Monday, September 26, 2022

Microsoft (MSFT) Dividend Stock Analysis

Microsoft Corporation (MSFT) develops, licenses, and supports software, services, devices, and solutions worldwide.

The company just raised its quarterly dividend by 9.67% to 68 cents/share on September 20th, 2022. Microsoft has managed to increase annual dividends for 17 consecutive years.

Annual dividends increased from 76 cents/share in 2012 to $2.42/share in 2022. At the new rate, the forward dividend is $2.72/share.

Earnings per share have increased from $2/share in 2012 to $9.65/share in 2022. Microsoft is expected to generate $10.98/share in 2023 and $12.82/share in 2024.

Future growth would be driven by its cloud based platform Azure, as corporations move to the cloud. It would be driven from Office, as more customers move to use software as a service, rather than buy licenses. Linkedin could help growth too, as would Xbox. Windows is essentially a utility, on which a lot of other applications run.

Strategic acquisitions could also boost the bottom line. The company is in the process of acquiring Activision Blizzard.

Earnings per share growth has been aided by share buybacks. Microsoft reduced the number of shares outstanding from 8.506 billion in 2012 to 7.504 billion in 2022.

The dividend payout ratio has moved around over the past decade, but seems reasonable at 25% today. It is possible that Microsoft may decide to grow dividends at a faster rate than earnings over the next decade. At least there is room in the payout ratio. 

The stock is not cheap today at 23.65 times forward earnings and a dividend yield of 1.10%. However, I will add to my position, because I believe it can deliver solid yields on cost and good returns over the next decade.

 Relevant Articles:

Eight Companies Expected to Raise Dividends in September

Thursday, September 22, 2022

Dividend Investors: Stay The Course

The past few months have been difficult for many investors. Stocks are down from their all time highs, reached just a few months ago. It is during times like these that you see who really is a long-term investor, and who is just a pretender. When you are a long-term buy and hold investor, you stand the best chances to take maximum advantage of the power of compounding, and end up with the probability for the highest dividend income and capital gains. These are the times where having a disciplined approach to investing pays off. These are the times when the ability to allocate capital to use in quality dividend stocks would seem stupid in the short-term, but potentially really brilliant 10 – 20 years down the road. When stock prices fall, there is an urge in the investor to protect their nest eggs from further price impairment.

This is a dangerous situation to be in because:

1) Noone knows in advance today when this correction is going to run out of steam or what its ultimate severity will be. So when you act on short-term noise, you are actually shooting yourself and those who will depend on you in the foot.

2) Therefore, if you act based on short-term price fluctuations, you are speculating and have essentially thrown out your edge of being a long-term investor. It is extremely difficult to win in investing as a short-term speculator – you will be in an out of stocks and paying taxes and commissions through the nose. Your main edge in the stock market lies in the ability to hold on to your stocks through thick and thin for decades, and cashing in those growing dividend checks ( or reinvesting them in the accumulation phase)

3) If you are in the accumulation phase, you should be praying for lower prices, because you are buying shares to provide for you in 20 – 30 years. A 200 point decline on the S&P 500 decline will likely look just like a blip on the charts 20 – 30 years from now. If you don’t believe me, check the 1987 crash. A lower entry price results in more future dividend income for you.

4) If you are in the retirement phase, you already have a plan to live off your assets. You are likely spending those dividends, and hopefully those dividends are coming from a diversified portfolio of dividend growth stocks. You are likely getting social security and possibly a pension. As long as there is some margin of safety in financial independence, and the dividend portfolio mostly consists of quality blue chips, the investor should be just cashing in their dividend checks and enjoy the fruits of their lifetime of labor.

I know that seeing unrealized capital losses hurts. However, the important thing is to just stick to your plan and stay the course. This is why I have chosen to be a dividend growth investor. When the stock market is going up, everyone is a total return investor and chases hot growth stocks and talks about how much capital gains they have made.

However, when the stock market starts going down in price, those capital gains could quickly turn into losses. Imagine having to sell chunks of your portfolio for living expenses when the stock market is going lower. You will eat your principal quickly, and increase your chances of panicking and doing the wrong thing of selling everything out. When your dividends cover your living expenses however, it is much easier to ignore those stock price fluctuations. As long as those dividends are coming from a diversified portfolio of quality blue chip stocks that are dependable, the investor has nothing to worry about. In fact, receiving cash dividends when the stock prices are going down is very reassuring, and provides the investor with positive reinforcement to just stay the course.

There is a reason why stocks have done much better than bonds in the long-run – they are riskier. With stocks, there is always the chance that there will be violent fluctuations in the price. You can have steep downturns, which can have many weak hands scrambling for the exits. When stock prices go down, many investors assume that something is wrong, they panic and sell. They forget that your upside potential in terms of dividends and capital gains is virtually unlimited. Some companies you own will ultimately cut dividends and sell at levels that were lower than what you paid for. Other companies in your portfolio will do well enough in the long term that will more than compensate for the failures you have experienced.

The issue with stocks of course is that the amount and timing of future capital gains is largely unknown in advance. This is why people panic when prices start going down – they project the recent past onto the future indefinitely. They forget that stocks are not just some pieces of paper or blips on a computer screen, but real businesses that sell real goods and services to consumers who are willing to exchange the fruits of their labor for those goods and services. Over time, those businesses as group will likely learn ways to sell more, charge more, earn more and reward their shareholders. No matter the turbulence we will experience in the US and Global stock markets and economies in the short-run, I believe that things will be better for all of us ten years from now. And as investors, we invest for the long term, not for the next 5 years or 5 months.

With bonds, you get limited upside mostly in terms of the interest payment you receive, and then hopefully a guaranteed return on investment after a set period of time. In my case, the only bonds I am interested in owning directly are Certificates of Deposit, Treasury Bonds and US Agency Bonds. This is the safety portion of my portfolio, which could ultimately account for somewhere between 10% - 15% of my portfolio by the end of the decade. The issue of course is that this portion of the portfolio will mostly keep up with inflation, at best since expected returns are low in the current interest rate environment. So while a portfolio of bank CD’s will not be quoted every day, providing an illusion that the money is safe, it is difficult to live off the small yields we see today. If inflation returns to its normal course of 3%/year, those bank CD’s will likely be unable to keep up purchasing power.

Holding on to stocks pays in the long term better than holding bonds precisely due to their “riskier” nature. If you stay the course of regularly adding money to your accounts, you will be able to buy more shares of quality companies at a discount. After the dust settles, you will be ending up with more valuable pieces of real businesses than before. It intuitively makes sense that you will be better off buying a stock like Altria  at $40/share as opposed to $75/share. If one share of Altria (MO) bought is today, and dividends are reinvested, it could result in a net worth of $400 in 30 years. This exercise assumes a total return of 8%/year, which is lower than the company's dividend yield alone. It also intuitively makes sense that if you reinvest your dividends when prices are low, you will end up with more shares and more dividend income over time.

Again, in order to benefit from all of this, you need to stay the course. This means saving money every month, putting money to work regularly, and not getting scared away. Perhaps if you are concerned about prices and you are in the accumulation phase, it may make sense to just start reinvesting dividends automatically. Or alternatively, it may make sense to automatically invest a portion of your paycheck through your 401 (k).

Relevant Articles:

Successful Dividend Investing Requires Patience
Fixed Income for dividend investors
Dividend income is more stable than capital gains
How to think like a long term dividend investor
Long Term Dividend Growth Investing

Wednesday, September 21, 2022

Keeping Investment Costs Low Matters

“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.”

- Warren Buffett

As an investor, I believe that long-term success is dependent on actions within my control. Namely these include:

1) Ability to select and stick to a strategy
2) Ability to invest regularly, through thick and thin, and not timing the market
3) Ability to diversify and not put all eggs in one basket
4) Ability to keep investment costs low

Today, I will focus on the fourth point, which is keeping investment costs low.

This is fairly easy today at least for US investors, because most brokers offer commission free investing. It has never been easier to buy into some of the worlds best companies, and share in the success of these enterprises in the form of higher dividends and higher share prices over time. It is fairly easy to set up a diversified portfolio as well.

When you keep investment costs low, this means that you have more money working hard for you.
If you pay a mutual fund or an investment adviser 1% per year on your investments, this means that you are losing out on future compounding of this money. To add further insult to injury, that 1% of assets under management is a recurring fee that is paid every year. In addition, that money would have compounded over time as well, which makes this cost an even bigger one. Paying a fee is equivalent to another tax on your dividend income.

For example, if you invested in Johnson & Johnson (JNJ) today, you would generate a yield of 2.75%.

However, if you paid me a 1% fee each year on net worth, you are essentially paying a 36% tax on your dividend income, in addition to paying taxes on dividend income. This exercise assumes you are using a taxable account.

Let’s run some numbers. If a stock delivers a total return of 7%/year over the next 30 years, it would turn $1,000 into $7,612.25. A total return of 7%/year could assume a starting yield of 3% and annual growth of 4%, compounded over time.

If you paid someone 1%/year to select these companies for you, your annual return is reduced to 6%/year. You are coming up with all the capital at risk, but the other party is coming up with all the ideas. It is possible that they have convinced you to invest intelligently, and that otherwise you may have been keeping your money under the mattress or in a savings account yielding 1% - 2%/year.

Either way, when you compound $1,000 at 6%/year for 30 years, you are left with $5,743.49.

That’s a difference of $1,868.76 over a 30 year period. If we make the period longer, the total lifetime cost will only get larger.

That’s why I believe that keeping investing costs low matters – because that way you have more money working hard for you to achieve your investment goals and objectives.

I actually believe that investing through a Roth IRA is a very good method to reach the full compounding potential for this portfolio, particularly for someone in the accumulation phase.Taxes are a highly personal matter however. While a Roth IRA may be perfect for one individual, a traditional IRA may be better for another individual who needs to keep their Adjusted Gross Income below certain levels (to qualify for tax credits or subsidies on healthcare insurance premiums) OR individuals who expect to be in lower tax brackets when they retire.

Let’s assume annual total returns of 7%/year, with 3% of that coming from dividends, and a 15% tax on qualified dividend income. This means that our total returns after tax end up being 6.45%/year. When we calculate the numbers, we end up with $6,708.16 after compounding an initial stake of $1,000 at 6.55%/year over a period of three decades. That’s $904.09 less than the 7% gross annualized returns available to investors during that time period.

You can see that it would be foolish not to take advantage of a tax deferred account such as a Roth IRA. I thoroughly encourage everyone who is able to contribute to a tax-deferred account to do so.

But they do need to speak with a tax professional first, because everyone’s individual circumstances vary.  In my working career, I have tried maxing out all retirement accounts I was eligible for, including but not limited to 401 (k), H S A, SEP IRA, Roth IRA to name a few.

There may be reasons why someone may not be using a retirement account. Some may not be eligible for them because they do not have employment income or they earn too much to contribute to one without having to go through hassles. A small group may not want to deal with retirement accounts, because they do not know enough about them. They also do not want to deal with complications. That may be an expensive lesson that could force them to work longer than needed to reach their goals and objectives. Or they may be just wrong, and choose to remain ignorant out of spite.

Relevant Articles:

- How early retirees can withdraw money from tax-deferred accounts such as 401 (k), IRA & HSA
Use these tools within your control to get rich
Why Holding 100% of Equity Investments in Taxable Accounts is a Mistake
How to buy dividend paying stocks at a 25% discount
Taxable versus Tax-Deferred Accounts for Dividend Investing

Monday, September 19, 2022

Seven Dividend Growth Stocks Rewarding Shareholders With a Raise

I review the list of dividend increases each week, as part of my monitoring process. This exercise allows me to monitor existing holdings, but also to keep in touch with companies that I may want to put on my list for further research.

I look for companies that can grow dividends, because their underlying business generates too much extra cash each year. 

Dividends bring more discipline to the management's investment decision-making. Holding onto profits might lead to excessive executive compensation, sloppy management, and unproductive use of assets. Studies show that the more cash a company keeps, the more likely it is that it will overpay for acquisitions and, in turn, damage shareholder value. In fact, companies that pay dividends tend to be more efficient in their use of capital than similar companies that do not pay dividends. 

I view dividend increases as a good gauge of managements near term business expectations. If a company can continue growing the dividend, that's great and shows that possibly business is going as usual. If a company stops growing dividends or cuts them, I see it as an indication that things are not going as well. There is more nuance to all of that however.

A cautious dividend hike could be an indication of soft business demand or management observing a slowdown down the road. It could also be an indication that the business is more cyclical than management cares to admit.

A dividend increase along a range of outcomes shows me that management expects business as usual, which is something I look at. 

Sometimes, businesses raise dividends fast, which may indicate optimism. A too high of a dividend increase may also show that management is too overconfident however.

Ultimately, a long history of dividend growth is an indication of a quality company with strong competitive advantages which also had a strong tailwinds to propel the business forward. Only a certain type of company can manage to grow the business and raise dividends for at least a decade. In other words, rising dividends are an end result of a great business. Whether that business can continue being great or not depends on a lot of factors. Either way, a strong track record of annual dividend increases, along with a good valuation is enough to make me want to research this business.

During the past week, there were seven companies that managed to raise dividends. All of these companies have managed to grow dividends for at least ten years in a row. The companies include:

Fifth Third Bancorp (FITB) operates as a diversified financial services company in the United States.

The bank hiked quarterly dividends by 10% to $0.33/share. This is the 12th year of consecutive annual dividend increases for this dividend achiever.

During the past decade, the company has managed to increase dividends at an annualized rate of 14.80%. The company did cut dividends during the Global Financial Crisis. Annual dividends per share have still failed to exceed the 2007 highs at $1.70/share.

The stock sells for 9.83 times forward earnings and yields 3.77%.

New Jersey Resources Corporation (NJR), an energy services holding company, provides regulated gas distribution, and retail and wholesale energy services.

The company increased quarterly dividends by 7.60% to $0.39/share.

NJR has paid quarterly dividends continuously since its inception in 1952, and this marks the 29th dividend increase over the last 27 years.

During the past decade, this dividend champion has managed to increase dividends at an annualized rate of 6.60%.

The stock sells for 18.22 times forward earnings and yields 3.24%

Philip Morris International Inc. (PM) operates as a tobacco company working to delivers a smoke-free future and evolving portfolio for the long-term to include products outside of the tobacco and nicotine sector. 

The company increased quarterly dividends by 1.60% to $1.27/share. This is much lower than the ten year rate of annualized dividend growth of 6.10% and the 5 year rate of annualized dividend growth of 3.40%.

The stock sells for 17 times forward earnings and yields 5.32%

Realty Income (O), The Monthly Dividend Company, is an S&P 500 company dedicated to providing stockholders with dependable monthly income. 

Realty Income increased its monthly dividend to $0.2480/share. That's a 0.20% raise over the last quarter, but 5.08% increase over the dividend from this time last year. Over the past decade, the company has managed to grow distributions at an annualized rate of 5%. The 5 year rate is 3.40%

This is the 117th dividend increase since Realty Income's listing on the NYSE in 1994.

The stock sells for 16 times FFO and yields 4.65%.

Texas Instruments Incorporated (TXN) designs, manufactures, and sells semiconductors to electronics designers and manufacturers worldwide. It operates in two segments, Analog and Embedded Processing

The company increased quarterly dividends by 7.80% to $1.24/share. The announcement marks 19 consecutive years of dividend increases for this dividend achiever. Over the past decade, the company has managed to grow distributions at an annualized rate of 22.40%.

The stock sells for 17.27 times forward earnings and yields 3%

U.S. Bancorp (USB) provides various financial services to individuals, businesses, institutional organizations, governmental entities and other financial institutions in the United States. It operates in Corporate and Commercial Banking, Consumer and Business Banking, Wealth Management and Investment Services, Payment Services, and Treasury and Corporate Support segments. 

The bank increased quarterly dividends by 4.30% to $0.48/share. Over the past decade, the company has managed to grow dividends at an annualized rate of 15%. It did cut dividends during the Global Financial Crisis, and has been growing them since. Last year, the annual dividend exceeded the 2008 amounts 

The stock is selling for 10.80 times forward earnings and yields 4.19%.

Farmers & Merchants Bancorp, Inc. (FMAO) operates as the bank holding company for The Farmers & Merchants State Bank that provides commercial banking services to individuals and small businesses in northwest Ohio and northeast Indiana. 

The bank increased quarterly dividends by 10.50% to $0.21/share. This represents the 28th consecutive annual increase in the Company’s regular dividend payment since 1994. Over the past decade, the company managed to grow dividends at an annualized rate of 6.10%.

The stock sells for 10.49 times forward earnings and yields 2.75%. 

Relevant Articles:

- Eight Companies Expected to Raise Dividends in September

Friday, September 16, 2022

What should I do with my Store Capital stock after the acquisition?

The popular REIT Store Capital (STOR) will be acquired by a Private Equity group. As part of the deal, shareholders would receive $32.25/share in cash when the deal closes. This was a 20% premium to the share price from the previous day. (Source: Press Release)

Naturally, a lot of investors were not happy. That's because the REIT is cheap at 14.80 times forward FFO/share and yields 4.80%. A lot of investors bought this REIT with the expectation that it keeps growing FFO/share and dividends per share in the future, and becoming as prominent as Realty Income. Many shareholders feel like they are being robbed of future potential.

Several investors reached out to me, to ask me my opinion on the situation. Naturally, there are a lot of trade-offs involved.

Investors today have several options:

1. Do Nothing

If investors do nothing, they would continue holding on to Store Capital until the deal closes sometime in the first quarter of 2023. Investors would receive the third quarter dividend payment in the amount of $0.385/share, but after that the dividends are suspended. That dividend has not been declared yet.

If investors continue holding, they would receive $32.25/share when the deal closes in Q1, 2023. However, it could take longer for the deal to close, so there is opportunity cost involved with this option. Your money would be tied out in an asset, which would not be paying a dividend in the meantime too.

However, if investors decide to hold, they could also benefit if another suitor comes over and offers a higher price for Store Capital. There is a possibility that someone may offer more. Nothing is guaranteed of course. This is a snippet from the press release:

The definitive merger agreement includes a 30-day “go-shop” period that will expire on October 15, 2022, which permits STORE Capital and its representatives to actively solicit and consider alternative acquisition proposals. There can be no assurance that this process will result in a superior proposal, and the Company does not intend to disclose developments with respect to the go-shop process unless and until it determines such disclosure is appropriate or is otherwise required.

The other thing to consider is taxes. If investors held in a tax-deferred account, then they won't think about timing of taxes. But, if investors held Store Capital in a taxable account, they would owe capital gains taxes if they have a profit on the sale. Deferring that tax payment to 2023 from 2022 may be a better decision from a time value of money perspective. If investors expect to be in a lower tax bracket in 2023 than 2022, it may also make sense to defer from a tax perspective. 

From a tax perspective, it may also make sense to sell next year, if it means that newer investors end up paying taxes at the long-term capital gains rate, rather than the short-term capital gains rate.

If investors decide to do nothing and the deal gets cancelled however, the stock price may go down below the offer price. That may be a short-term pain, but if you believe in the long-term prospects of the business, it may be a blessing in disguise.

From a timing perspective, if the deal goes through as expected and closes at $32.25/share in Q1 2023, investors would do well if stocks in general sell at a lower price then than today. If share prices are higher then than today, then investors would have been better off selling.

2. Sell today

If investors sell today, they would receive an amount that is pretty close to the deal price. There is less than 25 cents/share difference between the offer price and the current price. That money could be allocated somewhere else and pay dividends.

However, investors who sell today would miss out on the third quarter dividend. 

Investors who sell today could also miss out if Store Capital attracts another suitor who is willing to pay more for the stock.

Investors who sell today and hold the stock in a taxable account would owe taxes in 2022 rather than in 2023. If investors sold at a loss however, it may make sense to recognize it earlier in order to get the tax benefit earlier too.

If the deal falls through, investors who sold today may be able to acquire shares in Store Capital at a lower price.

From a timing perspective, if the deal goes through as expected and closes at $32.25/share in Q1 2023, investors would do well if stocks in general sell at a lower price then than today. If share prices are higher then than today, then investors would have been better off selling.


Today, I discussed the various options investors have to deal with the acquisition of Store Capital. They are not financial advice of course. The goal of the post was to show you that every decision involves various trade-offs, and various outcomes on the decision tree.

Thursday, September 15, 2022

My Favorite New Investing Resource

As a Dividend Growth Investor, I focus on quality companies that have managed to raise dividends for a certain number of years. Before I research a company however, I tend to look for:

1. Trends in earnings per share over the past decade

2. Trends in dividends over the past decade

3. Dividend payout ratio

4. Trends in shares outstanding over time

I can do this easily if I were focusing on just one company at a time, using annual reports for example. However, if I have to screen through a larger list of companies, such as the dividend champions for example, it is definitely a time saver to use a resource that showcases the data in an easy to access format. You may enjoy this list of resources I use.

One of my favorite new investing resources is the site ROIC.AI

I can quickly see trends in earnings, cashflows, revenues, shares over the past 10 - 15 years. 

For example, I can see the following data for PepsiCo (PEP) since 2006. (Source)

I can see trends in revenues per share, earnings per share and cash flow per share. You can also view trends in dividends per share and shares outstanding over the past 16 years.

The other neat feature is that the site shows financials for the past 30+ years.  This includes trends in Income Statement, Balance Sheet and Statement of Cash Flows. You can view this below:

They produce a chart similar to what Value Line reports look like (minus the qualitative review). (classic view)

They also provide earnings call transcripts for several years back for free, which is pretty neat as well. (source)

If you want to download the data , you have to subscribe to the paid service or tweet about it. 

You can get access to over 37,000 companies in EU, Australia, UK and India if you sign up for their premium service. I guess you can download data as much as you want with it too. I am using the free version.

I am not compensated for writing this post from ROIC. I am just sharing a free resource I found out on the internet, which may be helpful to readers.

I did a quick spot check of the data for several of the dividend champions, and it looked accurate. However, I would encourage you to always try to verify the data for accuracy. Anytime data is automatically pulled from databases, there is the possibility for inaccuracy. Some readers have reported inaccuracies for Canadian companies listed in the US. Perhaps that's because they do not submit 10-K filings but a 40-F.

The best source is the original source, as in the annual report at the company website or the However, the ability to quickly review data using a site like ROIC can definitely be a time saver.

Relevant  Articles:

Monday, September 12, 2022

The Coffee Can Portfolio

 As an investor, you can control what you invest in, how much you invest in, and what your costs are.

A very appealing concept along those lines is the idea of The Coffee Can Portfolio. It is a powerful idea, that can help you become a better investor, if implemented correctly.

The Coffee Can portfolio concept harkens back to the Old West, when people put their valuable possessions in a coffee can and kept it under-the mattress. That coffee can involved no transaction costs, administrative costs, or any other costs. The success of the program depended entirely on the wisdom and foresight used to select the objects to be placed in the coffee can to begin with

The idea is that you invest in a number of good companies, and then leave the portfolio alone. This means no tinkering with the portfolio, trading around, or selling.

For example, if I had a portfolio worth $100,000, I could allocate $2,000 each to 50 individual companies. I’d then leave it alone for years, if not decades. 

In the worst case scenario, I would lose $2,000 per company. In the best case scenario, my total returns ( capital gains and dividends) are unlimited. There would be no transaction costs and presumably less taxes. The less in transaction costs and fees, the more you have working for you. This of course assumes that I left the portfolio alone. Cue the narrative that the best investors are dead or forgot about their portfolio.

After a period of time, this portfolio would look lopsided. It would have a lot of small positions, but a few large positions, which would have been a result of companies becoming too successful. These holdings would have propelled the portfolio forward. For an investor who tinkers with their portfolio, the risk is that they sell these future great performers early, because of some silly reason. You can see that selling early is more dangerous than buying a value trap. That’s because a great performer can pay for a handful of mistakes, and still result in an overall net profit for the portfolio.

Of course, this exercise assumes that the investor is selecting quality companies.

This idea can help you become a better investor due to a variety of factors.

First, it focuses your mind on companies that you can just buy and hold and forget. In the words of Warren Buffett, only buy a stock with the intention to hold it even if the market closed for a decade.  Buffett also says that if you are not willing to own a stock for a decade, you should not even think about owning it for ten minutes.

There is a lot of wisdom in these quotes. There are not that many businesses that can be bought and forgotten about. 

This forces you to look for businesses with strong competitive advantages and tailwinds, which are likely to continue their dominant economic position for a long period of time, while growing earnings and dividends along the way. This means that there won’t be much in terms of disruption to the business.

A lot of such businesses can be found on the Dividend Aristocrats list. However, not all businesses on the Dividend Aristocrats list are buy and hold without looking types. But I have a healthy dose of conviction that they would likely do well as a group over the next decade.

By focusing on quality, investors can narrow down the list of great long-term holds substantially. 

Second, the coffee can portfolio forces you to have lower costs.

Turnover is expensive. You can have transaction costs, taxes, and fees. In addition, there is opportunity cost, because the companies you sold may end up doing much better than the companies you replace them with. In my observations, I have seen first hand that investors are their own worst enemies.

They lack patience, and get frustrated if they have to wait for a company to deliver. Very often, investors end up capitulating right before things turn around; only to replace with another investment that has done very well recently. Those recency and activity biases can be expensive. 

A portfolio is like a bar of soap, the more you handle if, the smaller it gets. I like that this coffee can approach reduces costs, and focuses you to be more patient and long-term oriented.

Even if you have a small amount of turnover every year, your portfolio would look very differently in a decade, provided you do selling/pruning/rebalancing. This is costly.

Third, this portfolio rewards patience.

Buy buying and holding, you let the power of compounding do the heavy lifting for you. You give companies maximum amount of time to shine. Total returns do not come at predictable intervals (only the dividend component does).

This type of a passive portfolio lets you maximize the full potential of your investments to your benefit. 

You do that by letting winners run, and keeping your losers at the minimum. 

You can only lose $2,000 in a 50 stock portfolio per each position. But the amount you can make is unlimited.

In other words, you are following the wisdom of Peter Lynch, where “you are watering the flowers and pruning the weeds”

The author of the “Coffee Can Portfolio” discusses the portfolio of a husband and wife. The husband bought shares in companies, but sold when his broker advised him to. His wife bought the stocks in her portfolio, but never sold it. As a result, she did much better than her husband:

The potential impact of this process was brought home to me dramatically as the result of an experience with one client. Her husband, a lawyer, handled her financial affairs and was our primary contact. I had worked with the client for about ten years, when her husband suddenly died. She inherited his estate and called us to say that she would be adding his securities to the portfolio under our management. When we received the list of assets, I was amused to find that he had secretly been piggybacking our recommendations for his wife‘s portfolio. Then, when I looked at the total value of the estate, 1 was also shocked. The husband had applied a small twist of his own to our advice: He paid no attention whatsoever to the sale recommendations. He simply put about $5,000 in every purchase recommendation. Then he would toss the certificate in his safe-deposit box and forget it. Needless to say, he had an odd-looking portfolio. He owned a number of small holdings with values of less than $2,000. He had several large holdings with values in excess of $100,000. There was one jumbo holding worth over $800,000 that exceeded the total value of his wife’s portfolio and came from a small commitment in a company called Haloid; this later turned out to be a zillion shares of Xerox.

This idea really reminds me of Jeremy Siegel paper on the performance of the original members of S&P 500. It also reinforces the lessons from the Corporate Leaders Trust and Changes in Dow Jones Industrials Average. 

The idea of Coffee Can portfolio is not popular on Wall Street. That’s because if you buy such a portfolio, you do not need an expensive mutual fund manager or a financial advisor. Hence, it is not going to be sold to you. I believe this is an idea worth exploring for my money.

Naturally, the question would come as to what companies can I invest in?

In my opinion, the list of Dividend Aristocrats includes 64 quality companies. Enterprising dividend investors may be able to narrow down the list using various criteria of their own; or even expand by including dividend champions etc.

Note: Data is as of Aug 31, 2022

Either way, a portfolio that is equally divided between the companies, and then left unattended for 10 – 20 – 30 years, would likely do better than most investors. I assume the DRIP is turned on. I also assume that the portfolio owner makes no active decisions, so they would keep all spin-offs, splits, and acquisitions if any. The only active decision would likely be when a company is acquired for cash.

If I wanted to narrow the list down, I'd do the following:

1) Focus on companies that have raised dividends for at least 25 years in a row (already done)

2) Review trends in earnings per share over the past decade, and focus on companies that have managed to grow earnings per share. 

3) Review the trend in dividends per share

4) Review trends in dividend payout ratio and focus on the ones with sustainable dividends. Safety first.

5) Try to understand the business, and determine the likelihood of future earnings and dividend growth

6) Review valuation. This is tricky, because it involves a lot of trade offs between yield and growth, dividend safety and likelihood for how long a company can keep growing on its own.

Check my analysis of Air Products & Chemicals (APD) in order to put things in perspective.


I have been fascinated by the concept of the Coffee Can Portfolio ever since I learned about it several years ago. In a way, it makes sense that keeping costs, turnover and fees low can result in a good result over time. 

This should not be a surprise to readers, as I have previously discussed how Investing in the Dividend Aristocrats from 2011 did, or investing in the 2007 Aristocrats List did.

Relevant Articles:

- Time in the market is your greatest ally in investing

- The Perfect Dividend Portfolio

- Where are the 2007 Dividend Aristocrats today?

- Dividend Aristocrats for 2022

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