Tuesday, June 27, 2017

Investing in the Dividend Aristocrats from 2007

Last week we saw how a $1 million investment in the original Dividend Champions did over the past nine years. Today, we are going to discuss how a similar passive investment in the Dividend Aristocrats at the beginning of 2008 would have done.

Introduction

S&P 500® Dividend Aristocrats® measure the performance S&P 500 companies that have increased dividends every year for the last 25 consecutive years. The Index treats each constituent as a distinct investment opportunity without regard to its size by equally weighting each company.

I first became fascinated with the list of Dividend Aristocrats in 2007/2008, just as I was beginning my dividend investing journey. This is what I wrote in an article from February 2008:

“One of my favorite stock lists is the S&P’s Dividend Aristocrats and the S&P High-Yield dividend aristocrats. These lists contain companies which have consistently increased their dividends over the past 25 years, which is a big achievement. These companies have gone through several up and down economic cycles and shown superiority of rewarding their shareholders with increasing payments through dividend growth.”

It made sense that solid blue chip companies, which have managed to grow dividends for 25 years in a row, are worthy of consideration. The requirement to grow dividends for a quarter of a century, or longer, weeds out a lot of the speculative companies out there. This requirement results in a list of quality companies with stable business models, which have withstood the test of time. It didn’t hurt that these companies had done phenomenally for their investors, while showering them with more dividends every year. Getting a rising dividend check, while also generating strong total returns in the process, is one example where you can have your cake and eat it too.

Thursday, June 22, 2017

Investing in the Dividend Champions from 2007

Imagine if you had $1 million dollars at the end of 2007. You decide to invest this money in the list of the original dividend champions companies. How would you have fared if you had invested that money in the dividend champions  almost a decade ago?

I have thought about the answers to this question many times. A few weeks ago I decided to start doing the work to answer it for myself. I always enjoy doing the hard work myself in order to form my opinions.

I used the information from David Fish and Robert Allan Schwarz in my data gathering phase. I wanted to determine how a passive investor in the original dividend champions from late 2007 to early 2008 would have done.

I was also inspired to do this research after observing those who always try to scare people away from dividend investing. The usual scare tactic involves mentioning one instance of a dividend cut, from the worst time for dividends during the 2007 – 2009 financial crisis, in order to trigger feelings of irrational fear. This low probability event is used to scare people away from dividend investing. Somehow, these doom and gloomers tend to focus on a once in a lifetime level of dividend cuts which has happened only during major financial collapses in 1929 – 1932 and 2007 – 2009. Otherwise, they do tend to ignore the 95% of the time when dividends are either up or flat for the year in aggregate.

I decided to accept the challenge, and offer proof that dividend growth investing works wonderfully even during a period that was extremely challenging for almost any strategy.

I decided to test how an investor in the original dividend champions from late 2007/early 2008 would have done through the end of 2016. The beginning period is right at the start of the Global Financial Meltdown, which supposedly decimated all dividend portfolios. Using data, and logic, I am going to refute the irrational fears against dividend growth investing.

Tuesday, June 20, 2017

Where are the Original Dividend Champions today?

The list of dividend champions was created by David Fish in 2007. It lists companies which have managed to boost dividends for 25 years in a row. David painstakingly maintains and updates the list every month on dripinvesting.org. In latter years, he has also added a list of dividend contenders and challengers ( companies raising dividends for more than 10 and more than 5 years respectively)
I first stumbled upon the list of dividend champions in early 2008, when I was starting my site from scratch. I have utilized the file in my research and investing, and have used it to gain insights into my investing.

In my research, I have also leveraged the historic compilation of the Dividend Champions, on the site of Robert Allan Schwartz. This collection of files has been instrumental in compiling the research on the original dividend champions.

There were 138 dividend champions in January 2008.

By the end of 2016, 78 of those original dividend champions are still on the list.

Monday, June 19, 2017

Eight Dividend Companies Increasing Dividend Payouts and Returns to Investors

As part of my monitoring process, I review the list of dividend increases every single week. I usually focus on companies that have raised dividends for at least a decade, in order to narrow down the list of companies to review. In order to be successful at dividend growth investing, you need to identify companies that can grow earnings, dividends and intrinsic values over time, which you can also purchase at an attractive valuation. I write these reviews in order to educate dividend investors about the quick way I use to look at companies before deciding whether to pursue further research or to discard them for the time being.

The companies that raised dividends last week, include:

Realty Income Corporation (O) is a publicly traded real estate investment trust. It invests in the real estate markets of the United States. The firm makes investments in commercial real estate. The REIT raised its monthly dividend to 21.15 cents/share. Realty Income is a dividend achiever, which has rewarded shareholders with rising dividends for 23 years in a row.

Friday, June 16, 2017

This is why you shouldn't overpay for stocks folks

You have probably read the news that Amazon is going to acquire Whole Foods Market (WFM) in cash for $42/share. This will increase competitive pressures in the grocery business, which has sent shares in companies like Target (TGT) and Wal-Mart (WMT) lower. Even retailers such as Ross Stores (ROST) and TJX Companies (TJX) are taking a beating. This decline could provide an opportunity to acquire quality merchandise at lower prices.

However, the issue I am going to discuss briefly deals with valuation. If you look at the chart of Whole-Foods over the past five years, you can see that the share price routinely sold above $42/share.

Whole Foods earned $1.26/share in 2012, and roughly $1.50/share every year through 2016. Therefore, anyone paying more than $30/share was likely overpaying for the stock. The company is worth $42/share in a going private transaction. However, if the buyout hadn't materialized, a discount to that price would have been warranted.

Thursday, June 15, 2017

Can you research everything about a company?

I have researched dividend paying companies for a decade. As a result, I have built a large database of dividend stock analyses that supported each of my decisions. I can afford to look back years after making an analysis, and seeing what worked, and what didn’t. I can also look back at my buying decisions, selling decisions, or the decisions to not do anything about a company, and see if these were smart or dumb in retrospect. I believe that every investor should evaluate their investments at least once per year, in order to improve themselves. It also helps to keep a diary of investment decisions, in order to see room for improvement over time. Regular reviews of my transactions have uncovered a lot of helpful tips for improvement. These reviews have also shattered a lot of my pre-existing beliefs.

I have found that I do not know in advance what the best performers will be. For example, I have been a big supporter of certain companies over others. However, the companies I was most confident about did not do as well as the companies I added without much confidence. This is why it is important to create fail-safe mechanisms that will propel the portfolio forward, even if you make mistakes. And believe me, you will make mistakes, which will be evident but only in retrospect.

The best lesson is that my basic analysis of quantitative factors have delivered better results than my analyses where I would review annual reports and press releases. In general, my evaluation of decisions uncovered that increasing the amount of information about a company did not add any incremental benefit. There has been a point of diminishing returns for me.

Monday, June 12, 2017

Two Dividend Machines Rewarding Shareholders With A Raise

As part of my monitoring process, I review the list of dividend increases every week. I focused my attention on companies with a ten year track record of annual dividend increases. I then also focused on companies that manage to grow dividends by more than a token rate. We generally want companies which can grow earnings over time, which then results in growth in dividends. The next requirement is to purchase those quality companies at attractive price.The following two dividend growth machines have high distribution growth rates, which are supported by strong growth in earnings per share.

Lowe’s Companies, Inc. (LOW) operates as a home improvement company in the United States, Canada, and Mexico. It offers a line of products for maintenance, repair, remodeling, and decorating. The company raised its quarterly dividend by 17.10% to 41 cents/share. This marked the 55th consecutive annual dividend increase for this dividend king.

Thursday, June 8, 2017

The Four Hour Dividend Investment Plan

If you are like most readers on this site, chances are you have a decent job, which allows you to have a certain lifestyle and to save money to invest. You are also likely to have other obligations including family, fixing the house or the car, plus a few other activities scattered around your schedule. It is very likely that you are starved on time. You are interested in dividend investing, but probably are hesitating to start it, because you do not believe you have the time to do all the work involved in it.

Well, there are a few solutions for you, if you want to go the self directed investor route. I would show you how you can be a dividend investor by spending less than four hours per week.

In order to achieve that, you need to be very efficient with your time. You need shortcuts to get the information you need, in order to make decisions. You would have to rely on the work and information presented by others, and should be ok with it. You should be ok that this information might include material omissions, some inaccuracies or might include an element of bias. Many believe that the best scenario for any investor is to immerse him/herself in the company they are studying by reading annual reports, industry publications, and try to get experience with the products/services offered. However, this takes time that you do not have, which is why the shortcuts are the way to go for you. Studies have shown that having too much information may actually lead to poor decision making. There is also point of diminishing returns when it comes to company information. In other words, it is unlikely that spending 100 hours studying the ins and outs of a particular security will result in better decision making over a couple of hours of research on the company for the average investor. (from the framework of having a diversified portfolio of course)

Tuesday, June 6, 2017

This Is How This Successful Dividend Investor Turned $1,000 Into $2 Million

I love reading stories of ordinary everyday folks, who manage to accumulate a multi-million dollar fortune that is donated for a good cause. I recently read the story of  the Chicago based dividend millionaire Russ Gremel, who donated $2.1 million dollar’s worth of Walgreen (WBA) stock to a wildlife refuge. Walgreen is a dividend champion, which has raised its dividends for 41 years in a row. You can read the story at the Chicago Tribune here.

Mr Gremel had accumulated the shares approximately 70 years ago, and had a cost basis of $1,000. The company kept growing and expanding over that long period of time. Mr Gremel never sold a single share during that stretch of time. Walgreen's had split the original shares to a cool 28,000 shares worth approximately $2.1 million by the time he made his donation in the past year. The amount of stock generates $42,000 in annual dividend income, which is equally impressive. In other words, the long-term investor receives his original cost basis back every single year, 42 times over. The article does not discuss whether dividends were reinvested into more stock over the years. However, using the limited amount of information available, it looks like this investment compounded at a cool 11.50%/year for 70 years. This is an impressive record. Compounding is a powerful force, especially when you stretch it over long period of time.

Thursday, June 1, 2017

Thirty Dividend Champions to Consider

I have written about my dividend investing journey for almost a decade now. One of the most common question I get asks how I identify companies for further research. In today’s post I will discuss the simple steps I use to obtain a manageable list of companies for further research. These are all used for potential additions to my dividend portfolio. Investing does not have to be complicated, and this simple process attests to this fact.

The first step I take is to start with the list of the US dividend champions, which is maintained and updated by David Fish every single month. To be a dividend champion, a company must have been able to increase its annual dividends per share for a minimum of 25 consecutive years. Only a company with a defensive business model can afford to grow the business, while also raising the dividend annually for a quarter of a century. Being a dividend champion is an indication of quality.

The second step I take is to focus on valuation. I look at the companies which sell at a P/E of 20 or lower. We look at valuation, in an effort to avoid overpaying dearly for an investment. Even the best company in the world is not worth overpaying for. When you buy at a lower price, your future expected returns are higher than buying at a higher price. I typically use Yahoo Finance’s trailing 12 months earnings for the earnings portion of the Price to Earnings calculation. However, I have found that one-time items have made it very difficult to determine the correct earnings power. This is why I use P/E based on forward earnings as a quick trick to scan a large group of companies, without getting bogged down in researching 100 one-time hits/gains to earnings.

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