Monday, November 23, 2015

Three Dividend Seeds I Planted Last Week

I view each investment I make as a seed that I plant for the long-term. Some seeds could turn into a tree that would provide fruit (dividend income) for decades to come. My goal as an investor is to ensure that I plant those seeds in a systematic way that increases the odds of success. My definition of success is the ability to live off dividends when I decide to stop working.

In the past week, I managed to add to my positions in the following three companies:

Target Corporation (TGT) operates as a general merchandise retailer in the United States. Target is a dividend champion which has raised dividends for 48 years in a row. Over the past decade, the company has raised dividends by 20.30%/year.

The stock is selling at 15.20 times expected earnings for 2015 and yields 3.20%. Check my analysis of Target at Seeking Alpha.

The most interesting thing is that I sold two-thirds of my Target position in early 2015. Now I am able to get back in at lower prices. This happens very rarely, and is more of an exception rather than the norm.

HCP, Inc. (HCP) is a hybrid real estate investment trust that invests in properties serving the healthcare industry including sectors of healthcare such as senior housing, life science, medical office, hospital and skilled nursing. The fund also invests in mezzanine loans and other debt instruments. HCP, Inc. is a dividend champion which has raised dividends for 30 years in a row. Over the past decade, the company has raised dividends by 2.70%/year. The REIT expects to generate $3.12/share in FFO in 2015. This REIT sells for 11.20 times expected FFO and yields 6.50%. Check my analysis of HCP.

Omega Healthcare Investors, Inc. (OHI) is a real estate investment trust that invests in long-term healthcare facilities in the US. Omega Healthcare Investors is a dividend achiever which has raised dividends for 13 years in a row. Over the past decade, the company has raised dividends by 10.90%/year. The REIT expects to generate $3.06/share in FFO in 2015. This REIT sells for 11 times expected FFO and yields 6.60%. Check my analysis of Omega Healthcare.

Approximately one year ago, I discussed that I was interested in building out my position in three REITS – HCP, Omega Healthcare Investors and W.P. Carey. I discussed that prices were too high, and that I expected them to gradually decrease due to interest rate fears. I also discussed how I wanted to slowly build out positions in each of those companies. I have made several purchases in the past year in each of the three REITs. So far I have been correct. I believe that further declines would provide better opportunities for investors. It is possible however that a large portion of those interest rate increases have already been incorporated into the prices of Real Estate Investment Trusts.

You might be surprised that I didn’t add to my position in WP Carey (WPC). As a result of my evaluation of the dividend growth, I am noticing that the REIT is growing distributions every quarter at a nominal amount. I view the slowing dividend growth as a negative, since the rate of increases barely covers inflation. At an annual dividend growth rate of 1.60%, even a high current yield of 6.20% is not enough. The REIT expects to generate $4.83/share in FFO in 2015. This REIT sells for 12.80 times expected FFO and yields 6.20%. Check my analysis of WP Carey.

I didn’t believe that interest rates will be raised in 2015. Based on news stories I am hearing, it looks like the Federal Reserve might increase rates in December. I won’t believe it until I see it however – the global economy is not as hot as the US one, and global central bankers are not raising rates. This provides some pressure on the US central bank policy makers. The pressure is that rising interest rates will make US cost of capital higher, and make US exports more expensive abroad if the dollar strengthens

Even if rates increase however, the raises are going to happen gradually and be spread out over time. An increase in interest rates is not an automatic sell for REITs. Increases in interest rates could also show that the economy is doing well, which means higher occupancy rates. Higher occupancy rates could soften the blow from increasing cost of interest financing. On the other hand, companies with long-term fixed interest rates on mortgages or bonds will not really feel the effect on existing borrowings until 5 – 10 years down the road. Either way, I plan to add to those REIT investments in a few months, as long as they offer compelling entry prices to me.

However, if dividend yields start exceeding 7%, I would start refraining from those investments. This is because pass-through entities like REITs grow by issuing shares and bonds in order to obtain capital to purchase real-estate. If their cost of capital is too high, then any additional real estate added might not provide the incremental benefit of increases to FFO/share and dividends growth to all shareholders. Good allocators of capital would not dilute existing owners too much to grow at a high cost especially when the market for real estate is overheated.

What have you been buying lately? Do you believe REITs to be good values today?

Thank you for reading

Full Disclosure: Long TGT, OHI, HCP, WPC

Relevant Articles:

Five Things to Look For in a Real Estate Investment Trust
Three REITs I Picked Last Week
Dividend Companies I am Considering this Month
Should Dividend Investors Worry About Rising Interest Rates?
Rising interest rates affect all businesses, not just dividend paying ones


  1. I feel like I have spent too much money on WPC, since its divident growth rate is slowing to snail pace these days. Maybe I should have used money rather to buy OHI that grows dividends much higher rate.

  2. I read the blogs of a few prominent economists who have been 100% correct so far in their statement that the Fed would not raise rates. Several are now saying that they think it's basically a done deal and the Fed will raise in December. (All three think it will be a mistake to raise rates, but they think the Fed has basically committed itself to making this mistake at this time.)

    What is not clear is whether this will be the first in a series of rate hikes or not.

    I'm not buying or selling anything in particular in anticipation of this rate hike, both because I'm not sure a single hike will have a big effect, and also because I'm not smart enough to know what the effect might be!

    Here's a quick link to a really useful recent economics post, in case you're interested:

  3. Both WPC and HCP increase their dividends too slowly for my taste.

    I bought TGT last week for the growth prospects, and will buy OHI as soon as I get some more money : )

  4. Target, HCP and OHI. I love all of them to be in my portfolio. Especially OHI and HCP for their attractive values.

    Great job!


  5. DGI,
    I believe these REIT dividends are not qualified dividends and are taxed higher than 15%. Are you tracking that? I usually only buy REITs for my ROTH IRA, solely for tax purposes. Thanks for the post and the thorough research that you do!


  6. long OHI, HCP, O, VTR ,WPC, TGT. Will wait to see what fed does next month before adding to REITS. thanks for the great article.

  7. I've been nibbling off and on with HCP. Like you, I initiated a small position in TGT last week.
    Did the same thing on CMI today. Near 4% yield. Reliable history and reasonable valuation, IMO.


    1. I'm going to start nibbling on HCP in December, with dividend payments from several other stocks that pay November 30th.

  8. I owned some target since 2013. Love their stores. When the identify thief story hit, I doubled my position at 57.00$. A few months ago I sold the entire position in the low 80's. I didn't want to sell Tgt and I know it went against building my dividend paying portfolio. Here's the problem. As much as I love Tgt I find myself using Amazon now for almost everything. I'm lazy buy nature and hate fighting nyc traffic to get to a Tgt when I can click a few iPad buttons a ups drops off my stuff next day. Zero stress. After seeing Walmart slide(I know Tgt is a different shopping experience) and Amazon hitting new highs, I decided to sell. Sadly I owned Amazon at 90 and sold at 125 years ago. What a mistake that was. Wish Amazon paid a div but I guess it be all on borrowed money haha.

    I also own Wpc and bought HCP a few weeks ago. Largest REIT position I have is O. I'll check out OHI. Thanks for the update DGI. Love reading your about your seed planting!

  9. Solid choices at good valuations, not much to dislike.

  10. Riocan. Have been long on Riocan

  11. I like all three your picks! Long TGT, HCP and OHI...

  12. Last week I've bought shares from ADM seeing as how it's currently trading near its 52-week low, has a low Graham number and should have enough room to keep its dividend growing at a good pace. If the previous decade is any indication for the next it should grow about 9 - 10% annually.
    Looking back I was a little too early when buying HCP mid-September for about $38.00. On the other hand, tomorrow I'll get my first dividend so my money is at work for me.

  13. I sold all of my TGT shares at the high earlier this year. With the price drop, I think maybe now is the time to jump back in. Nice purchase.

  14. I think rates may be baked in a bit with the REIT prices, but I am keeping some dry powder in case of more downside.
    With WPC, management were discussing the possibility of a split-up of the company into the American operations, European/International operations, and BDC.
    So maybe they are hoarding cash for effective execution of such a plan.

  15. Hi DGI, could you please share why you sold earlier this year? I followed your link to blog posted on 1/16/2015 but did not see the reason. I am interested to learn as I remember you tend to hold on to slightly overvalued stocks instead of selling them. Thanks.

  16. I like the tree comparison this is how I think of it as well. for me divided grow is like building an orchard to grow more fruit and buying index fund is like buying a forest for trees to be chopped down in a future.

    I also agree with your 7% rule. I would be very reluctant to invest in any company that pays more than 7% yield. I don't believe yield like this is sustainable for a long time and a risk of company cutting or reducing their dividend in the near future is far too great for me to put my money in the business.


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

Popular Posts