Wednesday, September 27, 2023

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. The issue of course is that fixed income will mostly keep up with inflation over time. Cash looks safe in the short-term, but it is expensive in the long run. Stocks look risky in the short run, but they are safer in the long run. While a portfolio of bank CD’s will not be quoted every day, providing an illusion that the money is safe, they are mostly keeping up with inflation rates in the long-run, before taxes.

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 at $40/share as opposed to $75/share. If one share a stock is bought 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.. 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

Monday, September 25, 2023

Seven Dividend Growth Stocks Raising Distributions Last Week

I review the list of dividend increases each week, as part of my monitoring process. This exercise helps me monitor existing holdings and potentially identify companies for further research.

Dividend increases offer a good gauge for management's opinion on near terms business conditions and their affect on company cashflows. As a result, dividend increases can provide a good overview of management's assessment of the business environment. Changes in the pace in dividend increases could provide valuable insight about the business, in conjunction with other factors at play, that could potentially provide investors with a slight edge.

I identified seven companies that increased dividends last week. All of these companies have managed to increase dividends for at least a decade. My short review of each company is listed below:


American Tower (AMT) one of the largest global REITs, is a leading independent owner, operator and developer of multitenant communications real estate with a portfolio of nearly 226,000 communications sites and a highly interconnected footprint of U.S. data center facilities.

American Tower raised its quarterly dividend by 3.20% to $1.62/share. This is a 10.20% increase over the dividend paid during the same time last year. This is the 11th year of consecutive annual dividend increases for this dividend achiever. Over the past decade, it has managed to grow dividends at an annualized rate of 20.30%.

The REIT grew FFO/share from $3.01 in 2012 to $11.41 in 2022. It expects to generate $9.74/share in FFO in 2023.

The REIT sells for 17.40 times forward FFO and yields 3.89%.


Fortis Inc. (FTS) operates as an electric and gas utility company in Canada, the United States, and the Caribbean countries.

Fortis hiked quarterly dividends by 4.40% to CAD $0.59/share. This marked the 50th year of consecutive annual dividend increases for this newly minted Canadian dividend king. Over the past decade, Fortis has managed to grow dividends at an annualized rate of 6.27%.

"Our Board of Directors declared a fourth quarter dividend representing a 4.4% increase that will mark 50 years of consecutive increases in dividends paid," said David Hutchens, President and CEO, Fortis Inc. "This makes Fortis one of only two companies listed on the Toronto Stock Exchange to reach this significant milestone."

"Our sustainable regulated growth strategy is focused on delivering cleaner energy that remains affordable and reliable for our customers while supporting annual dividend growth of 4-6% through 2028,” said Mr. Hutchens.

Between 2013 and 2022, the company managed to grow earnings from $1.74/share to $2.78/share. Fortis is expected to earn $3.05/share. I wanted to state that all numbers listed here for Fortis are in Canadian Dollars.

The stock sells for 17.84 times forward earnings and yields 4.35%.


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

Microsoft boosted quarterly dividends by 10.30% to $0.75/share. This is the 19th year of consecutive annual dividend increases for this dividend achiever. Over the past decade, it has managed to grow dividends at an annualized rate of 11.80%.

Microsoft grew earnings from $2.66/share in 2014 to $9.72/share in 2023.

The company is expected to earn $11/share in 2023.

The stock sells for 29 times forward earnings and yields 0.94%.


Norwood Financial Corp. (NWFL) operates as the bank holding company for Wayne Bank that provides various banking products and services.

The company increased quarterly dividends by 3.60% to $0.29/share. This is the 2th year of consecutive annual dividend increases for this dividend champion. Over the past decade, it has managed to grow dividends at an annualized rate of 4.40%.

Mr. Donnelly commented, “The Board is extremely pleased to provide our shareholders with this quarterly dividend. It reflects the Company’s financial strength and strong capital position which has contributed to our solid performance.”

Between 2013 and 2022, the company managed to grow earnings from $1.56/share to $3.59/share.

The company is expected to earn $3.38/share in 2023.

The stock sells for 7.95 times forward earnings and yields 4.42%. 


Shoe Carnival, Inc. (SCVL) operates as a family footwear retailer in the United States.

The company hiked quarterly dividends by 20% to $0.12/share. This marked the 11th year of annual dividend increases for this dividend achiever. Over the past decade, the company managed to grow dividends at an annualized rate of 18.90%.

“This marks our 46th consecutive quarterly dividend. With continued strong cash flow generation and no long-term debt, the Board’s decision to significantly increase the quarterly dividend demonstrates our confidence in driving continued shareholder returns, while also investing to grow the business,” commented Mark Worden, Shoe Carnival’s President and Chief Executive Officer.

Between 2014 and 2023 the company managed to grow earnings from $0.66/share to $4/share.

The company is expected to generate $3.09/share in 2023.

The stock sells for 7.26 times forward earnings and yields 2.10%.


Starbucks Corporation (SBUX) operates as a roaster, marketer, and retailer of specialty coffee worldwide. The company operates through three segments: North America, International, and Channel Development. 

The company raised quarterly dividends by 7.50% to $0.57/share. This dividend achiever has increased dividends for 13 years in a row. Over the past decade, it has managed to grow dividends at an annualized rate of 18.70%.

Starbucks has managed to grow earnings per share from $1.01 in 2013 to $2.85/share in 2022.

The company is expected to earn $3.45/share in 2023.

The stock sells for 26.95 times forward earnings and yields 2.43%.


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

The company raised quarterly dividends by 4.80% to $1.30/share. This marks 20 consecutive years of dividend increases for this dividend achiever. Over the past decade, it has managed to grow dividends at an annualized rate of 20.30%.

The increase is consistent with TI's long-term objective for dividends by providing a sustainable and growing dividend and reflects the company's continued commitment to return all free cash flow to its owners over time.

Between 2013 and 2022, the company increased earnings from $1.94/share to $9.51/share.

The company is expected to earn $7.44/share in 2023.

The stock sells for 21.56 times forward earnings and yields 3.25%.


Relevant Articles:

- Three Dividend Growth Stocks Rewarding Shareholders With Raises

- Eight Dividend Growth Companies Increasing Dividends Last Week

- Three Dividend Growth Companies Increasing Dividends Last Week

- Seven Dividend Growth Stocks Rewarding Shareholders With Raises

Monday, September 18, 2023

Three Dividend Growth Stocks Rewarding Shareholders With Raises

I review the list of dividend increases every week, as part of my monitoring process. This exercise helps me to monitor developments in existing holdings. It also helps me to potentially identify companies for further research.

I usually focus on companies with a ten year streak of annual dividend increases, in an effort to weed out cyclical companies. It is not a small feat to raise dividends through a full economic cycle. Meeting this screen increases the chances of identifying quality companies for further research.

Of course, this is just a screen. I look at several data points in order to determine if a company should be put on the list for further research, or discarded. 

I look at growth in earnings per share over the past decade, because earnings per share are the fuel behind future dividend increases. 

I also look at the most recent dividend increase, and compare it to the 5 and 10 year averages.

Then I also review trends in dividend payout ratios. That's because I do not want dividend growth that happens solely from expansion in the payout ratio.

If a business is fundamentally sound, I would put it on my list for further research.

Last but not least, I also look at valuation. If a business is overvalued, I would determine a price that I would consider it and wait. If a business is fairly valued, I would research it first (assuming I haven't done that before".

Over the past week, there were three companies that raised dividends. These companies have also increased dividends for at least ten years in a row. The companies include:


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 boosted its quarterly dividend by 2.40% to $1.30/share. This is the 15th consecutive annual dividend increase for this dividend achiever. The company has managed to grow dividends at an annualized rate of 4.70%/year over the past decade.

The company is expected to earn $6.25/share in 2023. Earnings per share went from $5.26 in 2013 to $5.82 in 2022.

The stock sells for 15.34 times forward earnings and yields 5.50%.

You can view PMI's dividend history since 2008 below:



Realty Income (O) is a real estate investment trust ("REIT") with over 13,100 real estate properties primarily owned under long-term net lease agreements with commercial clients. 

The company increased monthly dividends to $0.256/share. This was a 0.20% increase over the previous quarter and 3.22% increase over the distribution paid during the same time in the previous year. Over the past decade, the company has managed to grow dividends at an annualized rate of 5.30%.

This dividend aristocrat has increased annual dividends since 1994.

Realty Income has managed to grow FFO/share from $2.41 in 2013 to $4.04 in 2022. Realty Income is expected to grow FFO/share to $4.12 in 2023.

The stock sells for 13.12 times forward FFO and yields 5.60%.

You can view Realty Income's dividend history from 1994 below:



Fifth Third Bancorp (FITB) operates as a diversified financial services company in the United States. It operates through three segments: Commercial Banking, Consumer and Small Business Banking, and Wealth and Asset Management. 

The company raised its quarterly dividends by 6.10% to $0.35/share. This is the 13th consecutive annual dividend increase for this dividend achiever. The company has managed to grow dividends at an annualized rate of 13.10% over the past decade. Unfortunately, the dividend is still below its peak 2007 levels.

Between 2013 and 2022, the company managed to grow earnings per share from $2.05 to $3.38.

The company is expected to earn $3.30/share in 2023.

The stock sells for 8.30 times forward earnings and yields 5.10%.

Relevant Articles:

- Three Dividend Growth Companies Increasing Dividends Last Week




Thursday, September 14, 2023

Valuation

My investment philosophy is centered around buying quality dividend growth companies at an attractive valuation. I have discussed the importance of having a disciplined approach when it comes to prudent investing and avoiding overpaying for a stock. 

Just like everything else however, valuation could turn out to be in the eyes of the beholder.

I was thinking about valuation, and its components "growth" and "value", as I was compiling the returns of the Dividend Aristocrats from 2013. I looked at the ratios, and compared total returns through 2023 July 31.




Valuation is a double edged sword.


On one hand, if you overpay for a stock, you may end up losing money or not making much money.

On the other hand, if you're too conservative on your valuation assessment and don't invest, you may end up missing out on a lifechanging investment.


A stock may appear to be cheap, but in reality it could turn out to be a value trap as well. A primer example of that is AT&T over the past decade.

In my experience, I invested in Visa in 2011 when the stock was selling around 20 times earnings and had a dividend yield of about 0.70%. The stock seemed expensive at the time. Today it is up from $22 to $248/share and the dividend is at $1.80/share for an yield on cost of about 8%. In hindsight it seems cheap. If someone didn't invest in it because the yield was too low, they would have missed out on an incredible compounding.

Another company that seemed cheaper was Con Edison. Stock sold at 16 times earnings and had a dividend yield of 4.10%. Stock seemed fairly valued at the time. Today, it is up from $59 to $90/share and the dividend is up to $3.24/share for an yield on cost of 5.50%.. In hindsight it does not seem as cheap, as its share price and dividend has barely kept up with inflation.

This discussion is more of a reminder that investing is part art, part science. It is not a scientific exercise like physics, that has known laws which can be applied at all times with the same result. There is always an unknown factor after all.

This is also a reminder to be flexible in ones approach, without being too lenient however. Valuation is taking into consideration both “value” and ‘growth” schools of thought, without looking at things in isolation. Per Warren Buffett, the two approaches are joined at the hip: Growth is always a component in the calculation of value, constituting a variable whose importance can range from negligible to enormous and whose impact can be negative as well as positive.

It’s definitely helpful to think through trade-offs, and opportunity sets, rather than thinking in definitive terms such as good and bad, black and white. It's more of a gray.

When it comes to valuation, it is important to understand what drives future returns in a company.

In general, returns comprised of dividends and capital gains.  The fundamental returns of a company are dependent on dividends and earnings growth. The speculative component is dependent on changes in the valuation multiple. 

The US stock market has generated annualized returns of about 10%/year since 1926. This was driven by the 4% average annual dividend yield and the 6% growth in earnings per share. Any changes in the valuation multiple have had a very small impact over the past 97 years or so. 

Changes in valuation multiples do not matter as much over really long periods of time. They do matter over shorter periods of time however, such as 10 or 20 years. This could be a long period of time for the average investor, who probably invests for the next 30 – 40 years.

I use this model in my investments as well.

In an ideal world, a company would grow earnings per share, grow dividends and increase intrinsic value at a decent pace over the course of time.  Intrinsic value is the value of a business that could be attained by selling to another knowledgeable buyer. Think of a restaurant owner selling their business to another person. In an arms length transaction they are unlikely to just sell their blood, sweat and tears at a ridiculously low price, in relation to value. A reasonable buyer is also unlikely to massively overpay in an arms length transaction. That does happen in the stock market however.

In the real world, things are messier. For example, even if earnings per share and dividends per share increase at the same pace over a long period of time, the share price may not do so. That’s because share prices fluctuate much more than fundamentals, as observed by dividends and earnings per share.

As a result, share prices routinely may go above or below intrinsic value. This creates opportunities to buy shares of a good company at a discount. However, there are a lot of companies available at a discount or premiums to choose from. We need to compare not only one investment on its own merits, but also in relation to other investments. That’s our opportunity cost.

This works for comparing two companies. But in the real world, we also compare to other alternatives, such as investing in fixed income like US Treasury Bonds for example. Let’s simplify and just look at how I would compare two companies.

For example, a company that earns $4/share that never grows and pays $3/share in dividends may look cheap at $40/share. This company sells at 10 times earnings and yields 7.50%.

Another company that earns $4/share, grows at 10%/year and pays $2/share in dividends may look expensive at $80/share. This company sells at 20 times earnings and yields 2.50%.

Many retired investors may focus on chasing the high current yield of investment A, and ignore the smaller but growing dividend in company B. In my opinion, they should think about expected returns. They should also think about future yields on cost.

The expected returns on company A are 7.50%, assuming the earnings multiple stays constant. If you bought that stock and spent the dividends, after 30 years you would still be earning only 7.50% yield on the original cost. Chances are that those dividends would have a lower purchasing power due to inflation as well.

The expected returns on company B are 12.50%, assuming the earnings multiple stays constant. If you bought the stock and spent the dividends, after 30 years you would be sitting on an yield on cost of over 43%.  Of course, just like chasing yield is bad, so is chasing growth. Trees don't grow to the sky.

This exercise assumes that a high yielding company that never grows would be able to maintain that high payout ratio and that its business would go on without any changes for 30 years. That is a wild cart that may or may not turn out to be true. In reality, some companies with high payout ratios may end up cutting dividends if earnings per share hit a temporary slide. If the business starts descending into a permanent decline, those dividends may end up on the chopping block. We need to consider those trade-offs in the opportunity set.

This exercise also assumes that company B would have a high earnings growth for a very long period of time. That’s probable for a company with a strong moat, a competitive advantage of sorts, which has the pricing power and/or riding a long secular tailwind in demand to be able to grow earnings over a period of 30 years. Growth is never a given. If the business is unable to grow those earnings, valuation multiples would shrink. We need to consider those trade-offs in the opportunity set.


Of course, the same exercise will have different conclusions if valuations changed. 

If company A above sold at the same multiple, but turned out they can grow at 2.50%/year, the expected returns goes up to 10%/year.

If company B above sold at a multiple of 40, and growth stayed at 10%/year, the expected returns go down. The yield would be 1.25% + growth of 10% would result in expected returns of 11.25%. 


The same exercise will be even more fun as valuation multiples change

For example, if company A starts growing at 5%/year, then it may get re-rated from a P/E of 10 to a P/E of 15. That’s because it went from a period of low expectations to a period of unexpected good news. Investors who locked in an initial yield of 7.50% would also see some decent dividend growth and doubling of yield on cost in about 14 years. They achieve a high return because expected returns went from 7.50% to a higher amount. With a low P/E company however, the risk is that earnings are in a slow gradual decline. If they unexpectedly grow, that may be a good situation for the investor. 

If company B however sees growth decelerating from 10%/year to 5%/year, then it may get re-rated from a P/E of 20 to a P/E of 10. That’s because it went from high expectations to lower expectations. Due to this re-rating of the stock, investors may sit for 14 years and see limited growth in the share price, even if earnings double over that time period. That’s because reality was worse than expected. Only return would be from the share price. The expected returns dropped from 12.50% to a lower amount. 

That’s always one risk I think about with growthier dividend stocks – 1. That growth would decelerate 2 . That the P/E multiple may shrink as a result.

These scenarios were mostly a discussion of how I think about expected returns. They were discussions about how to calculate expected returns. They were also a discussion of the trade-offs involved and the possibility of potential outcomes that differ from expectations. It’s important to think about the risks and opportunities present, when making an investment. That can help position ourselves to better prepared to minimize the impact of any negative items thrown our way, while providing us with the opportunity to reap maximum rewards when the winds go our way.

After going through this exercise, along with my experience investing for the past few years, I’ve come to the conclusion that missing out on a potential big investment is a bigger sin than buying a bad investment. This of course assumes a diversified portfolio. 

That’s because if you invest in a company, the most you can lose is the amount put to work there, minus any dividends received (unless reinvested through DRIP). But the amount that can be made is virtually unlimited. In other words, a potential great investment can pay for a few stinkers along the way, which the portfolio is guaranteed to have along the way. 

In addition, it is hard to determine in advance, the conviction behind each investment. Hence, it may make sense to buy a diverse basket of quality companies, over time, with strong fundamentals, and then hold them. While it seems “irresponsible” to ignore valuation, in reality, it is hard to determine in advance if a stock is cheap or expensive. That’s because while we may know the P/E and dividend yield, we do not really know what the future EPS and DPS growth is going to be. At least that’s my conclusion from observing the aristocrats.

In practical terms, I view this as investing equally, in a group of companies that have qualitative characteristics (dividend growth companies). Then in the spirit of Coffee Can Portfolios, let the portfolio concentrate on its own, and rarely sell. It may be hard to try to avoid value traps (low P/E, low growth companies), and growth traps (high P/E, high expected growth). But that would be the cost of admission to end up with the quality dividend growth companies that grow earnings and dividends and intrinsic values for decades, building immense wealth in the process. That would more than compensate for any losers.

Going back to the main point of this article, valuation is a double edged sword.

If you overpay for a stock on one hand, you may end up losing money or not making much money.

If you're too conservative on your valuation assessment and don't invest on the other hand, you may end up missing out on a lifechanging investment.

A stock may appear to be cheap as well, but in reality it could turn out to be a value trap as well.

While it is not easy to "value", you still need to take into consideration yield, growth, P/E ratios in order to make an educated guesstimate.  You also need to be cognizant of trade-offs, and put yourself in the best position to benefit from any wealth creations from companies you invest in, while also minimizing losses as much as possible.


Relevant Articles:

- How to value dividend stocks







Sunday, September 10, 2023

Three Dividend Growth Companies Increasing Dividends Last Week

I review the list of dividend increases as part of my monitoring process. This exercise helps me monitor existing holdings and uncover candidates for further research. Monitoring dividend increases is one of the inputs I use to evaluate companies.


Brady Corporation  (BRC) manufactures and supplies identification solutions (IDS) and workplace safety (WPS) products to identify and protect premises, products, and people in the United States and internationally. It operates through two segments, IDS and WPS. 

The company increased quarterly dividends by 2.20% to $0.235/share. This was the 38th consecutive annual increase in dividends for this dividend champion.

Brady Corporation lost $0.89/share in 2014, but then managed to grow out of the whole to $3.51/share in 2023.

The company is expected to earn $4.06/share in 2023.

The stock sells for 13.60 times forward earnings and yields 1.71%.

New Jersey Resources Corporation (NJR) provides regulated gas distribution, and retail and wholesale energy services. The company operates through four segments: Natural Gas Distribution, Clean Energy Ventures, Energy Services, and Storage and Transportation. 

The company raised its quarterly dividend by 7.70% to $0.42/share. This is the 28th consecutive year of annual dividend increases for this dividend champion.

Between 2013 and 2022, the company managed to grow earnings from $1.38/share to $2.86/share.

The company is expected to earn $2.69/share in 2023.

The stock sells for 15.70 times forward earnings and yields 3.70%.

Verizon Communications Inc. (VZ) provides communications, technology, information, and entertainment products and services to consumers, businesses, and governmental entities worldwide. It operates in two segments, Verizon Consumer Group (Consumer) and Verizon Business Group (Business).

The company raised quarterly dividends by 1.90% to $0.665/share. This is the 17th consecutive year Verizon’s Board has approved a quarterly dividend increase. The company is a dividend achiever.

Verizon managed to grow earnings per share from $4.01/share to $5.06/share between 2013 and 2022

The company is expected to earn $4.72/share in 2023.

The stock sells for 7.16 times forward earnings and yields 7.72%.


Relevant Articles:

- Nine Dividend Growth Stocks Rewarding Shareholders With Raises Last Week




Wednesday, September 6, 2023

Should I sell or should I hold

There comes a time in the life of every investor, where one of their holdings experiences troubles of some sort. It doesn’t matter how much research you did upfront, you will have those.

I’ve had those too. 

Typically a company would have missed earnings, and the share price would go down or stay flat for extended period of time. Some shorter-term investors would panic, and start abandoning the ship. The sentiment turns sour, and more people start abandoning the company. Just mentioning the name makes people uncomfortable, let alone have them admit they have ever owned it.

I’ve had those too.  In fact, I probably have a few of them right now.

I have learned that I do not know in advance if a company’s troubles are temporary or the beginning of the end. Few can tell really.

I do know however that I should hold tight for as long as possible, for as long as the reason I bought still holds on.

I buy companies with a long streak of annual dividend increases. When I buy a company, I believe it to be a quality company selling at what I believe to be fair valuations. For as long as that company can at least maintain dividends, I would hold on to it. I would likely not add to it if fundamentals do not meet my entry criteria, but I would hold on to it.

As someone who has spent a lot of time reviewing dividend histories for a lot of companies (dead or alive), I can tell you that dividend growth does change from year to year and from cycle to cycle for different companies. It is rare to see a company grow at the same rate of dividend growth all the time. In reality, dividend growth goes up, then goes down, and may even turn flat as companies experience short-term turbulences. The best businesses adapt, and thrive. They take punches, consolidate, but then get back on their feet. They only tend to cut dividends when something is irreparably damaged. This typically tells you that the business environment or the product or the company no longer rides the same tailwind that produced the historical record of success. This means this change has caused this business to be outside my circle of competence in defiance of my original expectations, so it’s time for me to move on to some other long-term trend that can build wealth. 

I would sell in an instant however one second after the company cuts or suspends its dividend.

I would be very patient in holding through the ups and downs, and give the company as much time as it needs to turn the ship around. Even if it takes 5 or 10 years. I invest for the next 20 – 30  years or longer, so I can afford to hold for as long as they don’t cut the dividend. Many would have opinions, and have fear or greed, but I would be able to hold on and sit tight, for as long as I am getting paid to hold and that amount is not cut. If that dividend is cut however, then my original reason for owning the stock (enjoying a stable and growing dividend income) is not longer valid. That’s a fact that causes me to sell.

I follow a fact based approach to investing. I do not care about hopes and dreams and opinions, but facts. A dividend cut is a fact, so I sell. If the dividend is unchanged, then that’s a fact that causes me to hold. 

Management teams in the US are reluctant to cut dividends, because they view it as a failure. They are right, it is a failure. 

I do not want to sell a stock willy-nilly, just because there is some pressure. There is a trade-off of course. The issues companies face could either be temporary, in which case selling would have been a mistake. OR The issues companies face could be permanent, in which case selling is the best decision. But if you have to choose between worrying that you sold a value trap at $10 or $5, it doesn’t really matter in my opinion. It matters to keep amount at risk limited, and try to own companies that may grow EPS/DPS and intrinsic value.

If that pressure turns out to be right, and I sold “early”, I will have retained a higher amount of money to redeploy elsewhere. At least in theory. Otherwise, the theory says, by the time the dividend is cut and I sell, it would be too late. (They are probably right, but I also know that I won’t be right 100% of the time and I do not need to predict every twist and turn in a company share price. I buy companies with the expectation that they do well over time. If I am wrong, I cut my losses and get out when dividends are cut. I also keep amount invested per stock limited, so as to protect my capital when bad things happen to (good people -me ))

If that pressure turns out to be wrong however, and I sold “early”, I would have wasted a high amount of money by selling low and missing out on all upside. At least in theory. The theory says that if I try to predict a dividend cut that never comes (meaning I am wrong), I would be selling low and it would be too early. It could be even worse if I end up missing out on all the future prosperity and also ended up replacing a perfectly good company with something that turns out to be a value trap on its own. Compounding mistakes is never fun.


I know that this is getting to be a little bit of a rambling post, so let me provide some examples from my own experience.

Back in 2014 – 2017 we had McDonald’s (MCD) share price go nowhere for a few years. Earnings had started to stagnate, and people started to create all sorts of narratives about things. A lot of folks sold their stock. The company then simply managed to try and right the ship, and has managed to double earnings per share in the past 6 years. The stock has rebounded and dividends per share are rising as well.

In this case, holding on seems like a good idea. I’d tell you however that a lot of folks disagreed with me and argued with me against me holding. Urging me to sell. The issue is if I sold, I would have likely bought another company that may have done worse than McDonald’s. So I would have had a double loss of missing out on McDonald’s prosperity and ending up with a value trap.

This is not the first time McDonald's investors had their patience tested out. Back in the early 2000s, the company had experienced some growing pains, it had overexpanded and level of service had been declining. We also had an increased attention to the fact its food is not very healthy (remember "Supersize Me"). That being said, for the investor who held on, they did well. Of course, if they hadn't turned the operations around, and had cut dividends, the picture would have been much different.

Perhaps it’s still early to tell, but I am also holding on to Cardinal Health (CAH), a position I initiated about 5 years ago. The investment had been dead money for quite some time, and has generated abysmal annualized dividend growth over that time period. However, the share price has almost doubled, so perhaps the market is foolishly or smartly predicting that things are about to turn around. Perhaps EPS growth and dividend growth would return? That being said, the company is on track to earn $6.67/share in 2023, versus $3.42/share in 2014 and $4.54 in 2019.

I experienced a few years of slow dividend growth with the types of oil majors such as Exxon-Mobil over the past decade, particularly since 2019. Remember when oil prices turned negative in 2020, amidst the glut around the time after Covid hit? Several companies like Shell or BP cut dividends. Share prices were down for every oil major, including Exxon Mobil and Chevron. If someone sold in anticipation of a dividend cut, they would have sold low. Oil prices ultimately recovered, and so did share prices. I do remember sentiment being terrible for the energy sector in 2020. One of risks of selling after a company has not done well, is that you let emotions such as fear drive the actions. As a group, investors tend to feel the worst and most likely to capitulate around the time of a major bottom. We want to avoid that. However, we also want to avoid hoping for a turnaround that never happens, tying up precious capital in the process. This is where having an objective signal can be helpful in knowing what to do. That signal for me is the dividend - if it is held, I will hold on to the company. If it is cut, I will sell and re-evaluate. If it is increased again in the future, I would consider initiating a position again.

Two companies I am in the red today include 3M (MMM) and Walgreen’s (WBA). I’ve held those for over 10 – 15 years. When I bought them, they were considered to be quality dividend aristocrats, and they had managed to grow earnings and dividends at a good pace. In fact, they have increased dividends at a decent pace over the past 10 – 15 years.

In the case of Walgreen’s, the company had strong earnings growth and dividend growth prospects around 2010 – 2011 - 2012. Dividends have doubled over the past decade. Earnings per share also almost doubled from $2.69 in 2013 to $5.02 in 2022. It’s expected to earn $4/share in 2023, and pay $1.92/share in dividends. The dividend seems adequately covered from earnings. Dividend growth has come to less than 1% in 2022 and the company has skipped its dividend increase so far in 2023. I understand that things are looking hard, and there are a lot of competitive pressures. I will stick to the stock for the time being, for as long as the dividend is not cut. I viewed Walgreen’s as a growth stock about 10 – 15 years ago. It’s just a good reminder that you should not chase growth, just the same way as you should not chase yield either. Either way, I am sticking to this stock for as long as they don’t cut the dividend. I am not adding to it however. 

In the case of 3M, the company has managed to grow earnings per share at a decent clip between 2013 and 2022 from $6.83 to $10.21. It’s expected to earn $8.87/share in 2023. It pays a $6/share annualized dividend, so the distribution has a high payout ratio of around 67%. It’s manageable, for as long as earnings do not dip further. Any lack of future earnings growth would mean lack of future dividend growth as well. There are some lawsuits around, which are taking managements focus away from running the business in my opinion. Once these are behind us (or if they are behind us), they have the chance to regroup and hopefully get the business back on its feet. Either way, I am sticking to this stock for as long as they don’t cut the dividend. I am not adding to it however.

The annualized dividend growth for 3M has definitely been very slow over the past 4 - 5 years. The company has increased the quarterly dividends by 1 penny/share since 2019. This is not the first time that 3M's annualized dividend growth slowed down. However, that was around the time of the Global Financial crisis, when expectations were low and the issues surrounding that dividend increase were affecting more companies and the whole economy. It's much harder to take the pain when everyone else is doing well.

Another fun company I hold on to is Altria (MO). Back in 2017, the stock was overvalued, selling for roughly 25 - 30 times free cash flows per share. Free Cash Flow per share went from $2.12 in 2013 to $2.45 in 2017 to $5.02 in 2022. Yet, today the stock sells for 8 times Free Cash Flow/share. The stock price is down from a high of $70 - 75/share in 2017 to about $40 - $45/share in 2023. While management did burn billions of dollars on some terrible acquisitions (JUUL and Cannabis), the core business seems to be printing money for the time being.

Of course, tobacco has been a challenging business to hold, if you go by news headlines at least. Back in the late 1990s, tobacco companies almost went under due to heavy litigation. After the Tobacco Master Settlement Agreement, tobacco companies bounced back and kept printing cash to shareholders. There were some challenging times in the late 1990s, but shareholders who persisted despite the negative news headlines did well. There were no dividend cuts from the likes of Altria (then Phillip Morris). Phillip Morris did fail to raise quarterly dividends in 1997, though it did raise them in the third quarter of 1998. However, due to the timing of the increases, annual dividends kept increasing in 1996, 1997 and 1998, thus preserving its status of a dividend aristocrat. Again, nobody knew what would happen with tobacco in 1996 or 1997. But someone who held on for as long as the dividend is not cut would have done fine. If they had cut dividends however, mostly due to unfavorable litigation, that would have likely marked the end of the sector as an investable opportunity. However, someone who sold in fear of failure in 1997, would have likely regretted their behavior, as the company has delivered amazing total returns and dividend growth over the past 25 years.

I summary, when I invest, I try to buy shares in a quality business, at an attractive valuation. That business has a track record of annual dividend increases, which I expect to continue. I will continue holding on to that business, for as long as it does not cut or suspend dividends. 

Ultimately, it is hard to say in advance whether a business is experiencing temporary struggles or whether this business is experiencing an existential crisis all the way down to zero. This is why I keep holding on through the ups and downs, until the dividend is cut.

One of risks of selling after a company has not done well, is that you let emotions such as fear drive the actions. As a group, investors tend to feel the worst and most likely to capitulate around the time of a major bottom. We want to avoid that. However, we also want to avoid hoping for a turnaround that never happens, tying up precious capital in the process.

I also limit the amount of money I will allocate to that business as well, which limits the amount at risk for this particular position. I have a diversified portfolio, which I build over time as well, which serves as protection from the proverbial bad apple. 

Tuesday, September 5, 2023

Buffett's Folly and Opportunity Cost

Opportunity costs represent the potential benefits an individual, investor, or business misses out on when choosing one alternative over another. The idea of opportunity costs is a major concept in economics, as defined by Investopedia.

Opportunity costs can be easily overlooked if one is not careful, since they are not visible by definition. Understanding the potential missed opportunities foregone by choosing one investment over another allows for better decision-making.

Each decision we make as investors, carries an opportunity cost with it.

For example, if I invest in a portfolio of dividend aristocrats, my opportunity cost could be another investment within my opportunity set. For example, if my next door neighbor is Warren Buffett, I may have done better investing in his investment partnership or Berkshire Hathaway.

Even the Oracle of Omaha is subject to the same economic guidelines like us, ordinary investors. Every decision he makes carries with it an opportunity cost, which is the opportunity foregone by choosing one investment over another.

For example, back in February 1958, he bought a house for $31,500. His family was expanding, and his wife was about to give birth to their third child. 

As we discussed in a previous article on Buffett's earlier days, Buffett had rented a house on 5202 Underwood street in Omaha between 1955 and 1958 at a cost of $175/month. 

Today, this house is worth approximately $850,000 and has an estimated rent of $5,800/month according to Zillow.

It is fascinating to read his opinion on housing from that time:

In Omaha, I rented a house at 5202 Underwood for $175 a month. I told my wife, “I’d be glad to buy a house, but that’s like a carpenter selling his toolkit.” I didn’t want to use up my capital.

Buffett had started his investment partnership in 1956, and was on his way to becoming one of the best investors in the world. 

A dollar invested in his partnership at the end of 1957, and then reinvested into Berkshire in 1970 would have turned into $323,250 through August 2023.

However, he and his wife decided to buy a house and closed at the beginning of 1958, according to this article: “Sam Reynolds Home Sold to Warren Buffett's,” Omaha World-Herald, February 9, 1958.



Using returns from Buffett Partnership LTD between 1957 - 1970 and Berkshire Hathaway between 1970 to 2020, I was able to calculate the opportunity cost of owning his home, versus staying invested.

I calculated that if he had simply invested that $31,500 in early 1958, he would have managed to turn it into $10,180,000,000. That's 10 Billion and 180 Million. Check my calculations from this spreadsheet.

That's over ten billion dollars. That's a steep opportunity cost.

It was truly possible because Buffett managed to compound money at a high rate of return for a long period of time. 

For a normal person investing in something like S&P 500, the opportunity cost of buying a house would have been something close to $20 million.

What makes it worse is that he paid cash for the house, rather than taking a mortgage. He put about 10% of his net worth in the house, according to a 1998 Berkshire Hathaway meeting video.

By the way, Buffett has calculated the concept of opportunity cost of every dollar he spends since an early age. Few people think this way.

From the earliest age, Mr. Buffett has understood that building wealth depends not only on how much your money grows, but also on how long it grows.

He read a book that showed how a dollar compounding at a steady 10%/year can turn into $10.80 in 25 years and $117.40 in 50 years.

As a result, Warren began to think about time in a different way. Compounding married the present to the future. If a dollar today was going to be worth 10 some years from now, then in his mind the two were the same.

“Do I really want to spend $300,000 for this haircut?” was his attitude. If Susie wanted to spend some trifling sum of money, he would say, “I’m not sure I want to blow $500,000 that way.”48 But since Susie wanted to spend money that he wanted to withhold, and since he wanted Susie to be happy and she wanted to please him, their personalities were gradually meshing into a system of bargaining and trades.

In other words, he knew that each dollar he spends today could turn into $10 or $100 or $1000 in the future. That was helpful for him in evaluating trade-offs. While there is opportunity costs to various activities, if they made his wife happy, he had to do them. I am pretty sure that he would gladly accept the daily cost of six cherry cokes over the past 70 years, over having to drink water for example.

This shouldn't really be news for Dividend Growth Investors, who understand that with compounding, the largest results are visible at the end of your journey, after a long time of compounding.

A few weeks after buying the house however, Buffett called it "Buffett's Folly" in a letter to a friend, as discussed in " The Snowball":

With momentum behind him, Warren realized it was time to leave a house where there was barely room for a family with two young children—one an unusually energetic three-and-a-half-year-old—and a third on the way. The Buffett's bought their first house. It stood on Farnam Street, a Dutch Cape set back on a large corner lot overlooked by evergreens, next to one of Omaha’s busiest thoroughfares. While the largest house on the block, it had an unpretentious and charming air, with dormers set into the sloping shingled roof and an eyebrow window. Warren paid $31,500 to Sam Reynolds, a local businessman, and promptly named it “Buffett’s Folly.” 

In his mind $31,500 was a million dollars after compounding for a dozen years or so, because he could invest it at such an impressive rate of return. Thus, he felt as though he were spending an outrageous million dollars on the house.

After reading this article, and seeing the calculation behind the $10.10 billion opportunity cost for Buffett's purchase of a house in 1958 for $31,500, you may actually wonder whether I have included the whole picture in the calculation.

After all, once you buy a house, you get to live in it, without paying rent.

I didn't include the amount of rent in the calculation of the opportunity cost. That's because I didn't know what the rent would have been for his house over the past 65 years.

While it is hard to quantify the amount of money you could have saved on rent for 65 years by buying a house, it is even harder to quantify the amount of taxes, renovations, upkeep etc when you buy.  For example, upgrading the house, changing roofs, and landscaping, fixing things around the house cost time and money. If you outsource this task to a handyman, this will cost money too, and eat into some of the savings that you generate by owning a house free and clear. Since I didn't want to make too many estimates, I didn't even try.

(Ok, I did calculate investing that $31,500 at Buffett's rates of return, then subtracting rent using $200/month that increases at CPI +2% for 65 years. It turns out to $7.13 Billion. When you add the $15,000 spent on renovations too, the total comes out to almost $12 Billion. Source)

However, I am pretty confident that Buffett's family spent more in upkeep on this house than the amount they would have saved on rent. That's because immediately after buying the house for $31,500, Buffett's wife Susan spent $15,000 on renovations. This was half the cost of the house!

Even illness and the demands of caring for a new baby and two small children could not suppress her urge to decorate. As it sprang to life, she redid the house in cheery contemporary style, with chrome-and-leather furniture and huge, bright modern paintings covering the white walls. The $15,000 decorating bill totaled almost half of what the house itself had cost, which “just about killed Warren,” according to Bob Billig, a golfing pal.47 He didn’t notice colors or respond to visual aesthetics and so was indifferent to the result, seeing only the outrageous bill.

In Buffett's case, he is not as frugal as everyone makes him out to be. He spent $12,000/year in the 1950s in Omaha.  That's equivalent to a little over $134,000 today. Still, spending $15,000 on a renovation would have likely sunk his budget dramatically, given his annual level of spending. 

If we wanted to calculate the opportunity cost of spending $31,500 on a house in early 1958, coupled with spending $15,000 on renovations in 1958, I see a total opportunity cost of $13.60 billion by August 2023.

According to public property records, there was a remodeling done in 1989. I am not versed in residential tax assessor language, but it looks like the tax assessment shows close to $800,000 in improvements. 

Just for reference, each dollar from 1956 has the same purchasing power as $11.20/ today. A dollar from 1958 has the same purchasing power as $10.52 today.

So in other words, that $31,500 house in 1958 costs $331.400 in today's dollars. According to Zillow, his house costs about $1,332,000 today and would rent for $8,664/month. The annual property tax bill is at a little over $21,400. Still, this is lower than the $10 billion he would have had, if he rented instead, and invested the money.

This post will trigger a lot of people. That's because owning a home is a sacred tradition, which people are expected to hold on to, and teach the new generations about. Few people think about the opportunity cost of actions they partake, through a rational lens, without taking any emotions but focusing on the cold, hard, mathematical facts. We are human after all.

But that's what makes Warren Buffett.. well.. Warren Buffett.

That being said, if you want to improve on your decision making, and become the best version of yourself, it may be helpful to incorporate the concept of opportunity cost in your toolbelt. 

Thank you for reading!

Relevant Articles:

- Warren Buffett: America's Youngest Early Retiree

- Understanding Compounding and Getting Rich Late in Life



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