Monday, September 26, 2022

Microsoft (MSFT) Dividend Stock Analysis

Microsoft Corporation (MSFT) develops, licenses, and supports software, services, devices, and solutions worldwide.

The company just raised its quarterly dividend by 9.67% to 68 cents/share on September 20th, 2022. Microsoft has managed to increase annual dividends for 17 consecutive years.

Annual dividends increased from 76 cents/share in 2012 to $2.42/share in 2022. At the new rate, the forward dividend is $2.72/share.

Earnings per share have increased from $2/share in 2012 to $9.65/share in 2022. Microsoft is expected to generate $10.98/share in 2023 and $12.82/share in 2024.

Future growth would be driven by its cloud based platform Azure, as corporations move to the cloud. It would be driven from Office, as more customers move to use software as a service, rather than buy licenses. Linkedin could help growth too, as would Xbox. Windows is essentially a utility, on which a lot of other applications run.

Strategic acquisitions could also boost the bottom line. The company is in the process of acquiring Activision Blizzard.

Earnings per share growth has been aided by share buybacks. Microsoft reduced the number of shares outstanding from 8.506 billion in 2012 to 7.504 billion in 2022.

The dividend payout ratio has moved around over the past decade, but seems reasonable at 25% today. It is possible that Microsoft may decide to grow dividends at a faster rate than earnings over the next decade. At least there is room in the payout ratio. 

The stock is not cheap today at 23.65 times forward earnings and a dividend yield of 1.10%. However, I will add to my position, because I believe it can deliver solid yields on cost and good returns over the next decade.

 Relevant Articles:

Eight Companies Expected to Raise Dividends in September

Thursday, September 22, 2022

Dividend Investors: Stay The Course

The past few months have been difficult for many investors. Stocks are down from their all time highs, reached just a few months ago. 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. In my case, the only bonds I am interested in owning directly are Certificates of Deposit, Treasury Bonds and US Agency Bonds. This is the safety portion of my portfolio, which could ultimately account for somewhere between 10% - 15% of my portfolio by the end of the decade. The issue of course is that this portion of the portfolio will mostly keep up with inflation, at best since expected returns are low in the current interest rate environment. 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. 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 you will be better off buying a stock like Altria  at $40/share as opposed to $75/share. If one share of Altria (MO) bought is today, and dividends are reinvested, it could result in a net worth of $400 in 30 years. This exercise assumes a total return of 8%/year, which is lower than the company's dividend yield alone. 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

Wednesday, September 21, 2022

Keeping Investment Costs Low Matters

“If returns are going to be 7 or 8 percent and you're paying 1 percent for fees, that makes an enormous difference in how much money you're going to have in retirement.”

- Warren Buffett

As an investor, I believe that long-term success is dependent on actions within my control. Namely these include:

1) Ability to select and stick to a strategy
2) Ability to invest regularly, through thick and thin, and not timing the market
3) Ability to diversify and not put all eggs in one basket
4) Ability to keep investment costs low

Today, I will focus on the fourth point, which is keeping investment costs low.

This is fairly easy today at least for US investors, because most brokers offer commission free investing. It has never been easier to buy into some of the worlds best companies, and share in the success of these enterprises in the form of higher dividends and higher share prices over time. It is fairly easy to set up a diversified portfolio as well.

When you keep investment costs low, this means that you have more money working hard for you.
If you pay a mutual fund or an investment adviser 1% per year on your investments, this means that you are losing out on future compounding of this money. To add further insult to injury, that 1% of assets under management is a recurring fee that is paid every year. In addition, that money would have compounded over time as well, which makes this cost an even bigger one. Paying a fee is equivalent to another tax on your dividend income.

For example, if you invested in Johnson & Johnson (JNJ) today, you would generate a yield of 2.75%.

However, if you paid me a 1% fee each year on net worth, you are essentially paying a 36% tax on your dividend income, in addition to paying taxes on dividend income. This exercise assumes you are using a taxable account.

Let’s run some numbers. If a stock delivers a total return of 7%/year over the next 30 years, it would turn $1,000 into $7,612.25. A total return of 7%/year could assume a starting yield of 3% and annual growth of 4%, compounded over time.

If you paid someone 1%/year to select these companies for you, your annual return is reduced to 6%/year. You are coming up with all the capital at risk, but the other party is coming up with all the ideas. It is possible that they have convinced you to invest intelligently, and that otherwise you may have been keeping your money under the mattress or in a savings account yielding 1% - 2%/year.

Either way, when you compound $1,000 at 6%/year for 30 years, you are left with $5,743.49.

That’s a difference of $1,868.76 over a 30 year period. If we make the period longer, the total lifetime cost will only get larger.

That’s why I believe that keeping investing costs low matters – because that way you have more money working hard for you to achieve your investment goals and objectives.

I actually believe that investing through a Roth IRA is a very good method to reach the full compounding potential for this portfolio, particularly for someone in the accumulation phase.Taxes are a highly personal matter however. While a Roth IRA may be perfect for one individual, a traditional IRA may be better for another individual who needs to keep their Adjusted Gross Income below certain levels (to qualify for tax credits or subsidies on healthcare insurance premiums) OR individuals who expect to be in lower tax brackets when they retire.

Let’s assume annual total returns of 7%/year, with 3% of that coming from dividends, and a 15% tax on qualified dividend income. This means that our total returns after tax end up being 6.45%/year. When we calculate the numbers, we end up with $6,708.16 after compounding an initial stake of $1,000 at 6.55%/year over a period of three decades. That’s $904.09 less than the 7% gross annualized returns available to investors during that time period.

You can see that it would be foolish not to take advantage of a tax deferred account such as a Roth IRA. I thoroughly encourage everyone who is able to contribute to a tax-deferred account to do so.

But they do need to speak with a tax professional first, because everyone’s individual circumstances vary.  In my working career, I have tried maxing out all retirement accounts I was eligible for, including but not limited to 401 (k), H S A, SEP IRA, Roth IRA to name a few.

There may be reasons why someone may not be using a retirement account. Some may not be eligible for them because they do not have employment income or they earn too much to contribute to one without having to go through hassles. A small group may not want to deal with retirement accounts, because they do not know enough about them. They also do not want to deal with complications. That may be an expensive lesson that could force them to work longer than needed to reach their goals and objectives. Or they may be just wrong, and choose to remain ignorant out of spite.

Relevant Articles:

- How early retirees can withdraw money from tax-deferred accounts such as 401 (k), IRA & HSA
Use these tools within your control to get rich
Why Holding 100% of Equity Investments in Taxable Accounts is a Mistake
How to buy dividend paying stocks at a 25% discount
Taxable versus Tax-Deferred Accounts for Dividend Investing

Monday, September 19, 2022

Seven Dividend Growth Stocks Rewarding Shareholders With a Raise

I review the list of dividend increases each week, as part of my monitoring process. This exercise allows me to monitor existing holdings, but also to keep in touch with companies that I may want to put on my list for further research.

I look for companies that can grow dividends, because their underlying business generates too much extra cash each year. 

Dividends bring more discipline to the management's investment decision-making. Holding onto profits might lead to excessive executive compensation, sloppy management, and unproductive use of assets. Studies show that the more cash a company keeps, the more likely it is that it will overpay for acquisitions and, in turn, damage shareholder value. In fact, companies that pay dividends tend to be more efficient in their use of capital than similar companies that do not pay dividends. 

I view dividend increases as a good gauge of managements near term business expectations. If a company can continue growing the dividend, that's great and shows that possibly business is going as usual. If a company stops growing dividends or cuts them, I see it as an indication that things are not going as well. There is more nuance to all of that however.

A cautious dividend hike could be an indication of soft business demand or management observing a slowdown down the road. It could also be an indication that the business is more cyclical than management cares to admit.

A dividend increase along a range of outcomes shows me that management expects business as usual, which is something I look at. 

Sometimes, businesses raise dividends fast, which may indicate optimism. A too high of a dividend increase may also show that management is too overconfident however.

Ultimately, a long history of dividend growth is an indication of a quality company with strong competitive advantages which also had a strong tailwinds to propel the business forward. Only a certain type of company can manage to grow the business and raise dividends for at least a decade. In other words, rising dividends are an end result of a great business. Whether that business can continue being great or not depends on a lot of factors. Either way, a strong track record of annual dividend increases, along with a good valuation is enough to make me want to research this business.

During the past week, there were seven companies that managed to raise dividends. All of these companies have managed to grow dividends for at least ten years in a row. The companies include:

Fifth Third Bancorp (FITB) operates as a diversified financial services company in the United States.

The bank hiked quarterly dividends by 10% to $0.33/share. This is the 12th year of consecutive annual dividend increases for this dividend achiever.

During the past decade, the company has managed to increase dividends at an annualized rate of 14.80%. The company did cut dividends during the Global Financial Crisis. Annual dividends per share have still failed to exceed the 2007 highs at $1.70/share.

The stock sells for 9.83 times forward earnings and yields 3.77%.

New Jersey Resources Corporation (NJR), an energy services holding company, provides regulated gas distribution, and retail and wholesale energy services.

The company increased quarterly dividends by 7.60% to $0.39/share.

NJR has paid quarterly dividends continuously since its inception in 1952, and this marks the 29th dividend increase over the last 27 years.

During the past decade, this dividend champion has managed to increase dividends at an annualized rate of 6.60%.

The stock sells for 18.22 times forward earnings and yields 3.24%

Philip Morris International Inc. (PM) operates as a tobacco company working to delivers a smoke-free future and evolving portfolio for the long-term to include products outside of the tobacco and nicotine sector. 

The company increased quarterly dividends by 1.60% to $1.27/share. This is much lower than the ten year rate of annualized dividend growth of 6.10% and the 5 year rate of annualized dividend growth of 3.40%.

The stock sells for 17 times forward earnings and yields 5.32%

Realty Income (O), The Monthly Dividend Company, is an S&P 500 company dedicated to providing stockholders with dependable monthly income. 

Realty Income increased its monthly dividend to $0.2480/share. That's a 0.20% raise over the last quarter, but 5.08% increase over the dividend from this time last year. Over the past decade, the company has managed to grow distributions at an annualized rate of 5%. The 5 year rate is 3.40%

This is the 117th dividend increase since Realty Income's listing on the NYSE in 1994.

The stock sells for 16 times FFO and yields 4.65%.

Texas Instruments Incorporated (TXN) designs, manufactures, and sells semiconductors to electronics designers and manufacturers worldwide. It operates in two segments, Analog and Embedded Processing

The company increased quarterly dividends by 7.80% to $1.24/share. The announcement marks 19 consecutive years of dividend increases for this dividend achiever. Over the past decade, the company has managed to grow distributions at an annualized rate of 22.40%.

The stock sells for 17.27 times forward earnings and yields 3%

U.S. Bancorp (USB) provides various financial services to individuals, businesses, institutional organizations, governmental entities and other financial institutions in the United States. It operates in Corporate and Commercial Banking, Consumer and Business Banking, Wealth Management and Investment Services, Payment Services, and Treasury and Corporate Support segments. 

The bank increased quarterly dividends by 4.30% to $0.48/share. Over the past decade, the company has managed to grow dividends at an annualized rate of 15%. It did cut dividends during the Global Financial Crisis, and has been growing them since. Last year, the annual dividend exceeded the 2008 amounts 

The stock is selling for 10.80 times forward earnings and yields 4.19%.

Farmers & Merchants Bancorp, Inc. (FMAO) operates as the bank holding company for The Farmers & Merchants State Bank that provides commercial banking services to individuals and small businesses in northwest Ohio and northeast Indiana. 

The bank increased quarterly dividends by 10.50% to $0.21/share. This represents the 28th consecutive annual increase in the Company’s regular dividend payment since 1994. Over the past decade, the company managed to grow dividends at an annualized rate of 6.10%.

The stock sells for 10.49 times forward earnings and yields 2.75%. 

Relevant Articles:

- Eight Companies Expected to Raise Dividends in September

Friday, September 16, 2022

What should I do with my Store Capital stock after the acquisition?

The popular REIT Store Capital (STOR) will be acquired by a Private Equity group. As part of the deal, shareholders would receive $32.25/share in cash when the deal closes. This was a 20% premium to the share price from the previous day. (Source: Press Release)

Naturally, a lot of investors were not happy. That's because the REIT is cheap at 14.80 times forward FFO/share and yields 4.80%. A lot of investors bought this REIT with the expectation that it keeps growing FFO/share and dividends per share in the future, and becoming as prominent as Realty Income. Many shareholders feel like they are being robbed of future potential.

Several investors reached out to me, to ask me my opinion on the situation. Naturally, there are a lot of trade-offs involved.

Investors today have several options:

1. Do Nothing

If investors do nothing, they would continue holding on to Store Capital until the deal closes sometime in the first quarter of 2023. Investors would receive the third quarter dividend payment in the amount of $0.385/share, but after that the dividends are suspended. That dividend has not been declared yet.

If investors continue holding, they would receive $32.25/share when the deal closes in Q1, 2023. However, it could take longer for the deal to close, so there is opportunity cost involved with this option. Your money would be tied out in an asset, which would not be paying a dividend in the meantime too.

However, if investors decide to hold, they could also benefit if another suitor comes over and offers a higher price for Store Capital. There is a possibility that someone may offer more. Nothing is guaranteed of course. This is a snippet from the press release:

The definitive merger agreement includes a 30-day “go-shop” period that will expire on October 15, 2022, which permits STORE Capital and its representatives to actively solicit and consider alternative acquisition proposals. There can be no assurance that this process will result in a superior proposal, and the Company does not intend to disclose developments with respect to the go-shop process unless and until it determines such disclosure is appropriate or is otherwise required.

The other thing to consider is taxes. If investors held in a tax-deferred account, then they won't think about timing of taxes. But, if investors held Store Capital in a taxable account, they would owe capital gains taxes if they have a profit on the sale. Deferring that tax payment to 2023 from 2022 may be a better decision from a time value of money perspective. If investors expect to be in a lower tax bracket in 2023 than 2022, it may also make sense to defer from a tax perspective. 

From a tax perspective, it may also make sense to sell next year, if it means that newer investors end up paying taxes at the long-term capital gains rate, rather than the short-term capital gains rate.

If investors decide to do nothing and the deal gets cancelled however, the stock price may go down below the offer price. That may be a short-term pain, but if you believe in the long-term prospects of the business, it may be a blessing in disguise.

From a timing perspective, if the deal goes through as expected and closes at $32.25/share in Q1 2023, investors would do well if stocks in general sell at a lower price then than today. If share prices are higher then than today, then investors would have been better off selling.

2. Sell today

If investors sell today, they would receive an amount that is pretty close to the deal price. There is less than 25 cents/share difference between the offer price and the current price. That money could be allocated somewhere else and pay dividends.

However, investors who sell today would miss out on the third quarter dividend. 

Investors who sell today could also miss out if Store Capital attracts another suitor who is willing to pay more for the stock.

Investors who sell today and hold the stock in a taxable account would owe taxes in 2022 rather than in 2023. If investors sold at a loss however, it may make sense to recognize it earlier in order to get the tax benefit earlier too.

If the deal falls through, investors who sold today may be able to acquire shares in Store Capital at a lower price.

From a timing perspective, if the deal goes through as expected and closes at $32.25/share in Q1 2023, investors would do well if stocks in general sell at a lower price then than today. If share prices are higher then than today, then investors would have been better off selling.


Today, I discussed the various options investors have to deal with the acquisition of Store Capital. They are not financial advice of course. The goal of the post was to show you that every decision involves various trade-offs, and various outcomes on the decision tree.

Popular Posts