Monday, August 31, 2015

Altria Delivers Another Strong Dividend Hike

Last week, anywhere I checked on the internet, everyone was focused on stock market volatility. The fear is that we might be entering a new bear market. As a long term dividend investor I don’t really care much about things like that.

I care about selecting quality companies which can deliver results in any environment. I view declines in stock prices as opportunities to buy more shares at a discount.

The sad thing is that few managed to cover the news that Altria (MO) just raised its dividends. The company has been raising dividends for over 4 decades, and is still not done growing earnings and paying larger dividends to its shareholders. I find it impressive when a company can afford to be boring today, and just keep calm and carry on with its proven business model. As an investor, I like boring and predictable, particularly when I am paid in cash to hold on to that investment. Check my analysis of Altria for more details on the company.

Altria raised its quarterly dividend by 8.70% to 56.50 cents/share. This dividend champion has raised dividends for 46 years in a row. The ten year dividend growth rate is 11.60%/year. Given the fact that shares have been consistently undervalued over the past 60 years, the high dividend growth and the consistently high dividend yield, it is no surprise that Altria has been the best performing stock in the S&P 500 since 1957.

Friday, August 28, 2015

A Dividend Portfolio for Early Retirees

I am often asked the following question in some variation: If I were starting a dividend portfolio today, and had a lump sum to put to work, how would I invest it?

The goal of an early retiree is to have the flexibility to do what they want, paid for by their nest eggs.
Dividend growth stocks should be an ideal strategy for these individuals, because they provide a relatively safe stream of income which is always positive and is more stable than relying on total returns. The risk with traditional approaches to retirement such as the 4% rule is that you might have to sell assets when prices are low or stagnant, which could deplete the nest egg that you worked so hard to accumulate.

With dividend investing, you are essentially living off the dividends generated by the portfolio. This is similar to living off the fruit from a tree you have planted twenty years ago. Selling chunks of your portfolio in order to finance expenses in retirement is similar to cutting the tree branch you are sitting on. By cutting off the tree that gives you fruit, you won’t get any more fruit. However, by focusing on the fruit (income), you not only receive more fruit over time, but you also can benefit from long-term appreciation in the companies you have invested in ( the tree grows too). It is a true win-win for long term dividend investors. I also believe that dividend growth investing addresses many risks that retirees face these days.

Wednesday, August 26, 2015

Do not get emotionally attached to a dividend position

As someone who has been investing in, and writing about dividend paying companies for over seven years, I have accumulated a lot of observations about investor behavior. One of the issues I have observed is when investors get emotionally attached to a dividend stock they owned. While it is important to invest in companies you understand and believe in, it is equally important to also know when a company is no longer performing up to par. It is important to objectively evaluate and identify companies in a portfolio that are no longer pulling their weight, in order to stop adding to those companies and possibly even sell them. Failure to do so could result in permanent loss in capital, and permanent loss in capacity to generate dividend income.

Many investors I have interacted with over the years have liked the types of Johnson & Johnson (JNJ), Procter & Gamble (PG), Coca-Cola (KO) to name a few examples of successful dividend growth stocks from the past few decades. And I agree that these companies are great, with wide moats, strong competitive positions and global platforms for selling branded products at a premium price. However, while these companies are great there is not such a thing as a buy and forget investment.

It is important to monitor your dividend stocks regularly. Monitoring is important, because things change and people cannot predict what will happen to a business 20 years from now, using the information of the past or present. A healthy and growing company today might find itself in a declining industry and have its fortunes decimated. Investors should purchase stocks with the intention of holding on for the long run. However, if any warning signs are spotted investors should not add more funds to position, and even consider selling. Newspapers enjoyed an economic moat for decades. The internet ruined the moat of companies like Gannett (GCI). Other companies might decide to change business model and embrace hot growth industries, while disposing of their core stable cash generating assets in the process. Prime case in point is Enron. Another one was french water utility Vivendi, which turned itself into a media conglomerate.

Monday, August 24, 2015

Dividend Companies I purchased in August

The stock market is finally having the correction everyone has been waiting for since 2012. In the past month, the S&P 500 is down by 7 – 8% from its all-time-highs. I am not sure if people are scared yet or not. I have a feeling that stock prices can go down even further from here, though it will be a slow process that could take several months. Either way, this is not the time to panic. This is the time to stay the course, and keep following a sound strategy for achieving long-term investment goals and objectives. It is important to remember that time in the market trumps timing the market for the long-term dividend investor.

As many of you know, I am in the accumulation phase of the game. Therefore, I have money to deploy each month. That money comes from regular job income and dividends. It is very interesting that the most important asset I have is my ability to earn income. As long as I have that asset, I have the ability to deploy excess cash into investments that will pay rising dividends for me.

As a dividend investor, I view each stock I buy as an asset that will provide me with growing cashflow for decades to come. The only difference is that I do not have to spend 50 - 60 hours/week in the office, filing TPS reports, and sitting in long status update meetings which take more work than the work itself, in order to earn that passive dividend income.  I gladly accept lower prices for shares, because this means I am effectively purchasing my future retirement income at a discount. Since I am not a market timer, I cannot tell you whether stock prices are going to be up or down. My hunch is that things will go lower over the next few months, though not in a straight line down, given the fact that the broad market is only recently starting to sell off. No matter what happens, I do know that by investing my savings each month, without emotion, I should do fine over time.

Friday, August 21, 2015

Eaton Corporation: Attractively Valued Stock to Consider

Eaton Corporation plc (NYSE:ETN) operates as a power management company worldwide. This dividend company has paid dividends since 1923, but is the type of company that does not raise them every year. For example, in the past two decades the company kept annual dividends unchanged in 1999, 2000, 2002 and 2009. While you would not find the company covered by most other dividend investors, I believe that it has some great prospects for those willing to take the time and study this business. I recently added to my position in the company, and decided to update my analysis on the company.

The most recent dividend increase was in February 2015, when the Board of Directors approved a 12.20% increase in the quarterly dividend to 55 cents/share.

The company's competitors include Johnson Controls (NYSE:JCI), Parker Hannifin (NYSE:PH) and ITT Corporation (NYSE:ITT).

Wednesday, August 19, 2015

Are you ready for the next bear market?

It is not a secret that stock prices have been rising for 6 - 7 years in a row now. This makes it easy to hold on to stocks, and believe that we will have smooth sailing until we reach our goals and objectives.

In my investing, I do like to think about different scenarios. What if my quoted portfolio goes down by 50% in 2016?

I know a lot of investors who are focusing only on total returns would be unhappy. Imagine if you saved for 20 years, and accumulated a net worth of $1 million. Then boom – in one year, half of your net worth, blood,sweat and tears – gone. Would you panic?

I myself would likely be indifferent to a 50% stock price drop. As a dividend investor, I am somewhat insulated from stock price fluctuations. This is because I focus on the earnings power of the business, and the dividend payments that the businesses in my portfolio generates. It is very comforting to keep receiving cash, even when the quoted value of investments throughout the world is falling. When everyone else is hurting, I have the luxury of generating cash from my investments, which I can then deploy at ridiculously low valuations. As long as the underlying fundamentals of the businesses I own are intact, I can ignore stock price fluctuations. This is one of the most important traits of successful dividend investors. Those who do not understand that, are usually the ones that have not made any money in stocks to begin with.

Monday, August 17, 2015

Tax Loss Harvesting for Dividend Investors

As an investor my goal is to attain financial independence using my dividend growth strategy. As a dividend investor, my goal is to generate enough dividend income to pay for my expenses in retirement.

In order to achieve this goal, I have spent several years selecting quality dividend paying stocks. However, as I gain more knowledge, I also try to pick new tricks that would help me on my journey.

One of those tricks is tax-loss harvesting. Tax loss harvesting is selling securities at a loss in order to offset a capital gains tax liability. Tax loss harvesting is typically used to limit the recognition of short-term capital gains, which are normally taxed at higher federal income tax rates than long-term capital gains.

The benefit of tax-loss harvesting is that I will reduce my taxable income, which will reduce taxes I pay and results in more money available for me to allocate.

A taxpayer can use that loss to offset against other short-term or long-term capital gains. If there are no capital gains however for the year, then the taxpayer can reduce their income by $3,000 at most of a given year. If their capital loss exceeds $3,000, they can use it on future gains they incurred. If that taxpayer never earns another dime in capital gains, they can go on to reduce their income by $3,000/year, until their capital loss is exhausted. Depending on your marginal tax rates, triggering this $3,000 loss could result in a substantial tax benefit. I am in the 25% tax bracket, which means that $1,000 in capital losses translates into a reduction of my tax liability by $250. This of course assumes I earned no capital gains. However this is not a problem for me, since I am quick to book my losses, but I let my gains compound for years.

Friday, August 14, 2015

Should companies pay dividends?

As many of you know, I only invest my money in companies which pay dividends. I have made a lot of money that way, and I use dividends as a tool to measure my progress towards financial independence. Currently, I am on track to reach financial independence with dividends around 2018. We all know that dividends are more stable than capital gains. If I had to rely on total returns, and the stock market fell by 50% in 2018, I would have been in a lot of trouble. Since dividends are more stable however, I can ignore stock price fluctuations and focus on enjoying my life.

One of the fundamental questions I hear is whether companies should be paying dividends. The answer of course is that it depends on the company.

Mostly mature companies tend to pay dividends. These companies have an established niche in a market, and earn a lot of excess cashflow that they share with shareholders. Those companies have a lower risk of failure. A firm in the start-up phase will not pay dividends, because it needs all resources to grow or maintain the business. These types of companies are unproven, and therefore more speculative. We often hear about the successful companies that reinvested all profits and ended up being valued for billions of dollars. Google (GOOG) is one such example. The part for Google is that most profits are derived from online advertising. Any money allocated to other projects have not resulted in a meaningful return on investment for shareholders yet.

Wednesday, August 12, 2015

How well do you know your investment strategy?

I have been focusing on dividend growth investing for several years now. As such, I try to think about why it works, and also think about scenarios under which dividend growth investing would not work.

The premise of dividend growth investing is simple, yet not easy for many to grasp. Dividend growth companies are those that have managed to boost annual dividends for a minimum number of consecutive years. Some dividend investors require a five year streak of consecutive dividend increases, while others require ten or more. The next step is understanding whether that dividend growth was also accompanied by earnings growth. If it is, then the company should be analyzed further. The basic thesis behind dividend growth investing is that only companies with certain bulletproof business models can achieve a streak of annual dividend increases over a certain number of years. Without earnings growth, a company cannot continue to grow dividends into the future. And as dividend growth investors, our goal is to find the companies that will likely grow dividends in the future. The thesis then goes that a company that manages to grow earnings, and to grow dividends, is likely to continue doing so until something changes. This is where the idea of reviewing the business more thoroughly starts revealing itself. Another important thing to consider then is purchasing the company at a fair valuation. One should never overpay for a business, no matter how great fundamentals and growth prospects look. This is easier said than done however.

Monday, August 10, 2015

Are these oil dividends safe?

The price of oil has declined a lot since the summer of 2014. The West Texas Intermediate (WTI) in Cushing, Oklahoma has declined from a high of $107.52/barrel in June 2014 to a low of $45.25/barrel in August 2015. This severe decline in prices has reduced the earnings power of many energy dividend growth stocks, which are engaged in exploration and production.

The question on everyone’s mind is whether these dividends are safe. Only after we answer this question, can we determine whether it makes sense to purchase those shares for income in a dividend growth portfolio.

Back in late 2014, I discussed whether the oil price decline was the opportunity of a lifetime. I talked about three companies I had my eye on. Initially, I discussed how I wanted to slowly build my positions every month. I even made a purchase of ConocoPhillips in early 2015, followed by a small purchase of Exxon Mobil (XOM) a few later. As I was buying Exxon Mobil, I had a change of heart after realizing that the oil price shock had drastically reduced energy companies’ earnings a few weeks later. Therefore, the drop in share prices was much lower than the decline in earnings power, which made those shares overvalued. As a result, I changed course and only recently bought shares in Exxon Mobil.

Friday, August 7, 2015

UnitedHealth Group (UNH) Dividend Stock Analysis

UnitedHealth Group (UNH) is the largest, most diversified health care enterprise in the United States. It serves more than 85 million individuals worldwide. The company operates under two complementary business platforms, UnitedHealthcare for health benefits, and Optum for health services. UnitedHealth Group is a dividend contender, which has raised dividends for 6 years in a row.

The most recent dividend increase was in June 2015, when the Board of Directors approved a 33.30% increase in the quarterly dividend to 50 cents/share. High dividend growth is typical of companies in the first stage of dividend growth.

The company’s largest competitors include Aetna (AET), Humana (HUM), and Anthem (ANTM).

Tuesday, August 4, 2015

What should I do with Baxter and Baxalta after the split?

Note: I originally planned to post this article tomorrow, but in light of recent developments about Baxalta being in the process of being taken over by Shire, I am posting it today. I sold two-thirds of my Baxter and Baxalta shares yesterday. 

In early July, Baxter International split into two companies – Baxter and Baxalta. For every share of legacy Baxter, shareholders received a share of new Baxter (BAX) and a share of new Baxalta (BXLT).

A few readers had asked me about the new dividend payments after a press release from late June indicating that there might be a decrease in dividends. I decided to hang on, until both companies formally announced what their dividend policy will be.

Both companies recently announced dividend cuts effective in September. The new payment for Baxter will be 11.50 cents/quarter, while the payment for Baxalta will be 7 cents/quarter. This totals 18.50 cents/quarter, which is much less than the 52 cents/quarter that legacy Baxter paid to shareholders.

My goal as an investor is to generate a rising stream of income from my dividend growth portfolio. As such, I purchase shares in companies that can afford to and do grow dividends per share over time. I have found that it is easier to forecast and rely upon dividend income, rather than capital gains in the retirement years. Therefore, companies that have cut dividends have no place in my portfolio since they are no longer fitting with my overall goals and objectives that made them a purchase in the first place.

Monday, August 3, 2015

Create your own dividend ETF with Motif Investing

I believe that Robinhood is a better alternative for investors than Motif Investing.

Motif Investing is an established brokerage which lets investors create their own portfolios, and purchase them for a set commission. Each investor can build a portfolio of up to 30 individual securities, and then purchase that portfolio for a single commission of $9.95. This works out to 33 cents per trade on 30 securities, which is cheaper than Interactive Brokers on a per-trade basis. If you were making 30 individual stock trades at Scottrade, you would have to pay $210. At Tradeking, you would have to pay $148.50 for purchasing those 30 individual securities. At Schwab, it would cost $268.50 to assemble a portfolio of 30 individual stocks.

There are no monthly fees and no account minimums, which makes Motif Investing a good broker for new dividend investors. Motif Investing also offers single stock purchases for a low price of $4.95/trade, which is relatively cheap as well. They do require a minimum investment of $250 to purchase a Motif. You can buy or sell Motifs for $9.95 or you can re-balance also for $9.95/trade. The brokerage is SIPC insured, which means that securities up to $500,000 are protected in case the brokerage firm goes under. They do not reinvest dividends yet, but this is not really an issue for me, since I reinvest dividends selectively.

Motif will be charging inactive accounts with less than $10,000 in them a semi-annual fee of $10. This fee will be charged on investment accounts with an investment balance that is lower than  $10,000 or to those accounts where no commission trades had been made in the last six months.

These days, investing in exchange traded funds is all the rage. The problem with many of those funds is that they charge a commission to buy or sell, depending on the broker you use, and then they also charge an annual management fee on top of that. With a Motif, you can have direct ownership of up to 30 stocks reflecting one idea, you can have diversification across multiple securities, greater control over capital gains, and most importantly, you will not have to pay any management fees.

If you think about it, this service is pretty cheap for those investors who would like to build a portfolio by buying a basket of securities that fit their strategy. The baskets of securities that you can build are called” Motifs”.

Recently, I started using this service, and built and purchased my first Motif. The nice thing about it is that I was able to buy an equally weighted portfolio of several individual securities for just $9.95 in total. On a $2,000 investment, this one-time cost is less than half a percent. The nice thing is that this portfolio is instantly diversified, which reduces risk significantly.

I had been searching for a service like that for a long time. This is because I usually have a lot of ideas each month, but had to limit myself to only 2 – 3 each month in order to keep commissions low as a percentage of purchase price. I like to keep commission costs below 0.50%. Since I only have a limited amount of money to invest every month, and because I used to pay something like $5/trade before, I could only afford to make those 2 – 3 investments per month. This meant that I would only be able to purchase shares in a given company once per year. The drawback was that I would find a good company and add shares to it, but then it would go higher quickly, which meant that I couldn’t’ add more and I was left with a small position. I could purchase shares more often, I could have built a higher position and profit more.

With Motif investing, I could actually purchase shares in as many as 30 companies I like, and I can always change the list of companies I want to purchase when I have cash on hand. That way, I do not have to wait for 6 – 12 months, before I could add to my exposure in specific companies.

Opening an account is pretty easy and straightforward, as it requires the usual pieces of information such as name, address, social security information etc. I funded my account using ACH, which linked my checking to the Motif Investing brokerage.

I believe that Motif Investing could be useful to those investors who want instant diversification, more control over the types of companies they want to buy directly all in one low cost per transaction.

Currently, they have a promotion, where if you open a new brokerage account, and fund it with at least $2,000 within 30 days, you can receive up to $150 in cash. While Motif Investing offers Individual Retirement Accounts, unfortunately this offer is not applicable to IRA’s.

One qualifies for the bonus only after they make a few Motif investments. If you make 1 motif trade your will receive $50, while 3 motif trades will earn you a $75 cash bonus. If you make 5 motif trades you will receive $150 cash bonus. I believe that if you make 5 motif investments on a $2,000 account, this will be a good risk free return on investment of over 5%, which is not bad. ( $150 cash bonus minus 5 motif trades at $9.95 each, divided by $2000 cash deposit).

Overall, by opening an account with $2,000 and making 5 Motif investments, you will be able to earn a cash bonus of $150. This turns out to a return of over 5%, which is not bad. This of course is on top of the returns you will already generate from dividend stocks. I have learned never to despite the days of small beginnings. Again, this limited time offer will expire soon, so you have to act fast if you qualify. You can start by clicking on the banner below or by clicking on this link.

Update 04/14/2017: Starting on May 5, 2017, Motif will be charging inactive accounts with less than $10,000 in them a semi-annual fee of $10. Per the email I received this morning:

"We will assess a Platform charge of $10 semi-annually on low balance accounts with no trading activity.

Funded trading accounts with less than $10,000 in combined securities and cash, with no commission trades in the last six months, and without a established recurring ACH will incur this fee.

Note, active Motif Blue subscribers including Impact Account holders are exempt from this fee."

Full Disclosure: I will earn an affiliate commission for each customer that signs up for using Motif Investing

Relevant Articles:

- How to buy dividend stocks with as little as $10
- Best Brokerage Accounts for Dividend Investors
- Robinhood Brokerage Review
- Stress Testing Your Dividend Portfolio

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