Showing posts with label dividend stock ideas. Show all posts
Showing posts with label dividend stock ideas. Show all posts

Friday, August 28, 2015

A Dividend Portfolio for Early Retirees

I am often asked the following question in some variation: If I were starting a dividend portfolio today, and had a lump sum to put to work, how would I invest it?

The goal of an early retiree is to have the flexibility to do what they want, paid for by their nest eggs.
Dividend growth stocks should be an ideal strategy for these individuals, because they provide a relatively safe stream of income which is always positive and is more stable than relying on total returns. The risk with traditional approaches to retirement such as the 4% rule is that you might have to sell assets when prices are low or stagnant, which could deplete the nest egg that you worked so hard to accumulate.

With dividend investing, you are essentially living off the dividends generated by the portfolio. This is similar to living off the fruit from a tree you have planted twenty years ago. Selling chunks of your portfolio in order to finance expenses in retirement is similar to cutting the tree branch you are sitting on. By cutting off the tree that gives you fruit, you won’t get any more fruit. However, by focusing on the fruit (income), you not only receive more fruit over time, but you also can benefit from long-term appreciation in the companies you have invested in ( the tree grows too). It is a true win-win for long term dividend investors. I also believe that dividend growth investing addresses many risks that retirees face these days.

Monday, August 24, 2015

Dividend Companies I purchased in August

The stock market is finally having the correction everyone has been waiting for since 2012. In the past month, the S&P 500 is down by 7 – 8% from its all-time-highs. I am not sure if people are scared yet or not. I have a feeling that stock prices can go down even further from here, though it will be a slow process that could take several months. Either way, this is not the time to panic. This is the time to stay the course, and keep following a sound strategy for achieving long-term investment goals and objectives. It is important to remember that time in the market trumps timing the market for the long-term dividend investor.

As many of you know, I am in the accumulation phase of the game. Therefore, I have money to deploy each month. That money comes from regular job income and dividends. It is very interesting that the most important asset I have is my ability to earn income. As long as I have that asset, I have the ability to deploy excess cash into investments that will pay rising dividends for me.

As a dividend investor, I view each stock I buy as an asset that will provide me with growing cashflow for decades to come. The only difference is that I do not have to spend 50 - 60 hours/week in the office, filing TPS reports, and sitting in long status update meetings which take more work than the work itself, in order to earn that passive dividend income.  I gladly accept lower prices for shares, because this means I am effectively purchasing my future retirement income at a discount. Since I am not a market timer, I cannot tell you whether stock prices are going to be up or down. My hunch is that things will go lower over the next few months, though not in a straight line down, given the fact that the broad market is only recently starting to sell off. No matter what happens, I do know that by investing my savings each month, without emotion, I should do fine over time.

Friday, August 21, 2015

Eaton Corporation: Attractively Valued Stock to Consider

Eaton Corporation plc (NYSE:ETN) operates as a power management company worldwide. This dividend company has paid dividends since 1923, but is the type of company that does not raise them every year. For example, in the past two decades the company kept annual dividends unchanged in 1999, 2000, 2002 and 2009. While you would not find the company covered by most other dividend investors, I believe that it has some great prospects for those willing to take the time and study this business. I recently added to my position in the company, and decided to update my analysis on the company.

The most recent dividend increase was in February 2015, when the Board of Directors approved a 12.20% increase in the quarterly dividend to 55 cents/share.

The company's competitors include Johnson Controls (NYSE:JCI), Parker Hannifin (NYSE:PH) and ITT Corporation (NYSE:ITT).

Monday, August 10, 2015

Are these oil dividends safe?

The price of oil has declined a lot since the summer of 2014. The West Texas Intermediate (WTI) in Cushing, Oklahoma has declined from a high of $107.52/barrel in June 2014 to a low of $45.25/barrel in August 2015. This severe decline in prices has reduced the earnings power of many energy dividend growth stocks, which are engaged in exploration and production.

The question on everyone’s mind is whether these dividends are safe. Only after we answer this question, can we determine whether it makes sense to purchase those shares for income in a dividend growth portfolio.

Back in late 2014, I discussed whether the oil price decline was the opportunity of a lifetime. I talked about three companies I had my eye on. Initially, I discussed how I wanted to slowly build my positions every month. I even made a purchase of ConocoPhillips in early 2015, followed by a small purchase of Exxon Mobil (XOM) a few later. As I was buying Exxon Mobil, I had a change of heart after realizing that the oil price shock had drastically reduced energy companies’ earnings a few weeks later. Therefore, the drop in share prices was much lower than the decline in earnings power, which made those shares overvalued. As a result, I changed course and only recently bought shares in Exxon Mobil.

Friday, August 7, 2015

UnitedHealth Group (UNH) Dividend Stock Analysis

UnitedHealth Group (UNH) is the largest, most diversified health care enterprise in the United States. It serves more than 85 million individuals worldwide. The company operates under two complementary business platforms, UnitedHealthcare for health benefits, and Optum for health services. UnitedHealth Group is a dividend contender, which has raised dividends for 6 years in a row.

The most recent dividend increase was in June 2015, when the Board of Directors approved a 33.30% increase in the quarterly dividend to 50 cents/share. High dividend growth is typical of companies in the first stage of dividend growth.

The company’s largest competitors include Aetna (AET), Humana (HUM), and Anthem (ANTM).

Friday, July 31, 2015

Dividend Growth Stocks I Purchased in July

One of my favorite quotes from Warren Buffett deals with an issue that many dividend investors face from time to time. The quote is” If you like a stock at $50, you would love it at $30”

As usual this quote is jam-packed with a lot of insight. It makes perfect sense that a long-term investor should be excited to purchase ownership stakes in real businesses at cheaper valuations. If you have analyzed a company, and you like the business, and the economics of the business are not materially impaired, the investor should be excited that prices are lower. For us dividend growth investors, it is always better when we can obtain dividend income at a discount. Who doesn’t like getting more bang (dividend income) for their buck?

In the month of July, I managed to add to my stakes in the following companies listed below. I didn’t get to buy all companies I was eyeing at the beginning of the month, since unfortunately I only have a limited amount of capital to deploy each month. I also decided to take advantage of the declines in two transportation companies, which have been exhibiting weakness recently.


Friday, July 24, 2015

ACE Limited (ACE) Dividend Stock Analysis

ACE Limited (ACE), through its subsidiaries, provides a range of property and casualty insurance and reinsurance products worldwide. It operates through five segments: North American P&C, North American Agriculture, Insurance, Overseas General, Global Reinsurance and Life Insurance. ACE Limited is a dividend achiever, which has raised dividends for 23 years in a row.

The most recent dividend increase was in May 2015, when the Board of Directors approved a 3.10% increase in the quarterly dividend to 67 cents/share. After reviewing the past history of dividend increases however, I wouldn’t be surprised if there isn’t another dividend increase this year.

The company’s largest competitors include American International Group (AIG), Travelers (TRV), and Berkshire Hathaway (BRK.B)

Friday, July 17, 2015

McDonald's (MCD) Dividend Stock Analysis 2015

McDonald's Corporation (NYSE:MCD) franchises and operates McDonald's restaurants in the United States, Europe, the Asia/Pacific, the Middle East, Africa, Canada, and Latin America. As of December 31, 2014, it operated 36,258 restaurants, including 29,544 franchised and 6,714 company-operated restaurants. McDonald's is a dividend champion that has increased distributions for 39 years in a row. McDonald's is one of the 60 companies which could be purchased commission-free using Loyal3, with as little as $10.

The most recent dividend increase was in September 2014, when the Board of Directors approved a 4.90% increase in the quarterly dividend to 85 cents/share. The largest competitors for McDonald's include Restaurant Brands International (QSR), YUM! Brands (NYSE:YUM) and Starbucks (NASDAQ:SBUX).

Monday, July 6, 2015

Dividend Companies I am Considering this Month

The goal of every dividend investor is to generate dividend income that is larger than their annual expenses. This coveted goal is called the dividend crossover point. Regular readers know that my goal is to reach the dividend crossover point somewhere around 2018. I am on track to achieve that, because I put money to work every month, and have been doing that after starting from scratch more than 8 years ago. When you have a goal, and a plan to achieve that goal, the important thing is to keep working towards that goal. I do this by constantly searching for attractively valued companies, which also have good prospects to grow dividend income in the future.

In the article below, I have highlighted a few companies, which I am considering adding to. I had included Chubb (CB) when I originally started thinking about what purchases I am considering for July. However, insurer ACE Limited (ACE) decided to acquire Chubb last week, which derailed those plans. That being said, I will add ACE to my list for further review, and will post an analysis shortly. As I have said before, quality dividend growth stocks are more likely to be acquired by larger competitors.

Friday, June 26, 2015

Emerson Electric (EMR) Dividend Stock Analysis 2015

Emerson Electric Co. provides technology and engineering solutions to industrial, commercial, and consumer markets worldwide. It operates through five segments: Process Management, Industrial Automation, Network Power, Climate Technologies, and Commercial & Residential Solutions. Emerson Electric is a dividend king, which has raised dividends for 58 years in a row. There are only 16 dividend kings in the world.

The most recent dividend increase was in November 2014, when the Board of Directors approved a 9.30% increase in the quarterly dividend to 47 cents/share..

The company’s largest competitors include General Electric (GE), ABB (ABB), and Honeywell (HON)

Over the past decade this dividend growth stock has delivered an annualized total return of 9.10% to its shareholders.

Friday, June 19, 2015

Wal-Mart (WMT) Dividend Stock Analysis for 2015

Wal-Mart Stores Inc. (NYSE:WMT) operates retail stores in various formats worldwide. The company operates through three segments: Walmart U.S., Walmart International, and Sam's Club. This dividend champion has paid a dividend since 1974 and increased it for 42 years in a row. Wal-Mart is also one of the 60 companies, which can be purchased commission-free using Loyal3, with as little as $10.

The most recent dividend increase was in February 2015, when the Board of Directors approved a 2% increase in the annual dividend to 49 cents/share. This was the second year in a row that Wal-Mart delivered a small dividend increase. It is likely that management does not expect high earnings growth in the next couple of years, given by the very low hike in distributions in 2014 and 2015.

The largest competitors for Wal-Mart include Target (NYSE:TGT), Costco (NASDAQ:COST) and Dollar General (NYSE:DG).

Over the past decade this dividend growth stock has delivered an annualized total return of 7.30% to its shareholders. Future returns will be dependent on growth in earnings and dividend yields obtained by shareholders.

Tuesday, June 16, 2015

The most important metric for dividend investing

When selecting a dividend stock, investors should look at the dividend last. Income investors should first focus on profitability when investing in dividend paying companies. Investors should attempt to gauge whether companies can increase earnings in a sustainable way for the next decade. For master limited partnerships I would focus on Distributable Cashflow per Unit (DCF), while for REITs I would focus on estimated growth in Funds From Operations (FFO). Investors should not focus simply on revenues. They should also be beware of CEO’s who are empire builders or sales groups whose only goal is commissions, not company profitability.

In many cases, investors take into account unimportant pieces of information, which nevertheless influence their decisions. These investors should not focus on news stories and popular opinion, but should instead focus on the cold hard data.


Friday, June 5, 2015

Norfolk Southern (NSC) Dividend Stock Analysis

Norfolk Southern Corporation, together with its subsidiaries, engages in the rail transportation of raw materials, intermediate products, and finished goods. As of December 31, 2014, it operated approximately 20,000 miles of road in 22 states and the District of Columbia. Norfolk Southern Corporation is a dividend achiever, which has raised dividends for 14 years in a row.

The most recent dividend increase was in January 2015, when the Board of Directors approved a 3.50% increase in the quarterly dividend to 59 cents/share. This was the second increase in a year however, and represented a 9.30% dividend growth over the same time in 2014.

The company’s largest competitors include CSX Corporation (CSX), Union Pacific (UNP), and Burlington Northern Santa Fe which is part of Berkshire Hathaway (BRK/B).

Over the past decade this dividend growth stock has delivered an annualized total return of 15% to its shareholders. Future returns will likely be lower, and will be dependent on growth in earnings and starting dividend yields obtained by shareholders at time of investment.

The company has managed to deliver a 10.70% average increase in annual EPS over the past decade. Norfolk Southern is expected to earn $5.94 per share in 2015 and $6.84 per share in 2016. In comparison, the company earned $6.39/share in 2014.


Earnings per share have also been aided by share buybacks. The number of shares outstanding has decreased from 412 million in 2005 to 312 million by 2015.

Railroads are an oligopoly in the US, as 80% of industry revenues are generated by BNSF, Union Pacific, Norfolk Southern and CSX. The first two operate largely on the west coast, while the last two operate largely on the east coast. Railroads compete for customers, but also share assets as well. They compete with trucks, pipelines, ships and aircraft for hauling goods. Trucking provides more flexibility in transporting goods, though they are more expensive. It makes sense to transport goods on long distances using a combination of rail and other modes of transport for maximum cost savings when moving goods.

Long-term growth for Norfolk Southern will be driven by the growth in US economic activity. When economic activity improves over time, this would translate into more goods being shipped in the country.

The railroad's best prospects are long-term. As Warren Buffett put it, an investment in railroads is an all-in wager on the economic future of the United States. Over time, the movement of goods in the United States will increase, and railroads like BNSF, Union Pacific, Norfolk Southern and CSX should get its full share of the gain. Railroads move goods across longer distances in a much more efficient way that long-haul trucks. This provides railroads a cost advantage.

Today, the United States has half the usable track it had in 1970, though companies like BNSF are hauling much more freight than they did back then, and the American Association of Railroads estimates that freight loads will nearly double by 2035. That congestion—a signal of demand—means opportunity: Improve existing tracks and add new ones, and boost sales.

The economic moats around railroads are the billions of dollars it costs to build them and the fact that the rights of way they need are all but impossible to obtain today. Therefore, it is unlikely that a new railroad will be created, though other modes of transportation could chip away market share. However, given the fact that it costs 3 – 4 times lower to transport goods through a railroad than truck, railways have inherent cost advantage. This cost advantage could also allow railroads to raise prices, and still remain competitive. Railroads have some geographic advantage as well.

Furthermore, rail companies can increase profits by improving productivity. For example, using smart systems to optimize speed depending on terrain could generate significant fuel savings over time. Reducing the amount of time railcars sit idle, could also improve profitability (since using those assets more effectively reduces the need to buy too many railcars to begin with). Raising the length of trains could further boost productivity. Improving productivity reduces cost, and increases profitability over time.

Norfolk Southern transports raw materials, intermediate products and finished goods classified in the following commodity groups (percent of total railway operating revenues in 2014): intermodal (22%); coal (21%); chemicals (16%); metals/construction (13%); agriculture/consumer products/government (13%); automotive (8%); and, paper/clay/forest products (7%).

Growth in Norfolk Southern will be aided by increase in intermodal traffic and chemicals. It will likely be hurt by decreasing demand for coal, which will decrease the amount of coal transported by rail. The company has invested heavily in intermodal operations. Intermodal freight transport involves the transportation of freight in an intermodal container or vehicle, using multiple modes of transportation (rail, ship, and truck), without any handling of the freight itself when changing modes.

The thing to consider with railway companies like Norfolk Southern, Union Pacific or BNSF is that their fortunes are exposed to the cyclical fluctuations in demand for transportation. The downside is that these companies have substantial needs for capital, in order to comply with new regulations, replace track, locomotives and railcars and maintain their rail networks along the way. Maintaining their tens of thousands of miles of track is a cost that trucking companies do not have.

The annual dividend payment has increased by 17% per year over the past decade, which is higher than the growth in EPS. This was possible mostly due to the increase in the dividend payout ratio. Future rates of growth in dividends will be limited to the rate of growth in earnings per share.

A 17% growth in distributions translates into the dividend payment doubling almost every four and a quarter years on average. If we check the dividend history, going as far back as 2002, we could see that Norfolk Southern has actually managed to double dividends almost every four and a quarter years on average. The item to add however was that in 2000 the company did cut its dividends by more than 50%. Therefore, just like we saw with Union Pacific, while the dividend is likely sustainable, this is a cyclical company which is more likely to cut distributions than your typical consumer staples or healthcare dividend stock. So even if you plan on holding for the next 100 years, there will be hiccups and dividend cuts are likely every one or two decades.

In the past decade, the dividend payout ratio has more than doubled from a low of 15.40% in 2005 to 34.70 in 2014. The high percentage in 2009 was mostly an aberration, as earnings seem to have been hit by the Great Recession. A lower payout is always a plus, since it leaves room for consistent dividend growth minimizing the impact of short-term fluctuations in earnings.

Norfolk Southern has managed to grow its return on equity a little over the past decade, from 14.80% in 2005 to 16.80% in 2014. I generally like seeing a high return on equity, which is also relatively stable or rising over time.

Currently, Norfolk Southern is attractively valued at 15.80 times forward earnings, and it has a decent current yield of 2.50%. I initiated a small position in the railroad, because it is easier for me to track companies when I have skin in the game. I am interested in Norfolk Southern on dips below $95/share. I recently also initiated a small position in Union Pacific (UNP), to which I also plan on adding on dips below $90/share.

Full Disclosure: Long UNP, NSC

Relevant Articles:

Union Pacific (UNP) Dividend Stock Analysis
The Value of Dividend Growth
Dividend Investors have an advantage over everyone else on Wall Street
How to be a successful dividend investor
How to get dividend investment ideas

Thursday, May 28, 2015

Two New Dividend Growth Stocks I Bought This Week

In my investing, I try to put money to work every single month. I am extremely lucky that I have never had any material amount of debt, that I have been able to save large portions of income, and allocate them into dividend growth stocks. Every time I purchase shares in a company, I view it as a seed I plant, which will one day bear fruit for me. I will use this fruit picked from the tree in my retirement to live off of. I do not believe cutting the tree down, in order to buy fruit with the proceeds, to be the most sustainable retirement plan. There are three types of “seeds” I plant in my dividend portfolio, which are based on three different types of dividend yield and dividend growth trade-offs.

I usually purchase shares in companies I like slowly, over time. If my target allocation is $10,000/company, and I buy $1000 at a time, it might take me several years of purchases in order to reach this size. Add in the fact that there are usually 15 – 20 companies I find attractive at a time, and you can see that building a position takes time. I buy slowly because I want to be able to deploy more funds in good quality companies if they sell-off. When I purchase shares at lower prices, this means I am able to buy more future dividend income for a lower price today. I would love to see lower prices on the companies I bought this week.

Speaking of which, I initiated positions in the following two companies after Memorial Day:

The TJX Companies, Inc. (TJX) operates as an off-price apparel and home fashions retailer in the United States and internationally. It operates through four segments: Marmaxx, HomeGoods, TJX Canada, and TJX Europe. TJX Companies is a dividend achiever, which has raised dividends for 18 years in a row. The company has managed to deliver a 17.10% average increase in annual EPS over the past decade. The annual dividend payment has increased by 25.30% per year over the past decade, which is much higher than the growth in EPS. Despite the fact that I typically require a higher initial yield, I like the growth story and the growth prospects behind this company. This is why I initiated a small position in the stock at around 20 times forward earnings and a dividend yield of 1.30%. Check my analysis of TJX Companies for more details.

Ross Stores, Inc. (ROST), together with its subsidiaries, operates off-price retail apparel and home fashion stores under the Ross Dress for Less and dds DISCOUNTS brand names in the United States. It primarily offers apparel, accessories, footwear, and home fashions. Ross Stores is a dividend achiever, which has raised dividends for 21 years in a row. The company has managed to deliver a 22.80% average increase in annual EPS over the past decade. The annual dividend payment has increased by 25% per year over the past decade, which is much higher than the growth in EPS. I believe that Ross Stores is slightly riskier than TJX, since it doesn’t’ have the scale and depth of connections. However, it has more opportunities for growth due to lower number of locations domestically and the fact that there are no international locations as of yet. In addition, it is a more likely takeover candidate than a TJX. I initiated a position at 19.50 times forward earnings and a yield of 1%. Check my analysis of Ross Stores for more details.

The companies I bought above are examples of the low yield and high dividend growth type of company I invest in. I am hopeful that those seeds will turn into mighty oaks in the future. I would not be hesitant to add up to those small positions if they start decreasing in prices. As usual, my holding period will be forever, unless dividends are cut, there is material deterioration in the business, or shares become terribly overvalued relative to their prospects. The other risk that most long-term dividend investors have suffered from is when a quality company you own is acquired by someone else. The premium price is bittersweet, because it usually discounts the business relative to profits it could have generated for the patient investor.

Full Disclosure: Long ROST and TJX

Relevant Articles:

Ross Stores (ROST) Dividend Stock Analysis
TJX Companies (TJX) Dividend Stock Analysis
Types of dividend growth stocks
The Tradeoff between Dividend Yield and Dividend Growth
Lower Entry Prices Mean Locking Higher Yields Today

Friday, May 22, 2015

TJX Companies (TJX) Dividend Stock Analysis

The TJX Companies, Inc. (TJX) operates as an off-price apparel and home fashions retailer in the United States and internationally. It operates through four segments: Marmaxx, HomeGoods, TJX Canada, and TJX Europe. TJX Companies is a dividend achiever, which has raised dividends for 18
years in a row.

The most recent dividend increase was in March 2015, when the Board of Directors approved a 20% increase in the quarterly dividend to 21 cents/share.

The company’s largest competitors include Ross Stores (ROST), Kohl’s (KSS) and Target (TGT).

Over the past decade this dividend growth stock has delivered an annualized total return of 20.40% to its shareholders. Future returns will be dependent on growth in earnings and starting dividend yields obtained by shareholders.

The company has managed to deliver a 17.10% average increase in annual EPS over the past decade. TJX Companies is expected to earn $3.30 per share in 2016 and $3.71 per share in 2017. In comparison, the company earned $3.15/share in 2015.



Earnings per share have also been aided by share buybacks. The number of shares outstanding has decreased from 983 million in 2006 to 704 million by 2015. I like the fact that management is focused on delivering excess cashflow and then sharing that cashflow with shareholders in the form of higher dividends and share buybacks. While I would prefer special dividends to buybacks, I will take what I can.

Future growth in earnings per share will be driven by opening new stores, increasing same store sales, increasing margins, lowering costs and repurchasing shares.

I like the fact that TJX has a better scale in number of stores, purchasing agents and contacts, relative to its close rivals. This could translate into better bargaining power with suppliers, lower prices and high margins. The company has 900 buyers and 17000 vendors it works with.

The company sells branded quality fashion at discounted prices. It has a wide demographic reach and global sourcing capabilities. The type of company like TJX can prosper even during a difficult economic conditions, since it offers discounted branded fashion products to consumers.

Same store sales will be increased by attracting more traffic, expanding e-commerce, and continuing to provide a great assortment of great values on fashion, brands and quality. Loyalty programs and increase in marketing can result in retention of customers and attracting new ones to the stores. Maintaining a low inventory turnover rate of less than 2 months can also help in reducing markdowns and ensuring that a fresh new inventory assortment is available for repeat customers.

The company has 3389 stores as of fiscal year 2015. This includes 2094 TJ Maxx or Marshal’s stores, 487 Homegoods, 368 TJX Canada and 440 TJX Europe. TJX Companies expects that the number of stores under its umbrella could eventually reach 5475. The projections include 3000 TJ Maxx or Marshal’s stores, 1000 Homegoods, 500 TJX Canada and 975 TJX Europe. The company is opening its first stores in Austria and The Netherlans in 2015. While store saturation in the US is a potential risk, international expansion could bring a source of growth for years ahead. As international operations expand their scale, this could aid operating margins and profits. The downside to international operations is that a larger portion of TJX profits will be impacted to short-term fluctuations in the US dollar.

TJX Companies is also focusing on expanding its e-commerce platforms such as tjmaxx.com and sierratradingpost.com in the US and tkmaxx.com in the UK. Further sales growth could be obtained by leveraging the brick and mortar and online platforms. An example includes allowing customers to shop online and pick up items in stores.

I really like the fact that TJX Companies is dedicated to sharing excess cashflows with shareholders in the form of share buybacks and dividends. I would actually prefer more dividends to buybacks, but would take what I can get.

The annual dividend payment has increased by 25.30% per year over the past decade, which is much higher than the growth in EPS. Future growth in dividends will likely exceed growth in earnings per share given that the payout ratio has room for expansion.


A 25% growth in distributions translates into the dividend payment doubling almost every three years on average. If we check the dividend history, going as far back as 1997, we could see that TJX Companies has managed to double dividends almost every three and a half years on average.

In the past decade, the dividend payout ratio has increased from 12.70% in 2006 to 21.30% in 2015. A lower payout is always a plus, since it leaves room for consistent dividend growth minimizing the impact of short-term fluctuations in earnings.


TJX Companies has also managed to grow return on equity from 37.90% in 2006 to 52.20% in 2015. I generally like seeing a high return on equity, which is also relatively stable or rising over time.

Currently, TJX Companies is overvalued at 20.60 times forward earnings and yields 1.20%. Despite the fact that I typically require a higher initial yield, I like the growth story and the growth prospects behind this company. I may consider initiating a small position in the stock on dips below $66/share.

Full Disclosure: None

Relevant Articles:

Ross Stores (ROST) Dividend Stock Analysis
The Value of Dividend Growth
The work required to have an opinion
The Value of Dividend Growth
The Pareto Principle in dividend investing

Thursday, May 14, 2015

Three REITs I Picked Last Week

After scooping up some shares in 3M (MMM) last week, I didn’t expect to make more purchases this month. After all, April is usually an expensive month due to the amount of taxes I have to pay. June is also another expensive month, due to estimated taxes I have to pay on non-salary income I generate. In addition, I try to do most of the work towards maxing out 401 (k) early in the year. I leave room to max-out a quarter to third or so for the latter part of the year.

This week however I saw some weakness in a few REITs I have been monitoring. When I first discussed REITs in late 2014, I expressed my hope for declines in stock prices, similar to what we saw in 2013. Luckily, my hopes are starting to materialize. There is fear that interest rates will rise, which will reduce FFO/share, since cost of capital to acquire new properties will be higher. While interest rates will likely increase at some point in the future, I strongly doubt this will happen in the US in the near-term, especially when Europe and Japan are essentially flooding their economies with QE type stimulus.

I added to my positions in the following real estate investment trusts (REITs):

Omega Healthcare Investors, Inc. (OHI) is a real estate investment trust that invests in healthcare facilities, primarily in long-term healthcare facilities. This REIT has managed to boost distributions for 13 years in a row. The ten year dividend growth rate is 10.90%/year. Omega Healthcare Investors currently sells for 12.70 times funds from operations (FFO) and yields 6%. On a side note, Yahoo Finance shows the yield as 2%. This is incorrect - the quarterly dividend is 54 cents/share, but the last dividend that OHI paid was prorated for 1 month. I last analyzed Omega Healthcare Investors in 2013, and am working on refreshing my review. Please stay tuned.

W. P. Carey Inc. (WPC) is a real estate investment trust which invests in commercial properties that are generally triple-net leased to single corporate tenants including office, warehouse, industrial, logistics, retail, hotel, R&D, and self-storage properties. The company leases those properties back under long-term sale-lease back agreements. . This REIT has managed to boost distributions for 18 years in a row. The ten year dividend growth rate is 7.50%/year. W. P. Carey currently sells for 13.40 times FFO and yields 5.90%. Check my analysis of W.P. Carey for more details.

HCP, Inc. (HCP) is an independent hybrid real estate investment trust which invests in properties serving the healthcare industry including sectors of healthcare such as senior housing, life science, medical office, hospital and skilled nursing. The fund also invests in mezzanine loans and other debt instruments. . This REIT has managed to boost distributions for 30 years in a row. The ten year dividend growth rate is 2.70%/year. HCP currently sells for 13.10 times FFO and yields 5.70%. Check my analysis of HCP for more details. Despite issues with the company’s largest tenant, I think the dividend is safe and can grow over time. However, this one requires closer monitoring than the other two mentioned above.

I am not afraid of rising interest rates. Rising interest will increase the cost of capital, but they also signify the fact that business activity is better. If there is more business, companies hire more, need more space and probably will be able to afford higher lease payments. This is where examining the debt maturities of companies you are interested in investing could make sense. I know for a fact that a large portion of debt issued by companies is longer term in nature. When you sell a 10 year bond to finance a real estate purchase at a fixed rate, or when you get a 30 year mortgage, your interest rate is largely fixed. Therefore, you do not need to worry about interest rates increasing for the length of that loan term. In addition, I expect interest rates to increase gradually, which would allow companies to adapt when they need to access credit markets again.

Full Disclosure: Long OHI, WPC, HCP

Relevant Articles:

Four Dependable Dividend Stocks I Bought Last Week
Six Dividend Investments I Made Last Week
Five Things to Look For in a Real Estate Investment Trust
Are we in a REIT bubble?
Four High Yield REITs for current income

Friday, May 8, 2015

3M Company (MMM) Dividend Stock Analysis 2015

3M Company operates as a diversified technology company worldwide. 3M Company is a dividend king, which has raised dividends for 56 years in a row.

The most recent dividend increase was in December 2014, when the Board of Directors approved a 19.90% increase in the quarterly dividend to $1.025/share.

The company’s largest competitors include General Electric (GE), Siemens (SIEGY) and ABB (ABB).

Over the past decade this dividend growth stock has delivered an annualized total return of 9.50% to its shareholders. Future returns will be dependent on growth in earnings and starting dividend yields obtained by shareholders.

The company has managed to deliver a 7.10% average increase in annual EPS over the past decade. 3M is expected to earn $7.94 per share in 2015 and $8.78 per share in 2016. In comparison, the company earned $7.49/share in 2014.


Earnings per share have also been aided by share buybacks. The number of shares outstanding has decreased from 777 million in 2005 to 649 million by 2015. 3M expects to spend somewhere in the range of $17 billion to $22 billion on share repurchases through 2017.

The strength of 3M’s business model is largely driven by three key strategic levers: active portfolio management, investing in innovation, and business transformation. Management believes that these levers, combined with more aggressive capital deployment, will drive enhanced value creation.

The company’s financial objectives through 2017 include 9 – 11% growth in earnings per share, fueled by 4 – 6% annual revenue growth. In addition, 3M expects to make 5 – 10 billion in acquisitions over the next 3 - 4 years.

The company generates 35% of revenues from emerging markets, which could increase to 40 – 45% by 2017, driven by strong growth in developing economies of the world. In fact, emerging market revenues are expected to increase by 8 – 12% over the next four years, versus a more modest 2 – 4% growth for developed markets.

The company spends over 5% of revenues on R&D, and has been able to discover innovative products to bolster its bottom line. 3M expects to increase R&D expense to 6% of revenues by 2017. 3M keeps careful track of new product development, using a measure called the New Product Vitality Index (NPVI), which quantifies the percentage of 3M’s sales from products that were introduced during the past five years. In 2013, the NPVI was 33%. The company is trying to increase this index to 37% by 2017. 3M allows it engineers to spend 15% of their time on their own projects, which has resulted in a lot of innovation.

The annual dividend payment has increased by 9% per year over the past decade, which is higher than the growth in EPS. Future rates of growth in dividends will be limited to the rate of growth in earnings per share.

A 9% growth in distributions translates into the dividend payment doubling almost every eight years on average. If we check the dividend history, going as far back as 1973, we could see that 3M Company has managed to double dividends almost every eight and a half years on average.

In the past decade, the dividend payout ratio has increased from 40.40% in 2005 to 45.70% in 2015. A lower payout is always a plus, since it leaves room for consistent dividend growth minimizing the impact of short-term fluctuations in earnings.

3M has also managed to maintain a high return on equity over the past decade. During out study period, this indicator ranged between a high of from 37.70% in 2007 to a low of 26.60% in 2013, while ending little changed for the decade. I generally like seeing a high return on equity, which is also relatively stable or rising over time.

Currently, 3M is close to fully valued at 19.70 times forward earnings and a current yield of 2.60%. Last week, I added a little to my position in 3M. I would be excited to increase my exposure to this quality company on further dips in the stock price.

Full Disclosure: Long MMM and GE

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Friday, May 1, 2015

Johnson & Johnson (JNJ): A Quality Dividend King At An Attractive Valuation

Johnson & Johnson (NYSE:JNJ), together with its subsidiaries, is engaged in the research and development, manufacture, and sale of various products in the health care field worldwide. The company operates in three segments: Consumer, Pharmaceutical, and Medical Devices & Diagnostics. This dividend king has paid dividends since 1944 and has managed to increase them for 53 years in a row.

The company's latest dividend increase was announced in April 2015 when the Board of Directors approved a 7.10% increase in the quarterly dividend to 75 cents /share. The company's peer group includes Novartis (NYSE:NVS), Pfizer (NYSE:PFE) and Roche Holdings (RHHBY).

Over the past decade this dividend growth stock has delivered an annualized total return of 7.20% to its shareholders.

The company has managed to deliver 7.20% average increase in annual EPS over the past decade. Johnson & Johnson is expected to earn $6.14 per share in 2015 and $6.42 per share in 2016. In comparison, the company earned $5.70/share in 2014.

Johnson & Johnson also has managed to reduce number of shares outstanding. Between 2004 and 2015, the number of shares declined from 2,996 million to 2,826 million.

Johnson & Johnson has a diversified product line across medical devices, consumer products and drugs, which should serve it well in the future. This makes the company largely immune from economic cycles. In addition, the company has strong competitive advantages due to its scale, leadership role in various diverse healthcare segments, breadth of product offerings in its global distributions channels, continued investment in R&D, switching costs to users of its medical devices, as well as its stable financial position. The company generates 70% of revenues from products where it is number one or number two in the respective field. The ability to generate strong cash flows, have enabled Johnson & Johnson to reward shareholders with a higher dividends for 53 consecutive years.

Future profits growth could come from new product offerings, which are the result of continued investment in research and development, and through strategic acquisitions. The company spends approximately 11% on R&D, and generates a quarter of its revenue from products launched in the past five years. In the Pharmaceuticals segment, the company expects 10 major filings and 25 line extensions expected between 2013 and 2017. Approximately thirty major filings are expected between 2014-2016 in the Devices segment.

Johnson & Johnson is also expanding its business through strategic acquisitions. For example, the acquisition of Synthes, is expected to generate significant synergies for Johnson & Johnson and make it a leader in fast growing trauma market. This also allowed the company to use its overseas cash without having to pay the steep repatriation taxes. Emerging market growth and opportunities for cost restructurings should further help the company in squeezing out extra profits in the long run.

Sales in drugs like Simponi, Stelara, Zytiga, Xaralto and Olysio should more than offset the generic erosion from older drugs which are losing their patent protection. The fact that the company has exposure to other healthcare segments besides pharmaceuticals makes it a much safer play on the healthcare sector than pure pharma companies. I like the fact that there is diversity in the revenue generating behind each of the large segments. The three segments include Pharmaceutical with 43% of sales, Medical Devices & diagnostics with 37% of sales and the Consumer segment with approximately 20% of sales.

The annual dividend payment has increased by 9.60% per year over the past decade, which is higher than the growth in EPS.

A 10% growth in distributions translates into the dividend payment doubling every seven years on average. If we check the dividend history, going as far back as 1977, we could see that Johnson & Johnson has actually managed to double dividends every five and a half years on average.

In the past decade, the dividend payout ratio increased from 38.70% in 2004 to a high of 64.50% in 2011, before decreasing to 48.40%. 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 decreased from 29% in 2004 to 22.70% in 2014. This is still a very high return on equity however. Rather than focus on absolute values for this indicator, I generally want to see at least a stable return on equity over time. Given the fact that the amounts in this indicator are still high these days, I do not view this decline as a major warning sign.

Currently, the stock is attractively valued at 17.80 times forward earnings and a current yield of 2.70%. The only reason I am hesitating to add more shares is because the company is one my five largest holdings.

Full Disclosure: Long JNJ

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Friday, April 24, 2015

Ross Stores (ROST) Dividend Stock Analysis

Ross Stores, Inc. (ROST), together with its subsidiaries, operates off-price retail apparel and home fashion stores under the Ross Dress for Less and dds DISCOUNTS brand names in the United States. It primarily offers apparel, accessories, footwear, and home fashions. Ross Stores is a dividend achiever, which has raised dividends for 21 years in a row.

The most recent dividend increase was in February 2015, when the Board of Directors approved a 17.50% increase in the quarterly dividend to 23.50 cents/share.

The company’s largest competitors include TJ Companies (TJX), Kohl’s (KSS) and Macy’s (M).

Over the past decade this dividend growth stock has delivered an annualized total return of 21.90% to its shareholders. Future returns will be dependent on growth in earnings and starting dividend yields obtained by shareholders.

The company has managed to deliver a 22.80% average increase in annual EPS over the past decade. Ross Stores is expected to earn $4.84 per share in 2015 and $5.41 per share in 2016. In comparison, the company earned $4.42/share in 2014.


Earnings per share have also been aided by share buybacks. The number of shares outstanding has decreased from 293 million in 2005 to 209 million by 2015. I like the fact that management is focused on delivering excess cashflow and then sharing that cashflow with shareholders in the form of higher dividends and share buybacks. While I would prefer special dividends to share repurchases, I will take what I can.

As consumers become more price sensitive, companies like Ross Stores that provide quality merchandise at a discount tend to profit. Based on historical performance, it looks like this is a recession resistant business, which could deliver results in good and bad years.

Future growth will be aided by opening new stores in the US, as well as starting international expansion like competitor T.J. Companies.

The important factor for Ross is that it needs its buyers to select and purchase quality inventory that will sell quickly. In fact, it has managed to achieve that, as evidenced by its low inventory turnover of 2 months or so, versus three months for the average department store. When you manage to sell inventory quickly, you reduce the need for further discounting of inventory, and you reduce the costs associated with storing inventory for too long. In addition, bargain shoppers are more likely to increase the frequencies of their visits if the stores are constantly re-stocked with fresh new inventory on the shelves.

The company’s stores offer everyday low pricing on department store brands, which are sold at significant discounts off competitors. There is a broad assortment of goods, which creates a “treasure hunt” type environment for shoppers. The self-help type of the store reduces need for labor relative to competitors. In addition, I think there is a lower risk of disruption by the internet for the type of store like Ross or TJ Max, due to nature of its merchandise and treasure hunt mentality of shoppers there.

For Ross, it is important for buyers to have solid relationships in order to snap quality merchandise quickly and at discounted prices. Competition for that merchandise is intense, which is why speed and relationships and scale matter. Ross Stores does have quite have the scale in terms of 600 buyers negotiating with 8000 vendors in order to fill, the stores and 4 distribution centers in order to obtain the right inventory for the right stores at the appropriate time. However, its larger competitor has almost three times the number of stores as Ross, and twice as much buyers. However, Ross Stores has managed to grow operations rapidly, and still has room to expand its geographic reach beyond the 33 states it is in and the 1362 stores it currently owns and operates. Of those stores, 1210 are under the Ross Stores brand and 152 are dd’s Discounts brand.

The company expects that it would ultimately be able almost double stores in the US ( 1500 Ross Stores and 500 DD discount Stores). At a rate of 5% – 6% growth in number of stores, this could be achieved within 12 – 14 years. If Ross Stores also manages to grow same-store sales alongside with new store openings, and if it also manages to expand internationally, it could achieve high earnings growth over the next decade.

The annual dividend payment has increased by 25% per year over the past decade, which is much higher than the growth in EPS. Future growth in dividends will likely exceed growth in earnings per share given that the payout ratio has room for expansion.

A 25% growth in distributions translates into the dividend payment doubling almost every three years on average. If we check the dividend history, going as far back as 1995, we could see that Ross Stores has indeed managed to double dividends almost every three years on average.

In the past decade, the dividend payout ratio has remained steady, and it has only increased slightly to 18% in 2015. A lower payout is always a plus, since it leaves room for consistent dividend growth minimizing the impact of short-term fluctuations in earnings.

Ross Stores has also managed to grow its high return on equity from 24.90% in 2006 to 43.20% in 2015. I generally like seeing a high return on equity, which is also relatively stable or rising over time.

Currently, Ross Stores is overvalued at 21.40 times forward earnings and yields 0.90%. Despite the fact that I typically require a higher initial yield, I like the growth story and the growth prospects behind this company. I would consider initiating a small position in the stock on dips below $96/share.

Full Disclosure: None

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Friday, April 17, 2015

Philip Morris International (PM) Dividend Stock Analysis


Philip Morris International Inc. (PM), through its subsidiaries, manufactures and sells cigarettes, other tobacco products, and other nicotine-containing products. Its portfolio of brands comprise Marlboro, Merit, Parliament, Virginia Slims, L&M, Chesterfield, Bond Street, Lark, Muratti, Next, Philip Morris, and Red & White. The company was created in 2008 when Altria (MO) spun-off its international tobacco operations into Philip Morris International. Between 2008 and 2013, I believed Philip Morris International to be the security I like best. As a result it is one of my largest positions.

Philip Morris International has managed to boost dividends in every single year since 2008. The last dividend increase was in September 2014, when the quarterly dividend was raised by 6% to $1/share. The quarterly dividend has increased from 46 cents/share in 2008. The chart below shows dividends from 2008 to 2015. There were only 3 dividend payments made in 2008, and for 2015 it assumes that the dividend stays unchanged at $1/quarter. It is likely that it will be increased in October 2015, but it is unclear at this time what the increase will be.


In the future, the company can grow earnings per share through acquisitions, entry into new markets, through price increases that exceed decreases in demand, increase in market shares, through new product offerings (such as e-cigarettes) and through share buybacks. I would be curious to see whether PMI tries to diversify beyond tobacco in the future, into other areas such as packaged food for example or alcoholic beverages. The company is committed to returning 100% of cashflow to shareholders, which it has achieved through dividends and share buybacks.

Everyone is aware of the legislation risks behind tobacco companies, and dangers of tobacco investing. As a result, I am not going to discuss those. For those who do not like companies like PMI due to ethical considerations, I respect that. However, please do not try to impose your own ethical considerations on others.

The main positive for PMI is that the company is not dependent on the mercy of a single government and a single market, in terms of unfavorable legislation or bans on tobacco products. For example, the fact that Australia initiated plain packaging laws on cigarettes was not a blow to globally diversified companies like PMI. In addition, even if this plain packaging law spreads to the UK or a few other countries, the diversified nature of PMI’s operations could soften the blow. On the other hand however, it is more cumbersome to deal with 180 governments, which all have different laws and regulations regarding the manufacturing, processing and sale of tobacco products. The fact that a single government entity cannot throw a deadly blow to PMI is a plus. The other positive is that tobacco usage in certain places like emerging markets is actually growing. The downside is that profits per unit are higher in the developed world, and lower in emerging markets.

PMI has managed to increase earnings per share from $2.75 in 2007 to $5.26 in 2013. Since then, earnings per share have decreased and are expected to fall to $4.35 for 2015.


As a company that operates in countries outside of US, PMI is exposed to currency fluctuations. The company reports results in US dollars, but sells its products for Euros, Rubles, Yen, Rupees etc. This means that annual results in US dollars will fluctuate from year to year. This explains partially the reason why earnings per share have not been growing since 2013, when they were $5.26/share. Rather, earnings per share fell to $4.76 in 2014 and are expected to fall further down to $4.35 in 2015. One of the reasons for declines is the increase in the US dollar against other currencies. The unfavorable foreign exchange impact is equivalent to $1.15/share in 2015, which could bring back those earnings to $5.50. Even if you add in the currency impact, of $0.34 in 2013 and $0.80 in 2014 and expected $1.15 in 2015, earnings per share would have been flat for 3 years in a row however. The general belief is that these currency fluctuations make the company performance look worse than it is. I usually view currency fluctuations as a wash – you get some years where currencies go your way, and then years where they go against you. The negative part about PMI’s exposure to foreign exchange rates however is that emerging market currencies usually tend to depreciate against the dollar over time. Therefore, I am a little cautious about taking out foreign exchange impact since it is a normal cost of doing business. Emerging markets reflect 45% of company’s revenues in 2014.

The drop in earnings per share has pushed the dividend payout ratio up, and resulted in slowing down of dividend growth. In itself, a high payout ratio for a tobacco company is not as big of a problem.

However, when earnings per share are dropping, it is a slight cause for concern. The company has recently canceled its stock buyback program. Since May 2008, when PMI began its first share repurchase program, the company has spent an aggregate of $37.7 billion to repurchase 601.4 million shares. This represented 28.5% of the shares outstanding at the time of the spin-off in March 2008. The average price was $62.61 per share. However, the company is not repurchasing any shares for the time being, citing unfavorable currency fluctuations. In comparison, Philip Morris International has one of the most consistent share buyback programs between 2008 and 2014.


In 2014, PMI exceeded its one-year gross productivity and cost savings target of $300 million. In 2015, PMI's productivity and cost savings initiatives will include, continued enhancement of production processes, the harmonization of tobacco blends, the streamlining of product specifications and number of brand variants, supply chain improvements and overall spending efficiency across the company. This is something that could help in attaining future growth in earnings.

In general, I like PMI because the company has a wide moat. This means that its products have strong brand names, pricing power and loyal customer usage. In addition, PMI usually is number one or number two in most of its major markets in Europe, EMEA, ASIA etc. This strong advantage results in recurring sales and earnings for shareholders for years. This wide moat is the reason why I am willing to sit out any short-term turbulence in Philip Morris International. Since my holding period is the next 20 - 30 years, I am willing to sit out short-term weakness ( 3 - 5 years) if I believe that a company has solid long-term potential.

In contrast, Altria (MO) has done spectacularly well since 2008. The most interesting thing to learn is that in 2008, everyone (myself included) believed that PMI will do much better than Altria. Quite on the contrary however, Altria did better because it had a lower P/E ratio and a higher starting yield, which was coupled with consistently high growth in earnings per share. The moral of the story is that when it is conventional wisdom to accept something as a given, the real money making opportunity could be to pursue the alternative viewed as less desirable. By defying skeptics, Altria has rewarded its shareholders much better than PMI since 2008. However, Altria is riskier, since it derives most of its profits from US tobacco sales. The next major source of earnings is its stake in brewer SAB Miller.

Shares of Philip Morris International are not selling for 17.90 times forward earnings and yield 5.10%, with a payout ratio of 92%. If you adjust forward earnings for currency of $1.15/share, the forward P/E drops to 14.20 and payout ratio drops to 72.70%. After looking at the data, I would not consider adding to PMI today.  Of course, it is one of my largest positions, so common sense on diversification tells me that I should not buy more even if I wanted to. I believe that in the long-run, PMI’s profits will likely rebound. The nice thing is that I will be paid a high dividend in the process, which I can allocate into other interesting opportunities.

I do not like it when the dividend payout ratios is too high for companies I own and where earnings have been flat or going lower. While the risk that the company will cut dividends is low, since it has some room to maneuver after it has canceled stock buybacks, the risk for a dividend cut increases the longer the payout stays closer to 100%. I would like PMI to prove skeptics wrong, and return back to growing earnings. We all know that without rising earnings, dividend growth cannot be achieved in a sustainable fashion. That being said, I still think the long-term picture (10 - 20 years down the road) is solid however once short-term woes are behind us.

Full Disclosure: Long PM and MO

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