Friday, June 24, 2022

How Ronald Read managed to accumulate a dividend portfolio worth $8 million

Dividend investing is as sexy as watching paint dry on the wall. Defining an entry criteria that selects quality dividend stocks with rising dividends over time and then patiently reinvesting these dividends while sitting on your hands is not exciting. While active traders have a plethora of hedge fund managers on the covers of Forbes magazine there are not many well-publicized successful dividend investors. Even value investing has its own superstars – Ben Graham and Warren Buffett.

I did some research and uncovered several successful dividend investors, whose stories provide reassurance that the traits of successful dividend investing I outlined in a previous post are indeed accurate.

The reason why dividend investors are not highly publicized is because dividend investing is not sexy enough to be featured in the financial mainstream media. In addition to that, it is not profitable for Wall Street to sell you into the idea that ordinary investors can invest on their own. This is why you have advisors crying wolf over the fact that you are paying 15% tax on your dividend income, while charging clients 1%/year on assets under management, and investing that money in a mutual fund that costs an additional 1%/year. Mutual funds, annuities and other products generate billions in commissions for Wall Street, despite the fact that they might not be in the best interest of small investors.

The dividend investor to profile today is Ronald Read, who left an $8 million fortune behind when he passed away in 2015. What's fascinating about him is that he never earned a high income, because he worked as a gas station worker or a janitor. 

I find this story to be very inspiring, because it showed how an ordinary person who never earned a high income was able to amass a dividend portfolio worth $8 million by the time of his death. The portfolio was generating close to $20,000 in monthly dividend income on average. This portfolio was a result of frugality, hard work, and ability to buy stocks to hold for decades, while patiently reinvesting dividends.

When Ronald Read died at the age of 92 in 2014, he left a dividend portfolio worth $8 million to charity and his children. That story shows that Ronald Read earned close to $20,000 in monthly dividend income from this diversified portfolio of 95 blue chip securities. They were spread across a variety of sectors, including railroads, utility companies, banks, health care, telecom and consumer products. He avoided technology stocks. It looked like Mr Read invested solely for dividend income, and his portfolio was well put together. Besides being a good stock picker, he displayed remarkable frugality and patience which gave him many years of compounded growth.



Ronald Read didn't have a finance degree, nor an MBA, but was an ordinary Joe who managed to save and invest for the long term. The story is appealing to me because it shows that investors who pick quality blue chip stocks to hold for decades, and reinvest those dividends patiently, can accumulate a sizeable portfolio over time. The important trait is patience. I follow the same slow and steady approach to long term dividend investing as Ronald Read.

Attached below is a list of Ronald Read's largest portfolio holdings:


Mr. Read left behind a five-inch-thick stack of stock certificates in a safe-deposit box. Owning the stock directly is old school, but it also reinforces the behavior to buy and hold equity stakes in solid blue chips. 

Among his longtime holdings were blue-chip stalwarts such as Procter & Gamble, J.P. Morgan Chase, General Electric and Dow Chemical. When he died, he also had large stakes in J.M. Smucker, CVS Health and Johnson & Johnson. He was able to stick to his securities for many years. Not all of his securities worked out, but did pretty well in the end. For example, his portfolio included shares of Lehman Brothers Holdings, the financial firm that collapsed in 2008, for example. 

One example of a long-term investment was buying 39 shares of Pacific Gas & Electric on Jan. 13, 1959 for $2,380. Adjusting for stock splits, these shares would have been worth $10,735 at te time of his death. He ended up owning 578 shares in all of PG&E, worth just over $26,500, some of which he may have purchased with the dividend payments made to shareholders.

He researched his ideas thoroughly, reading business publications such as Wall Street Journal, going to the library, and chatting about investments with close friends.

Ronald Read's success was dependent on several important factors:

1) Stay frugal and live within your means
2) Invest savings at a high rate of return for a long period of time
3) Invest in companies with durable competitive advantages with a long runway
4) Stay patiently invested for decades, without selling
5) Keep reinvesting those dividends along the way

This dividend investor managed to turn small investments into a cash machine that generated large amounts of dividends. He was able to accomplish this through identifying quality dividend growth companies at attractive valuations, patiently reinvesting distributions and mostly maintaining a diversified portfolio of stocks. These are the lessons that all investors could profit from.





Thursday, June 16, 2022

Dividend Investors: Stay The Course

The past month has been difficult for many investors. It is during times like these that you see who really is a long-term investor, and who is just a pretender. When you are a long-term buy and hold investor, you stand the best chances to take maximum advantage of the power of compounding, and end up with the probability for the highest dividend income and capital gains. These are the times where having a disciplined approach to investing pays off. These are the times when the ability to allocate capital to use in quality dividend stocks would seem stupid in the short-term, but potentially really brilliant 10 – 20 years down the road. When stock prices fall, there is an urge in the investor to protect their nest eggs from further price impairment.

This is a dangerous situation to be in because:

1) Noone knows in advance today when this correction is going to run out of steam or what its ultimate severity will be. So when you act on short-term noise, you are actually shooting yourself and those who will depend on you in the foot.

2) Therefore, if you act based on short-term price fluctuations, you are speculating and have essentially thrown out your edge of being a long-term investor. It is extremely difficult to win in investing as a short-term speculator – you will be in an out of stocks and paying taxes and commissions through the nose. Your main edge in the stock market lies in the ability to hold on to your stocks through thick and thin for decades, and cashing in those growing dividend checks ( or reinvesting them in the accumulation phase)

3) If you are in the accumulation phase, you should be praying for lower prices, because you are buying shares to provide for you in 20 – 30 years. A 200 point decline on the S&P 500 decline will likely look just like a blip on the charts 20 – 30 years from now. If you don’t believe me, check the 1987 crash. A lower entry price results in more future dividend income for you.

4) If you are in the retirement phase, you already have a plan to live off your assets. You are likely spending those dividends, and hopefully those dividends are coming from a diversified portfolio of dividend growth stocks. You are likely getting social security and possibly a pension. As long as there is some margin of safety in financial independence, and the dividend portfolio mostly consists of quality blue chips, the investor should be just cashing in their dividend checks and enjoy the fruits of their lifetime of labor.

I know that seeing unrealized capital losses hurts. However, the important thing is to just stick to your plan and stay the course. This is why I have chosen to be a dividend growth investor. When the stock market is going up, everyone is a total return investor and chases hot growth stocks and talks about how much capital gains they have made.

However, when the stock market starts going down in price, those capital gains could quickly turn into losses. Imagine having to sell chunks of your portfolio for living expenses when the stock market is going lower. You will eat your principal quickly, and increase your chances of panicking and doing the wrong thing of selling everything out. When your dividends cover your living expenses however, it is much easier to ignore those stock price fluctuations. As long as those dividends are coming from a diversified portfolio of quality blue chip stocks that are dependable, the investor has nothing to worry about. In fact, receiving cash dividends when the stock prices are going down is very reassuring, and provides the investor with positive reinforcement to just stay the course.

There is a reason why stocks have done much better than bonds in the long-run – they are riskier. With stocks, there is always the chance that there will be violent fluctuations in the price. You can have steep downturns, which can have many weak hands scrambling for the exits. When stock prices go down, many investors assume that something is wrong, they panic and sell. They forget that your upside potential in terms of dividends and capital gains is virtually unlimited. Some companies you own will ultimately cut dividends and sell at levels that were lower than what you paid for. Other companies in your portfolio will do well enough in the long term that will more than compensate for the failures you have experienced.

The issue with stocks of course is that the amount and timing of future capital gains is largely unknown in advance. This is why people panic when prices start going down – they project the recent past onto the future indefinitely. They forget that stocks are not just some pieces of paper or blips on a computer screen, but real businesses that sell real goods and services to consumers who are willing to exchange the fruits of their labor for those goods and services. Over time, those businesses as group will likely learn ways to sell more, charge more, earn more and reward their shareholders. No matter the turbulence we will experience in the US and Global stock markets and economies in the short-run, I believe that things will be better for all of us ten years from now. And as investors, we invest for the long term, not for the next 5 years or 5 months.

With bonds, you get limited upside mostly in terms of the interest payment you receive, and then hopefully a guaranteed return on investment after a set period of time. So while a portfolio of bank CD’s will not be quoted every day, providing an illusion that the money is safe, it is difficult to live off the small yields we see today. Even if inflation returns to its normal course of 3%/year, those bank CD’s will likely be unable to keep up purchasing power.

Holding on to stocks pays in the long term better than holding bonds precisely due to their “riskier” nature. If you stay the course of regularly adding money to your accounts, you will be able to buy more shares of quality companies at a discount. After the dust settles, you will be ending up with more valuable pieces of real businesses than before. It intuitively makes sense that if one share of Altria (MO) will sell for $500 in 30 years, you will be better off buying the company at $40/share as opposed to $75/share. It also intuitively makes sense that if you reinvest your dividends when prices are low, you will end up with more shares and more dividend income over time.

Again, in order to benefit from all of this, you need to stay the course. This means saving money every month, putting money to work regularly, and not getting scared away. Perhaps if you are concerned about prices and you are in the accumulation phase, it may make sense to just start reinvesting dividends automatically. Or alternatively, it may make sense to automatically invest a portion of your paycheck through your 401 (k).


Relevant Articles:

Successful Dividend Investing Requires Patience
Fixed Income for dividend investors
Dividend income is more stable than capital gains
How to think like a long term dividend investor
Long Term Dividend Growth Investing

Monday, June 13, 2022

Are Dividend Increases Beating Inflation in 2022?

The US stock market has been turbulent recently. As a Dividend Growth Investor, I usually ignore stock price fluctuations, unless I am looking to buy a quality stock at a discount. As a long-term investor, I focus on growing my dividend income. Dividends are more stable, predictable and reliable than stock prices. Dividends also tend to grow above the rate of inflation over time.

The stability and predictability of dividend payments make them an ideal source of income for retirees. While share prices can fluctuate, I can sleep well at night, knowing that my dividends are coming in, and most likely increasing as well.

In previous reviews, I have found that dividends in the US tend to grow above the rate of inflation over time. You may remember this chart from this post:



Source: How dividends protect income from inflation

With inflation rising, I decided to take a more granular look at US Equities, and see how they are faring. It looks that so far this year, dividend stocks are able to maintain purchasing power. Of course, the year is still young. If we get a recession, it is very likely that dividend growth could slow down. Alternatively, it can also accelerate as companies pass on cost increases to customers.

I went ahead and obtained a listing of all companies in the S&P 500, and then looked at their dividend actions so far in 2022. This review covers all companies that are members of S&P 500, and tracks all dividend actions between January 1 and June 9th.

There have been 193 dividend increases, 5 initial dividends and 5 dividend cuts so far in 2022. You can view a summary of dividend actions by sector in the table below:


Next, I drilled down on the list of dividend increases. I wanted to see how many dividend increases so far this year exceeded 8%. While inflation is 8.60%, I used 8% as the number, because the inflation number has been increasing in 2022. I didn't want to unjustly penalize companies that raised dividends earlier in the year. I would argue if we are arguing about 0.60% difference, we are nitpicking and splitting hairs. 

Anyway, out of the 193 dividend increases so far in 2022, it looks like 117 increases were higher than 8%. This is good to know.



A more interesting view is to look at the list of dividend aristocrats. There were 32 dividend increases so far in 2022. 

It looks like 13 companies raised dividends by more than 8%. The rest of the companies raised dividends by less than 8%. The average dividend increase is 7.46% however.



There are 31 dividend aristocrats, which have not raised dividends so far in 2022. I have listed them below, and also included the months in which these companies have raised dividends in 2021. If history is any guide, these companies usually tend to announce their dividend increases around the same time each year.


On a side note, this data comes straight from S&P Global. They do not seem to have included Realty Income (O) in their dividend increases lists. It did raise dividends slightly in March from $0.2465 to $0.247, but I think it would raise dividends a few more times in 2022.

All the data is from S&P Global.



Relevant Articles:


Saturday, June 11, 2022

If you didn't get an 8.60% pay increase, you received a pay cut

Over the past year, inflation has been on the increase. A popular meme on the internet is the saying that if you didn't receive an 8.60% increase in your income, you essentially received a pay cut. This is very relevant for those who are still earning salary, and even more relevant for those who are living off dividends.



In general, dividend income tends to grow above the rate of inflation over time. That does not mean that it grows above the rate of inflation in every single year however. There could be a lag, but over time dividends do provide protection against inflation. This is true for a diversified portfolio of stocks of course. Some companies grow dividends above the rate of inflation, while others closely match it; a third group grows dividends at a slower rate. 


This is where it is important to build a portfolio that includes the three groups of dividend growth stocks:

1) High dividend growth with a lower dividend yield

2) Companies that are in the sweet spot in terms of dividend yield and dividend growth

3) High yielding companies with a slower pace of dividend growth

The most important thing of course is to make sure that the economic engine of each company is constructed well, so that the company can keep growing revenues and earnings throughout the ups and downs of the economic cycle. A company that can successful pass cost increases to its customers is worth its weight in gold. Rising earnings per share can help in growing the dividend income, which in turn means that your dividend income can maintain purchasing power.

Over the past week, there were several companies that raised dividends to shareholders. I isolated the ones that have managed to grow dividends for at least a decade. You can observe how the highest yielding companies grew dividends at a very slow rate, albeit this is consistent with what they had done in the preceding 5 or 10 years. You can also observe that the companies that yield a little less are able to grow dividends at the rate of or faster than inflation.

While this is an isolated sample of just a weeks worth of dividend increases from the universe of dividend growth stocks, it is still good to illustrate the point I am making.

Caterpillar Inc. (CAT) manufactures and sells construction and mining equipment, diesel and natural gas engines, and industrial gas turbines worldwide.

Caterpillar increased its quarterly dividend by 8.10% to $1.20/share. Caterpillar has paid higher annual dividends to shareholders for 28 consecutive years and is a member of the S&P 500 Dividend Aristocrat Index. Over the past decade, the company has managed to boost dividends at an annualized rate of 9%.

The stock sells for 18 times forward earnings and offers a dividend yield of 2.15%.

Target Corporation (TGT) operates as a general merchandise retailer in the United States. 

The company increased its quarterly dividend by 20% to $1.08/share. This is the 51st consecutive year in which Target has increased its annual dividend. Over the past decade, this dividend king managed to grow annualized distributions by 11.10%/year.

This dividend king sells for 17.42 times forward earnings and yields 2.89%.

UnitedHealth Group Incorporated (UNH) operates as a diversified health care company in the United States. It operates through four segments: UnitedHealthcare, Optum Health, Optum Insight, and Optum Rx. 

The company increased quarterly dividends by 13.80% to $1.65/share. That's the 13th consecutive annual dividend increase for this dividend achiever. Over the past decade, the company has managed to boost dividends at an annualized rate of 24.80%.

The stock sells for 22.35 times forward earnings and yields 1.36%.

Casey's General Stores, Inc., (CASY) operates convenience stores under the Casey's and Casey's General Store names. 

The company increased its quarterly dividend by 8.60% to $0.38/share. This was the 23rd consecutive year of annual dividend increases for this dividend achiever. Over the past decade, the company has managed to boost dividends at an annualized rate of 9.20%.

The stock sells for 20.83 times forward earnings and yields 0.80%.

Universal Health Realty Income Trust (UHT) is a real estate investment trust that invests in healthcare and human service related facilities including acute care hospitals, rehabilitation hospitals, sub-acute care facilities, medical/office buildings, free-standing emergency departments and childcare centers. 

The REIT increased quarterly dividends by 0.70% to $0.71/share. The new dividend is 1.42% higher than the dividend paid during the same time last year. That's the 37th consecutive annual dividend increase for this dividend champion. Over the past decade, the company has managed to boost dividends at an annualized rate of 1.40%.

The REIT sells for 14.50 times FFO and yields 5.34%.

Oil-Dri Corporation of America (ODC) develops, manufactures, and markets sorbent products in the United States and internationally. It operates in two segments, Retail and Wholesale Products Group; and Business to Business Products Group.

The company increased its quarterly dividends by 3.70% to $0.28/share. This declaration marks the nineteenth consecutive year Oil-Dri has increased dividends. That was the 20th consecutive year of annual dividend increases for this dividend achiever.  Over the past decade, the company has managed to boost dividends at an annualized rate of 4.90%.

The stock yields 4.15%.

Citizens Financial Services, Inc. (CZFS) operates as the bank holding company for First Citizens Community Bank that provides various banking products and services for individual, business, governmental, and institutional customers. 

The company raised its quarterly dividend by 3.20% to $0.475/share. This was the 25th year of consecutive annual dividend increases for this newly minted dividend champion. Over the past decade, the company has managed to grow dividends at an annualized rate of 6.50%/year. The five year annualized rate of dividend growth is a more modest 2.30% however.

The stock yields 2.88% and sells for 9.76 times forward earnings.


Relevant Articles:

- How dividends protect income from inflation

- A Look Under the Hood For Inflation



Thursday, June 9, 2022

Air Products and Chemicals, Inc. (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 aristocrat has paid distributions since 1954 and increased dividends on its common stock for 40 years in a row.

The company's last dividend increase was in February 2022 when the Board of Directors approved an 8.50% increase to 77 cents/share. The company's largest competitors include Linde (LIN) and Air Liquide (AIQUY).

Over the past decade this dividend growth stock has delivered an annualized total return of 13.50% to its shareholders.

The company has managed grow earnings from $4.66/share in 2012 to $9.12/share in 2021. Analysts expect Air Products and Chemicals to earn $10.29 per share in 2022 and $11.62 per share in 2023.

 


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. Recent acquisitions and projects in Saudi Arabia could drive future earnings growth.

Air Products and Chemicals streamlines operations and tries to manage costs strategically. In the past, the company has been shedding unprofitable operations, and focusing on cost cutting initiatives, in order to boost the bottom line.

In order to grow, the company should focus on 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, focusing on major customers in the electronics and performance materials segment, while also introducing new offerings that could increase margins and returns. Other important opportunities 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.

The company operates under long-term customer supply contracts, particularly in the gases on-site business. These contracts principally have initial contract terms of 15 to 20 years. There are also long-term customer supply contracts associated with the tonnage gases business within the Electronics and Performance Materials segment. These contracts principally have initial terms of 10 to 15 years. Additionally, they company has several customer supply contracts within the Equipment and Energy segment with contract terms that are primarily 5 to 10 years. Under those contracts, the Company has built a facility on land owned by the customer, and is essentially a de-facto monopoly in the specific geographic area for that customer.


The annual dividend payment has increased by 11.10% per year over the past decade.

 


The dividend payout ratio increased from 54% in 2012 to 75% in 2015, before gradually decreasing back to 64% in 2021. A lower payout is always a plus, since it leaves room for consistent dividend growth minimizing the impact of short-term fluctuations in earnings.

 


The number of shares outstanding has been growing at a snail pace. In general, you want to see shares outstanding flat or decreasing.

 


The stock is selling for 25.45 times forward earnings and yields 2.48%.

Relevant Articles:









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