Are you drowning in cash?

With dividend investing, I get a lot of cash every week/month/quarter/year. Since I started focusing exclusively on dividend growth investing 6-7 years ago, quarterly dividend income has been increasing exponentially. I get a lot of cash, which i have to deploy intelligently. By that I mean avoiding overpaying, keeping diversification intact, and always being on the lookout for bargains that offer dividend growth. I therefore try to benefit from multiple levels of compounding - one is the dividend income that grows because companies earn more and hike dividends. The second is reinvesting those dividends into more quality companies selling at attractive valuations. Too much of a good can be a good thing too.

Lately, it has been very difficult to find good ideas, which are also priced attractively. I am really trying hard, and had found some ideas. However, given elevated valuation levels, it is more difficult to deploy cash in the future. Many companies and investors have similar issues, because they are drowning in cash, and money is so cheap too. I am afraid this could create bad behavior, which will be punished a few years down the road at the next recession.

Cash might burn a hole in corporate boards pockets. If they pay out dividends, that could be smarter than buying back stock at inflated valuations. For example, companies like General Electric (GE) spent tens of billions repurchasing shares at $30 between 2004 – 2007, only to issue a bunch of shares and warrants at $23/share. This is also smarter than bidding for assets today and paying high prices in order to deploy that cash, without much margin of safety on the returns of those assets.

When you have a lot of cash on hand, the odds that u will do something stupid with it increase exponentially. Even Warren Buffett is not immune to this folly - examples include investments in United Airlines and Salomon Bros in the late 1980s. He was drowning in cash in the late 1980s and put capital to use at suboptimal prices in assets of questionable quality. I am not saying this to predict a crash, since i don’t forecast market or economic directions. It is a fools game to make predictions about prices, the economy etc. However, i am just venting how more difficult it is to find quality companies that are selling at good prices today. This increases the opportunity that I do something that is bad today, but looks cheap because i am drowning in cash.

Either way, I believe that for a long-term buyer of equities today, with a 20 year horizon would do much better than someone who holds cash waiting for lower prices. For example, ever since late 2009, I have been hearing from investors that they are accumulating cash and waiting for lower prices. I have also been hearing from those who are bearish on everything. These people seem to forget that over time, businesses become more valuable, as they plow more money in their operations and earn more. Then they pay out more to shareholders. That doesn’t happen every year of course, but over time, I believe that productivity gains, increases in numbers of consumers and reinvestment in operations will lead to stakes in quality corporations becoming more valuable. Therefore, it makes sense to put money to work as soon as you have it, and then hold on for 20 years. This strategy of regular dollar cost averaging worked even for those who started right around the Great Depression for example. There are always decent values out there, which would start the dividend compounding process for the investor. It is that the investor has to do the work to identify them. A few quality companies selling at decent prices today include:

Company	Ticker	Yrs Div Increase	5 year DG	Fwd P/E	Yield	Review
Target	TGT	47	21.40%	16.10	3.60%	analysis of TGT
Exxon Mobil	XOM	32	9.70%	13.20	2.70%	analysis of XOM
Philip Morris Intl	PM	6	28.40%	16.60	4.10%	analysis of PM
McDonald's	MCD	38	13.90%	17.50	3.20%	analysis of MCD
Baxter International	BAX	8	16.40%	14.60	2.80%	analysis of BAX
Aflac	AFL	31	8.10%	10.20	2.30%	analysis of AFL
IBM	IBM	19	14.30%	10.60	2.40%	analysis of IBM
Lockheed Martin	LMT	11	21.20%	14.60	3.20%	analysis of LMT
Diageo	DEO	15	7.20%	19.80	2.70%	analysis of DEO
Wal-Mart	WMT	41	14.20%	14.70	2.50%	analysis of WMT

Since I get cash every week/month/quarter from my investments and my other income sources, I am well positioned for a stock decline. In fact, I took a big advantage of the declines in February, during which i maxed out SEP IRA, and put one third of the maximum for the 401k. Plus I bought shares in taxable accounts. I have been opportunistically looking for companies which are temporarily battered by short-term noise for decent entry points. This is how I managed to initiate a small position in Accenture (ACN). It is too bad I didn’t put much in Roth IRA. Of course, perfectionist thinking is dangerous in investing, as it can also cause folly, that can lead to stupid actions on my part.

What are you buying these days?

Full Disclosure: Long ACN, TGT, XOM, PM, MCD, AFL, IBM, DEO, WMT

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How Warren Buffett earns $900 in dividend income per minute

On July 1, Buffett’s Berkshire Hathaway (BRK.B) received $122 million dollars in dividend income from their 400 million shares of Coca-Cola (KO). This comes out to roughly $928 dollars in dividend income for Berkshire Hathaway every minute, or almost $15.47 every single second. Those shares have a cost basis of $1.29 billion dollars, and were acquired between 1988 – 1994. The annual dividend payment produces an yield on cost of over 37.50%. This doesn’t assume dividend reinvestment and is 4 – 5 times higher than what investors in 30 year US Treasuries would be earning. This is why I believe that Warren Buffett is a closet dividend investor.

This is a testament to the power of long-term dividend investing, where time in market is the investors best ally, not timing the market. If you can select a business which is run by able and honest management, which has solid competitive advantages, and which is available at a good price today, one needs to only sit and let the power of compounding do the heavy lifting for them. As Buffett likes to say, time is a great ally for the good business. In the case of Coca-Cola, the past 26 years have been a great time to buy and hold the stock. The company has been able to tap emerging markets in Eastern Europe, Asia, Africa and Latin America like never before. As a result, it has been able to receive a higher share of the worldwide drinks market, which has also been expanding as well. If you add in strategic acquisitions, new product development, cost containment initiatives and streamlining of operations, you have a very powerful force for delivering solid shareholder returns. With dividend investing your are rewarded for smart decisions you have made years before.

If they closed the stock market for a period of 10 years, Coca-Cola would be one of the companies I would be willing to hold on to. This is because ten years from now, the company would likely be earning double what it is earning today, and would likely be distributing twice as much in dividend income than it is paying to shareholders today. Check my analysis of Coca-Cola for more information.

At the end of the day, if you identify a solid business, that has lasting power for the next 20 – 30 years, the job of the investor is to purchase shares at attractive values, and hold on to it. This slow and steady approach might seem unexciting initially, but just like with the story of the slow-moving tortoise beating the fast moving hare, the power of compounding would work miracles for the patient dividend investor.

Currently, Coca-Cola is selling for 20.20 times forward earnings and yields 2.90%. This dividend champion has managed to increase dividends for 52 years in a row. Over the past decade, Coca-Cola has managed to increase dividends by 9.80%/year, equivalent to dividend payments doubling every seven years. This is much better than the raises I have received at work over the past decade, despite the fact that I have routinely spent 55 - 60 hour weeks at the office.

Full Disclosure: Long KO and one share of BRK.B

Relevant Articles:

- Coca-Cola: A wide-moat dividend growth stock to buy and hold
- Warren Buffett Investing Resource Page
- Seven wide-moat dividends stocks to consider
- Warren Buffett’s Dividend Stock Strategy
- The importance of yield on cost

Can everyone achieve financial independence with Dividend Paying Stocks?

The goal of every dividend investor is to create a portfolio that makes enough dividend income to live off. In order to reach this goal, investors need three ingredients: regular savings, quality dividend stocks and time.
The first step in your journey as a dividend investor is to spend less than what you earn. Unless you are counting on receiving a big lump sum from an inheritance or winning the lottery, living within your means and savings are the primary sources of investable cash.

The next step is to choose quality stocks, which have a history of consistent dividend increases. The best place to start is the list of dividend champions and the list of dividend contenders maintained by David Fish. In order to reduce the number of stocks to a more manageable list, they can create a set of rules for screening dividend investments. A screen I use includes the following parameters:

1) Valuation – P/E less than 20
2) Consecutive years of dividend increases – at least 10
3) Ten year dividend growth of at least 6%
4) Dividend Yield exceeding 2%
5) Payout ratio of less than 60% for common stocks. For MLPs and REITs look at the DCF payout or FFO Payout ratios.

Once the screening criteria are utilized, and the list of potential candidates is generated, it is time to thoroughly research every single income investment. Researching entails reading the annual report, press releases, slides from analyst conferences, analyst reports and keeping up with major developments. The goal of this exercise is to evaluate whether the company can increase profits over time. While this sounds like a major time commitment on the surface, the reality is that few companies change so much over the course of a year. As a result, once our investor spends a large block of time to gain an understanding of the business, any additional information that is material to a business would only take less than a few hours per quarter.

Another crucially important component of investing is time. Even if you purchased the best dividend stock in town, at the best price possible, an investor could still be exposed to meaningless noise, that might lead them to trade in and out of stocks. This activity could be bad for your pocketbook, since time in the market is more important than timing the market. Most investors that lose money are those who frequently trade, and never really end up grasping the power of compounding for those patient enough to let the seeds of their capital mushroom over time. Those who make money are those who think like long-term business owners. Time is an important ally for good businesses, and for the patient investors who hold on to those quality businesses. If the business manages to grow earnings and pay rising dividends, this can compound your money until you reach your financial goals. Things could change over time, and as a result people need to create mechanisms for dealing with change. In order to ensure the successful passive income compounding of the dividend portfolio over time, one needs to diversify, reinvest dividends and sell losers.

Diversification is an important tool in the arsenal of the successful income investor, because it protects them against the proverbial bad apple that can take a serious bite out of your dividend income at the worst possible moment. I often encourage investors to build a diversified income producing portfolio consisting of at least 30 - 40 individual companies, which are representative of as many sectors that make sense. As a result, even if one bad apple cuts or eliminates distributions, the total dividend income would not be affected by as much. In addition, once the dividend cutter is sold, the proceeds could be used to purchase another cheap company in the sector. By avoiding the major losses that could seriously derail the investment portfolio, the investor would have all the odds in his or her favor that would allow them to compound their profits.

Investors can either compound their dividend income by reinvesting automatically in the firms that generated the income in the first place or by taking the cash distributions and reinvesting in another stock once the proceeds exceed their minimum lot size. Investors need to add new capital or accumulated cash dividends to the companies that are attractively valued. However, they should not commit more than 5% – 6% of their portfolio to a single security. If the top security is one you are already overweight in, invest your funds in the next most attractively valued stock that has a portfolio weight with room to grow. For example, I have frequently purchased companies like Johnson & Johnson (JNJ), Chevron (CVX) and Phillip Morris International (PM), which is why they are overweight in my portfolio. Because of that, any new money I add would have to be allocated to other quality investment opportunities available at good valuations.

An investor, who follows these simple principles, should be able to achieve financial independence at some point in the future. The end result is directly correlated with the level of effort and resources committed to achieving it.

Full Disclosure: Long JNJ, CVX, PM

Relevant Articles:

- Why Dividend Growth Stocks Rock?
- Dividend Champions - The Best List for Dividend Investors
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I purchased this dividend machine last week

In the past week I added to my position in a dividend growth stock I have been following for one year. This dividend achiever has managed to increase dividends for 11 years in a row. What is really surprising is that the company has managed to never cut dividends over the past 115 years, which is amazing.

The company I added to was General Mills (GIS). When I last analyzed the company back in 2013, I concluded that it was a nice stock to accumulate. I have already made a few purchases over the past 12 months, but those are nowhere close to building a substantial position in a short period time. I managed to take advantage of a drop in prices last week, in order to add to my existing position in General Mills. I view the stock as one of the core group of buy and hold forever type companies. Of course, as I have mentioned before however, buy and hold is still buy and monitor. However, if the stock drops further from here and is available in the $45 - $48 range and below, that would be really neat, and I would add to my positions there.

In the past decade, the company has managed to increase dividends by 9.90%/year. Earnings per share increased by 7.40%/year. The company is expected to increase earnings per share to $3.04 in 2015 and $3.24 in 2016. Even if the company manages to increase earnings per share by 7%/year, it would double them every decade. As a result, the intrinsic value of the business should double accordingly. Of course, if you are an investor who buys an asset where earnings increase by 7%/year, and they are also paid a 3% dividend yield, this translates into a total return of roughly 10%/year. The company itself is expecting that its adjusted earnings per share in constant currency will increase at the high single digits, which in my opinion is achievable.

The company was able to raise dividends in March 2014, when the dividend was increased by 8% to 41 cents/share. The company is expecting to grow dividends with earnings over time, and views dividend growth as a key method of providing returns to long-term shareholders. This track record is a real testimony to the strong and steady cash flows which are generated by its portfolios of consumer food brands.

Earnings per share could increase from new product offerings, strategic acquisitions, international expansion and streamlining of operations. A constant focus on operations, eliminating unnecessary costs, improving margins and reducing negative effects of input costs are something that should help the company accomplish its targets. The company is able to expand its distribution network on a global basis, invest in innovation and in its strong brands. Having a portfolio of stable food brands generates recurring excess cash flows. Those excess cash flows are not necessary for expansion of the business. Therefore they result in the ability for the company to shower shareholders with more cash every year through regular dividend payments and increases.

One interesting fact about General Mills is that the company was a dividend champion until 1995, when it spun-off Darden Restaurants (DRI) to shareholders. After that, the company was able to increase dividends between 1996 and 1999, but kept them unchanged between 2000 and 2004. Ever since 2004, dividends per share have been on the increase.

Currently, this dividend achiever is attractively priced at 18.50 times earnings, and a current yield of 3.10%.

Full Fisclosure: Long GIS

Relevant Articles:

- General Mills Delivers a Consistent Dividend Raise
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Best Dividend Investing Articles for June 2014

For your weekend reading enjoyment, I have highlighted a few interesting articles from the archives, which I find to be relevant today. The first five articles have been written and posted on this site, while the last five have been selected from other authors. I tend to post anywhere between three to four articles to my site every week. I usually try to write at least one or two articles that contain timeless information concerning dividend investing. This could include information about my strategy, or other pieces of information, which could be useful to dividend investors.

Below, I have highlighted a few articles posted on this site, which many readers have found interesting:

1) Companies I am Considering for my Roth IRA

In this article I discuss several companies, which I am considering for my 2014 Roth IRA contribution. I already added to General Mills (GIS), by taking advantage of last week's drop in prices. Over the next month or so, I expect to be able to add to a few more companies.

2) 7 Dividend Paying Stocks I Purchased Without Paying Commissions

Loyal3 is a great service, which allows investors to purchase shares directly from companies, without charging any commissions or fees. The great attributes include ability to invest as little as $10 in each investment commission free, as well as the ability to earn credit card rewards points for certain purchases.

3) Margin of Safety in Financial Independence

I want to be able to achieve the dividend crossover point by 2018. However, I want to do it on my own terms. In this article, I discuss methods that would help me reduce the risk of running out of money in retirement.

4) What Attracted Warren Buffett to IBM?

I discuss the things Warren Buffett looks at, when he evaluates companies. I then put those reasons in the context of Buffett's investment in IBM. This is one of the companies that I plan on adding to in the coming year.

5) Dividend Growth Stocks are Compounding Machines

Compounding is one of the eight wonders of the world. I have always been amazed how otherwise large, boring, and slow growing enterprises can end up delivering outstanding returns to their shareholders. I highlight three compounding machines, for which I believe best days are still ahead of them.

I read a lot about companies, and also read a lot of interesting articles from all over the web. A few that I really enjoyed over the past months include:

1) My Dividend Growth Portfolio's 6th Birthday Report

Dave Van Knapp has been monitoring a real-life dividend growth portfolio since June 2008. The primary goal of the portfolio has been to achieve a 10% yield on cost by June 2018. The performance in terms of annual dividend growth, and total returns, has been very good over the past six years.

2) Dividends Are A Return Of Capital And A Return On Capital

Dividend Mantra discusses how dividends are both a return on investment, but also reduce the amount investors have at risk. He also uses as an example one of my favorite dividend growth stocks, which coincidentally is one of his largest positions as well.

3) The Perfect Dividend Stock

Dividends4Life talks about his approach to balance between yield and growth, when selecting dividend stocks. It is helpful to select companies with different yield and growth characteristics, when constructing a dividend portfolio, in order to reduce risk.

4) Tracking your DGI Portfolio

Blogger DivGro outlines how he tracks his dividend portfolio, using Google Docs. This is helpful in monitoring  prices, valuations, dividend information for companies someone owns in their portfolio. It could also be helpful in setting up a list of companies for further monitoring. As always however, investors need to analyze companies one at a time, in order to really understand the data, make sure it is correct, and understand the story behind the business.

5) Short Term Price Movements Are Not Indicative of Value

Passive Income Earner discusses something that unfortunately is very prevalent in many investors. Many tend to focus on short-term fluctuations, and thus end up missing out on what truly matters in order to succeed as a long-term investor. Luckily, most dividend growth investors tend to be a conservative bunch, that focuses on fundamentals, and requiring a streak of dividend growth and the business strength to support it. Dividend growth investors by definition have a longer term view, which rapidly increases their odds of success.

Thank you for reading Dividend Growth Investor site. I am also on Twitter, if you are interested in following me on another platform, where I post about recent trades I have made.

Full Disclosure: Long GIS and IBM