Monday, October 27, 2014

Dividends Make Investing Easier During Market Declines

The past two weeks have been characterized by declines in stock prices. Many were speculating whether this decline is the beginning of a new bear market, or whether it was a sign that the US economy is heading into a recession. As I discussed in a previous article, I choose to ignore that noise, and stick to my simple long-term investing. It is during turbulent times, that I realize how much easier it is to keep a simple investment strategy that produces steady ( and growing) cash flow that goes directly to my bottom line.

For example, I used the cash produced by my income portfolio over the preceding few weeks to buy more shares. I also bought some shares in ConocoPhillips (COP) last week and just purchased some shares of IBM (IBM) as well. The fact is, I receive my dividend checks whether the stock market falls by 10% or rises by 10%. I will still receive them even if they closed the stock market for 10 years. Since I am in the accumulation phase, I reinvest all dividends into more dividend paying stocks each month. In addition, I am also able to save money from my day job, and use it to further build up my Dividend Growth Machine. As a passive investor with a long-term holding period, I have found that having a demanding career is helpful to keep me engaged. This helps because it prevents me from hearing noise about stocks, which would create an urge to do something. As we discussed last week, to be successful in investing, you have to have a set it and forget type of mentality where you let compounding to the heavy lifting for you. Worrying about ticks in unemployment, economy, Dow Jones Industrial s average is usually a recipe to do something stupid, such as panicking and selling when everyone else is selling. The other positive part of having a career is that I receive cash to deploy and invest.

Building wealth is really simple – get a job, save money, and then invest savings wisely. I invest my funds as if I would never ever be able to earn another penny, which is why I try to be a conservative income investor. This is a boring, slow and steady way, but if I methodically invest and compound my dividends, I know I will do reasonably well in 10, 20, 30 years.

The fact that I receive cash from the companies I own to deploy on a periodic basis is the fundamental strength of dividend investing. During a dip in stock prices, I can put that to work at more attractive valuations. If I needed retirement income which is predictable in amount and timing, my dividend checks satisfy both needs.

The things are getting better of course, when companies I own decide they have earned so much money, that they can now afford to not only pay me a dividend, but also to increase it for another consecutive year. I typically look for companies with long histories of consecutive dividend increases, because I have found that this is usually an indicator of a strong business with strong fundamentals. I do analyze companies in detail however before deciding if I want to buy their shares. In addition, I also try to follow a few basic valuation guidelines, in order to determine if share prices are attractive or not.

In the past week, several companies which I own, announced their intent to reward me with higher dividend payments.

Abbvie (ABBV) discovers, develops, manufactures, and sells pharmaceutical products worldwide. The company raised its quarterly dividend by 17% to 49 cents/share. In addition, the company approved $5 billion share buyback, after it scrapped its acquisition plan of Shire (SHPG). This was the second dividend increase for the company, since the split of Abbott Laboratories (ABT) into two companies. Given the fact that the company is expected to earn $4.06/share for the year ending December 2015, this puts the payout ratio at an adequate 48.30% and valuation of a forward 15 times earnings and an yield of 3.30%. Abbvie generates a large portion of sales from the drug Humira, which is scheduled to go off patent later in the decade. At this time I do not plan on adding to my position there, although I would keep holding, and allocating those dividends elsewhere.

Visa (V) operates as a retail electronic payments network worldwide. The company raised its quarterly dividends by 20% to 48 cents/share. This is the sixth consecutive dividend increase for the company which went public in 2008. The new dividend payment is 4.5 times larger than the initial payment of $0.105/share. The new yield is 0.90%, and the forward P/E ratio is 20.60 times FY 2015 earnings. The only reason to invest in Visa is if you believe that the company can maintain growing earnings per share by at least 15% for the next five years, and then by at least 10% for the subsequent 5- 10 years after that. This could translate into high dividend per share growth, and potential yields on cost that double every five years and come with massive capital gains in the process. Check my analysis of Visa on Seeking Alpha.

ONEOK Inc (OKE), which is the general partner of ONEOK Partners (OKS), raised its quarterly dividend to 59 cents/share. The forward yield on new shares is 3.90%. At the same time, ONEOK Partners (OKS) increased its quarterly distribution to 77.50 cents/unit, which is an increase of 6.90% over the same period in 2013. The forward yield is 5.80%. I sold most of my partnership units last week and purchased shares of the general partner with the proceeds. Based on my analysis of the situation, it almost always makes sense for a long-term investor to hold the general partnership shares, than the limited partnership units. ONEOK Inc is a dividend achiever, which has managed to boost distributions for 12 years in a row. It has a ten year dividend growth rate of 15.70%/year. ONEOK Partners on the other hand has increased distributions for 9 years in a row, and has a ten year dividend growth rate of only 6%/year.  I believe that yields on cost on an investment in ONEOK Inc (OKE) today could surpass the yield on cost in ONEOK Partners (OKS) in approximately five years. In addition, those shares could deliver higher total returns than the limited partnership units. That being said, I am keeping a minor position in ONEOK Partners in my retirement account, because the amount allocated to it is so small, the commissions to buy and sell are high at $7.95, which makes it not worth making a change at this time.

In addition, two other dividend champions continued their streak of regular dividend increases as well. Those included:

V.F. Corporation (VFC) designs, manufactures, or sources from independent contractors various apparel and footwear products primarily in the United States and Europe. This dividend champion raised its quarterly distributions by 21.90% to 32 cents/share. This marked the 42nd consecutive annual dividend increase for V.F. Corporation. The company has managed to increase annual dividends by 13.70%/year in the past decade. The stock sells for 21.50 times forward earnings and yields 1.90%

Parker-Hannifin Corporation (PH) manufactures and sells motion and control technologies and systems for various mobile, industrial, and aerospace markets worldwide. This dividend king raised its quarterly distributions by 31.25% to 63 cents/share. This marked the 59th consecutive annual dividend increase for Parker-Hannifin. The company has managed to increase annual dividends by 13.40%/year in the past decade. The stock sells for 15.20 times forward earnings and yields 2.20%.

Full Disclosure Long COP, IBM, OKE, OKS, ABBV, ABT

Relevant Articles:

- Dividend Champions - The Best List for Dividend Investors
The importance of yield on cost
Dividend Investors Will Make Money Even if the Stock Market Closed for Ten Years
Time in the market is more important than timing the market
Top Dividend Growth Stocks of the past decade

1 comment:

  1. Hi Tim. Was wondering if you had a minimum yield which you require in order to purchase. I thought about IBM but current yield is below my 3 to 3.5% threshold. Thanks. Tim B.

    ReplyDelete

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