Monday, October 15, 2018

Your favorite businesses are on sale

Last week, there was a correction in the stock market. For some reason, be it higher interest rates, trade wars, or fears of future inflation, stock prices went down. Your guess as to why this happened is as good as mine. The reason why this happened is not required to be a successful investor however.

As a dividend growth investor, I see myself as a part owner of a business. As a result, my focus is on acquiring shares in those businesses at attractive valuations. I could not care less about stock price fluctuations, other than as an opportunity to acquire more ownership in the world’s best run businesses at attractive valuations.

I focus on dividends, because dividends are more stable and more predictable than share prices. I focus on companies that can generate stable earnings and reliable dividend payments. Only a select few companies have even managed to grow dividends for more than a decade. A long streak of consecutive dividend increases is one of my filters to search for quality. A strong balance sheet, and the ability to generate strong recurring cashflows is the secret sauce that allows long track records of annual dividend growth to occur. I focus on the companies that can grow earnings per share, reinvest a portion to grow the business, and send any excess cash flows to shareholders in the form of dividends. I want those businesses at good entry prices however.

The next step in the process is evaluating the fundamentals of these businesses. As I mentioned in my article on how I analyze dividend stocks, this involves looking for growing earnings to support the future dividend growth. Evaluating the safety of those dividend payments is paramount.

Since dividends are a direct link with the fundamental health of the business, they are a form of return that is usually more stable and reliable than capital gains. Share prices on the other hand are derived from the collective expectations of stock market participants. Sometimes they are overly excited about the prospect of a business, and are willing to pay a high multiple for every dollar of earnings. Other times, these participants are gloomy, and not willing to pay even a bargain price for these earnings. Stock prices are driven by the madness of the participants with short-term expectations. As investors, our goal is to capitalize on those who set prices in the short run, and buy our future retirement income on sale. Our goal is to select the best businesses in the world, and buy them at attractive valuations. Our job after that is to monitor our holdings, and sit tight, as we are showered with a rising stream of dividends over time.

Since my focus is to grow my dividend income over time, I can focus on the dividend income, its safety and its potential for future growth. I could not care less if stock prices go up or down in the short-run.

As a result of the decline in the past week, I am seeing several companies I am monitoring for my dividend growth portfolio newsletter become attractively valued today. I will share the selections I am making on October 28 with premium subscribers. If further weakness continues, the list of potential additions to the portfolio will increase. That is great news, because I like to build out diversified dividend portfolios, in order to ensure that I generate a retirement stream of income that is defensible and can grow above the rate of inflation.

For example, Johnson & Johnson (JNJ) is selling at $133/share today, versus $142.88 at the highs last month and $148/share in January. The company is still expected to earn $8.15/share, yet participants valued the shares at different multiples. The company is still expected to pay $3.60/share in dividends.

In another example, 3M (MMM) is selling at less than $198/share today, versus $216 in September and $260 in January. At the same time the stock is attractively valued today using forward earnings at $10.29/share. 3M is expected to pay $5.44/share in dividends.

During the financial crisis, Johnson & Johnson’s share price fell from a high of $72.76/share in September 2008 to a low of $46.25/share in March 2009. At the same time, earnings per share went up from $3.63/share in 2007 to $4.57/share in 2008. Johnson & Johnson earned $4.40/share in 2009. The company’s dividend payments between 2007 and 2009 were $1.62/share in 2007, $1.80/share in 2008 and $1.93/share in 2009. Investors owning JNJ shares who focused on the growing stream of dividends could have been able to ignore the fact that share prices are volatile. They could do this, because the company they invested in had solid fundamentals, and the dividend was well covered and poised to grow. The diversified portfolio of businesses under the Johnson & Johnson umbrella represented products that consumers use on an everyday basis, which meant that the demand will not decrease as much during a recession. Those with cash to invest, would have been ecstatic to buy ownership interests in a world class business such as Johnson & Johnson below $50/share, rather than pay over $72/share for the same shares.

It is very likely that at some point, we will be entering a bear market. Investors in the accumulating phase should be looking forward to bear markets, because they will be able to buy shares in their favorite businesses at better entry valuations. This would mean that shares on other world class businesses such as Visa (V) and Starbucks (SBUX) will be available for sale at less than 20 times earnings.

To summarize, lower entry prices should be welcomed by dividend investors in the accumulation phase. As a result of lower prices, they can purchase future dividend income at a discount. Investors in the retirement phase should ignore stock price volatility, and should focus on dividend income, which is more stable, reliable and predictable than share prices. When you are paid for owning shares, holding those shares through the ups and downs of the economic cycle is much easier. Either way, the most important thing is to stick to your dividend portfolio through thick or thin. The consistency of dividend payments makes it easier to stick to your portfolio, and add to it, even when share prices are tanking. The investor with a clear strategy to pursue dividend paying equities, will continue following their plan, and invest money regularly in the best values at the moment. This consistency and long-term focus is the secret sauce that will help them succeed and reach their long-term goals.

Relevant Articles:

What are my dividend portfolio holdings?
Introducing Dividend Growth Investor Newsletter
How to value dividend stocks
How to read my stock analysis reports

Wednesday, October 10, 2018

How Long is Cardinal Health’s Record of Annual Dividend Increases?

According to the last list of Dividend Champions, Contenders and Challengers, compiled by the late David Fish, Cardinal Health (CAH) has managed to increase dividends for 21 years in a row. This track record is impressive, as there are only a couple of hundred companies in the US with this impressive record of annual dividend increases.

According to the Dividend Aristocrats Index however, which is maintained by Standard & Poor’s, Cardinal Health has managed to grow dividends for 30 years in a row.

This is an obvious disconnect. Just like with other disconnects, such as Altria and Abbott, I decided to research further in order to determine for myself the correct track record of annual dividend increases.This exercise was helpful in my monthly update process for the list of Dividend Champions that I post for my readers here.

The first step was to review press releases announcing dividend increases over the past decade, in an effort to determine what track record is being claimed by the company itself. Unfortunately, between 2007 and 2018, Cardinal Health has not stated what its track record of annual dividend increases really is.

The second step was to review the company’s dividend history using Cardinal Health’s Investor Relations website. I had to ensure I am properly adjusting for stock splits, stock dividends, and excluding one-time distributions. The dividend history was messy, as it appeared that dividends were being tracked by the company on an ex-dividend date basis, as opposed to how much actual cash per share was being distributed to shareholders.

For example, the company shows total dividends in 2017 as $1.8361/share.

Declared
Ex-Date
Record
Payable
Amount
11/8/2017
12/29/17 
    1/2/18 
1/15/18 
0.4624
8/9/2017
9/28/2017
10/2/2017
10/15/2017
0.4624
5/3/2017
6/29/2017
7/3/2017
7/15/2017
0.4624
2/2/2017
3/30/2017
4/3/2017
4/15/2017
0.4489
Total dividends in 2017:
1.8361

If you look closely, you can see that only three of those payments occurred in 2017, with the last one occurring in 2018. An investor was entitled to this dividend payment at the end of 2017, but didn’t receive it until January 2018.

A long-term investor in Cardinal Health would have received $1.8226 in total in 2017 for each share they owned. That is the cash amount they would have received in 2017 that would have been potentially taxable to the IRS.

Armed with this information, I calculated the annual dividend income based on two criteria.

The first one is based on actual cold hard cash collected in a calendar year per share of Cardinal Health. This method adjusted for stock splits and one-time dividend payments. Based on this method, Cardinal Health has raised dividends for 22 years in a row since 1996. The dividend payment in 1995 was the same as the dividend payment in 1996.

The second method is based on ex-dividend days, but still adjusted for splits and one-time distributions. Based on this method, Cardinal Health has raised dividends for 23 years in a row since 1995. The dividend payment in 1995 was the same as the dividend payment in 1994.



Today, we evaluated the dividend track record of Cardinal Health. We can see that the company has only been able to raise dividends for 22 years in a row, using calendar year cash payments. As a result, the company has correctly been excluded from the list of dividend champions today. Unfortunately, the company is included in the list of dividend aristocrats today. Based on my review of the history of the dividend aristocrats index, I have concluded that it is an incomplete list for dividend investors. Serious dividend investors should focus on the list of dividend champions, and ignore the dividend aristocrats. The real lesson to learn of course is that you should always do your homework, and try to do the work to reach your own conclusions.

Relevant Articles:

S&P Dividend Aristocrats Index – An Incomplete List for Dividend Investors
October 2018 Dividend Champions List
Cardinal Health (CAH) Dividend Stock Analysis
Dividend Aristocrats for 2018 Revealed

Monday, October 8, 2018

My screening criteria for dividend growth stocks

Screening is part of my process for identifying quality dividend growth stocks. For over a decade, I have managed to apply my screening criteria against the universe of dividend growth stocks I am interested in. This helps to narrow down the list of companies I am looking at. I use these parameters as a cornerstone in my dividend growth newsletter as well. However, I also tweak them in order to identify quality companies for further research.

The criteria I use are listed below:

1) A P/E ratio below 20

I have a set limit where I am not willing to pay more than 20 times earnings for a company. A P/E ratio of 20 translates into an earnings yield of 5%. This helps me avoid getting excited about chasing future growth opportunities and buying shares that are overvalued. I want to avoid situations where I buy a stock at inflated growth expectations, which do not turn out as expected. I also use this P/E ratio as a way to compare between dividend stocks. If I overpay dearly for a stock, my long-term returns may be lower than the returns of a company with better entry valuations. Dividend investors instinctively understand valuation, because overpaying for a stock results in buying future income at an inflated price; whereas buying a stock at a better entry valuation results in purchasing a future stream of income at a discount. Of course, valuation is a tricky subject, where P/E ratios should be taken into consideration while also evaluating the growth expectations of the business.

2) A dividend payout ratio below 60%

A quality dividend company reinvests a portion of earnings back into the business, and distributes the excess earnings to shareholders. This criterion ensures that I focus on the dividend payments which are sustainable. I want to have a margin of safety in case earnings temporarily decline during a recession. This goes back to my objective to generate dividend income that I can count on throughout the economic cycle. By focusing on companies with lower payout ratios, I reduce the risk of dividend cuts during the next recession. I also look for a dividend payout ratio that is sustainable, while also looking for growing earnings over time.

3) A dividend streak of at least 10 years

I have found that companies that manage to grow dividends for at least a decade are likely to have the business model and the corporate culture that rewards long-term shareholders with more dividends over time. Many companies that have managed to grow dividends for less than a decade tend to have a more cyclical business model that results in dividend freezes or dividend cuts when the business environment becomes more challenging. This requirement helps me avoid companies that have managed to grow dividends simply by expanding their payout ratio, which ultimately results in a dividend freeze after a few years. Again, my goal is to find companies that can grow the dividend for years down the road.

4) A positive dividend growth over the past decade

I want to get a positive dividend growth over the past decade. I look at the most recent dividend increase, and compare it to the five year and ten year rates of annual dividend growth. In general, I want a company that is able to produce reliable dividend growth over time. This achievement is possible only when the underlying business is able to deliver long-term results for the shareholders. I am not placing a numeric amount for dividend growth, because of the trade-off between dividend yield and dividend growth. A company like Verizon or Con Edison will have slower rates of dividend growth, but will compensate with higher yields. On the other hand, companies like Visa may have lower current yields, but will more than compensate with higher dividend growth over time.

5) A history of earnings growth over the past decade

This is the last step in the screening process. It is intertwined with the stock analysis process I follow. I want to buy companies that can grow earnings per share over time. Rising earnings per share can lead to higher dividend payments over time. If a business earns more over time, it should also be more valuable as well. This earnings growth provides ample margin of safety if the stock market decides to value equities at 10 times earnings, which is down from a purchase price of 20 times earnings for example. The rising stream of earnings will eventually bail out the investor, while also pocketing higher dividends along the way. I also look at earnings because I want to avoid purchasing a company which won’t be able to grow dividends in the future, due to high payout ratios, and stagnant or declining earnings per share.

I ran a screen of attractively valued dividend champions back in July 2018. I am presenting it again today for illustrative purposes only.


My screening process has evolved over time. I used to have a minimum yield requirement, which I have subsequently dropped. My screening process will also change based on the environment in which I operate. For example, if stocks are depressed, I may focus on securities with a P/E below 15 for example. I may also ignore companies that sell at a P/E of 19 if the industry group historically sells at 10 or 15 times earnings for example. My dividend growth requirements also vary, because of the yield/growth trade-off. At the end of the day, it really is about understanding each business and acting appropriately. Long-term readers know that I like Altria (MO), despite the fact that the company has a dividend payout ratio of close to 80%. That’s because the company has showed the ability to pay and grow dividends and earnings, despite the high payout ratio.

I wanted to reiterate that screening is just the first part of the process of evaluating dividend growth stocks. I also wanted to reiterate that I look at those criteria in tandem, and not in isolation. I may find a stock that fits all criteria, and still not buy it, because I do not understand the business well enough or because I may find another company that has a better score. I have also found that I am willing to tweak the parameters I am looking for. When you develop a strategy from scratch, you know when it may be a good idea not to follow it precisely ( as if precision ever existed in investing).

The next step of the process is to evaluate the companies, one at a time, in order to gain and understanding of whether they can continue delivering solid dividend growth for my portfolio. This step somewhat overlaps with step five above. In the process of reviewing earnings, dividends, payout ratios, I review the companies and tend to discard the ones that don’t fit my requirements. I try to focus on the remaining companies that grow earnings and dividends, have a sufficient track record of annual dividend increases, while having a sustainable dividend payout ratio and are available at an attractive valuation today.

Relevant Articles:

Rising Earnings – The Source of Future Dividend Growth
The ten year dividend growth requirement
Margin of Safety in Dividends
How to read my stock analysis reports

Thursday, October 4, 2018

Use these tools within your control to get rich

The ultimate goals of everyone reading this site is to retire wealthy and to stay retired. Financial independence provides flexibility, freedom and a lot of options in life for you. Getting there is usually the challenging part.

I have been on a quest to reach financial independence ever since I graduated college in 2007. I have spent at least a few hours per day, every day, for almost a decade now dreaming of, planning for and working towards my dividend crossover point. The dividend crossover point is the situation where my dividend income exceeds my expenses. While I am very close to this point today however, I also want to have some margin of safety in order to withstand any future shocks that might come my way.

In the process of thinking about how to reach financial independence, I have spoken to a lot of others who are working towards financial independence. I have come up with a list of a few tools that these people have used to get rich. These are tools that are within their control. While outcomes are never guaranteed in the uncertain world of long-term investing, taking maximum advantage of things within your control tilts the odds of success in your favor.

These levers are common sense, and are at a very high level, but I have found that they are super important. If you ignore those levers however, chances are that you may not reach your goals, even if you are a more talented stock picker than Warren Buffett.

I have found that the only levers within your control as an investor such as your savings, investing in something you understand, time you have, keeping costs low for taxes and commission/fees.

1) The most important thing for anyone that wants to attain financial freedom is savings. If you do not save money, you will never have the capital to invest your way to financial independence. As a matter of fact, under most situations, you have more control over your savings rate, than the returns you will earn as an investor. If you earn $50,000 per year, you can accumulate $10,000 in savings within one year if you save 20% of your income. In this case, your annual spending is $40,000/year. The $10,000 you saved will be sufficient to pay for your expenses for 3 months.

If you figure out a way to cut your expenses and to save 50% of your income, you will be able to save $25,000 in one year. This means that after one year of working and saving, you can take an year off. If you are like my friend Jacob from ERE, and you manage to save 80% of your income your spending would be $10,000/year. This means that after working for a whole year, you are accumulating enough money to last for 4 additional years. After five – six years of working and saving aggressively, you will be able to retire because you would have accumulated somewhere close to 20 – 24 times your annual expenses. And the best part is that all of this ignores investment returns. The point is not to focus on absolute dollars, but on the savings percentages. The point is that you have a higher level of control over how much you save, and this has a higher predictability of success when building wealth, than the returns on your investment. Unfortunately, future returns are unpredictable. Dividends are the more predictable component of future returns, which is why I am basing my retirement on dividend income.

This is why I have found it important to keep my costs low, in order to have a high savings rate and accumulate money faster. I have been lucky that I have essentially saved my entire after-tax salary for several years in a row. Besides keeping costs low, I have achieved that by trying to increase income as well. ( when you save a lot and invest in dividend paying stocks that pay dividends, you get more income)

2) The second important thing you have within your control is the type of investments you will put your money in. It is important to understand that despite a history of past returns, future returns are not guaranteed. You have no control over the amount and timing of future returns – the best you can do is to invest in something you understand and something that you will stick to no matter what. In my case, I invest in dividend paying stocks with long track records of regular annual dividend increases. Others have made money by investing in business, real estate, index funds, bonds etc. The important thing is to find the investment that works for you, and to stick to it.

I do this, because I have found that dividend income is more stable than capital gains. Plus, I want to only spend earnings in retirement, not my capital. With this type of investing, I am getting cash on a regular basis, which I can use to reinvest or spend. It is much easier to generate a return on my investment, and to stick to my investment plan, when I am paid cash every so often. If I invested in hot growth stocks, I would be subject to huge fluctuations that would impact how much I can spend in retirement. So I would be less likely to stick to my plan. Dividends are not guaranteed, but they are more stable and more reliable portion of total returns than capital gains. Investors who rely mostly on capital gains face huge risks because most of their returns will be dependent on the mood of Mr Market who may decide to value companies at anywhere from 5 to 100 times earnings. If you expect to sell stocks to fund your expenses, you would be in a lot of trouble if you sell at 5 times earnings because you will be eating up your capital quickly. In addition, you will be in a lot of trouble if Mr Market decides that the company for which you paid 25 - 30 times earnings and which grows your share of its income is now worth 10 - 15 times earnings. This is precisely what happened between 1968 and 1981 for US stocks as represented by S&P 500 – the P/E ratio contracted from 18.20 to 8.10, while earnings per share increased from $5.72 to $15.18. As a result, S&P 500 barely went up in nominal terms from $103.86 to $122.55 over the same 13 year period. Almost the entire equity returns over that period were derived from dividends, which increased from $3.04 to $6.83. (source).

3) The third important tool at your disposal is your ability to compound your investments over time. You have some control over the amount of time you will let your investments compound. Over time, a dollar invested today, that compounds at 10%/year should double in value every seven years or so. This means that in 28 – 30 years, the investor should have roughly $16 for each dollar invested at 10%. Of course, if the investor doesn’t allow their investments to compound, they would be worse off. Many investors are sold on the idea of long-term compounding. Unfortunately, a large portion end up trading far too often for various reasons. One reason is fear during a bear market. Another is the desire to take a quick profit, without letting compounding do its heavy lifting for them. I have observed people panic and sell everything when things sound difficult. Another reason for selling is the attempt to time the markets or the attempts to replace one perfectly good holding for a mediocre one.

In most situations, the investor would have been better off simply holding tight to the original investment. For the past 8 - 9 years of writing on my site, I have seen someone mention that stocks are at a high level almost every single month. Like this successful investor, who believed that stocks were expensive in 2009. Almost no one can sell at the top and buy at the bottom – so don’t bother timing the market. Most investors who claim that they have avoided bear markets do so, because they are often in cash. Therefore, they miss most of the downside, but they also miss most of the upside as well. A third reason for frequent trading is because the investor is told that some other group of stocks/strategies/ has done better recently, which somehow is a good reason to sell their original holdings. Again, your portfolio is like a bar of soap – the more you handle it, the smaller it gets. The best thing you can do is find a strategy you are comfortable with, and then stick to it. There aren’t any “perfect” strategies out there, so if you keep chasing strategies you are shooting yourself in the foot. As a matter of fact, you would likely do better for yourself if you buy long-term US treasuries yielding 3% and hold to maturity, than chase hot strategies/sectors/investments. So find a strategy, and stick to it through thick or thin.

4) The other important factor to remember is to keep investment costs low. What does that mean? It means to keep commissions low. When I started out, I paid a zero commission for investments. I then switched to other brokers and tried to never pay more than 0.50%. But this is too high – there are low cost brokers today, which charge little for commissions. Try to keep costs as low as possible, because that way you have the maximum amount of dollars working for you.

It also means to make sure to minimize the tax bite on your investment income as well. I used to have an acquaintance who chose to pay tens of thousands of dollars more in taxes every year than they had to. They did this because they didn’t want to learn about taxes. This was really surprising to me, because this person claimed to be super frugal. Once I really spend time to learn how to minimize the impact of taxes on my investments, the rate of net worth and dividend income growth increased significantly. I have calculated that a person who maximizes tax-deferred accounts effectively in the accumulation phase could potentially shave 2 -3 years for every ten years of saving and investing.

In order to keep costs low, the amount of fees you pay to an adviser should be eliminated. Most investment advisers out there do not know that much more than you do. If you decide to educate yourself on basic finance, you will likely know as much as most investment advisers ( most of whom are salespersons). It makes no sense to pay someone an annual fee of 1% - 2% per year on your investment portfolio. The long – term cost of 1% - 2% fee compounds over time to a stratospheric proportion. It makes no sense to have someone who doesn’t know that much charge you 1% - 2%/year merely for holding on to your investments ( because that’s what they are doing).

Thank you for reading!

Relevant Articles:


Monday, October 1, 2018

Best Dividend Investing Articles For September

For your reading enjoyment, I have highlighted several articles that the readers found of particular interest this month. I have included the article title, as well as a short description.

September 2018 Dividend Champions List
I included a listing of dividend champions for September 2018. As part of my monitoring process, I took upon myself to update the list of Dividend Champions every month. I have found it very helpful to update the list, in an effort to monitor more closely the list of dividend champions. This is the third update of the dividend champions list I have done so far. You can also review the last one containing the October 2018 Dividend Champions list here.

Abbvie Dividend Stock Analysis
I analyzed Abbvie, which was spun-off from Abbott in 2013. The company appeared on my value screen for a while. The stock sells at 14.60 times forward earnings and yields 4.10%. The dividend is adequately covered as well. I had to dig into the fundamentals in order to determine if it is a good long-term investment. 

I analyzed 3M in the article. 3M is a dividend king with a 60 year record of annual dividend increases. I took a deep dive in fundamentals and also performed a qualitative analysis of the company. I like 3M as a long-term investment, but unfortunately the valuation is one of the factors preventing me from adding to my position.

Where to find international dividend paying stocks?
A common question I have received from readers has to deal with finding quality dividend growth stocks that are not US based. For readers who are willing to do a little bit more research, there is the possibility to uncover hidden dividend gems abroad, which are under-followed and possibly undervalued. There are several lists of foreign dividend growth stocks that can be used in your research. I outline a few sources that could be used for further research.

Question to readers:

I also wanted to ask the readers about helpful articles on dividend investing they have recently read. For this exercise, please use articles from other authors. Please feel free to email me at dividendgrowthinvestor at gmail dot com.

Relevant Articles:

- 2018 Dividend Kings List
- Dividend Aristocrats for 2018 Revealed
- Best Investing Articles For 2017
- Dividend Growth Investor Newsletter

Saturday, September 29, 2018

October 2018 Dividend Champions List

I managed to update the list of Dividend Champions for a fourth month in a row. Part of my process of updating the list is to:

1) Review dividend increases weekly, and note if any dividend champions have raised dividends for the month. In addition, check if any dividend contenders have increased dividends

2) Obtain a listing of forward dividend payments at the end of the month, and make a comparison to determine if any changes occurred in the meantime.

You can see that this is a somewhat manual process. However, it is helpful for me, since I rely on dividend champions so much in general.

The October 2018 Dividend Champions list can be downloaded as Google Drive Document or a Dropbox Document.

September Dividend Increases

In the month of September, we had the following champions extending their streak of consecutive annual dividend increases:

Brady Corporation (BRC) raised its quarterly dividend by 2.40% to 21.25 cents/share. This marked the 33rd consecutive annual dividend increase for the dividend champion.

McDonald’s (MCD) hiked its quarterly dividend by 14.90% to $1.16/share. This was the 43rd consecutive annual dividend increase for McDonald’s.

I also updated the record for West Pharmaceutical Services (WST) to 26 years of annual dividend increases. The increase was announced in May 2018 together with the regular dividend payment. The new quarterly dividend of 15 cents/share is 7.10% higher than the previous amount of 14 cents/share.

Dividend Champion Additions/Removals

There were no dividend cuts. However, one company is probably going to lose its dividend champion status at the end of the year, if it doesn’t raise dividends. Tenant Company (TNC)  is in jeopardy of being removed from the list of dividend champions, since it hasn’t raised distributions since 2016.

Another company will be acquired in the first quarter of 2019, so I need to take it off the list then. This is utility Vectren (VVC), which had a 58 year streak of annual dividend increases. We have discussed before how dividend growth stocks make great acquisitions. I have found however that as a dividend investor, I would usually be in a better spot if the stock I owned was never acquired in the first place.

In the process of reviewing dividend histories and dividend increases, I have repeatedly stumbled upon a few companies with long histories of dividend increases that weren’t on the dividend champions list. After reviewing the dividend histories, I have decided to promote the following company into this elite list.

Abbott Laboratories (ABT) has increased dividends for 46 years in a row. The messy part about Abbott is that in early 2013, it split into Abbott Laboratories and Abbvie (ABBV). Since the split, both companies have managed to raise their dividends annually. Standard & Poor’s has both companies with the same track record of annual dividend increases, while the late Dave Fish had their track record at 5 years. The company that will keep the dividend increase record will be Abbott Laboratories, since Abbvie is a spin-off that doesn’t keep the legacy name. This is a similar situation to what happened with Altria (MO) in 2007 and 2008, after it spun-off Kraft and Phillip Morris International. Altria gets to keep the dividend record from before, while Kraft and PMI had to build theirs from scratch.

I decided to demote Realty Income, since it has only raised dividends for 24 years in a row. Realty income (O) raised its monthly dividend from 22 to 22.05 cents/share. The company will be eligible for inclusion after its first dividend increase in 2019 however. I still like the REIT, and would love it even more at lower entry prices.

Conclusion

This leaves us with 124 Dividend Champions for October 2018.

Relevant Articles:

Dividend Champions - The Best List for Dividend Investors
S&P Dividend Aristocrats Index – An Incomplete List for Dividend Investors
Dividend Stocks make great acquisitions
What are my dividend portfolio holdings?
September 2018 Dividend Champions List

Thursday, September 27, 2018

Illinois Tool Works (ITW) Dividend Stock Analysis

Illinois Tool Works Inc. (ITW) manufactures and sells industrial products and equipment worldwide. It operates through seven segments: Automotive OEM; Food Equipment; Test & Measurement and Electronics; Welding; Polymers & Fluids; Construction Products; and Specialty Products. Illinois Tool Works is a dividend champion with a 44 year track record of annual dividend increases.
Back in August, the company’s Board of Directors authorized a 28 percent increase in the dividend payout to shareholders. This brought the quarterly dividend to $1/share. This action brought the stock to my radar.

The company has a ten year dividend growth rate of 11.60%/annum. Rather than pursue lower-return, higher-risk opportunities that reside outside of the company’s core strengths and capabilities management has chosen to return surplus capital to its shareholders. This is the type of return focused and shareholder friendly management I like to see.



The company has reduced the number of shares outstanding from 556 million in 2007 to 347 million in 2017. This is a 38% decrease in shares outstanding over the past decade, or a reduction of 4.30%/year

The Board also approved a new share repurchase program that authorizes management to buy back up to $3 billion of the company’s common stock over an open-ended period of time. The full authorization represents approximately 22 million shares, or 6% of shares outstanding.

Over the past decade, the company has managed to increase earnings from $3.28/share in 2007 to $6.56/share in 2017. The 2017 earnings per share amounts were adjusted for $1.70/share charge related to the new tax law. Illinois Tool works is expecting to earn somewhere between $7.50/share to $7.70/share in 2018.

The company is in the middle of a restructuring that started in 2013. The goal was to simplify the business structure, narrow the focus and improve the quality of the portfolio, and ultimately focus on organic growth rather than growth through acquisitions. By simplifying and shedding areas that are more commoditified, the company has been able to boost profit margins. This realignment has been helpful in driving organic growth by focusing on most profitable segments, while simultaneously reducing the cost structure.

The ITW business model is focused on three pillars:

ITW has an 80/20 process, where it focuses on the 20 percent of its customers that generate 80 percent of its revenues and structures the business around serving and growing relationships with these key customers. The efficiencies gained from 80/20 deliver best-in-class operating margins, strong free operating cash flow and differentiated returns on invested capital.

The company’s innovation efforts are “80/20-enabled” as its businesses focus on building relationships with major customers to develop deep knowledge and insight around their key needs and pain points. This customer innovation approach has resulted in a large amount of patents, which further bolster the company’s competitive position.

Illinois Tool Works operates through 84 divisions in 57 countries in a highly decentralized structure that places responsibility on managers at the lowest level possible, in an attempt to focus each business unit on the needs of particular customers. Each business unit manager is held strictly accountable for the results of his or her individual business.

The company is targeting 3% – 5% organic revenue growth and 8% - 10% earnings growth through 2022, by leveraging the ITW business model outlined above.

The risks to ITW include the relative cyclicality in the businesses it serves. Another risk includes the fact that the company invests less than 3% of revenues on research & development, which is several times lower than competitors. The company may claim that it is only investing in areas where it can create value however, and that this low R&D investment is due to its laser sharp focus on providing value in its customer centric approach to innovation.

The dividend payout ratio increased from 28% in 2007 to 42% in 2017. The forward dividend payout ratio is at 53%. The dividend is safe based on the history of earnings growth and the dividend payout ratio.

Currently, the stock is fully valued at 18.90 times forward earnings, which is at the top of what I am willing to pay for a cyclical company. The stock yields 2.80%.

Relevant Articles:

September 2018 Dividend Champions List
Three Notable Dividend Increases To Consider
Dividend Aristocrats for 2018 Revealed
How I Manage to Monitor So Many Companies

Monday, September 24, 2018

Five Dividend Stocks Rewarding Shareholders With a Raise

As part of my monitoring process, I review the list of dividend increases every week. I use this process to evaluate existing holdings and also to identify hidden dividend gems. I find it helpful to observe the pulse of dividend increases in my overall monitoring process.

I looked at the list of dividend increases, and then narrowed it down to include those companies that have raised distributions for at least a decade.

The next step includes a focus on each company’s dividend increase, and comparison to its ten year average. After that, I am reviewing the trends in fundamentals, in order to determine if dividend growth is sustainable, and derived from earnings growth. In general, I want to focus my attention on companies which grow earnings and dividends in tandem; I want to avoid companies with stagnant earnings that grow dividends through the expansion in the dividend payout ratio. I have found that the companies with the safest dividends tend to have an adequate dividend payout ratio and growth in earnings per share to deliver future dividend growth, and provide an added margin of safety against short-term turbulence.

Last but not least, I also evaluate the valuation of each company. In general, I want to focus on companies with solid fundamentals, which are also available at attractive valuations.

Ingredion Incorporated (INGR) produces and sells starches and sweeteners for various industries. The company operates through four segments: North America, South America, Asia Pacific and Europe, and Middle East and Africa. The company raised its quarterly dividends by 4.20% to 62.50 cents/share. This marked the 8th consecutive annual dividend increase for this dividend challenger. The ten year dividend growth is 18.60%/year. Earnings grew from $3.52/share in 2008 to $7.06/share in 2017. Ingredion is expected to earn $7.50/share in 2018. Right now, the stock is attractively valued at 13.90 times forward earnings and yields 2.40%.

McDonald's Corporation (MCD) operates and franchises McDonald's restaurants in the United States and internationally. Its restaurants offer various food products, soft drinks, coffee, and other beverages, as well as breakfast menu. The company raised its quarterly dividend by 14.90% to $1.16/share. This marked the 43rd consecutive annual dividend increase for this dividend champion. The ten year dividend growth is 9.80%/year. Earnings grew from $3.76/share in 2008 to $6.37/share in 2017. McDonald's Corporation is expected to earn $7.67/share in 2018. The stock is slightly overvalued at 21.60 times forward earnings but yields 2.80%. McDonald’s may be worth a second look below $150/share.

Realty Income (O) The Monthly Dividend Company is an S&P 500 company dedicated to providing stockholders with dependable monthly income. The company is structured as a REIT, and its monthly dividends are supported by the cash flow from over 5,400 real estate properties owned under long-term lease agreements with regional and national commercial tenants.

Realty Income raised its monthly dividend to 22.05 cents/share. The new dividend is 4% higher than the dividend paid during the same time last year. The monthly dividend company has managed to reward shareholders with multiple dividend increases per year since going public in 1994. The ten year dividend growth is 4.40%/year. This was supported by growth in FFO/share from $1.89 in 2007 to $3.06 in 2017. The REIT yields 4.60% and is selling at 18.60 times FFO. I would prefer Realty Income below$53/share.

W. P. Carey Inc. (WPC) is an independent equity real estate investment trust. The firm also provides long-term sale-leaseback and build-to-suit financing for companies. It invests in the real estate markets across the globe. The firm primarily invests in commercial properties that are generally triple-net leased to single corporate tenants including office, warehouse, industrial, logistics, retail, hotel, R&D, and self-storage properties. The REIT raised its quarterly dividend to $1.025/share. The new rate is 2% higher than the dividends paid during the same time last year. W.P. Carey has raised dividends every year since going public in 1998. The ten year dividend growth rate is 8%/year. Since 2007, FFO/share has grown by 4.70%/year. The REIT yields 6.20%. I find W.P. Carey to be attractively valued today at 12.20 times AFFO.

Microsoft Corporation (MSFT) develops, licenses, and supports software, services, devices, and solutions worldwide. The company operates through Productivity and Business Processes, Intelligent Cloud, and More Personal Computing segments. The company raised its quarterly dividend by 9.50% to 46 cents/share. The forward dividend yield is 1.60%. This marked the 17th consecutive annual dividend increase for this dividend achiever. The ten year dividend growth is 14.50%/year. Microsoft has managed to increase its earnings from $1.62/share in 2009 to an estimated $4.28/share in 2018. The stock is overvalued at 26.70 times forward earnings. Microsoft may be worth a second look on dips below $85/share.

Relevant Articles:

Five Things to Look For in a Real Estate Investment Trust
The predictive value of rising dividends
How to read my weekly dividend increase reports
How to read my stock analysis reports

Sunday, September 23, 2018

Ten Dividend Stocks for September

Readers of my Dividend Growth Investor newsletter just received a list of ten dividend growth stocks I plan to purchase on Monday. This is a real money portfolio which I started in July, in an effort to educate investors on the process of building a portfolio to reach long-term objectives.

The report includes a detailed analysis of each company, using the methods I use to evaluate dividends for safety, valuation and whether dividend growth is on a solid footing. I used the same methods for building my dividend growth portfolio over the past decade.

The goal of the newsletter is to go beyond just identifying ten companies for investment every month. The real goal is to educate investors how real wealth can be built in the stock market. The process of building an income portfolio is very simple, but not easy. An investor simply needs to save money and put them to work in attractively valued stocks regularly. The next step involves reinvesting dividends either selectively or through a DRIP. The last step is the most exciting one – to patiently hold on to your collection of businesses for the long-term. To build a dividend machine, one has to arm themselves with a lot of patience and a long-term focus. This means avoiding the expensive habit of timing the market because it “looks high” or because “it is crashing”. Having the patience to hold on to your investments through thick or thin is a habit that is within the control of the investor.

I try to select companies that I believe will be around in a decade or so, and will be more profitable and pay higher dividend payments along the way. I also evaluate dividends for safety. I focus on valuation today as well as long-term fundamentals. Without growth in fundamentals, and the ability of the business to grow them over time, the companies I invest in will be unable to achieve future dividend growth. As a long-term investor, I buy companies to hold for years if not decades. This is not a newsletter where I will buy securities with the intent of selling them a few months later.

The price for the monthly subscription is just $6/month to new subscribers who sign up for the service. The price for the annual subscription is only $65/year for new subscribers. If you subscribe at the low introductory rate today, the price will never increase for you.

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Thursday, September 20, 2018

Dividend Growth Investor Newsletter – September Edition

The September 2018 edition of the Dividend Growth Investor newsletter comes out this Sunday, September 23. This will be the third edition of the dividend investment newsletter that I started two months ago.

It will list ten dividend growth stocks I plan to purchase on Monday, September 24. Each company is analyzed in detail, using the criteria I use. The goal is to evaluate the dividend for safety and evaluate the fundamentals that will allow that dividend to grow over time. The companies listed are attractively valued, and will be bought by my personal portfolio. I use commission-free broker Robinhood, in order to keep investment costs low.

We have 19 companies in our portfolio right now. The new edition that comes out on Sunday will increase the number of portfolio holdings. The goal is to reach 30 - 40 companies in the portfolio by end of the year. I find most of the companies in the portfolio to be good values today. Long-term readers know that I am a long-term investor who buys stocks and holds them for years. Each investment is made with the intention to hold it for years. Given that I am investing real money in these companies, I am extra careful in what I purchase for long-term dividend income. After two months of operating, we have already had 3 dividend increases so far. I believe we are on the right track to hit the long-term dividend goals.

The newsletter is much more than a list of top ten dividend stocks however. It shows how I make portfolio selections, and how to build a portfolio from scratch and monitor its progress along the way.
This newsletter focuses on a real portfolio. I am showing the process I used to build my own personal dividend portfolio for the past decade. I am using the principles of screening, monitoring, valuation, company analysis to get to a list of companies to buy each month, and to build that portfolio along the way.

While we discuss how to build a dividend portfolio by making regular investments, I believe this newsletter can be helpful to retired investors, not just those in accumulation phase.

You can get a 7 day risk free trial by signing up for the newsletter. I am pricing it at $65/year or $6/month. I believe that for less than 20 cents/day, you can learn from my investing experience, and obtain a list of ten attractively valued dividend stocks for further research. This is a great value.

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Monday, September 17, 2018

3 Undervalued High-Yield Stocks with Fast Dividend Growth On Sale Today

Dividends growth stocks are great for both accumulators and retirees, although the emphasis can vary depending on your goals.

For people that are in the accumulation phase of their investing career, the emphasis is generally on total returns. People in this group rationally seek out the best stable sum of dividend growth and dividend yield, so that decades from now their wealth and passive income will be maximized.

On the other hand, people that are nearing retirement or who have reached retirement tend to have more of an eye on investment income. For them, while total returns are still important, higher current dividend yields are emphasized more strongly. The point here is for the portfolio to produce a ton of reliable income now or in the near future, and for that income to continue increasing faster than inflation over the long-term.

Compared to investment-grade bonds, high dividend stocks can produce higher yields combined with growth that exceeds inflation. In addition, qualified dividend income is taxed at a lower rate than interest income in most cases (with the exception of municipal bonds), meaning that the effective after-tax yield that you get to put in your pocket from dividends is higher than bonds that produce similar yields.

The only real catch is that even safe high-yielding stocks have volatility. During a broad market drawdown, a dividend investor’s principle wealth will decline even if their dividend income ideally remains intact, and they must resist selling at unfavorable prices in a panic. For this reason dividend stocks might not be suitable for 100% of an older investor’s portfolio, but can still provide the long-term backbone of the investment income focused strategy when cushioned by bonds and other asset classes.

With that being said, here are three attractively valued high-yielding businesses with well-protected and growing dividends.

Thursday, September 13, 2018

Abbvie Dividend Stock Analysis

AbbVie Inc. (ABBV) discovers, develops, manufactures, and sells pharmaceutical products worldwide. The company was created in 2013, when Abbott Laboratories split into two companies – Abbvie and Abbott. Abbvie continued raising dividends to shareholders for the five years since becoming a separate publicly traded company. The company is a dividend aristocrat., with a 45 year track record of annual dividend increases.

GAAP Earnings per share have been largely flat since 2013. The company does provide reconciliation between GAAP and non-GAAP earnings however. The non-GAAP earnings have been increasing.

However, Abbvie is expecting GAAP adjusted earnings per share of $6.47 - $6.57/share in 2018. Based on those forward earnings, the stock seems attractively valued today.

The downside with Abbvie is that the company generates 60% of its sales and a larger share of profits from a rheumatoid arthritis drug called Humira. The drug’s patent expired in 2016 in the US and is expiring in 2018 in the European Union. However, due to the drug being a bio-similar, there are over 70 patents that provide some intellectual property protection until sometime in 2022 according to Abbvie.

Humira sales have been growing rapidly, and will likely continue going strongly, until competitors catch up to it. Abbvie projects that Humira sales will peak at $21 billion in 2020, up from $ 18.50 billion in 2017. It is possible that sales can continue growing at a healthy clip until 2022, after which they will start decreasing as competitors nibble at Humira’s market share. If the market it serves expands, or there are new uses for the drug, it is possible that sales can actually be maintained, even if we have increased competition.

I do not like the huge reliance on a single product, because it decreases the margin of safety factor. I also do not like the fact that this product will certainly face higher competition in the years to come. The third fact I do not like is that I do not see another blockbuster drug that will replace Humira’s sales after 2022. While there are many compounds in different stages of clinical trials, it would take several new drugs to compensate for the eventual loss of Humira’s sales.

As a dividend investor, I need growing earnings in order to have growing dividend income. If the current business model cannot be forecasted into the future, it may mean that the company may not be the type of buy and hold investment that can be safely be tucked into your portfolio. It may need more monitoring.

On the other hand, others may argue that these headwinds are already priced into the shares. As a result, despite the problems that are expected to occur in the 2020s, investors will do ok and enjoy a high dividend income in the meantime. To put things in perspective, Pfizer faced its own patent cliff in 2011, when large drugs were set to lose patent protection, impacting future profitability. In 2009 the company bought Wyeth. Fast forward a decade from now, and the company's dividend has been restored after a dividend cut. Investors who bought Pfizer a decade ago have done pretty well for themselves.

Perhaps Abbvie could similarly acquire growth through acquisitions as well. Hopefully they do not overpay for those acquisitions, and do not decide to cut the dividend in the meantime.

The annual dividend per share has increased from $1.60/share in 2013 to $2.56/share in 2017. Based on its most recent dividend increase, the company’s forward annual dividend comes out to $3.84/share.

The dividend seems adequately covered based on forward earnings for 2018. The forward dividend payout ratio comes out to 59.40%. However, if earnings per share over the next decade end up falling off a cliff if Humira sales start decreasing, the dividend may be in a dangerous territory sometime in the latter part of the next decade.

I find Abbvie to be attractively valued today at 14.60 times forward earnings and yields 4.10%. While the future is unclear as to where future growth in sales will be generated after Humira, the stock can still deliver solid returns in the near term. Some may argue that the future uncertainty is somewhat priced in the stock already. That being said, the stock could still provide good entry points for investors on bad news.

I am glad I held on to my Abbvie and Abbott stock following the split in early 2013. However, I am unsure about adding more to Abbvie at present levels. Abbvie seems like a company that needs closer monitoring, because it is not the type of business where future growth can be taken for granted. On the other hand, the dividend seems sustainable at the moment, and will likely grow for the next four - five years at a high single digit rate. Investors today need to decide for themselves whether the current valuation is attractive enough to outweigh future risks. Either way, investors are getting paid generously to hold onto their Abbvie shares.

Relevant Articles:

Dividend Companies Showering Shareholders With More Cash
Turbocharge Income Growth with Dividend Reinvestment
Dividend Aristocrats for 2018 Revealed
Is Pfizer (PFE) a value trap for investors?
Should dividend investors hold on to Abbott (ABT) and Abbvie (ABBV) following the split?

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