valued, as it trades at a forward P/E of 13.40 and a current yield of 3%. I hesitate on initiating a position in Occidental Petroleum, because I already have ownership in ConocoPhillips, Exxon Mobil, Chevron, British Petroleum and Royal Dutch Shell. That being said, the company could be a good investment for those who like to follow spin-offs, and possibly other investing strategies.

Full Disclosure: Long XOM, COP, CVX, BP, RDS/B

Relevant Articles:

Why Warren Buffett purchased Exxon Mobil stock?
How to Generate Energy Dividends Despite the Peak Oil Non Sense
Price is what you pay, value is what you get
ConocoPhillips (COP) Dividend Stock Analysis 2014
Companies I am Considering for my Roth IRA

Wednesday, June 25, 2014

Does diversification lead to lower quality of investments in dividend portfolios?

Diversification matters, because it protects investors from the proverbial bad apple that can take a serious bite out of your dividend income at the worst possible time. Dividend investors should construct an income producing portfolio consisting of at least 30 individual stocks, which are representative of as many sectors that make sense, in order to be somewhat diversified.

One of the main concerns that some investors have against diversification involves time spent keeping up with companies and the quality of new investments purchased.

The problem is that not every company is a quality one, and by expanding their list of holdings from 20 to 40, some investors are concerned that the quality of the portfolio would be deteriorating. This could be particularly true, if investors were simply adding additional positions in companies the sake of adding new positions simply to meet the number of positions requirement. Investors should never sacrifice quality of the companies they buy stock in, simply for the purposes of diversification. Owning shares of a company that makes horse-carriages just so you have exposure to the sector would have been a bad idea ever since the automobile became mainstream in the early 20th century. Investors should choose only these quality stocks that make sense and which are attractively valued.

The number of positions in a portfolio will depend on the external environment and the availability of quality firms at attractive valuations. It is much easier to start a dividend portfolio when stocks are undervalued, than when stocks are hitting new all-time-highs every day. However, in my investing I have found that there are usually at least 20 quality dividend companies with sustainable competitive advantages which I find attractively valued. I still monitor companies with solid competitive advantages that I have added to a wish list for a potential inclusion to my portfolio, in order to be ready when the right time comes. For example, in early February, I bought shares in McCormick (MKC) and Diageo (DEO) on the dip, thus taking advantage of a brief sell-off that had temporarily taken those shares into value territory.

The initial amount of time spent to research new positions can easily consume 10 – 30 hours per week. However, keeping up with new material developments affecting the company should not take more than a few hours per week. This makes a diversified portfolio of 30 - 40 individual securities manageable to maintain and monitor.

There are ten major sectors as identified by Standard and Poor’s. For my portfolio, I try to gain exposure to as many of these sectors as possible by purchasing the top three or four companies that pay rising dividends. This provides for an easy pool of at least 30 – 40 companies to own at some point in a diversified dividend portfolio, without lowering the quality of an income portfolio. By selecting the top three or four players in a given industry, when one incidentally ends up cutting dividends or going under, the other major players in the field will win business or might be available for purchasing on dips. As a result, the overall risk to the portfolio is not going to be that high, unless the whole sector is imploding. Of course, it doesn't make sense to merely add companies for the purposes of diversification. If a company is not perceived as a good quality by the investor, and it cannot be purchased for a good value today, then it should not be acquired, even if that means no exposure to the sector altogether. In some sectors such as energy, it is easier to select the top players, since most companies in this group of stocks tend to pay a stable and rising dividend. In other sectors such as Technology, it is more difficult to find a company that has raised distributions for over 20 years in a row for example. The availability of good stock candidates for inclusion in a dividend portfolio is going to vary over time. For example, back in 2008 - 2009, I found utilities like Con Edison (ED) or Dominion Resources (D) to be decent picks.  Currently, I am having a hard time justifying a purchase in any utility company in the US.

In my personal experience, having a diversified portfolio, representative of many sectors, and involving multiple companies per sector has definitely shielded me during difficult times.

For example, back in 2010, my energy holdings included Exxon Mobil (XOM), Chevron (CVX), British Petroleum (BP), Kinder Morgan (KMR) and Enbirdge Energy Management (EEQ). When British Petroleum (BP) cut dividends in 2010, I immediately sold the stock. With the cash proceeds I purchased a stock which was in the energy sector and was also based outside of the US. The company I purchased was Royal Dutch (RDS/B). I could have easily purchased any of the other major oil players, and had similar results. Whenever I sell a stock, I try to replace it with the stock of a company in the same industry when possible. However, this is not always a viable alternative.

Another example was during the 2008 – 2009 period, when many financials cut dividends. I ended up selling State Street (STT), General Electric (GE) and American Capital (ACAS). However, other financials such as Aflac (AFL) or M&T Bank (MTB) did not cut dividends, which is why I hung on to them. I even ended up adding to Aflac at some crazy low prices. Unfortunately, the financial sector did not offer many financial companies that fit my models, which is why I ended up reinvesting most of the funds generated from the sales in stock from other sectors.

To summarize, it is important for ordinary investors to spread their risk out, in order to protect their nest egg. This could be easily done by creating a diversified dividend portfolio that includes at least 30 - 40 equally weighted positions, that are built slowly over time, and purchased at attractive valuations. One should not add companies merely for the sake of adding companies of course. However, based on my experience since 2007 - 2008, a decent number of quality dividend paying stocks is always available at attractive valuations to the enterprising dividend investor. Therefore, it is quite possible to build a diversified portfolio of quality companies, and live off dividends, without being exposed too much to sector risk. As I frequently say, the goal of dividend growth investor is to get rich, and stay rich. I believe that one needs to get rich just once in their lifetime, and then reap the rewards for the rest of their life.

Full Disclosure: Long XOM, CVX,  KMR, EEQ, BP, AFL, MTB,

Relevant Articles:

Diversified Dividend Portfolios – Don’t forget about quality
Dividend Portfolios – concentrate or diversify?
- Replacing Dividend Stocks Sold
How long does it take to manage a dividend portfolio?
Myths about Warren Buffett

Monday, June 23, 2014

Multi-Generational Dividend investing

You have spent your whole life accumulating your nest egg. Building a long term dividend portfolio takes a lot of time, effort and a little bit of skill or luck. Once the dividend machine is set up properly however, and starts throwing off a sufficient stream of income, investors would have to spend less than 10 hours/week on managing investments. This is not a huge time commitment, but it provides investors with the ability to make changes if stories do not work out as expected. Investors, who looked after their income portfolios in 2007-2009 bear market, would have been able to dispose of their securities in a timely manner after they cut or eliminated dividend payments.

The question is however what happens if the individual/s who built the portfolio from scratch cannot afford to manage the investments anymore. This could be due to several reasons including death, incapacitation or other gruesome events. As dividend investors, we tend to focus on selecting companies that would generate income for decades, but do not spend a lot of effort on who would be the next one in the family to maintain and manage the portfolio. Selecting a beneficiary for your online brokerage accounts is just a small step in the process. Writing a will which lists all online accounts is another small step that should be done, in order to avoid having inheritors scramble to locate assets after an unfortunate event.

These unfortunately still do not answer the question of whom and how the income portfolio would be managed. There are several potential options, each coming with its own set of risks.

-The first is to just hold on stocks, don’t do anything , except for maybe sell after dividend cuts. I have noticed that many companies tend to raise dividends for long periods of time, and then freeze them, only to continue raising them again. Kellogg (K) is a prime example of this, as it ended a four decade streak of annual dividend raises in 2000, only to start boosting distributions again nine years ago. One piece of research I find particularly telling is the work that Jeremy Siegel has done on the performance of the original S&P 500 companies in 1957. He found that a portfolio of these companies, where investors did absolutely nothing, except for reinvest dividends and reinvest cash proceeds from acquisitions in the portfolios, would slightly outperform over the next 50 years.

- The second thing to do is to educate family/close ones, in order to ensure they can manage investments without a considerable input from outside help. The goal is to make family members motivated enough so that they can manage money and are interested in making it last for several generations. If family members are not motivated, chances are the amounts of money will be spent quickly, leaving little behind in a few short years after the original accumulator is no longer in charge. As a result, creating a trust fund where only the income could be spent might be the best solution. This would require some help from an attorney, in order to set up the trust properly, and outline bylaws and trustee responsibilities.

- The third option is to hire someone to manage investments and focus on implementing your strategy. This could cost a lot, particularly if the wrong type of an advisor is selected. In addition, there has to be a process for selecting advisers in the future, since many would end up retiring on their own. You also need to decide how to avoid the future Madoff’s of the world.

- There is a fourth option, where one could simply place the money in mutual funds, and probably be just fine with that. However, going back to step two, if the beneficiaries are not properly trained to think about money, they can blow through the funds in no time. Alternatively, someone who has a large nest inherited nest egg and doesn't know a lot about investments can panic during the next bear market and sell. Thus the beneficiary could potentially undo decades worth of patient compounding by the original capital accumulator.

Overall, I believe that a relatively well diversified portfolio, consisting of several stocks from each sector should do well over time, even if managed passively. I believe in the living off dividends method, since this is a sustainable way to ensure that a nest egg can produce income to live off for decades. This is what has ensured success for charitable organizations and trust funds for decades. Examples of companies to include per each sector includes:

Sector
Name
Ticker
Yrs increase
10 yr DG
Fwd P/E
Yield

Information Technology
IBM
IBM
19
19.40%
     10.21
2.40%
Financials
Aflac
AFL
31
16.80%
       9.95
2.40%
Energy
Chevron
CVX
27
10.55%
     11.86
3.50%
Healthcare
Johnson & Johnson
JNJ
52
10.84%
     17.44
2.70%
Consumer Staples
Procter & Gamble
PG
58
10.59%
     18.96
3.20%
Consumer Discretionary
McDonald's
MCD
38
22.80%
     17.48
3.20%
Real Estate
Realty Income
O
20
5.99%
N/A
5.10%
Telecommunications
AT&T
T
30
4.88%
     13.17
5.30%
Industrials
United Tech
UTX
20
14.48%
     17.05
2.00%

For my money, I plan on placing them in trusts that would distribute dividends only to beneficiaries for decades to come. The only decisions that would be done by a trustee would be about selling companies that cut or eliminated dividends, or distribute proceeds from companies that are acquired for cash by someone else.

What are you doing to ensure longevity of your nest egg, beyond your own generation?

Full Disclosure: Long K, IBM, AFL, CVX, JNJ, PG, MCD, O, UTX

Relevant Articles:

Living off dividends in retirement
Four Percent Rule for Dividend Investing in Retirement
Why Dividend Growth Stocks Rock?
A dividend portfolio for the long-term
How much money do you really need to retire with dividend paying stocks?

Friday, June 20, 2014

What Attracted Warren Buffett to IBM?

Back in 2011, Warren Buffett invested billions of dollars in IBM. This move by the Oracle of Omaha surprised many, since he is widely known to avoid technology stocks. Of course, these people do not know that Buffett made millions investing in a tech start-up in the 1950s. Currently, his company Berkshire Hathaway (BRK.B) holds a 6.30% stake in IBM.

Buffett and his partner Charlie Munger acquire businesses that are (1) Easy to understand (2) Have durable moat (3) Run by able and honest management and (4) Fairly priced.

The business of IBM is relatively simple to understand. It provides IT support services to companies on a global scale. Over half of revenues are recurring. The company is divided in five segments: Global Technology Services, Global Business Services, Systems and Technology, Software and Global Financing. International operations generate almost two-thirds of revenues.

Per Buffett’s comments, it is tough for companies to change auditors, lawyers and IT consulting firms like IBM. Once you have established the relationship, you will keep using their services for many years.

The business is managed by honest and able managers, who are setting up goals, and executing their strategy accordingly. One of the reasons why Buffett invested in IBM in the first place was the fact that management had outlined their plan to earn $20/share by 2015. In that plan, it is evident how exactly they would achieve that. In addition, the management was able to transform IBM from a company focused on hardware, into a firm that focuses on software, services like consulting and IT solutions.

The thing that appeals to me is the fact that management returns a lot of excess cash to shareholders in the form of dividends and share buybacks. IBM is a dividend achiever which has rewarded long term investors with an increase for 19 years in a row. In addition, IBM has managed to consistently buy back stock, through thick and thin, unlike other corporate boards. The company has managed to retire a significant chunk of outstanding shares over the past 20 years, and has managed to accomplish that at pretty attractive valuations as well.

The main concern investors have is about flat or declining total sales. This could be an issue, since you can only cut costs and streamline so much out of your bottom line. Of course, if the company can manage to get rid of businesses that generate revenues but do not have solid margins like hardware, and focuses more on software and services, which have much higher margins, this could translate into a win for the bottom line. While revenue growth is important, it is equally important to actually improve the profits, which is where dividends are paid from. Mindless acquisitions or chasing revenue is usually not a good strategy, although at some point in time revenues at IBM do need to start picking up.

The stock is trading at a pretty low P/E ratio of 10.20 forward earnings, which is the lowest in over a decade. In addition, IBM is spotting its highest yield in years at 2.40%. I own a little of the stock, and plan on adding to my position in my Roth IRA in 2014. Obviously, many investors have low expectations for the company, which explains the depressed stock price. Hence, this could provide some nice returns to contrarian investors. However, I also like Accenture (ACN), since it has much better cash flow generation capabilities and revenue growth that IBM lacks. Accenture is selling at 18.30 times forward earnings and yields 2.20%.

Full Disclosure: Long IBM and ACN

Relevant Articles:

Should you follow Buffett’s latest investments?
Four dividend paying companies with long term growth plans
Five Dividend Paying Companies with Consistent Share Buybacks
Accenture PLC (ACN) Dividend Stock Analysis
IBM (IBM) Dividend Stock Analysis

Wednesday, June 18, 2014

Investors Should Look for Organic Dividend Growth

The goal of every dividend investor is to have an active plan in service that will allow them to reach the dividend crossover point. This occurs when dividend income exceeds annual expenses for the first time. In order to achieve this, investors can rely on new contributions, the compounding power of dividend reinvestment and on dividend growth from their positions. Over time, these three powerful forces will be able to propel the passive income of our investor until they reach their goal. However, I think that investors need to also asses their portfolios at least once – twice per year at the very least.

Investors need to continually stress test their portfolio assumptions, in order to gauge whether their dividend machine can live up to its full potential in retirement. Investors need to understand if their portfolio would have produced increased income even if no new funds were added or if no dividends were reinvested. This is a very important step in dividend investing for retirement that would ensure that income is growing over time. Growing income is important, in order to maintain purchasing power of your dividend stream. For example, even if inflation was a low 3% per year, your purchasing power declines by 20% in year 7, 40% by year 17 and over 50% by year 24.

My expectation is that my dividend portfolio will deliver a six percent annual dividend increase, without adding any new money. For example, if I had a portfolio yielding 3% today valued at $100,000 I would generate $3,000 in annual income. If I add $6,000 to the portfolio in stocks whose average yield is 3%, I would have increased my dividend income by 6% to $3,180. Without new money, this income stream would lose purchasing power over time, which is a dangerous proposition in retirement. However, if the original stocks this this portfolio yielded 3% but also grew distributions by 6%/year, the distribution would be $3,180 without having to add $6,000 to the portfolio. As you can see, if all things were equal, organic dividend growth could be very valuable weapon in your quest for financial independence, because the internal compounding results in lower needs for capital to be placed in-service into your dividend machine.

In my income portfolio, I always look at my holdings at the end of the year, and then ignore any additions or deletions I made since the beginning of the year. I assume that I didn't add any funds and I also assume I put all dividends received in my checking account. I took a look at my starting portfolios at the end of 2008, 2009, 2010, and 2011 to come up with the following organic dividend growth rates:


2009
2010
2011
2012
2013
Dividend Growth
-0.97%
6.74%
7.50%
7.11%
8.70%

I was building out my portfolio throughout 2008, which is the only reason why an organic dividend growth rate was not calculated for that year. In comparison, the dividend income assuming dividend reinvestment and new money addition was much higher.The cuts in General Electric (GE) and State Street (STT) really prevented me from achieving organic dividend growth in 2009. Since I reinvested the funds from the stocks I sold however, my total dividend income increased in 2009, even before accounting for purchases I made.

To summarize, I believe it is important to invest in companies that regularly increase dividends for their shareholders out of the earnings growth their business generates. This results in an increase in dividend income that is much cheaper for the dividend investor, and doesn't require constant reinvestment of dividends in order to keep up purchasing power or increase income.

Full Disclosure: None

Relevant Articles:

How to Generate an 11% Yield on Cost in 6 Years
Reinvest Dividends Selectively
Replacing dividend stocks sold
The Sweet Spot of Dividend Investing
Dividend Investing vs Trading

Tuesday, June 17, 2014

Companies I am Considering for my Roth IRA

Ever since last year, I am on a quest to max out any tax-deferred vehicles available for me. This is in an effort to diversify my asset base, since the majority of my money is in taxable brokerage accounts. However, by maxing out tax deferred accounts, I am deferring taxes on dividends and capital gains for several decades. In the case of some accounts like 401 (k) and SEP IRA, I am also receiving a pretty nice tax break today. I have maxed out 401 (k) and SEP IRA for 2014, the next goal is to max out my Roth.

Last year, I separated my Roth IRA contribution and made approximately 30 transactions. I ended up paying less than 0.50% on the total thing, which was great. This year, I am finding less quality companies to invest in, that are also available at attractive valuations. As a result, I am going to split the results in only a few companies.

Many readers of the site know that I own a lot of companies in my dividend portfolio. Since I already own too many companies, I have decided to add the new funds in the best positions that I already own. However, I am going to refrain from allocating any of the new funds in the five holdings with the largest portfolio weights. This means that companies like Philip Morris International (PM) would not be considered, given the fact that I am overweight in it, relative to any other holdings. I will also exclude certain foreign companies from consideration for my Roth IRA, because of dividend taxes that foreign governments withhold from my distributions at source.

The companies I am interested in purchasing include:

Exxon Mobil Corporation (XOM) explores and produces for crude oil and natural gas. The company has managed to increase dividends for 32 years in a row. In the past decade, this dividend champion has managed to boost distributions by 9.60%/year, and earnings per share by 8.90%/year. Currently, the stock is selling at 13 times forward earnings and yields 2.70%. Check my analysis of Exxon Mobil.

International Business Machines Corporation (IBM) provides information technology products and services worldwide. The company has managed to increase dividends for 32 years in a row. In the past decade, this dividend achiever has managed to boost distributions by 9.60%/year, and earnings per share by 13.20%/year. Currently, the stock is selling at 10.30 times forward earnings and yields 2.40%. Check my analysis of IBM.

ConocoPhillips (COP) explores for, develops, and produces crude oil, bitumen, natural gas, liquefied natural gas, and natural gas liquids worldwide. The company has managed to increase dividends for 13 years in a row. In the past decade, this dividend achiever has managed to boost distributions by 15.70%/year, and earnings per share by 6.20%/year. Currently, the stock is selling at 12.70 times forward earnings and yields 3.40%. Check my analysis of COP.

Altria Group, Inc. (MO), through its subsidiaries, manufactures and sells cigarettes, smokeless products, and wine in the United States and internationally. The company has managed to increase dividends for 44 years in a row. In the past decade, this dividend champion has managed to boost distributions by 11.40%/year. Currently, the stock is selling at 16.50 times forward earnings and yields 4.70%. Check my analysis of Altria.

Ameriprise Financial, Inc. (AMP), through its subsidiaries, provides a range of financial products and services in the United States and internationally. The company has managed to increase dividends for 9 years in a row. In the past five years, this dividend company has managed to boost distributions by 24.90%/year, and earnings per share by 12.40%/year over the past six years. Currently, the stock is selling at times forward earnings and yields 2%. Check my analysis of Ameriprise.

General Mills, Inc. (GIS) produces and markets branded consumer foods in the United States and internationally. The company has managed to increase dividends for 11 years in a row. In the past decade, this dividend achiever has managed to boost distributions by 9.90%/year, and earnings per share by 8.60%/year. Currently, the stock is selling at 19.20 times forward earnings and yields 3%. Check my analysis of General Mills.

The Chubb Corporation (CB), through its subsidiaries, provides property and casualty insurance to businesses and individuals. The company has managed to increase dividends for 32 years in a row. In the past decade, this dividend champion has managed to boost distributions by 9.20%/year, and earnings per share by 15%/year. Currently, the stock is selling at 12.80 times forward earnings and yields 2.10%. Check my analysis of Chubb.

Aflac Incorporated (AFL), through its subsidiary, American Family Life Assurance Company of Columbus, provides supplemental health and life insurance products. The company has managed to increase dividends for 31 years in a row. In the past decade, this dividend champion has managed to boost distributions by 16.80%/year, and earnings per share by 16.10%/year. Currently, the stock is selling at 10.20 times forward earnings and yields 2.40%. Check my analysis of Aflac.

Accenture plc (ACN) provides management consulting, technology, and business process outsourcing services worldwide. The company has managed to increase dividends for 9 years in a row. In the past five years, this dividend company has managed to boost distributions by 28.40%/year, while in the past decade earnings per share have risen by 16%/year. Currently, the stock is selling at 18.50 times forward earnings and yields 2.20%. Check my analysis of Accenture.

Of course, this is all subject to changes, given the fact that valuations chance. If companies like ConocoPhillips keep going higher without any break, I might have to put the money into the next best ideas. For example, I had Family Dollar on the list when I initially wrote the article in late May, but given recent actions by activist investors, I dropped it due to increase in price. I am also hesitant on adding Target to my Roth IRA, since I already have a plan of investing there in one of my regular taxable accounts already, so that all the stock is in one place. In addition, if other companies drop suddenly, I would consider them instead.

The companies I don’t own, that could also be included for consideration include:

General Electric Company (GE) operates as an infrastructure and financial services company worldwide. The company has managed to increase dividends for years in a row. In the past decade, this former dividend champion has managed to deliver negative earnings per share and dividends per share. Currently, the stock is selling at 16.10 times forward earnings and an yield of 3.30%. Check my analysis of General Electric.

Baxter International Inc. (BAX) develops, manufactures, and markets products for people with hemophilia, immune disorders, infectious diseases, kidney diseases, trauma, and other chronic and acute medical conditions. The company has managed to increase dividends for 8 years in a row. In the past decade, this former dividend champion has managed to boost distributions by 12.40%/year, and earnings per share by 9.20%/year. Currently, the stock is selling at 14.30 times forward earnings and an yield of 2.80%. Check my analysis of Baxter.

Again, in my purchases I am looking for good entry price today, coupled with good growth opportunities. The resulting compounding effect would do the heavy lifting for my capital and dividend incomes.

I plan on making the contribution sometime in the next month or so. After that, my contributions for tax-deferred accounts such as 401 (k), SEP IRA and Roth IRA would be complete for 2014. I would only have to rebuild my cash reserves after maxing out those contributions and paying out another steep tax bill in April. Going forward, I continue to view my taxable accounts as a place to purchase out-of-favor securities on dips, while viewing my tax-deferred accounts as the place to put money to work on a more regular basis.

Full Disclosure: Long TGT, IBM, XOM, COP, MO, AMP, GIS, CB, AFL, ACN

Relevant Articles:

Dividends Provide a Tax-Efficient Form of Income
My Retirement Strategy for Tax-Free Income
How to buy dividend stocks with as little as $10
Nine Quality Dividend Stocks Purchased for the Roth IRA
Roth IRA’s for Dividend Investors

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