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

Tuesday, January 14, 2014

Two Dividend Machines I Purchased Last Week

Over the past week, I purchased shares in two quality dividend paying companies. I made those purchases in my Loyal3 account, which lets you buy stock in over 50 well-known companies without paying any commissions, with investment amounts as little as $10 per transaction and as much as $2,500 per transaction. I believe these companies to be good values today, and would be happy to add more over the next year, especially if we get the correction that every dividend investor is anxiously waiting for.

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. This dividend champion has rewarded long-term investors with a dividend raise for 38 years in a row. Over the past decade, McDonald’s has raised dividends by 22.80%/year. Over the past five years however, dividend growth has slowed down to a more reasonable 13.90%/year. The company is expected to earn $5.56 in 2013 and $5.93 in 2014. Earnings growth seems to be slowing down to about 6 – 7%/year. I am not worried about temporary slowdowns in earnings and dividend growth, because these things are to be expected. Growth in dividends varies from year to year, and goes in cycles. When your investment timeframe is 30 years, you will see periods where dividend growth slows down. This scares off the weak and impatient holders, who sell. For example, in 2001 and 2002 dividend growth at McDonald’s slowed down to 5%/year. Since then, the annual dividend paid is up by a factor of 13.

However, even if the days of 6-7% growth are here to stay, all is not bad. This would likely mean slowing down of dividend growth to the rate of earnings growth. This is not bad for a company with annual sales of over $28 billion. Annual earnings growth at 7%, plus a healthy 3.40% dividend yield can compound capital at 10%/year for the patient investor with a long-term timeframe. The stock also trades at P/E of 17 times earnings. Check my analysis of McDonald’s for more detail on the company.

Target Corporation (TGT) operates general merchandise stores in the United States. This dividend champion has managed to reward loyal shareholders with dividends raises for 46 years in a row. Over the past decade, Target has managed to boost distributions by 19.80%/year.

The year 2013 was a very challenging one of the retailer. First, its expansion into Canada did not go as smoothly as expected. I do believe this issue is a temporary one in nature, and the company would use the lessons learned in its further international expansion abroad. So far, most of its stores have been based in the US, so a large portion of future growth would likely come from international expansion. The second issue with Target in 2013 was the fact that 70 million customer credit and debit cards have been compromised in the November – December period. The biggest issue is that the real truth is slowly being uncovered, and not surprisingly the real impact is getting larger with any new discovery. Initially, the number of compromised accounts for 40 million, then debit cards were added to the list of compromised accounts. This could mean that the company might still not know the full impact of hacker breaches.

However, I believe that the best time to buy stock I when there is blood on the streets. Growth in earnings, dividends and share prices is never linear. Big companies stumble from time to time. If you assess the issues currently faced by a business and determine problems are temporary in mature, you might get interested in the company. Your next point is to determine if the price adequately compensates you for the risk you are taking. The thing is that unfortunately all retailers, whether brick and mortar or on the internet, are exposed to the problems that Target is experiencing. While the current breach is an issue, I believe it will pass in a few months, without destroying the brand that so many shoppers enjoy.

I am slowly moving my way into accumulating a decent position in the retailer, by adding a small amount every month into the stock in taxable accounts, and one or two small purchases in tax-deferred accounts. That way, if the stock continues going down in price, I would be able to average my cost basis down.

Currently, Target sells at 16.70 times earnings and yields a very sustainable 2.70%. Check my analysis of Target for more information on the company.

I have broken those transactions, and instead of putting the usual amount I put per each investment at a time, I am going to separate that into four purchases. Basically I am going to spread purchases over three – four months, in an effort to take advantage of any corrections. Particularly in Target’s case, I might be value hunting too early, as prices could easily fall into the low to mid $50s, especially if investors get particularly pessimistic about the company. Lower prices would be very welcome in general however. These were a partial lot purchases, as I am conserving resources in case my Coca-Cola (KO) January puts I sold are exercised. I also like to build my share positions slowly.

The bull market of 2009 – 2013 has trained investors to put money to work as soon as possible. Otherwise, they witnessed steep increases in prices for quality dividend stocks while waiting in cash, and had to pay those higher prices later in order to get a piece of the action. As a contrarian investor, I try to do the opposite of what everyone else is doing. As a result, I never chase rising prices, but try to rationally allocate my capital in the best values at the moment. I also try not to get excited too much even for the best dividend paying stocks. This could be expensive, as I would end up overpaying for the future stream of dividend payments. My goal is to buy future dividend income growth at reasonable prices today. If I get in on a 7 – 10% dividend growth at 2% and a P/E of 20, rather than at 3% at a P/E of 20, I will generate lower future dividend incomes over time.

Full Disclosure: Long MCD, TGT

Relevant Articles:

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Wednesday, November 13, 2013

Dividend Stocks Are Not a Bubble, but Many Technology High-Fliers Are Dangerously Overhyped

So far, 2013 has been a great year for investors. Stock prices are rising left and right, many participants are flush with cash, and there are few alternatives to equities at the moment.

The rising tide has left many of the usual suspects I bought over the past five – six years slightly overvalued. I am referring to the likes of Colgate –Palmolive (CL), or Automatic Data Processing (ADP), which trade above 20 times earnings. Other steady-eddies like Coca-Cola (KO) and Procter & Gamble (PG) are trading at slightly less than 20 times earnings. This is not going unnoticed however. Several times so far this year, someone is coming to attack the viability of dividend investing as a strategy, mostly due to that overvaluation. These Neanderthals proclaim the death of dividend investing all the time. In general, I think these people should be ignored, as they are dangerous to your wealth building process.

All the while these self-proclaimed gurus talk about the so called bubble in dividend investing; they are failing to recognize the real threat to investors today. This threat is simply there, in plain sight, for anyone to see. Yet, everyone seems to be focusing on the so called bubble in dividend stocks. I don’t get it how you can call Coca-Cola at 19 times earnings a bubble, when Facebook (FB) is trading at a P/E ratio of 50 times expected earnings. I guess in the modern world, a company that has an established distribution network, a loyal customer base, pricing power, a diversity of products and a culture of dealing with over 100 years’ worth of challenges, is no match for a young technology company that offers a product that might not even be there 15 years from now. On the other hand, I am pretty sure people would still be brushing their teeth, drinking liquids and shaving.

What the gurus are missing, is the sky-high valuations on a certain set of over-hyped companies. Many of these companies are justifying their valuation based on extremely optimistic projections going many years into the future. The thing that makes those projections highly doubtful is that these companies have untested business models, and are subject to rapid paradigm shifts in consumer demands. It is very difficult to make projections on sales, revenues and profits ten years into the future on new concepts. This smells more like speculation, rather than sound investing. Even if you have a great idea that would make the world a much better place, it would still not be enough for early investors to make a reasonable return on their investment. If you massively overpay for future growth, you might end up without much of a return for a long period of time.

A few of these over-hyped companies include:

Tesla Motors (TSLA), which is supposed to revolutionize the automotive industry. We have the buzz word of a visionary entrepreneurial CEO with a proven track record, the fact that a company selling a few thousand cars per month has a market cap that is half to a third of more established General Motors (GM) and the lack of profits. It is true that the company has a lot of potential, but in order for the valuation to make sense, it must sell a lot of cars. Even if Tesla cars become widespread in the world in ten years, this still does not present a guarantee of profits and stock price gains for investors who buy today. Even if Tesla sells 500,000 cars annually by 2023, this could still not be enough to justify the lofty valuation of today. Tesla has a market cap of 16.5 billion, while GM has a 50.5 billion dollar capitalization. In 2012, GM delivered 9.3 million vehicles, while Tesla will have 21,000 vehicles delivered in 2013. The company is expected to reach 500,000 vehicles in the future. While the company is great, I doubt that current valuations make sense for investors.

Amazon.com (AMZN) is an awesome company, whose services I use very often. The company is trading at a P/E of a few hundred times earnings, and has managed to grow revenues through scaling operations, expanding into new sexy businesses such as the cloud, and disrupting the retail business. However, the company is almost 20 years old, yet still behaves like a start-up. I remember the first time everyone said that profits don’t matter in the late 1990s. I also remember the early 2000s, which were brutal for the former technology darlings. Many did go under, including the likes of Pets.com and Webvan. I think that Amazon would likely be there in 20 years, however I do not know if simply growing revenues is a viable business model that can reward shareholders in the long-run. At the end of the day, the goal for a business is not to grow revenues to the sky and be a disruptive force in as many industries as possible, but to make money for the shareholders. Between 1995 and 2012, the company has earned a total of $1.9 billion dollars. Currently, the market capitalization of Amazon is 160 billion dollars. While the company is great, current valuations do not make sense for investors.

Twitter (TWTR) recently had a widely successful Initial Public Offering (IPO). The company has not yet made a profit, but at least it is generating some revenues. Just a few short years ago, Twitter didn’t even know how to monetize its wide number of users. I use Twitter, but in all seriousness, I find it very obnoxious, and pretty spammy. Of course, I do not care about the Kardashians or Jersey Shore, so maybe I just don’t “get it“. However, when a company whose business trades at 24 times expected revenues in 2014, it could take a lot of luck for this investment to work out for investors. The company’s market capitalization is $22.70 billion and analysts expect it to have revenues of $1.15 billion by 2014. In 2012, the company lost $79 million on revenues of $317 million. Current valuations do not make sense for investors in Twitter.

I understand that all of these companies can justify their lofty valuations today, if they keep growing revenues and eye-balls at a fast pace for several years to come. However, this type of valuation method assumes perfection, and we all know how in a world of ever changing technology and rapid shifts in consumer technology tastes, todays darling could become tomorrow pariah. Just look at MySpace.

If the stock prices turn lower from here, the biggest losers are going to be the investors in the three companies mentioned above.

You can call me old-fashioned, but the types of companies I find attractive enough today to buy and hold for 20 years include:

The Coca-Cola Company (KO), a beverage company, engages in the manufacture, marketing, and sale of nonalcoholic beverages worldwide. The company has rewarded shareholders with dividend increases for 51 years in a row. Over the past decade, Coca-Cola has managed to hike dividends by 9.80%/year. Currently, the stock is trading at 19 times earnings and yields 2.80%. Check my analysis of Coca-Cola for more details.

Chevron Corporation (CVX), through its subsidiaries, engages in petroleum, chemicals, mining, power generation, and energy operations worldwide. The company has rewarded shareholders with dividend increases for 26 years in a row. Over the past decade, Chevron has managed to hike dividends by 9.60%/year. Currently, the stock is trading at 10 times earnings and yields 3.40%. Check my analysis of Chevron for more details.

Target Corporation (TGT) operates general merchandise stores in the United States. The company has rewarded shareholders with dividend increases for 46 years in a row. Over the past decade, Target has managed to hike dividends by 18.60%/year. Currently, the stock is trading at 15.70 times earnings and yields 2.70%. Check my analysis of Target for more details.

Philip Morris International Inc. (PM), through its subsidiaries, manufactures and sells cigarettes and other tobacco products. The company has rewarded shareholders with dividend increases for years in a row. Since the spin-off from its parent Altria in 2008, Philip Morris International has managed to hike dividends by 13%/year. Currently, the stock is trading at 17 times earnings and yields 4.20%. Check my analysis of Philip Morris International for more details.

I believe that the key to investing success is not how much a company will supposedly benefit society, but rather determine what their competitive advantage is and how durable that moat really is. After that, if you manage to purchase such a company at a fair price, and you hold at least 30 such companies in your dividend portfolio, you should do quite well for yourself in the long-run.

Full Disclosure: Long KO, CVX, TGT, CL, ADP, PM

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Friday, November 8, 2013

Northrop Grumman (NOC) Dividend Stock Analysis

Northrop Grumman Corporation (NOC) provides systems, products, and solutions in aerospace, electronics, information systems, and technical service areas to government and commercial customers worldwide. Northrop Grumman has raised dividends for 10 years in a row. Over the past decade, it has managed to boost distributions by 13%/year. The outstanding shares from decreased from 368 million in 2003 to 237.5 million in 2013. The company has an open buyback facility to repurchase approximately 25% of outstanding shares by 2015. Analysts expect that this dividend achiever would earn $7.78/share in 2013 and $7.99/share by 2014. In contrast, it earned $7.81/share in 2012.

The past decade has been great for defense contractors in the US, with two major wars going on, and an increase in Federal spending. However, the next decade might look different, which is why I am not going to look at the past decades trends in earnings per share, dividends per share, payout ratios or returns on equity for Northrop Grumman.

I discussed that US defense spending is likely to contract in the near future, meaning in the next five years or so. However, in the long-run, it is quite possible that defense spending will be higher in 20 years. Actually, per the Sequester agreement in early 2013, defense spending is expected to fall by 6.40% in 2013 and 5.5% in 2014. After that, it is expected that increases will match increases in inflation through 2023, which is about 2% or so. Check this document for more information.

In an interview, famous investor Mohnish Pabrai discussed some of the three strategies for investment success by Charlie Munger. One of them was to focus on carnivores, or companies which have managed to repurchase a substantial amount of their shares. If a company manages to retire 20 – 25% of outstanding shares, and manages to maintain a consistent level of profits after that, it should deliver good returns to shareholders. With Northrop Grumman, the company has managed to consistently implement and execute programs to repurchase stock. If the company can maintain the level of sales and income, shareholders could reasonably expect another massive buyback program after this one is completed in 2015. While I usually prefer dividends over buybacks, I am open to companies regular repurchasing shares at attractive valuations.

When I looked at Northrop’s statement of cash flows, I uncovered a hidden gem. It looks like the company is drowning in cash. For example, in 2012 the company generated 2.64 billion in cash flow from operating activities, while Capex amounted to 331 million. The Capex figure was the lowest in the past five years however, as it was as high as $770 million in 2010. The lowest cash flow from operating activities over the past five years was in 2011 at $2.115 billion.

At the same time, the total amount paid on dividends distributed back to shareholders has been very stable in the range of $525 - $545 million per year. Despite the fact that dividends per share increased in each of the past five years, Northrop has managed to keep the total amount spent on distributions by repurchasing massive amounts of shares.

In fact, the company has managed to decrease the total number of shares outstanding from 354 million in 2007 to 237.50 million in 2013.

Northrop Grumman has managed to spend anywhere from $1.1 billion on share buybacks in 2009 to $2.3 billion in 2011. The company spent $1.3 billion on share buybacks in 2012.

Either way you look at it, the management of Northrop Grumman looks like a very shareholder friendly oriented management. Currently, the stock is attractively valued at 12.20 times earnings and yields 2.30%. This is a lower yield than Lockheed Martin's (LMT) over 4% yield, but it seems more sustainable. Although there is uncertainty over the US defense budgets, the consistent nature of share repurchases could translate into very good dividend and capital gains returns for investors who snap up these cheap shares today. I would consider adding to the stock on dips below $98/share ( equivalent to a 2.50% yield).

What is your opinion on the company?

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Lockheed Martin Corporation (LMT) Dividend Stock Analysis

Friday, November 1, 2013

Lockheed Martin Corporation (LMT) Dividend Stock Analysis 2013

Lockheed Martin Corporation (LMT), a security and aerospace company, engages in the research, design, development, manufacture, integration, and sustainment of advanced technology systems and products for defense, civil, and commercial applications in the United States and internationally. This dividend achiever has increased dividends for eleven years in a row.

The company’s last dividend increase was in September 2013 when the Board of Directors approved a 15.60 % increase in the quarterly dividend to $1.33 /share. The company’s peer group includes Raytheon (RTN), General Dynamics (GD), Northtrop Grumman (NOC) and Boeing (BA).

Over the past decade this dividend growth stock has delivered an annualized total return of 13.80% to its shareholders.


The company has managed to deliver a 15.20% average increase in annual EPS between 2003 and 2012. Analysts expect Lockheed Martin Corporation to earn $9.48 per share in 2013 and $9.68 per share in 2014. In comparison, the company earned $8.36/share in 2012. Over the next five years, analysts expect EPS to rise by 6.45%/annum. The company has also managed to reduce the number of outstanding shares over the past decade from 450 million in 2003 to 326 million in 2013.

With Lockheed Martin, over 80% of revenues are derived from the US Government or US Government Agencies. The problems with the US budget deficit are widespread. As a result, it is very possible that defense contractors would experience decreases or limits to the amount of weapons they can sell to their main customer. This could potentially lead to lower profits and dividend freezes or cuts.

In the long-run however, (15 - 20 years from now), I cannot see anything else but increases in US government spending on defense. The world could be a hostile place, and countries need to spend on defense simply to keep up with pace of technology. However, even if you buy today, you can still experience dividend cuts five years down the road, although chances are your distributions would recover within 10 years or so.

For additional background on my view of the defense company prospects, check this article.

The return on assets increased between 2003 and 2007, but has been on the decline since then. I generally want to see at least a stable return on equity over time. I use this indicator to assess whether management is able to put extra capital to work at sufficient returns.

The annual dividend payment has increased by 24.70% per year over the past decade, which is higher than the growth in earnings per share. This has been achieved mostly due to the expansion of the dividend payout ratio.

Unfortunately, it is highly doubtful that the company will be able to increase dividends per share at this high of a rate over the next decade. Given the outlook for defense spending in the US, even a modest dividend growth would be a positive for dividend investors who hold the stock today. In order to be able to experience dividend growth, investors need to acquire shares of defense contractors when defense spending is on the upswing. For example, the company froze dividends in 1996 and cut them in 2000. The original Lockheed Corporation suspended dividends in 1969, and did not resume payments until the early 1980’s.

The dividend payout ratio has increased from 25% in 2003 to almost 50% in 2012. Over the past decade, Lockheed Martin has managed to increase distributions at a rate that was much higher than earnings growth, by expanding the dividend payout ratio. A lower payout is always a plus, since it leaves room for consistent dividend growth minimizing the impact of short-term fluctuations in earnings.

Currently Lockheed Martin is attractively valued at 14.30 times earnings, yields 4% and has a sustainable distribution. However, a business that is dependent on a single customer for over 80% of their revenues scares me. Despite the great valuation, I simply cannot make myself purchase the stock, because I do not know if earnings won't fall 5 years down the road. I believe there are easier companies for me to invest money in. I see this company as a slightly riskier category than your regular sleep well at night companies like Johnson & Johnson or Coca-Cola. In order to make money on this stock, I need to be able to to get too many variables correctly, such as increase or decrease in defense spending, and how it would impact profitability. While defense spending would likely be higher in 20 years, this does not preclude short-term contractions or freezes in government spending on military over the next five years for example. This could halt earnings growth, and lead to dividend freezes or even worse, dividend cuts.

That being said, the company is flush with cash, and since the US defense budget is projected to grow at 2% per year between 2014 and 2023, I think it could be a decent addition for an enterprising investor, if there were few other investment ideas available. Again, as I mentioned in my previous article on defense spending, it might be a better idea to purchase shares in more than one defense company, just so you can mitigate company specific risk.

Full Disclosure: None

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Monday, October 28, 2013

Nine Dividend Paying Stocks I Accumulated in the Past Month

My 2013 Roth IRA experiment continued on, with the purchase of nine additional dividend paying stocks. With this experiment, I am trying to prove that it is possible to create a diversified dividend portfolio even if you only had a few thousand dollars to invest, by holding great businesses for the long term. I am also proving a point that almost anyone can start investing in dividend paying stocks, and not have to pay high commissions in the process. With my Sharebuilder account, I am going to essentially end up paying slightly less than 0.50% of total contributions. ($24 in commissions to invest $5,500). Another goal for this experiment is that investors who are just starting out should not be discouraged from investing and should not despise the days of small beginnings.

While the original ten securities were purchased in one transaction in early September, for the second month I tried to space it out a few times a week. The goal of building a portfolio is to build it over time and slowly. It should not matter if you are investing $5.5 million or $5,500 – the principle of accumulating attractive dividend paying stocks over time, and building a portfolio of quality companies is the same in both situations.

The companies I invested in over the past month include:

Kinder Morgan, Inc. (KMI) owns and operates energy transportation and storage assets in the United States and Canada. The company was beaten down by negative comments from an analyst whose motives seem highly questionable. I viewed this as an opportunity to acquire shares in a business that owns general partner interests and holds units in two master limited partnerships – Kinder Morgan Energy Partners (KMP) and El Paso Pipeline Partners (EPB). Because of the general partner arrangement, I expect Kinder Morgan Inc to be able to grow dividends by 9 – 10%/year for the foreseeable future. Add in to that the high current yield of 4.60% and the fact that its CEO has almost all of their net worth in the stock, and I think I have a winner.

Altria Group, Inc. (MO), through its subsidiaries, engages in the manufacture and sale of cigarettes, smokeless products, and wine in the United States and internationally. I found this domestic tobacco stocks to be cheap at 16.60 times earnings and yielding 5.40%. The company has been able to grow dividends by 10.60%/year since it spun-off Phillip Morris International (PM) in 2008. While number of smokers declines every year, the prices per pack increase. This leads to growing profits in an industry that squeezes out efficiencies and cannot spend money to advertise its products. Hence it is tough for new entrants into the market, leading to hefty returns for shareholders. Check my analysis of Altria for more details.

International Business Machines Corporation (IBM) provides information technology (IT) products and services worldwide. The company was much cheaper at times earnings than competitors like Accenture (ACN) although its yield is low at about 2%. This dividend achiever has managed to boost distributions for years in a row. The good client relationships are generating rising profits, which are expected to reach $20/share by 2015. I bought the stock twice for the ROTH portfolio.In addition, I also added to my existing IBM position in taxable accounts. One was before the dip two weeks ago, and the other time was after it. Check my analysis of IBM for more details.

BP p.l.c. (BP) provides fuel for transportation, energy for heat and light, lubricants to engines, and petrochemicals products. is one of the most underloved oil companies out there. It is trading at a forward P/E of 9.70 and with one of the highest current yields of 5%. The company has only raised dividends since the cut in 2010, and everyone is scared that the Gulf of Mexico incident in 2010 might bankrupt it. I think those fears are irrational, and I also initiated a position in my taxable accounts as well.

Vodafone Group Public Limited Company (VOD) provides mobile telecommunication services worldwide. Vodafone is selling its 45% stake in Verizon Wireless to Verizon for $130 billion. Currently, Vodafones entire market capitalization is approximately $170 billion. While investors will receive some cash consideration and stock in Verizon wireless after the sale is completed in 2014, I believe that the remaining business for Vodafone is still very undervalued. Given the status of a dividend achiever, attractive valuation at 14.50 times earnings, and the high yield of 5.60%, I like the company. I also believe that the company has a lot of potential. Once Europe gets it mess together, Vodafone might really shine in your portfolio. Check my analysis of Vodafone.

General Mills, Inc. (GIS) produces and markets branded consumer foods in the United States and internationally. I initiated a position in General Mills, which had good valuation at the time. I like the revenue and earnings stability of food companies, and the almost complete lack of exposure to the cyclical whims of the economy. Companies like General Mills have strong brands that consumers purchase repeatedly throughout the course of the year. It is not surprising that even if the economy does not do well, people still need to eat. This dividend achiever has raised distributions for a decade, yields 3.10% and trades at 17.20 forward earnings. Check my analysis of General Mills.

I also bought shares in Kellogg (K) for the Roth IRA portfolio, using the same logic that I used for General Mills. Food staples usually grow at a steady rate, have quality brands, and manage to reward shareholders with rising dividends over time. I was particularly attracted by Kellogg, because the earnings figures in most financial databases do not show the true earnings power of the company. My Yahoo finance screen shows that Kellogg is trading at 23.90 times earnings. Therefore, a lot of investors are likely ignoring this stock, because they think it is too expensive. However, the company is expected to earn $3.77/share in 2013. At current prices, this translates to a P/E of 16.60.

Unilever PLC (UL) operates as a fast-moving consumer goods company in Asia, Africa, the Middle East, Turkey, Europe, and the Americas. I used the dip early in the month to acquire some more consumer staples in the Roth Portfolio. Unilever is a good candidate for a long-term buy and forget holding, because of the broad diversity of staples it offers on a global scale. I like the steady growth in earnings, distributions, although I would prefer P/E ratios below 16- 17 for companies like Unilever. This international dividend achiever has rewarded shareholders with rising dividends for 14 years in a row. When looking at international stocks, one needs to look at dividend growth in local currency, not US dollars. The company is under the radar, as David Fish has erroneously removed it from his list, probably because of his focus on US dollar dividends, not in their value in Euros. Currently, it trades at a P/E of 19 and yields 3.50%. Check my analysis of Unilever.

Clorox (CLX)is the purchase in the Roth, which is the most questionable one. I like the company a lot, its history of raising dividends for 36 years in a row, and the ten year dividend growth at 11.30%/year. Unfortunately, the stock is trading at the very high points of the acceptable entry valuation I am willing to pay for a dividend paying stock. I would much rather pay 15 times earnings for this stock, like I did when I accumulated my position in the company in taxable accounts over the past five years. However, I believe that a quality business like Clorox can churn out an ever rising stream of earnings, that would result in rising dividends to me for decades to come. The stock is trading at 19.40 times forward earnings, and yields 3.30%. Check my analysis of Clorox.

I plan on doing a few more trades by the end of November, after which I won’t make any contributions to this account until sometime in 2014.

This is just an illustration of what one can do even with small amounts of money. It is not a recommendation to buy these stocks however. I also invest my funds in slightly different lots, typically at $2,000/position these days. However, when I started building my dividend portfolios, my position size was $100/stock. If I can cover 50 – 60% of expenses with dividend paying stocks, so can you!

Full Disclosure: Long all companies listed in this article. (except ACN and EPB)

Relevant Articles:

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Monday, October 21, 2013

Undervalued Dividend Stocks I purchased in the past week

In the past week I made a few stock purchases in my Roth IRA and for my taxable account. Today I am going to discuss the purchases I made in my taxable account.

I usually scan the list of dividend champions and achievers at least two times per month, in order to uncover quality that sells at cheap prices. I also have a list of stocks I own in Yahoo Finance, which I monitor each morning for headlines. Based on monitoring companies I owned with small allocations to my portfolio, and based on their relative valuation, I decided to add to them. The companies whose shares I acquired included International Business Machines (IBM) and American Realty Capital Properties (ARCP).

International Business Machines Corporation (IBM) provides information technology (IT) products and services worldwide. This dividend achiever has managed to raise distributions for 18 years in a row.

Back on Thursday, I noticed that IBM stock was unduly punished to a 52 week low after supposedly missing analyst revenue growth expectations. The issue with IBM is that revenue has been growing very slowly over the past decade. However, as an investor in a business all I care about is the earnings per share that this business earns. This is because rising earnings per share provide the cornerstone behind future dividend growth. The thing I like about IBM is that its goal is to grow shareholder value, and not just chase meaningless revenues that would not translate into higher profits. As part of the company’s 2015 vision plan, it aims to earn $20/share by 2015. So far the company has been on track to achieve those goals.

IBM has also managed to consistently repurchase stock for 19 years in a row. It has reduce shares outstanding through its regular share repurchases from 2.34 billion at the end of 1994 to 1.10 billion by 2013. Further, this dividend achiever has increased distributions for 18 years in a row. Over the past decade, IBM has managed to increase dividends by 18.80%/year. If the stock price continues languishing for several years, that is good news for IBM shareholders, because that would mean that the dollars allocated for share repurchases would buy out a greater number of shares outstanding.  One of the largest investors in IBM is Berkshire Hathaway (BRK.B), which is the holding company controlled by legendary investor Warren Buffett.

The stock has a low dividend above 2%, but is really cheap at 12 times 2012 earnings and 10.30 times forward 2013 earnings. Given the cheap valuation, and prospects for very good dividend growth, it is no surprise I added to my IBM position. Check my analysis of IBM.

American Realty Capital Properties, Inc. (ARCP) owns and acquires single tenant, freestanding commercial real estate that is net leased on a medium-term basis, primarily to investment grade credit rated and other creditworthy tenants. I originally purchased shares of this REIT after selling my position in National Retail Properties early in the year.

This REIT has been public for less than two years. However, it has managed to raise its monthly dividends several times since going public in 2011. This indicates potential for shareholder friendly management. There are several things I look for in a REIT, as described in my REIT checklist.

The REIT has been rapidly expanding its portfolio of triple-net leased properties, and acquiring American Realty Capital Trust IV, a lot of other freestanding properties and is in the process of acquiring CapLease (LSE). This is a lot of M&A for one year, but it is all expected to be accretive to Funds from Operations per share. In fact, AFFO/share is expected to come at 1.14 – 1.18/share, which is substantially above the annual dividend of 94 cents/share. Based on forward valuation, this REIT is a steal at current prices.

In my checklist for REITs, I look for plans for growth, and American Realty Capital Properties does have the drive to reach the critical mass of Realty Income (O). It’s top 10 tenants account for less than one third of revenues, which are diversified across 48 states. It is surprising to find that the REIT has an almost 100% occupancy rate.

The one risk I see is that ARCP grows too quick too fast. This means that a company that grows too fast, might end up leveraging itself too much, and if the world throws it a curveball, it could derail plans for world domination. Typically when different companies are acquired or merged, there is the possibility for clash of cultures. I am not saying that this would happen, but one of the possible reasons for the cheap valuation on this REIT is that it still has a relatively unproven track record in comparison with Realty Income (O) or National Retail Properties (NNN).

That being said, it offers a yield of 7.30% that seems to be well covered from forward FFO/share. The distribution is paid monthly, and the tenant base seems pretty stable and respectable, which lowers the chance of occupancy declining.

Full disclosure: Long IBM, ARCP, O

Relevant Articles:

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Wednesday, October 16, 2013

Should Dividend Investors be Defensive about these stocks?

Everyone knows that the US is running huge budget deficits. As a result, the US has a multi-trillion dollar debt load. Early on in 2013, we witnessed some automatic spending cuts by the Federal government, which affected government spending on defense. We are currently all witnessing the Debt Ceiling theater, which is the ultimate stupidity in the making. In addition, with the wars in Iraq and Afghanistan being close to complete, it looks like companies in the defense sector might have a tough time generating much in terms of earnings and dividend growth over the next decade.

Defense companies earn money from providing products and services for US government. If government pays them for research, and companies can use this knowledge, then this know-how could bolster prospects of earnings significantly over time. The relationship between inventions and profitability is not linear, as it takes time for an idea to come to market and reach a certain level of following, before generating profits. From a long-term perspective however, it could pay dividends for years to come.

The past decade had been tremendously profitable for defense companies such as Lockheed Martin (LMT), Raytheon (RTN), General Dynamics (GD) and Northrop Grumman (NOC). These companies enjoyed rising earnings that allowed them to bump up distributions to shareholders every year. Share prices increased as a result of the improved profitability at these corporations as well. Currently, a lot of these companies are looking attractively valued, and also have above average market yields. The question in the minds of many dividend investors is whether these companies are worth purchasing right now.

Lockheed Martin Corporation (LMT), a security and aerospace company, engages in the research, design, development, manufacture, integration, and sustainment of advanced technology systems and products for defense, civil, and commercial applications in the United States and internationally. The company derives over 80% of revenues from US government and US agencies. Approximately 18% is derived from sales to foreign governments. Lockheed Martin has raised dividends for 11 years in a row. Over the past decade, it has managed to boost distributions by 24.70%/year. The outstanding shares from decreased from 450 million in 2003 to 326 million in 2013. Analysts expect that this dividend achiever would earn $9.49/share in 2013 and $9.68/share by 2014. In contrast, it earned $8.36/share in 2012. Currently, the stock is attractively valued at 14.20 times earnings and yields 4.30%. Check my analysis of Lockheed Martin.

General Dynamics Corporation (GD), an aerospace and defense company, provides business aviation; combat vehicles, weapons systems, and munitions; military and commercial shipbuilding; and communications and information technology products and services worldwide. The company derives over 66% of revenues from US government. Approximately 13 percent of revenues are derived from international defense the remainder is from commercial customers. General Dynamics  has raised dividends for 22 years in a row. Over the past decade, it has managed to boost distributions by 13%/year. The outstanding shares from decreased from 398 million in 2003 to 353 million in 2013. Analysts expect that this dividend achiever would earn $6.96/share in 2013 and $7.23/share by 2014. In contrast, it earned $5.65/share in 2012. Currently, the stock is attractively valued at 12.60 times forward 2013 earnings and yields 2.60%. Check my analysis of General Dynamics.

Raytheon Company (RTN), together with its subsidiaries, provides electronics, mission systems integration, and other capabilities in the areas of sensing, effects, and command, control, communications, and intelligence systems, as well as a range of mission support services in the United States and internationally. Raytheon  has raised dividends for 9 years in a row. Over the past decade, it has managed to boost distributions by 25.40%/year. The outstanding shares from decreased from 415 million in 2003 to 326 million in 2013. Analysts expect that this dividend stock would earn $5.66/share in 2013 and $5.95/share by 2014. In contrast, it earned $5.65/share in 2012. Currently, the stock is attractively valued at 13.20 times earnings and yields 3%.

Northrop Grumman Corporation (NOC) provides systems, products, and solutions in aerospace, electronics, information systems, and technical service areas to government and commercial customers worldwide. Northrop Grumman  has raised dividends for 10 years in a row. Over the past decade, it has managed to boost distributions by 13%/year. The outstanding shares from decreased from 368 million in 2003 to 238 million in 2013. The company has an open buyback facility to repurchase approximately 25% of outstanding shares by 2015Analysts expect that this dividend achiever would earn $7.78/share in 2013 and $7.99/share by 2014. In contrast, it earned $7.81/share in 2012. Currently, the stock is attractively valued at 12.20 times earnings and yields 2.50%.

L-3 Communications Holdings, Inc. (LLL), through its subsidiary, L-3 Communications Corporation, provides command, control, communications, intelligence, surveillance, and reconnaissance (C3ISR) systems; aircraft modernization and maintenance; and national security solutions in the United States and internationally. Over 75% of revenues were derived from US Department of Defense and Government Agencies, while International Sales accounted for 19% of revenues. The remainder is generated from sales to US corporate customers. L-3 Communications has managed to increase dividends for 9 years in a row. Over the past five years, it has managed to boost distributions by 15.30%/year. The outstanding shares decreased from 127 million in 2007 to 91 million in 2013. The number of outstanding shares increased from 106 million in 2003 to 127 million in 2007, because the company has grown through acquisitions, paid for by stock and cash. L-3 Communications has an open buyback facility to repurchase approximately 20% of outstanding shares by 2015Analysts expect that this dividend stock would earn $8.13/share in 2013 and $8.17/share by 2014. In contrast, it earned $8.30/share in 2012. Currently, the stock is attractively valued at 11.20 times forward 2013 earnings and yields 2.40%.

A company can only afford to maintain and increase dividends per share over time only through increases in earnings per share. Without earnings growth, the dividend can only grow to a certain level after which it would stagnate and lose purchasing power to inflation.

For companies like the ones mentioned in this article, a large portion of revenues are derived from the US Government or US Government Agencies. The problems with the US budget deficit are widespread. As a result, it is very possible that defense contractors would experience decreases or limits to the amount of weapons they can sell to their main customer. This could potentially lead to lower profits and dividend freezes or cuts.

Because most defense contracts are won after a competitive bidding, it might wise to acquire shares of several contractors such as Lockheed Martin, Raytheon, General Dynamics, Northrop Grumman, rather than focus on a single company. I am unable to determine which one would win the most revenues from the defense budget pile, which is why such an approach could be useful. In troubled times, I wouldn't be surprised to also see consolidations in the sector.

One positive is that companies have been able to repurchase a large portion of its stock over the past decade. A company which can consistently retire 1%-2% of shares each year, pays 4% yield and that can grow net income by 1-2%, can easily manage to grow distributions at a rate that can maintain purchasing power of the income. If the largest customer cuts their spending budget however, this yield could get axed as profitability suffers.  Either way, if a company generates so much cash flow that it is able to buyback a significant amount of outstanding stock at attractive valuations, and could continue doing so, it could provide decent returns to investors. Some notable buybacks include the ones from Northrop Grumman (NOC) and L-3 Communications (LLL), which could retire as much as 20 - 25% of outstanding shares within 2- 3 years. This could also provide room for dividend increases, even if overall sales and net incomes are flat.

However, US will always need to spend money on defense, given its role as a “world cop”. The world is continuing to be a hostile place, particularly in certain hot spots such as North Korea, Iran and a few of the countries that participated in the Arab Spring in 2011.

In the long-run however, (say 20 years from now), I cannot see anything else but increases in US government spending on defense. The world would still be a hostile place, and countries need to spend on defense simply to keep up with pace of technology. This means that if you buy today, you can still experience dividend cuts five years down the road, although chances are your distributions would recover within 10 years or so. This cyclical nature of dividend booms and busts makes relying on defense dividends riskier than relying on distributions from Coca-Cola (KO).

Surprisingly, some of the best times to acquire defense companies was right after the cold war ended in 1989. Other attractive times to buy defense companies occurred right after the official end of Vietnam war in 1975.

To summarize, the major bearish factor behind defense companies is the US Government spending situation in the next few years, and the need to reduce the budget deficit and curtail the growth of national debt. This could cause stagnating or decreasing military budgets. Since the major wars the US fought over the past decade are pretty much over, this could potentially affect profitability in defense companies.

The major bullish factors include cheap valuations, and the potential for a few of those companies to repurchase massive amounts of stock at these low valuations. If I were to invest in the sector, I would focus on the companies that reduce a large portion of shares outstanding. If net income can be at least maintained, the reduction in shares would lead to increases in earnings per share, which could also result in dividend growth.

Full Disclosure: Long KO

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Wednesday, October 2, 2013

Two dividend payers I recently purchased for my taxable accounts

For the first five years of this site, I have mostly discussed companies I found attractively valued for investment, as well as my dividend investing strategy. However, I rarely discussed the companies I have been purchasing in my accounts. This is because I believed that it was much better to discuss the tools of the trade and my investment philosophy and ideas, rather than focus too much in on recent investments. I never even published my investment portfolio in detail, until recently. Readers could only guess what I owned by going through articles, and checking my full disclosures. However, through interactions with readers over the years, I have realized that some enjoy reading about specific investment ideas that I have added money to.

Over the past ten days, I made two purchases in my regular taxable stock accounts. I purchased Realty Income (O) and British Petroleum (BP).

When I last analyzed Realty Income (O), I mentioned that I would only purchase it at a specific yield. Well, back on September 21 I tweeted about my purchase of the stock as I found the yield to be attractive. The company has managed to raise dividends multiple times per year since going public in 1994, and continued raising even during the dark days of the Great Recession in 2008 and 2009. After an acquisition closed in early 2013, Realty Income raised distributions by over 19%. I like that this triple net REIT continues growing through targeted acquisitions of competitors and properties and that it is not afraid to look outside the box in order to find attractive uses of its capital at attractive cap rates of return. You are also paying for the expertise of the management team, which has done a superb job of ensuring quality tenants, diversification and keeping the properties occupied.

One of the risks behind REITs is that rising interest rates would cause investors to sell their stocks off, and purchase bonds instead. As an investor, I realize this could potentially increase the cost of capital for Realty Income, which obtains money to grow through stock or debt issuance. As long as new properties are acquired at rates of return above cost of capital however, future acquisitions should continue adding to the pool of funds available for shareholder distributions. In addition, while interest rates would increase, they would likely do so very slowly and would likely reach about the same levels that we had prior to the 2008 – 2009 crisis first. In addition, I would much rather have my money in a business like Realty Income that provides the potential to generate a high dividend yield today and the opportunity for dividend growth versus a long US Treasury Bond at a similar yield. This is because an increasing dividend payment over time would keep the purchasing power of my income and protect it from inflation. Fixed income instruments do not do this for you. Currently, Realty Income yields 5.40% and has a ten year dividend growth rate of 4.20%/year. It trades at 16.70 times FFO ( assuming FFO of $2.40/share).

The other company I purchased was British Petroleum (BP) on September 30. In addition, I also sold a January 2015 put with a strike of $42. If the stock trades below $42 at expiration date, I would have to buy it at $42/share. However, my effective cost would be slightly less than $37/share. If the stock trades above $42/share, I would end up with the equivalent of slightly more than $5/share. The option premium received financed a portion of my purchase of BP.

Before I discuss the purchase, I wanted to discuss my history with the company. I initially purchased shares back in 2008, and considered them one of the safest dividends for current income. However, the events in 2010 led to a dividend cut, after which I sold out my position completely and reinvested the proceeds into Royal Dutch Shell (RDS.B). I sell automatically after a dividend cut, as a means to protect myself from getting married to a company that is collapsing. I do not want to be in a position of someone who has received dividends from a company for 40 years, and is emotionally attached to the stock, and therefore ignores warning signs that the business is in trouble. This could lead to losses in investment capital, which could result in going back to work. There have been investors who hold on for too long to a lost cause, and then end up not only losing their income source but also their capital. I also do not want to end up justifying to myself that a business will bounce back, while I am experiencing the pain from losses and hoping, rather than assessing the situation with a cool head.

Since the company has started raising dividends after the cut however, I am willing to give it another try. I think that the Gulf of Mexico spill is a major reason why the stock is still so cheap at 9 times forward 2013 earnings and 7.90 times forward 2014 earnings. However, I think that the fear of bankruptcy for BP is larger than the total cash outlays it would end up expending over time for the oil spill. Therefore, I sense an opportunity to purchase an asset at reasonable valuations that no one likes. The stock also yields 5.10% with a $2.16 in annual dividend. The total amount dividends paid annually was $3.36/share prior to the oil Spill in the Gulf of Mexico. I believe that this could easily be achieved by the end of this decade, especially if oil prices keep steady.

British Petroleum owns 19.75% of Russian Company Rosneft, which is the largest energy company in the world by reserves, and has a market capitalization of over 80 billion. BP also received a sizable cash consideration in the process, and will be using $8 billion from that to repurchase shares over the next 12 – 18 months. This would offset the reduction in earnings following the sale of its stake of BP –TNT to Rosneft for the cash and stock consideration.

In addition, BP has managed to replenish its reserves continuously over the past two decades. This is an important metric for oil companies, because it shows that they can replace the oil and gas extracted from developed fields through exploring for or acquiring fields that hold an equivalent amount or more of these precious carbons it sells worldwide.

Just like all other integrated energy companies, BP could suffer if oil and gas prices fall and stay low. However, I think that in the long-term, energy demand is only going higher from here. For example oil has so many uses outside of energy, that even if the whole world was running on solar and wind, there would still be a massive need for oil and gas. Even if the whole world used renewable energy to power the economy, realistically this is at least a couple decades away from it becoming mainstream. In the meantime, you can use the sizable dividend from BP as a sort of “rebate” to lower your cost basis in the stock.

Overall, I don't think I can go too wrong on a company like BP, which is cheap but has room to grow over time, offers a good dividend and buys back its cheap stock.

I would hate to turn this site into a stock picking service, but if there is interest, I would keep posting recent investments. As was the cash with my Roth IRA investments, I am going to post those in a couple weeks. I do post the tickers on Twitter, the day I make the transactions in that portfolio.

Please remember that I am making investments in my own accounts with my own money, based on information, estimates and biases (or experience) I have. These are not investment recommendations for you, but merely examples of the end result behind my investment philosophy and strategy in action. Do your own research before putting your money to work.

Full Disclosure: Long O, BP, RDS.B

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Friday, September 20, 2013

Looking for Advertising Dividend Paying Stocks

One of my favorite shows is Mad Men. The story depicts life in an advertising agency in Manhattan in the 1960's. I was intrigued by the portrayal of the advertising business, since it involved maintaining client relationships for long periods of time if successful. I also wanted to look for ideas beyond the usual investment targets.

Advertising agencies have a very interesting business model. Businesses have to advertise their products or services, even during a recession. The business of advertising agencies is not characterized by heavy capital investment, typical to most other professional service organizations. However, because few of the companies have raised dividends for at least ten years in a row, they are not found on typical dividend growth screens.

The business is characterized by having strong relationships with clients, who trust their agencies with everything related to the advertising process. This includes the creative process of making the actual ad across different channels such as print, TV or web, to purchasing ad space across multiple platforms. Once a client is working with a particular agency, chances are that the relationship can last for many years. After all, by working with clients for many years, advertising agencies know their business, their executives, and the needs of the business better than what a newcomer would do. As a result, big accounts stay with their agencies for many years, which could translate into a steady stream of profits for those agencies.

Advertising companies also have the scale to implement the ads using a variety of channels within their control, either print, TV, radio, web or other channels. As new channels to reach the consumer like web and mobile are developed, there is an even higher opportunity for advertising companies to offer more services. The repetitive nature of advertising virtually guarantees revenues and profits for ad companies even during a recession.

Some pundits claim that the business of advertising agencies is threatened by online and mobile advertising. However, digital is not a threat but rather an opportunity, because it merely represents another channel through which to reach out to consumers. A company like Coca-Cola cannot advertise solely online. Thus, companies need someone like WPP Group or Omnicom to execute a marketing strategy consistently across different channels.

The business also has some float as well, which is created by the timing of payments from client to advertising agency and from advertising agency to media publisher. Because of their scale, advertising companies can negotiate much cheaper rates with media companies than those which the clients pay. Many share a portion of the savings back with the client, which creates a mutually profitable arrangement.

Revenue for creating ads is usually billed by the hour, plus a profit and overhead. In addition, most contracts allow for an incentive to be paid out to advertising companies if specific qualitative or quantitative results are hit.

Advertising agencies essentially have a toll-bridge type business model, that connects customers with TV, print, radio and online companies.

The market is dominated by a few large players such as Omnicom, Publicis, WPP, Interpublic. Unfortunately, none of them has a history of regularly raising dividends.

WPP plc (WPPGY) provides communications services worldwide. The company seems to have frozen its dividend in 2009, which ended its streak of consecutive dividend increases. WPP was dropped from the list of international dividend achievers after the dividend freeze of 2009, although it would likely be added back in 2014 if it maintains a five year streak of dividend increases. I reviewed the company site, and could find raises starting in 1995. This is the advertising company I would likely consider for inclusion in my dividend portfolio if it trades at attractive valuations.


Currently, the stock is slightly overvalued at 20.90 times earnings and yields approximately 2.30%. I would need to research the company in more detail and analyze it, before I initiate a position in it, but I usually require at least a 2.50% entry yield coupled with a P/E ratio below 20. The company might not end up delivering dividend growth every year, but over time, I expect it to grow dividends above the rate of inflation.

Omnicom Group Inc. (OMC), together with its subsidiaries, provides advertising, marketing, and corporate communications services in the Americas, Europe, the Middle East, Africa, and the Asia pacific. While the company has not raised dividends every year, over the past decade it has managed to quadruple the quarterly payment from 10 to 40 cents/share. When I initially started researching the basics of the advertising companies, I found Omnicom to be a company I would consider owning one day. Unfortunately, with the announced merger with french company Publicis (PUBGY),  there are some changes to take into account. It looks as if the new company will be based in the Netherlands, which could pose issues for dividend investors from a tax withholding standpoint. In addition, companies that merge might lose focus on their brands, as Interpublic did in late 1990's. I also do not like the fact that the combined Omnicom/Publicis will have both Coca-Cola and PepsiCo as clients. I am not sure if these clients would be happy if their business is handled by the same advertising agency. Currently, Omnicom trades at 17.70 times earnings and yields 2.50%.

The third advertising company I reviewed was Interpublic (IPG), which provides marketing and advertising solutions worldwide. While it does not have a consistent history of raising dividends, the company could well be an acquisition target itself. The company went on a major acquisition spree in the late 1990's, lost focus, and eventually cut dividends in the early 2000's. It reinstated it a few years ago, and currently trades at 18.90 times earnings and yields 1.80%. Warren Buffett used to be a shareholder in Interpublic between the bear market in 1972 - 1974 and the mid 1980's.

Full Disclosure: Long KO and PEP

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Wednesday, September 18, 2013

Ten Dividend Paying Stocks I purchased in September

Earlier this year, I decided to max out any tax-deferred accounts I am eligible for. This included 401 (k), Sep IRA and ROTH IRA. My goal is to not only have a diversified income portfolio, but to diversify from a tax perspective as well. At the beginning of September, I tweeted about purchasing shares in ten attractively valued companies in my Roth IRA. The Roth IRA has several very appealing features such as tax-free compounding of capital, distributions are never taxed and there are no required minimum contributions.

I allocated $2,000 to the purchase of ten securities in September, and have $3,500 more to invest until the contribution limit of $5,500 for 2013 is exhausted. The brokerage used to execute this transaction was Sharebuilder. I believe that this is the best brokerage to use if you are just starting out your dividend investing journey and have low initial amounts of capital to invest.

It is important to maintain low costs when purchasing dividend paying stocks. As a rule, I try to avoid paying more than 0.50% in commissions on my purchases. With my regular accounts, it is easy to achieve that if I pay less than $5/trade and invest at least $1,000 at a time. With Roth IRA’s however, the $5,500 limit makes it difficult to invest in more than 5 – 6 companies/year at such commission rates. Since I have much more ideas than that, and since I wanted to have a diversified allocation each year, I decided to buy a greater number of companies. I signed up for Sharebuilder’s automatic investment program, which charges $12/month for 12 automatic monthly stock purchases. These stock purchases are executed on Tuesdays, with the automatic investment program. I also wanted to build the allocation over a period of time, rather than in a lump sum. I am allocating $2,000 in September, $2,000 in October and $1,500 in November. Since the first month of signing up was free, I am essentially going to end up spending $24 to invest $5,500, which is only 0.43%. After that I am going to cancel the service, until I am ready to put the contributions for year 2014 to work.

I purchased shares in the following ten companies in early September: (open link in another window)



Full Disclosure: Long all stocks listed in the article

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Tuesday, September 3, 2013

Why do I keep talking about the same companies all the time?

Dividend investing is so boring, it makes watching paint dry up look very exciting in comparison. You get to identify a few great quality companies, and then continuously try to purchase them at attractive valuations.

Unfortunately, some of my readers are unhappy with the fact that I keep writing about the same stocks over and over. The point is that once I tell you how great Coca-Cola (KO) or Wal-Mart (WMT) or Exxon-Mobil (XOM) are, it seems that there isn't really much more to learn.

I think these readers might have a valid point that I do tend to write about a select few companies in some of the articles discussing strategy. I can understand how this could sound boring.

However, on the strategy articles I write, I use ideas like Wal-Mart (WMT), McDonald's  (MCD) etc, merely as an illustration of a principle. It is true that I can use a company like Lowe's (LOW), Automatic Data Processing (ADP) or Brown-Forman (BF/B), but then some readers would be unhappy because these stocks are really expensive today.

The problem is that there are only so many dividend stocks that are both 1) cheap to buy from a valuation perspective and 2) something I would consider quality companies.

My starting point is usually the list of dividend champions and dividend contenders, that Dave Fish so graciously updates every month. For example, out of thousands of stocks traded on NYSE, Nasdaq and AMEX, only 105 have managed to boost dividends for over 25 years in a row. While I do focus on companies with long histories of consecutive dividend increases, I do not find all of them investable from my point of view. Every dividend growth investor has their own nuance to the strategy of course, but as a rule I tend to avoid companies I do not understand very well. For example, I am not very good at predicting whether Microsoft (MSFT) or Intel (INTC) have the same durable competitive advantages like Coca-Cola for example. I cannot foresee how disruptive changes in technology could result in changes in the way users consume computing resources. However, I can reasonably expect that people would still use the refreshment of one of the 500 drink brands that Coca-Cola sells worldwide. If you understand Microsoft or Intel better than I do however, then this is your edge and you should be sticking to it.

I believe readers like to both hear about quality companies, but also want to hear about them when I think they are priced attractively. If I think Wal-Mart (WMT) is cheap today, I would keep writing about it. If Procter & Gamble (PG) is fully valued, I might not write about it. With the current bull market, oil (Chevron (CVX) and, ConocoPhillips (COP)) and some retailers ( Wal-Mart (WMT), and Target (TGT)) are the ones I have been eyeing on. This is why I keep writing about them over and over.

The thing to consider is that different quality dividend stocks are available for sale at different times. For a period of 2008 – 2012, the companies like Johnson & Johnson, Procter & Gamble, Kimberly-Clark (KMB) and Colgate-Palmolive (CL) were attractively valued. This is why I kept using them as examples to illustrate my points in in my articles on dividend investing. Once they stopped being attractively valued per my understanding, I stopped writing about them, except as an opportunity to vent about their overvaluations.

On the other hand, I do post a weekly stock analysis almost every Friday, where I do try to feature a different company. I have found however that the majority of readers are mostly interested in hearing about the Johnson & Johnson and Coca-Cola of the world. Unfortunately, very few readers are interested in little known companies such as Dr. Pepper Snapple Group (DPS), Casey's General Stores (CASY) or Ameriprise Financial (AMP) for example.

At the end of the day, dividend investors should focus on the types of companies they understand, and then keep buying them when they are attractively valued. Dividend investing is a slow and steady process, as it takes years of meticulous monthly contributions, before you build a decent income base that allows you to retire. If you specialize in the right types of quality companies, you understand how they make money and you expect them to keep churning higher profits and dividends, then I do not see a reason to keep looking elsewhere just for the sake of looking elsewhere.

Full Disclosure: Long WMT, TGT, DPS, CASY, AMP, JNJ, KO, PG, CL, KMB,

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Friday, August 30, 2013

Air Products and Chemicals (APD) Dividend Stock Analysis

Air Products and Chemicals, Inc. (APD) provides atmospheric gases, process and specialty gases, performance materials, equipment, and services worldwide. This dividend champion has paid distributions since 1954 and increased dividends on its common stock for 31 years in a row.

The company’s last dividend increase was in March 2013 when the Board of Directors approved a 10.90% increase to 71 cents/share. The company’s largest competitors include Airgas (ARG), Praxair (PX) and Air Liquide (AIQUY).

Over the past decade this dividend growth stock has delivered an annualized total return of 10.80% to its shareholders.


The company has managed to deliver 11.20% in annual EPS growth since 2003. Analysts expect Air Products and Chemicals to earn $5.50 per share in 2013 and $6.08 per share in 2014. In comparison Air Products and Chemicals earned $4.66/share in 2012.

Air Products and Chemicals is expected to post growth in sales, due to strong demand for industrial gases in rapidly growing economies in Asia. Long term growth will be driven by acquisitions, expansion into rapidly growing markets in South America and Asia.

While European divisions have been operating in a tough environment, Air Products and Chemicals is attempting to streamline operations and manage costs strategically.

The priorities that have been outlined in the latest annual report included increasing volumes in the merchant segment, plus executing new projects on time and budged in the tonnage segment, while focusing on plan efficiency improvements. In addition, the company is focusing on major customers in the electronics and performance materials segment, while also introducing new offerings that would hopefully increase margins and returns. Other important priorities include focusing on the pricing and the right mix of productivity and cost reductions, in order to hit profitability and margin goals set for itself.

In recent weeks, activist investor Bill Ackman has built a 10% stake in the firm, with his goal likely to push management to improve performance. This could be achieved either by passing on cost increases to customers, cutting costs or a combination of both.

The return on equity has increased from 11% in 2003 to 22% in 2011, before slipping to 16% in 2012. Rather than focus on absolute values for this indicator, I generally want to see at least a stable return on equity over time.


The annual dividend payment has increased by 11.80% per year over the past decade, which is higher than to the growth in EPS.

A 12% growth in distributions translates into the dividend payment doubling every six years. If we look at historical data, going as far back as 1985 we see that Air Products and Chemicals has managed to double its dividend every seven years on average.

The dividend payout ratio remained at or below 50% over the past decade, with the exception of two brief spikes in 2009 and 2012. A lower payout is always a plus, since it leaves room for consistent dividend growth minimizing the impact of short-term fluctuations in earnings.


Currently, Air Products and Chemicals is slightly overvalued at 22.90 times earnings, yields 2.70% and has an adequately covered dividend. I would consider adding to my position in the stock on dips below $94.

Full Disclosure: Long APD

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Wednesday, August 28, 2013

A long streak of dividend growth is an indication of a business with exceptional fundamentals

In my dividend investing, I focus on mostly companies with long streaks of dividend increases. A company can only afford to build a long streak of consecutive dividend increases if it generated a growing stream of excess cash flows.

A company that generates so much excess cash flows that it can not reasonably reinvest all of it into the business has possibly a high return on equity. Such a business needs only a portion of profits to be reinvested back to maintain and grow operations, leaving excess cashflows filling in the company treasury coffers. This growing pile of excess cashflows, allows companies to pay a rising dividend stream of decades to come.

Such a company probably has a product or service, which is unique, and provides value to customers. These products are typically characterized by strong brands, that carry a premium and consumers are willing to pay top dollar for. The competitive advantages of the company would likely be difficult to replicate because of patent protection, trademarks and know-how, customer relationships, difficulty to switch providers, scale that could be very expensive to replicate to name a few obstacles. This is what Buffett refers to as a company that has a wide-moat.

A long streak of dividend increases is not a slam dunk of course, as things can change over time. However, if you determine that the business has higher odds of continuing their profitability streak, and you can buy it at attractive prices, then it might be a good holding for the next several decades.

These companies could spend a lot of shareholders’ money on research, acquiring other companies or doing something else to try and earn even more. However, placing all excess profits back into the business alters the risk profile negatively. This is because you are moving from earning money from a relatively lower risk rate of profits that you earn in ordinary course of business, to taking somewhat of an educated gamble with shareholders money. If a company has a worth of $1 billion, and wants to acquire another firm for $100 million, it does not need to use reinvested profits. It might be better off to either take on debt or issue equity, particularly if its shares are overvalued. However, many times acquisitions do not work and are utter failures.
For example, in 2012 Microsoft (MSFT) wrote off its entire $6.20 billion purchase cost of digital ad company aQuantive. Some do work of course, and can lead to synergies and all the other buzz words meaning cost savings. However, it is difficult to have different cultures merged together, and it is also difficult to acquire companies that are from different industries. For example, during the 1960’s, the term “leisure” was a catchphrase, which demanded high P/E multiples. People were all supposed to work less because of advancements in technology, and therefore have more leisure. According to Michael O’Higgins in “Beating the Dow”: “a company that made surfboards and sold books somehow had synergy because they were leisure-related”.

As far as investing in R&D goes, or opening new locations, the return on investment is not guaranteed. If a tobacco company tries to create cigarettes with low nicotine levels, it might do so, but the new product could create negative associations to consumers. If Pfizer (PFE) spent $5 billion developing new drugs, there is no guarantee that the funds would result in new discoveries. In retail, if a company like Wal-Mart (WMT) doubles the number of stores overnight, this will not result in doubling of sales. This is because you need to take into effect cannibalization of sales from existing stores, legal restrictions from opening a store in certain locations, specifics of local markets as well as time it takes to research market and build a store.

For example, Coca-Cola (KO) could not reinvest all of its profits in the business, because for many decades it had multiple limitations. Prior to 1989’s fall of the Berlin Wall, it could not easily expand into the countries from the Soviet Bloc or in their ally countries. In addition, Coke products are not cheap for many people in countries like China, India, Russia and other developing countries. As more people in emerging markets become middle class, Coca-Cola would be able to deliver its product to them, using a network of bottlers. However, this would take time.

This could also mean that once companies reach a certain scale, profits are then returned to shareholders to do as they please. As an investor who plans to live off my nest egg, I highly prize companies that can shower me with cash on a regular basis. This is because dividend income is more stable than relying on stock prices alone. I value the stability and relative certainty in the amount and timing of dividend income, because it makes it easy to plan and budget my expenses. I do not want to worry whether I can afford one or two PBJ sandwiches if markets drop 50% tomorrow.

Many readers complain that I keep writing about the same stocks over and over again. The hidden truth is that there are only so many businesses in the US which are exceptional and publicly traded.

Johnson & Johnson (JNJ), together with its subsidiaries, engages in the research and development, manufacture, and sale of various products in the health care field worldwide. This dividend aristocrat has managed to raise distributions for 51 years in a row. Over the past decade, it has managed to reward shareholders with 11.70% in annual dividend raises on average. Currently, the stock trades at 16.50 times forward earnings, and yields 3%. Check my analysis of Johnson & Johnson.

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. This dividend aristocrat has managed to raise distributions for 36 years in a row. Over the past decade, it has managed to reward shareholders with 28.40% in annual dividend raises on average. Currently, the stock trades at 17.40 times earnings, and yields 3.20%. Check my analysis of McDonald’s.

Exxon Mobil Corporation (XOM) engages in the exploration and production of crude oil and natural gas, and manufacture of petroleum products. This dividend aristocrat has managed to raise distributions for 31 years in a row. Over the past decade, it has managed to reward shareholders with 9% in annual dividend raises on average. Currently, the stock trades at 11 times earnings, and yields 2.90%. Check my analysis of Exxon Mobil.

Wal-Mart Stores, Inc. (WMT) operates retail stores in various formats worldwide. The company operates in three segments: Walmart U.S., Walmart International, and Sam's Club. This dividend aristocrat has managed to raise distributions for 39 years in a row. Over the past decade, it has managed to reward shareholders with 18.10% in annual dividend raises on average. Currently, the stock trades at 14.60 times earnings, and yields 2.50%. Check my analysis of Wal-Mart.

The Coca-Cola Company (KO), a beverage company, engages in the manufacture, marketing, and sale of nonalcoholic beverages worldwide. This dividend aristocrat has managed to raise distributions for 51 years in a row. Over the past decade, it has managed to reward shareholders with 9.80% in annual dividend raises on average. Currently, the stock is slightly overpriced at 20.50 times earnings, and yields 2.90%. Check my analysis of Coca-Cola.

Full Disclosure: Long KO, WMT, MCD, JNJ

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