Showing posts with label dividend portfolio. Show all posts
Showing posts with label dividend portfolio. Show all posts

Monday, December 2, 2013

Nine Quality Dividend Stocks Purchased for the Roth IRA in November

Back in September, I started making contributions for my Roth IRA. I bought shares the following ten companies in September, these nine in October, and a few more in November. The purpose of this series of posts is to prove that it is possible to create a diversified dividend portfolio even if you do not have a lot of starting capital, while also keeping costs as low as possible. The low costs were possible because I used Sharebuilder, which allows you to make 12 purchases per month for $12. The first month after you sign up is a trial month, meaning that all twelve transactions are free. Therefore, if you make 12 trades/month for three months, the most you are going to pay is $24. That comes down to less than 0.50% of the investment amount, if you contribute the 2013 maximum contribution of $5,500. If you were putting more money than that to work however, the initial set up cost would be an even much lower percentage.

The more challenging part of the portfolio building process was uncovering quality dividend stocks, which were also attractively valued. Given the fact that stocks are hitting all-time-highs every day, it is difficult to find quality companies that are not overvalued.

As a result, I was able to purchase shares in the following dividend paying companies in November:

Philip Morris International Inc. (PM), through its subsidiaries, manufactures and sells cigarettes and other tobacco products. The company has consistently raised dividends since being spun off from parents Altria Group (MO) in 2008. Over the past 5 years, PMI has managed to boost distributions by 13%/year. The company is really cheap at 16.20 times earnings and yields 4.40%. This is my second largest holding, which is why it does not make sense from a diversification standpoint to keep adding money there for me. Check my analysis of Philip Morris International.

General Mills, Inc. (GIS) produces and markets branded consumer foods in the United States and internationally. I initiated a small position in the stock. This dividend achiever has raised distributions for 10 years in a row. Over the past decade, General Mills has managed to boost dividends by 8.70%/year. The company is selling for 17.40 times forward earnings, and yields 3%. Check my analysis of General Mills.

Target Corporation (TGT) operates general merchandise stores in the United States. This dividend champion has raised distributions for 46 consecutive years in a row. Over the past decade, Target has managed to boost dividends by 18.60%/year. The company is selling for 17.20 times earnings and yields 2.70%. The big opportunity behind the company is international expansion, which could reward shareholders immensely, if it is done right. Check my analysis of Target.

Exxon Mobil Corporation (XOM) engages in the exploration and production of crude oil and natural gas, and manufacture of petroleum products. This dividend champion has raised distributions for 31 years in a row. Over the past decade, Exxon Mobil has managed to raise dividends by 9%/year, and has also managed to repurchase stock consistently for decades. Currently, the stock is trading at 12.25 times earnings and yields 2.70%. The stock popped on news Warren Buffett initiated a large position in it, which is why adding to Exxon on dips might be a good strategy. Check my analysis of Exxon Mobil.

The Toronto-Dominion Bank (TD), together with its subsidiaries, provides financial and banking services in North America and internationally. The stock is selling for 13 times earnings and yields 3.60%. The company started raising dividends in 2011, after freezing them in 2008.

Royal Bank of Canada (RY), a diversified financial service company, provides personal and commercial banking, wealth management, insurance, corporate and investment banking, and transaction processing services worldwide. The stock is selling for 12.10 times earnings and yields 3.90%. The company started raising dividends in 2011, after freezing them in 2007.

Canadian Imperial Bank of Commerce (CM) provides various financial products and services in Canada and internationally. The stock is selling for 10.20 times earnings and yields 4.30%. The company started raising dividends in 2011, after freezing them in 2007.

The Bank of Nova Scotia (BNS), together with its subsidiaries, provides various personal, commercial, corporate, and investment banking services in Canada and internationally. The stock is selling for 12 times earnings and yields 3.90%. The company started raising dividends in 2011, after freezing them in 2008.

Bank of Montreal (BMO), together with its subsidiaries, provides various retail banking, wealth management, and investment banking products and services in North America and internationally. The stock is selling for 11 times earnings and yields 4%. The company started raising dividends in 2013, after freezing them in 2007.

Overall, I am very bullish on Canadian banks for the very long term. None of the five largest Canadian banks cut dividends during the financial crisis, although they did freeze them for a few years. I think that the Canadian economy is in a unique position to deliver population growth, economic growth, that would trickle down to bolster long-term earnings for the largest banks in the country. This is a bet that Canada in 50 years will be very prosperous, which would trickle down to huge amount of rising dividends from those banks. In addition, while Canadian dividends face a 15% withholding for taxable accounts, there is no withholding in retirement accounts such as Roth IRA's. I plan on writing an article specifically outlining my thesis behind a core long-term holding of these five Canadian banks. Please stay tuned.

UPDATE 2/5/2014 : Sharebuilder is still withholding Canadian taxes on dividends, despite the fact that it is in a ROTH IRA. They seemed unwilling to accommodate my needs as a client, which is why I would not recommend them for buying Canadian dividend paying stocks in tax-deferred accounts.

With this, my allocations for 2013 Roth IRA are complete. I would wait to make my 2014 Roth IRA, until I make my SEP IRA contributions in the first quarter of 2014. Given the fact that I am trying to put away as much as possible in tax-deferred accounts, ( 401K, Sep and Roth IRA’s), I am not going to be able to make as many investments in taxable accounts as before. Therefore, my dividend income would grow merely as a result of organic dividend increases and dividend reinvestment. I expect this to lead to a 10% annual increase in dividends for the next five years. Let’s see if this can be done.

Full Disclosure: Long all companies mentioned in this article

Relevant Articles:

Check the Complete Article Archive
Why Warren Buffett purchased Exxon Mobil stock?
Roth IRA’s for Dividend Investors
Six things I learned from the financial crisis
My Retirement Strategy for Tax-Free Income

Monday, October 14, 2013

Why do I own so many individual dividend paying stocks?

In the past month, I published the list of dividend holdings I own to my subscribers. Many subscribers were amazed at the number of companies I own. I have always mentioned that having at least 30 – 40 individual positions is great for diversification purposes. This ensures that I am not overly reliant on a single company for my dividend income, in case it cuts or suspends distributions.

However, there is the other side of the coin, where owning too many securities is too much. It could mean that effective monitoring a portfolio might be more difficult with more than a certain number of positions in it.

The first reason behind the excessive number of companies in my portfolio is corporate actions. For example, several of the companies I own stock in have tended to split in two separate entities. Examples of that include when legacy Abbott Laboratories divided itself into Abbvie (ABBV) and Abbott Laboratories (ABT) in 2013. Another example includes when Kraft Foods split into Kraft (KRFT) and Mondelez International (MDLZ). Currently, my small position in Vodafone (VOD) will result in yet another addition to my portfolios after it distributes Verizon Wireless (VZ) stock to me in 2014.

The second reason behind the excessive number of companies in my portfolio is valuation. When I identify a quality company at a reasonable price, I tend to start nibbling at it one lot or half lot at a time. Because I have a limited amount of capital relative to the number of investment ideas I have, I might end up making an investment in a new idea once or twice per year. For example, if it was cost efficient to purchase stock in $1000 increments and I had the ability to put only $12,000/year, I can only make 12 purchases in my portfolios. Therefore, if I had 12 ideas, I might not be able to make another investment in any of those ideas for a whole year. By that time, the stock could have become overvalued or there might be a better value in a whole new enterprise. The company would still be a good long-term hold, which is why selling it would violate common sense. This is why I am considering dividing my monthly contributions into all my ideas, using Sharebuilder. I just need to make sure I can find $2,400 every month, in order to make this exercise cost effective at a $12 monthly fee for 12 trades.

The third reason behind the large number of securities I own is because I have been investing in dividend paying stocks for several years. When I first started investing in dividend stocks, I did not pay any commissions and could only put a small amount of funds to invest. Therefore, I usually put about $100 - $200 per position. Over time, I have increased my lot size from there. Unfortunately, some of those companies stopped being attractively valued, which is why I ended up stuck with them. Since I am now paying commissions to sell those legacy securities, I have calculated I am better off sitting on them. For example, I try to maintain my trade costs below 0.50%. Therefore if I paid a $5 commission to buy or sell stocks, it would not make economic sense to sell a position whose value is less than $1,000. Investment costs can add up pretty quickly, which is why I try to run a tight operation. It also does not make sense to sell stock in a company that is delivering earnings and dividend growth, and its only sin is being overvalued.

Reasons number two and three have contributed to a number of great companies, where I have pretty low position amounts in plenty of companies.

The fourth reason I own so many companies includes some points from reasons two and three. I essentially have managed to find attractively valued stocks at every single point since 2007 – 2008. Unfortunately, the list of attractive candidates for my money has changed over time pretty significantly. For example, for several years I had companies like Colgate – Palmolive (CL) or Clorox (CLX) or Procter & Gamble (PG) on my shopping list whenever I had cash to put to work. Unfortunately, these companies have been selling at prices that exceeded what I was willing to pay for them in 2013. In addition, since I constantly search for unconventional ideas, I might end up finding better values. This is how I ended up with so much in Phillip Morris International (PM) or Kinder Morgan Inc (KMI) for example.

The fifth reason behind this large number of portfolio holdings is some actions I took over the past year. I sold my shares in a position I believed to be overvalued and having poor future, and then divided the money into several ideas. For example, I also did some selling of a few overvalued REITs such as National Retail Properties (NNN) or Universal Health Realty Income Trust (UHT). I then put the money to work in three new REITs and added to positions in an existing REIT (O). These reits included American Realty Capital (ARCP), Digital Realty Trust (DLR) and Omega Healthcare Investors (OHI). Another example includes the sale of Cincinatti Financial (CINF), and using the money to buy stock in the five leading Canadian Banks – Toronto Dominion Bank (TD), Bank of Montreal (BMO), Bank of Nova Scotia (BNS), Royal Bank of Canada (RY) and the Canadian Imperial Bank of Commerce (CM).

The good part of owning so many companies is that I can still monitor these positions regularly. I am reminded I own these companies anytime I receive an annual report in the mail. I also monitor the conditions of companies I have sold previously. That way, I am able to keep up with and learn about business ,which should hopefully pay dividends for a long period of time. Although I do not have the time to read 500 pages/day like Warren Buffett, I try to find the time to search for knowledge on a daily basis. I have quite a few “starter” positions in companies that were attractive at some point, but later on were not or there were better values out there. I do monitor them however, and could add to them if I saw the right opportunity. For example, in 2013 I added to Family Dollar (FDO) and Yum Brands (YUM), when there were weaknesses in the stocks, which were not warranted.

I believe that investors should follow as many companies as possible, in order to learn as much as they can about business. Even if you only own 20 companies in your portfolio, if all you do is keep up with those 20, you might be doing yourself a disservice.

Overall, I do realize I have too many companies in my portfolio. However, I am never going to let this stop me from looking for new opportunities. For example, I like General Mills (GIS) stock at current levels. I find it a much better value than competitors than existing peers I already hold in my portfolio. I recently initiated a position in the stock. I could theoretically buy shares in PepsiCo (PEP) or Nestle (NSRGY) or Kellogg (K) instead, in order to keep the number of positions in my portfolio static. From a capital allocation point however, it seems pretty dumb not to focus on the best value you find when you have new money to put to work.

I find that investors who focus on absolute number of stocks in a portfolio, miss this important nugget of gold. There is no limit to the amount of companies in your dividend portfolio. It should only be limited by the number of good ideas you have. You should also build your portfolio slowly, one position at a time, and several buys per each position. The worst piece of advise I hear is from those who paraphrase Warren Buffett and his supposedly concentrated approach. The saying goes that your 25th idea is not as good as your first idea.

I have news for you - you are not Warren Buffett. I am highly skeptical that investors know in advance which ideas are their best ideas. From my experience, my best ideas were way past portfolio components number 25 or 30. At the time of purchase, you do not know which company will keep raising dividends, and which would cut them and burn to the ground. With income investing, you are dealing with a lot of bits and pieces of imperfect information, which is why it is impossible to know which company will perform great. In addition, while Warren Buffett was not very diversified during the days of the Buffett Partnership, he has diversified extensively since the early 1970s. I have read his annual reports, and he has never once said that Berkshire Hathaway has too many subsidiaries or stock holdings.

I do not believe that holding so many stocks is probably not perfect if I wanted to outperform all other investors. You can see that despite the large number of holdings, the top 30 positions account for almost 80% of the portfolio. The top 40 positions account for 90% of the portfolio. Some of the remaining ideas have the chance to grow if they became attractively valued. For example, Peter Lynch from the Fidelity Magellan Fund managed an outstanding performance over a 13 year period, while holding hundreds of individual stocks in his portfolio. This did not hurt his performance at all. While I am not a super investor, I believe that the notion of finding a good idea and testing it with real money, before adding a significant amount of change to it has some merits.

I believe the real reason behind my comfort level with so many individual holdings, is because of my intense focus on reducing risk. I believe that you only need to get rich once in life. I would hate to spend years of my adult life accumulating a nest egg, only to lose it due to a few concentrated stupid investments. I would much rather end up with $1 million but with lower risk, than shoot for the stars and end up with somewhere between $10 million or zero dollars. If all I need to be retired is the $1 million, then why shoot for the stars and potentially risk it all?

Full Disclosure: Long everything mentioned above except for NNN, UHT, VZ and CINF

Relevant Articles:

Check the Complete Article Archive
Best Brokerage Accounts for Dividend Investors
Dividend Portfolios – concentrate or diversify?
Buffett Partnership Letters
Warren Buffett on Dividends: Ideas from his 2013 Letter to Shareholders

Popular Posts