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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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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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
Financial Independence Is Easier to Model with Dividends

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:

Twenty-Four Attractively Valued Dividend Champions for Further Research
Dividend Aristocrats List for 2019
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?
Estimating future Dividend Growth
The value of dividend growth in retirement planning

Tuesday, October 8, 2019

Four Dividend Growth Stocks Rewarding Shareholders With A Raise

I have long subscribed to the theory that buy and hold means buy and monitor. Dividend investors should continue monitoring their holdings after an initial investment. They should also monitor the dividend investing universe fin order to keep informed of notable company developments. It is helpful to observe dividend growth in action, in order to identify new companies for further research.

I review divided growth actions by companies each week as part of my review process. It is helpful to observe the rate of changes in annual dividend increases for companies I own and companies I may consider owning under the right conditions ( valuation/fundamentals etc)

As part of this weeks review, I focused my attention on the companies that have managed to grow dividends for at least a decade. A long track record of annual dividend increases is a way to identify quality companies for further research.

I also reviewed each company by focusing on the rate of dividend increases relative to the ten year average. I also reviewed trends in earnings per share, in order to determine the likelihood of future dividend growth. Investors can expect dividend growth only from companies that can grow earnings over time. It is also important to look at valuation, since even the best companies in the world are not worth overpaying for. I look at valuation in conjunction with growth, and payout ratios. After all, a company with a P/E ratio of 10 and a dividend yield of 4% will not grow as fast as a company with a P/E of 25 and a dividend yield of 1%.

The companies for today’s review include:

American Financial Group, Inc. (AFG) is an insurance holding company, which provides property and casualty insurance products in the United States. The company operates through three segments: Property and Casualty Insurance, Annuity, and Other.

The company increased its dividend by 12.50% to 45 cents/share. This marked the 14th consecutive annual dividend increase for this dividend achiever. During the past decade, it has managed to grow distributions at an annualized rate of 11.20%.

Between 2009 and 2018, American Financial Group managed to grow earnings from $4.45 to $5.85/share.The company is expected to generate $8.65/share in 2019.

The stock looks fairly valued at 12.10 times forward earnings and yields 1.70%.

Bank OZK (OZK) provides retail and commercial banking services to businesses, individuals, and non-profit and governmental entities.

Bank OZK increased its quarterly dividend to 25 cents/share. This is a 4.17% increase over the last quarterly dividend and a 19% increase over the dividend paid during the same time last year. The bank is a dividend achiever with a 23-year history of annual dividend increases. During the past decade, it has managed to grow distributions at an annualized rate of 20.30%.

Between 2009 and 2018, the bank managed to grow earnings from 55 cents/share to $3.24/share.
The company is expected to generate $3.33/share in 2019.

Right now it is attractively valued at 7.90 times forward earnings and offers a dividend yield of 3.80%.

RPM International Inc. (RPM) manufactures and sells specialty chemicals for the industrial, specialty, and consumer markets worldwide.

The company raised its quarterly dividend to 36 cents/share. This represents a 2.90% increase over the last quarterly payment, and a 12.50% increase over the distribution paid during the same time last year.

This action marks RPM’s 46th consecutive year of increased cash dividends paid to its stockholders. Over the past decade, this dividend champion has managed to grow distributions at an annualized rate of 5.50%.

Between 2010 and 2019, RPM has managed to grow earnings from $1.39/share to $2.01/share.
The company is expected to generate $3.39/share in 2019.

The stock is fully valued at 20.20 times forward earnings and offers a dividend yield of 2.10%

Northwest Natural Holding Company (NWN) provides regulated natural gas distribution services to residential, commercial, and industrial customers in Oregon and Southwest Washington.

The Board of Directors of Northwest Natural Holding Company increased the quarterly dividend to 47.75 cents per share on the Company's common stock. This marks the 64th consecutive annual dividend increase for this dividend king. This is a half a percent raise in the quarterly dividend.

During the past decade, this dividend king has managed to grow distributions at an annualized rate of 2.20%.

Between 2009 and 2018, earnings per share dropped from $2.83/share to $2.24/share. The company is expected to generate $2.39/share in 2019.

The stock is overvalued at close to 29.30 times forward earnings. The stock yields 2.70%, but has a very high payout ratio, no earnings growth and the likelihood of dividend growth stopping in a few years is high.

Thank you for reading!

Relevant Articles:

Six Dividend Growth Stocks Rewarding Shareholders With a Raise
Record Dividend Payments in the US For A Decade
My Portfolio Monitoring Process In a Nutshell
Altria Group Joins The Dividend Kings List

Thursday, October 3, 2019

Stock Investing is Commission Free in the US

As an investor, there are a few things you can control. You can control how much you save, what strategy you have to achieve your goals, your temperament and your ability to keep investment costs low. In this article I will discuss how easy it is today to keep investment costs low. As low as zero actually, using a commission free broker. There seem to be plenty of them these days, and the numbers are only getting bigger from here.

I have long been a fan of commission free brokers. I used broker Zecco extensively a decade ago, until it started charging commissions and merged with Tradeking. There have been a few other brokers charging zero commissions, namely Robinhood and Merrill Edge. Merrill Edge does have some hoops to jump through in order to qualify for 30 to 100 commission free trades, but in my opinion these were not to tough to accomplish, provided you had the assets and bank and broker accounts needed.

Over the past five years, I have been a big fan of Robinhood brokerage, which charges no commissions to buy or sell stock ( there is a small fee to sell, but this is a regulatory fee that is simply passed though). Robinhood has disrupted the world of online stockbrokers, since it offered commission free trading long before it was the norm with stocks and ETFs. I have seen a lot of negative publicity against Robinhood, mostly because it generates revenues by selling order flow. After using Robinhood for five years, I can attest that my order fills have been quick and the price I received has been comparable to prices I get from other brokers. The difference is that with other brokers, I paid a commission and the broker also earned money by selling my order flow. With Robinhood, I paid nothing in commissions and my entry price was comparable. Most negative publicity ignored the fact that other brokers also received money for order flows and shorting stock, and also charged fees to transact on top of it.

Last week, Interactive Brokers announced that it was launching an Interactive Brokers Lite account. This is a commission free account, which had no inactivity fees. The account is scheduled to be launched this month, but I have not heard specific on the timing. The account would offer commission free trading, which is a pretty good deal for investors, used to paying $5 - $10/trade. Interactive Brokers is already a great broker for dividend investors, as it allows direct access to the stock market at a very low fee of 35 cents/trade to $1/trade. Depending on the order you place, you may also end up being paid to add liquidity to the stock market. That’s a fee that most other brokers tend to pocket for themselves.

The nice thing is that Interactive Brokers is open to non-US based investors. So if you are based in Canada or the UK or another country, it means that you can potentially invest in US listed securities by paying no commission. That’s a game changer.

Interactive Brokers opened the floodgates with their announcement. Within a few days, Charles Schwab decided to offer commission free stock investing for stocks and ETFs, starting October 7th. Prior to that Schwab charged $4.95/trade. There are no account minimums, but the nice thing is that they have great customer service and local branches to visit. This is open to US investors only however. Schwab already had a list of commission free ETFs it was offering. However, ETFs carry a small but ongoing annual fee to investors. They will still charge a commission to buy or sell options.

Next, we had TD Ameritrade decide to offer commission free stock and ETF investing as well. TD Ameritrade has a list of commission free etf’s as well. However, it charged $6.95/trade to buy or sell stocks. They will still charge a commission to buy or sell options, similar to Schwab, Interactive Brokers and Etrade. Robinhood doesn't charge for options trading.

Finally, just a few hours ago, we also had Etrade join the party of zero-commission stock trades. Etrade had a line-up of commission free ETFs already. However, Etrade has some hidden fees related to selling ETFs within 90 days, and some fees if you have a reverse stock split, a company is acquired for example. I have been charged those fees, and had some of them waived, but I am just throwing this out there - be cautious and always read the fine print.

It is interesting that Interactive Brokers set off the chain reaction with their announcement last week. Ironically, the IBKR Lite account is not ready to be opened yet. However, for Schwab, TD Ameritrade and Etrade, you can open an account and invest commission free starting on October 7th at the very latest.

There are a couple smaller brokers offering commission free trading since last year. The first one is Firstrade, which offers free stock and ETF trading. The broker also offers different account types, such as IRA. Robinhood didn’t offer these types of accounts. Firstrade is also open to investors from a few countries outside the US – China, Taiwan, Hong Kong, Macau, Japan, Mexico, New Zealand, Singapore, Korea, Republic of (South) and Israel.

Another commission free option was M1Finance, which lets you build your own portfolio without paying a commission. It also allows investors to build portfolios with partial shares, but is more geared towards investors who buy the same securities. It is easy to set up a portfolio with the same 10 or 20 or 100 securities and equally weight it. If you want to buy the same securities every so often, and just do rebalancing between the two, M1Finance sounds like a perfect broker. However if you buy 10 companies this month, and then want to buy ten different companies next month as so on, it is impossible to execute using M1 Finance. They do offer different types of IRA accounts as well however.

A commission free broker which is not really advertised as such is Motif Investing. It lets you buy partial shares in equities commission free, provided that you schedule your order for the open at the next day. It is very easy to create an equally weighted portfolio by putting $10 in 50 companies. The other thing to consider is that there is an inactivity fee provided you do not make a paid transaction within a certain time period OR you do not keep a certain amount of investments in your portfolio. If you keep more than $10,000 at Motif, this is not a problem however.

Overall, I wanted to share that it has never been easier or cheaper to buy individual stocks in the US. While plenty of brokers offer commission free ETF trading already, this was still a limited list of what you can and cannot invest in. With commission free stock investing, you do not need to check if your investment is pre-approved by someone else – you can just buy it and not pay a commission.
However, you always need to review the commission and fee schedules for your brokers, even if they claim to be commission free. That’s because some brokers have some “gotcha” clauses that you need to be aware of. A few notorious examples include inactivity fees, or fees if your account balance falls below a certain dollar amount. In general, you want to avoid these.

Some brokers charge you for a security reorganization, which is a broad term that could apply to stock splits, reverse stock splits, spin-offs to name just a few corporate events that are expensive.
You can also expect to be charged a fee if you hold certain instruments, namely ETFs or mutual funds for less than 30 or 90 days.

Finally, if you plan to close your account and move securities to another broker, you can expect to be charged a fee. If you close a retirement account, you will likely be charged a fee as well.

When you keep investing costs low, this means that you keep more money working hard for you. This goes on for commissions, but should also be something to think about in terms of minimizing taxes. This could be easily achieved in the US by opening a Roth IRA account, and doing more of your investing through it. Everyone’s tax situation is different however, so you need to consult with a tax adviser, because of different limitations and opportunities. If your adjusted gross income is below a certain amount, you are not going to pay taxes on certain amounts of dividends and capital gains. Again, you need to consult with a tax professional to see how this applies to your situation ( or research it on your own).

The best thing to come out of this exercise is that investors are winning in the end. Plus, there is more emphasis on cost than ever before. This goes beyond commissions, taxes and fees however. I believe that the days of paying an adviser 1% to assemble a portfolio for you are also coming to an end. This may be bad for asset managers.

Thank you for reading!

Relevant Articles:

Robinhood Offers Free Stock Trading for Dividend Investors
The Best Broker for Dividend Investors: Interactive Brokers
Merrill Edge Offers Commission Free Trades for Dividend Investors
Roth IRA’s for Dividend Investors
Best Brokerage Accounts for Dividend Investors

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