Sunday, August 31, 2014

Best Dividend Investing Articles for August 2014

For your weekend reading enjoyment, I have highlighted a few interesting articles from the archives, which I find to be relevant today. The first five articles have been written and posted on this site, while the last four have been selected from other authors. I tend to post anywhere between three to four articles to my site every week. I usually try to write at least one or two articles that contain timeless information concerning dividend investing. This could include information about my strategy, or other pieces of information, which could be useful to dividend investors.
Below, I have highlighted a few articles posted on this site, which many readers have found interesting:

1) 14 Dividend Growth Stocks I Bought On the Dip Last Week

As some companies started declining in price at the beginning of August, I was able to initiate or add to positions in those securities. As I continuously screen a group of companies I am interested in based on price, it is very helpful when those get into the value territory. Overall, August was a busy month for purchases and sales of puts. Unfortunately, I won't be able to allocate more cash to stocks until some time in October. Of course, January's Roth and SEP contributions are just a few months away from there, followed by tax day. Hence, a little bit of cash accumulation might be helpful.

2) Dividend Investing for Financial Independence

I plan on living off dividends in retirement. In this article I discuss numerically, how to reach target monthly dividend income levels. For example if an investor puts $1000/month companies yielding 4% today and achieving a 6% annual dividend growth,and reinvests dividends, their portfolio will generate over $7,900 in annual dividend income in ten years. However, if our investor put away $2000/month in income stocks with the same characteristics as above, they would be achieving $7,900 in annual dividend income only after 72 months.

3) Kinder Morgan to Merge Partnerships into One Company

Kinder Morgan is simplifying its structure, by merging all limited partner interests into the parent company Kinder Morgan Inc (KMI). This move will create an energy powerhouse, which will be able to enjoy benefits of scale, unique geographic position, simplified structure, lower cost of capital and a ready currency for further acquisitions. The combined company is forecasting an increase in the annual dividend to $2/share by 2015 and then a 10% annual dividend growth through 2020. As a shareholder of KMI, I am happy. As a shareholder of KMR, I am happy as well. The unitholders of KMP and EPB will face some immediate tax hits, once the transaction closes. However, I believe that for those who buy and hold, they will do pretty well for themselves if they do not do anything for at least a decade. Now all shareholders and former partners will have the same interests as Richard Kinder, who I believe to be the Warren Buffett of Energy.

4) How to Invest Like Warren Buffett

Buffett has become a billionaire by continuously keeping an open mind for opportunities which will keep paying him for decades to come. All he has done is look for those situations where he can find a quality business, which will earn more in 15 - 20 years, has a low risk of change that will impact profitability, is managed by quality management team and is available at a good price. Of course, Buffett has also been helped immensely by the insurance float generated for Berkshire Hathaway, as well the hedge fund fees he earned in his days of the Buffett Partnership in the 1950s and 1960s. However, as an ordinary investor, I keep most of my energy focused on how I can select companies that generate a lot of cashflows to me, that I can use to then buy more stock in companies that generate more dividends for me.

5) Why Warren Buffett likes Investing in Bank Stocks

I wrote another article on Warren Buffett and why he likes investing in bank stocks. I believe that he likes their deposit float, which is essentially a very low cost of capital, which is pretty stable over time, and could be deployed by able and honest managers into lucrative projects such as mortgage or business loans. Of course, management quality is of utmost importance, which is why he has been adding to shares of Wells Fargo (WFC) in the past couple of decades.

I read a lot about companies, and also read a lot of interesting articles from all over the web. A few that I really enjoyed over the past months include:

1) Warren Buffett's $50 Billion Decision

I often get asked why do I want to "retire" early, given the fact that my "idol" Warren Buffett is 84, and is not even thinking about "retirement". The truth of the matter is that Buffett has been "retired" since 1956. This article from Forbes describes the decision that the Oracle of Omaha did for himself when he was 26 years old. Surprisingly, his retirement gave him the time to pursue his passion of learning and investing. The billions he made as a result of Buffett Partnerships and Berkshire Hathaway were a pretty nice side-gig. Retirement is about being in control of your time, and doing what you love, not about watching soap operas.

2) Weekend Reading – August 29, 2014

Dividend Mantra has compiled several interesting articles on dividend investing, in his weekly review. In addition, his "retirement" seems to be going really well, as he is making thousands of dollars writing about dividends, and he has recently been interviewed by Mint.

3) Weekly Links: August 31, 2014

My friend Dividends4Life has also compiled a list of pretty good articles on dividend investing on his website. I am surprised that not a lot of other readers know about him, given that he has written about dividend investing for over 7 - 8 years and has tracked his dividend numbers for the same period of time. He is a baby boomer who is dilligently working his way towards retirement.

4) Weekly Roundup - August 31, 2014

The Passive Income Earner also has a list of several articles on Dividend Investing. This is another site I read regularly, given that the writer is someone who has been saving and investing huge amounts to kick-start his dividend machine. I also have used his site to find other sites related to dividend investing.

Thank you for reading Dividend Growth Investor site. I am also on Twitter, if you are interested in following me on another platform, where I post about recent trades I have made.

Full Disclosure: Long KMI, KMR, WFC, BRK.B 

Friday, August 29, 2014

Starbucks: The Next Dividend Growth Success Story

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

The most recent dividend increase was in October 2013, when the Board of Directors approved a 23.80% increase in the quarterly dividend to 26 cents/share. The company's main competitors include McDonald's (NYSE:MCD), Nestle (OTCPK:NSRGY) and Dunkin Brands (NASDAQ:DNKN).

Since the company initiated a dividend payment in 2010, the stock has returned 225%. Future returns will be dependent on growth in earnings and dividend yields obtained by shareholders, as well as the initial valuation locked in at the time of investment.

Wednesday, August 27, 2014

Dividend Growth Stocks Are Still Great Acquisition Targets

Imagine that you are the CEO of a major corporation, which is sitting on a lot of cash. You are desperate to find some use for this cash, in order to justify a bigger bonus for yourself, and in order to grow the company you are managing. One of the things you can do is start a new division, invent a new product or try to expand organically. However, this is risky, since there is absolutely no guarantee that the expansion, or the new product will be a success. Another option is to acquire an existing business, which already has the products or services that customers want, is available at a good price, has a unique competitive position, and which also manages to earn a lot of profit s every year, while drowning shareholders in cash. It does seem like a lower risk proposition to acquire that business. Of course, if those managements have the discipline to pay a regular dividend to shareholders, they would have much less money for squandering, which would limit their focus to only the best ideas with the most potential for return on investment. But this is a topic of a whole other article.

The business to be acquired that I just described at a very high level is essentially what most dividend growth companies represent. A business that manages to grow dividends every year for a long time, indicates in many cases a business which manages to earn more profits over time. This is an attractive business to invest in, whether you are an acquirer or an ordinary mom and pop investor, provided valuation is not excessive. Thus, dividend growth stocks make great acquisitions.

In most cases however, shareholders would have been better off simply holding on to the companies they are owning and collecting a growing a stream of dividend checks with the passing of every single year. Unfortunately, many shareholders these days have an extremely short-term holding horizon, which is why they approve of those deals to earn a quick buck, while sacrificing future potential.

This is why I believe that even for long-term passive buy and hold dividend investors, it is highly unlikely that their portfolios will be static over a 20 – 30 year time period. A portfolio of dividend growth stocks selected in 2014 will likely look much different in 2044. Contrary to popular belief however, this is not because of a high failure rate in dividend growth stocks. The reason is because a large portion of dividend growth stocks are indeed attractive acquisition or merger partners. When you are the prettiest girl at the prom, odds are much higher that more than one person will ask you to dance with them. Same is true with those dividend growth stocks, which make excellent merger partners or great acquisitions to tap into. As for failure rates, based on historical research I have conducted, only a small portion of companies fail outright.

When I look at the dividend aristocrats list from 25 years ago, I notice that there are a lot of companies that are no longer here. As I mentioned in the earlier paragraph, this is because a large part of those companies either were acquired or merged. As a passive investor, I seldom sell. However, if the company that acquired my dividend holdings pays me cash for my stock, I will have to dispose of my shares. This is what happened with Anheuser Busch in 2008, when it was acquired for $70/share by InBev. This is also what happened to Rohm & Haas in 2009, when it was acquired by Dow Chemical (DOW). Nowadays, this is what is happening to Family Dollar Stores (FDO), which is being acquired by Dollar Tree for mostly in cash. Only a small portion of acquisition will be paid in stock, thus triggering a taxable event. Because I expected more in taxable income in 2015, that will potentially put me in a higher tax bracket, it made sense for me to sell today, as much as I don’t want to get any tax waste.

Based on my tax situation, it made more sense to sell my Family Dollar holdings in taxable accounts this year. For any tax-deferred accounts, I would simply hold on to the shares I receive, but reinvest the cash I receive in other quality companies selling at attractive valuations. Thus, I am saving on one commission, rather than sell all the stock, then buy another stock. In an essence I am holding in my retirement account, and then when the cash is paid, I can use it to buy other shares. At the same time I will probably keep the Dollar Tree shares, despite the fact that they won’t pay a dividend.

Of course, the issue with selling was that I missed out on the bidding war from Dollar General. The problem is that Dollar General’s offer, while a few dollars per share higher, was all in cash. Whoever acquires Family Dollar, will reward their shareholders tremendously, because they are paying for a great asset with cash that costs very little today. If you add in synergies expected, that deal will result in great returns for Dollar Tree or Dollar General shareholders, depending on who ends up owning Family Dollar stores.

Full Disclosure: Long FDO

Relevant Articles:

Dividend Stocks make great acquisitions
I bought this quality dividend paying stock last week
Dividend Stocks make great acquisitions
Where are the original Dividend Aristocrats now?
1991 Dividend Achievers additions- Where are they now?

Monday, August 25, 2014

Dividend Paying Companies I recently added to my income portfolio

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

I added to my positions in the following companies:

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

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

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

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

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

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

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

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

Relevant Articles:

Warren Buffett Investing Resource Page
14 Dividend Growth Stocks I Bought On the Dip Last Week
How to Invest Like Warren Buffett
Why Warren Buffett purchased Exxon Mobil stock?
I bought this quality dividend paying stock last week

Friday, August 22, 2014

PepsiCo (PEP) Dividend Stock Analysis 2014

PepsiCo, Inc. (NYSE:PEP) manufactures, markets, and sells various foods, snacks, and carbonated and non-carbonated beverages worldwide. The company operates in four divisions: PepsiCo Americas Foods (PAF), PepsiCo Americas Beverages (PAB), PepsiCo Europe, and PepsiCo Asia, Middle East and Africa (AMEA). The company is a dividend champion, which has increased distributions for 42 years in a row. PepsiCo is also one of the 60 companies, which could be purchased commission-free using Loyal3, with as little as $10.

The most recent dividend increase was in May 2014, when the Board of Directors approved a 15.40% increase in the quarterly dividend to 65.50 cents/share. PepsiCo's largest competitors include Coca Cola (NYSE:KO) and Dr Pepper Snapple Group (NYSE:DPS).

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

Wednesday, August 20, 2014

How to Invest Like Warren Buffett

Warren Buffett is the most successful stock investor in the world. He made his first $20 million dollars by running a hedge-fund like investment partnership in the 1950’s and 1960’s. However, if he hadn’t changed his investing habits from being a pure value investor to being influenced by Charlie Munger and Phillip Fisher, he would not have been as successful as he is today. Buffett’s earlier cigar-butt investments produced large gains initially, but then he had to do more research in order to find more value investments, and reinvest his money. What he learned from See’s Candies, Berkshire’s Insurance Operations and Newspapers however, shaped the way Buffett invests. By using his investing acumen to identify these superb businesses, his company managed to earn a recurring stream of profits for years to come.

The best lesson that Warren learned happened when he purchased See’s Candies for 25 million dollars in the 1970’s. The business had a strong brand, which was synonymous with quality, and had a loyal customer base. The strong competitive advantages of the business helped it maintain pricing power, and slowly boost prices to consumers over time. When competitors tried to emulate its packaging in order to steal market share, they were sued by See’s and promptly had to stop doing that. At the same time the business did not need to reinvest a substantial portion of earnings in order to increase sales over time. As a result, the business has generated over a billion dollars for the forty years that Berkshire Hathaway (BRK.B) has owned it. In effect, the business has paid for itself almost 50 times over.

The other businesses that Buffett purchased included newspaper and insurance companies. At the time, newspapers had strong competitive advantages in metropolitan areas, which allowed them to serve as the only local exchange of information, services and goods in a given city. All of these businesses were flush with cash, and were spitting excess free cash flows every quarter. They also had strong competitive advantages, and didn’t need all of their profits to be reinvested back in the business in order for it to grow. Unlike the cigar-butt investments that Buffett made earlier in his career, the companies with competitive advantages managed to deliver returns for years to come, rather than deliver a one-time return and then nothing.

Buffett then used the free cash flows from these businesses to purchase more income streams that generated more excess cash flows. This is very similar to what dividend investors in the accumulation phase are doing. They design a dividend portfolio, and then use dividends received in order to purchase more shares of other attractively valued companies. As a result, I have long argued that Buffett is a closet dividend investor. If you read his letters to shareholders closely, one would notice that he keeps reiterating how Berkshire Hathaway’s investments keep producing excess cashflows of staggering amounts every month.

In fact, dividend investors can essentially emulate Buffett’s style by creating their own mini-Berkshire’s using dividend growth stocks purchased at attractive valuations. Some of the most widely-held dividend stocks to serve this purpose include:

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 increased dividends for 38 years in a row. The company has a 10 year average dividend growth rate of 22.80%/annum. Currently, the stock is selling for 17 times forward earnings and yields 3.20%. Check my analysis of McDonald's.

Wal-Mart Stores Inc. (WMT) operates retail stores in various formats worldwide. This dividend champion has increased dividends for 41 years in a row. The company has a 10 year average dividend growth rate of 18%/annum. Currently, the stock is selling for 14.80 times forward earnings and yields 2.50%. Check my analysis of Wal-Mart Stores.

Philip Morris International Inc. (PM), through its subsidiaries, manufactures and sells cigarettes and other tobacco products. This dividend stock has increased dividends for 6 years in a row. The company has a five year average dividend growth rate of 14%/annum. Currently, the stock is selling for 16.50 times forward earnings and yields 4.10%. Check my analysis of PMI.

International Business Machines Corporation (IBM) provides information technology (IT) products and services worldwide. This dividend achiever has increased dividends for 19 years in a row. The company has a 10 year average dividend growth rate of 19.40%/annum. Currently, the stock is selling for 10.60 times forward earnings and yields 2.40%. Check my analysis of IBM.

Exxon Mobil Corporation (XOM) explores and produces for crude oil and natural gas. This dividend champion has increased dividends for 32 years in a row. The company has a 10 year average dividend growth rate of 9.60%/annum. Currently, the stock is selling for 12.80 times forward earnings and yields 2.70%. Check my analysis of Exxon Mobil.

Full Disclosure: Long MCD, KO, WMT, PM, IBM and 1 share of BRK.B

Relevant Articles:

What Attracted Warren Buffett to IBM?
Warren Buffett is now working for me
Why Warren Buffett purchased Exxon Mobil stock?
Warren Buffett Investing Resource Page
How Warren Buffett built his fortune

Monday, August 18, 2014

Kinder Morgan Limited Partners Could Face Steep Tax Bills

As I touched upon earlier last week, Kinder Morgan is trying to combine all companies under a C-Corp corporate umbrella of Kinder Morgan Inc (KMI). The shareholders of Kinder Morgan Management LLC (KMR) will receive shares of Kinder Morgan Inc, which would not be a taxable event for them. Unitholders in Kinder Morgan Energy Partners (KMP) and El Paso Pipeline Partners (EPB) will receive cash and Kinder Morgan Inc shares in exchange for their units.  This will create a taxable event for limited partners.

Typically, when you purchase units in a master limited partnership, most of initial distributions are treated as a return of capital. Those do not result in a taxable income for the year, but they decrease the cost basis of the unitholder. Once the cost basis reaches zero, the distributions are taxed at long-term capital gains rates. If the unitholder passes away, their children receive a step up basis in the units.

Is your head spinning yet? Basically, if you purchased Kinder Morgan Energy Partners (KMP) at the end of 2002 for about $35, you would have received $46.30 in distributions since then. The first $35 in distributions would have been treated as a return of capital and therefore been non-taxable in the year received. However, they would be tax-deferred only, since a sale would have triggered a taxable event and those would have been payable at ordinary income taxes. The next $11.30 in distributions received would have been treated as long-term capital gains, which receive preferential tax treatment.

If our limited partner decided to sell at $95 today, they would essentially have a long-term capital gain of $60/unit and an ordinary gain of $35/unit. The long-term capital gain will be taxed at 15% for most unitholders, and will result in tax of $9. The ordinary income gain of $35 would be taxable at ordinary income tax rates. Let’s say you were married, and both you and your spouse were in the 25% tax bracket. This would mean that you owe $8.75 in tax on that depreciation recapture. So in total, our limited partner would owe tax of $17.75.

Unfortunately, for those limited partners of Kinder Morgan Energy Partners and El Paso Energy Partners, the acquisition by Kinder Morgan Inc could result in triggering of tax liabilities.

When you sell your units for cash or have them exchanged into shares of Kinder Morgan, this creates a taxable event. In essence, the act of exchanging your Kinder Morgan Energy Partners units for Kinder Morgan Inc stock is treated as if you sold your units for cash. Therefore, a tax is due on all recaptured depreciation at ordinary income tax rates, and at long-term capital gains rates for anything in excess of the purchase price and value received at the time of conversion to corporation. On the bright side of course, if you received $95 in Kinder Morgan shares for your Kinder Morgan Energy Units worth $95, your basis in the shares will be $95. However, now I see why Kinder Morgan decided to offer cash to unitholders. Most will need that cash to pay their taxes on deferred gains.

Of course, you didn’t buy Kinder Morgan Partnership Units just for the tax benefits, did you? You bought Kinder Morgan because you believe in management, you believe you are getting in at a good price, and you believe that in the future the business will be able to generate more cash and pay more back to you. If you choose to hold onto your Kinder Morgan shares however, projections are for dividends to increase by 10%/year through 2020, which is not a bad rate of growth, considering the already high yield on the stock. I like that the incentives of shareholders are aligned with those of the main shareholder Richard Kinder, who i believe to be The Warren Buffett of Energy.

The acquisition of limited partnerships will increase the basis in pipeline and other fixed assets that Kinder Morgan Inc will now own. Kinder Morgan will get to depreciate those assets as if they were brand new assets. As a result, there will be $20 billion in tax savings from the proposed deal. In addition, the structure will be more streamlined, will have lower cost of capital because there won’t be those incentive distribution rights any more.

The lower cost of capital would mean that projects will generate more money right away, and the company would not have to dilute existing holders, because it sells too many units to grow. Retaining some cash flow for funding growth seems like a smart strategy. The company still needs growth projects in order to generate growth to pay for higher distributions down the road of course. Now with a single entity like Kinder Morgan Inc, it could use its stock as currency for further acquisitions. Given the track record of Richard Kinder, I am confident that he would be able to integrate any acquired companies into the Kinder Morgan umbrella quite successfully, while realizing synergies, higher profits for shareholders.

Full Disclosure: Long KMR and KMI

Relevant Articles:

Kinder Morgan to Merge Partnerships into One Company
Richard Kinder: The Warren Buffett of Energy
Kinder Morgan Partners (KMP) for High Yield and Solid Distributions Growth
Kinder Morgan Partners – One Company three ways to invest in it
General vs Limited Partners in MLP's
Master Limited Partnerships (MLPs) – an island of opportunity for dividend investors

Friday, August 15, 2014

Procter & Gamble (PG) Dividend Stock Analysis 2014

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

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

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

The company has managed to deliver 7.60% average increase in annual EPS over the past decade. Procter & Gamble is expected to earn $4.20 per share in 2014 and $4.52 per share in 2015. In comparison, the company earned $3.86/share in 2013.

Procter & Gamble also has managed to reduce number of shares outstanding. Since the acquisition of Gillette closed in 2006, the number of shares declined from 3,286 million to 2,894 million.

The company strives to generate cost savings, tries to grow through innovation and through acquisitions, while carefully managing the cash flow in order to pay dividends and buy back stock consistently. Procter & Gamble is targeting earnings per share growth in the high single to low double digits, which should not be difficult to achieve given the fact that it is offering products that results in repeat sales by consumers. The growth in emerging market economies is a great opportunity for consumer giants like Procter & Gamble.

Procter & Gamble's long-term strategic goals also include growing organic sales at one or two percentage points faster than market growth in the markets in which the company competes. Those are formidable goals, given the fact that Procter & Gamble is so huge.

The company offers a broad scope of products for every consumer at different price points, and has a sizeable distribution network, which enables it to have a global geographic reach. The company invests in innovation, has a broad portfolio of products and strengths in emerging markets. Procter & Gamble also owns strong brand names, which allow it to maintain pricing power, in order to be able to pass price increases to consumers. The company is the leader is segments such as blades and razors, feminine care, baby products.

The sheer scale of its massive operations and broad geographic reach ensure that the company is able to generate consistent revenue streams. The scale, diversify of products, being a leader in most of your categories and global reach are a definite advantage, which is why I believe the company to have a wide moat. When you have scale, per unit costs for your products are lower than competitors.

Procter & Gamble is going through a $10 billion cost savings program, which would boost earnings. The savings would be realized through elimination of overhead positions, reducing packaging costs, increasing focus on digital advertising at the expense of print as well as squeezing out inefficiencies.

The company might have stumbled as of the past few years, as evident by the lack of earnings per share growth since 2008. The company lost a little bit of focus, and needs to keep driving innovation and win more consumers to engage in repeated purchases of its products. The risk to it includes consumers looking for more value, and switching to cheaper alternatives. As the economic recovery from the Great Recession accelerates however, I believe that consumer spending should be able to find its way to branded products that companies like Procter & Gamble offer.

The annual dividend payment has increased by 10.80% per year over the past decade, which is higher than the growth in EPS.

An 11% growth in distributions translates into the dividend payment doubling every six and a half years on average. If we check the dividend history, going as far back as 1970, we could see that Procter & Gamble has actually managed to double dividends every five years on average.

In the past decade, the dividend payout ratio increased from 40% in 2004 to a high of 68.60% in 2012, before decreasing to 59.30. 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 return on equity has decreased from 45.70% in 2005 to 17.10% in 2013. The decrease occurred after the acquisition of Gillette in 2005. After that, this indicator has bee generally stable. Rather than focus on absolute values for this indicator, I generally want to see at least a stable return on equity over time.

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

Wednesday, August 13, 2014

Dividend Investing for Financial Independence

There are millions of Baby-Boomers in the US. Every day, thousands of them retire from the workforce. Most will rely on a mix of social security, company pensions and personal assets for income in their golden years. Fewer employers are offering traditional pensions these days however, and the future of the Social Security system is not as sound as it once was. Depending on who you listen to, Social Security system would either run out of money in 35 years or will be able to continue paying benefits, albeit at a deeply reduced rate. For many investors outside the Baby Boomer generation, the realization is that they would have to provide for their own retirement, and not rely on employers or the government.

The tools that there investors can leverage in order to reach their financial independence goals include time, compounding, capital and smart investing.

One investment strategy that can provide for your own investing is investing in dividend paying stocks. By creating a portfolio that consists of dividend paying stocks, an investor generates income that is paid to them at predictable intervals of time. Having a stream of income deposited in your brokerage account every month or every quarter makes budgeting much easier, and living off dividends a no brainer solution.

I view every dollar I can save as a dollar that can generate income for life. Let’s assume that this dollar is invested in a dividend stock that yields 4%, grows distributions and stock price by 6% annually. After ten years, this dollar will generate 7.16 cents in income, which will increase to 12.80 cents by year 20. In 30 years, this dollar will be generating almost 23 cents in annual income. If distributions are reinvested however, the dollar will be generating 10 cents, 26.70 cents and 71 cents in the next 10, 20 and 30 year periods. One cannot retire on a single dollar alone, but if you keep adding dollars to your investment portfolio and let them compound through dividend reinvestment, our investor can afford to generate enough income to retire.

These dollars need to be invested by designing and creating a diversified dividend portfolio that consists of at least 30 individual stocks. The portfolio should have representation from as many industries that make sense at the time of implementation. This portfolio should focus on dividend growth stocks, which are companies that have a history of regular dividend increases. A company that regularly increases dividends essentially provides investors with a stream of income that keeps its purchasing power over time. Compared to interest income, dividend income looks like a clear winner for preserving purchasing power from inflation.

The element of time is another crucial element in achieving financial independence with dividend paying stocks. Depending on the amount of capital invested initially, as well as the amount of capital added each month, a portfolio would require differing amounts of time to compound before a sustainable amount of income is generated. The portfolio would need more time to compound investment dollars in order to reach the target monthly dividend income if the amount of capital added is not high enough. However, if the amount of capital added to it is large enough, the time needed to reach the monthly income targets would be greatly reduced.

For example, let’s assume that an investor puts $1000/month in the stocks yielding 4% today and achieving a 6% annual dividend growth. If dividends are reinvested, the portfolio will generate over $7,900 in annual dividend income in ten years. However, if our investor put away $2000/month in income stocks with the same characteristics as above, they would be achieving $7,900 in annual dividend income only after 72 months.

Besides diversification and power of compounding, another crucially important factor to building a successful dividend portfolio is stock valuation. Just like a house is composed of many bricks, placed one by one, a portfolio is comprised of many individual stocks which are the building blocks that provide support behind the portfolio. If one or a few companies in a concentrated sector bet crumbles during a recession, it could potentially destroy the whole structure. Having a strong foundation would protect investors’ income portfolios in the event of dividend cuts or eliminations as a result of unfavorable business conditions. Each dividend stock in a portfolio should thus have to be carefully chosen, and should be purchased only at attractive valuations. Purchasing shares when they are cheap maximizes price gains and dividend income for shareholders over time. This further turbocharges the compounding in income stream growth over time. I typically look for companies that have raised dividends for over 10 years, that trade at less than 20 times earnings, have a dividend payout ratio of less than 60% and which yield at least 2.50%. For Master Limited Partnerships and Real Estate Investment Trusts however, the only differences related to how I calculate payout ratios and what minimum yield requirements I selected.

A few companies which are attractively valued today include:
10 yr DG











Full Disclosure: Long ADM, AFL, CB, CVX, JNJ, MCD, MMM, WMT, XOM

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