Thursday, November 14, 2019

The million dollar dividend portfolio for retirement

A few days ago, I posted an inspiring quote on Twitter. I stated that if you have a portfolio worth $1 million, you can easily expect to generate $30,000 in annual dividend income. I also mentioned that annual dividends would likely grow at 6%/year, which is higher than the raises received from most jobs.

This statement infuriated a lot of people out there. It was also well received by a lot of people too.

Based on reading the responses, I came to the conclusion that there are two camps of thought.

The first one consisted of individuals who are not millionaires, and do not see themselves as someone who will ever achieve financial independence. This is why they produced the most bitter responses. I felt sad for them, because I believe that anyone can reach financial independence if they are willing to live below their means, work to increase their income and cut expenses, and invest money intelligently with a long-term mindset. While everyone gets their fair share of disappointments and setbacks in life, we can at least control our reaction to these unfortunate events, and at least try to improve our financial situation. This group saw the million dollar figure, immediately became scared of what seems like an insurmountable amount of money, and concluded that it is impossible to reach it in the first place. The second group on the other hand immediately grasped the concept at hand, and understood the process to get to their goals and objectives.

The second type of responses were from individuals who were either financially independent, or had a plan in action to reach financial independence. These individuals understand the simple mechanics behind achieving financial independence, and were using the tools within their disposal to get there. These common sense tools include saving money in order to invest in assets, and hold those assets for the long-term. Some examples include buying income producing assets such as dividend stocks, real estate, index funds, businesses, which also grow wealth over time. These individuals are go-getters, who try to learn as much as possible, and improve themselves, in order to improve their lives. This group saw the million dollar figure, and immediately asked themselves how they can get there. The participants in this group knows that they should not despise the days of small beginnings. These investors know how to break down a large goal into small manageable tasks, and to conquer it along the way.

Perhaps the first group did not understand that building wealth is dependent on four simple wealth-building tools within their disposal:

1) The amount of money they save regularly, by living within their means. This includes cutting expenses, while increasing income. The math behind early retirement is simple.

2) The types of investments they select for building wealth. This could include dividend growth stocks, rental real estate, business ownership or index funds.

3) Their holding period. Being a buy and hold investor is probably the best option for most out there. By managing your behavior and investing regularly, you are following a plan and not reacting to the ups and downs of the economy. Staying the course is smarter than active trading, and results in lower costs in terms of taxes and commissions.

4) Another important tool is to educate yourself about investments all the time, while taking a firm control of your money. No one cares more about your family’s financial situation than you. This is why it is important to invest in your own financial education, avoid expensive middlemen that cost you money. It may also make a lot of sense to minimize tax liabilities by investing through tax-deferred accounts.

It is fascinating that a million-dollar portfolio can generate $30,000 in annual dividend income. A 3% yield is fairly easy to obtain today, whether you focus on building out your own portfolio one company at a time, or whether you go the ETF route. If history is of any guidance, dividend income is expected to grow faster than inflation over time. A carefully selected and diversified portfolio of dividend growth stocks can reasonably be expected to grow distributions at an annualized rate of 6%/year over time. If you are still in the accumulation phase and you can reinvest those distributions, you can easily grow portfolio dividends at a double digit percentage rate annually. By adding more money to the portfolio regularly, you are further turbocharging your dividend machine.

The nice thing about being a dividend investor is that dividend payments are more stable than share prices. It is easier to estimate future dividend payments, than to forecast what share prices will do. This is why retirees love the recurring nature of dividend payments. Dividends are more stable than share prices, which makes them an ideal source of income for my retirement. Plus, dividends represent a return on your investment, and help you avoid focusing on short-term stock price fluctuations. In essence, I am being paid to hold on to my shares when I receive dividends. In other words, dividends represent a return on investment, as well as a return of investment.

Getting to the coveted dividend crossover point, which is the point at which your dividend income covers your expenses is the ultimate goal of every investor out there. Getting to the point is a function of:

1) Amount of money you invest every month
2) The dividend income and yield you receive when you invest your money
3) The annual dividend growth for your portfolio
4) The amount of time you let your portfolio to compound for
5) Keeping your investment and tax costs to the bone

Notice that I am a firm believer in regular investing whenever I have money to invest. It makes to sense to me to even think about timing the market. I have learned that the sooner I invest in income producing assets, the sooner I can start earning dividends. While the amount of time to get to your financial independence will vary, I do believe getting there is a function of patience and perseverance.

Once you get there, you have control over your time and schedule. You can decide to continue working, to change careers, or to retire and watch Disney + all day. This is your life and your time, and you will be in charge of it. After all, you have worked hard to get there, and have done something that most people are not willing to even try.

The best part is that once you generate a healthy chunk of dividends, and you choose to stop working for money, you are joining the investor class. As an investor you are in a unique position to make money without needing to do much work, and you are getting hefty tax breaks in the process. You can do this from work, in your pajamas if you choose to.

As a result, for married couple that files jointly in the US, who earns up to $100,000 in qualified dividend income, they would owe zero in taxes to the Federal Government. Plus, they would owe zero taxes for FICA. They may owe state and local taxes. This is the best part about being financially independent however – they are location independent as well. They do not need to be in a certain place in order to generate money. A financially independent investor can travel the world, and still receive their dividends deposited neatly into their brokerage accounts. If you just move across state lines to one of the states that do not tax income, you won’t owe any taxes on income.

When you work in the accumulation phase, you end up paying high marginal tax rates to the Federal and State Governments, and you have to change employers if you want to work from a state with no income taxes. Plus, you would have to pay FICA, and you would have expenses related to
commuting and dressing in appropriate attire. Working is expensive because it ties you down to a certain area, and it sucks up most of your productive time in the week. You have less time to spend with your family, which is why you may end up outsourcing tasks to daycares, house cleaners etc.

This is the mindset I have always had about wealth building in general. I have always tried to get to the coveted financial independence spot, and have tried to accumulate all sorts of knowledge and experience to get me there. While it took a while to get to financial independence, the journey has definitely been exciting. Rather than be bitter about others successes, I have embraced them and tried to learn from them. Rather than be scared of the lofty goal of achieving financial independence, I have tried to break down the goal into smaller components and smaller targets, that are easier to accomplish. I have also focused my attention on building a system of achieving my goals, through meticulous savings, investing and patience, while also enjoying the journey along the way.

It is ironic that when I was first starting out, I was infuriating people because my first dividends were about 20 cents/month. I was scoffed at as insignificant. Nowadays, people are infuriated because the amount of dividend income seem high, and they do not believe in themselves enough to think how to get to their financial independence. It is easier to be dismissive of accomplishments, rather than try and figure out for your self how you can get there. Perhaps the lesson for me is that no matter what you do, you should do things to achieve your goals and objectives, and not try to appease everyone. Having an inner scorecard definitely helps. And that helps in the wealth building phase, because you can save much more when you don't spend money on luxury cars, expensive clothes and McMansions, in order to look better to others.

So in order to get to the financial independence, it is important to get started. Then enjoy the journey!

Relevant Articles:

How to retire in 10 years with dividend stocks
What are your investment goals?
The Initial Grind Is The Hardest
Use these tools within your control to get rich
- The Dividend Crossover Point

Monday, November 11, 2019

Eleven Dividend Growth Stocks For Further Research

As part of my monitoring process, I review the list of dividend increases every week. This is helpful in checking developments for companies I own, as well as companies I am considering. Quite often, dividend increases are announced alongside the release of quarterly or annual results. It is helpful to pay attention to major developments, but it is equally important not to read too much into it, and end up micromanaging your portfolio by increasing trading activity. In general, this exercise helps me to see if my original thesis is working. If I see developments that show me that I was wrong, I will stop adding to my positions. In the case of a dividend cut, I will sell. Otherwise, I will hold on, and just allocate dividends elsewhere.

I share an article about dividend increases weekly with you, in order to show you how I go about quickly reviewing companies, and how I screen for them on the go. I am hopeful that this exercise shows readers the qualities I look for in companies, before I put them on my list for further research.

In general, I look for:

1) Minimum streak of annual dividend increases. Usually more than 10 years in a row.
2) A valuation below 20 times earnings. However, I am not as big of a stickler for it as I once were.
3) A dividend payout ratio below 60%. The obvious exceptions are companies which have a history of high payout ratios, while also raising dividends for long period of time. Companies in the Utilities, Telecom and Real Estate sectors are prime suspects off the top of my mind.
3) Earnings growth over the past decade, whether is more likely to continue and fuel future dividend increases
4) Dividend growth over the past decade exceeding inflation. I am on the lookout for acceleration or deceleration in dividend growth. When management slows down on dividend growth, this tells me that there are some headwinds along the way.

Inter Parfums, Inc., (IPAR) manufactures, markets, and distributes a range of fragrances and fragrance related products. The company operates in two segments, European Based Operations and United States Based Operations.

The company raised its quarterly dividend by 20% to 33 cents/share. This is in line with the ten year average of 20.20%/ year.

Between 2008 and 2018, the company managed to grow earnings from 77 cents/share to $1.71/share. Inter Parfums is expected to earn $1.90/share in 2019.

The stock is overvalued at 40 times forward earnings. It yields 1.70%.

Assurant, Inc. (AIZ) provides risk management solutions for housing and lifestyle markets in North America, Latin America, Europe, and the Asia Pacific. The company operates through three segments: Global Housing, Global Lifestyle, and Global Preneed.

The company raised its quarterly dividend by 5% to 63 cents/share. This marked the 16th year of annual dividend increases for this dividend achiever. During the past decade, Assurant has managed to boost distributions at an annualized rate of 1%

Between 2008 and 2018, the company managed to grow earnings from 3.76 cents/share to $3.98/share. Assurant is expected to generate $8.69/share in 2019.

The stock is fairly/ valued at 15 times forward earnings and offers a well-covered dividend yield of 1.90%. It may be worth researching further.

Snap-on Incorporated (SNA) manufactures and markets tools, equipment, diagnostics, and repair information and systems solutions for professional users worldwide. It operates through Commercial and Industrial Group, Snap-on Tools Group, and Repair Systems & Information Group segments.

Snap On declared $1.08/share quarterly dividend, which is a 13.7% increase from prior dividend of $0.95. This is the tenth consecutive annual dividend increase for this newly minted dividend achiever. During the past decade, Snap-On has managed to boost distributions at an annualized rate of 11%/year.

Over the past decade, Snap-On has managed to grow earnings from $4.07/share to $11.87/share. The company is expected to generate $12.26/share in 2019.

The stock is fairly valued at 13.60 times forward earnings and offers a well covered dividend yield of 2.60%. It may be worth following for further research.

Aaron's, Inc. (AAN) operates as an omnichannel provider of lease-purchase solutions to underserved and credit-challenged customers. It operates in three segments: Progressive Leasing, Aaron's Business, and DAMI.

The company raised its quarterly distribution by 14.30% to 4 cents/share. This marked the 17th year of annual dividend increases for this dividend achiever. Over the past decade, Aaron’s has managed to boost distributions at an annualized rate of 10.90%/year.

Between 2008 and 2018, earnings per share increased from $1.11 to $2.78. Aaron’s is expected to generate $3.93/share.

The stock is attractively valued at 14.80 times forward earnings. It yields 0.30%, but offers the opportunity for faster dividend growth and potentially higher total returns. It may be a good idea for younger investors to research.

Emerson Electric Co. (EMR) is a technology and engineering company, that provides solutions to industrial, commercial, and consumer markets worldwide.

Emerson Electric hiked its quarterly dividend by 2% to 50 cents/share. As a result, this dividend king achieved 63 consecutive years of increased dividends per share. The company has managed to hike distributions at an annualized rate of 4.70% over the past decade.

Between 2008 and 2018, Emerson Electric has managed to grow earnings from $3.06/share to $3.46/share. The company is expected to generate $3.67/share in 2019. In other words, earnings per share have been flat for over a decade. Dividend growth has been running on fumes, as evidenced by the slowdown in distributions growth. There is some pushback from activist investors, so I am hopeful that they can reinvigorate the company. Otherwise, it may be forced to end its streak of annual dividend increases in the near future.

The stock is also overvalued at 20.40 times forward earnings. While it offers a decent yield at 2.70%, its dividends are growing slowly due to stagnation in earnings per share and the higher payout ratio. I view the stock as a hold today, with dividends being allocated elsewhere.

Utah Medical Products, Inc. (UTMD) develops, manufactures, and distributes medical devices for the healthcare industry in the United States, Europe, and internationally.

The company raised its quarterly dividend by 1.80% to 27.50 cents/share. It has managed to increase dividends by 1.80%/year over the past decade. Utah Medical Products is a dividend achiever which has managed to increase distributions for 17 years in a row.

Between 2008 and 2018, Utah Medical Products has managed to boost earnings from $1.86 to $4.95/share.

The stock is slightly overvalued at 21 times earnings. Utah Medical Products yields 1.10%, but offers a very slow rate of annual dividend increases. I like the potential for capital gains, but the slow rate of dividend increases is putting me off a little bit.

KLA Corporation (KLAC) designs, manufactures, and markets process control and yield management solutions for the semiconductor and related nanoelectronics industries worldwide.
The company managed to increase distributions by 13.30% to 85 cents/share. It has managed to boost dividends for 10 years in a row. Over the past decade, KLA Corporation has managed to increase distributions at an annualized rate of 16.80%.

Between 2008 and 2018, this dividend achiever managed to boost earnings per share from $1.95 to $7.49. The company expects to earn $10.01/share in 2019.

KLA Corporation looks fairly valued at 17.40 times forward earnings and yields 1.95%. It may be worth researching, only to understand how this former dot-com darling managed to increase earnings and hit all-time-highs.

Evergy, Inc. (EVRG) engages in the generation, transmission, distribution, and sale of electricity in Kansas and Missouri.

Evergy increased its quarterly dividend by 6.30% to 50.50 cents/share. This marked the 15th consecutive annual dividend increase for this dividend achiever. Over the past decade, it has managed to increase distributions at an annualized rate of 4.30%.

Between 2008 and 2018, the company has managed to boost earnings from $1.69/share to $2.50/share. Evergy is expected to earn $2.88/share in 2019.

The stock is overvalued at 21.90 times forward earnings and yields 3.20%. It may be worth reviewing on dips.

BOK Financial Corporation (BOKF) operates as the financial holding company for BOKF, NA that provides various financial products and services in Oklahoma, Texas, New Mexico, Northwest Arkansas, Colorado, Arizona, and Kansas/Missouri. It operates through three segments: Commercial Banking, Consumer Banking, and Wealth Management.

The company hiked its quarterly distribution by 2% to 51 cents/share, bringing its track record of annual dividend increases to 15 years in row. Over the past decade, it has managed to boost distributions at an annualized rate of 8.10%.

BOK Financial managed to boost earnings per share from $2.27 to $6.63/share between 2008 and 2018. The company is expected to generate $7.35/share in 2019.

The stock is attractively valued at 11.20 times forward earnings and yields 2.50%. I like the long term trend in earnings per share, and the owner-operator behind the enterprise. The slowdown in dividend increases is giving me pause however.

WestRock Company (WRK) manufactures and sells paper and packaging solutions for the consumer and corrugated markets in North America, South America, Europe, and the Asia Pacific.

The company raised dividends by 2.20% to 46.50 cents/share. This was a much slower rate of distribution growth than the ten year average of 25.50%/year. WestRock is a dividend achiever with an 11 year record of annual dividend increases.

The company earned $1.07/share in 2008, and has managed to grow it to an estimated $3.41/share in 2019.

The stock is attractively valued at 11.80 times forward earnings and yields 4.70%. Based on the slow increase in dividends, it looks like the days of fast dividend growth are over.

Atmos Energy Corporation (ATO) engages in the regulated natural gas distribution, and pipeline and storage businesses in the United States. It operates through Distribution, and Pipeline and Storage segments.

The utility increased its quarterly distribution by 9.50% to 57.50 cents/share. This marked the 36th consecutive annual dividend increase for this dividend champion. During the past decade, it has managed to boost distributions at an annualized rate of 4.30%.

Atmos Energy earned $2/share in 2008, and is expected to earn $4.63/share in 2019.
The stock is overvalued at 23.20 times forward earnings. It yields 2.10%.

Relevant Articles:

Six Companies Growing Dividends for Shareholders
Best Dividend Stocks For The Long Run – 10 years later
Evolution of the dividend kings list over the years
Seven Dividend Paying Companies Rewarding Their Owners With a Raise

Thursday, November 7, 2019

Kimberly-Clark (KMB) Dividend Stock Analysis

Kimberly-Clark Corporation (KMB), together with its subsidiaries, manufactures and markets personal care, consumer tissue, and professional products worldwide. It operates through three segments: Personal Care, Consumer Tissue, and K-C Professional.

This dividend champion has paid dividends since 1935 and has increased them for 47 years in a row. The last dividend increase occurred in January 2019, when the board of directors raised the quarterly payment by 3% to $1.03/share.

Between 2008 and 2018, Kimberly-Clark managed to grow earnings from $4.05/share to $4.03/share.  The figures should be adjusted upwards in my opinion for the impact of the 2018 restructuring program to the tune of $2.24/share. This would bring the figures closer to $6.27/share. If you add-in one-time items related to the US tax reform to the tune of 33 cents/share, we come up with adjusted EPS of $6.60/share. Kimberly-Clark is expected to earn $6.82/share in 2019.

Demand for company’s products is relatively stable and relatively recession resistant. There is a high probability that people will still be using tissues, toilet paper and other products that KMB produces for several decades out. Demand won’t change drastically during a recession.  The company can grow earnings through new product innovation, expansion in emerging markets and taking cost out through streamlining of operations. Product marketing should keep customers continuing to buy branded products, rather than switching to generics, which are perceived as lower quality by consumers and are not really saving a lot of money per item either.

In 2019 the company unveiled its K-C Strategy 2022, whose objective is to deliver growth and create shareholder value in what is viewed as a challenging business environment. This would be achieved by growing Kimberly-Clark's iconic brand portfolio, leveraging the company's strong cost and financial discipline and allocating capital in value-creating ways. (Source:)

Key highlights:
The company will target to grow sales in-line with, or slightly ahead of, category growth rates. Kimberly-Clark's three growth pillars are to elevate core businesses, accelerate growth in D&E markets and drive digital marketing and e-commerce. The company expects to achieve these pillars by launching differentiated product innovations, driving category development and leveraging commercial capabilities in sales and marketing.
The company will generate savings in order to fund growth initiatives and improve margins. Focus areas will include driving ongoing supply chain productivity improvements through the FORCE program ( a 4 year cost-savings target of $1.5 billion through 2021), executing the 2018 Global Restructuring Program ( workforce reductions of 12 – 13% of headcount that could save 500 -550 million per year, while eliminating or selling manufacturing facilities.), rigorously controlling discretionary spending to sustain the company's top-tier overhead cost structure and driving further improvement in working capital.

The company will allocate capital in value-creating ways, enabled by strong cash generation. Kimberly-Clark expects to spend capital at an annual rate of 4 to 5 percent of net sales after completing the 2018 Global Restructuring Program. In addition, the company plans to return significant amounts of cash to shareholders through dividends and share repurchases.
The company's medium-term financial objectives associated with K-C Strategy 2022 assume that category growth remains relatively modest and similar to recent conditions.

The objectives are as follows:
Sales and organic sales growth - 1 to 3 percent annually.
Adjusted earnings per share growth - mid-single digits annually.
Adjusted Return On Invested Capital - at least maintain at current level.
Dividend growth - generally in line with adjusted earnings per share growth.


The company has maintained a very consistent stock buyback program over the past year. Between 2008 and 2018, the number of shares decreased from 419 million to 350 million.

The annual dividend payment has increased by 6.20% per year over the past decade, which is higher than the growth in EPS. This has been achieved mostly due to the expansion of the dividend payout ratio. In January 2019 the Board of Directors approved a 3% increase in the quarterly annual dividend to $1.03/share. I believe that future dividend growth will likely be closer to 4% - 5%/year over the next decade, mostly driven by growth in earnings per share.

The dividend payout ratio has increased from 57% in 2008 to almost 61% in 2018. A lower payout is always a plus, since it leaves room for consistent dividend growth minimizing the impact of short-term fluctuations in earnings.


I find Kimberly-Clark to be close to fully valued at 19.60 times forward earnings. The stock yields 3% and has a sustainable distribution.

Relevant Articles:

Seven Companies Working Hard For Their Stockholders
Dividend Aristocrats for 2019 Revealed
Best Dividend Stocks For The Long Run – 10 years later
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Monday, November 4, 2019

Seven Dividend Growth Stocks For Further Research

Welcome to my weekly review of dividend increases. I have done this process for over eleven years on my site, in order to share with readers how I go about monitoring my portfolio. I also review the list of dividend increases every week in order to uncover any hidden dividend gems.

I start by looking at dividend increases for the past week by US listed companies. I narrow the list down to the ones with a ten year track record of annual dividend increases. This exercise provides me with the list of companies for today’s article.

The next step in my process applies my entry criteria, in order to determine if a company is worth researching today or at some lower point. A few companies are good values today, while others may be a good idea for research if they come down in price. A third group of companies are not worth researching for me for one reason or another.

The type of review I do focuses on growth in dividends per share that is fueled by growth in earnings per share. I also review recent dividend increases and compare them to the ten year average. Recent dividend increases are a good barometer for management sentiment towards their short-term business environment. I also review valuation of course, in order to determine the point at which a company may be worth researching. I always try to do the work of researching a company, before investing. That way, I have a record of the reasons why I bought in the first place, which is helpful for my education as an investor.

The companies I that made the cut for today’s review include:

The Estée Lauder Companies Inc. (EL) is one of the world’s leading manufacturers and marketers of quality skin care, makeup, fragrance and hair care products.

The company raised its quarterly dividend by 12% to 48 cents/share. This marked the tenth consecutive annual dividend increase for this newly minted dividend achiever. Over the past decade, the company has managed to grow distributions at an annualized rate of 19%.

Between 2009 and 2019, Estee Lauder managed to grow earnings from 55 cents/share to $4.82/share. The company is expected to generate $5.89/share in 2020.

The stock is overvalued a 31.70 times forward earnings and offers a dividend yield of 1%. Estee Lauder may be a good idea on dips below $120/share.

Rockwell Automation, Inc. (ROK) provides industrial automation and information solutions worldwide. It operates in two segments, Architecture & Software; and Control Products & Solutions.

The company raised its quarterly dividend by 5% to $1.02/share. This marked the tenth consecutive annual dividend increase for this newly minted dividend achiever. Over the past decade, the company has managed to grow distributions at an annualized rate of 12.10%.

Between 2008 and 2018, the company managed to grow its earnings from $3.90/share to $4.21/share. It is expected to earn $8.59/share in 2019.

The stock is slightly overvalued at 20.70 times forward earnings. The stock yields 2.30. It may be worth a look on dips below $172/share.

UMB (UMBF) offers personal banking, commercial banking, healthcare services and institutional banking, which includes services to mutual funds and alternative-investment entities and registered investment advisors. UMB operates banking and wealth management centers throughout Missouri.

The company increased its quarterly dividend by 3.30% to 31 cents/share. This marked the 28th consecutive annual dividend increase for this dividend champion. Over the past decade, the company has managed to grow distributions at an annualized rate of 6.20%.

Between 2008 and 2018, UMB Financial has managed to increase earnings from $2.38/share to $3.93/share. UMB Financial is expected to generate $4.76/share in 2019.

The stock is fairly valued at 13.90 times forward earnings but offers a low dividend yield of 1.90%. This is a low yield for a bank. The slowing dividend growth is a concern.

Cintas Corporation (CTAS) provides corporate identity uniforms and related business services primarily in North America, Latin America, Europe, and Asia. It operates through Uniform Rental and Facility Services and First Aid and Safety Services segments.

The company increased its annual dividend by 24.40% to $2.55/share. This is the 36th consecutive year that the annual dividend has increased, which is every year since Cintas’ initial public offering in 1983. Over the past decade, this dividend champion has managed to boost distributions at an annualized rate of 16.10%.

Between 2009 and 2019, Cintas has managed to grow earnings from $1.48/share to $7.99/share.
Cintas is expected to generate $8.59/share in 2020.

The stock is overvalued at 31.30 times forward earnings. Cintas yields 0.95%. The stock may be worth a look on dips below $172/share, which may be possible if we get another decline like the one from December 2018.

Black Hills Corporation (BKH), operates as an electric and natural gas utility company in the United States. It operates through Electric Utilities, Gas Utilities, Power Generation, and Mining segments.
The company hiked its quarterly distribution by 5.90% to 53.50 cents/share. This marked the 49th consecutive annual dividend increase for this dividend champion. Over the past decade, the company has managed to grow distributions at an annualized rate of 3.30%.

The company managed to grow earnings from $2.75/share in 2008 to $3.54/share in 2018. The company is expected to earn $3.46/share in 2019.

The stock is overvalued at 23 times forward earnings. It offers a dividend yield of 2.70%. I like the acceleration of dividend growth in recent history relative to the ten year average, but I find the valuation to be too rich at present levels.

DTE Energy (DTE) is a Detroit-based diversified energy company involved in the development and management of energy-related businesses and services nationwide.

The company raised its quarterly dividend by 7% to $1.0125/share. This event marked the 11th consecutive annual dividend increase for this dividend achiever. During the past decade, DTE has managed to boost distributions at an annualized rate of 5.20%.

Between 2008 and 2018, the company managed to boost earnings from $3.34/share to $6.17/share.
The company is expected to generate $6.25/share in 2019.

The stock is overvalued at 20.30 times forward earnings. DTE Energy yields 3.20%. While low interest rates have pushed valuations for utilities upwards, I would like to be able to acquire shares at a lower valuation.

Mercury General Corporation (MCY), engages in writing personal automobile insurance in the United States.

The company raised its quarterly dividend by 0.40% to 63 cents/share. This marked the 33rd consecutive annual dividend increase for this dividend champion. Over the past decade, the company has managed to boost distribution’s at an annualized rate of 0.80%.

Earnings per share have gone all over the place over the past decade, oscillating between a high of $7.32/share in 2019 to a low of -$4.42/share in 2008. The company is expected to generate $2.85/share in 2019.

Mercury General is trading at 17 times forward earnings, yields 5.20% and has a payout ratio of 88%. I am not interested in the company at this point, given the slow rate of dividend growth, high payout ratio and inconsistent earnings trend.

Relevant Articles:

Twelve Dividend Growth Stocks In The News
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How to value dividend stocks
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Thursday, October 31, 2019

Does paying off a mortgage beat investing in stocks?

In the last example, I ran some numbers in order to determine if it was better to pay off my mortgage early or to invest the money and use the capital to make the mortgage payments.

After going through the examples, I received a lot of feedback from readers. Turns out I made an error. The best response came from reader Keith S., who is CPA. This is what I heard from him:



Hi Dividend Growth Investor:

I just read your article about paying off mortgage vs investing.

As you state, if the mortgage is 4% and the investment is 10%, not paying the mortgage down should be best.

The problem is your spreadsheet.

Option 1 Pay down the mortgage.

You are now assuming you take $11,460 per year that you would have paid on the mortgage and invested it. After 30 years, we have $1,885,101 invested in equities and a fully paid for house. 

Option 2 Put $200,000 in side fund.

In this case, you still would be making the $11,460 in mortgage payments (not taking them out of the side fund). Otherwise, option 1 would be taking $11460 out of pocket each year while option 2 would not be taking anything out of pocket).

So after 30 years, option 2 the mortgage is paid off and the side fund has grown to

$200,000 compounded at 10% for 30 years= $3,489,880

So, in fact, leaving the money in the side fund is much better by over $1.5 million.

Hope that helps


Plenty of other readers commented, showing the issues. I have a great community of sharp readers, who can spot inconsistencies, and take advantage of them.

The moral of the story is that you should always be skeptical of everything you read on the internet. You should trust, but also verify the numbers. This goes without saying, but you should really double-check numbers, assumptions, and logic when excel spreadsheets are involved. If someone is making a statement, you should always try to verify using data and trying to make an objective analysis to evaluate the date.

This process applies equally to content and analysis done by people you agree with or disagree with. Everyone can make an error, which is why it makes sense to double check your work, before making any actionable changes. It is also great to receive feedback, as it can help grow.

Last but not least, it is important to have an open mind. If you make an error, admit it, and learn from it. In my case, I have made lots of errors over time. However, I have tried to be open about it, and see it as a learning opportunity. If you keep learning, you keep growing, so hopefully your investment portfolio will show improved performance over time.


Should I pay off my mortgage or invest in stocks?

Update: I made an error in one of assumptions, which several readers pointed out to me. The error was related to the option where you put $200,000 into stocks, and you have to pay $11,460 for the mortgage payments each year. The missing part that I did not account for is the $11,460 in fresh contributions for 30 years, which offset the need to pay for mortgage payments out of investing income. Therefore, the best solution is to invest in stocks on a lump sum basis, as it leads to an investment value of over $3.489 million. You may still want to read the article, and see if you can spot where I had errors in logic. 

It is great to admit mistakes, so that I can learn from them. And it is great that I have sharp readers, who can point out development opportunities for me that I can learn from too!

A little over two years ago, I bought a house. My spouse and I decided that we could afford the payments, and also wanted to have a stable place for our offspring.

We took a 30 year mortgage in order to buy the house, after putting in a downpayment equivalent to 20% of the original purchase price.

For the past two years or so, I have had the urge to pay off the debt as soon as possible.

I have never had debt in my life ( before the mortgage). I pay my cards off every month, and try to be frugal, in order to get enough money to put to work in equities. I have learned to invest money every month, whenever I have available cash to deploy in dividend paying stocks.

I always told myself that it doesn’t make sense to pay off the house, because my interest is 4%, while the expected total return on equities is 10%/year (2% dividends, 8% price increase or 3% dividends/7% price increase). So I just made the monthly payments, and sometimes sprinkled in a small extra payment to principal just for the fun of it.

If you are familiar with mortgage amortization tables, you would notice that at the beginning, a larger part of your monthly payment is comprised of interest. The remainder goes to principal.

Approximately a third or less of the monthly payment goes to principal, with the rest going to interest in the initial stages.

In my monthly payment, I also have the taxes and insurance bundled in neatly. However, those are going to be due whether I own my house outright or if I have a 30 year mortgage on it. The same logic goes for maintenance and improvements – these are due no matter what. So the items in this paragraph are not going to influence the decision to pay off the house quickly or to invest.

I have been considering paying my mortgage off quickly in recent months. So I decided to crunch some numbers.

You can download the spreadsheet from this location.

I assumed that we are dealing with a $200,000 mortgage at 4%. The monthly payment on a 30 year mortgage comes out to $955 for 30 years. This comes out to $11,460/year.

We can either pay off the mortgage today, or we can invest the money and use the profits to make the payments.

Paying off the mortgage frees up $11,460 to invest in equities each year. After you pay off the mortgage, you don’t have to make monthly mortgage payments after all. I assume an annual total return of 10%/year when investing the money. I am going to ignore the effect of taxes, and I will also assume a flat 10% annual return. This is a model, and not real life, but the ten percent expectation is closer to the historical annual returns on US stocks.

In other words, in year one we start with $11,460. After a full year of investing, the amount has grown to $12,606. When we add the $11,460 saved from not having to make mortgage payments, we are left with $24,066. After 30 years, we have $1,885,101 invested in equities.

The second option is to invest the full $200,000 in equities today, but to use the investment returns to make the monthly mortgage payments for 30 years. I assume an annualized total return of 10%.

This means that in year one, we turn the $200,000 into $220,000. We then withdraw $11,460 to make the mortgage payments. As a result, we are left with $208,540 by the end of year one. After 30 years of paying off the mortgage from the investment account, we are left with $1,604,779 invested in equities.

This is the point that surprised me. If you pay off the mortgage today, you have $11,460 to allocate towards equities for 30 years. The amount grows to $1,885,101. This is a higher amount than the outcomes where we invest a lump-sum today, but we use the profits to pay off the mortgage. This finding runs contrary to what I originally believed in.

Based on the findings of this study, I will need to work towards paying off my mortgage as soon as possible.

Of course, real life is messier. Things do not go as neatly as a simulation can incorporate. If you pay off a loan quicker, you are left with less money on hand for large and unexpected expenditures. With stocks, you have instant liquidity that can allow you to use the money within a moment’s notice. If the money is spent on a house however, it is very difficult to extract that money from the home equity. In addition, a portfolio of equities worth $200,000 offers some diversification. On the other hand, a house worth $200,000 is a concentrated bet on a single asset class in a single geographic location, which is also not very liquid.

On the other hand, some individuals are paying a large premium for their desire to have liquidity. Some investors hold massive amounts of fixed income directly or indirectly today. These fixed income instruments could pay off their mortgage in a second. However, these individuals seem to have forgotten that a mortgage is part of their personal balance sheet as much as bonds owned in a brokerage account. To add insult to injury, fixed income today doesn’t yield more than 2% ( assuming US Treasury or Agency bonds). This is a much lower rate of return than the interest rates on a 30 year mortgage today of 4%. Even a 15 year mortgage costs around 3% today, which is a higher cost than the yield you can obtain from investment grade bonds today. So in other words, if you invest in bonds yielding 2% today, but pay a mortgage that costs 4% today, you are essentially losing 2% on that capital every year. By paying off your mortgage from that fixed income, you are going to stop the bleeding. Of course, you should still be smart and determine for yourself if perhaps a large cash pile makes you more comfortable through the ultimate ups and downs of life.

Another nice reminder is the fact that people move often. That’s why very few individuals will be able to actually benefit from sitting on a house for 30 years. However, I do believe individuals should focus on buying a house the same way they invest in equities – by having a long-term focus and a holding period in the decades. Plus, not everyone has the amount of cash just laying around, waiting to pay off their mortgage at once. But if you do, it may be a good idea to run the numbers for yourself.

For example, the situation is further complicated by decisions such as investing the money through an employer sponsored retirement plan, which may come with a 401 (k) match and tax deferral on contributions. If you do not invest in a 401 (k), IRA or HSA plan today, you cannot go back in time to use those limits. The decision would also be complicated, if the amounts available to pay off the mortgage are sitting in equities today. Selling those equities could result in a payment of capital gains taxes.

It is nice to mention that in both cases (paying off mortgage earlier or investing earlier), the individual is left with a fully paid off house after 30 years and an investment portfolio. The exercise showed how paying off the house can result in a larger equities portfolio.

Thank you for reading!

Relevant Articles:

Rent Versus Buy - How to decide which one is best for you?
Entering Wealth Preservation Mode
Do I need an emergency fund?
Taxable versus Tax-Deferred Accounts for Dividend Investors

Monday, October 28, 2019

Twelve Dividend Growth Stocks In The News

As part of my monitoring process, I review the list of dividend increases every week. I use this process to update my files on companies I own, and see if they are performing according to my expectations. I also use this exercise in order to uncover any hidden dividend gems.

In order to come with the list of dividend increases for this article I followed these steps:

1) I outlined companies that raised dividends last week
2) I focused on the ones with at least a ten year history of annual dividend increases

Subsequently, I reviewed each company using the following criteria, in order to determine if they are worth reviewing further:

1) Comparing the latest dividend increase to the ten year average
2) Reviewing trends in earnings per share, in order to determine the likelihood of future dividend increases
3) Looking at valuation, in order to determine whether a company is worth researching further.

The companies that made it for this weeks review are listed below:

Lincoln Electric Holdings, Inc. (LECO), designs, manufactures, and sells welding, cutting, and brazing products worldwide. It operates through three segments: Americas Welding, International Welding, and The Harris Products Group.

The company raised its quarterly dividend by 4.30% to 49 cents/share. This marked the 25th consecutive annual dividend increase for this dividend champion. During the past decade, the company has managed to boost distributions at an annualized rate of 12.10%/year

The company grew earnings from $2.46/share in 2008 to $4.37/share in 2018.

The company is expected to generate $4.97/share in 2019.

The stock is fairly valued at 18.50 times forward earnings and a dividend yield of 2.10%.

American Electric Power Company, Inc. (AEP) is an electric public utility holding company, which engages in the generation, transmission, and distribution of electricity for sale to retail and wholesale customers in the United States.

The company raised its quarterly dividend by 4.50% to 70 cents/share. This marked the tenth consecutive year of annual dividend increases for this dividend achiever. During the past decade, AEP has managed to boost distributions at an annualized rate of 4.50%.

The company grew earnings from $3.42/share in 2008 to $3.90/share in 2018.

The company is expected to generate $4.16/share in 2019.

The stock is overvalued at 22.70 times forward earnings and a dividend yield of 3%.

Middlesex Water Company (MSEX), owns and operates regulated water utility and wastewater systems. It operates in two segments, Regulated and Non-Regulated.

The company increased its quarterly dividend by 6.70% to 25.625 cents/share. This marked the 47th year of annual dividend increases for this dividend champion. Over the past decade, this dividend champion has raised distributions at an annualized rate of 2.60%.

The company grew earnings from $0.89/share in 2008 to $1.96/share in 2018.

The company is expected to earn $1.97/share in 2019.

The stock is overvalued at 33.10 times forward earnings and offers a dividend yield of 1.60%.

Prosperity Bancshares, Inc. (PB) operates as bank holding company for the Prosperity Bank that provides retail and commercial banking services to small and medium-sized businesses, and consumers.

The bank increased its quarterly dividend by 12.20% to 46 cents/share. This marked the 22nd year of annual dividend increases for this dividend achiever. During the past decade, the company has managed to boost distributions at an annualized rate of 11.20%.

Between 2008 and 2018, Prosperity Bancshares managed to increase earnings from $1.86/share to $4.61/share. The company is expected to earn $4.74/share in 2019.

The stock is fairly valued at 15.40 times forward earnings and offers a dividend yield of 2.50%.

Stepan Company (SCL) produces and sells specialty and intermediate chemicals to other manufacturers for use in various end products in North America, Europe, Latin America, and Asia. The company operates through three segments: Surfactants, Polymers, and Specialty Products.

The Board of Directors of Stepan Company approved 10% increase on its quarterly cash dividend to 27.50 cents/share. The increase marks the 52nd consecutive year in which the quarterly dividend rate for this dividend king has increased. Over the past decade, this dividend king has managed to grow distributions at an annualized rate of 8.10%.

Between 2008 and 2018, earnings per share rose from $1.76 to $4.83. Stepan is expected to generate $4.95/share in 2019.

The stock is close to fully valued at 19.60 times forward earnings and yields 1.10%.

Visa Inc. (V) operates as a payments technology company worldwide. Visa’s board of directors increased its quarterly cash dividend by 20% to 30 cents per share. This marked the 11th consecutive year of annual dividend increases for this dividend achiever. Over the past decade, it has managed to grow dividends at an annualized rate of 32.60%.

Between 2008 and 2018, earnings grew from 24 cents/share to $4.42/share.

Visa is expected to earn $6.26/share in 2019, followed by $7.26/share in 2020.

The stock is overvalued at 28.40 times forward earnings. Visa yields 0.70%. The stock doesn't yield much, but offers a potential for rapid dividend growth.

Cass Information Systems, Inc. (CASS) provides payment and information processing services to manufacturing, distribution, and retail enterprises in the United States. It operates through two segments, Information Services and Banking Services.

The company raised its quarterly dividend by 3.80% to 27 cents/share. This marked the 18th consecutive annual dividend increase for this dividend achiever. During the past decade, it has managed to grow distributions by 10.70%/year.

Between 2008 and 2018, the company has managed to boost earnings from $1.27 to $2.03/share.

The stock is overvalued at 26.30 times earnings and offers a dividend yield of 2%. It may be worth a look below $40/share, assuming the dividend growth doesn't pick up from the low rate of change recently.

Hubbell Incorporated (HUBB) designs, manufactures, and sells electrical and electronic products in the United States and internationally. It operates through two segments, Electrical and Power.

Hubbell increased its quarterly dividend by 8.30% to 91 cents/share. This marked the twelfth consecutive annual dividend increase for this dividend achiever. During the past decade, it has managed to grow dividends at an annualized rate of 8.80%.

The company has managed to boost earnings from $3.93/share in 2008 to $6.54/share in 2018. Hubbell is expected to earn $8.05/share in 2019.

The stock is attractively valued at 17.30 times forward earnings and offers a dividend yield of 2.60%.

V.F. Corporation (VFC) engages in the design, production, procurement, marketing, and distribution of branded lifestyle apparel, footwear, and related products for men, women, and children in the Americas, Europe, and the Asia-Pacific. It operates through four segments: Outdoor, Active, Work, and Jeans.

The company raised its quarterly dividend by 11.60% to 48 cents/share. This marked the 47th consecutive annual dividend increase for this dividend champion. During the past decade, V.F. Corp has managed to grow dividends at an annualized rate of 12.50%.

The company earned $1.35/share in 2008, and managed to grow earnings to $3.15/share in 2018.

V.F. Corporation expects to earn $3.39/share in 2019, followed by earnings of $3.89/share in 2020.

The stock is overvalued at 24.80 times forward earnings and offers a dividend yield of 2.30%. It may be worth a second look on dips below $68/share.

The Gorman-Rupp Company (GRC) designs, manufactures, and sells pumps and pump systems worldwide.

Gorman-Rupp declared a quarterly dividend of 14.50 cents/share, which was a 7.40% in the quarterly distributions. This marked the 47th consecutive annual dividend increase for this dividend champion. During the past decade, this dividend champion has managed to grow distributions at an annualized rate of 7.10%.

Between 2008 and 2018, Gorman-Rupp managed to grow earnings from $1.04/share to $1.53/share. The company is expected to earn $1.39/share in 2019.

The stock is overvalued at 26 times forward earnings. Gorman-Rupp yields 1.60%. Given the slow rate of earnings growth and the high valuation, I do not view it as a good idea even if it is available below 20 times forward earnings.

Brown & Brown, Inc. (BRO) markets and sells insurance products and services in the United States, England, Canada, Bermuda, and the Cayman Islands. It operates through four segments: Retail, National Programs, Wholesale Brokerage, and Services.

The company raised its quarterly dividend by 6.30% to 8.50 cents/share. This marked the 26th consecutive annual dividend increase for this dividend champion. Over the past decade, Brown & Brown has managed to grow dividends at an annualized rate of 7.90%.

Brown & Brown managed to grow earnings from 58 cents/share in 2008 to $1.22/share in 2018. The company is expected to generate $1.40/share in 2019.

The stock is overvalued at 25.70 times forward earnings and offers a dividend yield of 0.90%. Brown & Brown may be worth a second look on dips below $28/share.

ONEOK, Inc., (OKE) engages in the gathering, processing, storage, and transportation of natural gas in the United States. It operates through Natural Gas Gathering and Processing, Natural Gas Liquids, and Natural Gas Pipelines segments.

ONEOK Inc raised its quarterly dividend to 91.50 cents/share, which is a 7% increase over the distributions paid during the same time last year.

ONEOK is a dividend achiever who has rewarded shareholders with a raise for 17 years in a row. During the past decade, ONEOK has managed to boost distributions at an annualized rate of 16.90%.

The stock yields 5.10% today.

Magellan Midstream Partners, L.P. (MMP) engages in the transportation, storage, and distribution of refined petroleum products and crude oil in the United States. The company operates through Refined Products, Crude Oil, and Marine Storage segments.

Magellan Midstream Partners raised its quarterly distribution to $1.02/share, which is a 4.30% increase over the distribution paid during the same time last year. Over the past decade, it has managed to boost distributions at an annualized rate of 10.80%. Magellan Midstream Partners is a dividend achiever with a 19 year track record of annual dividend increases.

The partnership yields 6.40% today.

Relevant Articles:

- Fastenal Company (FAST) Dividend Stock Analysis
- Dividend Momentum from Five Dividend Growth Stocks
- What is intrinsic value?
- Four Dividend Paying Companies For Further Research
- The Initial Grind Is The Hardest

Wednesday, October 23, 2019

Fastenal Company (FAST) Dividend Stock Analysis

Fastenal Company (FAST), engages in the wholesale distribution of industrial and construction supplies in the United States, Canada, and internationally. It offers fasteners, and other industrial and construction supplies under the Fastenal name. The analysis of Fastenal was posted to readers of my Dividend Growth Investor Newsletter on September 30, 2019 when the stock was at $32.67/share.

Fastenal is a dividend achiever with a 21-year track record of annual dividend increases. The last dividend increase occurred in July 2019, when management raised its quarterly dividend by 2.30% to 22 cents/share. This was the second dividend increase over the past year however. There was a 7.50% dividend increase in January 2019. Overall, the new dividend is 10% higher than the distribution paid during the same time last year. I would continue monitoring the dividend increase developments for any continuation or deceleration in the dividend growth rate.

During the past decade, Fastenal has managed to boost dividends at an annualized rate of 19.50%. I would expect this rapid growth to slow down to possibly below 10% (more like a 7% - 10% range) over the next decade. Rising earnings per share will provide the fuel behind future dividend increases, given the payout ratio today (please see below)

Fastenal has managed to grow earnings per share over the past decade, which provided the fuel behind dividend increases. Fastenal earned $1.31/share in 2018, which was a good increase from the 47 cents/share it earned in 2008. It is notable to see that earnings per share did decrease in 2009 to 31 cents/share, before rebounding in 2010 to 45 cents/share. The company is expected to generate $1.37/share in 2019.

The company can grow by opening new branches to distribute products, increase sales at existing locations. The principal competitive advantages for Fastenal are its customer service, price, product availability, and convenience.

Growth can be achieved by further expansion abroad, while location growth in the US will be more limited. International accounts for 14% of sales, with the majority of international sales from Canada and Mexico. Having an installed base of vending machines and on-site locations at customer places of business is a great way to get foot in the door and generate recurring revenues ( albeit subject to the cyclical nature of industries it serves). Being part of the customer process embeds Fastenal there, which is a competitive advantage., which can drive incremental revenues. Other growth area includes inventory management services. That could mean more business for Fastenal, which could further its scale and help it offer even more products in its catalogs. The company’s scale is a competitive advantage, both in sourcing and distribution.

Taking share from smaller distributors is another way to capture a bigger market share, and grow revenues. As its customers consolidate, they would require a distributor with a better reach in the US, in order to consistently serve the account. Fastenal offers fast delivery to 90% of products, which is great for its customers, who know they will be taken care of quickly.

Fastenal’s customer base exposes it to the cyclical nature of this client base. Tariffs could be bad for the customers and for Fastenal, as it sources its products from abroad, including China. Tariffs and trade tensions could squeeze margins, as it would increase costs and put pressure on revenues too. Fastenal can pass some cost increases to customers of course, but in a competitive environment, this could be difficult.

The dividend payout ratio increased from 28% in 2008 to 59% in 2018. The doubling of the payout ratio is one reason why dividend growth exceeded the high earnings growth over the past decade. I do not think that there is a lot of room left for further expansion of the payout ratio. A lower payout ratio is a plus, since it provides a margin of safety against temporary declines in earnings.

Fastenal also started repurchasing shares around 2014, reducing the number of shares by almost 4% to 574 million shares. It would be interesting to see if they do more share buybacks in the future as a way to manage earnings per share. It is great to see a company that doesn’t engage in financial engineering in order to reduce shares outstanding at any cost and increase earnings per share at any cost. I like that Fastenal has been able to grow the earnings per share the old fashioned way – by actually growing the business.

Right now the stock is selling at 26.90 times forward earnings and offers a defensible yield of 2.35%.

Relevant Articles:

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MSC Industrial Direct (MSM) Dividend Stock Analysis
Seven Dividend Growth Stocks Rewarding Shareholders With a Raise
Time in the market is your greatest ally in investing

Monday, October 21, 2019

Dividend Momentum from Five Dividend Growth Stocks

Dividend momentum is a strategy that takes full advantage of the theory behind companies in motion, who tend to stay in motion for years and decades down the road.

A body in motion tends to stay in motion unless acted on by an outside force. The following dividend payers kept the dividend momentum coming, by raising distributions to shareholders. What is particularly interesting is the fact that most of them have raised distributions consistently for more than one. This is essentially what successful dividend growth investing is all about – finding a dividend grower in the early stages, that keeps paying increasing amounts of dividends each and every year for years to come.

The companies which raised distributions include:

The Wendy's Company (WEN) operates as a quick-service restaurant company. The company is involved in operating, developing, and franchising a system of quick-service restaurants specializing in hamburger sandwiches.

Wendy’s raised its quarterly dividend by 20% to 12 cents/share. This marked the tenth consecutive year of annual dividend increases for this newly minted dividend achiever. The company has been able to grow dividends at an annualized rate of 2.90% during the past decade. That's due to a dividend cut in 2008.

The company earned 34 cents/share in 2007, and has managed to grow that all the way to 59 cents/share in 2018. The 2018 figures are adjusted for the impact of the new tax law that went into effect at the end of 2017. Wendy's is expected to generate 58 cents/share in 2019. The company has not had a long-term history of consistency in operational performance.

The stock is overvalued at 37.20 times forward earnings and offers a dividend yield of 2.20%. The company has a high payout ratio at 82.70%.

1st Source Corporation (SRCE) operates as the holding company for 1st Source Bank that provides commercial and consumer banking services, trust and investment management services, and insurance to individual and business clients.

The company raised its dividend to 29 cents/share, which is the second increase over the past year. The new dividend is 16% higher than the distribution paid during the same time last year. This marked the 33rd consecutive annual dividend increase for this dividend champion. Over the past decade, the company has managed to boost dividends at an annualized rate of 6.20%.

Between 2008 and 2018, the company has managed to boost earnings from $1.25/share to $3.16/share. It is expected to earn $3.55/share in 2019.

The stock is attractively valued at 13.90 times forward earnings and offers a dividend yield of 2.35%.

Tompkins Financial Corporation (TMP) operates as a community-based financial services company that provides commercial and consumer banking, leasing, trust and investment management, financial planning and wealth management, and insurance services. The company operates through three segments: Banking, Insurance, and Wealth Management.

The company raised its quarterly dividend by 4% to 52 cents/share. This marked the 33rd consecutive annual dividend increase for this dividend champion. During the past decade, the company has managed to grow its dividend at an annualized rate of 4.90%.

Between 2008 and 2018, the company has managed to grow earnings from $2.53/share to $5.35/share. The company is expected to earn $5.16/share in 2019. Looking at the earnings chart over the past 20 – 30 years, I see a very nice up trending line.

The stock looks fairly valued at 16 times forward earnings and yields 2.50%.

Eagle Financial Services, Inc. (EFSI) operates as the bank holding company for Bank of Clarke County that provides various retail and commercial banking services in the Shenandoah Valley and Northern Virginia.

The company increased its quarterly dividend by 4% to 26 cents/share. This marked the 34th consecutive annual dividend increase for this dividend champion. Over the past decade, the company has managed to increase dividends at an annualized rate of 3.40%.

Between 2008 and 2018, the company has managed to boost earnings from $1.29 to $2.60/share.
The stock is cheap at 11.60 times earnings and yields 3.40%.

Omega Healthcare Investors (OHI) is a real estate investment trust that invests in the long-term healthcare industry, primarily in skilled nursing and assisted living facilities. Its portfolio of assets is operated by a diverse group of healthcare companies, predominantly in a triple-net lease structure
The REIT announced a 1.50% hike in its quarterly dividend to 67 cents/share.

Omega Healthcare has managed to boost annual dividends for 16 years in a row. The REIT has managed to grow distributions at an annualized rate of 8.30% over the past decade. The rate of dividend growth has slowed down recently - the last dividend increase occurred in 2018. The stock yields 6%, which is a good yield in today’s environment.

Relevant Articles:

Four Dividend Paying Companies For Further Research
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Four Dividend Growth Stocks Rewarding Shareholders With A Raise
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Thursday, October 17, 2019

What is intrinsic value?

The value of a business to a buyer in a going private transaction is its intrinsic value. In other words, if a business is acquired by another entity, the amount exchanged for that business is its intrinsic value.

Quite often, investors confuse price and value. The price of a business is readily available throughout the day on the internet. On the other hand, the value of the business to an acquirer is not quite easy to determine. It takes some analysis, before coming up with an estimate of the intrinsic value in a going private transaction.

The price of the shares will fluctuate above and below the intrinsic value of the business, driven by the fear and greed of market participants. The market price is just based on the amounts that stock investors are willing to pay. The price is just their guesstimate of intrinsic value, but these opinions vary widely from day to day. In fact, these opinions vary more than the changes in a company’s intrinsic value. It is interesting to observe that even for large and mature large cap companies there is a large gap from year to year between the high and low prices investors are willing to pay for a security. This is why Warren Buffett and Ben Graham refer to the stock market as a manic-depressive individual.

For example, Johnson & Johnson (JNJ) has traded between $121 and $149 over the past 12 months. I would think that this is a high variation, driven by short-term news. I do not believe that the intrinsic value fluctuated that much over the past twelve months. This is why I prefer to look at dividends, since they are not the opinion of stock traders, like share prices. Dividends are the only direct link between company’s fundamental performance and investor returns. While everyone these days seems to believe that dividends are useless because share prices are adjusted downwards on the ex-dividend date, I disagree. I have long argued that dividends unlock value, as evidenced by special dividend announcements. Dividends accrue to share prices in between ex-dividend dates. And since dividends are directly linked to fundamentals, they are more stable and predictable than share prices.

Another way to unlock the true value of an enterprise is when it is acquired by someone else.

This was very evident with Versum Materials, which is a company whose stock I owned. The company was acquired for $53/share in cash in early October.

The company was a spin-off from Air Products & Chemicals (APD) in 2016. The stock fluctuated in price between a low of $22 in 2016 to a high of $53 in 2017, before dropping down to $25/share in late 2018.



Versum Materials initiated a quarterly dividend of 5 cents/share in 2017. It then raised it to 6 cents/share in 2018, before raising it again to 8 cents/share in late 2018 after two quarters. Shareholders received 15 cents/share in 2017, 24 cents/share in 2018 and 24 cents/share in 2019.

The company earned $1.93/share in 2016, $1.77/share in 2017 and $1.80/share in 2018.


In January 2019, the company was in talks to merge with Entegris, which resulted in an increase in the share price to almost $40/share.

By February 2019, Versum received an offer by Merck of Germany for $48/share. The company rejected it. Ultimately, Merck of Germany ( not to be confused with Merck (MRK), although both companies were connected before WWII)) had some wiggle room and managed to win Versum for $53/share. The intrinsic value of Versum was therefore $53/share.

It is interesting to note how shares fluctuated, but never really exceeded the intrinsic value. Anyone who ever purchased shares in Versum, and never sold, made money. Investors who held on to their shares after the spin-off from Air Products & Chemicals made money too.

I have seen examples where companies share prices sold above their intrinsic values. When these companies were acquired, many investors lost money on the transaction. This was evident with the acquisition of Whole Foods by Amazon in 2017. My conclusion was that you should not overpay for securities, hoping for future growth. That’s because if the stock is acquired, you may not be able to participate in the future growth of the enterprise. It is also possible that the rich valuation today is driven by opinion of future growth, which is a little too optimistic.  So investors should try to avoid overpaying for future growth.

The other lesson is to hold on to your spin-offs. And to trade as little as possible. In the age of zero-commission investing, it is easy to tinker too much with your portfolio.

Relevant Articles:

Price is what you pay, value is what you get
Does Paying a Dividend Reduce a Company’s Value?
Dividend income is more stable than capital gains
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Monday, October 14, 2019

Four Dividend Paying Companies For Further Research

For this week’s review of notable dividend increases, I have included four companies which raised distributions last week. Each company has a ten-year track record of annual dividend increases. I believe that each of these companies is worth researching further. I find at least a few of them to be attractively valued today too.

My reviews include comparisons of the recent dividend increases relative to the ten-year average. I also look at the trends in earnings per share, coupled with a view of valuation. These are a derivative of my screening criteria.

The companies in today’s review include:

A. O. Smith Corporation (AOS) manufactures and markets residential and commercial gas and electric water heaters, boilers, tanks, and water treatment products in North America, China, Europe, and India. It operates through two segments, North America and Rest of World.

A.O. Smith raised its quarterly dividend by 9% to 24 cents/share. This marked the 26th consecutive annual dividend increase for this dividend champion. Over the past decade, the company has managed to grow distributions at an annualized rate of 19.90%.

Earnings per share have increased from 59 cents/share in 2009 to an estimated $2.36/share in 2019. Currently A.O. Smith is fully valued at 20.30 times forward earnings and offers a dividend yield of 2%.

Thor Industries, Inc. (THO) designs, manufactures, and sells recreational vehicles (RVs), and related parts and accessories primarily in the United States, Canada, and Europe. It operates in three segments: North American Towable Recreational Vehicles, North American Motorized Recreational Vehicles, and European Recreational Vehicles.

Thor Industries raised its quarterly dividend by 2.50% to 40 cents/share. This is a far cry from the annualized dividend growth of 18.30% over the past decade.

The company earned $2.07/share in 2010, and is expected to generate $5.62/share in 2019.
The stock looks attractively valued at 9.60 times forward earnings. Thor Industries yields 3%. The slow recent rate of dividend increases is giving me pause before putting this stock on my list for further research. I would imagine the RV market is fairly cyclical in nature, and the performance during 2006 – 2010 confirms my thesis. However, this company has managed to grow earnings in the long-run, which is pretty impressive.

Eaton Vance Corp. (EV) engages in the creation, marketing, and management of investment funds in the United States. It also provides investment management and counseling services to institutions and individuals. Further, the company operates as an adviser and distributor of investment companies and separate accounts.

Eaton Vance raised its quarterly dividend by 7.10% to 37.50 cents/share. The increase marks the 39th consecutive fiscal year that this dividend champion has raised its regular quarterly dividend. During the past decade, this dividend champion has managed to grow distributions at an annualized rate of 7.80%.

Eaton Vance earned $1.07/share in 2009. The company is expected to generate $3.39/share in 2019.
Currently, the stock is attractively valued at 12.80 times earnings and offers a dividend yield of 3.45%. Check my analysis of Eaton Vance for more information about the company.

Enterprise Products Partners L.P. (EPD) provides midstream energy services to producers and consumers of natural gas, natural gas liquids (NGLs), crude oil, petrochemicals, and refined products. The company operates through four segments: NGL Pipelines & Services, Crude Oil Pipelines & Services, Natural Gas Pipelines & Services, and Petrochemical & Refined Products Services.

Enterprise Products Partners raised its quarterly distributions to 44.25 cents/unit. This distribution is 2.30% higher than the distribution paid during the third quarter of last year. The rate of annual distributions growth has slowed down from the ten-year average of 5.30%. Enterprise Products Partners is a dividend achiever with a 21 year track record of annual dividend increases.

Enterprise Products Partners is one of the best managed pipeline companies in the US. It yields 6.40% today, but issues K-1 tax forms during tax time since it is a partnership. This factor complicates return filings at the federal and state levels for investors, which is why it is not suitable for everyone.

Relevant Articles:

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2019 Dividend Champions List
November 2018 Dividend Champions List

Thursday, October 10, 2019

The Initial Grind Is The Hardest

I started my website almost twelve years ago. During that time I shared my process of looking for and analyzing companies. I discussed my strategy in detail, delved into topics such as building and monitoring a portfolio. I have discussed resources I use, books I have read, and investors who have inspired me.

Last year, I decided to put all of this information to practical use in real time, and launch a premium newsletter where I show investors how I am building a dividend portfolio from scratch. After investing in this portfolio for 16 months, I have learned a few lessons that are applicable to almost anyone investing in dividend growth stocks.

The goal of this dividend portfolio is to generate $1,000 in monthly dividend income after investing $1,000/month for a certain period of time. I try to allocate the money each month in ten attractively valued companies. It is exciting to launch a new portfolio from scratch, and watch it grow by applying my principles in real time. But investing is a long-term process. This project will go on for at least a decade. As such it is more of a marathon than a sprint.

I have invested $15,579.29 so far in 49 companies through September 30th. The portfolio is projected to generate $482.44 in annual dividend income. This comes out to $40 in monthly dividend income, and takes us to around 4% of our long-term dividend goal. The forward dividend income has steadily increased since launching of the newsletter in July 2018. I expect this trend to continue, driven by new investments, dividend reinvestment and dividend growth.



Currently, the impact of new capital contributions drives most of the gains in forward dividend income. The rate of dividend growth is not as significant, given the small relative capital and dividend base. After a few years of investing however, the impact of dividend growth will be much more powerful than the impact of new contributions. This is why when investing, I need to play a long-term game, and focus on companies that can grow earnings and dividends 5 - 10 - 20 years down the road. In an uncertain world, I need to focus on companies with business models that can endure most calamities. Yet, I also need to be diversified, in order to protect against tail risks.

The portfolio has had 41 dividend increases since the launch of the newsletter. We haven't had any dividend cuts yet. If we do have a dividend cut, I will sell the security with a cut one second after the announcement, and buy something else with the proceeds. I may reconsider a dividend cutter after I have sold it, once it starts growing dividends again. I have had two dividend freezes, which is when companies keep dividends unchanged. I will continue holding, but not sell.

The amounts of dividend income quoted today are low. However, this is just the beginning. Plus, I believe that what I am presenting to you is a strategy/system for achieving long-term financial goals and objectives. This is the type of investment program I have followed in my personal portfolio for over a decade.

By following a consistent program of making regular new investments, reinvesting dividends selectively and patiently holding on to those shares, we have created a virtuous cycle which increases chances of financial success. Best of all, investing is a scalable activity. The same amount of effort is needed to invest $1,000 or $10,000 or $100,000.

The initial grind is always the hardest part of investing. When you buy $1,000 worth of shares, and you generate $30- $40 in annual dividend income, it is easy to get discouraged.

For those rare individuals like you and me however, that first $30 - $40 in annual dividend income is pretty exhilarating. You get your a-ha moment when you see that passive dividend income as your stepping stone towards your eventual financial independence. Once you make the investment, you realize that money is working hard for you, so that you don’t have you. You see each dollar invested as a dollar that will grow dividend income for you, without any additional effort. Similar to building a house brick by brick, you see the process of building a dividend portfolio through the lens of each individual purchase.

You realize that with every single investment you make, you are buying your financial freedom.

After several years of investing, the amounts of dividend income start getting noticeable.

After several years of patiently buying quality blue chip companies, reinvesting the dividends and holding those shares for the long term, the dividend income starts getting some real traction. This is the point where the powerful force of compounding starts to overtake the monthly amounts that are added to the portfolio.

To summarize, the system for building wealth and passive income is really simple:
  • Buy quality dividend growth stocks every month 
  • Hold those shares for as long as the dividends are not cut 
  • Reinvest dividends selectively 
  • Maintain a diversified portfolio 
  • Be a patient buy and hold investor

Investors with a long-term outlook, who won't despise the days of small beginnings, and who patiently accumulate assets stand a chance to reach their financial goals and objectives.

Relevant Articles:

Use these tools within your control to get rich
What drives future investment returns?
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