Friday, November 22, 2013

What to do about those rising stock prices?

In the past week, I have dipped into my savings pool, and have also dipped into my margin by buying more Target (TGT). I was also thinking of buying more Exxon Mobil (XOM) and General Mills (GIS), but I stopped myself. Given the fact that Warren Buffett announced he had amassed a large position in Exxon Mobil, it was a good idea to just wait for the initial euphoria to calm down a little.

I realized that I need to replenish my savings pool, which should have 3 – 6 months of savings in cash. I also need to plan for my SEP IRA contribution in 2014, plus any estimated taxes I would owe for 2013. The SEP IRA is part of my plan to cut tax expenses as much as I can. As part of this tax minimization strategy, I am also funding a Roth each year. My funding for 2013 is complete, and I just finished up building the allocation for 2013 this week.

As a result, I should really not make much in terms of stock investments at least until early 2014. I have a put on Coca-Cola (KO) that I sold a few months, which could result in some cash outlay if exercised in January 2014.

I still am finding some value, like in the case of Target, Exxon Mobil and General Mills, where I would like to build out a decent sized position. I guess I would have to wait, which could probably mean that I face an above average risk of missing out if they keep going higher. Incidentally, my top two holdings are also attractively valued at the moment - Kinder Morgan Inc (KMI) and Philip Morris International (PM). Unfortunately, I have too much allocated to them already, which means I would have to hold off on adding to my positions there.

Target Corporation (TGT) operates general merchandise stores in the United States. This dividend champion has rewarded shareholders with higher dividends for 46 years in a row. Over the past decade, Target has managed to raise dividends by 18.60%/year. Currently, the stock is attractively valued at 16 times earnings and yields 2.60%. Check my analysis of Target for more details.

Exxon Mobil Corporation (XOM) engages in the exploration and production of crude oil and natural gas, and manufacture of petroleum products. This dividend champion has rewarded shareholders with higher dividends for 31 years in a row. Over the past decade, Exxon Mobil has managed to raise dividends by 9%/year. In addition, Exxon Mobil is one of the largest and most consistent share buyback programs in Corporate America. Between 2003 and 2013, the number of shares decreased from 6.66 billion to 4.64 billion. Currently, the stock is attractively valued at 12.50 times earnings and yields 2.60%. If you can wait until you get slightly better entry prices after the enthusiasm from Warren Buffett's recent purchase wanes, you might get better entry yields at 2.80% or so ( equivalent to a $90/share price). Check my analysis of Exxon Mobil for more details.

General Mills, Inc. (GIS) produces and markets branded consumer foods in the United States and internationally. This dividend achiever has rewarded shareholders with higher dividends for 10 years in a row. Over the past decade, General Mills has managed to raise dividends by 8.70%/year. Currently, the stock is attractively valued at 17.50 times forward earnings and yields 3%. Check my analysis of General Mills for more details.

The relentless rise in stock prices since 2009 have conditioned me to think that prices would only keep going up. As a result, I am, fearful that if I do not put money in stocks as soon as possible and keep cash instead, I am going to miss out. In reality, I need to step back for a couple months, and reassess the situation as an impartial observer.

This is not a call on the general levels in stock prices, as I do not know where they are going. It is mostly an observation which is specific to my own situation. I need to have cash on hand, since emergencies happen. Of course, I might still wake up one day and buy something if I find a compelling value, like I did with IBM last month.

If stock prices declined by 20% in the next month, I would likely be unable to participate fully in purchasing cheaper securities. However, if these stocks kept steady from there or falling further, I would be able to get a higher number of shares using the money I receive from various sources each month ( salary and dividends to name a few). Therefore, I do not believe I need a 30% allocation to fixed income or cash, merely as a tool to buy shares in case they drop in values. My disciplined strategy of buying stocks every month works wonderfully on the way down. It also works on the way up as well, as long as there is value to be uncovered.

My portfolio allocation is entirely in common stocks, with less than 1% in fixed income equivalents like CD’s. I definitely need to have some fixed income allocation, but current yields are making this a foolish proposition. There is absolutely no place to go if you have cash, other than investing in businesses and real estate, which pay distributions to income starved investors. That being said, having some cash on hand can be helpful in case of emergencies. Luckily, all of my investments generate cash flow, which is deposited into my central cash account. As a result, if I did absolutely nothing for 1 year, my cash from dividend payments would increase to 3 – 3.5% of portfolio value by end of 2014.

In conclusion, I plan on accumulating some cash in my accounts, in order to work on rebuilding emergency funds, saving up the amount for 2013 Sep IRA, and potentially buying up options that could be exercised. This means I might not buy more stocks in December and maybe even January, unless i see some compelling values. The great thing about being a dividend investor in quality companies is that you can afford to sit on your portfolio and do absolutely nothing, while it pumps out cold hard cash into your account every week, month, quarter, year.

Full Disclosure: Long TGT, XOM, GIS

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