As a dividend growth investor, I spend several hours per week screening for attractive candidates for my portfolio and then researching them in detail. I believe in fundamental analysis first and foremost. I look for stability and stimulants for growth in earnings that can deliver strong dividend growth and stock price gains in the future. I also believe in regular monitoring of dividend growth stocks, in order to check how companies I own are doing. One aspect of monitoring involves checking for any recent dividend increases for every company in the US. That way I can not only monitor my holdings, but also find out about prospective dividend growth stocks at the start of their potential long journeys to stardom.
Over the past week, there were several dividend growth stocks that announced their intent to increase distributions to shareholders. I only included those that have managed to increase dividends for at least one
decade. The companies include:
Target Corporation (TGT) operates general merchandise stores in the United States and Canada. The company raised its quarterly dividends by 20.90% to 52 cents/share. This dividend champion has increased dividends for 47 years in a row. In the past decade, the company has managed to increase dividends by 19.80%/year. The stock is attractively valued at 15.50 times forward earnings and a current yield of 3.60%. Despite headwinds that the company has faced in the past year, I find the stock to be attractively valued, and I have been adding to my exposure several times so far this year. Check my analysis of Target.
Casey’s General Stores, Inc. (CASY), operates convenience stores in 14 Midwestern states, primarily Iowa, Missouri, and Illinois. The company raised its quarterly dividends by 11.10% to 20 cents/share. This dividend achiever has increased dividends for 15 years in a row. In the past decade, the company has managed to increase dividends by 19.10%/year. The stock is attractively valued at 20.10 times forward earnings and a current yield of 1.10%. Check my analysis of Casey’s General Stores.
Caterpillar Inc. (CAT) manufactures and sells construction and mining equipment, diesel and natural gas engines, industrial gas turbines, and diesel-electric locomotives worldwide. The company raised its quarterly dividends by 16.70% to 70 cents/share. This dividend achiever has increased dividends for 21 years in a row. In the past decade, the company has managed to increase dividends by 12.70%/year. The stock is attractively valued at 17.20 times earnings and a current yield of 2.60%. Check my analysis of Caterpillar.
Universal Health Realty Income Trust (UHT) is a real estate investment trust, that invests in healthcare and human service related facilities. The company raised its quarterly dividends by 0.80% to 63 cents/share. This dividend champion has increased dividends for 28 years in a row. In the past decade, the company has managed to increase dividends by 2.40%/year. This REIT currently yields 5.85%. I sold my stake in the company last year, given the anemic dividend growth of the past and do not plan on initiating a position again.
C. R. Bard, Inc. (BCR) designs, manufactures, packages, distributes, and sells medical, surgical, diagnostic, and patient care devices worldwide. The company raised its quarterly dividends by 4.80% to 22 cents/share. This dividend champion has increased dividends for 43 years in a row. The stock is attractively valued at 16.60 times earnings and a current yield of 0.60%. In the past decade, the company has managed to increase dividends by 6.20%/year. Ordinarily given the low yield and low dividend growth, I will take a pass at this time. However, there is something about C.R. Bard’s relentless increase in earnings per share that makes me really want to add the stock to my list for further research.
National Fuel Gas Company (NFG) operates as a diversified energy company in the United States. The company raised its quarterly dividends by 2.70% to 38.50 cents/share. This dividend champion has increased dividends for 44 years in a row. In the past decade, the company has managed to increase dividends by 3.40%/year. The stock is overvalued at 21.50 times forward earnings and a current yield of 2.10%. Given the low growth, I would take a pass on it for the time being.
Oil-Dri Corporation of America (ODC) mines, develops, manufactures, and markets sorbent products in the United States and internationally. The company raised its quarterly dividends by 5.30% to 20 cents/share. This dividend achiever has increased dividends for 12 years in a row. In the past decade, the company has managed to increase dividends by 9.60%/year. The stock is attractively valued at 16.40 times forward earnings and a current yield of 2.70%. I would add it to my list for further research.
Essex Property Trust, Inc. (ESS) is a real estate investment trust in the United States that engages in the ownership, operation, management, acquisition, development, and redevelopment of apartment communities, as well as commercial properties. The company raised its quarterly dividends by 7.40% to $1.30/share. This dividend achiever has increased dividends for 20 years in a row. In the past decade, the company has managed to increase dividends by 4.30%/year. This REIT yields 2.90% today, which I believe to be low for a pass-through entity these days.
Best Buy Co., Inc. (BBY) operates as a multi-national, multi-channel retailer of technology products in the United States, Canada, China, and Mexico. The company raised its quarterly dividends by 11.80% to 19 cents/share. This dividend achiever has increased dividends for 12 years in a row. In the past decade, the company has managed to increase dividends by 13%/year. The stock is attractively valued at 12.60 times forward earnings and a current yield of 2.60%. I need to add Best Buy on my list for further research.
FedEx Corporation (FDX) provides transportation, e-commerce, and business services in the United States and internationally. The company raised its quarterly dividends by 33.30% to 20 cents/share. This dividend achiever has increased dividends for 12 years in a row. In the past decade, the company has managed to increase dividends by 10.70%/year. The stock is overvalued at 21 times forward earnings and a current yield of 0.60%. I would add it on my list for further research.
Full Disclosure: Long TGT, CASY
Relevant Articles:
- How long does it take to manage a dividend portfolio?
- Buy and Hold means Buy and Monitor
- Dividend Champions - The Best List for Dividend Investors
- Dividend Achievers Offer Income Growth and Capital Appreciation Potential
- How to read my weekly dividend increase reports
Monday, June 16, 2014
Friday, June 13, 2014
Realty Income - A dependable dividend achiever for current income
Realty Income Corporation (O) is a publicly traded real estate investment trust. It invests in the real estate markets of the United States. The firm makes investments in commercial real estate. This dividend achiever pays monthly dividends to shareholders, and has managed to increase them each year since going public in 1994. Many investors purchase REITs for high current income, stability of revenue streams, and diversification opportunities.
In an earlier article, I discussed the items I look for in Real Estate Investment trusts. I will cover those items in the stock analysis below.
The company has managed to increase its Funds from Operations (FFO)/share from $1.47 in 2003 to $2.41 by 2013. At the same time, dividends per share increased from $1.18 in 2003 to $2.15 by 2013. The FFO payout ratio has increased from 80% to 89% over the same time period, which is not something I would like to see. However, this ratio has been going down since hitting a high of 94% in 2010. As you can see, there was a big jump in FFO/share and dividends per share in 2013, as a result of the $3.2 billion acquisition of American Realty Capital Trust. In addition, the company also invested $1.5 billion in 459 properties throughout the year.
The other metric I like to look at with REITs is occupancy ratios. As Realty Income has been expanding over the past decade, it is important to see that this has not resulted in additions of properties to mask a deterioration in existing locations. The occupancy levels dropped during the financial crisis, but then recovered and are close to where they were last year.
The Realty Income of today is much larger and more diversified that the Realty Income of 2003. The top ten tenants account for less than 45% of revenues:
The record low interest rates have been a boon for Real Estate Investment trusts. Investors have fled the sector, attracted by high yields relative to US Treasuries and CD’s. Realty Income has been able to sell $750 million worth of ten-year notes in 2013 at 4.65%/year, which is pretty low. However, this influx of capital has led to many companies competing for assets, which pushes the initial yields on those properties lower. As a result, when debts need to be refinanced in a decade from now, and interest rates increase substantially, it is quite possible that those result in lower profits down the road on those issues. This could be of particular concern since rents usually increase at slightly less than the rate of inflation. Another potential concern I see is the increased deal making in the sector, in an effort to build the largest triple-net company out there. With Realty Income, this is not an issue, although it is a risk I am watching carefully.
Of course, the risks that I am presenting are just something to watch out for. I truly believe that there is much more growth ahead for Realty Income. This would be fueled by property acquisitions that provide incremental free cash flow to grow dividends into the future. Historically, the company has done a good job in evaluating tenants, and filing in occupancies by getting new tenants or selling those properties.
The company has managed to earn a cap rate of 7.10% on its 2013 property acquisitions and a cap rate of 7.20% on its 2012 property acquisitions. This compares well relative to the interest rates on notes sold in 2013, and the average interest rate on its $3.20 billion in notes payable of 4.90%. In addition, it compares well to the 5.30% interest on its $755 million in mortgages payable. The company finds the cash necessary to grow by issuing common stock, preferred stock and debt to investors. Therefore, it is essential that there is a positive spread between cap rates on property investments and cost of capital.
I really like the stability of the long-term triple-net type leases that Realty Income uses to rent out its properties. The average lease term for the 3896 properties at the end of 2013 was 10.80 years, which should translate into stability in cashflows that are used to pay the monthly dividends to shareholders. Those leases provide for rent escalations over time, and also make the tenants pay for maintenance expenses, taxes, insurance, utilities.
I do not foresee dividends growing faster than 4%/year, unless of course another big accretive acquisition is made. This would be fueled by acquisitions as well as annual increases in rents from the properties that the company owns throughout the US.
Overall, I like Realty Income, and intend to hold my position for as long as possible. However, I would like to receive a higher starter yield on an investment in this REIT. Currently, the REIT yields 5.10%, although the yield was as high as 6% in December 2013. Given the low growth expectations, paying a lower entry price might be helpful in generating good returns from Realty Income. This is particularly true given the fact that W.P. Carey (WPC) and American Realty Capital Properties (ARCP) yield 5.50% and 8% respectively.
Full Disclosure: Long O and ARCP
Relevant Articles:
- Five Things to Look For in a Real Estate Investment Trust
- Four High Yield REITs for current income
- Are we in a REIT bubble?
- My Dividend Retirement Plan
- Realty Income (O) Raises Dividends by a Record 19.20%
In an earlier article, I discussed the items I look for in Real Estate Investment trusts. I will cover those items in the stock analysis below.
The company has managed to increase its Funds from Operations (FFO)/share from $1.47 in 2003 to $2.41 by 2013. At the same time, dividends per share increased from $1.18 in 2003 to $2.15 by 2013. The FFO payout ratio has increased from 80% to 89% over the same time period, which is not something I would like to see. However, this ratio has been going down since hitting a high of 94% in 2010. As you can see, there was a big jump in FFO/share and dividends per share in 2013, as a result of the $3.2 billion acquisition of American Realty Capital Trust. In addition, the company also invested $1.5 billion in 459 properties throughout the year.
Year
|
2013
|
2012
|
2011
|
2010
|
2009
|
2008
|
2007
|
2006
|
2005
|
2004
|
2003
|
FFO
|
2.41
|
2.02
|
1.98
|
1.83
|
1.84
|
1.83
|
1.89
|
1.73
|
1.62
|
1.53
|
1.47
|
DPS
|
2.15
|
1.77
|
1.74
|
1.72
|
1.71
|
1.66
|
1.56
|
1.44
|
1.35
|
1.24
|
1.18
|
DPR
|
89%
|
88%
|
88%
|
94%
|
93%
|
91%
|
83%
|
83%
|
83%
|
81%
|
80%
|
Occup
|
98.2%
|
97.2%
|
96.7%
|
96.6%
|
96.8%
|
97.0%
|
97.9%
|
98.7%
|
98.5%
|
97.9%
|
98.1%
|
The other metric I like to look at with REITs is occupancy ratios. As Realty Income has been expanding over the past decade, it is important to see that this has not resulted in additions of properties to mask a deterioration in existing locations. The occupancy levels dropped during the financial crisis, but then recovered and are close to where they were last year.
The Realty Income of today is much larger and more diversified that the Realty Income of 2003. The top ten tenants account for less than 45% of revenues:
The record low interest rates have been a boon for Real Estate Investment trusts. Investors have fled the sector, attracted by high yields relative to US Treasuries and CD’s. Realty Income has been able to sell $750 million worth of ten-year notes in 2013 at 4.65%/year, which is pretty low. However, this influx of capital has led to many companies competing for assets, which pushes the initial yields on those properties lower. As a result, when debts need to be refinanced in a decade from now, and interest rates increase substantially, it is quite possible that those result in lower profits down the road on those issues. This could be of particular concern since rents usually increase at slightly less than the rate of inflation. Another potential concern I see is the increased deal making in the sector, in an effort to build the largest triple-net company out there. With Realty Income, this is not an issue, although it is a risk I am watching carefully.
Of course, the risks that I am presenting are just something to watch out for. I truly believe that there is much more growth ahead for Realty Income. This would be fueled by property acquisitions that provide incremental free cash flow to grow dividends into the future. Historically, the company has done a good job in evaluating tenants, and filing in occupancies by getting new tenants or selling those properties.
The company has managed to earn a cap rate of 7.10% on its 2013 property acquisitions and a cap rate of 7.20% on its 2012 property acquisitions. This compares well relative to the interest rates on notes sold in 2013, and the average interest rate on its $3.20 billion in notes payable of 4.90%. In addition, it compares well to the 5.30% interest on its $755 million in mortgages payable. The company finds the cash necessary to grow by issuing common stock, preferred stock and debt to investors. Therefore, it is essential that there is a positive spread between cap rates on property investments and cost of capital.
I really like the stability of the long-term triple-net type leases that Realty Income uses to rent out its properties. The average lease term for the 3896 properties at the end of 2013 was 10.80 years, which should translate into stability in cashflows that are used to pay the monthly dividends to shareholders. Those leases provide for rent escalations over time, and also make the tenants pay for maintenance expenses, taxes, insurance, utilities.
I do not foresee dividends growing faster than 4%/year, unless of course another big accretive acquisition is made. This would be fueled by acquisitions as well as annual increases in rents from the properties that the company owns throughout the US.
Overall, I like Realty Income, and intend to hold my position for as long as possible. However, I would like to receive a higher starter yield on an investment in this REIT. Currently, the REIT yields 5.10%, although the yield was as high as 6% in December 2013. Given the low growth expectations, paying a lower entry price might be helpful in generating good returns from Realty Income. This is particularly true given the fact that W.P. Carey (WPC) and American Realty Capital Properties (ARCP) yield 5.50% and 8% respectively.
Full Disclosure: Long O and ARCP
Relevant Articles:
- Five Things to Look For in a Real Estate Investment Trust
- Four High Yield REITs for current income
- Are we in a REIT bubble?
- My Dividend Retirement Plan
- Realty Income (O) Raises Dividends by a Record 19.20%
Wednesday, June 11, 2014
Margin of Safety in Financial Independence
Financial independence is the point at which your annual dividend income meets or exceeds your annual expenditures. At this point, the dividend investor does not need to have a job, although they could decide to keep doing their work if they enjoy it. The best part is that the investor does not need to work for money again in their life, and can choose to spend their time as they please. They could do volunteer work, take care of younger or elder family members, travel, read or write, or even watch soap operas all the time. If they enjoy their work, they could continue doing that, or they might decide to start their own independent business. The sky is the limit when you have taken care of the downside, by having a dividend portfolio generate an ever rising amount of cash every year, which covers your expenses.
I believe that a dividend portfolio will generate rising income for decades, and solid capital gains in the process of 30 years or more. Even at a total return of 7%/year, $1 million today will grow to $8 million over that time period. That of course assume that dividends are spent, and very little is reinvested back. Some companies will be sold, acquired, merged or fail, but in general this will be a very passive portfolio. I am pretty optimistic about my portfolio after I reach financial independence and believe I will ultimately end up earning much more in dividends than what I would ever earn from paid employment. Once I select a quality dividend paying company, my only downside is the price I paid for the stock. My upside is the sum of all future dividends I will receive until the end of time. The rest is unrealized capital gains, which would result in a step-up basis for whoever inherits the DGI nest egg. However, I am also operating under the belief that the upside will take care of itself. Therefore, I need to spend my time to protect my downside risks. As a result, I believe in generating redundancies in my portfolio, in order to ensure that I stay financially independent. This is where the concept of margin of safety in Financial Independence comes from.
I took the idea of redundancies from the concept of engineering, where bridges are constructed, so that they can carry several times their projected peak load. They have built in overlaps and redundancies just in case peak loads increase over time, and also to withstand a long period of normal wear and tear.
For my portfolio, I want to ensure I it withstands as much pressure without breaking. Thus, i expect to have multiple layers of redundancies built into my portfolio.
- I buy stocks that have many products/services with revenues derived from many continents/countries. This diversity in revenue streams ensures that company is not overly reliant on a single product for which demand softens.
- I buy stocks from different industries, and I try to be diversified so that a total collapse of one of these companies doesn't derail my plans. I seek safety in numbers and believe that a portfolio should include at least 30 – 40 individual components for diversification purposes.
- I focus on companies that regularly hike dividends, and have an established track record of doing so. This provides an extra layer protection that my dividend income will keep up with inflation over time.
- I make sure dividend payments are adequately covered for any new companies I buy, so that short term fluctuations in earnings per share do not leave dividends in danger. In addition, I make sure that dividend growth is not largely achieved by the expansion in the payout ratio.
- I also plan to retire when dividend income covers expenses by a nice margin of up to 1.30- 1.50 times expenses. I am placing the money that generates the excess dividends in tax-deferred accounts, so that they grow uninterrupted if I never use them. In addition, putting money in tax-deferred accounts further diversifies my asset base, and would shelter this portion of networth from taxes for several decades from now.
- I hold my stocks through several brokerages, in order to make sure I would always be under the SIPC covered amounts, and protect myself in case of broker failures
On a personal note, I also try to keep 3 – 6 months of expenses in my checking account. I do these funds just in case, even though I do not really need an emergency fund. I do not need an emergency fund, because I am disciplined about my spending. In addition, my dividend portfolio is an emergency fund of itself, since it would throw off enough cash to support me for 12 months. Currently, this figure is close to 7 months worth of expenses being covered by dividend income. Plus, I view my dividend portfolio as an emergency fund that has enough resources to pay for somewhere around 240 months’ worth of expenses.
In addition to that, I also have a line of credit equivalent to 2 years expenses I can draw on, in case my cash reserves are depleted. I honestly doubt that I would ever use the cash or line of credit for emergency purposes, but then you never know what the future holds for.
Next, I also expect that I will be able to collect some Social Security benefits in the future, when I become eligible for them. I strongly doubt that Social Security will ever be destroyed, although I wouldn’t be surprised if it gets modified in the future. I view Social Security income as similar to an investment in an inflation-protected annuity or inflation protected treasury bond.
The one weak spot in my retirement planning is the absolutely low amount of fixed income allocation I have. In order to withstand the next Great Depression or Japan of the past 20 years, I would need to have exposure to domestic government bonds. If we get deflation, this would jeopardize corporate profits and the ability to maintain dividend payments for a lot of companies. My allocation to fixed income is currently less than 1% today. I do not believe that the current environment offers good prospects for buyers of US Treasuries, which is why I have abstained from investing there. I simply do not want to invest my money in an asset whose principal and income are certain to lose purchasing power over time. However, I am monitoring the situation, and would gladly change my mind if attractive offers are present.
Relevant Articles:
- Dividend Investing Is Not As Risky As It Is Portrayed
- Dividends Offer an Instant Rebate on Your Purchase Price
- How to define risk in dividend paying stocks?
- Stress Testing Your Dividend Portfolio
- Where are the original Dividend Aristocrats now?
I believe that a dividend portfolio will generate rising income for decades, and solid capital gains in the process of 30 years or more. Even at a total return of 7%/year, $1 million today will grow to $8 million over that time period. That of course assume that dividends are spent, and very little is reinvested back. Some companies will be sold, acquired, merged or fail, but in general this will be a very passive portfolio. I am pretty optimistic about my portfolio after I reach financial independence and believe I will ultimately end up earning much more in dividends than what I would ever earn from paid employment. Once I select a quality dividend paying company, my only downside is the price I paid for the stock. My upside is the sum of all future dividends I will receive until the end of time. The rest is unrealized capital gains, which would result in a step-up basis for whoever inherits the DGI nest egg. However, I am also operating under the belief that the upside will take care of itself. Therefore, I need to spend my time to protect my downside risks. As a result, I believe in generating redundancies in my portfolio, in order to ensure that I stay financially independent. This is where the concept of margin of safety in Financial Independence comes from.
I took the idea of redundancies from the concept of engineering, where bridges are constructed, so that they can carry several times their projected peak load. They have built in overlaps and redundancies just in case peak loads increase over time, and also to withstand a long period of normal wear and tear.
For my portfolio, I want to ensure I it withstands as much pressure without breaking. Thus, i expect to have multiple layers of redundancies built into my portfolio.
- I buy stocks that have many products/services with revenues derived from many continents/countries. This diversity in revenue streams ensures that company is not overly reliant on a single product for which demand softens.
- I buy stocks from different industries, and I try to be diversified so that a total collapse of one of these companies doesn't derail my plans. I seek safety in numbers and believe that a portfolio should include at least 30 – 40 individual components for diversification purposes.
- I focus on companies that regularly hike dividends, and have an established track record of doing so. This provides an extra layer protection that my dividend income will keep up with inflation over time.
- I make sure dividend payments are adequately covered for any new companies I buy, so that short term fluctuations in earnings per share do not leave dividends in danger. In addition, I make sure that dividend growth is not largely achieved by the expansion in the payout ratio.
- I also plan to retire when dividend income covers expenses by a nice margin of up to 1.30- 1.50 times expenses. I am placing the money that generates the excess dividends in tax-deferred accounts, so that they grow uninterrupted if I never use them. In addition, putting money in tax-deferred accounts further diversifies my asset base, and would shelter this portion of networth from taxes for several decades from now.
- I hold my stocks through several brokerages, in order to make sure I would always be under the SIPC covered amounts, and protect myself in case of broker failures
On a personal note, I also try to keep 3 – 6 months of expenses in my checking account. I do these funds just in case, even though I do not really need an emergency fund. I do not need an emergency fund, because I am disciplined about my spending. In addition, my dividend portfolio is an emergency fund of itself, since it would throw off enough cash to support me for 12 months. Currently, this figure is close to 7 months worth of expenses being covered by dividend income. Plus, I view my dividend portfolio as an emergency fund that has enough resources to pay for somewhere around 240 months’ worth of expenses.
In addition to that, I also have a line of credit equivalent to 2 years expenses I can draw on, in case my cash reserves are depleted. I honestly doubt that I would ever use the cash or line of credit for emergency purposes, but then you never know what the future holds for.
Next, I also expect that I will be able to collect some Social Security benefits in the future, when I become eligible for them. I strongly doubt that Social Security will ever be destroyed, although I wouldn’t be surprised if it gets modified in the future. I view Social Security income as similar to an investment in an inflation-protected annuity or inflation protected treasury bond.
The one weak spot in my retirement planning is the absolutely low amount of fixed income allocation I have. In order to withstand the next Great Depression or Japan of the past 20 years, I would need to have exposure to domestic government bonds. If we get deflation, this would jeopardize corporate profits and the ability to maintain dividend payments for a lot of companies. My allocation to fixed income is currently less than 1% today. I do not believe that the current environment offers good prospects for buyers of US Treasuries, which is why I have abstained from investing there. I simply do not want to invest my money in an asset whose principal and income are certain to lose purchasing power over time. However, I am monitoring the situation, and would gladly change my mind if attractive offers are present.
Relevant Articles:
- Dividend Investing Is Not As Risky As It Is Portrayed
- Dividends Offer an Instant Rebate on Your Purchase Price
- How to define risk in dividend paying stocks?
- Stress Testing Your Dividend Portfolio
- Where are the original Dividend Aristocrats now?
Tuesday, June 10, 2014
Dividend Growth Stocks are Compounding Machines
Compounding is one of the eight wonders of the world. The steady methodical reinvestment at a particular rate of a return, over a period of time results in a much larger amount in the future.
In my studies of dividend growth stocks I have always be amazed how otherwise large, boring, and slow growing enterprises can end up delivering outstanding returns to their shareholders. Most people on the street believe that the way to make money in stocks is by finding a company that can double your money overnight. Many of those lose thousands of dollars each year, trying to find a method to identify the next Microsoft, Google, Amazon, Tesla etc. At the same time the blue chip dividend stocks that provide spectacular long-term results are familiar to everyone, are usually selling at decent valuations, and provide steady a dependable growth of their earnings and dividends. All the while the first group of investors is looking for the best get rich quick scheme, the investors in the mature dividend growth stocks are quietly compounding their wealth and dividend incomes.
The largest gains are harvested by those that have the patience to buy a portfolio of quality dividend growth stocks, patiently reinvest dividends into more quality dividend paying stocks over long periods of time. To someone who doesn’t want to open their mind to the world of successful dividend investing, a 3% current dividend yield and a steady 6% annual dividend growth does not sound glamorous at all. To an investor with a vision however, this is seen as $400 in annual dividend income on a $1000 investment in 30 years. In other words, this investor will be getting massive amounts of dividend income in the future, for a decision they made 30 years before. If we extend the time period to 40 years, the annual dividend income will be close to $960. Those are of course extremely conservative estimates, as they are close to the historical growth in dividends in US stocks on average throughout most of the 20th century.
In essence, those companies earn excess cash flows. After they reinvest cash in the business in order to maintain and increase the size of operations, there is a plenty of cash left over. They are then sending those growing piles of dividend checks to their shareholders. If you are drowning in liquidity, you cannot help it but prosper as an enterprise or as an investor.
I have highlighted here a few examples of compounding machines. This is not an exhaustive list, as there are a lot more companies to start researching. So here are the examples below:
Exxon-Mobil (XOM)
The company has managed to grow earnings per share from $1.04 in 1993 to $7.37 in 2013. At the same time, the company has managed to increase annual dividends per share from 72 cents in 1993 to $2.46 in 2013. If you invested $1000 in 1993, your investment would be worth almost $10,983 today, and would be earning $300 in annual dividend income.
Johnson & Johnson (JNJ)
The company has managed to grow earnings per share from $0.69 in 1993 to $4.81 in 2013. At the same time, the company has managed to increase annual dividends per share from 25 cents in 1993 to $2.59 in 2013. If you invested $1000 in 1993, your investment would be worth $14,491 today, and would be earning $393 in annual dividend income.
PepsiCo (PEP)
The company has managed to grow earnings per share from $0.98 in 1993 to $4.32 in 2013. At the same time, the company has managed to increase annual dividends per share from 30 cents in 1993 to $2.24 in 2013. If you invested $1000 in 1993, your investment would be worth $7,061 today, and would be earning $210 in annual dividend income.
Many investors refuse to purchase these companies, because they believe that most of the profits have already been made. They believe that there is not much to look forward to for those companies, which is why they keep ignoring them. This is precisely why those investments have done so well for their shareholders – there have always been low expectations for them. As a result, those dividends have been patiently reinvested into more shares at low valuations, resulting in more dividend income, that is then reinvesting into more shares at depressed valuations.. This is a virtuous cycle, that is almost guaranteed to lift the investor fortunes.
Full Disclosure: Long XOM, JNJ, PEP
Relevant Articles:
- Six Compounding Machines for Long Term Dividend Investors
- How to retire in 10 years with dividend stocks
- How to find long term dividend stock ideas
- How to become a successful dividend investor
- Achieve Financial Independence with Dividend Paying Stocks
In my studies of dividend growth stocks I have always be amazed how otherwise large, boring, and slow growing enterprises can end up delivering outstanding returns to their shareholders. Most people on the street believe that the way to make money in stocks is by finding a company that can double your money overnight. Many of those lose thousands of dollars each year, trying to find a method to identify the next Microsoft, Google, Amazon, Tesla etc. At the same time the blue chip dividend stocks that provide spectacular long-term results are familiar to everyone, are usually selling at decent valuations, and provide steady a dependable growth of their earnings and dividends. All the while the first group of investors is looking for the best get rich quick scheme, the investors in the mature dividend growth stocks are quietly compounding their wealth and dividend incomes.
The largest gains are harvested by those that have the patience to buy a portfolio of quality dividend growth stocks, patiently reinvest dividends into more quality dividend paying stocks over long periods of time. To someone who doesn’t want to open their mind to the world of successful dividend investing, a 3% current dividend yield and a steady 6% annual dividend growth does not sound glamorous at all. To an investor with a vision however, this is seen as $400 in annual dividend income on a $1000 investment in 30 years. In other words, this investor will be getting massive amounts of dividend income in the future, for a decision they made 30 years before. If we extend the time period to 40 years, the annual dividend income will be close to $960. Those are of course extremely conservative estimates, as they are close to the historical growth in dividends in US stocks on average throughout most of the 20th century.
In essence, those companies earn excess cash flows. After they reinvest cash in the business in order to maintain and increase the size of operations, there is a plenty of cash left over. They are then sending those growing piles of dividend checks to their shareholders. If you are drowning in liquidity, you cannot help it but prosper as an enterprise or as an investor.
I have highlighted here a few examples of compounding machines. This is not an exhaustive list, as there are a lot more companies to start researching. So here are the examples below:
Exxon-Mobil (XOM)
The company has managed to grow earnings per share from $1.04 in 1993 to $7.37 in 2013. At the same time, the company has managed to increase annual dividends per share from 72 cents in 1993 to $2.46 in 2013. If you invested $1000 in 1993, your investment would be worth almost $10,983 today, and would be earning $300 in annual dividend income.
Johnson & Johnson (JNJ)
The company has managed to grow earnings per share from $0.69 in 1993 to $4.81 in 2013. At the same time, the company has managed to increase annual dividends per share from 25 cents in 1993 to $2.59 in 2013. If you invested $1000 in 1993, your investment would be worth $14,491 today, and would be earning $393 in annual dividend income.
PepsiCo (PEP)
The company has managed to grow earnings per share from $0.98 in 1993 to $4.32 in 2013. At the same time, the company has managed to increase annual dividends per share from 30 cents in 1993 to $2.24 in 2013. If you invested $1000 in 1993, your investment would be worth $7,061 today, and would be earning $210 in annual dividend income.
Many investors refuse to purchase these companies, because they believe that most of the profits have already been made. They believe that there is not much to look forward to for those companies, which is why they keep ignoring them. This is precisely why those investments have done so well for their shareholders – there have always been low expectations for them. As a result, those dividends have been patiently reinvested into more shares at low valuations, resulting in more dividend income, that is then reinvesting into more shares at depressed valuations.. This is a virtuous cycle, that is almost guaranteed to lift the investor fortunes.
Full Disclosure: Long XOM, JNJ, PEP
Relevant Articles:
- Six Compounding Machines for Long Term Dividend Investors
- How to retire in 10 years with dividend stocks
- How to find long term dividend stock ideas
- How to become a successful dividend investor
- Achieve Financial Independence with Dividend Paying Stocks
Monday, June 9, 2014
7 Dividend Paying Stocks I Purchased Without Paying Commissions
Several months ago, I opened an account with Loyal3, which is a commission free stock brokerage. The nice part about this brokerage was that one could buy shares in companies with as little as $10 per transaction, and not pay any commissions. In addition, one can use a credit card to purchase shares in some of America’s greatest brands. The issue was that there are only 50 or so companies that are available to be purchased directly using Loyal3. On the bright side however, there are several world-class dividend champions, which are core holdings for many dividend growth investors. Those strong brands will likely grow dividends and enhance shareholder value for decades to come.
Once I signed up for the service, I decided to put about $50/month in several of those companies, which had increased dividends for a set number of years and met some basic valuation guidelines. The appeal of not paying commissions, and obtaining a 1% credit card rebate was attractive. For one of the companies, Target (TGT), I put more than $50 using Loyal3. For a few others, I played around and increased or decreased contributions. In one case, I stopped contributions to Wal-Mart Stores (WMT) after they announced the lowest dividend increase in their history. Currently, I am putting $50/month in the following companies:
The Coca-Cola Company (KO), a beverage company, engages in the manufacture, marketing, and sale of nonalcoholic beverages worldwide. This dividend champion has consistently raised distributions for 52 years in a row. Over the past decade, the company as managed to boost dividends by 9.80%/year. Currently, the stock is trading at 19.50 times forward earnings and yields 3%. Check my analysis of Coca-Cola for more details.
Dr Pepper Snapple Group, Inc. (DPS) operates as a brand owner, manufacturer, and distributor of non-alcoholic beverages in the United States, Canada, Mexico, and the Caribbean. This dividend stock initiated dividends in 2009 and has been raising them annually ever since. Currently, the stock is trading at 16.70 times forward earnings and yields 2.80%. Check my analysis of Dr Pepper for more details.
Kellogg Company (K), together with its subsidiaries, manufactures and markets ready-to-eat cereal and convenience food products primarily in North America, Europe, Latin America, and the Asia Pacific. This dividend stock has managed to raise distributions for ten years in a row. Over the past decade, the company has managed to boost dividends by 5.90%/year. Currently, the stock is trading at 17.30 times forward earnings and yields 2.70%. Check my analysis of Kellogg for more details.
McDonald'’s Corporation (MCD) franchises and operates McDonald's restaurants in the United States, Europe, the Asia/Pacific, the Middle East, Africa, Canada, and Latin America. This dividend champion has consistently raised distributions for 38 years in a row. Over the past decade, it has managed to boost dividends by 22.80%/year. Currently, the stock is trading at 17.80 times forward earnings and yields 3.20%. Check my analysis of McDonald's for more details.
PepsiCo, Inc. (PEP) operates as a food and beverage company worldwide. This dividend champion has consistently raised distributions for 42 years in a row. Over the past decade, it has managed to boost dividends by 13.70%/year. Currently, the stock is trading at 19.30 times forward earnings and yields 3%. Check my analysis of PepsiCo for more details.
Target Corporation (TGT) operates general merchandise stores in the United States. This dividend champion has consistently raised distributions for 46 years in a row. Over the past decade, it has managed to boost dividends by 19.80%/year. Currently, the stock is trading at 15.50 times forward earnings and yields 3%. Check my analysis of Target for more details.
Unilever PLC (UL) operates as a fast-moving consumer goods company in Asia, Africa, the Middle East, Turkey, Europe, and the Americas. This international dividend achiever has consistently raised distributions for over 19 years in a row. Over the past decade, Unilever has managed to boost dividends by 9.90%/year. Currently, the stock is trading at 19.90 times forward earnings and yields 3.50%. Check my analysis of Unilever for more details.
If any of those companies sell for more than 20 times forward earnings 1 - 2 days prior to purchase date, I would cancel the recurring transaction however. Several of the companies on that list are interesting, but I would only consider them at better valuations. Hershey (HSY), Yum! Brands (YUM) and Starbucks (SBUX) are examples of such ideas.
I view this as an experiment than anything else. If you put $50/month in several individual dividend paying stocks, and you do this for a long period of time, you could end up with a lot of money in the future. This mass of enterprises could deliver tens of thousands of dollars in annual dividend income decades down the road. The only things you need to do is make sure to not overpay, diversify and then let the capital compound over long periods of time. If you think that $400 is nothing, you definitely need to spend more time learning about investments, time value of money, and the power of compounding. There are plenty of examples of successful dividend investors, who have turned small amounts of capital into multi-million dollar bequests to their favorite charities after their death. Therefore, do not despise the days of small beginnings.
The one thing that surprised me is how effortless automatic dividend investment could be. Over the course of 5 – 6 months, regularly putting money in several companies has resulted in a balance of several thousand dollars without much effort. The annual dividend income from this portfolio is now in the hundreds of dollars per year. This income will keep increasing over the next 30 – 40 years. This growth would be further compounded by selective dividend reinvestment.
The other lesson to learn is to start investing as early as possible, and try to put as much capital to work as possible. Consumption today is expensive from the lens of what the capital could generate if you let it compound for 30 – 40 years. For those who say that they do not have money to invest today, there is no absolutely no excuse to avoid investing, given that Loyal3 allows commission free investing with as little as $10.
Full Disclosure: Long KO, DPS, K, MCD, PEP, TGT, UL, WMT, YUM and short HSY puts
Relevant Articles:
- How to buy dividend stocks with as little as $10
- How to become a successful dividend investor
- Warren Buffett – A Closet Dividend Investor
- The Most Successful Dividend Investors of all time
- Living off dividends in retirement
Once I signed up for the service, I decided to put about $50/month in several of those companies, which had increased dividends for a set number of years and met some basic valuation guidelines. The appeal of not paying commissions, and obtaining a 1% credit card rebate was attractive. For one of the companies, Target (TGT), I put more than $50 using Loyal3. For a few others, I played around and increased or decreased contributions. In one case, I stopped contributions to Wal-Mart Stores (WMT) after they announced the lowest dividend increase in their history. Currently, I am putting $50/month in the following companies:
The Coca-Cola Company (KO), a beverage company, engages in the manufacture, marketing, and sale of nonalcoholic beverages worldwide. This dividend champion has consistently raised distributions for 52 years in a row. Over the past decade, the company as managed to boost dividends by 9.80%/year. Currently, the stock is trading at 19.50 times forward earnings and yields 3%. Check my analysis of Coca-Cola for more details.
Dr Pepper Snapple Group, Inc. (DPS) operates as a brand owner, manufacturer, and distributor of non-alcoholic beverages in the United States, Canada, Mexico, and the Caribbean. This dividend stock initiated dividends in 2009 and has been raising them annually ever since. Currently, the stock is trading at 16.70 times forward earnings and yields 2.80%. Check my analysis of Dr Pepper for more details.
Kellogg Company (K), together with its subsidiaries, manufactures and markets ready-to-eat cereal and convenience food products primarily in North America, Europe, Latin America, and the Asia Pacific. This dividend stock has managed to raise distributions for ten years in a row. Over the past decade, the company has managed to boost dividends by 5.90%/year. Currently, the stock is trading at 17.30 times forward earnings and yields 2.70%. Check my analysis of Kellogg for more details.
McDonald'’s Corporation (MCD) franchises and operates McDonald's restaurants in the United States, Europe, the Asia/Pacific, the Middle East, Africa, Canada, and Latin America. This dividend champion has consistently raised distributions for 38 years in a row. Over the past decade, it has managed to boost dividends by 22.80%/year. Currently, the stock is trading at 17.80 times forward earnings and yields 3.20%. Check my analysis of McDonald's for more details.
PepsiCo, Inc. (PEP) operates as a food and beverage company worldwide. This dividend champion has consistently raised distributions for 42 years in a row. Over the past decade, it has managed to boost dividends by 13.70%/year. Currently, the stock is trading at 19.30 times forward earnings and yields 3%. Check my analysis of PepsiCo for more details.
Target Corporation (TGT) operates general merchandise stores in the United States. This dividend champion has consistently raised distributions for 46 years in a row. Over the past decade, it has managed to boost dividends by 19.80%/year. Currently, the stock is trading at 15.50 times forward earnings and yields 3%. Check my analysis of Target for more details.
Unilever PLC (UL) operates as a fast-moving consumer goods company in Asia, Africa, the Middle East, Turkey, Europe, and the Americas. This international dividend achiever has consistently raised distributions for over 19 years in a row. Over the past decade, Unilever has managed to boost dividends by 9.90%/year. Currently, the stock is trading at 19.90 times forward earnings and yields 3.50%. Check my analysis of Unilever for more details.
If any of those companies sell for more than 20 times forward earnings 1 - 2 days prior to purchase date, I would cancel the recurring transaction however. Several of the companies on that list are interesting, but I would only consider them at better valuations. Hershey (HSY), Yum! Brands (YUM) and Starbucks (SBUX) are examples of such ideas.
I view this as an experiment than anything else. If you put $50/month in several individual dividend paying stocks, and you do this for a long period of time, you could end up with a lot of money in the future. This mass of enterprises could deliver tens of thousands of dollars in annual dividend income decades down the road. The only things you need to do is make sure to not overpay, diversify and then let the capital compound over long periods of time. If you think that $400 is nothing, you definitely need to spend more time learning about investments, time value of money, and the power of compounding. There are plenty of examples of successful dividend investors, who have turned small amounts of capital into multi-million dollar bequests to their favorite charities after their death. Therefore, do not despise the days of small beginnings.
The one thing that surprised me is how effortless automatic dividend investment could be. Over the course of 5 – 6 months, regularly putting money in several companies has resulted in a balance of several thousand dollars without much effort. The annual dividend income from this portfolio is now in the hundreds of dollars per year. This income will keep increasing over the next 30 – 40 years. This growth would be further compounded by selective dividend reinvestment.
The other lesson to learn is to start investing as early as possible, and try to put as much capital to work as possible. Consumption today is expensive from the lens of what the capital could generate if you let it compound for 30 – 40 years. For those who say that they do not have money to invest today, there is no absolutely no excuse to avoid investing, given that Loyal3 allows commission free investing with as little as $10.
Full Disclosure: Long KO, DPS, K, MCD, PEP, TGT, UL, WMT, YUM and short HSY puts
Relevant Articles:
- How to buy dividend stocks with as little as $10
- How to become a successful dividend investor
- Warren Buffett – A Closet Dividend Investor
- The Most Successful Dividend Investors of all time
- Living off dividends in retirement
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