Monday, October 6, 2014

Ten Dividend Seeds I Planted for Long Term Income

My favorite saying is the following: The best time to plant a tree was 20 years ago. The second best time is today.

This saying illustrates the power of compounding in a simple way, which is very easy to understand by anyone. You do not need to be a Math Whiz to understand that a small seed can turn into a mighty oak, provided you allow it enough time to grow and deliver the shade under which you can rest.

I see myself as a someone who plants seeds today, and expects that a few of them would turn into mighty oaks. The seeds I am planting represent money I invest in solid blue chip dividend payers, which are available at attractive valuations. Those companies will compound my dividend income, and I will further magnify this effect by strategically reinvesting those dividends into shares of more quality companies, paying me more in dividend income. When you set up a dividend stream, the first few dividend payments start out small. Later on however, as you keep putting more money to work for you, and as those growing dividends are reinvested, the dividend starts snowballing into a very tangible amount that is very noticeable. After 7 years of savings and investing in dividend paying stocks, I believe I am close to reaching the critical mass, after which the dividend snowball starts rolling exponentially. What can I say, I like letting my capital work hard for me in quality dividend paying companies I own, and pay me rising dividends, rather than me having to work hard. By leveraging creativity and effort of those people working in the companies I own, I am essentially buying time.

Share prices are finally starting to go down, which makes me salivate, because I like averaging down my cost basis. I was fortunate to be able to save some money, and put them to work in the following dividend paying companies.

Aflac (AFL) provides supplemental health and life insurance products. It operates through two segments, Aflac Japan and Aflac U.S. This dividend champion has managed to boost distributions for 31 consecutive years. The company has managed to increase those dividends at a rate of 8.10%/year in the past five years. Currently, the stock sells for 9.30 times forward earnings and an yield of 2.60%. Check my analysis of Aflac.

Baxter International Inc. (BAX) develops, manufactures, and markets products for people with hemophilia, immune disorders, infectious diseases, kidney diseases, trauma, and other chronic and acute medical conditions. This dividend growth company has managed to boost distributions for 8 consecutive years. The company has managed to increase those dividends at a rate of 16.40%/year in the past five years. Currently, the stock sells for 14.10 times forward earnings and an yield of 2.90%. Check my analysis of Baxter.

The Chubb Corporation (CB), through its subsidiaries, provides property and casualty insurance to businesses and individuals. This dividend champion has managed to boost distributions for 32 consecutive years. The company has managed to increase those dividends at a rate of 6.20%/year in the past five years. Currently, the stock sells for 13.20 times forward earnings and an yield of 2.20%. Given the fact that Chubb consistently buys back shares, the decline in the stock price is actually good for earnings per share. Check my analysis of Chubb.

ConocoPhillips (COP) explores for, develops, and produces crude oil, bitumen, natural gas, liquefied natural gas, and natural gas liquids worldwide. This dividend achiever has managed to boost distributions for 14 consecutive years. The company has managed to increase those dividends at a rate of 13.30%/year in the past five years. Currently, the stock sells for 11.60 times forward earnings and an yield of 3.90%. Check my analysis of ConocoPhillips.

Deere & Company (DE), together with its subsidiaries, manufactures and distributes agriculture and turf, and construction and forestry equipment worldwide. This dividend achiever has managed to boost distributions for 11 years in a row. The five year dividend growth rate is 13.40%/year. Currently, this cyclical company sells for 9.80 times estimated current year’s earnings, and yields 2.90%. However, it is possible that shares appear cheaper than they should be, because I am buying them at the top of the cycle, when earnings are highest. The company is expected to earn much lower profits in the year after, leading to a still cheap 12.20 times forward 2015 earnings. Either way, of the ten companies listed here, this one is the lowest conviction for me. My next purchase would likely be on dips to price levels close to $60 - $70/share. Check my analysis of Deere.

Diageo plc (DEO) manufactures and distributes premium drinks. This international dividend achiever has managed to raise distributions for over 15 years. The company has managed to increase those dividends in local currency at a rate of 5.80%/year in the past decade. Currently, the stock sells for 16.90 times forward earnings and an yield of 3.10%. It is much cheaper than Brown Forman (BF/B), which sells for 26.60 times forward earnings. Check my analysis of Diageo.

Eaton Corporation plc (ETN) operates as a power management company worldwide. This dividend paying company has managed to boost distributions for 5 consecutive years. The company has managed to increase those dividends at a rate of 10.90%/year in the past five years. Currently, the stock sells for 13.80 times forward earnings and an yield of 3.10%. Check my analysis of Eaton on Seeking Alpha.

Exxon Mobil Corporation (XOM) explores and produces for crude oil and natural gas. This dividend champion has managed to boost distributions for 32 consecutive years. The company has managed to increase those dividends at a rate of 9.70%/year in the past five years. Currently, the stock sells for 12.20 times forward earnings and an yield of 3%. Given the fact that Exxon Mobil consistently buys back shares, the decline in the stock price is actually good for earnings per share. Check my analysis of Exxon Mobil.

General Mills, Inc. (GIS) manufactures and markets branded consumer foods in the United States and internationally. This dividend achiever has managed to boost distributions for 11 consecutive years. The company has managed to increase those dividends at a rate of 11.50%/year in the past five years. Currently, the stock sells for 16.90 times forward earnings and an yield of 3.30%. Check my analysis of General Mills.

Philip Morris International Inc.(PM), through its subsidiaries, manufactures and sells cigarettes and other tobacco products. This dividend paying company has managed to boost distributions for 6 consecutive years. The company has managed to increase those dividends at a rate of 11.70%/year in the past five years. Currently, the stock sells for 16.50 times forward earnings and an yield of 4.80%. Check my analysis of Philip Morris International.

After these purchases, I would likely not be able to add more to my taxable accounts until sometime in November. I am probably going to get aggressive early in 2015, and try to max out any retirement accounts in the first half of the year. Let’s see how this unfolds.

I am also continuing to question most of the major expenses I have. I see myself as a corporation, whose primary asset is my earning power for now. If I can stretch that as much as possible, through careful tax planning, cutting expenses without sacrificing quality of service, and setting up more passive income streams from my dividend portfolio, I will do fine.

Full Disclosure: I have a position in all companies mentioned ( duh)

Relevant Articles:

The importance of investing for retirement as early as possible
Five Dividend Paying Companies with Consistent Share Buybacks
Dividend Growth Stocks are Compounding Machines
Let dividends do the heavy lifting for your retirement
Dividend Investors Will Make Money Even if the Stock Market Closed for Ten Years

13 comments:

  1. Nice choices. I like BAX and XOM myself, and hope to add to BAX within a month or two. XOM would be a new position, but hope to see it in my portfolio someday.

    ReplyDelete
  2. How does one search your blog for topics you may have already written about? I want to know what you think about stock buyback vs dividends.

    ReplyDelete
  3. Love the title. When buying dividend stocks it is exactly like planting seeds for reaping future fruits. Thanks for sharing this article. I happen to own many of the names you mention above as my long term core holdings.

    ReplyDelete
  4. I hold PM, XOM, COP, CVX, AFL and over 20 others. we have been doing the same thing as you for last 16 years.

    ReplyDelete
  5. I just bought some xom as well. Bought around 94.50, could have got it lower but I don't think that will matter much in 20 years. I've never done the fundamentals for Eaton but I do use their products all the time. They make good electrical panels readily available at HD and most electrical supply houses.

    ReplyDelete
  6. Love the quote, as it just affirms that you shouldn't keep waiting to invest; today's the day. Great group of companies. I'm slowly investing in COP and XOM right now, along with about 12 others. I'd really like to get DE and AFL soon, but we shall see how the market does for the rest of 14.

    ReplyDelete
  7. Like the commenter above, I'd like to hear what you have to say on the debate of dividends vs buybacks, especially as it relates to XOM. I've looked at AFL before, but have always been cautious after reading articles about the currency issues with regards to their business in Japan.

    ReplyDelete
  8. He does talk about stock buybacks vs dividends. You just have to read the article and follow the links in it. It is that easy

    ReplyDelete
  9. Great list. I am happy to own several stocks on this list. All ten are great buy and hold companies and willvserve any dividend investor well over the long run. I have not monitored BAX closely, but I will now add it to my watch list. It is one of those non sexy dividend growth stocks, which are my favorite. Thanks for taking the time to compile the list!

    Bert, One of the Dividend Diplomats

    ReplyDelete
  10. Nice article. I am long AFL, BAX, XOM, & GIS. Added to BAX this week.

    ReplyDelete
  11. Very nice! Im certainly planting the seeds today as you put it, and 20 years ago I wasn't old enough, so today sounds pretty good :) Looking to make a purchase sometime this month and watching a few companies and if they drop a good two percent more I'll probably pick one up.

    ReplyDelete
  12. I see you also spotted John Deere, as I did years ago too. They are still true to John Deere's original quality philosophy which makes them growing consistently. You seem to have a similar uncanny knack like Warren Buffet ...

    ReplyDelete
  13. I've been a DG investor for many years. I retired two years ago at age 68.

    Since I don't have to sell anything to make up the income to live on, the move to retirement was smooth as could be.

    If I had to give any advice it would be to limit the tax-sheltered investments. It's very enticing when you are investing but could become a big problem when you retire and start withdrawing.

    At some point the required withdrawal will be greater than your income less what you use for living expenses. Then you have a problem of what to do.

    During the recession I decided that I didn't have enough cold, hard cash. So I started to slowly move part of my portfolio out of tax shelter and paid the taxes.

    While it will eventually become a problem I have already taken a big step in reducing future taxes.


    ReplyDelete

Questions or comments? You can reach out to me at my website address name at gmail dot com.

Popular Posts