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

Friday, October 24, 2014

AT&T: A High Yield Telecom for Current Income

AT&T Inc. (T) provides telecommunications services to consumers and businesses in the United States and internationally. This dividend champion has paid dividends since 1984 and increased them for 30 years in a row. The most recent dividend increase was in December 2013, when the Board of Directors approved a 2.20% increase in the quarterly dividend to 46 cents/share.

The company’s competitors include Verizon (VZ), Sprint (S) and T-Mobile (TMUS).

Over the past decade this dividend growth stock has delivered an annualized total return of 9% to its shareholders. Future returns will be dependent on growth in earnings and dividend yields obtained by shareholders.

Read the rest of the article on Seeking Alpha

Full Disclosure: Long VZ

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Monday, October 20, 2014

United Technologies (UTX): A Diversified Dividend Powerhouse To Consider

United Technologies Corporation (UTX) provides technology products and services to the building systems and aerospace industries worldwide. This dividend achiever has paid a dividend since 1936 and increased it for 20 years in a row. Back in June 2013, when the Board of Directors approved a 10.30% increase in the quarterly dividend to 59 cents/share.

The company has managed to deliver a 10.20% average increase in annual EPS over the past decade. United Technologies is expected to earn $6.86 per share in 2014 and $7.52 per share in 2015. In comparison, the company earned $6.17/share in 2013.

United Technologies has consistent history of share repurchases. The company has been able to reduce the number of shares outstanding from 1.006 billion in 2004 to 916 million in 2014.

The annual dividend payment has increased by 14.40% per year over the past decade, which is higher than the growth in EPS. Future growth in dividends will likely match rate of increase in earnings per share, and be somewhere around 10%/year.

United Technologies has been able to generate a high return on equity, which has ranged between 19.70 in 2014 to 25.20% in 2008. I generally like seeing a high return on equity, which is also relatively stable over time.

Currently, United Technologies is attractively valued at 14.60 times forward earnings, and has a dividend yield of 2.40%. I recently added to my position in the stock, and plan on adding further this year, subject to availability of funds.


Full Disclosure: Long UTX and GE

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Friday, October 17, 2014

Two and a half purchases I made this week

This is going to be a short article. The purpose is to discuss how I was able to acquire shares in two companies this week. The third transaction is explained in more detail below.

The first company I purchased shares in included Eaton (ETN). Eaton Corporation plc operates as a power management company worldwide. The company has increased dividends for five years in a row. However, it has not cut dividends to shareholders but increased it every other year since 1983. The company has managed to deliver an 11.80% average increase in annual EPS over the past decade. Eaton is expected to earn $4.60 per share in 2014 and $5.34 per share in 2015. In comparison, the company earned $3.90/share in 2013. The annual dividend payment has increased by 13.80% per year over the past decade, which is higher than the growth in EPS. Currently, Eaton is attractively valued at 13 times forward earnings, and has a dividend yield of 3.30%. I initiated a position in the company in the past quarter, and have since added to it. I would be looking forward to adding to my position in the company in the coming years, subject to availability of funds, opportunity cost and valuation. Check my analysis of Eaton on Seeking Alpha.

The second company in which I purchased shares was Williams Companies (WMB). It owns the general partner interest in Williams Partners (WPZ) and Access Midstream Partners (ACMP) along with any limited partnership units in both MLPs. Those are pretty valuable, especially if the pipelines do manage to increase cashflows. Williams Companies is a dividend achiever, which has managed to raise dividends for 11 years in a row. The company has a pretty aggressive plan to increase dividends per share through 2017 and expects to pay $2.46 in 2015, $2.82 in 2016, and $3.25 in 2017. Given the current annual payment of $2.24/share, which translates to a roughly 4.70% current yield, I would be interested in the company even if growth slows down to 5% – 6%/year. But no, Williams Companies expects to grow dividends by 15%/year through 2017. Those projections are one of the reasons I initiated a position in the company a few months ago. Given that pipelines are under pressure in the past two weeks, I think prices are starting to get more attractive. I probably need to write a more detailed analysis of the company, so please stay tuned.

These purchases are relatively small, given that I didn’t expect to have enough funds till sometime in November. I might make another small purchase either next or the week after next week. The purchases I am trying to make are basically additions to shares of companies I own, in an effort to increase positions by taking advantage of decreasing prices.

The third transaction I did earlier did week involved some shares of Kinder Morgan Inc (KMI), which I sold in my taxable account and purchased Kinder Morgan Management LLC (KMR). Since I am replacing one security for another, I view this as a half “purchase”. Actually, since once the deal closes I will end up with KMI anyway, it shouldn’t even be considered a purchase. A few weeks ago, I discussed that there is an arbitrage opportunity, where by purchasing KMR shares, an investor who waits till the acquisition by Kinder Morgan Inc is complete, can end up with more KMI shares than purchasing them outright. This is because the price of KMR shares is lower than the conversion factor times the value of KMI shares. If that paragraph is making your head spin, read the whole article explaining the process.

On the plus side, Kinder Morgan Inc (KMI) announced it increased quarterly dividends to 44 cents/share, which is a 7.30% increase over the same rate paid in the same quarter last year. Unitholders of Kinder Morgan Energy Partners (KMP) will get a quarterly distribution of $1.40/unit, which is a 4% increase over the same distribution paid to unitholders in the same quarter last year. Given that Kinder Morgan Management LLC (KMR) is equivalent to KMP, minus the ominous tax structure of a partnership, and given its higher yield relative to Kinder Morgan Inc ( plus it is not taxable since I get shares "reinvested" without triggering any taxable liabilities to the IRS), I think that I made the right choice. Now if Kinder Morgan Inc (KMI) drops to $30 or below, I would replace my remaining position with Kinder Morgan Management LLC (KMR) shares.

The other half I transaction I did was the fact that I replaced most of my position (90% or so) in ONEOK Partners (OKS) in my taxable account with the general partner ONEOK Inc (OKE). There are multiple reasons for the switch. The first reason is that if you like an MLP, the best returns in terms of dividend growth and capital appreciation are always derived from investing in the general partner. Thus I believe that OKE will do better than OKS over the next decade. I also made a mistake by chasing yields in the first place in 2011, when I sold OKE to buy OKS. Chasing yield on my part is not the smartest thing to do. I discussed this mistake in a previous article I posted a few months earlier. I needed to fix the mistake, once I identified it. Another reason for the change is that I need to simplify my life, as I will no longer have to do K-1 forms. They are not that difficult for me to do, and ONEOK Partners (OKS) does a really good job in showing you what forms to file with the IRS. However, if I am no longer in charge of the DGI portfolio ( due to death, disability, insanity etc), I know that this would make it more difficult for whoever inherits the dough. Thus, I used the sell-off in the pipeline sector to get in on the general partner, which declined much faster and much more than the limited partner units. On the surface, it sounds crazy that I replaced a 5.80% current yield for a 4% current yield. The thing of course is that the second yield is expected to grow by 10%/year, while the first higher yield would grow much slower. Over time, investing in the general partner interest will likely achieve better yields on cost. For the time being, I am still going to keep the remaining ONEOK Partners (OKS) in my IRA however.

Full Disclosure: Long ETN, WMB, KMI, KMR, OKE, OKS

Relevant Articles:

Ten Dividend Seeds I Planted for Long Term Income
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How to buy Kinder Morgan at a discount
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Monday, October 13, 2014

Canadian Banks for Long Term Dividend Growth

Last week, I added to my holdings of the largest Canadian Banks. I initiated a position in those five banks in early 2013, and then added some more in late 2013. If prices make sense, and I have money to invest, I will likely make another investment sometime in 2015. The banks include:

Bank of Montreal (BMO) provides various retail banking, wealth management, and investment banking products and services in North America and internationally. It has operations in the US, in the form of BMO Harris Bank. Bank of Montreal has paid dividends since 1829. Over the past decade, Bank of Montreal has increased dividends per share by 5.90%/year. And that’s despite the fact that the annual dividend was left unchanged in 2009, 2010 and 2011.Earnings per share have increased by 4.10%/year over the same time period. The bank sells for 12.50 times earnings and yields 3.80%.


The Bank of Nova Scotia (BNS) provides various personal, commercial, corporate, and investment banking services in Canada and internationally. It operates in four segments: Canadian Banking, International Banking, Global Wealth & Insurance, and Global Banking & Markets. This is the most international Canadian bank, as it has services in Caribbean, Latin America, Central America, and Asia. Bank of Nova Scotia has paid dividends since 1834. Over the past decade, Bank of Nova Scotia has increased dividends per share by 7.50%/year. And that’s despite the fact that the annual dividend was left unchanged in 2010. Earnings per share have increased by 7.10%/year over the same time period. The bank sells for 12.40 times earnings and yields 3.80%.

Canadian Imperial Bank of Commerce (CM) provides various financial products and services to individuals, small businesses, and commercial, corporate, and institutional clients in Canada and internationally. The company operates through three segments: Retail and Business Banking, Wealth Management, and Wholesale Banking. Canadian Imperial Bank of Commerce has paid dividends since 1890. Over the past decade, Canadian Imperial Bank of Commerce has increased dividends per share by 4.40%/year. And that’s despite the fact that the annual dividend was left unchanged in 2009 and 2010. Earnings per share have increased by 4%/year over the same time period. The bank sells for 11.30 times earnings and yields 4%.

Royal Bank of Canada (RY), a diversified financial service company, provides personal and commercial banking, wealth management, insurance, investor, and capital markets products and services worldwide. This is another bank that has operations in the US. Royal Bank of Canada has paid dividends since 1870. Over the past decade, Royal Bank of Canada has increased dividends per share by 10.60%/year. And that’s despite the fact that the annual dividend was left unchanged in 2009 and 2010. Earnings per share have increased by 11.10%/year over the same time period. The bank sells for 13.20 times earnings and yields 3.50%.

The Toronto-Dominion Bank, (TD) provides financial and banking services in North America and internationally. The company also has significant operations in the US. The Toronto-Dominion Bank has paid dividends since 1857. Over the past decade, Royal Bank of Canada has increased dividends per share by 10.10%/year. And that’s despite the fact that the annual dividend was left unchanged in 2010. Earnings per share have increased by 9.70%/year over the same time period. The bank sells for 11.30 times earnings and yields 3.80%.

Overall, I like the fact that Canadian Banks didn’t cut or eliminate dividends during the 2007 – 2009 financial crisis. Instead, they kept them steady for a few years, and have been increasing them for a few years now as well. I don’t believe this was due to dumb luck, but because there were stricter lending practices, than what we had in the US prior to the Great Recession.

In the grand scheme of things, I am bullish on Canada in the very long-term. An investment in all banks is a bet that Canada will be a developed country in 30 – 40 - 50 years (after that – I don’t care). It is a bet that its economy will gradually grow over time, the number of people will increase, and that Canadian people and businesses will need the services of a financial institution. I think that the Canadian government has its house in order, and that the relatively more open immigration system will encourage faster population growth.

It seems that most of the banking in Canada is done through one of those five largest banks. There are a few smaller ones, but I chose to only focus on the larger entities. Once a consumer starts using the services of one of the banks, they get used to it, and the switching costs are high. Once you establish that relationship with the bank and a banker, chances are that you will do checking through it, manage your investments, use credit cards and take on loans like car or mortgage on a house. Therefore, I believe they have competitive advantages, and scale of operations.

That being said, I have no idea whether there will be a financial crisis in Canada in the next 5 – 10 years. It is possible that one of the largest five banks fails during the next major recession. That’s fine, because the ones left standing will pick up the business and do better. This is why I am putting equal amounts of investment in each bank. No matter how the economy does, banking needs to get done, meaning that one of those five banks will get business. Again, as a long-term investor, my holding period is in the decades. I know growth is not going to be smooth year over year, which is why I am fine with encountering bumps along the road. This will help me build out my positions at cheaper prices.

It is also possible that earnings on those banks do not do that well over the next decade. That’s fine, since I am essentially getting paid anywhere between 3.50% and 4% annually to hold on to those banks. I think that even if earnings do not grow that much, dividends per share will grow enough to maintain purchasing power of my income. This is why I am slowly putting money once per year in those banks, in case I get the timing of the purchases wrong. Actually, even if I get the timing wrong in the next five years, that’s ok. It is ok, because I am investing for the next 30-40-50 years, not for the next five months. I have a conviction behind those ideas, which is why I would not hesitate to average down, if prices are much lower than today come 2015.

Full Disclosure: Long all companies listed above

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Friday, October 10, 2014

Visa: High Dividend Growth Stock To Consider

Visa Inc. (V), a payments technology company, operates as a retail electronic payments network worldwide. The company facilitates commerce through the transfer of value and information among financial institutions, merchants, consumers, businesses, and government entities. The company went public in 2008, and has managed to pay and increase dividends ever since. I initiated a position in 2011, after witnessing the strong dividend growth, the attention of Berkshire Hathaway, and the fact that the stock was available at 20 times earnings

Currently, Visa is slightly overvalued at 20.50 times forward 2015 earnings, and has a low yield of 0.80%. If the company manages to earn $20 per share by 2020, and even if the P/E ratio compresses to 15 times by, the stock could provide very good returns to investors. Another plus is that dividend growth could result in very high yields on cost for Visa investors in 15 - 20 years. Of course, long-term growth is never certain, which is why I do not plan on adding to Visa unless I can buy it at 20 times forward earnings or less. However, I am willing to break my rules slightly, and accept 20 times forward earnings for 2015. If we get a more significant stock correction, I would be a buyer and will try to increase my position to a top 20 level ( meaning it will be in my top 20 portfolio positions by size).  


Full Disclosure: Long V

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Monday, October 6, 2014

Ten Dividend Seeds I Planted for Long Term Income

My favorite saying is the following: The best time to plant a tree was 20 years ago. The second best time is today.

This saying illustrates the power of compounding in a simple way, which is very easy to understand by anyone. You do not need to be a Math Whiz to understand that a small seed can turn into a mighty oak, provided you allow it enough time to grow and deliver the shade under which you can rest.

I see myself as a someone who plants seeds today, and expects that a few of them would turn into mighty oaks. The seeds I am planting represent money I invest in solid blue chip dividend payers, which are available at attractive valuations. Those companies will compound my dividend income, and I will further magnify this effect by strategically reinvesting those dividends into shares of more quality companies, paying me more in dividend income. When you set up a dividend stream, the first few dividend payments start out small. Later on however, as you keep putting more money to work for you, and as those growing dividends are reinvested, the dividend starts snowballing into a very tangible amount that is very noticeable. After 7 years of savings and investing in dividend paying stocks, I believe I am close to reaching the critical mass, after which the dividend snowball starts rolling exponentially. What can I say, I like letting my capital work hard for me in quality dividend paying companies I own, and pay me rising dividends, rather than me having to work hard. By leveraging creativity and effort of those people working in the companies I own, I am essentially buying time.

Share prices are finally starting to go down, which makes me salivate, because I like averaging down my cost basis. I was fortunate to be able to save some money, and put them to work in the following dividend paying companies.

Aflac (AFL) provides supplemental health and life insurance products. It operates through two segments, Aflac Japan and Aflac U.S. This dividend champion has managed to boost distributions for 31 consecutive years. The company has managed to increase those dividends at a rate of 8.10%/year in the past five years. Currently, the stock sells for 9.30 times forward earnings and an yield of 2.60%. Check my analysis of Aflac.

Baxter International Inc. (BAX) develops, manufactures, and markets products for people with hemophilia, immune disorders, infectious diseases, kidney diseases, trauma, and other chronic and acute medical conditions. This dividend growth company has managed to boost distributions for 8 consecutive years. The company has managed to increase those dividends at a rate of 16.40%/year in the past five years. Currently, the stock sells for 14.10 times forward earnings and an yield of 2.90%. Check my analysis of Baxter.

The Chubb Corporation (CB), through its subsidiaries, provides property and casualty insurance to businesses and individuals. This dividend champion has managed to boost distributions for 32 consecutive years. The company has managed to increase those dividends at a rate of 6.20%/year in the past five years. Currently, the stock sells for 13.20 times forward earnings and an yield of 2.20%. Given the fact that Chubb consistently buys back shares, the decline in the stock price is actually good for earnings per share. Check my analysis of Chubb.

ConocoPhillips (COP) explores for, develops, and produces crude oil, bitumen, natural gas, liquefied natural gas, and natural gas liquids worldwide. This dividend achiever has managed to boost distributions for 14 consecutive years. The company has managed to increase those dividends at a rate of 13.30%/year in the past five years. Currently, the stock sells for 11.60 times forward earnings and an yield of 3.90%. Check my analysis of ConocoPhillips.

Deere & Company (DE), together with its subsidiaries, manufactures and distributes agriculture and turf, and construction and forestry equipment worldwide. This dividend achiever has managed to boost distributions for 11 years in a row. The five year dividend growth rate is 13.40%/year. Currently, this cyclical company sells for 9.80 times estimated current year’s earnings, and yields 2.90%. However, it is possible that shares appear cheaper than they should be, because I am buying them at the top of the cycle, when earnings are highest. The company is expected to earn much lower profits in the year after, leading to a still cheap 12.20 times forward 2015 earnings. Either way, of the ten companies listed here, this one is the lowest conviction for me. My next purchase would likely be on dips to price levels close to $60 - $70/share. Check my analysis of Deere.

Diageo plc (DEO) manufactures and distributes premium drinks. This international dividend achiever has managed to raise distributions for over 15 years. The company has managed to increase those dividends in local currency at a rate of 5.80%/year in the past decade. Currently, the stock sells for 16.90 times forward earnings and an yield of 3.10%. It is much cheaper than Brown Forman (BF/B), which sells for 26.60 times forward earnings. Check my analysis of Diageo.

Eaton Corporation plc (ETN) operates as a power management company worldwide. This dividend paying company has managed to boost distributions for 5 consecutive years. The company has managed to increase those dividends at a rate of 10.90%/year in the past five years. Currently, the stock sells for 13.80 times forward earnings and an yield of 3.10%. Check my analysis of Eaton on Seeking Alpha.

Exxon Mobil Corporation (XOM) explores and produces for crude oil and natural gas. This dividend champion has managed to boost distributions for 32 consecutive years. The company has managed to increase those dividends at a rate of 9.70%/year in the past five years. Currently, the stock sells for 12.20 times forward earnings and an yield of 3%. Given the fact that Exxon Mobil consistently buys back shares, the decline in the stock price is actually good for earnings per share. Check my analysis of Exxon Mobil.

General Mills, Inc. (GIS) manufactures and markets branded consumer foods in the United States and internationally. This dividend achiever has managed to boost distributions for 11 consecutive years. The company has managed to increase those dividends at a rate of 11.50%/year in the past five years. Currently, the stock sells for 16.90 times forward earnings and an yield of 3.30%. Check my analysis of General Mills.

Philip Morris International Inc.(PM), through its subsidiaries, manufactures and sells cigarettes and other tobacco products. This dividend paying company has managed to boost distributions for 6 consecutive years. The company has managed to increase those dividends at a rate of 11.70%/year in the past five years. Currently, the stock sells for 16.50 times forward earnings and an yield of 4.80%. Check my analysis of Philip Morris International.

After these purchases, I would likely not be able to add more to my taxable accounts until sometime in November. I am probably going to get aggressive early in 2015, and try to max out any retirement accounts in the first half of the year. Let’s see how this unfolds.

I am also continuing to question most of the major expenses I have. I see myself as a corporation, whose primary asset is my earning power for now. If I can stretch that as much as possible, through careful tax planning, cutting expenses without sacrificing quality of service, and setting up more passive income streams from my dividend portfolio, I will do fine.

Full Disclosure: I have a position in all companies mentioned ( duh)

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Friday, August 29, 2014

Starbucks: The Next Dividend Growth Success Story

Starbucks Corporation (SBUX) operates as a roaster, marketer, and retailer of specialty coffee worldwide. The company initiated its dividend in 2010, and has been growing distributions rapidly since then. While the company has only managed to increase dividends for four years in a row, I believe that it has the potential to reach dividend achiever status, and have the growth story to become as successful for its dividend growth investors.

Currently, I find Starbucks to be overvalued at 28.70 times forward earnings and a low yield of 1.35%. Starbucks is a growth company, which will likely grow earnings per share by 12% - 15%/year over the next decade, which somewhat justifies the low yield and optimistic valuation. Unfortunately, I cannot get myself to pay more than 20 times earnings for a company, because I know that things could go wrong to derail even for the best crafted plans. If the company stumbles, or if stock markets finally decide to cool off a little bit during the next bear market, that would be the best opportunity to acquire a stake in this otherwise fine company. The third option for me would be to sell a long-dated put with a strike as far out as January 2016 with a strike of $70, earn a premium of $5, and pay an effective entry price of $65 per share if called out. If not, and the stock price explodes from here, I would at least earn some premium.

Check the complete analysis at Seeking Alpha

Full Disclosure: Long MCD and NSRGY

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Monday, August 25, 2014

Dividend Paying Companies I recently added to my income portfolio

A few weeks ago, I mentioned that I am done purchasing dividend paying stocks for my portfolio until sometime in September. Well, I looked a closer look at the dip in prices we had, read a few articles that said that the bear market is beginning, and then decided to put more funds to work for me. This now means that I won’t be able to add funds to my dividend portfolio until October. If stock prices dip from here, but rebound by October, I would likely miss out on this opportunity. The only "savior" will be dividends in my tax-deferred accounts, which are automatically reinvested.

I added to my positions in the following companies:

Diageo plc (DEO) manufactures and distributes premium drinks. The company has managed to raise dividends for 15 years in a row. Over the past decade, the company has been able to increase dividends at a rate of 5.80%/year. Currently, this dividend achiever sells for 17.60 times forward earnings and yields 2.60%. I am trying to increase my position in this company, and would welcome further declines in this cheap spirits company. Check my analysis of Diageo.

International Business Machines Corporation (IBM) provides information technology products and services worldwide. The company has managed to raise dividends for 19 years in a row. Over the past decade, the company has been able to increase dividends at a rate of 19.40%/year. Currently, this dividend achiever sells for 10.60 times forward earnings and yields 2.30%. Buffett is one of the largest shareholders in the company, which consistently repurchases stock, boosts dividends, and focuses on repositioning to higher margin businesses. Check my analysis of IBM.

Exxon Mobil Corporation (XOM) explores and produces for crude oil and natural gas. The company has managed to raise dividends for 32 years in a row. Over the past decade, the company has been able to increase dividends at a rate of 9.60%/year. Currently, this dividend champion sells for 12.70 times forward earnings and yields 2.80%. This is another Buffett investment, that regularly buys back shares, raises dividends, and has a good strategy for strategically allocating cash and focusing only on projects with high expected return on investment. Check my analysis of Exxon Mobil.

United Technologies Corporation (UTX) provides technology products and services to the building systems and aerospace industries worldwide. The company has managed to raise dividends for 20 years in a row. Over the past decade, the company has been able to increase dividends at a rate of 14.50%/year. Currently, this dividend achiever sells for 15.90 times forward earnings and yields 2.20%. Check my analysis of United Technologies.

Visa Inc. (V), a payments technology company, operates as a retail electronic payments network worldwide.  The company has managed to raise dividends for 6 years in a row. Visa has managed to almost quadruple its quarterly dividend from 10.50 cents/share in 2008 to 40 cents/share in 2014. Currently, this company sells for 20.80 times forward earnings for 2015 and yields 0.80%. I initiated a small position in Visa back in 2011. With the most recent investment from last week, I essentially doubled my position there, although it will likely be a small portion of my portfolio due to high valuation. Check my analysis of Visa.

I also looked at my portfolio, and I identified quite a few companies where I want to keep adding funds, in order to reach a certain dollar size. I have quite a lot of work ahead of me, and quite a lot of money to save, and invest. Given that a large portion of funds is going into tax-deferred accounts that mostly offer index funds, that would require me to re-think my savings, cut expenses, and try to increase income. As I mentioned in my April Fool’s day post a year ago, I have a shopping addiction. Luckily, this is the type of addiction that pays dividends, and does not leave me with a bunch of useless stuff that is sitting in my closet, my garage or in a storage box.

I have also been selling puts on companies I want to own, but I believe them to be overpriced today. Those include Disney (DIS), a wonderful company, which I believe to be a great long-term holding. Another includes Starbucks (SBUX), another wonderful business with great growth prospects, but very high valuation. I like the aspect of getting paid money upfront, in order to purchase shares in a company at a pre-determined price in the future. The price I am willing to pay is usually lower than today’s price. If you subtract the premium received from the options, that further reduces the cost of the shares. The nice part is that I get to use that premium today, and invest it accordingly.

Full Disclosure: Long DEO, UTX, XOM, IBM, V

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Friday, August 15, 2014

Procter & Gamble (PG) Dividend Stock Analysis 2014

The Procter & Gamble Company, together with its subsidiaries, manufactures and sells branded consumer packaged goods. The company operates through five segments: Beauty, Grooming, Health Care, Fabric Care and Home Care, and Baby Care and Family Care. This dividend king has paid dividends since 1944 and has managed to increase them for 58 years in a row.

The company’s latest dividend increase was announced in April 2014 when the Board of Directors approved a 7% increase in the quarterly dividend to 64.36 cents /share. The company’s peer group includes Colgate-Palmolive (CL), Kimberly-Clark (KMB) and Clorox (CLX)

Over the past decade this dividend growth stock has delivered an annualized total return of 6.60% to its shareholders.

Currently, the stock is attractively valued at 17.70 times earnings and yields 3.20%. Procter & Gamble is already one of my ten largest holdings, which is why further additions there would be less likely for me. I do like the company, and believe it to be one of the few great corporations to hold forever.

Check the full analysis at Seeking Alpha.

Full Disclosure: Long PG, CLX, CL, KMB

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Tuesday, August 12, 2014

I bought this quality dividend paying stock last week

After purchasing shares in 14 companies in the previous week, I didn't expect to put any more money to work until sometime in September. However, sometimes, there are external factors that come up my way, which can cause me to act in a certain way.

First, I sold half of my position in Family Dollar (FDO) last week. I had forgotten that dividend growth stocks could be attractive takeover candidates. Those were the shares I hold in my taxable accounts. The company is going to be acquired by Dollar Tree (DLTR), and the transaction is expected to close in 2015. Unfortunately, approximately 80% of the purchase price will be in cash, while the remainder will be in Dollar Tree stock. Therefore I expected to receive mostly cash for my stake in Family Dollar. Thus, my options were to either recognize gain and pay tax in 2014 or recognize gain in 2015. If I held till the deal closed, this would have meant that I would have a taxable event in 2015. Given the fact that at the time I expected to pay taxes on inversions from Abbvie (ABBV), Medtronic (MDT) and potentially Walgreen (WAG), I wanted to sell my Family Dollar shares this year. There is a very high chance that I will likely be in a higher tax bracket in 2015, which could make it more expensive to sell stock and earn qualified dividend income. Besides the tax situation, I didn’t see much additional upside for Family Dollar stock.

What I forgot to account for however was that a competing bidder could come and chase after Family Dollar. The day after I sold, the stock went up, because there were rumors that Dollar General (DG) could make a competing bid for Family Dollar. So while a deal between two companies could be set, and no further upside is expected, if a third suitor comes along, the price could get higher. The downside of course is that the first bidder could walk away if it fails to obtain regulatory approvals or financing for example. Thankfully, I still plan on holding on to my Family Dollar stock in tax-deferred accounts, and if the deal is closed, I would use the cash to purchase other shares. I would likely keep the Dollar Tree shares I potentially receive.

I also received a free trade with one of my brokers, which I used to promptly sell my remaining shares in Con Edison (ED). I do not like the slow growth in dividends for this slow-moving utility. I know many hold it for the above average yield of 4.50%. The problem is that the annual dividend growth over the past 18 years has been consistently lower than inflation. This means that this juicy high yield is actually losing purchasing power every single year. Thus, I believed that my capital could be better served elsewhere. I had previously sold the majority of my exposure in 2012, but those legacy shares were left stranded in one of my brokerage accounts. They had been there for the past 5 years – 6 years.

Now I had cash to deploy. Thankfully, I noticed that shares of Walgreen (WAG) dropped by 15% on the news that it would acquire the stake in Swiss-based Alliance Boots it didn’t already own, but it won’t do a tax inversion. I thus allocated the cash proceeds from Family Dollar into Walgreen (WAG) at a 2.30% yield and 17.80 times forward earnings. In addition, Walgreen managed to increase dividends by 7.10% to 33.75 cents/share, which was the 39th consecutive dividend increase for this dividend champion.

I analyzed Walgreen, and still liked what I saw. I believe the acquisition will be accretive to earnings. I would also be open to adding on further weakness below $54/share.

Full Disclosure: Long WAG, FDO

Relevant Articles:

Twenty Dividend Stocks I Recently Purchased for my 401 (k) Rollover
Dividend Stocks make great acquisitions
Why I am replacing ConEdison (ED) with ONEOK Partners
Family Dollar Stores (FDO) Dividend Stock Analysis
14 Dividend Growth Stocks I Bought On the Dip Last Week

Sunday, August 10, 2014

Kinder Morgan to Merge Partnerships into One Company

The Kinder Morgan group of companies issued a press release today, which discussed some interesting new developments. Basically, the general partner being Kinder Morgan Inc (KMI) will be acquiring the master limited partner structures such as Kinder Morgan Energy Partners (KMP), Kinder Morgan Management LLC (KMR) and El Paso Pipeline Partners (EPB). There will no longer be any master limited partnerships involved with the Kinder Morgan name, which would simplify things and roll all assets under one corporation. For a brief overview of the current structure, please check this article.

The limited partners in Kinder Morgan Energy Partners (KMP) will receive 2.1931 KMI shares and $10.77 in cash for each unit they hold. The limited partners of El Paso Pipeline Partners (EPB) will receive .9451 KMI shares and $4.65 in cash for each unit they hold. While I doubt that the KMI shares received would be taxable, because of the like-kind nature of this exchange, I believe that the cash will be a taxable event for some unitholders.

The shareholders in Kinder Morgan Management LLC (KMR) will receive 2.4849 KMI shares for each share of KMR. This would essentially eliminate the gap between KMR and KMP, which has existed for the past several years. This was one of the reasons why I initially purchased KMR over KMP – lower prices, plus possibility for tax-free compounding of distributions, without the added complexity of K-1 tax forms that partnerships generate around tax time.

Before the deal was announced, I was actually expecting that the limited partnerships will take over the general partner, or that the general partner Kinder Morgan Inc would merge into them, thus creating a one giant MLP. Instead, Kinder Morgan Inc will be subject to double taxation as a result of this deal, and also would no longer be enjoying the sweet incentive-distribution rights as a general partner. Those IDR’s will be eliminated, thus lowering cost of capital. However, the company would be enjoying some nice depreciation benefits, which would shelter a portion of income. The drawback is that now most of distributions would no longer pass-through directly to unitholders of limited partner units. On the contrary, the corporation would have to pay taxes on corporate income level, and then when it sends those dividend checks to shareholders, they would also be liable for any taxes.

The other drawback for other investors could be that the yields they will generate will be lower. This is because KMP yields 6.90% while EPB yields 7.50%.Even at the higher dividend of $2/share, KMI yields 5.50% at best.

One positive behind the deal is that there won’t be the need to constantly issue new shares as much as with the MLP structure. Therefore, existing shareholders would not be diluted as much as with other MLPs. In addition, it would be much easier for the company to operate as one, rather than four complicated structures. This would make it easier to move aggressively on acquisitions, which would further boost growth.

The other competitive advantage for the new structure would be that it won’t have to distribute all cash flow to unitholders for distributions, but could actually choose to reinvest a portion in the business. That should reduce need for debt, although it won’t eliminate it. The main attraction of course is that the elimination of the IDR's will make cost of capital lower.

However, the company now expects annual dividends to hit $2/share in 2015, and then grow by 10%/year through 2020. I don’t know about you, but this sounds like a pretty sweet deal, if it could be realized. Based on my calculations, Kinder Morgan Inc could end up paying $3.22/share by 2020, which is an yield on cost of roughly 9%. I believe this is a doable target, because the new company will be retaining more cash to invest in the business, and it will be able to better focus on finding acquisitions for further growth.

After this deal is closed, Kinder Morgan will be the largest position in my dividend portfolio. Kinder Morgan Inc (KMI) was already one of my largest four positions. Kinder Morgan Management LLC (KMR) has also been a decent size position. This is why I haven’t added to Kinder Morgan Inc for over an year and a half. Because this position will account for much more than any other position in my portfolio, and because its high current yield is higher than the yield on my portfolio as a whole, I doubt I would buy more shares for at least one or two years from now. The only exception is one of my IRA accounts, where dividends are reinvested automatically. As I have explained earlier, it makes sense to do so given the fact that this account is not going to get any future cash contributions in the future.

Full Disclosure: Long KMI, KMR

Relevant Articles:

Kinder Morgan Partners – One Company three ways to invest in it
Richard Kinder: The Warren Buffett of Energy
I admire Investors with Skin in the Game
Master Limited Partnerships (MLPs) – an island of opportunity for dividend investors
General vs Limited Partners in MLP's
MLPs for tax-deferred accounts

Wednesday, August 6, 2014

Johnson & Johnson (JNJ) Dividend Stock Analysis 2014

Johnson & Johnson (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 52 years in a row.

The company’s latest dividend increase was announced in April 2014 when the Board of Directors approved a 6.10% increase in the quarterly dividend to 70 cents /share. The company’s peer group includes Novartis (NVS), Pfizer (PFE) and Covidien (COV).

Over the past decade this dividend growth stock has delivered an annualized total return of 12.10% to its shareholders.

Currently, the stock is attractively valued at 17.80 times forward earnings and a current yield of 2.70%. I last purchased shares of the stock in 2013, and the only reason I am hesitating to add more is because the company is one of the five highest weighted in my portfolio.

Check the full analysis at Seeking Alpha

Full Disclosure: Long JNJ

Relevant Articles:

Multi-Generational Dividend investing
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Monday, August 4, 2014

14 Dividend Growth Stocks I Bought On the Dip Last Week

In the past week, share prices started going down for the first time in a few months. As a buyer of quality businesses, this is always something that I look for with excitement. This is because when prices for good businesses decrease, this means that I am able to purchase them at lower valuations and I am also able to get more dividend income for every dollar I put to work.

I screened my list of dividend ideas, and came up with the following group of companies that I purchased. I am mostly looking for value these days, and cheap dividend growth at a low price multiple. I was lucky that last week prices of many companies started falling. If I am more lucky, prices will finally start a correction, and I will be able to put my future contributions to work at lower prices. I was able to allocate the funds for the next 2 months, which is why I won’t be able to make another purchase until sometime in September.

The companies I purchased include:

Aflac Incorporated (AFL), through its subsidiary, American Family Life Assurance Company of Columbus, provides supplemental health and life insurance products in Japan and in the United States of America. I really like this insurer, particularly given the low valuation and dedication to dividend growth. Unfortunately, this is one of my top ten positions, which is why further additions are less likely. The company is a dividend champion, which has been able to increase dividends for 31 years in a row. Over the past decade, the company has been able to boost dividends by 16.80%/year. The stock is selling for 9.50 times forward earnings and yields 2.30%. Check my analysis of Aflac.

Baxter International Inc. (BAX) develops, manufactures, and markets products for people with hemophilia, immune disorders, infectious diseases, kidney diseases, trauma, and other chronic and acute medical conditions. The company has been able to increase dividends for 8 years in a row. Over the past decade, the company has been able to boost dividends by 12.40%/year. The stock is selling for 14.60 times forward earnings and yields 2.80%. I like the low valuation on Baxter, and the opportunities for further growth in earnings and distributions. The company was a dividend champion until a spin-off 1998, but then froze it for 8 years. Currently, it is in the process of splitting in two parts some time in 2015, which could unlock some value for shareholders. Check my analysis of Baxter.

The Chubb Corporation (CB), through its subsidiaries, provides property and casualty insurance to businesses and individuals. The company is a dividend champion, which has been able to increase dividends for 32 years in a row. Over the past decade, the company has been able to boost dividends by 9.20%/year. The stock is selling for 12.30 times forward earnings and yields 2.10%. I like the valuation for Chubb, and I believe that management is of great quality and integrity. Therefore, I believe they have the discipline to keep earning more over time and allocate company resources intelligently. Company’s management has been on a mission to repurchase a large amount of shares each year since 2006. My position is small, but I would welcome even lower prices in order to build it higher, and provide me more exposure to financials with dividend growth streaks. Check my analysis of Chubb.

Deere & Company (DE), together with its subsidiaries, manufactures and distributes agriculture and turf, and construction and forestry equipment worldwide. The company is a dividend achiever, which has been able to increase dividends for 11 years in a row. Over the past decade, the company has been able to boost dividends by 16.30%/year. The stock is selling for 10.10 times forward earnings and yields 2.60%. As I discussed in my analysis of Deere, the company is cyclical which means that earnings rise and fall with the economic cycle. However, I believe that in the future there will be a higher need for equipment that Deere sells, due to increased world population and demand for food, and the rise of disposable incomes for that population.

Diageo plc (DEO) produces, distills, brews, bottles, packages, and distributes spirits, beer, wine, and ready to drink beverages. The company is a dividend achiever, which has been able to increase dividends for 15 years in a row. Over the past decade, the company has been able to boost dividends by 5.80%/year. The stock is selling for 18.10 times forward earnings and yields 2.60%. In fact, Diageo is the cheapest spirits maker that pays dividends out there. My position there is small, which is why I would welcome further declines in order to build my exposure further. Check my analysis of Diageo.

General Electric Company (GE) operates as an infrastructure and financial services company worldwide. The company has been able to increase dividends for five years in a row. The stock is selling for 15.10 times forward earnings and yields 3.30%. This is the first purchase of General Electric I have made since 2008. I am starting out slow, and plan to ultimately build this position into a sizeable one. I also sold a few puts, and actually used the premiums to purchase that first initiation position in GE. Check my analysis of GE.

General Mills, Inc. (GIS) manufactures and markets branded consumer foods in the United States and internationally. The company is a dividend achiever, which has been able to increase dividends for 11 years in a row. Over the past decade, the company has been able to boost dividends by 9.90%/year. The stock is selling for 16.90 times forward earnings and yields 3%. I want to build my position in this quality company, which is why I keep nibbling here and there. This is another opportunity where I sold puts, and then used the premium to purchase shares in the underlying company. Check my analysis of General Mills.

International Business Machines Corporation (IBM) provides information technology products and services worldwide. The company is a dividend achiever, which has been able to increase dividends for 19 years in a row. Over the past decade, the company has been able to boost dividends by 19.40%/year. The stock is selling for 10.60 times forward earnings and yields 2.40%. I am slowly building my exposure to IBM, where I like the consistency of share repurchases and dividend increases. When you consistently repurchase 4%-5% of outstanding shares at low prices and you pay an almost 2.50% annual dividend yield, you can generate total returns even without growing revenues by much. Any gain in organic earnings per share will further turbocharge investor returns. Check my analysis of IBM.

McDonald’s Corporation (MCD) franchises and operates McDonald's restaurants in the United States, Europe, the Asia/Pacific, the Middle East, Africa, Canada, and Latin America. The company is a dividend champion, which has been able to increase dividends for 38 years in a row. Over the past 5 years, the company has been able to boost dividends by 13.90%/year. The stock is selling for 16.70 times forward earnings and yields 3.20%. As I build out my portfolio, and don’t add to my legacy positions for a while, their relative weight tends to shrink. I have a good exposure to the Golden Arches, but need to add more to my allocation there. Check my analysis of McDonald’s.

United Technologies Corporation (UTX) provides technology products and services to the building systems and aerospace industries worldwide. The company is a dividend achiever, which has been able to increase dividends for 20 years in a row. Over the past decade, the company has been able to boost dividends by 14.50%/year. The stock is selling for 15.30 times forward earnings and yields 2%. I like the company, and believe that it offers a compelling value for the growth potential here, plus it also provides exposure to industrials for my dividend portfolio. Check my analysis of United Technologies.

Wells Fargo & Company (WFC) provides retail, commercial, and corporate banking services to individuals, businesses, and institutions. The company has been able to increase dividends for 4 years in a row. The stock is selling for 12.20 times forward earnings and yields 2.60%. I initiated a small position in 2013, and now I am adding to it. Wells Fargo is one of the best run banks in the US, which also has pretty good returns on capital, sells at an attractive price to book and has managed to grow book value pretty consistently in the past. Check my analysis of Wells Fargo.

Wal-Mart Stores Inc. (WMT) operates retail stores in various formats worldwide. The company is a dividend champion, which has been able to increase dividends for 42 years in a row. Over the past decade, the company has been able to boost dividends by 18%/year. The stock is selling for 14.20 times forward earnings and yields 2.50%. While sales and dividend growth appear to be slowing down, and size is a drag on future growth, I like the scale and moat for this retailer. While everyone claims that Amazon will disrupt retail sales, I believe Wal-Mart to be one of the few retailers who can and will compete successfully on the web. Check my analysis of Wal-Mart.

McCormick & Company (MKC) manufactures, markets, and distributes spices, seasoning mixes, condiments, and other flavorful products to retail outlets, food manufacturers, and foodservice businesses. The company is a dividend champion, which has been able to increase dividends for 28 years in a row. Over the past decade, the company has been able to boost dividends by 11.40%/year. The stock is not cheap as it is selling for 20 times forward earnings and yields 2%. Check my analysis of McCormick.

Eaton Corporation plc (ETN) operates as a power management company worldwide The company has been able to increase dividends for five years in a row. Over the past decade, the company has been able to boost dividends by 13.80%/year. The stock is selling for 14.60 times forward earnings and yields 2.50%. I have been monitoring Eaton for several months now, and finally initiated a decent size position in the company last week. While the company froze dividends during the financial crisis, and it doesn’t raise them every year, it has not cut them ever, and it tends to grow earnings and dividends over time. This is good enough for me. I am also increasing my exposure outside consumer staples with this investment, and am also buying future dividend growth at a compelling valuation. I will do a more detailed analysis of Eaton shortly.

I am hopeful that stock prices decrease further from here, and that that 20% correction everyone has been waiting for over the past two years actually does finally materialize. I am hopeful for a further correction, because I was only able to allocate two months or so worth of investment savings at those prices. The problem is that I am planning on saving and investing for several years. Therefore, I need lower prices, in order to get more stock for my buck and further speed up my goals.

Another thing that is helping me is the fact that my investment costs are now about $1/trade, thanks to my switch to Interactive Brokers early last month. This means that if I put $1000 in a dividend paying stock, I will end up paying 0.10% in a one-time commission. If I hold this stock for more than one year, the investment costs will be cheaper than even the cheapest mutual fund out there. Over time, investment savings add up, and could result in more capital working for me.

This list is not a recommendation to buy or sell any stocks. Just because I managed to buy so many companies, doesn’t mean that you should do that too. I am able to monitor a lot of companies pretty regularly, which is probably not the case for the majority of investors out there. Many of those purchases were bolt-on additions to existing positions, with only a few being newly initiated positions for me.

Full Disclosure: Long all stocks mentioned above

Relevant Articles:

Why do I use a P/E below 20 for valuation purposes?
Dividend Investors Should Focus on Valuation, not Just Dividend Yield
The importance of pricing and valuation in dividend investing
Price is what you pay, value is what you get
Dividend Investing Over the Past Seven Years Was Never Easy

Tuesday, July 15, 2014

Seven Dividend Stocks I purchased for the long-term

In the past week, I acquired stakes in seven dividend growth companies. For three of the companies, I am adding to existing positions. For the rest of the companies, I initiated positions in companies which I believe will be around in 20 years, and stand a chance of earning more over time. The higher estimated level of earnings will hopefully lead to higher dividend payments to me as a shareholder. While the positions are small initially, I find it much better to monitor a company I am interested in by having some skin in the game. That way, if prices drop from here, I will be in a better position to take advantage of the situation, since I have done the prep work already and am monitoring the situation by being invested in the stock.

I am now increasingly favoring tax-deferred accounts, in an effort to minimize tax liabilities today, and enjoy uninterrupted tax-deferred growth of dividends and capital gains for the next 30 – 40 years. The 401 (k), Roth IRA and SEP IRA accounts are here to house the assets that will be generating my buffer dividend income. This is the income I don’t expect to ever need in retirement, but would have it just in case. I am also exploring ways to utilize a Health Savings Account, as another tool to cut down on taxes today, and have uninterrupted tax-deferred growth for decades on those funds. My only regret is that I didn’t max those out prior to 2012. If I had, I would have been much better off. Better late than never of course.

With those moves, my Roth IRA is maxed out for the year 2014. The companies I purchased there include:

Exxon Mobil Corporation (XOM) explores and produces for crude oil and natural gas. This dividend champion has managed to increase dividends for 32 years in a row. In the past decade, the company has managed to increase annual dividends per share by 9.60%/year. Currently, the stock is attractively valued at 13.30 times forward earnings and an yield of 2.70%. Check my analysis of Exxon Mobil.

International Business Machines Corporation (IBM) provides information technology (IT) products and services worldwide. This dividend achiever has managed to increase dividends for 19 years in a row. In the past decade, the company has managed to increase annual dividends per share by 19.40%/year. Currently, the stock is attractively valued at 10.50 times forward earnings and an yield of 2.40%. Check my analysis of IBM.

The Chubb Corporation (CB), through its subsidiaries, provides property and casualty insurance to businesses and individuals. This dividend champion has managed to increase dividends for 32 years in a row. In the past decade, the company has managed to increase annual dividends per share by 9.20%/year. Currently, the stock is attractively valued at 12.70 times forward earnings and an yield of 2.10%. Check my analysis of Chubb.

The Williams Companies, Inc. (WMB) operates as an energy infrastructure company. The company’s Williams Partners segment owns and operates natural gas pipeline system extending from Texas, Louisiana, Mississippi, and the offshore Gulf of Mexico through Alabama, Georgia, South Carolina, North Carolina, Virginia, Maryland, Delaware, Pennsylvania, and New Jersey to the New York City metropolitan area. The company has managed to boost dividends for 11 years in a row, and has a ten year dividend growth rate of 43.10%/year. I like the fact that the company owns the General Partner rights to Williams Partners, and has plans for further growth in dividend income through 2017. I have been monitoring the stock for 2 years, and just now initiated a position, which might not be at the best price of the moment. Of course, noone knows where prices will go next, which is why the best time to initiate a position is today. The yield is at 2.90%.

With the investment listed below, my SEP IRA is close to being maxed out for the year 2014 as well. I purchased the following investments there:

Baxter International Inc. (BAX) develops, manufactures, and markets products for people with hemophilia, immune disorders, infectious diseases, kidney diseases, trauma, and other chronic and acute medical conditions. The company has managed to increase dividends for 8 years in a row. In the past decade, the company has managed to increase annual dividends per share by 12.40%/year. Currently, the stock is attractively valued at 14.70 times forward earnings and an yield of 2.80%. Check my analysis of Baxter.

Deere & Company (DE), together with its subsidiaries, manufactures and distributes agriculture and turf, and construction and forestry equipment worldwide. The returns from this company are going to be lumpy from year to year, but the possibilities are high if world population increases, and more people in developing countries can afford to eat as much as those in the developed world. Deere is a dividend achiever, which has managed to increase dividends for 11 years in a row, and has a ten year dividend growth rate of 16.30%/year I believe the company will be around in 20 years, and given the low valuation today of 10.50 times forward earnings and yield of 2.60%, it offer a good opportunity for dividend growth and capital appreciation. Check my analysis of Deere.

Republic Services, Inc. (RSG), together with its subsidiaries, provides non-hazardous solid waste collection, transfer, and recycling and disposal services for commercial, industrial, municipal, and residential customers in the United States and Puerto Rico. The company is essentially part of an oligopoly, given the fact that waste storage locations need a lot of money, expertise to open and operate. I also like the recurring annuity like cash flow streams for the company. I believe that waste is going to increase over time in this country, and companies like Republic Services are going to benefit from this. I also like the fact that the company has managed to increase dividends for 11 years in a row, and had a five year dividend growth rate of 6.60%/year. The stock is close to being pricey at 19 times forward earnings and yields 2.80%. Check my analysis of Republic Services.

I consider myself incredibly lucky that I have been able to save money consistently, and put it to work towards my future. I have been very lucky that I kept adding money even throughout the 2008 – 2009 crash, and the subsequent recovery, when everyone was telling me that stocks are about to crash. Even if they do fall by 20%, 30%, 50% from here, as an investor in the accumulation stage, I am going to view this as an opportunity to get more stock for my buck. If you are building out your stock portfolio today, you should be praying for lower stock prices, which means better stock values and better dividend incomes. In addition, to paraphrase Charlie Munger, if you are not willing to sit through a 50% decline in stock prices, then you should not be in stocks.

What purchases have you recently been making to your dividend portfolios?

Full Disclosure: Long all companies listed above

Relevant Articles:

Deere & Co (DE) Dividend Stock Analysis
Can everyone achieve financial independence with Dividend Paying Stocks?
I purchased this dividend machine last week
Multi-Generational Dividend investing
My Retirement Strategy for Tax-Free Income

Friday, July 11, 2014

Deere & Co (DE) Dividend Stock Analysis

Deere & Company (DE), together with its subsidiaries, manufactures and distributes agriculture and turf, and construction and forestry equipment worldwide. The company is a dividend achiever that has paid dividends since 1937 and managed to increase them for 11 years in a row. The company’s peer group includes CNH Industrial (CNHI), Caterpillar (CAT) and AGCO Corp (AGCO)

The company’s latest dividend increase was announced in May 2014 when the Board of Directors approved a 17.60% increase in the quarterly dividend to 60 cents /share. "Deere is well-positioned to benefit long-term from global trends that hold great promise for the company's customers and investors," said Samuel R. Allen, chairman and chief executive officer. "Our dividend increase reflects our confidence in Deere & Company's ability to generate strong cash flow throughout the cycle. We remain committed to our plans for profitable growth and for returning cash to shareholders."

Over the past decade this dividend growth stock has delivered an annualized total return of 12.10% to its shareholders.


The company has managed to deliver a 21.30% average increase in annual EPS over the past decade. Deere is expected to earn $8.55 per share in 2014 and $7.73 per share in 2015. In comparison, the company earned $9.09/share in 2013.


Deere also has an impressive record of consistent share repurchases. Between 2004 and 2014, the number of shares declined from 506 million to 379 million.

I have been biased against Deere, because it looks like a cyclical company, which managed to get lucky and ride a profitable trend over the past decade. As most of you are aware of, the past 10 – 15 years have been characterized by the rapid growth in emerging economies, which has lifted the boats of a lot of other companies. I am afraid that Deere might keep capitalizing on the those emerging markets, but at some point in time, it would have to go back to being a cyclical company with cyclical earnings. This could be a decade down the road, or could occur within the next few years. As a dividend growth investor, my goal is not only to find a cheap stock with a good dividend, but also a company that can grow earnings over time. If earnings per share are not increased over the next decade, most of dividend growth will come from increases in the dividend payout ratio, which is seldom a good sign for dividend income stability. I simply do not view Deere as the type of set it and forget it dividend growth stock that I can pass on to my heirs. That being said, it could still be a profitable investment for someone who buys today, given the low valuation, even if earnings do not increase by much. That would be true, as long as earnings per share do not decrease.

Long-term prospects could be brighter than I imagine however. An increasing world population should continue to exert pressure on food supplies, which in effect could raise the demand for new efficient farm machinery. However, if commodity pricing pressures farmer’s profits, demand for equipment could soften.

New products could be another boost for farming equipment, as is a cycle to upgrade old equipment over time, in an effort to boost productivity. The company has strong position in North America, with an established brand name and a 50% market share, which should provide it with a good scale of operations.
I also like the fact that management seems very shareholder friendly, as evidenced by their commitment to dividend growth over the past 20 years, the consistent share buybacks, and the fact that operations are run pretty well. For example, the finance division has pretty low loan losses, which is encouraging and shows that proper credit evaluation is being done before lending money to farmers.

I also like the fact that the largest shareholders is Cascade Investments LLC, which is the holding company that holds the investment portfolio of Bill Gates. I have been reading some about Bill Gates, and have found that his holding company is managed by Michael Larson, who is a very successful value investor.

The annual dividend payment has increased by 16.30% per year over the past decade, which is lower than the growth in EPS.

A 16% 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 1989, we could see that Deere has actually managed to double dividends every eight years on average. What makes this analysis tricky however the fact that the company cut dividends in 1982 is, and the annual dividend didn’t exceed the 1982 highs till 1990. The annual dividend from 1982 didn’t really double until 2005.

Over the past decade, the dividend payout ratio has mostly remained low below 25%, with the exception of 2009. A lower payout is always a plus, since it leaves room for consistent dividend growth minimizing the impact of short-term fluctuations in earnings.

Deere has managed to increase return on equity from 30.60% in 2004 to 41.30% in 2013. Rather than focus on absolute values for this indicator, I generally want to see at least a stable return on equity over time.

Currently, the stock looks cheap, as it trades at a forward P/E of 10.40 and a current yield of 2.60%. I believe that the business is more exposed to economic cycles than the typical dividend growth stock that I usually focus on. However, when a business is cheap, it can still generate shareholder value even if there is only a small improvement. With Deere, the $8 billion share buyback could be one catalyst that could result in better returns going forward. As a result, I initiated a small position in the stock this week.

Full Disclosure: Long DE

Relevant Articles:

Dividend Stocks Offering Positive Feedback to Investors
Caterpillar (CAT) Dividend Stock Analysis
Look beyond P/E ratios dividend investors
Return on Investment with Dividend Stocks
Price is what you pay, value is what you get

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