Monday, July 6, 2020

Bank OZK and John Wiley & Sons Reward Shareholders With Raises

I review the list of dividend increases every week, in an effort to monitor existing holdings, and uncover hidden dividend gems for further research.

I usually narrow my research to companies with a ten year history of annual dividend increases.
Last week, there were two companies that raised dividends. The companies include:

Bank OZK (OZK) provides retail and commercial banking services to businesses, individuals, and non-profit and governmental entities. The bank is expected to earn $1.51/share in 2020 and $2.26/share in 2021.

The bank raised its quarterly dividend by 0.90% to 27.25 cents/share. This increase represents a 13.50% hike over the dividend paid during the same time last year.

This was the 24th consecutive year of annual dividend increases for this dividend achiever. During the past decade, Bank OZK has managed to increase dividends at an annualized rate of 21.90%.
The company raised its earnings from 94 cents/share in 2010 to $3.30 in 2019.

Bank OZK is expected to earn $1.51/share in 2020 and $2.26/share in 2021.

The stock sells for 15.20 times forward earnings and yields 4.70%.

John Wiley & Sons, Inc. (JW-A) operates as a research and learning company worldwide. The company operates through three segments: Research Publishing & Platforms, Academic & Professional Learning, and Education Services.

The company raised its quarterly dividend by 0.70% to 34.25 cents/share. This was the 27th consecutive year of annual dividend increases for this dividend champion. During the past decade, the company has managed to increase dividends at an annualized rate of 9.50%. The rate of annualized dividend growth has been stalling over the past one, three and five years however.

John Wiley & Sons is expected to generate $2.02/share in 2020 and $2.43/share in 2021. For reference, the company earned $2.80/share in 2011 but lost $1.32/share in 2019.

The stock is fairly valued at 18.63 times forward earnings. The stock yields 3.64%.

I personally view both stocks as risky. Bank OZK has grown rapidly over the past decade, but that was in a very favorable economic environment. They’ve had some issues, so I am going to wait this one out.

John Wiley and Sons is a company that has not managed to grow earnings per share over the past decade. Perhaps because traditional publishing business model is under siege.

Relevant Articles:

Three Dividend Stocks in the News
Expect Dividend Cuts and Dividend Freezes in the Banking Sector
My Favorite Exercise As A Dividend Growth Investor
Seven Dividend Growth Stocks Rewarding Shareholders With Raises

Sunday, July 5, 2020

Dominion Energy (D) Cuts Dividends

I just learned that Dominion Energy (D) is going to cut annual dividends to $2.50/share, from $3.76/share. This ends an 18 year track record of annual dividend increases.

The company is selling assets to Berkshire Hathaway.

Proceeds will be about $3B as the deal includes the assumption of $5.7B in debt and taxes.

The proceeds of the asset sale will be used to buy back stock.

Dominion Energy is disposing of its Gas Transmission & Storage segment assets.

That includes more than 7,700 miles of natural gas storage and transmission pipelines and about 900 billion cubic feet of gas storage that Dominion currently operates.

This is from the press release that was just issued:

Dominion Energy is revising its 2020 operating earnings guidance. The company now expects 2020 operating earnings of $3.37 to $3.63 per share. The company's previous guidance was $4.25 to $4.60 per-share. 

Dominion Energy expects 2021 operating earnings per share to grow around 10 to 11 percent over 2020, reflecting the full-year impact of planned share repurchases, and by about 6.5 percent annually starting in 2022, off a 2021 base. This represents a 1.5 percentage point, or approximately 30 percent, increase from previous long-term earnings per share growth guidance. 

The company now expects to target an approximately 65 percent payout ratio to be effective upon completion of the transaction. This new payout ratio implies a 2021 dividend payment of around $2.50 per share. The projected reduction in the annual dividend reflects the absence of income from the divested assets and a revision to the company's target payout ratio to align with best-in-class industry peers.

Beginning in 2022, the company expects annual dividend-per-share increases of approximately 6 percent per year.  This represents a significant increase from previous long-term dividend per-share growth guidance of 2.5 percent. 

For 2020, the company has made two quarterly payments of 94 cents per share in March and June. The company expects to make an additional payment of 94 cents per share in September and currently expects a fourth payment in December 2020 of approximately 63 cents reflecting the expected timing of transaction closing.

The company is going to be earning about a full $1/share less than originally expected ( The actual loss in earnings power per year 97 cents/share - $1.23/share). The company had 838 million shares as of 3/31/2020. This means that Dominion energy is losing roughly $800 million in earnings power, while receiving less than $10 billion in "value" from Berkshire Hathaway. Value is derived by assumption of debt in the amount of $5.7B and pre-tax cash proceeds in the amount of $4B.

This is a P/E of 12.5 - 13 for the assets that Buffett is acquiring. It looks to me that this deal is not a good one for Dominion shareholders. I do not understand why a company would voluntarily impair its earnings power, in order to sell those assets at a low price, and then have to reduce dividends to shareholders.

It is odd that the sale of these assets will result in reduction of earnings per share by $1 per year. It is also interesting that Dominion is losing almost $1 billion to taxes. This comes out to $1.25/share. The debt reduction is $5.70 billion, and pre-tax proceeds are at $4 billion ( $3 billion after-tax).

Dominion Energy has been unable to grow earnings per share for quite some time however. This is the reason why I haven't added to my position for over 6 years. Wihout growing earnings per share, you cannot grow dividends per share or grow intrinsic value.


Dominion last raised dividends in December by 2.50% to 94 cents/share. This was a very slow dividend increase, which was in stark contrast to the high raises in the years before. This is what I mentioned in my review last year:

"The earnings history over the past decade has been spotty, due to one-time adjustments for which the numbers have to be corrected for ( and which won’t be done for the purposes of this weekly review).
Dominion Energy is expected to generate $4.20/share in 2019.

The stock seems richly valued at 19.25 times forward earnings but yields 4.60%. The forward payout ratio is at 89.50%, which is a little high for my liking. Dividend growth may disappoint given the high payout ratio, unless the company manages to grow its earnings per share."

The other announcement is that Dominion and Duke Energy announced the cancelation of the Atlantic Coast Pipeline ("ACP") due to ongoing delays and increasing cost uncertainty which threaten the economic viability of the project. Recent public guidance of project cost has increased to $8 billion from the original estimate of $4.5 to $5.0 billion. In addition, the most recent public estimate of commercial in-service in early 2022 represents a nearly three-and- a-half-year delay with uncertainty remaining. That project was announced in 2014, so it's cancellation surely is going to cut into future profitability. (Source)

Contrary to popular sentiment, utility stocks tend to cut dividends quite often. I realized that when I researched the histories of companies in the Dow Jones Utility Average a few years ago. Check my article:


I own some shares in my personal account, which I may end up selling on Monday. I would like to initiate a position in Nextera (NEE), but the valuation is a little high for my taste. Otherwise, Con Edison (ED) is not a bad choice today for decent current income, though the future dividend growth would be less than 3%/year. A lot of folks like Southern Company (SO), but this one has been unable to grow earnings per share over the past decade either. Plus, it has some cost overruns in a project that may not be completed.


Relevant Articles:

Tuesday, June 30, 2020

Simon Property Group (SPG) and Wells Fargo (WFC) to cut dividends

Right after the market closed on Monday, June 29, I learned that Simon Property Group (SPG) is cutting dividends per share. Simon is a real estate investment trust engaged in the ownership of premier shopping, dining, entertainment and mixed-use destinations. Check my analysis of Simon for more details about the REIT.

The company declared a dividend of $1.30/share, which is 38.10% decrease over the dividend paid during the first quarter of 2020. The Company expects to pay at least $6.00 per share in common stock dividends for 2020, in cash, subject to Board of Directors approval. Since Simon already paid $2.10 in February, this means that it plans to distribute two more payments of $1.30/share through the end of 2020. That's fine, since the REIT essentially skipped its dividend for the second quarter of 2020.

Back in May 2020, the company ended up being ambiguous on its dividend, as it failed to declare a payment for the second quarter. There were several things happening, namely the acquisition of Taubman (TCO), the Covid-19 shutdown of its properties, and the difficulty in collecting rent from tenants. Since then we have had no visibility on the amount of rent that is collected, but judging by other peers it is likely low. Hence why Simon is in the news for trying to sue tenants such as The GAP for not paying rent.

Simon is also trying to cancel the merger with Taubman, citing the Covid-19 situation and using the deterioration in business as a cause to walk away from this transaction. While it may have to pay a steep fine to walk away, Simon may actually be bluffing its way to bring Taubman to the negotiating table, and lower the entry price for the deal. We could only speculate of course.

I had a very small position in Simon, which I just sold today. That dividend cut ended a 10 year streak of annual dividend increases. Ironically, buying Simon when it last cut dividends in April-May 2009 would have turned out to be a smart decision through 2018. If we look at prices today however, the returns are not as high since early 2009.

I also wanted to add to my article from Friday, about expectations for dividend increases and dividend cuts in the banking sector.

It turns out that the results for the initial stress tests are out. It turns out that the following banks are going to keep dividends unchanged in the third quarter:

- Goldman Sachs (GS)
- Bank of America (BAC)
- Citigroup (C)
- Ally (ALLY)
- State Street (STT)
- U.S. Bank (USB)
- BNY Mellon (BK)
- Discover Financial Services (DFS)
- Fifth Third Bancorp (FITB)
- PNC Financial (PNC)
- American Express (AXP)
- J.P. Morgan (JPM)

Jamie Dimon, Chairman and CEO of JPMorgan Chase said: “At this time, using both JPMorgan Chase’s and the Federal Reserve’s base case economic outlook, the Firm can continue to pay its dividend in future quarters while maintaining healthy capital and liquidity positons. If there is a significant deterioration in the future outlook, the Firm will, of course, consider reducing dividends.

The only major bank that won't be keeping dividends unchanged is Wells Fargo (WFC). (Source)

"The company expects its common stock dividend in third quarter 2020 will be reduced from the current level of $0.51 per share. The company expects that the level of the third quarter dividend will be announced when it releases second quarter financial results on July 14, 2020."

This would be the first dividend cut for Wells Fargo since the Global Financial Crisis. Back in March 2009, the bank cut dividends as part of the TARP program. Incidentally, that was a great time to buy Wells Fargo below $10/share. The stock rebounded and went as high as $65 by early 2018, but has slowly gone downhill from there. Buffett is one of the largest holders of Wells Fargo, and is likely not very happy with the outcome. The bank was one of the strongest a decade ago, but its been mired in scandals related to fictitious account openings, and its size of operations has been capped.

I had a very small position in Wells Fargo. I built it in 2013, but stopped adding after raising some concerns that noone else paid attention to at the time. After all, if Buffett was buying, it was good enough. The nice part of my risk management procedures is that I usually build positions slowly, always doubt myseld and if the story changes, I stop buying more. When I am wrong, I like to keep losses low. I believe in keeping losses low, while trying to maximize future dividends and capital gains.

Relevant Articles:

Wells Fargo Joins the Crowd of Dividend Cutters
Should you invest in Wells Fargo (WFC)?
Why Warren Buffett Likes Investing in Bank Stocks
Simon Property Group (SPG): A High Yield and High Risk REIT
Expect Dividend Cuts and Dividend Freezes in the Banking Sector

Monday, June 29, 2020

Three Dividend Stocks in the News

I review the list of dividend increases as part of my monitoring process. This helps me to see whether the companies I own continue to progress financially, as evidenced by a well supported dividend increase. A well-supported dividend increase is one that is derived from growing earnings per share over time, and a business that continues humming along nicely. A well-supported dividend increase is one where the payout ratio is not too high, but just right.

Reviewing the list of dividend increases also helps me to identify companies for further research. While I do my fair share of screening on the list of dividend champions, dividend aristocrats, achievers and contenders, I also prefer to look at individual stories. I invest using a bottom up approach, but also try to look at the big picture as well.

Over the past week, there were three companies that raised dividends:

The Kroger Co. (KR) operates as a retailer in the United States. The company operates supermarkets, multi-department stores, marketplace stores, and price impact warehouse stores.

The Kroger Co.'s Board of Directors approved a dividend increase from 16 to 18 cents per quarter. Kroger's quarterly dividend has grown at a double-digit compound annual growth rate since it was reinstated in 2006. This marks the 14th consecutive year of annual dividend increases for this dividend achiever.

"Kroger's 12.50 percent dividend increase reflects our ability to deliver strong free cash flow during uncertain times and throughout the economic cycle," said Rodney McMullen, Kroger's chairman and CEO. "It also reflects the Board of Directors' confidence in both our business model and our commitment to return value to shareholders and achieve consistently attractive total shareholder returns."

Over the past decade, this dividend champion has managed to grow distributions at an annualized rate of 12.60%.

Kroger managed to grow earnings from 94 cents/share in 2009 to $2.04/share 2020. The company is expected to earn $2.71/share in 2021 and $2.56/share in 2022.

Kroger sells for 12.10 times forward earnings and yields 2.20%. Check my analysis of Kroger for more information about the company.

Hingham Institution for Savings (HIFS) is a Massachusetts-chartered savings bank located in Hingham, Massachusetts.

The bank announced that its Board of Directors has declared a regular quarterly cash dividend of $0.43 per share. This represents an increase of 2% over the previous regular quarterly dividend of $0.42 per share as well as a 10.20% increase over the dividend paid during the same time last year.
The company has consistently increased regular quarterly cash dividends over the last twenty-five years. The Bank has also declared special cash dividends in each of the last twenty-five years, typically in the fourth quarter.

Over the past decade, this dividend champion has managed to grow distributions at an annualized rate of 6.10%.

The bank has managed to grow earnings from $3.79/share in 2009 to $17.83/share in 2019. There are no earnings estimated for 2020 due to its small size, but trailing 12 month earnings are at 14.33/share.
The stock is selling for 11.10 times earnings and has a dividend yield of 1.10%.

Worthington Industries (WOR) is a leading industrial manufacturing company delivering innovative solutions to customers that span many industries including transportation, construction, industrial, agriculture, retail and energy.

The board of directors of Worthington Industries, declared a quarterly dividend of $0.25 per share, an increase of 4%. Worthington has increased its dividend for 10 consecutive years and has paid a quarterly dividend since it became a public company in 1968.

Over the past decade, this newly minted dividend achiever has managed to grow distributions at an annualized rate of 6.70%.

The company managed to grow earnings from 57 cents/share in 2010 to $1.41/share in 2020. The company is expected to earn $2.06/share in 2020 and 2021.

The stock sells at 16.60 times forward earnings and offers a dividend yield of 2.90%.

Relevant Articles:

My screening criteria for dividend growth stocks
How to read my stock analysis reports
Dividend Investing Resources I Use
How to determine if your dividends are safe

Friday, June 26, 2020

Expect Dividend Cuts and Dividend Freezes in the Banking Sector

Update 06/29/2020: Wells Fargo (WFC) announced that it may have to cut dividends after releasing results on July 14, 2020. Source: WFC Announcement

The Federal Reserve released its information on bank stress tests yesterday - June 25, 2020. You can read the announcement at this link. I found the following information very interesting, as it pertains to investors:


"For the third quarter of this year, the Board is requiring large banks to preserve capital by suspending share repurchases, capping dividend payments, and allowing dividends according to a formula based on recent income. The Board is also requiring banks to re-evaluate their longer-term capital plans.

All large banks will be required to resubmit and update their capital plans later this year to reflect current stresses, which will help firms re-assess their capital needs and maintain strong capital planning practices during this period of uncertainty. The Board will conduct additional analysis each quarter to determine if adjustments to this response are appropriate.

During the third quarter, no share repurchases will be permitted. In recent years, share repurchases have represented approximately 70 percent of shareholder payouts from large banks. The Board is also capping dividend payments to the amount paid in the second quarter and is further limiting them to an amount based on recent earnings. As a result, a bank cannot increase its dividend and can pay dividends if it has earned sufficient income."


I bolded the words to show you the support behind my analysis.

It basically boils down to the fact that banks will experience credit losses due to high unemployment, and the recession related to Covid-19. The bank system is sound, and can survive a recession, as well as a potential W or V shaped recovery. There may be fewer casualties, in comparison to the Great Recession from 2007 - 2009. Therefore, the Federal reserve expects fewer bank failures from the larger companies.

However, in order to maintain liquidity and capital reserves, banks cannot do share buybacks for the third quarter. It is likely that banks won't be able to do share buybacks until the recession is over. That may mean that they won't be able to take advantage of "low prices", due to government regulation.

Banks can still continue paying dividends, but they will be unable to raise dividends for the duration of this recession. It would be nice if we just get away with dividend freezes - meaning dividends are unchanged. Financial dividends will return after the recession is over, and the stress tests allow them to do so.

The trouble is if banks report losses due to loans deteriorating due to the recession. If they are temporarily unable to earn enough to pay the dividend, they have to cut dividends. In other words, if Wells Fargo loses money in Q3 2020, it would have to cut dividends or suspend them, even if the bank recovers in Q4 2020. I doubt that a recovery would be so quick, as it looks today that we are headed for a second wave of Covid-19 cases, and potentially a second shutdown.

It also looks like the Federal Reserve is viewing share buybacks differently from dividends. It makes sense, because companies usually allocate any residual excess cash flows to buybacks that are not committed to dividends or growing the business. Buybacks can be best viewed as special dividends, so they are not recurring, and dependable like dividends.

I have a small allocation to banks. I will be selling if we have dividend cuts however. If a company maintains dividends, I will hold on to it. Perhaps I would finally learn the lesson that banks are cyclical companies, which cannot pay dependable dividends through the ups and downs of the economic cycle.

Selling financial companies after a dividend cut worked well early in the last recession, mostly in 2007 and 2008. Selling after a dividend cut was a mistake in 2009. Either way, it is important to stick to a plan, through thick or thin!

Relevant Articles:


TARP is bad for dividend investors
Which Bank will be next? Follow the dividend cuts
Dividend Investing During the Financial Crisis
Six things I learned from the financial crisis

Wednesday, June 24, 2020

The first $100,000 is the hardest

Charlie Munger is Warren Buffett’s business partner at Berkshire Hathaway. He is a successful lawyer, and investor, who was instrumental in helping Warren expand his investing horizon. Charlie is credited with encouraging Buffett to invest in high quality businesses, which compound over time. Before that, Buffett spent most his attention to statistically cheap stocks.

Charlie Munger is not studied as well as Warren Buffett, which is a shame. It’s a shame because Charlie Munger has shared a lot of insightful lessons on investing, human nature and human biases, which could help many aspiring investors.

There are two good books I have read about Charlie Munger. The first one is “Damn Right: Behind the Scenes with Berkshire Hathaway Billionaire Charlie Munger”, and the second is “Poor Charlie's Almanack: The Wit and Wisdom of Charles T. Munger, Expanded Third Edition”.

There is a passage from “Damn Right”, which really resonates with me:

Charlie Munger has said that accumulating the first $100,000 from a standing start, with no seed money, is the most difficult part of building wealth.

Making the first million was the next big hurdle. To do that a person must consistently underspend his income

Getting wealthy, he explains, is like rolling a snowball.

It helps to start on top of a long hill—start early and try to roll that snowball for a very long time.

It helps to live a long life.

There is another quote from him from a shareholder meeting, saying that

“The first $100,000 is a bitch, but you gotta do it.

I don’t care what you have to do—if it means walking everywhere and not eating anything that wasn’t purchased with a coupon, find a way to get your hands on $100,000.

After that, you can ease off the gas a little bit.”

Just for reference, $100,000 in 1960 has the same purchasing power as $875,065 today. Perhaps the modern version of this story is that the first million is the hardest.

In another reference, $100,000 invested in 1960 in the S&P 500 would be worth over $31 million today. This investment would be generating over $600,000 in annual dividend income.

These are some simple, but powerful lessons in these quotes.

The first lesson is that you need to spend less than what you earn, in order to be able to find the savings to make any successful investments. It makes sense that if you live paycheck to paycheck, you will never be able to accumulate any savings to invest for your long-term future.

The second lesson is that once you have savings, you need to invest them intelligently. Once you have a process in place, you stick to it, and keep adding money to your portfolio. You start small, and the efforts from the first few years are not very visible. After saving and investing for 5 – 10 years however, the power of compounding starts showing its true force. Once you accumulate a decent sized nest egg, it will grow net worth and investment income over time, without needing any additional capital from you. At this point, investment income will likely exceed your investment contributions.

I would personally keep adding, for as long as I can, because I enjoy the process of investing for the future. But it is nice to know that once you reach a certain amount of net worth, that is invested intelligently, you know that no matter how hard you mess in life, you have a third worker quietly working for you, compounding your capital, income and sharing the fruits of its labor with you by working 24/7.

The third lesson is about the power of compounding. It is a small trickle at the beginning. Once you invest for a while, the power of compounding becomes a wonderful force, which keeps accelerating net worth and investment income. You investment capital snowballs into enormous amounts the longer you keep it invested, and do not interrupt the compounding process.

The largest effect of compounding is observed at the end of the financial independence journey. For example, if you invest $1 at 10%/year, you will have $2 in roughly 7 years. However, if you keep that dollar invested at 10%/year for 50 years, you end up with over $117.

For example, Warren Buffett became a billionaire in 1986. He is now worth over $60 billion. More than 99% of his net worth was generated in the past 35 years, long after he turned 56.

If you manage to compound money at a high rate, and do it for a long period of time, you would end up with a very high amount.

Relevant Articles:

How Warren Buffett built his fortune
Charles Munger: A Lesson on Elementary, Worldly Wisdom As It Relates To Investment Management & Business
- Simple Investing Principles to Follow

Monday, June 22, 2020

Visa (V) Dividend Stock Analysis

Visa Inc. (V) operates as a payments technology company worldwide. The company facilitates commerce through the transfer of value and information among consumers, merchants, financial institutions, businesses, strategic partners, and government entities.

Visa is a dividend achiever, which has managed to increase its quarterly dividends for 11 consecutive years.

Between 2009 and 2019, the annual dividend increased from 10 cents/share to $1/share. The last dividend increase occurred in October 2019, when the Board of Directors hiked quarterly dividends by 20% to 30 cents/share.

The company is in the initial phase of dividend growth, where dividends increase faster than earnings due to low initial payout ratio. Future growth in dividends will likely exceed the rate of increase in earnings per share over the next decade, after which dividend growth would likely closely follow growth in earnings per share.

The growth in dividends was fueled by rapid growth in earnings per share over the past decade. Visa managed to grow earnings from 78 cents/share in 2009 to $5.32/share in 2019.

The company is expected to earn $5.03/share in 2020 and $5.87/share in 2021. The Covid-19 recession decreased earnings expectations. A little over the past 90 days the expectations were for $6.10/share in earnings for 2020 and $7.16/share in 2021.


With Visa I liked the fact that the company is part of a global duopoly with Mastercard (MA) in the global credit card market. In the future, the proportion of cashless payments is going to increase. While the market for credit cards is developed in the US, in emerging markets there is the opportunity for hundreds of million people who will sign up for the first card in their lives over the next decade.
Visa has a wide moat due to its strong brand, scale of operations, and legal barriers to entry, as well as the Network Effect. When more retailers accept a given card, other merchants will be more willing to accept Visa as a payment method, in order to compete successfully for customers. When more retailers accept Visa, more customers are willing to use Visa as a payment method due to its convenience factor. When more customers are willing to use Visa, more retailers are willing to accept Visa as a payment method, in order to gain those customers. As a result, any additional new customer or a new retailer that is added to the network increases its depth and appeal, thus making it more valuable and needed. With the Network Effect, a service is more valuable when more participants use it.

When you have a payment network, you also achieve scale, as you have a large number of participants (both retailers and customers). Therefore, it is extremely difficult to set up a competing network for payments. In addition, there are high barriers to entry due to complicated legal and regulatory frameworks in different countries. Once you achieve a certain scale, the type that Visa and MasterCard possess, each additional transaction in the network is much more profitable.
The market for cashless transactions is destined to only increase in the future. Most transactions in the developing world are still done with cash currency, which causes a cost to merchants. Accepting, storing, and transporting cash is expensive because of the risk of theft, counterfeit currencies, and making errors in calculations. I expect the volume of cashless transactions using debit and credit cards to only increase in the coming two decades. I like the strong brand of Visa, which is essentially a duopoly with MasterCard, although American Express has somewhat of an entrenched position with business customers. In addition, as more shopping is done online, the need for debit and credit cards increases as well. Retailers like plastic, because consumers end up spending more when they pay on credit and do not have to dole out physical cash right away.

In addition, I expect the amount of transactions to increase over time as well. Therefore, the company will benefit from growth of overall transaction volume and the increase in share of cashless transactions globally.

The risk to companies like Visa is a paradigm shift in technology, which could help consumers to use an alternative payment method for cashless transactions. However, those paradigm shifts will be difficult for competitors because of the regulatory barriers and the fact that the competing network would still need to get more customers to use it and more retailers to accept it. Building out a competing network from scratch could be costly and time-consuming. It would be much easier for such a paradigm-shifting technology to partner with the likes of Visa, rather than compete directly head-on with it.

The company has returned money to shareholders through dividends and share buybacks since its IPO. Between 2009 and 2019, the number of shares outstanding has decreased from 3.036 billion to 2.272 billion. The consistent decrease in shares outstanding adds an extra growth kick to earnings per share over time.

The dividend payout ratio has increased from 13% in 2009 to 19% in 2019. There is room to increase dividends at a rate higher than earnings by expanding the payout ratio. A lower payout is always a plus, since it leaves room for consistent dividend growth, minimizing the impact of short-term fluctuations in earnings.


The stock is overvalued at 38 times forward earnings and yields only 0.60%. This is a company that will offer a high potential for future dividend growth, and a high yield on cost in the future. I would be surprised if Visa does not pay at least $5/share in annual dividends in 2030. Chances are its earnings would be triple what they are today by 2030. Of course, this is a company worth $400 billion too, so the mere size will be an impediment to future growth rates.


2019
2018
2017
2016
2015
2014
2013
2012
2011
2010
P/E High
        35.16
        34.08
        38.15
        33.79
        29.81
        27.26
        26.43
        42.70
        17.42
        22.71
P/E Low
        22.86
        23.73
        26.85
        26.66
        18.91
        20.85
        17.75
        25.54
        12.23
        15.17

Relevant Articles:

The importance of yield on cost
- Twelve Dividend Growth Stocks In The News
My Dividend Growth Stock Wish List
Should Dividend Investors Ever Break Their Rules?
Four Dividend Growth Stocks to Consider on Dips

Thursday, June 18, 2020

How long will it take to generate $1,000 in monthly dividend income?

Hitting $1,000 in Monthly Dividend Income

How long should I be investing for, before hitting $1,000 in monthly dividend income?

This is a question which I frequently receive from readers, who signed up for my premium newsletter.

As you know, I try to invest $1,000 every month, in ten attractively valued companies. I try to invest in what I find to be some of the best values that I can find at the time. As a result, one of my frequent answer is that the time it would take to generate $1,000 in monthly dividend income will depend on the circumstances during the next decade or so.

When pressed for a timeline, I usually answer that it would take anywhere between ten to fifteen years. As you can see, I am offering a range of potential outcomes, because life is uncertain and because I see a likely range of how things will unfold in the future. The range of outcomes is in dividend yields available when I have money to invest, as well as the estimated dividend growth I will experience during the investing journey. The only constant will be the amount of money I plan to invest each month, which will be around $1,000/month.

As a general rule, if stocks are overvalued during the next decade, it could take longer to reach my objectives. If stocks are undervalued, it should take much less time to reach out my goals.

I then looked at a few different scenarios, the likelihood of which is pretty difficult to estimate. But I did make those projections anyways.

I used the following spreadsheet to input my estimates. You may give it a try.

It lists a few different inputs on cells C1, C2 and C3, notably dividend growth, dividend yield and amount I plan to invest.

The calculations in rows 6 through 305 show the projections, using inputs above.

The first column shows the month.

The second column shows the number of shares accumulated through new investment and dividend reinvestment.

The third column is showing the share price for the average company that the model is investing in.

Initially, the share price is at $1, but then it tends to increase by the rate of annual dividend growth. This is why when you invest $1,000 initially, you can buy 1000 shares. In 12 months, after the dividend increases by 6%, the share price increases by 6% as well. As a result, the same $1,000 only buys 943 new shares.  The fourth column simply shows the monthly dividend amount per share, which tends to increase by the rate expected in cell C1. The last column is simply the monthly dividend income generate by the portfolio. This is the column where I look for the amount that is at or above $1,000, in order to see how many months it would take me to reach the stated portfolio goals and objectives.

I am going to run through a few of the scenarios listed below:

The first scenario uses a dividend yield of 3% and an annual dividend growth of 6%/year. If I can find securities yielding 3%, which also grow dividends by 6%/year, I would be able to reach $1,000 in monthly dividend income within 188 months, which is about 15 and a half years. Based on how I have been investing over the past 10 months, this sounds like a decent possibility for an outcome. This example assumes that I can invest my portfolio in a basket of securities every single month with an average dividend yield of 3% and an average annual dividend growth of 6%/year. This and all the other assumptions listed below also take into consideration dividend reinvestment – essentially dividends are reinvested into a basket of stocks yielding 3%, with a 6% rate of organic dividend growth.

Per the model, someone who invested for 23 months should have an estimated monthly dividend income of $60.98, which translates to an annual dividend income of $731.76. Coincidentally, after investing for 23 months in the Dividend Growth Portfolio Newsletter, I have invested $24,410 and have an estimated dividend income of $791.40/year. This translates to a monthly dividend income of $65.95.



Increasing the dividend growth rate to 7% only shaves off a few months, as it will only take 180 months to reach the goals and objectives of my real money experiment.  Now, if my dividend growth portfolio that yields 3% ends up growing distributions at an annual rate of 10%/year, I would reach my goals within 157 months. Given the state of the available opportunities today, I am not sure that I can find companies growing dividends above 6%/year, which will also yield 3% or more.

If share prices become overvalued from here, to the point where the average portfolio yield is 2%, but the dividend growth is 7%/year, it would take me 229 months (19 years) to reach my goal of earnings $1,000 in monthly dividend income from my portfolio. This is a scenario with a low likelihood in my opinion.

If on the other hand we get better entry yields, and we see dividend yield of 4% and dividend growth of 6%/year, I will reach my goals within 154 months. This is close to 13 years. This is a likely scenario, which will likely present itself during the next bear market. It is possible that dividend investing falls out of favor with the investment community, which may translate into lower prices and better starting yields. Around the time of the financial crisis, and even up to 2012, it was possible to build a portfolio of attractively valued securities yielding around 4%. This was the when utilities such as Con Edison (ED) yielded close to 6%.

If we get the recession that everyone has been warning about over the past decade, we would likely get depressed stock prices for a long period of time. Under such a scenario, it may be possible to build a portfolio yielding 5% or even 6%, while everyone else is selling securities and building underground bunkers. For this to happen of course, we would likely be seeing some type of an economic contraction, high inflation and high interest rates. For example, in 1980, Coca-Cola (KO) was yielding close to 6% at one time. Colgate-Palmolive (CL) yielded 8%, Clorox (CLX) had a dividend yield of close to 9%, while Procter & Gamble (PG) yielded 5%.

If I use the estimate for a 5% dividend yield, coupled with 6% in dividend growth, I can see myself reaching the goals and objectives within 130 months. At a 6% dividend yield, I will reach the goals and objectives within 110 months. That doesn’t mean that I will be chasing yield however.

I want to caution you against chasing yield to reach the goals. I want to build a sustainable dividend portfolio, where safety of the dividend income is of primary importance. I want a dividend income stream that grows at least at the rate of inflation over time, in order to maintain purchasing power of my dollars. I also want to have a margin of safety in dividend payments, in order to minimize the risk and impact of dividend cuts on the income stream. Most companies with higher yields today have higher dividend payout ratios. If the underlying business suffers short-term turbulence in earnings due to a recession for example, or increased competition, there is a high risk of a dividend cut. A 6% dividend yield is of no help to the retired investor, if the dividend is slashed in half during the next recession. Managing risks to the portfolio is of utmost importance to the retired dividend investor.

The other thing I want to state is that future projections are fairly linear in nature. In my projections I use a flat expectations in terms of yield and growth. It is possible that we may have one set of outcomes that span a few years, followed by another set of outcomes for a few years. For example, we may have valuations where dividend yield is 3% for a few years, followed by a couple of years where valuations are very attractive and yields on blue chip securities reach 5% - 6%. Since I have the discipline to keep investing every month, I will be in a good position to take advantage of fire sales occurring along the way. The lower valuations along the way will help me reach my goals sooner.

If on the other hand stocks become overvalued and do not experience declines of any sustained kind, it will take a very long time to reach my goals and objectives. I will still try to turn over hundreds of rocks, in order to find the best values at the moment. However, results will suffer if quality companies are overvalued at available at a starting yield of 2% versus a starting yield of 4%.

I am also trying to maintain a diversified dividend portfolio, and not swing for the fences by taking concentrated bets which can work greatly or fail miserably. I am a conservative investor who is building this portfolio as if it will be the only stream of income providing for me in old age, when I cannot work or generate any other form of income. As such I emphasize on the security of the dividend stream, valuation, and company’s ability to maintain and grow that dividend stream through growth in the business. However, I do not want to rely too much on a single security for my fortune. I want a group of companies, working as a team, to shower me with more cash every year.

I look beyond sector and company allocations in terms of diversifiecation however. I also try to stack companies with the three different types of dividend growth and dividend yield characteristics. The first group is comprised of companies with lower current yields, which is compensated by higher expected dividend growth. The second group is comprised of companies in the sweet spot, where dividend yields are adequate, while dividend growth is above the mid single digits. The last group includes companies which offer higher yields today, but the dividend growth is expected to be slower.

The nature of the stock market is that the attractively valued securities and sectors do not come at a predictable timeline. Sometimes, whole sectors are overvalued for extended periods of time, which is why I may not build out significant positions there for extended periods of time. Then all of a sudden, investor sentiment may shift, and these companies may be available at a better valuation. For example, REITs were richly valued in late 2019. Just a little over an year or two before that, the likes of Realty Income were selling at attractive valuations. Realty Income went to an attractive valuation in March - June 2020 again.

Alternatively, many sectors and securities are almost always available at attractive valuations. This is great when building out a dividend portfolio, but the risk is that I may end up being overly concentrated there. This is why it pays to keep monitoring the situation and take advantage of any declines in prices. However, it is also important to manage risks appropriately, in order to avoid concentrating too much in a given sector or company.

The most important lesson I learned from investing in dividend growth stocks over the years is to enjoy the journey!

Thank you for reading!

Relevant Articles:

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Sunday, June 14, 2020

Five Dividend Growth Stocks Rewarding Shareholders With A Raise

I review the list of dividend increases every week, as part of my monitoring process. I tend to focus my attention on companies that have an established track record of annual dividend increases. This is why I focus on the dividend increases from the last week for companies that have a ten year history of annual dividend growth. Some of these companies are in my dividend growth portfolios, while others are simply ideas for further research. A third group would be in my "too hard" pile, where I will not spend any time researching due to one reason or another.

There were five such companies that increased dividends last week. Each company has at least a ten year streak of annual dividend increases under its belt. I review each dividend increase, and compare it relative to the ten year average for context.

Next, I also review the trends in earnings during the past decade, in order to determine if there is fuel for future dividend increases down the road.

Last but not least, I do a quick check on valuation.

Realty Income (O) is a REIT with over 6,500 real estate properties owned under long-term lease agreements with commercial tenants.

Realty Income raised its monthly dividend to 23.35 cents/share. This is a 3.10% increase over the dividend paid during the same time last year. The monthly dividend company has raised dividends several times per year since going public in 1994, and is a member of the dividend aristocrats list. During the past decade, this REIT has managed to grow distributions at an annualizd rate of 4.70%.

I like Realty Income, because it managed to grow dividends even during the 2007 - 2009 Great Recession. Right now, it has managed to collect 84% of April rent and 82% of May rent. This is not high, but I believe provides enough liquidity to continue paying the current rate of dividends.

Realty Income managed to grow FFO from $1.84/share in 2009 to $3.29/share in 2019. It's FFO/share dipped only slightly between 2007 and 2010, from $1.89 to $1.83. Realty Income is expected to generate $3.32/share in FFO for 2020.

The stock is selling for 18.20 times forward FFO and yields 4.65%. Check my analysis of Realty Income for more information about this dividend aristocrat.

W. P. Carey Inc. (WPC) is an independent equity real estate investment trust. The firm also provides long-term sale-leaseback and build-to-suit financing for companies. It invests in the real estate markets across the globe. The firm primarily invests in commercial properties that are generally triple-net leased to single corporate tenants includng office, warehouse, industrial, logistics, retail, hotel, R&D, and self-storage properties.

W.P. Carey raised its quarterly dividend to $1.042/share. This is a mere 0.80% increase over the dividend paid during the same time last year. The rate of dividend increases is slowing down on W.P. Carey, mostly because its AFFO/share is not growing and the FFO payout is increasing. You should not forget that, and be excited alone by the high rate of rent collections. It is still impressive that it collected 96% of April rent and 95% of May's. W.P. Carey is a dividend achiever with a 21 year history of annual dividend increases.

Since 2007, FFO/share has grown by 4.50%/year, from $3.34/share to $5/share. W.P. Carey is expected to generate $4.56/share in FFO in 2020.

The stock is selling for 15.15 times forward FFO and yields 6%.

Check my analysis of W.P. Carey for more information on this dividend achiever.

National Fuel Gas Company (NFG) operates as a diversified energy company. It operates through four segments: Exploration and Production, Pipeline and Storage, Gathering, and Utility.

National Fuel Gas raised its quarterly dividend by 2.40% to 44.50 cents/share. It has a fairly consistent pace of annualized dividend growth, with the ten year average at 2.70%/year annualized.

This dividend champion has increased dividends for 49 years in a row. The company press release stated that it had raised dividends for 50 years, but it's dividend history website only shows 49 years. As a result, National Fuel Gas is not eligible to become a dividend king until 2021. Perhaps the people writing the press release should have checked the company's website first?

National Fuel Gas managed to grow earnings from $2.73/share in 2010 to $3.51/share in 2019. The company is expected to generate $2.85/share in 2020 and $3.17/share in 2021.

The stock sells for 14.50 times forward earnings and yields 4.30%.

Target Corporation (TGT) operates as a general merchandise retailer in the United States.

Target increased its quarterly dividend by 3% to 68 cents/share. This marked the 49th consecutive annual dividend increase for this dividend champion. Annualized dividend growth has decreased from 14.70% during the past decade to around 3%/year.

Target managed to grow earnings from $4/share in 2011 to $6.36/share in 2020. The company is expected to generate $5/share in 2021 and $6.80/share in 2022.

The stock is selling for 23.50 times forward earnings and yields 2.35%. Check my analysis of Target for more information about this dividend champion.

W. R. Berkley Corporation (WRB) is an insurance holding company,which operates as a commercial lines writer in the United States and internationally. It operates through two segments, Insurance and Reinsurance & Monoline Excess.

The company increased its quarterly dividend by 9.10% to 12 cents/share. This marked the 19th consecutive annual dividend increase for this dividend achiever. During the past decade, the company has managed to grow distributions at an annualized rate of 10.40%.

W.R. Berkley managed to grow earnings from $1.92/share in 2010 to $3.52/share in 2019. The company is expected to generate $2.59/share in 2020 and $3.04/share in 2021.

The stock is selling for 23 times forward earnings and yields 0.85%.


Thank you for reading!


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Thursday, June 11, 2020

Sysco Corporation (SYY) Dividend Stock Analysis

Sysco Corporation (SYY) markets and distributes a range of food and related products primarily to the foodservice or food-away-from-home industry in the United States, Canada, the United Kingdom, France, and internationally. It operates through three segments: U.S. Foodservice Operations, International Foodservice Operations, and SYGMA.

The company is a dividend king with a 50-year history of annual dividend increases. During the past decade, Sysco has managed to boost dividends at an annualized rate of 5%.

The last dividend was in November 2019, when Sysco hiked quarterly dividends by 15.40% to 45 cents/share

Between 2009 and 2019, Sysco has managed to boost earnings from $1.77share to $3.20/share. Growth wasn’t even, as most of it occurred in the past five years. The first five years were largely flat in terms of earnings per share growth. The company was expected to earn $3.79/share in 2020, before Covid-19 hit. Now, earnings are expected to hit $2.07/share in 2020 and $2.38/share in 2021.

The company has solid competitive advantages in the distribution business, due to its scale of operations. This lets it sell each unit to customers at a lower per unit cost – because it gets to spread costs over a larger base.

In addition, it has some scale in purchases, which also result in better prices, and higher margins. Being the largest distributor, and being closer to clients can lead to better margins that competitors.
In addition, Sysco has tried to focus on cost containment, process improvement in order to improve competitiveness and increase margins. Some examples of cost containment include centralizing purchasing for its distribution centers, eliminating 10% of corporate workforce.

The company is also trying to grow through acquisitions in the US and abroad. While it won’t have the same scale and competitive advantage abroad as it does in the US, this is still a good start. Getting new customers is also something it is trying to achieve, and it tries to offer services and consulting to clients that smaller scale distributors cannot do. Sysco also has half of its orders placed electronically by customers, which frees some time for the sales team to do value added services and look for new business opportunities.

The company distributes private label products and branded products to customers. The private label ones carry better margins for Sysco.

There are risks to investing in Sysco of course, notably labor shortages, food inflation, and recessions. It is difficult to find qualified truck drivers, which compresses margins. In addition, food inflation may make it difficult to quickly pass costs to customers, which may depress margins. A decrease in the economic activity may results in less of a demand for Sysco’s distribution of goods. Integrating acquisitions could also turn out to be more costly than expected.

The largest risk today is that a lot of their customers are having difficulties, due to Covid-19 related shutdowns. It is possible that many of their customers may not survive. The ones that are adaptable however, should be able to weather the storm.

Sysco may also benefit, because some of its smaller and less capitalized competitors may not survive, which could result in the opportunity to further consolidate its market position, and make it even stronger.

The company has been actively repurchasing shares during the past decade. The number of shares outstanding has been reduced from 596 million in 2009 to 523 million in 2019. It looks like the reduction in shares outstanding was more pronounced in the past five years, which is probably one of the reasons behind the growth in earnings per share during the period as well.

The dividend payout ratio increased from 2009 to 2015, before falling to a more reasonable 48% in 2019. Based on forward earnings, the forward dividend payout ratio is at 87%. This is high, but if you believe that this crisis is relatively temporary in nature, it may be a good time to review the stock.

The stock is selling for 27.50 times forward earnings and yields 3.50%. There will be an earnings hit in 2020, which means that the stock multiple looks high. Based on prior year's earnings, Sysco looks like a steal. If you believe that there will be a recovery in the restaurant industry, and that this health crisis will dissipate soon, today may be a good time to start reviewing the company. There is a pent-up demand, where customers will want to go out, and treat themselves to a meal prepared by someone else, in an environment that is not their home.

However, if this turns out to radically change how everyone does business, leading to a wave of closures, and a reduction in demand, Sysco may end up earning less money and its dividend may be in danger. As usual, the stock price can always move lower, which is a risk particularly when fundamentals are on a shakier ground due to specific industry risks that Covid-19 is causing to Sysco.

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Monday, June 8, 2020

My Favorite Exercise As A Dividend Growth Investor

One of my favorite exercises is reviewing the list of dividend increases.

As a dividend growth investor, I buy companies with an established track record of annual dividend increases. I usually require a minimum of 10 consecutive years of annual dividend increases, before I even look at a company. This minimum streak merely gets a company on my watchlist for further review and screening.

My review looks at trends in earnings, dividends, payout ratios, and valuation. I try to review qualitative, as well as quantitative characteristics, while remaining objective. Each company is unique, and it has to fit in to the overall goals and objectives of my portfolio as well. I want to determine if the company would be able to continue growing earnings and growing those dividends. I also want to determine how secure is the dividend, by looking at the payout ratio and trends in earnings per share.

The next part is valuation, which is difficult, because it is not a clear cut process. I look at stability of earnings throughout the economic cycle, versus P/E ratios and past and expected growth. I have tried to codify it, but I also don’t want to be overly prescriptive, because the opportunities available vary from one month to the next. I do not want to end up being too strict, and missing out on future dividend growth and total returns merely because I didn’t want to overpay by 1 cent/share. I also do not want to be too lenient either.

With dividend growth investing, a lot of the work done before investing my money is done up front. I receive a lifetime of growing dividend income due to a decision made years ago. Once I set up a dividend income stream, by investing in a company, I just buckle up and enjoy the ride. I am paid regular dividends to own quality companies. Every 90 days or so, I receive a cash deposit for a decision that I may have made years or decades ago. Dividend growth investing is the gift that keeps on giving me cold hard cash every year, and dividend increases every year. Hopefully, the investment works, and I continue receiving dividend increases every year for the duration of my investment. I do not micromanage my investments, and just let them do their own thing.

When I receive dividend increases, this is a testament that my original plan is still working. This action by management shows me that they are confident in the near terms prospects of the business, enough so that they dedicate a certain portion of their cash flows to dividends. When management teams set a dividend, they know that shareholders are now expecting at least a stable dividend payment. That’s why management teams are usually conservative on the amount of dividends they will distribute to shareholders, because they view it as a commitment. Usually, the amount of dividends is determined after a careful evaluation of the business needs, the competitive environment, future investments and the amounts that the business does not require for its needs. In other words, dividends are paid by excess cash flows. If these are growing, management teams would likely grow those dividend payments as well. This is why a dividend increase shows me that my original investment thesis is still working, since the companies are still paying more due to growth in the business.

During the past week, there were three companies that raised dividends to shareholders. I own shares in one of these three companies. The companies include:

Alexandria Real Estate Equities, Inc. (ARE) is a real estate investment trust that invests in office buildings and laboratories leased to tenants in the life science and technology industries.

The REIT declared a quarterly dividend of $1.06/share, which is a 2.90% increase over the previous dividend payment, and a full 6% increase over the dividend paid during the same time last year. This marked the 11th consecutive year of annual dividend increases. During the past decade, Alexandria Real Estate Equities has increased dividends at an annualized rate of 5.50%.

The REIT has managed to increase FFO/share from $3.55 in 2010 to $7.80 in 2019. This dividend achiever is expected to generate $7.30/share in FFO in 2020 and $7.75/share in FFO in 2021.
This REIT is richly priced at 21.70 times forward FFO, and offers a dividend yield of 2.70%.

UnitedHealth Group Incorporated (UNH) is an American for-profit managed health care company based in Minnetonka, Minnesota. It offers health care products and insurance services.

The health insurer increased its quarterly dividend by 15.70% to $1.25/share. This marked the 11th consecutive annual dividend increase for this dividend achiever. During the past decade, the company has managed to grow distributions at an annualized rate of 66.70%.

UnitedHealth has managed to grow earnings per share by a factor of 6 over the past decade. Earnings grew from $3.24/share in 2009 to $14.33/share in 2019. The company is expected to earn $16.24/share in 2020.

I find the stock to be fairly valued at 19.20 times forward earnings and a forward yield of 1.60%. Check my analysis of UnitedHealth Group for more information about the company.

Universal Health Realty Income Trust (UHT) is a real estate investment trust that invests in healthcare and human service-related facilities including acute care hospitals, rehabilitation hospitals, sub-acute care facilities, medical/office buildings, free-standing emergency departments and childcare centers.

The real estate investment trust increased its quarterly dividend by 0.70% to 69 cents/share. This is the second dividend increase over the past 12 months. The new distribution is 1.50% higher than the distribution paid during the same time last year. This real estate investment trust has managed to increase annual dividends for 34 years in a row. During the past decade, this dividend champion has managed to boost shareholder distributions at an annualized rate of 1.30%.

FFO/share grew from $2.80 in 2009 to $3.20 in 2019. This is a very slow rate of dividend growth.

I sold UHT in 2013, because of its slow rate of dividend growth, high payout ratio and what I perceived to be a high valuation. I was wrong apparently, since the stock price has doubled since then, while the dividend is still rising at a snails pace. I replaced it with Digital Realty Trust (DLR) and Omega Healthcare (OHI).

And I believe that the stock is even more overvalued today at 31.60 times forward earnings and yields 2.70%. The FFO Payout ratio is at 86.25%, which is high.

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