Wednesday, July 28, 2021

How dividends protect income from inflation

Since 1960s, dividends have increased at a steady pace. Perhaps due to inflation, perhaps due to the end of the Gold Standard, perhaps due to changes in the types of industries.

As an investor, I buy shares in companies that sell goods and services to consumers, and earn a profit in the process. Many of these companies have competitive advantages, which would allow them to pass on any sustainable cost increases to the final customers by raising prices. 

This means that equities could turn out to deliver a good inflation protection. If companies grow earnings, they can distribute more to shareholders in the form of dividends. In other words, dividends tend to produce a stream of income that protects against inflation.

I looked at the data for S&P 500 dividends since 1960 in order to test this hypothesis. (Source)

I also obtained data on annual inflation in the US. (source)

It does seem that dividends have managed to exceed inflation in each decade since 1960. The exception is in the 1970s, when dividends trailed slightly behind inflation. However, stock prices lost a lot more ground to inflation.

I tried to look at it by breaking it down by years. The period of high inflation in the US was between 1966 – 1981. During that time, inflation was just slightly above dividend growth. But if you spent dividends you largely maintained standard of living.

It looks like there were a few years where dividend income was lower at an inflation adjusted rate than 10 years earlier (1975). In other words, the purchasing power decreased by 25% through 1975, compared to 1965. But then it rebounded from there.

If we looked at real stock prices between 1965 and 1981 however, the picture is much worse. The inflation adjusted stock price, as indicated by S&P 500, decreased by 50% between 1965 and 1975 and stayed there till 1981. This means that if you held stock that could purchase $100,000 worth of goods in 1965, by 1975 that same basket of stocks could buy half of what you could buy before.

I do not have the data on Bonds, but interest income definitely lost purchasing power even more rapidly.

Overall, dividends have managed to provide a good protection against inflation. That being said, while dividends provide good inflation protection over time, that may not hold true in every single year. The period from 1965 - 1975 clearly indicates this.

The question for me is how would this affect me if I were retired and living off dividends between 1965 - 1975. I would probably have to look for ways to cut expenses in some areas, but not in others. The nice thing is that my personal basket of goods and services used will be different than the basket measured using CPI. 

I can always try to adjust my spending and my budget. For example, if travel was a big expense, I may spend less time travelling to expensive destinations like Paris, France and go to cheaper locations. I may go for switching brands or I may go for stocking up on certain items earlier in the year. Of course, certain expenses like healthcare are more difficult to manage and forecast too. 

In addition, while I used S&P 500 dividends as a proxy for dividend incomes in general, this is just a proxy. The portfolio of companies I would have invested in may have generate a dividend income stream that provides a better protection against inflation ( though it could be worse too if I chose poorly). Not all S&P 500 companies are dividend growth type however. The index includes a lot of cyclical names like U.S. Steel or General Motors, which tend to cut dividends during recessions, and are not dividend growth stocks. I tend to focus my attention on the companies that grow dividends annually, and have a track record for doing so. It also helps to analyze these companies, in order to understand if they can keep growing earnings and dividends. Having a competitive advantage, a strong brand name and a leadership position are big pluses in my book.

If I focus my attention on companies that grow dividends each year, I stand a better chance of growing my dividend income and protecting it against the ravages of inflation.

I obtained the historical dividends for three dividend growth stocks I thought about at the top of my head. I would argue that these are prominent large cap companies that have been prominent large and established companies for many decades, so it is reasonable to conclude that an investor would have had a chance of selecting them 55 years ago.

For example, Johnson & Johnson (JNJ) managed to grow real dividend income by a factor of 5 during the 1965 - 1981 period

Procter & Gamble shareholders also saw a gradual increase in their inflation-adjusted dividend income, albeit at a much slower pace than Johnson & Johnson. 

Coca-Cola shareholders also saw a gradual increase in their inflation-adjusted dividend income, albeit at a much slower pace than Johnson & Johnson, but faster than Procter & Gamble.

It looks like it has paid to be selective, when looking for dividend growth stocks that can grow dividends at or above the rate of inflation.

Thank you for reading. Please let me know what you think in the comments below.

Relevant Articles:

- A Look Under the Hood For Inflation

- Dividend Growth Stocks Protect Investors from Inflation

Monday, July 26, 2021

Stanley Black & Decker: A Dividend King in Focus

Stanley Black & Decker, Inc. (SWK) engages in the tools and storage, industrial, and security businesses worldwide.

The company raised its quarterly dividend by 12.90% to 79 cents/share just last week. This marked the 54th consecutive annual dividend increase for this dividend king.

Stanley Black & Decker's CEO, James M. Loree, commented, "I am pleased to continue our trend of consecutive annual dividend increases, which reflects the continued confidence we have in the cash generation potential of the company.  A strong and growing dividend is a key element of our shareholder value proposition, and is consistent with our capital deployment philosophy to deliver approximately half of our excess capital to shareholders over the long term." (source)

Over the past decade, Stanley Black & Decker managed to grow dividends at an annualized rate of 7.60%.

Between 2011 and 2020, earnings per share grew from $3.97 to $7.77. The company is expected to generate $11.21/share in 2021.

The company has managed to grow through acquisitions, notably the merger between Stanley Works and Black & Decker in 2010. In 2017 it acquired the Craftsman brand from Sears. It actively manages its portfolio of products. Growing the businesses through M&A is central to the company’s strategy

The company is looking to increase efficiencies in the supply chain to reduce cost, and increase sales in emerging markets. About 59% of sales comes from the US, 4% in Canada, 24% Europe, 8% Asia. 

Stanley Black & Decker is also focused on growing its e-commerce sales, which account for $2 billion out of its $14 billion in sales.

The company is organized in three segments.

Tools & Storage accounts for 71% of sales and 80% of operating profits. The company is a leader in tools and storage. It has a portfolio of brands that tradespeople and DIY folks rely on. We are speaking about hand tools, power tools like DeWalt, Craftsman, Black & Decker etc.

Industrial accounts for 16% of revenues and 12% of operating profits. It builds solutions like preferred engineered fastening solutions in automotive and industrial channels to inflastructure solutions like hydraulic tools and attachments.

Security accounts for 13% of revenues and 8% of operating profits. The company delivers peace of mind with advanced electronic safety, security and monitoring solutions, automatic doors, and sophisticated patient safety, asset tracking and productivity solutions.

I believe that a picture is worth 1,000 words. Which is why I am including this slide from their annual report, which summarizes their value creation model.

Source: Company's Annual Report

The company managed to reduce the number of shares outstanding between 2011 and 2016 from 170 million to 148 million. Shares outstanding are up since then due to acquisitions.

The payout ratio has largely remained between 30% and 45%, with the exception of two spikes in 2013 and 2018. Those were triggered by one-time accounting items affecting earnings per share in each of those two years.

Currently, the stock is selling for 18.21 times forward earnings and yields 1.55%.

What is your opinion on the company? Please share in the comments below.

Relevant Articles:

Thursday, July 22, 2021

The Illusion of Choice in Consumer Goods

One of my favorite charts shows a listing of eleven consumer goods companies, and the brands that they own. It reinforces my belief that strong brands grow dividends.

You can view this chart from here:

Source: Brewminate

This illustration shows these massive companies that control large portions of a given segment of the market. While the sheer number of brands creates the illusion that there is unlimited choice, the reality is that just a few brands control what you buy on a regular basis. It looks like there is a lot of competition, when in reality just a few companies control a lot of the brands we purchase. The sheer reach of brands is fascinating. 

This is understandable, given the fact that many companies own brands that target different segments. Many of these companies have established relationships with retailers for shelf space. Many of these retailers value these brands, because consumers expect to see them, and want them. It is a mutually beneficial relationship.

This of course is a result of creating new brands from scratch, as well as decades of consolidations through mergers and acquisitions.

As an investor, I like looking at companies with solid brands that consumers buy on a recurring basis. I also like the consumer goods companies, because they sell goods that consumers would buy even during a recession. I like companies with large brands that have a dominant position, because I believe that a successful company that has been successful for a long time would likely continue being successful in the future.  Having scale is helpful in procuring the lowest per unit costs, as you have centralized marketing, purchasing and distribution. The more successful you get, the more you stack the odds in your favor.

The companies listed in this chart represent some good ideas for further research. They are not automatic buys of course. When I evaluate companies, I generally like to look for:

1) A track record of annual dividend increases

2) Growth in earnings per share over the past decade

3) Growth in dividends per share over the past decade

4) Dividend sustainability

5) Good entry valuation

I like the stability of their business models. These companies do well in a slow but steady way, and navigate near term economic turbulent nicely. While past performance is not indicative of future results, I believe that these companies would still be dominant in the next 50 years. If you are reading this in 2071, please let us know how this prediction turned out.

The companies included in the chart are:

Coca-Cola (KO) is a beverage company that manufactures, markets, and sells various nonalcoholic beverages worldwide. 

The company is a dividend king with a 59 year track record of consecutive annual dividend increases. Over the past decade, Coca-Cola has managed to grow dividends at an annualized rate of 6.40%.

The stock sells for 25.53 times forward earnings and yields 3.01% today.

Unilever (UL) operates as a fast-moving consumer goods company. It operates through Beauty & Personal Care, Foods & Refreshment, and Home Care segments.

Unilever is an international dividend achiever, which has increased dividends for 25 years in a row. Unilever has managed to boost dividends at an annualized rate of 7.20% over the past decade.

The stock sells for 20.33 times forward earnings and yields 3.43% today.

PepsiCo (PEP) operates as a food and beverage company worldwide. The company operates through seven segments: Frito-Lay North America; Quaker Foods North America; PepsiCo Beverages North America; Latin America; Europe; Africa, Middle East and South Asia; and Asia Pacific, Australia and New Zealand and China Region. 

The company is a dividend aristocrat with a 49 year track record of consecutive annual dividend increases. PepsiCo has managed to boost dividends at an annualized rate of 7.80% over the past decade.

The stock sells for 25.04 times forward earnings and yields 2.76% today.

Kellogg's (K) manufactures and markets ready-to-eat cereal and convenience foods. The company operates through four segments: North America, Europe, Latin America, and Asia Middle East Africa.

The company is a dividend achiever with an 18 year track record of consecutive annual dividend increases. Kellogg's has managed to boost dividends at an annualized rate of 3.90% over the past decade.

The stock sells for 15.94 times forward earnings and yields 3.58% today.

Mondelez (MDLZ) manufactures, markets, and sells snack food and beverage products worldwide. 

The company was formed in 2012, when Kraft Foods split into two. Mondelez has managed to increase dividends annually since the split. Over the past five years, Mondelez has managed to increase dividends at an annualized rate of 12.80%.

The stock sells for 21.94 times forward earnings and yields 1.97% today.

Johnson & Johnson (JNJ) researches and develops, manufactures, and sells a range of products in the health care field worldwide. It operates through three segments: Consumer Health, Pharmaceutical, and Medical Devices.

The company is a dividend king with a 59 year track record of consecutive annual dividend increases. Over the past decade, Johnson & Johnson has managed to grow dividends at an annualized rate of 6.60%.

The stock sells for 17.47 times forward earnings and yields 2.54% today.

Nestle (NSRGY) operates as a food and beverage company. 

Nestle is an international dividend aristocrat, which has managed to increase dividends annually since 1995. It has managed to boost dividends over the past decade at an annualized rate of 4%. Check my analysis of Nestle for more information about the company.

The stock sells for 26.07 times forward earnings and yields 2.38% today.

Procter & Gamble (PG) provides branded consumer packaged goods to consumers worldwide. It operates in five segments: Beauty; Grooming; Health Care; Fabric & Home Care; and Baby, Feminine & Family Care.

The company is a dividend king with a 65 year track record of consecutive annual dividend increases. Over the past decade, Procter & Gamble has managed to grow dividends at an annualized rate of 5.20%.

The stock sells for 24.96 times forward earnings and yields 2.48% today.

General Mills (GIS) manufactures and markets branded consumer foods worldwide. The company operates in five segments: North America Retail; Convenience Stores & Foodservice; Europe & Australia; Asia & Latin America; and Pet. 

General Mills has increased dividends for 1 year. The company lost its status of a dividend achiever in 2018. This ended a 15 year streak of consecutive annual dividend increases. Over the past decade however, it managed to grow annual dividends at a rate of 5.95%.

The stock sells for 16.29 times forward earnings and yields 3.36% today.

Kraft Heinz (KHC) manufactures and markets food and beverage products.

Kraft Heinz was formed from the merger of Kraft Foods and Heinz. Sadly, the company cut dividends a few years ago, and has kept them unchanged. Kraft Foods had split into two in 2012, and had managed to increase distributions for a few years before that.

The stock sells for 14.80 times forward earnings and yields 4.07% today.

Mars Inc is a privately held company. It's owned by members of the Mars family.

Relevant Articles:

Monday, July 19, 2021

Seven Dividend Growth Stocks Rewarding Shareholders With Raises

As part of my monitoring process, I review the list of dividend increases every week This activity helps me to monitor the business performance of any companies I am invested in. It also helps me to identify any hidden dividend gems, and place them on my list for further research.

My reviews are an example of the quick way I use to evaluate companies, before deciding if they are worth a second look later or not.

The companies in today’s article have managed to grow dividends for at least ten years in a row. These companies also announced a dividend increase during the past week. The companies include:

Walgreens Boots Alliance, Inc. (WBA) operates as a pharmacy-led health and beauty retail company. It operates through three segments: Retail Pharmacy USA, Retail Pharmacy International, and Pharmaceutical Wholesale. 

Walgreens Boots Alliance hiked its quarterly dividend by 2.1 percent to 47.75 cents/share. This marked the 46th consecutive annual dividend increase for this dividend aristocrat. Over the past decade, it has managed to increase dividends by 11.50%/year. Lately, the rate of dividend increases has declined to about 2%/year.

Walgreen’s earned $2.94/share in 2011 and is expected to earn $4.80/share in 2021. It looks like Walgreen’s has been unable to grow earnings per share for about 3 – 4 years now.

The stock is selling for 9.59 times forward earnings and yields 4.15%.

Marsh & McLennan Companies, Inc. (MMC) is a professional services company which provides advice and solutions to clients in the areas of risk, strategy, and people worldwide. It operates in two segments, Risk and Insurance Services, and Consulting.  

Marsh & McLennan Companies hiked its quarterly dividend by 15.10% to 53.50 cents/share. This marked the 12th consecutive year of annual dividend increases for this dividend achiever. Over the past decade, the company managed to grow dividends at an annualized rate of 8.60%/year.

Earnings increased from $1.55/share in 2010 to $3.94/share in 2020.

The company is expected to generate $5.65/share in 2021.

The stock sells at 25 times forward earnings and yields 1.51%.

PPG Industries, Inc. (PPG) manufactures and distributes paints, coatings, and specialty materials worldwide. The company raised its quarterly dividend by 9.30% to 59 cents/share. This marked the 50th consecutive year of annual increases in the company’s dividend for this newly minted dividend king.

Between 2011 and 2020, the company managed to grow earnings from $3.44/share to $4.45/share. PPG Industries is expected to earn $8.03/share in 2021.

The stock sells for 21.21 times forward earnings and yields 1.39%.

National Retail Properties (NNN) invests primarily in high-quality retail properties subject generally to long-term, net leases.

The company raised its quarterly dividend by 1.90% to 53 cents/share. The increase in the quarterly dividend marks the 32nd consecutive annual dividend increase for this dividend champion. Over the past decade, the company has managed to grow annual dividends at a rate of 3.20%.

The REIT is expected to generate $2.76/share in FFO in 2021. It earned $1.70/share in FFO in 2011 and grew it to $2.51//share in 2020.

The REIT is selling for 17.50 times forward FFO and yields 4.38%.

Computer Services, Inc. (CSVI) provides core processing, digital banking, managed services, payments processing, print and electronic distribution, and regulatory compliance solutions to financial institutions and corporate entities in the United States.

Computer Services, Inc. hiked its dividend by 8 percent to 27 cents/share. This marked the 50th consecutive year of increased cash dividends paid to shareholders, according to the company.  

I have been unable to verify this claim however, as the company has only been public since 1995, and old annual reports only go back to 2004.

If you go to their 2006 annual report however, and flip to page 20, it states that “The fiscal 2006 cash dividend marks the 17th consecutive year with a dividend increase”.

They started claiming a 42 year history of annual dividend increases in 2014’s annual report. On the 2013s annual report the claim was for a 24th consecutive year of annual dividend increases.

Between 2012 and 2021, the company has managed to grow earnings from 87 cents/share to $2.10/share.  The company has managed to grow dividends at an annualized rate of 16.20% over the past decade.

The stock is selling for 28.18 times earnings and yields 1.90%.

Duke Energy Corporation (DUK) operates as an energy company in the United States. It operates through three segments: Electric Utilities and Infrastructure, Gas Utilities and Infrastructure, and Commercial Renewables.

Duke Energy Corporation hiked quarterly dividends by 2.1 percent to 98.50 cents/share. This marked the 17th year of consecutive annual dividend increases for this dividend achiever. Over the past decade, Duke has managed to boost dividends at an annualized rate of 2.80%.

The company earned $3.83/share in 2011 and is projected to generate $5.18/share in 2021.

The stock is selling for 20.21 times forward earnings and yields 3.76%.

Cummins Inc. (CMI) designs, manufactures, distributes, and services diesel and natural gas engines, electric and hybrid powertrains, and related components worldwide. It operates through five segments: Engine, Distribution, Components, Power Systems, and New Power.

Cummins increased its quarterly dividend by 7.4 percent to $1.45/share.  This dividend achiever has managed to increase annual dividends for 16 years in a row. Over the past decade, Cummins has managed to grow dividends at an annualized rate of 19.70%.

The company managed to grow earnings from $9.55/share in 2011 to $12.01 in 2020.

Cummins is expected to earn $16.11/share in 2021.

The stock sells for 14.81 times forward earnings and yields 2.43%.

Ryder System, Inc. (R ) operates as a logistics and transportation company worldwide. The company operates through three segments: Fleet Management Solutions (FMS), Supply Chain Solutions (SCS), and Dedicated Transportation Solutions (DTS).

Ryder System raised its quarterly dividends by 3.60% to 58 cents/share. This marked the 17th year of consecutive annual dividends for this dividend achiever.

The company is expected to earn $5.92/share in 2021. For comparison, the company earned $3.28/share in 2011, but lost money in 2019 and 2020.

The stock is selling for 11.98 times forward  earnings and yields 3.27%.

Relevant Articles:

Wednesday, July 14, 2021

The Dividend Crossover Point

The goal of every dividend investor is to one day accumulate a portfolio of income producing stocks, which would throw off a large amount of dividends every month. The magic point is where the dividend income exceeds the expenses of the dividend investor. At the dividend crossover point your dividend income meets or exceeds your expenses. For many dividend investors, this is the point synonymous with financial independence. After all, after years of sacrifice, wise investment and sticking to a plan, investors would finally be able to do be free from a nine to five job. The goal of reaching the dividend crossover point is achievable, but it takes capital, time, skill or luck in order to get to the magic point.

In order to reach that magical point, a lot of work needs to be done. Investors need to design a retirement strategy, and then stick to it through thick and thin, while also improving along the way. Some of the biggest dangers to successful dividend investing are not market volatility, dividend cuts or recessions, but investor psychology.

The process of accumulating a viable dividend stream will take anywhere from several years for those who are starting out with a large amount in their 401 (k) or IRA’s to a few decades for these young investors who are just starting out in their professional careers. Along the way, many investors will lose track of the goal due to sheer boredom or due to lack of patience. Successful dividend investing is sometimes as exciting as watching paint dry. Unfortunately, investors who enter dividend investing for the sheer excitement do not stick to it. On the other hand, investors who attempt to find shortcuts to speed up the process of capital accumulation by using options and futures, risky growth stocks or massive leverage will likely be disappointed along the way.

The key ingredients to accumulating a sufficient dividend income stream include time, dividend reinvestment and regular contributions to your portfolio. The power of regular contributions is important, because this ensures that investors consciously keep working towards their goal of dividend independence by investing in dividend stocks every month. While markets fluctuate greatly, I have always found at least 15 – 20 attractively valued income stocks at all times. Dividend reinvestment in dividend growth stocks is essential for turbo-charging your passive income. And last but not least, investors need the time to let their income compound to their desired amount.

Dividend investing takes time, before the amount of distributions reaches decent levels. Imagine that someone managed to save $1000/month for one year. Each month, they put $1000 total in two companies ($500 dollars per company per month). At the end of the first year, they would have about 24 companies, and the portfolio cost will be $12,000. If the average yield were 4%, this portfolio will generate $480 in annual dividends, which accounts for roughly $40/month. On the positive side, the dividends from this portfolio will generate enough to purchase one additional stock position per year. In addition, $40/month could pay for utilities, phone or internet bills for the investor pretty much for life. On the negative side, assuming that the investor needs $1000/month to cover their basic expenses, he or she would calculate that they would need to sacrifice almost for one decade, before their income reaches a decent amount. Once they are there however, and their portfolios consist of wide-moat dividend champions with sustainable distributions, investors will be able to live off dividends.

You can see that building that dividend machine can be a long term process. The levers within the control of the investor include their savings rate, ability to develop a strategy and stick to it, in order to allow the power of long-term investment compounding to do its magic.

In my investing, I have found very important to follow a few simple rules in order to create a sustainable dividend producing machine, which would produce dependable income for decades.

First, investors should focus on companies which have a long history of paying and raising dividends. I typically look for companies which have increased dividends for at least ten years in a row.

Second, investors should make sure that these companies are trading at attractive valuations. I have found that paying a P/E of over 20 could lead to poor results.

Third, investors should make sure that the company’s dividend is sustainable out of earnings or cash flows. I typically look for a dividend payout ratio of less than 60% for ordinary stocks. For REITs or Master Limited Partnership I look for FFO Payout and DCF Payout Ratios.

Fourth, investors should perform a qualitative analysis of the dividend paying company they consider for purchasing. This analysis should include understanding how the business makes money, growth prospects, competitive landscape, whether the business has any moat, whether the company has any strong brands, which consumers are loyal to and result in pricing power.

Fifth, investors should try to build a diversified dividend portfolio consisting of at least 50 -60 individual stocks coming from at least ten sectors. Having exposure to internationally based companies is a plus, despite the fact that most dividend growth stocks derive a major part of their profits from outside the US.


Today we discussed the concept of the dividend crossover point, which is the point where dividend income exceeds expenses. We also discussed the tools within the investor’s control to get there.

Finally, I shared a brief overview of the types of simple investing rules I follow to evaluate dividend paying stocks. All of the principles listed in this article are the cornerstones of the Dividend Growth Portfolio Newsletter that I launched a few years ago. I believe that by showing how I am building a real world portfolio from scratch, I can educate investors on the inner works of dividend investing.

At the same time, dividend income makes it easy to see how we are doing against our ultimate goal of $1,000 in monthly dividend income. Right now, the dividend growth portfolio is earning $110 in expected average monthly dividend income after three years of saving and investing. 

I expect that by following the principles outlined in this post, we should be able to hit the dividend crossover point of $1,000 in monthly dividend income within ten to fifteen years. The outcomes vary, because the conditions over the next decade or so will likely vary as well. If more securities are available at higher starting yields or if dividend growth is faster than anticipated we will achieve our goals quicker. If on the other hand starting yields are lower and dividend growth is lower, we will achieve our goals in a slower fashion

Relevant Articles:

Use these tools within your control to get rich
Getting Started – The Hardest Part About Dividend Investing
What are your investment goals?
Financial Independence Is Easier to Model with Dividends

Sunday, July 11, 2021

J. M. Smucker (SJM) Dividend Stock Analysis

The J. M. Smucker Company (SJM) engages in manufacturing and marketing branded food products primarily in the United States, Canada, and internationally. 

The company is a member of the dividend achievers index, and has boosted distributions for 24 years in a row.

The company’s last dividend increase occurred last week, when the Board of Directors approved a 10% increase to 99 cents/share. 

Over the past decade this dividend growth stock has delivered an annualized total return of 8.33% to its shareholders.

J.M. Smucker Company has managed to increase earnings from $4.05/share in 2011 to $7.79/share in 2021. 

The EPS figures are not adjusted for amortization charges, which are related to intangible assets which are generated when acquisitions occur. These amortizations depress earnings per share artificially by $2.08/share in 2021, $2.07 in 2020, $2.11 in 2019 and $1.82 in 2018. The company is expected to generate adjusted earnings of $8.70 to $9.10/share in 2022. For comparison, adjusted earnings per share for 2021 were $9.12/share.









Amortization/ share








Future increases in earnings would likely be generated by acquisitions and some by cost restructuring. The company has a track record of making acquisitions that work. The company has taken the initiative to improve operations and production efficiencies and improving its cost base. The demand for products in Smucker’s end markets is stable and would grow slowly over time.

The demand for coffee, peanut butter, jelly, and cooking oils is pretty stable, and results in repeatable sales to consumers, once you establish that relationship. However, the industry is fiercely competitive, which is why the company needs to constantly spend on marketing, and is also exposed to rising costs and potentially being unable to pass them onto consumers.

International sales account for less than a quarter of revenues, which is an opportunity for growth. Product innovation could also provide opportunities for growth.

One risk factor to look at is that sales to Wal-Mart account for over a quarter of revenues. This is a high reliance on the world’s largest retailer, which is known for its stance to keep costs low. On the other hand, this is a mutually beneficial relationship, as customers looking for a particular brand may be turned off a retailer if they do not find it.

The number of shares outstanding has been largely flat. While it went down between 2009 and 2015, a strategic acquisition increased the number of shares in 2016. They have repurchased only a negligible amount of stock back.

The annual dividend payment has increased by 8.70% per year over the past decade, which higher than the growth in EPS. This was achieved mainly through the expansion in the dividend payout ratio.

An 8.70% growth in distributions translates into the dividend payment doubling almost every eight years. If we look at historical data, going as far back as 1978 we see that J. M. Smucker has actually managed to double its dividend every seven years on average.

The dividend payout ratio has increased from 39.10% in 2007 to 46% in 2016. A lower payout is always a plus, since it leaves room for consistent dividend growth minimizing the impact of short-term fluctuations in earnings.

Thursday, July 8, 2021

Understanding Compounding and Getting Rich Late in Life

I once shared the story of Ronald Read, who died at the age of 92 in 2014 with a dividend portfolio worth $8 million. That story shows that Ronald Read earned close to $20,000 in monthly dividend income from this diversified portfolio of 95 blue chip securities. It looked like Mr Read invested solely for dividend income, and his portfolio was well put together.

I was confused by some of the feedback, mostly judging him for his frugal lifestyle. A lot of folks asked me if he really enjoyed his life.

I think that these folks do not understand the powerful force of compounding. It is likely that they do not understand frugality, and the fact that you need to save something, in order to find money to invest.

But what they really failed to understand the power of investing small amounts on a consistent basis, and then letting that money compound for long periods of time. This is how wealth is built in the stock market.

The problem with long term investing is that the investment balances and dividend incomes will be largest at the end of our journeys. If you compound money for a long period of time, most of the gains will be visible after 40 - 50 - 60 years. That would be the case even if your savings rate was around 10% - 20%, which is not extreme in any case shape or form.

Let’s start with the basics

$1 invested today at 10% turns into $1.10 in one year, and $1.21 in two years. The extra cent in year 2 is due to the power of compounding. If you never compounded that $1, you would be simply stacking 10 cents per year. When you reinvest, you end up earning profits on top of profits, which creates a virtuous cycle of wealth.

Compounding is a powerful force, especially when you have a good return and you let the snowball roll for a long period of time. Most of the results will be visible at the end of the journey however.

The initial grind is always the hardest, because right away the fruits of compounding are very small. That same dollar invested at 10%/year won’t double until year 7. And still, the mind will trick you into believing that it was not worth it to wait for 7 long year for one measly dollar. A lot of folks lose hope in the initial stages of compounding. This is further compounded by the fact that returns do not arrive at a steady and predictable 10%/year. To earn 10%/year in equities, you would have to endure long drawdowns, recessions, unemployment, and only those patient enough to stick to their plan and to persevere get to enjoy the power of compounding to their advantage.

If that $1 is invested for 50 years at 10% compounded annually, it turns int o$117.39 after half a century.

Therefore, if you are a 30-year-old with $70,000 invested, and you can compound the money for 50 years at 10%/year, you could be worth close to $8 million when you are an 80-year-old.
If you manage to compound money for 60 years, you only need to put $26,275 to work for you, in order to reach $8M in net worth.

It is even more interesting to observe the interaction between savings rates, equity returns and reaching out your goals and objectives. Having the perspective of running the numbers and alooking at different scenarios definitely helps us see things clearly.

Imagine that you earn $5,000/month.

1) If you save and invest $1,000/month and earn 10%/year, you will become a millionaire in 22 years. It would take you approximately 42 years in total to reach a net worth of $8 million. This is a savings rate of 20%, which is high for US standards but nothing extreme.

At this level of savings, our investor spends $4,000/month. If our portfolio has an average dividend yield of 3%, we would need close to $1.60 million to generate $48,000 in annual dividend income. It would take close to 27 years to reach financial independence at this rate of savings.

2) If you save and invest $2,000/month and earn 10%/year, you will become a millionaire in 16 years. It would take a little over 35 years at this savings rate to reach a net worth of $8 million.

At this level of savings, our investor spends $3,000/month. If our portfolio has an average dividend yield of 3%, we would need close to $1.20 million to generate $36,000 in annual dividend income. It would take close to 18 years to reach financial independence at this rate of savings.

3) If you save and invest $4,000/month, but earn 10%/year, you will become a millionaire in 11 years. It would take almost 29 years to reach a net worth of $8 million at this rate of return and this very high rate of savings. It would be very hard to save 80% of income for 3 decades.

At this level of savings, our investor spends $1,000/month. If our portfolio has an average dividend yield of 3%, we would need close to $400,000 to generate $12,000 in annual dividend income. It would take close to 6 years to reach financial independence at this rate of savings.

As you can see, if you want to get rich quickly you need to play a game of strong offense and strong defense. The strong offense is earning a high income, and a strong defense is keeping costs low and trying to avoid lifestyle inflation.

Why am I telling you all of this common sense?

That’s because any time I share a story of someone that ended up with a lot of money at an old age, people always say “I hope he/she enjoyed their money”.

When most folks think about having $1M, they imagine how they will spend it all. These are the folks that live paycheck to paycheck, and seldom advance financially. Another problem with these questions is assigning what's important to someone else as a benchmark of what should be important to him. This is very arbitrary measure of "success".

These comments show that the person making them is not understanding the power of compounding, and the fact that most of the visible gains are seen at the end of someone’s lifetime.

For example, Ronald Read died at the age of 90 in 2014 with an estate worth $8m. That same estate could have been worth $4M in 2007 or $2M in 2000. Most of the gains on this portfolio probably occurred after he retired with an adequate amount. It is very likely that he didn’t even become a millionaire before the age of 70 in the early 1990s.

I extrapolated that data through a review if the total return performance of the proxy for US stocks - a fund based on S&P 500 since 1990. It shows that a $100 investment in S&P 500 in early 1990 would have turned into $900 by 2014 and $2,350 by 2021.

Let's assume that Ronald Read had $8 million in his stock portfolio in 2014, and he just reinvested dividends for the past 25 years and didn't add a single dollar. This means that its value was close to $900,000 in 1990. While this is still an above average amount, it is not as mind-boggling as $8 million. Given the fact that he probably kept adding money to his portfolio, his net worth may have been even lower in 1990.

If he had simply invested $7,812.50 at the age of 22 or $15,625 at the age of 29, and never added a single cent, he would have been worth $8 million by the age of 92. That's merely due to the power of compounding, and assuming 10% annualized returns.

Using the rule of 72, if I generate 10% annualized returns, my money would double roughly every 7 years. The table below illustrates this simple concept:

Because of the nature of compounding, Ronald Read most probably generated 90% of his net worth after the age of 70.

The power of compounding is truly visible with Warren Buffett. He first became a billionaire at the age of 56 in 1986. Today, his net worth is over $100 billion at the age of 91. And that’s after he donated tens of billions of stock to charity. You can see that due to compounding, over 99% of his net worth was built after the age of 56.

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I like researching different stories and viewpoints, and then trying to take the best lessons that apply in my situation. Ultimately, you are successful if you do something you enjoy.

Thank you for reading!

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Monday, July 5, 2021

Dividend Stock Analysis of Kroger (KR)

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. 

Kroger is a dividend achiever, which recently hiked quarterly dividends by 16.70% to 21 cents/share. This marked the 15th consecutive year of annual dividend increases for the company.

Warren Buffett has also been slowly building up a position in Kroger.

During the past decade, Kroger has managed to grow dividends at an annualized rate of 12.60%.

Kroger managed to grow earnings per share from 95 cents/share in 2008 to $3.27/share in 2020. The 2018 numbers are adjusted to exclude the gain on sale of Kroger’s convenience store business. The company expects to generate between $2.95 - $3.10/share in 2021. 

Last year was a nice bump in earnings, given the fact that earnings per share had gone nowhere since 2015. That was due to investments in the company’s business going forward. It appears that earnings may go lower in 2021 as fewer consumers stock up on goods like they did at the beginning of the pandemic.

Kroger's financial strategy is to use its free cash flow to drive growth while also maintaining its current investment grade debt rating and returning capital to shareholders. The company actively balances the use of its cash flow to achieve these goals.

The grocery business is highly competitive, with Kroger competing against the likes of Wal-Mart and Target, as well as mom and pop grocery stores, as well as the likes of Amazon. The company needs to continuously invest in stores, drive efficient operations, new products and innovation ( such as online, and delivery/pick up). Kroger does have the scale of operations to effectively compete, and also has attractive store locations. This allows it to be able to do online purchase and pick up at 57% of its stores and home delivery for 91% of customers. Back in 2018, Kroger invested in Ocado, which is its exclusive grocery delivery partner in the US. Ocado delivers groceries in Europe. Kroger has also made investments in new warehouses, store optimization, expanding its own private label brands and digital, in an effort to drive long-term sales growth. Same store sales growth and cost reductions are the drivers that will propel earnings per share growth over time.

Kroger is also competing by offering a large variety of private label brands that it owns and manufactures internally. This allows it to generate very good profit margins on these items relative to branded products.

Kroger also competes by including pharmacies in order three-quarters of its stores and a gas station in over half of its locations. Customers who fill in a prescription by getting in the store are also likely to make another purchase or two. The same goes for customers who would appreciate the convenience of shopping for gas, filling prescriptions and doing their grocery shopping.

Kroger is also planning to develop alternative revenue streams using the data it collects on shoppers, targeting personal finance products and media ad revenues. The company collects a lot of date on customers that shop there, which can also be used as a tool to provide a more personalized shopping experience. Another alternative revenue stream is the Home Chef meal delivery service, which provides ingredients for meals in 48 states in the United States. Kroger acquired Home Chef in 2018, and the meal kits are available at Kroger locations, including a few Walgreen’s stores.

Kroger has rewarded shareholders handsomely with dividends and share buybacks. Between 2008 and 2020, the number of shares outstanding has gone down from 1.31 billion shares to 781 million shares. This means that shareholders from 2008, who stayed invested in Kroger, increased their ownership in the company by two-thirds without doing anything.

The dividend payout ratio increased from 17.90% in 2008 to 20.80% in 2020.  A lower payout ratio provides an adequate margin of safety in the dividend payment, which can provide protection against short-term turbulence in earnings per share. There is room for increase in the payout ratio from here. Future dividend growth can be helped by a gradual increase in the payout ratio. If Kroger is unable to jump start earnings growth however, there will be a natural limit to further dividend growth. I would get worried if earnings are not growing, but dividends are, and the payout ratio exceeds 60%. 

Currently the stock is attractively valued at 12.51 times forward earnings and offer an attractive dividend yield of 2.20%.

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Thursday, July 1, 2021

Early Retirement For Dividend Investors

There are a lot of stories about people who become financially independent these days in their 30s or 40s. While these are isolated instances in the grand scheme of things, they are part of a broader movement online, where people want to take ownership of their time and retire to something more meaningful in their lives. Some call it retirement, others call it financial independence, and a lot of them are calling it FIRE – Financial Independence Retire Early. I use the terms financial independence interchangeably with the term retirement in this article. I view both as simply points in time for a person’s life, which allow them more options of how to live their life. This is a point where you have enough money to never have to work again in your life. When you become financially independent, you typically receive dividends, capital gains, rent payments, royalty payments from investments, and you have the added benefit of not having not work even a day in your life from there. Depending on how things work out for you, this can be achieved as early as your 30s or as late as your 50s or 60s.

Retirement is typically viewed as the activity where someone stops working for an employer, after they receive a pension or a Social Security check. As long as those checks pay for the persons expenses, they have the option to not have to work another day in their lives. The main difference is that we associate traditional retirement with folks in their 50s or 60s, whereas financial independence is not something defined or limited by age. I view both as interchangeable, because in essence, in both cases folks are having the financial flexibility to live life to their own terms, not being chained to a desk or a job they may dislike. In both situations, you have the option to leave one endeavor and focus on another one.

I embrace the pursuit of financial independence. It shouldn’t be a big surprise that after discussing investments for over a decade, I am a big fan of pursuing financial independence at my own terms. To me, financial independence is the point at which your passive income meets or exceeds your expenses. This is the so called dividend crossover point. The point of learning about dividend investing and applying it with real money on the line has always been to help me reach my dividend crossover point.

The main ingredients that allow you to reach financial independence are focused around earning money, saving money and investing that money.

Earning money is the first step in pursuing financial independence. If you are able to earn a good income, it is much easier to manage expenses and save money. Getting to that income point may result in choosing a profession that pays well, while avoiding crippling student loans that may set you back. A good paying job in IT, professional services such as consulting or accounting, medicine ( doctor, nurse), law or engineering can provide the fuel to save enough money, while also maintaining a good standard of living. Other fields may offer good earnings such as being a plumber, electrician, HVAC technician, handy-person, without the need to go to an expensive college. In other words, if you spend $30,000/year, it is easier to save money if you earn $100,000/year than if you earn $40,000/year. Theoretically, the amount you can earn is unlimited. However, it is good to know that for a typical work week in your chosen profession you can expect a certain income range depending on your qualifications. Therefore, it makes sense to increase your worth to an employer and get recognition for it, in order to unlock your value and earn more. In many cases these days, this means moving from one employer to the next every 2 – 3 years or so, in order to obtain the market value for your skills. It also may mean getting more qualifications and taking on challenging projects that no one else wants to take. Income is relative however, and meaningless, without thinking about the expense side of the equation.

Saving money is the next step in pursuing financial independence. You may be earning all the money in the world, but if you spend everything, you will never be able to save any money to reach financial independence. You need to have a balance between spending and savings. It is easier to save more money if you earn a lot. However, the important link is the percentage of salary that you can save, rather than the maximum total dollar amount. For example, if you earn $100,000/year and save $10,000/year, you are not better off than someone who earns $30,000/year but saves $10,000/year. That's because the first person is spending $90,000/year and not saving enough to cover their expenses. The second person is spending $20,000/year, but saves enough to pay for half an year's worth of expenses.

If you are able to save half of your salary, you are theoretically able to work for one year and take an year off. If you work for 20 years, you will be able to save enough money to sustain you for 20 years without working ( assuming you keep the money in a savings account). Of course, if you invest the money, the power of compound interest would provide more than enough to sustain you for even longer than 20 years. If you are able to save a quarter of your salary, you can theoretically take one year off for every four years of work. After working for 40 years, you should be able to take a decade off. OF course, due to compound interest, the amount of time you can take off is going to be a little bit higher. If you cannot work for 40 years however, the amount of funds you can save will be lower as well.

In order to be able to save money, it means being mindful about your spending and cutting unnecessary costs. Not keeping up with the joneses is one strategy that can result in a higher savings rate. Learning some DIY skills can also result in better savings rates. Managing the largest expenses around housing, transportation, taxes and food can be the deal changer between saving enough and not saving enough.

The last piece is investing the money intelligently, to provide for your retirement needs when you no longer pursue active employment. Earning a decent income and saving enough is not sufficient to get to financial independence if all you do is keep the money in the bank. In order to reach financial independence, you need to have your money work hard for you, so that you don’t have to.
There are various schools of thought on the best investment techniques to preserve and grow wealth. I have followed a few, and stopped on dividend growth investing. It makes perfect sense that a business that generates excess cashflows while still growing is one I want to focus and analyze. If this business ends up sharing that growing cashflows with shareholders, they are essentially getting paid to hold on to their ownership stakes. This is the type of business that attracts long-term shareholders, and not the active trader types who are focused on share prices too much for their own good. If I can assemble a diversified selection of such businesses at attractive valuations, I know that I should do ok over time. Financial independence is also much easier to model with dividend income.

Other investors are putting their money to work in diversified index funds, rental real estate or some type of momentum or value companies. Each strategy has its pros and cons, and no strategy is perfect. However, if you find the right strategy for your temperament and your situation, you should embrace it and stick to it ( assuming it has a positive expectancy of a gain). By harnessing the power of compound interest through smart and regular investing, you will be able to grow your savings to a point where they can meet your expenses. In my case, this is the dividend crossover point, which is where dividend income covers personal expenses.

There are many reasons to pursue financial independence.

- Spend more time with family members
- Spend more time on hobbies which fulfill you
- Flexibility if you lose your job due to downsizing or illness
- Volunteer for causes that are dear to your heart
- Shape government policies
- Start a business
- Move to another industry or job type

I am sure that there are a lot of reasons to pursue financial independence, which I have left out. Please feel free to email me with your ideas, and I will add them to the article.

In my case, I have pursued investing as a way to provide financial stability for me, which is independent from having to report for 40 – 60 hours/week to an employer.

The typical corporate environment today is characterized by constant restructuring and reorganizations has left with many companies expecting to pay the least to their rank and file workers, while expecting them to do the jobs of two or three people. Doing a good job is not enough, because you also need to take on new responsibilities and find ways to work beyond what your job description requires from you. That doesn’t mean anything however, because your department or position may not be viewed as essential in the next round of layoffs and eliminated. While you build some skills at this job, you have no say in the management, because you are just a tool in the corporate machine that is expected to operate at peak capacity at all times. That tool is instantly replaceable however. Perhaps that's why it is better to own the tools of production, by buying and holding stock in the corporations, than work for them.

Companies also expect employees to dedicate their lives to them, and potentially sacrifice evenings and weekends for them, in order to finish projects with impossible timelines due to poor design. This doesn’t bode well for having an adequate work-life balance.

While some readers may be in careers they enjoy today, they should still be in the market for pursuing financial independence. You never know when things would change, and the great job may turn into a toxic work environment. A corporate restructuring, a new boss, office politics, companies pushing workers against each other, or increased scrutiny and unrealistic expectations could easily derail the enjoyment at the workplace. If you have reached out your dividend crossover point, you may be in a position to walk out of a bad situation, without worrying about how this decision could impact your finances.

I view the pursuit of financial independence as an endeavor that would allow readers to reclaim their own time, while also providing the flexibility to pursue what is truly important for them.

What about you? How far along your journey to financial independence are you? You can comment below or reach out at

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