How to find companies for my dividend portfolio

I am a buy and hold dividend growth investor. This means that I build my portfolio patiently. It also means that I rarely sell. I buy stocks to hold for decades, and would do so for as long as the dividend is not cut or for as long as a company is not acquired. This inactivity keeps investment fees and costs low.

It also reduces the impact of behavioral errors. I believe that time in the market beats timing the market. I try to buy companies that I would be comfortable owning even if the stock market closed for a decade. 

To paraphrase Warren Buffett “If you aren't willing to own a stock for ten years, don't even think about owning it for ten minutes.”

I have discussed how I evaluate each company in detail. But I have not discussed how I find companies to research and potentially invest in a more comprehensive way.

Today I will share with you the general process I use to find companies for investment. 

One of the goals of my newsletter is to try and share how I operate as an investor. My goal is to help you become a more rounded investor, so as you can create your own investing process that would help you to achieve your investment goals and objectives. While I would hope that you would stay and follow my journey over the years, I would be happier if you end up as an investor who can follow their own system, and be an independent thinker that would take their financial future in their own hands.

I wanted to share with you the process I follow to identify companies for further research, and potential acquisition. 

My process has evolved over time of course, but there are a few places where I look for investment ideas.

The first place is the good old list of dividend aristocrats. It is a well-known and widely distributed list of S&P 500 companies which have managed to increase dividends for at least 25 years in a row.

Membership is restrictive, but I like the quality and the fact that this list includes great businesses and it is not too exhaustive either. The list has ranged from 40 to 65 members over the past 10 – 15 years. If you managed to learn about each company, you will likely have a list of companies that make sense to you from a business perspective. The next step is either to consider acquiring the ones that are attractively valued, or to wait for the right price for the companies that seem expensive.

I generally screen the list by focusing on growth in earnings per share, dividends per share growth versus valuation, payout ratios etc. 

The second place is the list of dividend champions, contenders and challengers. It is updated monthly, and includes over 800 companies. The number of companies raising dividends for over 25 years is double the Dividend Aristocrats list, because it includes companies that are not part of the S&P 500. It doesn’t have liquidity or market capitalization requirement either.

This list also includes a list of companies that have increased dividends for over 10 years or over 5 years. It has a lot of useful data as well.

The third place I look is the monitoring process, where I review dividend increases every week. I like reviewing the press release for nuance, and try to gauge the management optimism. Sometimes, they read that we are in a situation where it is business as usual. Other times they seem too optimistic. After reading it for a few years, you may get a hang of it too.

A fourth place is through checkups of activity, including press releases, large sudden drops or increases in share price etc. While I review the list of dividend champions, dividend aristocrats and my portfolio holdings, I still learn about major moves in other businesses that I may want to study.

A fifth place is by scuttlebutt. Basically, in my daily life, I look at products, services, ideas, trends etc. You can identify investable opportunities this way. This is also an interesting way to admit that a lot of the missed opportunities I have had have been underneath my nose all those years.

If you like a certain product or service, you should always check and see if there is a company behind it. If that company is publicly traded, you may want to put it on your list for research. This idea is inspired by Peter Lynch.

Sometimes we overcomplicate life. Some of the best investment opportunities are right under our noses. I am reminded about Wal-Mart, Target, Lowe’s, Home Depot, Microsoft, Apple, Starbucks, Hormel, Altria, etc.

I recently saw a video, about a very simple investing process. The eat them, drink them, smoke them and go to the doctor portfolio. You may check it out from here - https://www.youtube.com/watch?v=U23fhx06SUQ&feature=youtu.be

Sometimes, I like a company, and decide to review some of its peers. I may end up owning stakes in all of them.

The sixth place is primary the most dangerous one. I follow a lot of dividend investors and other investors. Sometimes I see a lot of them buying a stock, perhaps because they are blindly following each other. Or perhaps because they are all seeing a good value, possibly because the stock had a catalyst that makes it a value. It is dangerous to be a lemming and blindly follow others, because you may be following them into their bad ideas, lose conviction, and ignore their best ideas. Also, you are not learning much by following others. Groupthink may influence you, which could be bad for your investment returns. 

I believe it is best to have your own process to follow, because you are not at the mercy of others for ideas. Plus, no single investors out there, even Warren Buffett is right 100% of the time. If you follow someone, make sure to follow all of their investment ideas. However, also make sure you have your own process to decide for yourself if a stock is a buy or an avoid.

For example, Buffett received a lot of negative publicity a few years ago, after he sold his airline stocks. In my opinion, that was a bad decision in the first place. After he sold at a loss, everyone out there started saying that he has lost his touch. After Apple went up to $185/share however, everyone started signing praises for him again. Right now, he is sitting on an unrealized gain of over $100 billion, and few are saying that he has lost his touch. And overall, his gains on Apple are higher than his losses on airlines and IBM.

Today, I discussed six places I look for, in my quest for uncovering companies for further research. I believe it is important to have a good population of quality companies, before going to the next stage of screening, evaluating and ultimately buying good companies for my portfolio. 

Kroger (KR) Dividend Stock Analysis

The Kroger Co. (KR) operates as a retailer in the United States. The company operates supermarkets, multi-department stores, marketplace stores, and price impact warehouse stores. Kroger is a dividend achiever, which hiked quarterly dividends by 11.50% to 29 cents/share in June 2023. This marked the 17th consecutive year of annual dividend increases for the company. During the past decade, Kroger has managed to grow dividends at an annualized rate of 14.30%. 

Kroger managed to grow earnings per share from $1.39 /share in 2013 to $3.15/share in 2023. The company expects to generate 4.51/share in 2024. 

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

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

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

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

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

Kroger has rewarded shareholders handsomely with dividends and share buybacks. Between 2013 and 2023, the number of shares outstanding has gone down from 1.074 billion shares to 727 million shares. This means that shareholders from 2013, who stayed invested in Kroger, , increased their ownership in the company by half without doing anything.

The dividend payout ratio increased from 18% in 2013 to 30% in 2023. A lower payout ratio provides an adequate margin of safety in the dividend payment, which can provide protection against short-term turbulence in earnings per share. There is room for increase in the payout ratio from here. Future dividend growth can be helped by a gradual increase in the payout ratio. If Kroger is unable to jump start earnings growth however, there will be a natural limit to further dividend growth. I would get worried if earnings are not growing, but dividends are, and the payout ratio exceeds 60%. 

Currently the stock is attractively valued at 10.22 times forward earnings and offer an attractive dividend yield of 2.50%. 

Diageo (DEO) Dividend Stock Analysis

 Diageo plc (DEO) produces, distills, brews, bottles, packages, and distributes spirits, beer, wine, and ready to drink beverages. This international dividend company has increased dividends for 25 years in a row. The company’s peer group includes Brown-Forman (BF.B), Suntory, and Constellation Brands (STZ).

The company’s latest dividend increase was announced in January 2023 when the Board of Directors approved an 5% increase in the interim dividend to 30.83 pence /share. The final dividend had been increased by 5% to 46.82 pence/share in October 2022. 

The annual dividend payment has increased by 6.30% per year since 2009, which is in line with the growth in EPS.

A 6% growth in distributions translates into the dividend payment doubling every twelve years on average. Between 1998 and 2008 dividends per share doubled. The next double took about eleven years to achieve, which is not bad.

Dividends on the ordinary shares are normally paid twice a year: an interim dividend in April and a final dividend in October. The approximate split between the two payments is 40:60.

Diageo trades on NYSE as American Depository Receipts. Each receipt is equivalent to 4 shares traded in London. As such, there is a small fee by the custodian bank that issues the ADR’s in the US. Being a British Company, there are no dividend withholdings at the source. You still owe tax to Uncle Sam in a taxable account however.

The company has managed to deliver an 6.10% average increase in annual EPS in British Pounds since 2009. Diageo is expected to earn 164 pence per share in 2023In comparison, the company earned the equivalent of 140 pence/share in 2022. Each American Depository Receipt (ADR) that you can purchase on the NYSE is equivalent to four shares that are traded on the London Stock Exchange. 

Between 2009 and 2022, the number of shares decreased from 2.485 billion to 2.325 billion.

Diageo owns a portfolio of strong brands, with wide consumer appeal, which are usually number one or two in their respective categories. A few include Smirnoff, Johnnie Walker, Guinness, Baileys, and Captain Morgan. The company also has a wide distribution network on a global scale, which might be difficult for a competitor to replicate. Diageo is the largest spirits company in the world, which provides it with the advantage of scale, relative to its competitors.

Future growth could be driven by organic growth of its premium brands as well as through strategic acquisitions. The company has also focused on its core competencies, by disposing of Pillsbury and Burger King in the early 2000s. North America accounts for one third of sales but over 45% of operating profits. Emerging markets in Asia, Africa and Latin America account for 43% of sales by 29% of operating profits. Europe accounts for 24% of sales and 25% of operating profits. Continued investments in strategic emerging markets could translate into higher sales in the future, particularly as the number of middle class consumers who will be able to afford premium drinks rises significantly.

The company has really high return on equity, which is common for most high quality dividend payers that do not require a lot of equity to operate the business. Rather than focus on absolute values for this indicator, I generally want to see at least a stable return on equity over time.

The dividend payout ratio has remained around 50% for most of the time (excepting during the Covid turmoil of 2020). A lower payout is always a plus, since it leaves room for consistent dividend growth minimizing the impact of short-term fluctuations in earnings.

Currently, the stock is fairly valued, as it trades at a forward P/E of roughly 20.85 and yields 2.24%. I am analyzing the company because I believe it is quality dividend growth stock, which is very good addition to my portfolio. I currently find Diageo to be a much better value than Brown-Forman (BF.B), at 36 times forward earnings and yield of 1.20%. 

Four Companies Increasing Dividends to Shareholders Last Week

I review the list of dividend increases each week, as part of my monitoring process. I follow this process in order to monitor existing investments and to potentially identify companies for further research. I focus on quality companies with consistent cashflows, which can be purchased at attractive valuations, which I can then buy and hold forever. These are the types of long-term investments that can deliver rising dividends for decades, while also delivering dependable returns in the process.

This exercise also shows the data points I use in my quick evaluation of a company. This helps me determine if I want to proceed in analyzing a company for potential investment or not. Typically, a promising fundamental development, such as increasing earnings, a sustainable payout ratio and a track record of consistent dividend increases would place a company on my list for further research. I review the growth in earnings and dividends over the past decade, in order to evaluate the likelihood of them continuing their steady march upwards. I also look at valuation together with fundamental performance. 

If a company is attractively valued, that's definitely great and increases the chances of it becoming a part of my portfolio, if my analysis doesn't raise any red flags. Even if the company seems overvalued today, I would still review it, in order to be ready to act if it ever becomes cheaper.

Over the past week, there were four companies that have managed to increase dividends for at least a decade, AND also increased dividends last week. The companies include: 

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

The company increased quarterly dividends by 4.20% to $0.495/share. This dividend king has increased annual dividends for 53 straight years.

Over the past decade, the company has managed to grow dividends at an annualized rate of 2.60%.

The company managed to grow earnings from $3.11/share in 2013 to $6.19/share in 2022. The company is expected to earn $5.18/share in 2023.

The stock is selling for 10 times forward earnings and yields 3.81%.

Realty Income (O) is a real estate investment trust with over 12,400 real estate properties owned under long-term net lease agreements with commercial clients.

The company increased monthly dividends by 0.20% to $0.2555/share. This is a 3.23% increase over the dividend paid during the same time last year. This dividend aristocrat has increased dividends multiple times per year since going public in 1994.

Over the past decade, the company has managed to grow dividends at an annualized rate of 5.30%.

Between 2013 and 2022, the company managed to grow FFO/share from $2.41/share to $4.04/share. Realty Income is expected to generate $4.13/share in FFO in 2023.

The stock is selling for 14.85 times forward FFO and yields 5%.

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

The company increased quarterly dividends by a paltry 1.90% to $1.10/share. This is the 52nd consecutive year in which Target has increased its annual dividend. 

Over the past decade, the company has managed to grow dividends at an annualized rate of 11.60%.

This dividend king has managed to grow earnings from $3.10/share in 2014 to $6.02/share in 2023. However, earnings are down from the pandemic high of $14.23/share in 2023. The company is expected to earn $8.27/share in 2024.

The stock is selling for 16.19 times forward earnings and yields 3.28%.

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

The company increased quarterly dividends by 10% to $0.11/share. This is the 22nd year of consecutive annual dividend increase for this dividend achiever.

Over the past decade, the company has managed to grow dividends at an annualized rate of 9.90%.

The company increased earnings from $1.64/share in 2013 to $4.99/share in 2022. The company is expected to earn $4.68/share.

The stock is selling for 12.66 times forward earnings and yields 0.78%.

Relevant Articles:

- Five Dividend Growth Companies Increasing Distributions to Shareholders

- Eight Companies Rewarding Shareholders With a Raise

- Seventeen Dividend Growth Stocks Raising Dividends Last Week

- 16 Companies Rewarding Shareholders With a Raise Last Week

Five Dividend Growth Companies Increasing Distributions to Shareholders

I review the list of dividend increases as part of my monitoring process. This exercise helps in monitoring existing positions and potentially identify companies for further research.

Over the past week, there were five companies that both increased dividends and have managed to increase them for at least ten consecutive years. The companies include:

Alexandria Real Estate Equities (NYSE: ARE) is a life science REIT that owns, operates, and develops of collaborative life science, agtech, and technology campuses in AAA innovation cluster locations, including Greater Boston, the San Francisco Bay Area, New York City, San Diego, Seattle, Maryland, and Research Triangle. 

The REIT hiked quarterly dividends by 2.48% to $1.24/share. The new dividend is 5.08% higher than the distribution paid during the same time last year. This marked the 13th consecutive annual dividend increase for this dividend achiever. 

Alexandria Real Estate Equities has managed to increase dividends at an annualized rate of 8.72% over the past decade.

It has managed to grow FFO/share from $4.33 in 2013 to $5.44 in 2022. Forward FFO estimates for 2023 are at $8.95/share.

The stock is selling for 13.47 times forward FFO and yields 4.11%.

Casey's General Stores, Inc. (CASY) operates convenience stores under the Casey's and Casey's General Store names. 

The company increased quarterly dividends by 13.16% to $0.43/share. This was the 24th consecutive annual dividend increase for this dividend achiever. Over the past decade the company has managed to increase dividends at an annualized rate of 8.77%.

The company grew earnings per share from $3.19 in 2014 to $9.85 in 2023. The company is expected to earn $10.73/share in 2024.

The stock is selling for 20.44 times forward earnings and yields 0.79%.

Oil-Dri Corporation of America (ODC) develops, manufactures, and markets sorbent products in the United States and internationally. It operates in two segments, Retail and Wholesale Products Group, and Business to Business Products Group. 

The company increased quarterly dividends by 3.57% to $0.29/share. This marked the 21st consecutive annual dividend increase for this dividend achiever. Over the past decade ,it has managed to grow dividends at an annualized rate of 4.62%

Earnings per share fluctuated from a high of $2.09 in 2013 to a low of $0.82/share in 2022. Trailing 12 month earnings are at $3.29,

The stock is selling for 14.30 times trailing earnings and yields 2.46%.

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

The company increased dividends by 1.41% to $0.72/share. This marked the 38th year of consecutive annual dividend increases for this dividend champion. Over the past decade, the company has managed to increase dividends at an annualized rate of 1.49%.

FFO/share increased from $2.76 in 2013 to $3.54 in 2022. Forward FFO for 2023 is at $3.46/share.

The stock is selling for 14.26 times forward FFO and yields 5.81%.

UnitedHealth Group Incorporated (UNH) operates as a diversified health care company in the United States. It operates through four segments: UnitedHealthcare, Optum Health, Optum Insight, and Optum Rx.

The company hiked quarterly dividends by 13.94% to $1.88/share. This marked the 14th consecutive annual dividend increase for this dividend achiever. Over the past decade, the company has managed to increase dividends at an annualized rate of 23.11%.

UnitedHealth Group managed to grow earnings from $5.50/share in 2013 to $21.18/share in 2022. The company is expected to earn $25/share in 2023.

The stock is selling for 19.61 times forward earnings and yields 1.52%.

Relevant Articles:

- Eight Companies Rewarding Shareholders With a Raise

- 16 Companies Rewarding Shareholders With a Raise Last Week

- Thirteen Dividend Growth Stocks Rewarding Shareholders With a Raise

- Four Notable Dividend Increases From Last Week

The importance of investing for retirement as early as possible

At the beginning of the 21st century most young people are told that social security won’t be there for them when they retire from the work force. Thus, in order to be able to completely retire from the workforce, a person has to invest as early as possible in order to take full advantage of the power of compounding.

Let’s follow the story of Erica and John. They both grew up on the same street in the same city. Their mothers gave birth to them at almost the same time. Erica and John went to the same high-school, after which their paths separated. They lost contact with each other for the next 40 years, at which point they found each other on Facebook, and met to reminiscence their childhood and talk about grandkids.

They quickly started talking about their retirement and the amount of money they had each had at the time of their retirement. John, who always saved the extra money he earned from jobs at college and his first job after college, started investing $2000/year in dividend stocks starting at the age of 18 and kept saving and investing the same amount until he was 28. At that point he had so many expenses in order to pay for the needs of his growing family that he couldn’t save anymore. Despite the fact that John couldn’t contribute any more to fund his retirement, he was very good at picking solid dividend growth stocks, and was able to generate annual returns of 10% for the next four decades.

Erica on the other hand had decided that she didn’t want to work in college since she wanted to concentrate on her studies while also enjoying the whole college experience. She then decided to go ahead and get a masters degree after which she was able to get a very good job with one of the largest companies in the USA. She did accumulate a large amount of student debt in the process, which she diligently paid off in a record time after she got her first job. After learning about the importance of saving for your own retirement, she started investing $2000/year in dividend stocks, and was able to also generate 10% in annual returns.

We then fast forward to the age of 65. At age of 65, John's net worth is 1,192,257.81. Erica's networth is $728,086.87 at the age of 65. 

Despite the fact that John had invested only $20,000 in total, versus $76,000 that Erica had invested, he was able to achieve a higher amount of wealth because he had taken a full advantage of the power of compounding by investing his hard earned money as early as his freshman year in college. Even though Erica contributed money for over 37 years her nest egg was $400,000 lower than John’s, because she had ten years less to utilize the power of compounding. You could also access the spreadsheet from here. 

The most important point from this exercise is: start investing for your retirement as early as possible! Ask your kids to invest their first paychecks from high school jobs. And most importantly, let the money compound uninterruptedly for as long as possible. And if you want to take full advantage of compounding, Turbo Charge Your Portfolio With Reinvested Dividends.

Relevant Articles:

- Determining Withdrawal Rates Using Historical Data

- Why do I like Dividend Aristocrats?

- The case for dividend investing in retirement

- When to sell your dividend stocks?

Health Savings Account (HSA) for Dividend Investors

A Health Savings Account is a tax-advantaged medical account which is available to individuals in the US who have enrolled into a high-deductible health plan (HDHP). For 2023, individuals cannot contribute more than $3,850/year, while families cannot put more than $7,750. There is a catch-up contribution of $1,000 for those 55 or older. Individuals who are enrolled in Medicare are not eligible to open an HSA. 

I first signed up for a Health Savings Account (HSA) with my employer almost a decade ago. I signed up for the HSA mainly as another way to defer money for future investment. As most of you know, I am already maxing out other tax-deferred accounts in an effort to cut one of my largest expenses.

Benefits

An HSA offers a triple tax advantage in most states. The contributions are before tax, which means that the account holder does not pay Federal, State and FICA taxes. If you were in the 24% marginal tax bracket, had a 5% state income tax rate, and you didn’t pay 7.65% for FICA, you will end up saving 36.65% merely by contributing to an HSA account. On $3,850, this comes out to $1,411.02 in tax savings right off the bat. The money can be used for qualified medical expenses at any age, without having to pay any taxes on such withdrawals. However, support documentation should be retained in case of an audit. Withdrawals not for qualified medical expenses are subject to a 20% penalty and income tax. After age of 65, withdrawals are not subject to a 20% penalty. While they continue to be tax-free for medical expenses, they are taxed at your ordinary income rate for any other type of distribution from the account.

I was attracted to HSA’s because of the large up-front tax deduction. When I contribute money to a tax-deferred vehicle, I have more money under my control, since I reduce the largest expense in my household budget ( taxes). I have done a similar thing by maxing out 401 (k) and Sep IRA contributions since early 2013. 

I was also attracted by the fact that money put in an HSA account compounds tax-free. In addition, unlike a Flexible Spending Account (FSA), the money does not have to be used by a certain date. Hence with an HSA the money carries over from one year to the next, and thus stays in the account and could potentially compound over time.

The other nice thing about HSA accounts is that they are portable. I can move balances to another plan, even if I am still employed and using my employer's HSA plan. In other words, I am not stuck with an HSA plan that may have high fees. I can either do an HSA Transfer or an HSA Rollover. 

An HSA Transfer involves filling up a form, and having the current HSA Custodian send the money to another HSA Custodian. Usually there is a small fee involved.

An HSA Rollover involves filling up a form, obtaining a check from the current Custodian and then depositing the money into the new HSA Account. While this avoids fees, you have to be careful to rollover the money within 60 days, or else face penalties and fees by the IRS. You can only do one HSA rollover within a 12 month period.

Drawbacks

One of the major drawbacks to HSA accounts is the large monthly fees with many providers. When I reviewed different providers in 2014 - 2015, it looked like a minimum account balance that is anywhere between $3,000 - $5,000 has to be maintained in cash, in order to avoid a monthly charge in the range of $2 - $5/month. 

Many employers tend to cover this amount for their employees, so this is a benefit. However, there are additional fees on each withdrawal, ordering checks to pay for items, opening fees, account closing fees etc. Plus, there are monthly fees if you plan to invest that HSA money into something. This is in addition to the fees for failing to maintain a minimum balance in the account. In addition, most of the investment options are limited to mutual funds, some of which have really high expense ratios that come close to 1%/year.

The one positive thing however is that a person is not stuck with an HSA provider, if their employer offers a high-fee HSA provider. One can simply rollover the funds from their original HSA administrator, to the HSA administrator of their choice. This is one thing I did a few years ago. I moved my HSA money to LivelyMe, which is a no-cost HSA alternative. 

The other drawback is the low limits on how much one can potentially defer. If limits for individuals are increased to at least match those on IRA or Roth IRA accounts, this would be a good start.

Best Providers

I looked at different providers, and looked at their costs to have an account, and availability of investment options. In my research, I give extra points for companies that are not going to charge me $4- $5/month on a $3,000 - $6,000 balance that takes 1 – 2 years to build up, or at least will not charge me monthly fees after my total balances exceed a reasonable amount of dollars. I am talking about eliminating as much in monthly or annual fees are possible, since some administrators tend to charge you an HSA Bank fee if you have less than $3,000 - $5,000 in a bank, in addition to charging you a monthly brokerage fee. I also wanted to find the broker that would allow me as much flexibility as possible in choosing investments that do not cost me a lot. 

When I originally wrote this article in 2015, there were not a lot of good options out there. At the end of 2021 however, there are two great options.

The first one is with Fidelity. Up until a few years ago, it was impossible to open an account with Fidelity. But now, it is relatively easy and anyone can open one to move money to a Fidelity HSA.

It offers No-Fee-HSA's, which means that you have a maximum amount of money working for you. There are no account service charges, minimum fees, or fees to invest your money. You can pretty much invest the money in anything you want from individual stocks, to ETFs or mutual funds. Plus, this is with Fidelity, which is an investing brokerage powerhouse.

The second one was with Lively up to 2023. It had no fees for HSA accounts, and also offered free investing options. There were no hidden charges. You could invest the money through TD Ameritrade. My only downside for Lively was that it is a relatively new player, so it may not be around for a long time if it gets acquired or goes out of business. 

One recent change with Lively is that their investment option is moving from TD Ameritrade to Charles Schwab. That's because Schwab has acquired TD Ameritrade. Unfortunately, that means there will be an annual fee of $24, unless the account holder holds $3,000 in cash in their Lively Account. At a 4% interest rate, that's an opportunity cost of $120/year to save on $24 in fees.

I have used both Fidelity and Lively, and really like the ease of opening and funding accounts. You can do pretty much everything electronically. You do need to fax information if moving assets, but that is similar to moving assets from one broker to the next. 

The thing to consider of course is that fees can change if minimum balances are changed as well. Plus, there might be fees assessed if you transfer money from one custodian to the next.

I have contributed to a Health Savings Account since 2015, and have enjoyed the process of accumulating funds there and investing them. One thing to note is that all of my employers that have offered an HSA have also matched a certain portion of contributions. This is similar to a 401 (k) match, but only for HSA's. In a way, it is another account to use to accumulate a nest egg in a tax efficient way.

Health Savings Accounts make perfect sense for those like me who are looking for another vehicle where they get a tax deduction upfront today, and receiving a tax-advantaged growth of their investments. The real nice part is that after age of 65 I can withdraw the money for whatever reasons I desire, and will not have to pay any penalties (if the money is spent on non-medical expenses, it is taxed at ordinary income tax rates). I have decided that even if I have to end up with an index fund in that Health Savings Account, I would be better off than picking individual dividend stocks in a taxable account. Let me walk you through a hypothetical (made-up) calculation.

I calculated that if I choose to invest $1,000 in an HSA that generates a net annual total return of 7%/year, I would end up with $5,807 in 26 years. This return assumes that no taxes are taken and also assumes fees paid are subtracted from returns ( meaning the gross return is slightly higher). However, if I were to earn those $1,000 from my day job but decided not to put them in an HSA, I would be left with $623.50. This is because I would be paying 24% Federal Tax, 5% State Tax, 1% City Tax and 7.65% FICA. If I managed to earn an after-tax annual total return of 9%/year for 26 years in a row, my account balance will be $5860. The break-even point will be 26 years. Of course I am not comparing apples to apples here, because an after-tax return of 9% in a taxable account usually requires a return above 10% even at today’s low rates on dividends and capital gains.

Conclusion

To summarize, I believe that HSA accounts provide several benefits to investors who want to build retirement savings, and have exhausted common vehicles such as 401 (k) or IRA's. 

The first advantage of HSA's is triple tax advantage, because of the deduction for Federal, State and FICA taxes. This leaves more money working for the investor. 

The second advantage is tax-deferred growth of that capital for decades. 

The third advantage is that this money can be withdrawn at any time, penalty free if it is for qualified medical expenses. It can also be withdrawn penalty free after the age of 65.  

The money is taxed after the age of 65 if used for non-medical purposes at the ordinary income tax rates. 

The drawbacks behind HSA's include fees, low variety of investment options and the fact that annual contribution limits are low. Of course, for those of us who understand the power of compounding, we know that even a small contribution of $3,000/year over a period of a couple decades could turn into a few nice supplement to the retirement nest egg.

Relevant Articles:

- Why I Considered Tax-Advantaged Accounts for My Dividend Investments
- Roth IRA’s for Dividend Investors
- Six Dividend Paying Stocks I Purchased for my IRA
- Twenty Dividend Stocks I Recently Purchased for my 401 (k) Rollover
- Nine Quality Dividend Stocks Purchased for the Roth IRA

Carlisle Companies (CSL) Dividend Stock Analysis

Carlisle Companies Incorporated (CSL) operates as a diversified manufacturer of engineered products in the United States, Europe, Asia, Canada, Mexico, the Middle East, Africa, and internationally.

The company is a dividend champion, which has increased dividends to shareholders for 46 years in a row.  Over the past decade the company has managed to grow dividends at an annualized rate of 13%/year.

 

The last dividend increase was in August 2022, when the Board of Directors approved a 38.90% hike in the quarterly distributions to 75 cents/share.

Chris Koch, Chair, President and Chief Executive Officer, said “As part of our legacy of being superior capital allocators, we are very pleased to announce a dividend increase for the 46th consecutive year. This 39% increase is our largest in the past 25 years, and reflects our strong, sustainable financial position, and confidence in continued growth of Carlisle’s earnings power. Our commitment to returning capital to shareholders is made possible by the support of Carlisle’s dedicated employees, who embrace our culture of continuous improvement and maintain a steadfast commitment to creating value for all stakeholders.”

The company has managed to boost earnings from $3.57/share in 2012 to $17.58/share in 2022. The company is expected to earn $18.05/share in 2023. We have to take forward guidance with a grain of salt, given the state of affairs in the world economy today.

 

Their Vision 2025 strategy is an interesting program. In Vision 2025, the company targets doubling annual revenues to $8 billion, expanding operating margins to 20%, and generating 15% ROIC. This would be achieved through 5% organic growth, and reducing costs by 1% - 2% of sales, by using efficiencies. The company is also working to make acquisitions and review existing divisions for further optimization. Carlisle expected to invest in M&A through 2025. The company is working to develop its employees as well, and spend money on capital expenditures, share buybacks and dividends to reward long-term shareholders.  Carlisle Companies is trying to reach $15/share by 2025. They expect revenues of 8 billion by 2025.

I like these slides on the Vision 2025 strategy:

https://s22.q4cdn.com/386734942/files/doc_presentations/2020/Vision-2025-CSL-Investor-Presentation_Updated-Feb7.pdf

Also check out the Vision 2025 Website

The company operates in these major segments: 

Construction materials accounted for 80% of 2021 revenues. Manufactures EPDM, TPO, and PVC roofing systems, as well as energy-efficient rigid foam insulations panels, spray polyurethane foam, and metal roofing products. Key end markets served include US and EU Non-residential and Building Envelope.

The risk factor is that a slowdown in construction amidst rising interest rates could slow down growth, leading to a decrease in profits. The impact of a slowing construction may not be seen for a few quarters to an year.

Interconnect Technologies accounted for 14% of revenues. Designs and manufactures high-performance wire, cable, connectors, contacts, and cable assemblies for transfer of power and data. Key markets served include Commercial Aerospace, Medical Technologies and General Industrial.

Fluid Technologies accounted 5% of revenues. Manufactures industrial finishing equipment for spraying, pumping, mixing, and curing of protective coatings for industrial applications. Key markets served include Transportation, General Industrial and Automotive.

The company has been active on the share repurchase front over the past 7 years. Prior to that, shares increased, due to acquisitions.

 

The company’s dividend is well covered from earnings. It has managed a conservative payout ratio that has largely remained below 30%.

 

Right now, the company looks fairly priced at 12 times forward earnings and yields 1.40%.