Tuesday, August 30, 2022

92 Investing Lessons from Warren Buffett

Warren Buffett turns 92 today!



The super-investor from Omaha has achieved quite the investment record at Buffett Partnership and Berkshire Hathaway. He needs no introduction.

I compiled a list with 92 investing lessons I learned from him:


1. “Rule No. 1: Never lose money. Rule No. 2: Never forget rule No.1”

2. “Remember that the stock market is a manic depressive.”

3. “The most important thing to do if you find yourself in a hole is to stop digging.”

4. “Price is what you pay. Value is what you get.”

5. “Should you find yourself in a chronically leaking boat, energy devoted to changing vessels is likely to be more productive than energy devoted to patching leaks.”

6. “Beware the investment activity that produces applause; the great moves are usually greeted by yawns.”

7. “For the investor, a too-high purchase price for the stock of an excellent company can undo the effects of a subsequent decade of favorable business developments.”

8. “Risk comes from not knowing what you are doing.”

9. “Never invest in a business you cannot understand.”

10. “If returns are going to be 7 or 8 percent and you’re paying 1 percent for fees, that makes an enormous difference in how much money you’re going to have in retirement.”

11. “In the business world, the rearview mirror is always clearer than the windshield.”

12. “Time is the friend of the wonderful company, the enemy of the mediocre.”

13. “The three most important words in investing are margin of safety.”

14. “It’s far better to buy a wonderful company at a fair price, than a fair company at a wonderful price.”

15. “The key to investing is not assessing how much an industry is going to affect society, or how much it will grow, but rather determining the competitive advantage of any given company and, above all, the durability of that advantage.”

16. “On the margin of safety, which means, don’t try and drive a 9,800-pound truck over a bridge that says it’s, you know, capacity: 10,000 pounds. But go down the road a little bit and find one that says, capacity: 15,000 pounds.”

17. “If a business does well, the stock eventually follows.”

18. “Only buy something that you’d be perfectly happy to hold if the market shut down for 10 years.”

19. “For the investor, a too-high purchase price for the stock of an excellent company can undo the effects of a subsequent decade of favorable business developments.”

20. All there is to investing is picking good stocks at good times and staying with them as long as they remain good companies

21. I never attempt to make money on the stock market. I buy on the assumption that they'd close the market the next day and not reopen it for 10 years

22. “It is a terrible mistake for investors with long-term horizons — among them pension funds, college endowments, and savings-minded individuals — to measure their investment ‘risk’ by their portfolio’s ratio of bonds to stocks.”

23. Successful investing takes time, discipline and patience. No matter how great the talent or effort, some things just take time: You can’t produce a baby in 1 month by getting nine women pregnant

24 The stock market is designed to transfer money from the active to the patient

25. “Calling someone who trades actively in the market an investor is like calling someone who repeatedly engages in one-night stands a romantic.”

26. “If you aren’t thinking about owning a stock for 10 years, don’t even think about owning it for 10 minutes.”

27. “Our favorite holding period is forever.”

28. “An investor should act as though he had a lifetime decision card with just twenty punches on it.”

29. “Do not take yearly results too seriously. Instead, focus on four or five-year averages.”

30. “Time is the friend of the wonderful company, the enemy of the mediocre.”

31. “Why not invest your assets in the companies you really like? As Mae West said, ‘Too much of a good thing can be wonderful.’”

32. “The business schools reward difficult complex behavior more than simple behavior, but simple behavior is more effective.”

33. “There seems to be some perverse human characteristic that likes to make easy things difficult.”

34. “The most important quality for an investor is temperament, not intellect. You need a temperament that neither derives great pleasure from being with the crowd or against the crowd.”

35. “Success in investing doesn’t correlate with IQ … what you need is the temperament to control the urges that get other people into trouble in investing.”

36. “The stock market is a no-called-strike game. You don’t have to swing at everything — you can wait for your pitch.”

37. “You don’t need to be a rocket scientist. Investing is not a game where the guy with the 160 IQ beats the guy with 130 IQ.”

38. “What counts for most people in investing vs saving is not how much they know, but rather how realistically they define what they don’t know.”

39. “There is nothing wrong with a ‘know nothing’ investor who realizes it. The problem is when you are a ‘know nothing’ investor but you think you know something.”

40. “Forecasts may tell you a great deal about the forecaster; they tell you nothing about the future.”

41. “Buy a stock the way you would buy a house. Understand and like it such that you’d be content to own it in the absence of any market.”

42. “It’s better to have a partial interest in the Hope diamond than to own all of a rhinestone.”

43. You only have to be able to evaluate companies within your circle of competence. The size of that circle is not very important; knowing its boundaries, however, is vital

44. Diversification is protection against ignorance. It makes little sense if you know what you are doing

45. “Wide diversification is only required when investors do not understand what they are doing.”

46. “Opportunities come infrequently. When it rains gold, put out the bucket, not the thimble.”

47. “For 240 years it’s been a terrible mistake to bet against America, and now is no time to start.”

48. “American business — and consequently a basket of stocks — is virtually certain to be worth far more in the years ahead.”

49. “Widespread fear is your friend as an investor because it serves up bargain purchases.”

50. “Whether we’re talking about socks or stocks, I like buying quality merchandise when it is marked down.”

51. “The best thing that happens to us is when a great company gets into temporary trouble…We want to buy them when they’re on the operating table.”

52. “Speculation is most dangerous when it looks easiest.”

53. “Most people get interested in stocks when everyone else is. The time to get interested is when no one else is. You can’t buy what is popular and do well.”

54. “Keep things simple and don’t swing for the fences. When promised quick profits, respond with a quick “no.”

55. Most common cause of low prices is pessimism; sometimes pervasive, sometimes specific to a company or industry. We want to do business in such an environment, not bc we like pessimism but bc we like the prices it produces. It’s optimism that's the enemy of the rational buyer

56. “After 25 years of buying and supervising a great variety of businesses, Charlie [Munger] and I have not learned how to solve difficult business problems. What we have learned is to avoid them.”

57. “Half of all coin-flippers will win their first toss; none of those winners has an expectation of profit if he continues to play the game.”

58. “If past history was all that is needed to play the game of money, the richest people would be librarians.”

59 “You do things when the opportunities come along. I’ve had periods in my life when I’ve had a bundle of ideas come along, and I’ve had long dry spells. If I get an idea next week, I’ll do something. If not, I won’t do a damn thing.

60. “The investor of today does not profit from yesterday’s growth.”

61. “What we learn from history is that people don’t learn from history.”

62. “We simply attempt to be fearful when others are greedy and to be greedy only when others are fearful.”

63. “Today people who hold cash equivalents feel comfortable. They shouldn’t. They have opted for a terrible long-term asset, one that pays virtually nothing and is certain to depreciate in value.”

64. “Only when the tide goes out do you discover who’s been swimming naked.”

65. “Predicting rain doesn’t count, building the ark does”

66. “This does not bother Charlie [Munger] and me. Indeed, we enjoy such price declines if we have funds available to increase our positions”

67. “It’s better to hang out with people better than you. Pick out associates whose behavior is better than yours and you’ll drift in that direction.”

68. “Of the billionaires I have known, money just brings out the basic traits in them. If they were jerks before they had money, they are simply jerks with a billion dollars.”

69. “It takes 20 years to build a reputation and five minutes to ruin it. If you think about that, you’ll do things differently.”

70. “Lose money for the firm, and I will be understanding. Lose a shred of reputation for the firm, and I will be ruthless.”

71. “If you get to my age in life and nobody thinks well of you, I don’t care how big your bank account is, your life is a disaster.”

72. “I always knew I was going to be rich. I don’t think I ever doubted it for a minute.”

73. “Basically, when you get to my age, you’ll really measure your success in life by how many of the people you want to have love you actually do love you.”

74. “Honesty is a very expensive gift. Don’t expect it from cheap people.”

75. “You only have to do a very few things right in your life so long as you don’t do too many things wrong.”

76. “Wall Street is the only place that people ride to in a Rolls Royce to get advice from those who take the subway.”

77. “When trillions of dollars are managed by Wall Streeters charging high fees, it will usually be the managers who reap outsized profits, not the clients.”

78. “Someone’s sitting in the shade today because someone planted a tree a long time ago.”

79. “If you’re in the luckiest 1% of humanity, you owe it to the rest of humanity to think about the other 99%.”

80. “The difference between successful people and really successful people is that really successful people say no to almost everything.”

81. “You’ve gotta keep control of your time, and you can’t unless you say no. You can’t let people set your agenda in life.”

82. “In the world of business, the people who are most successful are those who are doing what they love.”

83. “It is not necessary to do extraordinary things to get extraordinary results.”

84. “Tell me who your heroes are and I’ll tell you who you’ll turn out to be.”

85. “The best thing I did was to choose the right heroes.”

86. “Chains of habit are too light to be felt until they are too heavy to be broken.”

87. “The most important investment you can make is in yourself.”

88. “Read 500 pages like this every day. That’s how knowledge works. It builds up, like compound interest. All of you can do it, but I guarantee not many of you will do it.”

89. “I insist on a lot of time being spent, almost every day, to just sit and think. That is very uncommon in American business. I read and think. So I do more reading and thinking, and make less impulse decisions than most people in business.”

90. “Imagine that you had a car and that was the only car you’d have for your entire lifetime. Of course, you’d care for it well, changing the oil more frequently than necessary, driving carefully, etc. Now, consider that you only have one mind and one body."Prepare them for life, care for them. You can enhance your mind over time. A person’s main asset is themselves, so preserve and enhance yourself.”

91. “Over the long term, the stock market news will be good. In the 20th century, the United States endured two world wars and other traumatic and expensive military conflicts; the Depression; a dozen or so recessions and financial panics; oil shocks; a fly epidemic....and the resignation of a disgraced president. Yet the Dow rose from 66 to 11,497.”

92. “I call investing the greatest business in the world … because you never have to swing. You stand at the plate, the pitcher throws you General Motors at 47! U.S. Steel at 39! and nobody calls a strike on you. There’s no penalty except opportunity lost.. All day you wait for the pitch you like; then when the fielders are asleep, you step up and hit it.”


There are no strikes for not swinging!

I hope you enjoyed this collection of 92 timeless pieces of wisdom for Buffett's 92nd Birthday!

I would encourage you to read:

- Buffett Partnership Letters

- Berkshire Hathaway Annual Letters to Shareholders

- The Snowball

Thank you for reading!


Monday, August 29, 2022

Five Companies Committed to Providing Returns to Shareholders

My monitoring process includes reviewing dividend increases every week. This is a helpful exercise in reviewing existing investments, but also in uncovering new ideas for further research.

Companies decide on the rate and increase in dividends, after a careful evaluation of business needs, growth plans, the economy and opportunities.

Dividend increases provide an indication of managements conviction in the near-term prospects of the business and the stability of its cash flows. An increase in the cash dividend reflects confidence in the prospects for the business. It also shows a commitment to return excess cashflows to shareholders.

In my reviews, I typically focus on the companies that have managed to increase annual dividends for at least a decade. Over the past week, there were five such companies that increased dividends to shareholders:

Altria Group, Inc. (MO) manufactures and sells smokeable and oral tobacco products in the United States. 

The company raised quarterly dividends by 4.40% to $0.94/share. This marked the 53rd year of consecutive annual dividend increases for this dividend king. Over the past decade, the company has managed to grow dividends at an annualized rate of 8.40%.

The stock sells for 9.60 times forward earnings and yields 7.76%.

Atrion Corporation (ATRI) develops, manufactures, and sells products for fluid delivery, cardiovascular, and ophthalmology applications in the United States, Canada, Europe, and internationally. 

The company raised quarterly dividends by 10.30% to $2.15/share. This marked the 19th consecutive year of annual dividend increases for this dividend achiever. Over the past decade, the company has managed to grow dividends at an annualized rate of 15.10%.

The stock sells for 33.06 times forward earnings and yields 1.22%.

EastGroup Properties, Inc. (NYSE: EGP), an S&P MidCap 400 company, is a self-administered equity real estate investment trust focused on the development, acquisition and operation of industrial properties in major Sunbelt markets throughout the United States with an emphasis in the states of Florida, Texas, Arizona, California and North Carolina. 

The REIT hiked its quarterly dividends by 13.60% to $1.25/share. This is the eleventh consecutive year of annual dividend increases for this dividend achiever. Over the past decade, the company has managed to grow dividends at an annualized rate of 4.60%.

The stock sells for 24.83 times forward FFO and yields 2.39%.

First American Financial Corporation (FAF) provides financial services. It operates through Title Insurance and Services, and Specialty Insurance segments. 

The company raised its quarterly dividend by 2% to $0.52/share. This is the twelfth consecutive year of annual dividend increases for this dividend achiever. Over the past decade, the company has managed to grow dividends at an annualized rate of 23.20%. The five year rate is 10.10% however. The company achieved this high rates of dividend growth, because it initiated dividends at a low payout ratio 12 years ago. It's important to not expect high rate of dividend growth to continue for companies in the initial phase of dividend growth.

The stock sells for 9.27 times forward earnings and yields 3.52%

Northrim BanCorp, Inc. (NRIM) operates as the bank holding company for Northrim Bank that provides commercial banking products and services to businesses and professional individuals. It operates in two segments, Community Banking and Home Mortgage Lending. 

The company increased dividends by 22% to $0.50/share. This is the 13th year of consecutive annual dividend increases for this dividend achiever.  Over the past decade, the company has managed to grow dividends at an annualized rate of 11.60%.

The stock sells for 8.53 times forward earnings and yields 3.90%.

Relevant Articles:

- Five Companies Rewarding Shareholders With Raises

- Six Dividend Growth Stocks Rewarding Shareholders With a Raise

- Twelve Companies Committed to Returning More Profits to Shareholders

- 15 Dividend Paying Companies Raising Dividends Last Week





Tuesday, August 23, 2022

Lessons from the Japanese Stock Market Bubble

Back in 1989, the Japanese stock market reached an all time high. Japan was growing rapidly, and there was no end in sight behind Japanese industry and innovation. The popular theme was that Japan would overpower the US soon. This is similar to the situation today, where China is viewed as the emerging dominant economic power that would dethrone the US as the number one economy in the world.

Japan was in the midst of a stock and real estate bubble in the 1980s. The Japanese equity market became larger than the US stock market in 1989, with a total market capitalization of over $4 Trillion, versus $3 Trillion for the US.



Japanese land prices were out of control too. The land below the Imperial Palace in Tokyo was worth more than the land in the entire state of California in 1989. (Source)

However, that bubble popped at the beginning of 1990. After over 30 years, the Japanese economy has stagnated, and share and real estate prices are still below the all-time-highs from 1989. The all time high for Nikkei 225 index was 38,915.87 from 1989.


There are many reasons why the stock market did not do as well.

The most obvious reason is that Japanese equities were very overvalued in 1989. They sold for over 50 times earnings by 1989. This was high.

Dividend yields were low at 0.50%, which was low too. Dividend yields had been decreasing since 1970, as share prices kept rising higher and higher.  Investors didn't really care about dividends when share prices kept rising. This is usually what happens during a manic bull run that keeps going for a long period of time.


The most interesting fact however is that real earnings per share didn't grow between 1970 and 1990. Real earnings per share are EPS adjusted by inflation.


The source for the charts so far is the following paper from Kenneth French and James Poterba.  "Were Japanese stock prices too high?"

As was already established above, Japanese equity prices were very high. An investor who planned to retire on Japanese equities in 1989 probably would have expected that stock prices keep going up. Unfortunately, that didn't work and if they had followed a 4% type rule where you sell 4% of stocks each year, they would have run out of money. 

Someone who was a dividend investor would have seen the low dividend yield an concluded that they can only live off 0.50% of portfolio value, which is what the dividend yield was in 1989. It is low, and I would not base a retirement on such a low number as there are alternatives. However it does show that estimated future returns were low.

Fast forward to 2022, and the Nikkei 225 index is still below its all time high set in 1989.

However, Japanese companies started growing dividends about 15 - 20 years ago. Those tiny dividends, when compounded over time ended up accumulating to investor brokerage accounts to the point that Japanese equities are much more attractive than deposits or bonds.

However, it has taken Nikkei almost 32 long years to exceed its 1989 high using dividend reinvestment. Nikkei 225 Total Return hit a record high in 2021.



According to this researcher, if you invested regularly in Japanese stocks beginning in 1989, you would be sitting at a profit by now.


Today Nikkei has a dividend yield of 2.10% and a P/E of 13. (Source)


Nikkei index dividends went from 108 in 2004 to 489 points in 2021.



 Conclusion:

So that was a lot of data to share. I have observed Japan for a while, and I have observed this data too.

I believe that buying an investment at a high valuation is risky. That's because there is a limited margin of safety in this investment, even if its fundamentals perform up to expectations. Even if earnings grow according to expectations, the investor that overpays may have to wait for a long time to make money.

A low dividend yield on a stock market shows that valuation is high. If valuation is high, perhaps an investor should not be spending more than what their investment can generate in dividends. They can theoretically bet that prices will be rising in the short run when they need to money to spend. But that's speculation, as nobody can consistently predict where share prices will be anyways.

If you are a know-nothing investor, building wealth over time through regular dollar cost averaging works. However, you have to be able to stick to that plan through thick or thin, the highs and the lows, and keep investing regularly. You also need to have a long timeframe.

When reviewing equities, we need to look at total returns. Only looking at stock prices is deceptive, as it doesn't show the full picture of investor returns. Nikkei is at 28,400 today, versus an all-time-high if 38,915 in 1989. Accounting for total returns, it has exceeded 1989 highs already. Dividends matter.

It's also important to take a lot of "predictions" about the future with a grain of salt, no matter how mainstream and widely accepted they are. Back in the late 1980s Japan was viewed very favorably, and it was supposed to overtake the US. The reality turned out differently about 30 years later. Nobody really knows anything.

In order to survive and thrive as an investor, you need to create your own process, manage risk and then stick to your plan through thick or thin. At the same time, you have to learn from your mistakes and try to improve continuously. 

In my case, if I had invested in Japan, I probably would have stopped buying companies in the early 1980s. I would have held on to existing companies, but allocated money elsewhere globally if that was possible. US companies were much cheaper throughout the 1980s; many European companies were cheaper in the early part of the 1980s as well;

The hardest part would have been missing out on the 1980 - 1989 epic bull run in Japanese companies, and feeling out of touch with this "new reality", "new paradigm" etc. When someone is doing better than you, they may be louder than anyone else. 

This experience would have taught everyone all the bad lessons that valuation does not matter, dividends don't matter, only share price gains matter etc. So as an investor, developing the patience to hold on to your stocks when they keep going up in price, and developing the patience to hold on to your stocks when they are flat or someone else's stocks do better, is a superpower.



Relevant Articles:

- Skate to where the puck is going




Sunday, August 21, 2022

Five Companies Rewarding Shareholders With Raises

I review the list of dividend increases each month, as part of my monitoring process. As part of this review, I tend to focus attention on companies that have managed to grow dividends for at least a decade.

This review helps me monitor existing positions, and potentially uncover hidden gems for further research. This is a very repetitive and somehow confusing process for a lot of readers, despite the fact that I've been doing it publicly for 14 years here. 

It is just one aspect of Dividend Growth Investing, but it serves as a reminder that it does take time to identify companies for research, researching them and monitoring them. 

I do monitor the list of dividend increases, but I also monitor the dividend growth universe in various ways. Screening using some parameters helps, along with familiarizing myself with as many businesses as possible, and determining the value at which 

Cboe Global Markets, Inc. (CBOE) operates as an options exchange worldwide. It operates through five segments: Options, North American Equities, Futures, Europe and Asia Pacific, and Global FX.

The company raised quarterly dividends by 4.20% to $0.50/share. This is the 12th consecutive year that CBOE has increased its dividend. Over the past decade, the company has managed to grow dividends at an annualized rate of 15.10%.

The stock is selling at 19.27 times forward earnings and yields 1.55%. I dislike the slowdown in the pace of dividend growth for CBOE, especially in comparison with the rate of growth from the past decade.

American Financial Group, Inc. (AFG) is an insurance holding company, provides specialty property and casualty insurance products in the United States. 

The company raised its quarterly dividend by 12.50% to $0.63/share. This is the 17th year of annual dividend increases for this dividend achiever. Over the past decade, the company has managed to grow dividends at an annualized rate of 12%.

The stock is selling at 11.72 times forward earnings and yields 1.66%. This looks like an interesting company for further research on my end.

C&F Financial Corporation (CFFI) operates as a bank holding company for Citizens and Farmers Bank that provides banking services to individuals and businesses. 

C&F Financial raised its quarterly dividend by 5% to $0.42/share. This is the 11th year of annual dividend increases for this dividend contender. Over the past decade, the company has managed to grow dividends at an annualized rate of 4.50%.

The stock sells for 6.85 times earnings and yields 3.18%. The slow rate of dividend growth does not really excite me about this stock. Perhaps the valuation is warranted.

Stock Yards Bancorp, Inc. (SYBT) operates as a holding company for Stock Yards Bank & Trust Company that provides various financial services for individuals, corporations, and others in the United States. It operates in two segments, Commercial Banking, and WM&T.

Stock Yards Bancorp raised its quarterly dividend by 3.60% to $0.29/share. This is the 13th consecutive year of annual dividend increases for this dividend contender. Over the past decade, the company has managed to grow dividends at an annualized rate of 8.60%.

The stock sells for 19.64 times forward earnings and yields 1.59%. The slow pace of dividend increases does not excite me, especially when coupled with a low yield today.

Evans Bancorp, Inc. (EVBN) primarily operates as the financial holding company for Evans Bank, N.A. that provides a range of banking products and services to consumer and commercial customers in Western New York and the Finger Lakes Region of New York State. It operates in two segments, Banking Activities and Insurance Agency Activities.

The company raised its semi-annual dividend by 3.20% to $0.64/share. This is the eleventh year of consecutive annual dividend increases for this dividend contender. Over the past decade, the company has managed to grow dividends at an annualized rate of 11.60%.

The stock sells for 9.35 times forward earnings and yields 3.23%. The slow rate of dividend growth does not really excite me about this stock. Perhaps the valuation is warranted.


Relevant Articles:

- Six Dividend Growth Stocks Rewarding Shareholders With a Raise

- Twelve Companies Committed to Returning More Profits to Shareholders

- 15 Dividend Paying Companies Raising Dividends Last Week

- Nine Dividend Growth Stocks Rewarding Shareholders With a Raise





Wednesday, August 17, 2022

Roth IRA’s for Dividend Investors

Nothing is certain in this world except for death and taxes. For many dividend growth investors, this could be characterized as a feeling that they are being taxed to death. I am always on the lookout to legally minimize my investment taxes as much as possible. In fact there is an easy way to invest in dividend paying stocks without ever having to pay taxes on your investment.

The Roth IRA allows individuals who have earned income in a given year to contribute up to $6000 in after-tax dollars to their retirement account. There is a catch-up contribution of $1000 for individuals who are 50 years of age or older. While contributions to Roth IRA’s are not deductible on your tax returns, earnings and principal distributions are tax free once certain age and time requirements are met. 

Roth IRA’s allow for tax-free compounding of capital over time. This means that you will not pay taxes on dividends or capital gains on your investments that are placed in a Roth IRA.

The earned income includes compensation from salary, wages, commissions, bonuses and alimony. Income from interest, dividends, annuities or pensions does not count as earned income in the eyes of the IRS.

A non-working spouse can set-up a Spousal Roth IRA, even if they have no working income, as long as the other spouse has enough working income to contribute. For example, if one of the spouses earns $50,000/year, and the other one stays home, they can each contribute $6,000/year to their own Roth IRA's. If they are over the age of 50, the $1,000 catch-up contribution still applies.

The contribution limit for a Roth IRA is the same as the contribution limit for a regular IRA. However the amount that can be contributed to a Roth IRA is the amount remaining after subtracting any contribution made to a regular IRA. This means that if you contributed the maximum allowable amount to your regular IRA of $6000, you would not be able to contribute anything to a Roth IRA in that year.

There are no required minimum distribution rules for Roth IRAs. 

However, there are phase-out income limits for high earning taxpayers, which reduce the opportunity to use this tax advantaged investment account. A modified adjusted gross income (MAGI) of $214,000 for a couple filing jointly, or $144,000 for an individual makes you ineligible to contribute to a Roth IRA in 2022. The following table outlines the Roth IRA Contribution limits for 2022.


Source: Schwab

There are ways around it of course, using the "Backdoor IRA Conversion" Strategy.  Basically, it entails contributing to a Regular IRA, and immediately converting it to a Roth.

In order to avoid paying taxes on distributions from Roth IRA accounts, investors need to become acquainted with the qualified nontaxable distribution rules.

According to the IRS, qualified nontaxable distributions for Roth IRA’s are those made at least 5 years after the taxpayer’s first contribution to a Roth IRA and made:

1) After the taxpayer become 59.5 years old
2) To a beneficiary after the death of the taxpayer
3) Because the taxpayer becomes disabled
4) For a use of a first time homebuyer

The biggest benefits of a Roth IRA are the long-term tax free compounding of capital, the fact that qualified distributions are tax-free and the fact that there are no required minimum distributions. Another little known fact behind Roth IRA’s is that direct contributions may be withdrawn at any time. This makes them a perfect investment vehicle for investors who plan on retiring early and living off dividends before they reach typical retirement ages of 60 years.

I hold a portion of my assets in a Roth IRA. While the contribution limit is only $6,000, that is still a good start. For a married couple maxing out their Roth IRA's, you have $12,000 to invest. 

In today's commission free world and fractional shares, you can build a diversified portfolio fairly easily.


Relevant Articles:

- Kinder Morgan Partners – One Company three ways to invest
- Philip Morris International (PM) Dividend Stock Analysis



Monday, August 15, 2022

Six Dividend Growth Stocks Rewarding Shareholders With a Raise

I review the list of dividend increases every week, as part of my monitoring process. It helps me evaluate existing holdings, and identify companies for further research.

In my review, I focus on companies that have raised dividends for at least a decade. That's a quality filter that screens out a lot of cyclical companies, and companies that may not have what it takes to compound capital for long periods of time. 

Next, I review the raise, along with any pertinent financial information. I like reading management's opinion about the raise, and compare it to financial history for more context. 

When I review companies in more detail, I look at trends in earnings per share and payout ratios, in order to determine if the company can continue delivering in the future.

Over the past week, there were several companies that raised dividends, and have a ten year track record of annualized dividend increases. The companies include:

Badger Meter, Inc. (BMI) manufactures and markets flow measurement, quality, control, and communication solutions in the United States, Asia, Canada, Europe, Mexico, the Middle East, and internationally. 

The company raised quarterly dividends by 12.50% to $0.225/share. This was the 30th consecutive year of dividend increases for this dividend champion. Over the past decade, the company has managed to grow dividends at an annualized rate of 9.70%.

Kenneth C. Bockhorst, Chairman, President and Chief Executive Officer, stated, “We remain committed to our long tradition of paying dividends to our shareholders as part of their total returns, and are incredibly proud of achieving 30 consecutive years of dividend increases. Dividends are a key element of our disciplined approach to capital allocation, and evidence of the confidence that Badger Meter has in the resilience of our earnings and cash flow.”

The stock is expensive at 43.78 times forward earnings however. Badger Meter yields 0.81%. Even at the June lows, the stock sold as low as 33 times forward earnings.

Broadridge Financial Solutions, Inc. (BR) provides investor communications and technology-driven solutions for the financial services industry worldwide.

The company raised its quarterly dividends by 13.30% to $0.725/share. This was the 16th consecutive year of annual dividend increases for this dividend achiever. Over the past decade, the company has managed to grow dividends at an annualized rate of 14.50%.

"Our results reflect continued execution of our long-term growth strategy, the ongoing digitization of financial services, and strong performance from our Itiviti acquisition.

"Broadridge's resilient business model is built to deliver growth through different economic cycles. Looking ahead, we expect continued growth in Fiscal 2023, with 6-9% organic recurring revenue growth, continued margin expansion, and 7-11% Adjusted EPS growth. Most importantly, we are well-positioned to deliver, again, on our three-year financial objectives, with recurring revenue and Adjusted EPS growth at or above the higher end of the range," Mr. Gokey added.

"Finally, I'm pleased to announce that our Board has approved a 13% increase in our annual dividend amount to $2.90 per share. Broadridge has now increased its dividend for 16 consecutive years, further underlining the strength and resiliency of our business and the durability of the trends driving our growth."

The stock sells for 26.35 times forward earnings and yields 1.58%. Even at the lows in June, the stock only went as low as 20.80 times forward earnings.

J&J Snack Foods Corp. (JJSF) manufactures, markets, and distributes nutritional snack foods and beverages to the food service and retail supermarket industries in the United States, Mexico, and Canada. It operates in three segments: Food Service, Retail Supermarkets, and Frozen Beverages.

The company hiked its quarterly dividend by 10.60% to $0.70/share. This is the 17th consecutive year of annual dividend increases for this dividend achiever. The company has managed to grow dividends at an annualized rate of 18% over the past decade.

The stock is expensive at 55.33 times forward earnings. The stock yields 1.61%. Even at the lows in May, the stock sold at 45 times forward earnings.

Nordson Corporation (NDSN) engineers, manufactures, and markets products and systems to dispense, apply, and control adhesives, coatings, polymers, sealants, biomaterials, and other fluids worldwide. It operates through two segments, Industrial Precision Solutions (IPS) and Advanced Technology Solutions (ATS).

The company hiked quarterly dividends by a massive 27.50% to $0.65/share. This increase represents Nordson’s 59th consecutive year of annual dividend increases. Over the past decade, this dividend king has managed to grow dividends at an annualized rate of 14.30%.

“Nordson has a proud history of returning a portion of its cash flow to our shareholders. This increase moves our annual dividend yield to slightly over one percent,” said Joseph Kelley, executive vice president and chief financial officer. “This increase reflects our confidence in our long-term profitable growth, which is driven by the continued execution of our Ascend strategy, designed to deliver top-tier growth with leading margins and returns.”

The stock sells for 25.62 times forward earnings and yields 1.07%. Even during the June lows, the stock only got as cheap as 21 times forward earnings.

ResMed Inc. (RMD) develops, manufactures, distributes, and markets medical devices and cloud-based software applications for the healthcare markets. The company operates in two segments, Sleep and Respiratory Care, and Software as a Service.

The company increased quarterly dividends by 4.80% to $0.44/share. This marks the 10th year of consecutive annual dividend increases for this newly minted dividend achiever. Over the past five years however, the company has raised dividends at an annualized rate of 4.94%. 

The stock is expensive at 42 times forward earnings. Even in May, it sold as cheaply as 33 times forward earnings, which is not cheap either. The dividend yield is 0.73%.

Westlake Corporation (WLK) manufactures and supplies petrochemicals, polymers, and building products worldwide. It operates through two segments, Performance and Essential Materials; and Housing and Infrastructure Products. 

The company hiked its quarterly dividends by 20% to $0.2975/share. This was the 18th year of consecutive annual dividend increases for this dividend achiever. Over the past decade, the company has managed to grow dividends at an annualized rate of 23.50%. The five year dividend growth is 8.80% annualized however.

The stock is selling at 21.74 times forward earnings. The new dividend yield is 1.15%.

Relevant Articles:

- Eight Dividend Growth Companies Rewarding Owners With a Raise Last Week

- Twelve Companies Committed to Returning More Profits to Shareholders

- 15 Dividend Paying Companies Raising Dividends Last Week




Wednesday, August 10, 2022

Stocks that leave the Dow tend to outperform after their exit from the average

Note: Article was originally posted in August 2020

The Dow Jones Industrials average is the oldest continuously updated stock index in the US. It was launched in 1896 by Charles Dow, who included 12 companies. The number of companies was later increased to 20 and finally in 1928 the number was increased to 30 companies.

It tracks the performance of 30 blue chip companies, which are representative of the US economy. Its holdings are selected by a five-member index committee at Standard & Poor’s/Dow Jones. This committee is basically comprised of the best stock pickers in the world, since they have managed to do better than most mutual fund managers and individual investors. They have done better than Buffett over the past 10 – 15 years as well.

The index made news in August 2020, when it was announced that it would drop three members of the index, following the stock split in Apple’s shares. Since the index is weighted by the share prices of its components, Apple’s stock split reduced it technology exposure.

As a result, the index committee is replacing Exxon Mobil (XOM), Pfizer (PFE) and Raytheon (RTX) with Salesforce.com (CRM), Honeywell International (HON) and Amgen (AMGN).

A lot of investors believe that indices such as Dow Jones do better over time, because of new members. In reality, the opposite has been the case.

I recently read a study that shows how the companies that have been deleted from the Dow Jones Industrials Index between 1929 and 2006 have actually done much better than the companies that were added to the index. The study is titled " The Real Dogs of the Dow"

This study reminded me of the study of the original 500 members of the S&P 500 from 1957. This study had found that if someone had only invested in the original 500 members of the S&P 500 from 1957, they would have done better than the index themselves. That's because the companies that were added did worse than the companies that were removed from the index. You may read more about this study and my analysis here.

This study also reminded me of the Corporate Leaders Trust, a mutual fund that was started in 1935 with a portfolio of blue chip stocks that stayed constant in time. This mutual fund did better than S&P 500 since the 1970s. You can read my review of the Corporate Leaders Trust here.

This is due to the principle of reversion to the mean. The reversion to the mean hypothesis states that companies taken out of the Dow may not be in as bad of a situation as expected. It also suggests that the companies that replace them may not be as great as their current record suggests.

As a result the stock of the deleted company may be too cheap, while the stock of the added companies may turn out to be too expensive. As a result, companies that were deleted from the Dow may deliver better results than companies that were added to the Dow.

This is somewhat counter-intuitive. But it makes sense. The companies that are likely to be deleted are the ones that have suffered for a while, and they are down on their fortunes. As a result, investor expectations are low, which means that these shares are low too, as they are priced for the end of the world. The nice thing about such companies is that if the world doesn’t end, and they do just a little bit better, they can reward their shareholders handsomely. That’s because you will likely experience an expansion in the P/E, at the same time earnings and dividends are rising too.

On the other hand, the companies that are recently added to the index tend to have done very well. They are promising companies of the future. As a result, they sell at premium valuations. However, if these companies fail to live up to their lofty expectations, their returns may suffer, because investors may be willing to pay a lower P/E multiple. If profits do not grow as expected as well, it is likely that investors would also suffer from that as well.

As I mentioned above, I found a study that analyzed the substitutions in the Dow Industrials Index between 1928 and 2005.  The results were in line with what my expectations would be based on my research on the Corporate Leaders Trust and the Performance of the Original Members of S&P 500.

Over this period, there were 50 additions and deletions. In 32 of 50 cases, the deleted stock did better than the added stock.

Figure 1 shows that, with the exception of the 1990s, the Deletion portfolio consistently outperformed the Addition portfolio over the 76-year period.

Figure 2 shows the ratio of the average deletion wealth to the average addition wealth each day over a ten-year horizon. The deleted stocks outpace the added stocks for approximately five years after the substitution date. Then their relative performance stabilizes

Table 4 summarizes the average levels of wealth for the Deletion and Addition stocks at 250- day intervals (approximately 1 year) over the five-year period following the substitution dates.

For example, the deleted stocks showed, on average, a 19.30% increase in value 250 trading days after the publication date, while the added stocks showed an average increase of only 3.37%. The differences in average wealth grow increasingly pronounced as the horizon lengthens.

The study had a fascinating conclusion.

A portfolio consisting of stocks removed from the Dow Jones Industrial Average has outperformed a portfolio containing the stocks that replaced them. This finding contradicts the efficient market hypothesis since changes in the composition of the Dow are widely reported and well known. Our explanation for this anomaly is the market’s insufficient appreciation of the statistical principle of regression to the mean, an error that has been previously identified in a variety of contexts and is no doubt present in a great many other contexts.

This is fascinating research, which spans a period of close to 80 years. The main point behind this research is reversion to the mean. Basically, a trend can only go so far, until it is reversed. It goes in both directions of course.

I went ahead and obtained a listing of all the additions and deletions for Dow Jones since 2004. I then compared the five-year performance for an investor who bought the deletions of the Dow and for an investor who bought the additions to the Dow. For companies that were bought out, I basically stopped the clock at the acquisition date.

I did not calculate anything past 2019, since the information is still new.



I present to you the data below. Again, please understand that I am one person who did this data analysis using free resources, such as dividendchannel.com. My data may be incomplete, or missing fields. I am not pulling it from an academic database, like all the other researchers.

Out of 14 substitutions, the deletions did better on only 4 occasions. The additions did better on 10 occasions. The total wealth for putting $10,000 in each deletion was $180,609 versus $227,540 for putting $10,000 in each of the additions.

The most interesting factor for me however was that since the research was published in 2005, I have found that the opposite has been the case.

In other words, the companies that were deleted did not do as well as the companies that were added to the list. Perhaps this is due to the way that things move faster these days in the globalized economy. The pace of change is faster, and the level of obsolescence is increasing as well. This just goes to show that success in investing is not going to be based on some simple formula that we can copy and paste and generate instant riches.

Another interesting piece of information relates to International Business Machines (IBM). The company was replaced by AT&T on March 14, 1939. I do not believe researchers were even able to find a reason behind the decision.

IBM did not get back into the index until June 29, 1979. At that point, the stock had increased in value by 562 times, which is incredible. AT&T stock had barely tripled over that 40-year period. You may read this excellent article on Dow Jones 22,000 point mistake.



Source: Global Financial Data

I am mentioning this part in order to show that a large portion of the 1939 – 1979 outperformance of deleted companies over the added companies could be attributed to this decision.

By the time IBM was added to the index, it stopped growing. Chrysler was removed because it was very close to going under in 1979. It would have gone bankrupt, had it not been for Lee Iacocca, and a $1.2 billion bailout by the US Government. The stock went as low as $2/share in 1979, before rebounding all the way up to $50/share before the 1987 stock market crash.

This information comes from the book " Beating the Dow".

In conclusion, based on this study, someone who bought the companies that were deleted from Dow Jones Industrials Average between 1928 and 2005 would have done better than Dow Jones Industrials Index. That's because the companies that were deleted ended up delivering a better performance than the companies that were added over this 77 year period. 

However, strategies and edges on Wall Street are not carved in stone. Things do change, either permanently or stay irrational for far longer than a follower of the strategy may remain solvent. 

For example, if you look at performance of US Stocks versus International, US Small versus Large Cap, and Value versus Growth, you can see that they are generally cyclical. Those cycles can last many decades however. These long cycles may fool market participants that they are seeing a trend. Check the charts on this article " Dividends Are The Investors' Friend"

It is also possible that the excellent results of this reversion to the mean strategy may have been due to a fluke in the 1939 removal of IBM, which turned out to be a very successful corporation. It was further compounded by the removal of Chrysler, which turned out to rebound. What happened in 1979 with Chrysler may have caused an investor to buy General Motors in 2009, believing that they would experience the same type of turnaround. However, if you bought General Motors in 2009, you lost your entire nest egg. Again, history does not repeat, it just rhymes. This is why you have to learn from history, but you also have to realize that the same thing happening twice over a span of 30 years may have a totally different outcome. 

Update: August 09, 2022

It looks like the three additions have not done as well as Dow Jones Industrials Average since August 31, 2020 (the date changes took place). 




It also looks like the three deletions did much better than Dow Jones Industrials Average since August 31, 2020:






Relevant Articles:

Monday, August 8, 2022

Twelve Companies Committed to Returning More Profits to Shareholders

Companies that grow dividends tend to have better financial health and produce sustained earnings and revenue growth. Dividends help identify well-managed companies; every dividend declaration represents a promise by management and a vote of confidence by the board of directors in the company's leadership. Companies that consistently raise their dividend payouts also raise the bar on their own performance expectations. These dividend increases show the longstanding commitment of returning capital to shareholders for these companies. These increases also provide evidence that companies are executing on their long-term business strategies.


Shares of dividend-paying companies possess built-in value that makes them generally more resilient in down markets, with solid appreciation potential during earnings-driven market upturns — with less price volatility.

I follow the list of dividend increases weekly as part of my dividend investing strategy. I try to approach investing from different points of view, in order to ensure that I can see emerging dividend success stories and monitor existing holdings.

Over the past week, there were several companies that raised their dividends to shareholders. I am listing below the ones which have managed to grow dividends over the past week and also have at least a ten year track record of annual dividend increases. The companies include:


This list is not a recommendation to buy or sell stocks. It is simply a list of companies that raised dividends last week. The companies listed have managed to grow dividends for at least ten years in a row.

The next step in the process would be to review trends in earnings per share, in order to determine if the dividend growth is on strong ground. Rising earnings per share provide the fuel behind future dividend increases.

This should be followed by reviewing the trends in dividend payout ratios, in order to check the health of dividend payments. A rising payout ratio over time shows that future dividend growth may be in jeopardy. There is a natural limit to dividends increasing if earnings are stagnant or if dividends grow faster than earnings.

Obtaining an understanding behind the company’s business is helpful, in order to determine how defensible the dividend will be during the next recession. Certain companies are more immune to any downside, while others follow very closely the rise and fall in the economic cycle.

Of course, valuation is important, but it is more art than science. P/E ratios are not created equal. A stock with a P/E of 10 may turn out to be more expensive than a stock with a P/E of 30, if the latter is growing earnings and the former isn’t. Plus, the low P/E stock may be in a cyclical industry whose earnings will decline during the next recession, increasing the odds of a dividend cut. The high P/E company may be in an industry where earnings are somewhat recession resistant, which means that the likelihood of dividend cuts during the next recession is lower.


Relevant Articles:




Wednesday, August 3, 2022

Dividend Stocks versus Dividend ETFs

Readers often ask me about my favorite dividend ETFs. I do tend to prefer to build my own portfolios consisting of individual dividend stocks, over buying dividend ETFs. However, I realize that not everyone is like me.

I have listed several reasons why I prefer selecting my own companies over using a dividend ETF:


1) Cost

Buying individual stocks in the US is commission free. It doesn’t cost me anything to buy stocks in individual companies like PepsiCo, Johnson & Johnson or Lockheed Martin. In addition, it doesn’t cost me anything to hold on to individual companies in my portfolio. In comparison, ETFs have an annual charge, which can range dramatically. Paying 0.40%/year does not seem like much, but if you hold a portfolio worth $100,000, that’s $400 that goes out of your pocket each year. Over time, these fees can add up.


2) Portfolio holdings

When I select individual companies for my portfolio, I can control which companies to add and what criteria to use for inclusion. I can vary the number of holdings to as low or as high number as I choose. I can decide which types of companies can be included, and which don’t stand a chance. I can also decide when to remove a company and what to do with the proceeds. 

With ETFs, you are basically letting someone else decide what to include. You have to trust that they will follow their process consistently.


3) Portfolio Weights

I can decide how to properly weight my portfolio holdings. If investing a lump-sum, I can decide to allocate money equally between the number of holdings I have. I believe in giving each company I own an equal chance of success.

Most ETFs weight their holdings based on factors that make building an ETF easy for the ETF provider, not necessarily the best method for investors. For example, most ETFs are based on a market capitalization basis, which assigns the highest portfolio value to larger companies. 

Very often you see ETFs that may have 100 or more individual holdings. When you dig further however, you see that half of the portfolio value is concentrated in 10 - 20 companies, while the rest are just filler.


4) Portfolio Turnover

I have more control over turnover than a dividend ETF. For example, I try to be as passive as possible, because turnover costs in terms of commissions, taxes, fees, and opportunity costs. I try to avoid selling, for as long as the dividend is not cut. I would have turnover, as companies split, merge, get acquired, and cut dividends. But I have found that selling for other reasons has been a mistake for me.

I also like knowing that I own certain businesses, when I design a portfolio. With ETFs, I cannot say that the businesses I own would still be in the portfolio. For example, the Schwab Dividend ETF had Microsoft (MSFT) in 2016, but doesn’t have it today in 2022. The company is a quality one, and has kept raising dividends in the past 5 years. I am not sure why it was deleted, but in my opinion, this is not a good move. Not just because it did so well, but because it was removed for no reason in my opinion.


That being said, there are reasons for using ETFs. Of course, for some investors, ETF’s may have appeal.


1) Time Factor

The main reason someone may like investing in a dividend ETF is because they do not want to select any of the companies themselves, and are fine to delegate this responsibility to someone else for a recurring annual fee. Some folks do not feel comfortable selecting well-known dividend growth stocks, which is fine. It’s better to let a more qualified party select companies for you, than to end up selecing the wrong companies in the process.


2) Instant Diversification

One advantage of ETFs is that you get instant diversification at the click of one button, albeit at the cost of a recurring annual fee that would increase in dollar amount as your investment accounts grow. I would argue that today I can generate this instant diversification by selecting companies one at a time, but I do understand the appeal of clicking just one button versus say 50.


3) Re-Balancing

The biggest advantage of ETFs is that they do not generate any capital gains to shareholders when they re-balance their portfolios. In other words, if an ETF decided to eliminate a certain company from its portfolio, and realizes a capital gain in the process, its shareholders do not get taxed on it. However, if there is a loss when an individual portfolio holding is disposed of, the ETF shareholders won’t be able to take the loss for tax purposes. This tax discussion only centers around the ETF portfolio holdings. If you sell the ETF at a gain, you will pay tax in a taxable account; if you sell an ETF at a loss, you will get a benefit.


Conclusion:

I have tried to summarize the pros and cons of selecting my own individual dividend stocks versus selecting a dividend ETF. I have discussed this topic a few times on the blog too. You may check out the "Relevant Articles" below for more information on my thought process.


Relevant Articles:

- The Best Dividend ETF to Consider








Monday, August 1, 2022

15 Dividend Paying Companies Raising Dividends Last Week

As part of my monitoring process, I review the list of dividend increases every week. This exercise helps me to monitor existing portfolio holdings, and to identify promising companies for further research.

I tend to focus my attention on companies with at least ten years of annual dividend increases. This activity helps me to focus on companies with a higher chance of delivering sustainable dividends, and lets me identify the companies with a long runway for future dividend increases.

I review each company, in order to determine if it can continue raising its dividends for the foreseeable future. I believe that rising earnings per share are the fuel behind future dividend increases.

I look at rising earnings per share, in conjunction with trends in the dividend payout ratio. A high payout ratio is generally a warning sign, unless the business model is highly predictable or earnings are growing faster than dividends. I generally prefer if earnings and dividends grow at roughly the same long-term rate. Sometimes there are changes, and reasons for why that’s not the case, especially if a company just recently started growing dividends from a low base.

I like to review trends in dividend growth too, and check if it is accelerating, decelerating or just keeping pace at a constant rate.

I also like to review the valuation in terms of P/E and yield. While these are viewed as old-fashioned today, I have found them to be useful yardsticks to follow, along with dividend growth, payout ratio and earnings growth. Valuation is part art, part science.

Over the past week, there were 15 companies that raised dividends that also have a ten year track record of annual dividend increases. The companies include:


This list is not a recommendation to buy or sell stocks. It is simply a list of companies that raised dividends last week. The companies listed have managed to grow dividends for at least ten years in a row.

The next step in the process would be to review trends in earnings per share, in order to determine if the dividend growth is on strong ground. Rising earnings per share provide the fuel behind future dividend increases.

This should be followed by reviewing the trends in dividend payout ratios, in order to check the health of dividend payments. A rising payout ratio over time shows that future dividend growth may be in jeopardy. There is a natural limit to dividends increasing if earnings are stagnant or if dividends grow faster than earnings.

Obtaining an understanding behind the company’s business is helpful, in order to determine how defensible the dividend will be during the next recession. Certain companies are more immune to any downside, while others follow very closely the rise and fall in the economic cycle.

Of course, valuation is important, but it is more art than science. P/E ratios are not created equal. A stock with a P/E of 10 may turn out to be more expensive than a stock with a P/E of 30, if the latter is growing earnings and the former isn’t. Plus, the low P/E stock may be in a cyclical industry whose earnings will decline during the next recession, increasing the odds of a dividend cut. The high P/E company may be in an industry where earnings are somewhat recession resistant, which means that the likelihood of dividend cuts during the next recession is lower.


Relevant Articles:


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