Dividend growth investing is a strategy that focuses on companies which regularly raise dividends. The strategy focuses on growth in dividends over a longer period of time that usually exceeds ten years. The typical dividend growth stock does not yield a lot today, but can generate very high yields on cost, that will definitely trump even some of the highest yielding stocks today.
The important tool that makes dividend growth investing is growth in earnings per share. Growth in earnings per share enables companies to increase dividends over time in a sustainable matter. A company that grows dividends for a period of time without corresponding earnings growth will eventually run out of room to boost distributions. I call these dividend stocks on autopilot, and try to avoid them whenever possible. I typically look for the annual rates of increase in dividends and earnings per share to be similar within a certain range.
As a result, dividend growth investors focus on the catalysts that can generate a higher net income for the corporations whose stock they are purchasing. Companies can earn more by selling more, increasing prices, streamlining operations, expanding in new markets, selling new products or acquiring and merging with other companies. Mergers and acquisitions can only lead to higher earnings per share if they result in synergies. We want growth in earnings per share after all, not just a growth in overall net income.
There is not a one size fits all approach, which is why some time needs to be spent learning about the company and determining where the growth will come from. For many consumer staples such as Coca-Cola (KO) or Procter & Gamble (PG), future growth will be positively correlated with the expansion in the number of middle class consumers in emerging markets of Asia, Latin America, Africa and Eastern Europe. Strong pricing power of companies like Coca-Cola (KO) and Phillip Morris International (PM) can also allow them to pass on cost increases to consumers, while increasing their profits. For other companies such as 3M (MMM), future growth could arise from a culture that focuses on innovation and bringing new products to market in order to generate growth.
Imagine a company which yields 2.50% today, but can grow earnings and distributions by 10%/year. The stock trades at $100 today, earns $5/share and pays a $2.50 dividend. The stock will probably yield around 2% - 3% over the course of an year, and would be usually ignored by investors who simply look at current yields. In approximately 14-15 years however, this company would likely still yield somewhere between 2% - 3%. However, the stock would be earning close to $20/share and probably paying about $10/share in annual dividends. It would not be unreasonable to assume that the stock could be valued at $400/share. The investor, who had the vision to acquire this stock when it traded at $100/share, is now generating an yield on cost of 10%. If they reinvested dividends along the way, they would likely be earnings much more in dividend income. The rising dividend income also provides protection against inflation over time.
A few important things to note are related to entry price, diversification, and dividend reinvestment.
Having a strategy that provides a maximum entry price to pay for a stock helps in being a disciplined investor, who avoids getting carried away. I try to never pay more than 20 times earnings for a stock. At the end of the day, if you overpay by purchasing a company like Coca-Cola (KO) or Wal-Mart (WMT) at 30 times earnings, you might end up regretting the investment for a long time. You would likely receive a small yield as well. If you had the fortitude of selecting a great company with solid fundamentals and a rising earnings tide, it would eventually “bail you” out, as earnings growth would compress the P/E ratio. This would make the stock compelling again. However, if for some reason the company stops growing, it might be dead money for a long period of time. Hopefully some of your other investments deliver better returns if that were the case.
This leads me to the next point on diversification. Dividend growth investors need to absolutely build a portfolio consisting of at least 30 individual securities, which come from as many industries that make sense. Investors who own less than 30 positions, and are heavily focused on a sector or two are just asking for trouble. A diversified portfolio of over 30 stocks provides a fail-safe mechanism to protect the portfolio income against a few bad apples. It can also protect investors against a wave of dividend cuts in a given sector. Investors in the financial sector experienced dividend cuts and eliminations across the board during the 2007 – 2009 financial crisis. Not every company in the financial sector cut dividends however, and the carnage was mostly focused there.
The good part about the strategy is that investors receive cash in their brokerage accounts from their dividend paying stocks. This allows them to have the necessary resources available for opportunities present during recessions for example. Not all sectors are attractive to invest in at all times. This is why building your exposure at the most attractive stocks across a variety of sectors over time is an effective way to deploy dividends received and new capital put to work.
Full Disclosure: Long KO, PM, WMT, PM, MMM
Relevant Articles:
- Check the Complete Article Archive
- Buy and hold dividend investing is not dead
- Reinvest Dividends Selectively
- Dividend investing timeframes- what's your holding period?
- How much money do you really need to retire with dividend paying stocks?
Friday, November 15, 2013
Wednesday, November 13, 2013
Dividend Stocks Are Not a Bubble, but Many Technology High-Fliers Are Dangerously Overhyped
So far, 2013 has been a great year for investors. Stock prices are rising left and right, many participants are flush with cash, and there are few alternatives to equities at the moment.
The rising tide has left many of the usual suspects I bought over the past five – six years slightly overvalued. I am referring to the likes of Colgate –Palmolive (CL), or Automatic Data Processing (ADP), which trade above 20 times earnings. Other steady-eddies like Coca-Cola (KO) and Procter & Gamble (PG) are trading at slightly less than 20 times earnings. This is not going unnoticed however. Several times so far this year, someone is coming to attack the viability of dividend investing as a strategy, mostly due to that overvaluation. These Neanderthals proclaim the death of dividend investing all the time. In general, I think these people should be ignored, as they are dangerous to your wealth building process.
All the while these self-proclaimed gurus talk about the so called bubble in dividend investing; they are failing to recognize the real threat to investors today. This threat is simply there, in plain sight, for anyone to see. Yet, everyone seems to be focusing on the so called bubble in dividend stocks. I don’t get it how you can call Coca-Cola at 19 times earnings a bubble, when Facebook (FB) is trading at a P/E ratio of 50 times expected earnings. I guess in the modern world, a company that has an established distribution network, a loyal customer base, pricing power, a diversity of products and a culture of dealing with over 100 years’ worth of challenges, is no match for a young technology company that offers a product that might not even be there 15 years from now. On the other hand, I am pretty sure people would still be brushing their teeth, drinking liquids and shaving.
What the gurus are missing, is the sky-high valuations on a certain set of over-hyped companies. Many of these companies are justifying their valuation based on extremely optimistic projections going many years into the future. The thing that makes those projections highly doubtful is that these companies have untested business models, and are subject to rapid paradigm shifts in consumer demands. It is very difficult to make projections on sales, revenues and profits ten years into the future on new concepts. This smells more like speculation, rather than sound investing. Even if you have a great idea that would make the world a much better place, it would still not be enough for early investors to make a reasonable return on their investment. If you massively overpay for future growth, you might end up without much of a return for a long period of time.
A few of these over-hyped companies include:
Tesla Motors (TSLA), which is supposed to revolutionize the automotive industry. We have the buzz word of a visionary entrepreneurial CEO with a proven track record, the fact that a company selling a few thousand cars per month has a market cap that is half to a third of more established General Motors (GM) and the lack of profits. It is true that the company has a lot of potential, but in order for the valuation to make sense, it must sell a lot of cars. Even if Tesla cars become widespread in the world in ten years, this still does not present a guarantee of profits and stock price gains for investors who buy today. Even if Tesla sells 500,000 cars annually by 2023, this could still not be enough to justify the lofty valuation of today. Tesla has a market cap of 16.5 billion, while GM has a 50.5 billion dollar capitalization. In 2012, GM delivered 9.3 million vehicles, while Tesla will have 21,000 vehicles delivered in 2013. The company is expected to reach 500,000 vehicles in the future. While the company is great, I doubt that current valuations make sense for investors.
Amazon.com (AMZN) is an awesome company, whose services I use very often. The company is trading at a P/E of a few hundred times earnings, and has managed to grow revenues through scaling operations, expanding into new sexy businesses such as the cloud, and disrupting the retail business. However, the company is almost 20 years old, yet still behaves like a start-up. I remember the first time everyone said that profits don’t matter in the late 1990s. I also remember the early 2000s, which were brutal for the former technology darlings. Many did go under, including the likes of Pets.com and Webvan. I think that Amazon would likely be there in 20 years, however I do not know if simply growing revenues is a viable business model that can reward shareholders in the long-run. At the end of the day, the goal for a business is not to grow revenues to the sky and be a disruptive force in as many industries as possible, but to make money for the shareholders. Between 1995 and 2012, the company has earned a total of $1.9 billion dollars. Currently, the market capitalization of Amazon is 160 billion dollars. While the company is great, current valuations do not make sense for investors.
Twitter (TWTR) recently had a widely successful Initial Public Offering (IPO). The company has not yet made a profit, but at least it is generating some revenues. Just a few short years ago, Twitter didn’t even know how to monetize its wide number of users. I use Twitter, but in all seriousness, I find it very obnoxious, and pretty spammy. Of course, I do not care about the Kardashians or Jersey Shore, so maybe I just don’t “get it“. However, when a company whose business trades at 24 times expected revenues in 2014, it could take a lot of luck for this investment to work out for investors. The company’s market capitalization is $22.70 billion and analysts expect it to have revenues of $1.15 billion by 2014. In 2012, the company lost $79 million on revenues of $317 million. Current valuations do not make sense for investors in Twitter.
I understand that all of these companies can justify their lofty valuations today, if they keep growing revenues and eye-balls at a fast pace for several years to come. However, this type of valuation method assumes perfection, and we all know how in a world of ever changing technology and rapid shifts in consumer technology tastes, todays darling could become tomorrow pariah. Just look at MySpace.
If the stock prices turn lower from here, the biggest losers are going to be the investors in the three companies mentioned above.
You can call me old-fashioned, but the types of companies I find attractive enough today to buy and hold for 20 years include:
The Coca-Cola Company (KO), a beverage company, engages in the manufacture, marketing, and sale of nonalcoholic beverages worldwide. The company has rewarded shareholders with dividend increases for 51 years in a row. Over the past decade, Coca-Cola has managed to hike dividends by 9.80%/year. Currently, the stock is trading at 19 times earnings and yields 2.80%. Check my analysis of Coca-Cola for more details.
Chevron Corporation (CVX), through its subsidiaries, engages in petroleum, chemicals, mining, power generation, and energy operations worldwide. The company has rewarded shareholders with dividend increases for 26 years in a row. Over the past decade, Chevron has managed to hike dividends by 9.60%/year. Currently, the stock is trading at 10 times earnings and yields 3.40%. Check my analysis of Chevron for more details.
Target Corporation (TGT) operates general merchandise stores in the United States. The company has rewarded shareholders with dividend increases for 46 years in a row. Over the past decade, Target has managed to hike dividends by 18.60%/year. Currently, the stock is trading at 15.70 times earnings and yields 2.70%. Check my analysis of Target for more details.
Philip Morris International Inc. (PM), through its subsidiaries, manufactures and sells cigarettes and other tobacco products. The company has rewarded shareholders with dividend increases for years in a row. Since the spin-off from its parent Altria in 2008, Philip Morris International has managed to hike dividends by 13%/year. Currently, the stock is trading at 17 times earnings and yields 4.20%. Check my analysis of Philip Morris International for more details.
I believe that the key to investing success is not how much a company will supposedly benefit society, but rather determine what their competitive advantage is and how durable that moat really is. After that, if you manage to purchase such a company at a fair price, and you hold at least 30 such companies in your dividend portfolio, you should do quite well for yourself in the long-run.
Full Disclosure: Long KO, CVX, TGT, CL, ADP, PM
Relevant Articles:
- Buy and hold dividend investing is not dead
- Dividend Investing in times of a Social Media Bubbles
- How to invest when the market is at all time highs?
- Common Misconceptions about Dividend Growth Investing
- Frequently Asked Questions (FAQ) About Dividend Investing
The rising tide has left many of the usual suspects I bought over the past five – six years slightly overvalued. I am referring to the likes of Colgate –Palmolive (CL), or Automatic Data Processing (ADP), which trade above 20 times earnings. Other steady-eddies like Coca-Cola (KO) and Procter & Gamble (PG) are trading at slightly less than 20 times earnings. This is not going unnoticed however. Several times so far this year, someone is coming to attack the viability of dividend investing as a strategy, mostly due to that overvaluation. These Neanderthals proclaim the death of dividend investing all the time. In general, I think these people should be ignored, as they are dangerous to your wealth building process.
All the while these self-proclaimed gurus talk about the so called bubble in dividend investing; they are failing to recognize the real threat to investors today. This threat is simply there, in plain sight, for anyone to see. Yet, everyone seems to be focusing on the so called bubble in dividend stocks. I don’t get it how you can call Coca-Cola at 19 times earnings a bubble, when Facebook (FB) is trading at a P/E ratio of 50 times expected earnings. I guess in the modern world, a company that has an established distribution network, a loyal customer base, pricing power, a diversity of products and a culture of dealing with over 100 years’ worth of challenges, is no match for a young technology company that offers a product that might not even be there 15 years from now. On the other hand, I am pretty sure people would still be brushing their teeth, drinking liquids and shaving.
What the gurus are missing, is the sky-high valuations on a certain set of over-hyped companies. Many of these companies are justifying their valuation based on extremely optimistic projections going many years into the future. The thing that makes those projections highly doubtful is that these companies have untested business models, and are subject to rapid paradigm shifts in consumer demands. It is very difficult to make projections on sales, revenues and profits ten years into the future on new concepts. This smells more like speculation, rather than sound investing. Even if you have a great idea that would make the world a much better place, it would still not be enough for early investors to make a reasonable return on their investment. If you massively overpay for future growth, you might end up without much of a return for a long period of time.
A few of these over-hyped companies include:
Tesla Motors (TSLA), which is supposed to revolutionize the automotive industry. We have the buzz word of a visionary entrepreneurial CEO with a proven track record, the fact that a company selling a few thousand cars per month has a market cap that is half to a third of more established General Motors (GM) and the lack of profits. It is true that the company has a lot of potential, but in order for the valuation to make sense, it must sell a lot of cars. Even if Tesla cars become widespread in the world in ten years, this still does not present a guarantee of profits and stock price gains for investors who buy today. Even if Tesla sells 500,000 cars annually by 2023, this could still not be enough to justify the lofty valuation of today. Tesla has a market cap of 16.5 billion, while GM has a 50.5 billion dollar capitalization. In 2012, GM delivered 9.3 million vehicles, while Tesla will have 21,000 vehicles delivered in 2013. The company is expected to reach 500,000 vehicles in the future. While the company is great, I doubt that current valuations make sense for investors.
Amazon.com (AMZN) is an awesome company, whose services I use very often. The company is trading at a P/E of a few hundred times earnings, and has managed to grow revenues through scaling operations, expanding into new sexy businesses such as the cloud, and disrupting the retail business. However, the company is almost 20 years old, yet still behaves like a start-up. I remember the first time everyone said that profits don’t matter in the late 1990s. I also remember the early 2000s, which were brutal for the former technology darlings. Many did go under, including the likes of Pets.com and Webvan. I think that Amazon would likely be there in 20 years, however I do not know if simply growing revenues is a viable business model that can reward shareholders in the long-run. At the end of the day, the goal for a business is not to grow revenues to the sky and be a disruptive force in as many industries as possible, but to make money for the shareholders. Between 1995 and 2012, the company has earned a total of $1.9 billion dollars. Currently, the market capitalization of Amazon is 160 billion dollars. While the company is great, current valuations do not make sense for investors.
Twitter (TWTR) recently had a widely successful Initial Public Offering (IPO). The company has not yet made a profit, but at least it is generating some revenues. Just a few short years ago, Twitter didn’t even know how to monetize its wide number of users. I use Twitter, but in all seriousness, I find it very obnoxious, and pretty spammy. Of course, I do not care about the Kardashians or Jersey Shore, so maybe I just don’t “get it“. However, when a company whose business trades at 24 times expected revenues in 2014, it could take a lot of luck for this investment to work out for investors. The company’s market capitalization is $22.70 billion and analysts expect it to have revenues of $1.15 billion by 2014. In 2012, the company lost $79 million on revenues of $317 million. Current valuations do not make sense for investors in Twitter.
I understand that all of these companies can justify their lofty valuations today, if they keep growing revenues and eye-balls at a fast pace for several years to come. However, this type of valuation method assumes perfection, and we all know how in a world of ever changing technology and rapid shifts in consumer technology tastes, todays darling could become tomorrow pariah. Just look at MySpace.
If the stock prices turn lower from here, the biggest losers are going to be the investors in the three companies mentioned above.
You can call me old-fashioned, but the types of companies I find attractive enough today to buy and hold for 20 years include:
The Coca-Cola Company (KO), a beverage company, engages in the manufacture, marketing, and sale of nonalcoholic beverages worldwide. The company has rewarded shareholders with dividend increases for 51 years in a row. Over the past decade, Coca-Cola has managed to hike dividends by 9.80%/year. Currently, the stock is trading at 19 times earnings and yields 2.80%. Check my analysis of Coca-Cola for more details.
Chevron Corporation (CVX), through its subsidiaries, engages in petroleum, chemicals, mining, power generation, and energy operations worldwide. The company has rewarded shareholders with dividend increases for 26 years in a row. Over the past decade, Chevron has managed to hike dividends by 9.60%/year. Currently, the stock is trading at 10 times earnings and yields 3.40%. Check my analysis of Chevron for more details.
Target Corporation (TGT) operates general merchandise stores in the United States. The company has rewarded shareholders with dividend increases for 46 years in a row. Over the past decade, Target has managed to hike dividends by 18.60%/year. Currently, the stock is trading at 15.70 times earnings and yields 2.70%. Check my analysis of Target for more details.
Philip Morris International Inc. (PM), through its subsidiaries, manufactures and sells cigarettes and other tobacco products. The company has rewarded shareholders with dividend increases for years in a row. Since the spin-off from its parent Altria in 2008, Philip Morris International has managed to hike dividends by 13%/year. Currently, the stock is trading at 17 times earnings and yields 4.20%. Check my analysis of Philip Morris International for more details.
I believe that the key to investing success is not how much a company will supposedly benefit society, but rather determine what their competitive advantage is and how durable that moat really is. After that, if you manage to purchase such a company at a fair price, and you hold at least 30 such companies in your dividend portfolio, you should do quite well for yourself in the long-run.
Full Disclosure: Long KO, CVX, TGT, CL, ADP, PM
Relevant Articles:
- Buy and hold dividend investing is not dead
- Dividend Investing in times of a Social Media Bubbles
- How to invest when the market is at all time highs?
- Common Misconceptions about Dividend Growth Investing
- Frequently Asked Questions (FAQ) About Dividend Investing
Monday, November 11, 2013
How to buy dividend stocks with as little as $10
Update 1/7/2016: The credit card option is no longer available. You can only purchase shares using your linked checking account.
Many Americans use credit cards for a lot of their everyday purchases. In fact, many Americans have a problem with too much plastic. As a result, people in the US save a very small amount of their incomes. At the same time, a lot of individuals have a problem with debt.
On the other scale, you have beginning dividend investors, who cannot put more than a few hundred dollars per month in quality dividend stocks. Many investors are put off investing, because they believe they need a lot of money to start investing. With commissions at even the best brokers run anywhere between $5 - $10 per transaction, many investors rightly know that they need a lot of money coming each month before they can consider investing in dividend paying stocks. They are somewhat right, since a $5 commission on a $200 investment is equivalent to 2.50%, which is prohibitively high. A $10 commission on a $200 investment corresponds to an even worse 5%.
The options for this investor are to either purchase commission free ETF’s or mutual funds, use dividend reinvestment plans (DRIPs) or find a low or zero commission way to acquire stock. When I was first starting out, the best broker for me was Zecco, because it provided free trades every month. Now unfortunately there are almost no such options.
However, I recently stumbled upon Loyal3, which lets you purchase shares of some of the best stocks in the world for no cost. In fact, you can purchase shares in some of your favorite dividend stocks with as little as $10 with no costs whatsoever. Even better, you can use your credit card to purchase shares directly from the companies you are investing in with no cost and earn credit card rewards in the process. Selling you shares is commission free as well, and all costs so far have been bore by the companies themselves. The companies benefit by creating a truly loyal and long-term shareholder base, and get capital to invest in their businesses. If the stock you are buying costs more than $10/share, it is not a problem, since Loyal3 allows you to buy partial shares.
With Loyal3, you can essentially buy shares in your favorite stocks with as little as $10, which democratizes the investing process. This way, even the 99% have a chance of making money from the economic success of some of America’s greatest companies. One of the downsides behind this investing scheme is that there are only a limited number of 50 or so companies which have signed up to offer shares directly to stockholders.
Using the following list, you can see that there are several prominent dividend paying stocks there. A few notable examples include McDonald's (MCD), Coca-Cola (KO), PepsiCo (PEP), Unilever (UL), Target (TGT) and Wal-Mart (WMT).
One downside is that Loyal3 is a start-up, and therefore it is not an established broker. Therefore, this opportunity could be of a limited time whose purpose is to attract customers, before initiating a monthly fee or a small commission. Of course, once you own the stock, you can always transfer securities elsewhere, and close your Loyal3 account.
While I like that you can buy stock in companies with as little as $10 per investment with a credit card, you can only do this if you set up a monthly investment plan. If you are not good at managing your personal finances, it is possible to rack up quite an amount of credit card debt from those monthly recurring transactions if you say forget about it and do not track your credit card statements. Of course, if I had the choice of having a credit card debt from shopping for clothes or buying stocks, I would choose stocks any time. Therefore, you should be careful not to overextend yourself. However, since I monitor my accounts daily, I would never buy anything that will jeopardize my personal finances. Of course, if you use your checking account, you can make a one time investment at any time in a given month. You are only limited to buying up to $2,500 per stock in a given company per month ( for both credit and checking accounts).
The other thing to look for when you buy shares is execution speed and price. You do not want to “save” $5 on a commission, only to get horrible execution price from your broker. For example, if you had $200 and a share of IBM cost $190, you should end up with one share of IBM and $10 with a commission free broker. If your execution price is $195, it is quite possible that your broker is compensating for the lack of commission by making you pay inflated prices for stocks you are buying. With Loyal3, the shares are purchased at prices that approximate the market price within a few pennies/share, which is reasonable. In addition, the shares are put in your account soon after purchase.
Actually, the website says that “You will receive the actual share price (market price) of stock bought on your behalf on the day your purchase is executed". You will receive a link to your trade confirmation shortly after the shares are purchased in the open market. Based on 10 transactions I made with the site, I can attest that prices were very similar to market prices at time of purchase confirmation.
For example, I had set up my account to automatically purchase shares of Unilever (UL)on the 7th day of the month, using my credit card. The credit card was charged on October 7, and the stock was purchased at $37.68/share. The number of shares was posted to the account within a couple of business days.
Selling is really easy as well. It took approximately 3 businesses days when selling a stock, before you can get the money in your Loyal3 account. Per the company, you will receive the actual price (market price) of shares sold through the LOYAL3 platform on your behalf on the day your sale is executed.
Another thing to look for when evaluating brokers is to make sure that they are SIPC insured. This protects the investors for an amount up to $500,000, if the broker failed. Loyal3 is SIPC insured, so you should be ok if your investment there are worth less than $500 thousand.
The company does not automatically reinvests dividends for you into more shares. This does not speed up the compounding process for you. If you earn enough in dividends however, you can easily allocate the cash to your best idea available at Loyal3.
I would also want to see them have more information about investing in general. I think that most of the people using Loyal3 would likely be new to investments, and therefore an education section there would be helpful.
I have bought shares in the following companies in this account over the past month:
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 28.40%/year. Currently, the stock is trading at 17.50 times earnings and yields 3.30%. Check my analysis of McDonald's 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 18.60%/year. Currently, the stock is trading at 15.60 times earnings and yields 2.70%. Check my analysis of Target for more details.
Wal-Mart Stores, Inc. (WMT) operates retail stores in various formats worldwide. This dividend champion has consistently raised distributions for 39 years in a row. Over the past decade, the company has managed to boost dividends by 18.10%/year. Currently, the stock is trading at 15.10 times earnings and yields 2.40%. Check my analysis of Wal-Mart 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 15.30 times earnings and yields 3.20%. Check my analysis of Dr Pepper for more details.
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 51 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 times forward earnings and yields 2.80%. Check my analysis of Coca-Cola 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 14 years in a row. Over the past decade, Unilever has managed to boost dividends by 9.90%/year. Currently, the stock is trading at 18.70 times earnings and yields 3.70%. Check my analysis of Unilever 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 nine years in a row. Over the past decade, the company has managed to boost dividends by 5.60%/year. Currently, the stock is trading at 16.50 times forward earnings and yields 3%.
Overall, I am excited about Loyal3, and highly recommend it to anyone just starting out. If you already have a brokerage account, it might still make sense to acquire stock directly through Loyal3, assuming you find great companies available at attractive prices at that site, since there are no commissions.
This platform is very intuitive, easy to set up, and would satisfy the needs for most long-term dividend investors. If you need instant liquidity and instant gratification, plus streaming quotes and the ability to day-trade stocks, sell calls and puts on them, then this is not the platform for you. However, it is time in the market, not timing the market, that truly has determined the success of some of the most successful dividend investors of all time. Patience is a very lucrative virtue in the world of dividend investing for the long run.
Full Disclosure: Long IBM, MCD, TGT, WMT, K, DPS, KO, UL
Relevant Articles:
- Check the Complete Article Archive
- Do not despise the days of small beginnings
- Ten Dividend Paying Stocks I purchased in September
- Using DRIPs for faster compounding of dividends
- Why Investors Should Look Beyond Typical Dividend Growth Screens
This article was featured on the Carnival of Wealth
Many Americans use credit cards for a lot of their everyday purchases. In fact, many Americans have a problem with too much plastic. As a result, people in the US save a very small amount of their incomes. At the same time, a lot of individuals have a problem with debt.
On the other scale, you have beginning dividend investors, who cannot put more than a few hundred dollars per month in quality dividend stocks. Many investors are put off investing, because they believe they need a lot of money to start investing. With commissions at even the best brokers run anywhere between $5 - $10 per transaction, many investors rightly know that they need a lot of money coming each month before they can consider investing in dividend paying stocks. They are somewhat right, since a $5 commission on a $200 investment is equivalent to 2.50%, which is prohibitively high. A $10 commission on a $200 investment corresponds to an even worse 5%.
The options for this investor are to either purchase commission free ETF’s or mutual funds, use dividend reinvestment plans (DRIPs) or find a low or zero commission way to acquire stock. When I was first starting out, the best broker for me was Zecco, because it provided free trades every month. Now unfortunately there are almost no such options.
However, I recently stumbled upon Loyal3, which lets you purchase shares of some of the best stocks in the world for no cost. In fact, you can purchase shares in some of your favorite dividend stocks with as little as $10 with no costs whatsoever. Even better, you can use your credit card to purchase shares directly from the companies you are investing in with no cost and earn credit card rewards in the process. Selling you shares is commission free as well, and all costs so far have been bore by the companies themselves. The companies benefit by creating a truly loyal and long-term shareholder base, and get capital to invest in their businesses. If the stock you are buying costs more than $10/share, it is not a problem, since Loyal3 allows you to buy partial shares.
With Loyal3, you can essentially buy shares in your favorite stocks with as little as $10, which democratizes the investing process. This way, even the 99% have a chance of making money from the economic success of some of America’s greatest companies. One of the downsides behind this investing scheme is that there are only a limited number of 50 or so companies which have signed up to offer shares directly to stockholders.
Using the following list, you can see that there are several prominent dividend paying stocks there. A few notable examples include McDonald's (MCD), Coca-Cola (KO), PepsiCo (PEP), Unilever (UL), Target (TGT) and Wal-Mart (WMT).
One downside is that Loyal3 is a start-up, and therefore it is not an established broker. Therefore, this opportunity could be of a limited time whose purpose is to attract customers, before initiating a monthly fee or a small commission. Of course, once you own the stock, you can always transfer securities elsewhere, and close your Loyal3 account.
While I like that you can buy stock in companies with as little as $10 per investment with a credit card, you can only do this if you set up a monthly investment plan. If you are not good at managing your personal finances, it is possible to rack up quite an amount of credit card debt from those monthly recurring transactions if you say forget about it and do not track your credit card statements. Of course, if I had the choice of having a credit card debt from shopping for clothes or buying stocks, I would choose stocks any time. Therefore, you should be careful not to overextend yourself. However, since I monitor my accounts daily, I would never buy anything that will jeopardize my personal finances. Of course, if you use your checking account, you can make a one time investment at any time in a given month. You are only limited to buying up to $2,500 per stock in a given company per month ( for both credit and checking accounts).
The other thing to look for when you buy shares is execution speed and price. You do not want to “save” $5 on a commission, only to get horrible execution price from your broker. For example, if you had $200 and a share of IBM cost $190, you should end up with one share of IBM and $10 with a commission free broker. If your execution price is $195, it is quite possible that your broker is compensating for the lack of commission by making you pay inflated prices for stocks you are buying. With Loyal3, the shares are purchased at prices that approximate the market price within a few pennies/share, which is reasonable. In addition, the shares are put in your account soon after purchase.
Actually, the website says that “You will receive the actual share price (market price) of stock bought on your behalf on the day your purchase is executed". You will receive a link to your trade confirmation shortly after the shares are purchased in the open market. Based on 10 transactions I made with the site, I can attest that prices were very similar to market prices at time of purchase confirmation.
For example, I had set up my account to automatically purchase shares of Unilever (UL)on the 7th day of the month, using my credit card. The credit card was charged on October 7, and the stock was purchased at $37.68/share. The number of shares was posted to the account within a couple of business days.
Selling is really easy as well. It took approximately 3 businesses days when selling a stock, before you can get the money in your Loyal3 account. Per the company, you will receive the actual price (market price) of shares sold through the LOYAL3 platform on your behalf on the day your sale is executed.
Another thing to look for when evaluating brokers is to make sure that they are SIPC insured. This protects the investors for an amount up to $500,000, if the broker failed. Loyal3 is SIPC insured, so you should be ok if your investment there are worth less than $500 thousand.
The company does not automatically reinvests dividends for you into more shares. This does not speed up the compounding process for you. If you earn enough in dividends however, you can easily allocate the cash to your best idea available at Loyal3.
I would also want to see them have more information about investing in general. I think that most of the people using Loyal3 would likely be new to investments, and therefore an education section there would be helpful.
I have bought shares in the following companies in this account over the past month:
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 28.40%/year. Currently, the stock is trading at 17.50 times earnings and yields 3.30%. Check my analysis of McDonald's 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 18.60%/year. Currently, the stock is trading at 15.60 times earnings and yields 2.70%. Check my analysis of Target for more details.
Wal-Mart Stores, Inc. (WMT) operates retail stores in various formats worldwide. This dividend champion has consistently raised distributions for 39 years in a row. Over the past decade, the company has managed to boost dividends by 18.10%/year. Currently, the stock is trading at 15.10 times earnings and yields 2.40%. Check my analysis of Wal-Mart 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 15.30 times earnings and yields 3.20%. Check my analysis of Dr Pepper for more details.
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 51 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 times forward earnings and yields 2.80%. Check my analysis of Coca-Cola 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 14 years in a row. Over the past decade, Unilever has managed to boost dividends by 9.90%/year. Currently, the stock is trading at 18.70 times earnings and yields 3.70%. Check my analysis of Unilever 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 nine years in a row. Over the past decade, the company has managed to boost dividends by 5.60%/year. Currently, the stock is trading at 16.50 times forward earnings and yields 3%.
Overall, I am excited about Loyal3, and highly recommend it to anyone just starting out. If you already have a brokerage account, it might still make sense to acquire stock directly through Loyal3, assuming you find great companies available at attractive prices at that site, since there are no commissions.
This platform is very intuitive, easy to set up, and would satisfy the needs for most long-term dividend investors. If you need instant liquidity and instant gratification, plus streaming quotes and the ability to day-trade stocks, sell calls and puts on them, then this is not the platform for you. However, it is time in the market, not timing the market, that truly has determined the success of some of the most successful dividend investors of all time. Patience is a very lucrative virtue in the world of dividend investing for the long run.
Full Disclosure: Long IBM, MCD, TGT, WMT, K, DPS, KO, UL
Relevant Articles:
- Check the Complete Article Archive
- Do not despise the days of small beginnings
- Ten Dividend Paying Stocks I purchased in September
- Using DRIPs for faster compounding of dividends
- Why Investors Should Look Beyond Typical Dividend Growth Screens
This article was featured on the Carnival of Wealth
Saturday, November 9, 2013
Best Articles on Dividend Investing for October 2013
For your weekend reading enjoyment, I have highlighted a few interesting articles over the past month from the archives, which readers 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:
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 several months include:
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 several months include:
If you have any ideas on topics that I could cover, please write down below. I would add them to y to-do the list promptly.
Friday, November 8, 2013
Northrop Grumman (NOC) Dividend Stock Analysis
Northrop Grumman Corporation (NOC) provides systems, products, and solutions in aerospace, electronics, information systems, and technical service areas to government and commercial customers worldwide. Northrop Grumman has raised dividends for 10 years in a row. Over the past decade, it has managed to boost distributions by 13%/year. The outstanding shares from decreased from 368 million in 2003 to 237.5 million in 2013. The company has an open buyback facility to repurchase approximately 25% of outstanding shares by 2015. Analysts expect that this dividend achiever would earn $7.78/share in 2013 and $7.99/share by 2014. In contrast, it earned $7.81/share in 2012.
The past decade has been great for defense contractors in the US, with two major wars going on, and an increase in Federal spending. However, the next decade might look different, which is why I am not going to look at the past decades trends in earnings per share, dividends per share, payout ratios or returns on equity for Northrop Grumman.
I discussed that US defense spending is likely to contract in the near future, meaning in the next five years or so. However, in the long-run, it is quite possible that defense spending will be higher in 20 years. Actually, per the Sequester agreement in early 2013, defense spending is expected to fall by 6.40% in 2013 and 5.5% in 2014. After that, it is expected that increases will match increases in inflation through 2023, which is about 2% or so. Check this document for more information.
In an interview, famous investor Mohnish Pabrai discussed some of the three strategies for investment success by Charlie Munger. One of them was to focus on carnivores, or companies which have managed to repurchase a substantial amount of their shares. If a company manages to retire 20 – 25% of outstanding shares, and manages to maintain a consistent level of profits after that, it should deliver good returns to shareholders. With Northrop Grumman, the company has managed to consistently implement and execute programs to repurchase stock. If the company can maintain the level of sales and income, shareholders could reasonably expect another massive buyback program after this one is completed in 2015. While I usually prefer dividends over buybacks, I am open to companies regular repurchasing shares at attractive valuations.
When I looked at Northrop’s statement of cash flows, I uncovered a hidden gem. It looks like the company is drowning in cash. For example, in 2012 the company generated 2.64 billion in cash flow from operating activities, while Capex amounted to 331 million. The Capex figure was the lowest in the past five years however, as it was as high as $770 million in 2010. The lowest cash flow from operating activities over the past five years was in 2011 at $2.115 billion.
At the same time, the total amount paid on dividends distributed back to shareholders has been very stable in the range of $525 - $545 million per year. Despite the fact that dividends per share increased in each of the past five years, Northrop has managed to keep the total amount spent on distributions by repurchasing massive amounts of shares.
In fact, the company has managed to decrease the total number of shares outstanding from 354 million in 2007 to 237.50 million in 2013.
Northrop Grumman has managed to spend anywhere from $1.1 billion on share buybacks in 2009 to $2.3 billion in 2011. The company spent $1.3 billion on share buybacks in 2012.
Either way you look at it, the management of Northrop Grumman looks like a very shareholder friendly oriented management. Currently, the stock is attractively valued at 12.20 times earnings and yields 2.30%. This is a lower yield than Lockheed Martin's (LMT) over 4% yield, but it seems more sustainable. Although there is uncertainty over the US defense budgets, the consistent nature of share repurchases could translate into very good dividend and capital gains returns for investors who snap up these cheap shares today. I would consider adding to the stock on dips below $98/share ( equivalent to a 2.50% yield).
What is your opinion on the company?
Relevant Articles:
- Check the Complete Article Archive
- Dividends versus Share Buybacks/Stock repurchases
- Should Dividend Investors be Defensive about these five stocks?
- Lockheed Martin Corporation (LMT) Dividend Stock Analysis
The past decade has been great for defense contractors in the US, with two major wars going on, and an increase in Federal spending. However, the next decade might look different, which is why I am not going to look at the past decades trends in earnings per share, dividends per share, payout ratios or returns on equity for Northrop Grumman.
I discussed that US defense spending is likely to contract in the near future, meaning in the next five years or so. However, in the long-run, it is quite possible that defense spending will be higher in 20 years. Actually, per the Sequester agreement in early 2013, defense spending is expected to fall by 6.40% in 2013 and 5.5% in 2014. After that, it is expected that increases will match increases in inflation through 2023, which is about 2% or so. Check this document for more information.
In an interview, famous investor Mohnish Pabrai discussed some of the three strategies for investment success by Charlie Munger. One of them was to focus on carnivores, or companies which have managed to repurchase a substantial amount of their shares. If a company manages to retire 20 – 25% of outstanding shares, and manages to maintain a consistent level of profits after that, it should deliver good returns to shareholders. With Northrop Grumman, the company has managed to consistently implement and execute programs to repurchase stock. If the company can maintain the level of sales and income, shareholders could reasonably expect another massive buyback program after this one is completed in 2015. While I usually prefer dividends over buybacks, I am open to companies regular repurchasing shares at attractive valuations.
When I looked at Northrop’s statement of cash flows, I uncovered a hidden gem. It looks like the company is drowning in cash. For example, in 2012 the company generated 2.64 billion in cash flow from operating activities, while Capex amounted to 331 million. The Capex figure was the lowest in the past five years however, as it was as high as $770 million in 2010. The lowest cash flow from operating activities over the past five years was in 2011 at $2.115 billion.
At the same time, the total amount paid on dividends distributed back to shareholders has been very stable in the range of $525 - $545 million per year. Despite the fact that dividends per share increased in each of the past five years, Northrop has managed to keep the total amount spent on distributions by repurchasing massive amounts of shares.
In fact, the company has managed to decrease the total number of shares outstanding from 354 million in 2007 to 237.50 million in 2013.
Northrop Grumman has managed to spend anywhere from $1.1 billion on share buybacks in 2009 to $2.3 billion in 2011. The company spent $1.3 billion on share buybacks in 2012.
Either way you look at it, the management of Northrop Grumman looks like a very shareholder friendly oriented management. Currently, the stock is attractively valued at 12.20 times earnings and yields 2.30%. This is a lower yield than Lockheed Martin's (LMT) over 4% yield, but it seems more sustainable. Although there is uncertainty over the US defense budgets, the consistent nature of share repurchases could translate into very good dividend and capital gains returns for investors who snap up these cheap shares today. I would consider adding to the stock on dips below $98/share ( equivalent to a 2.50% yield).
What is your opinion on the company?
Relevant Articles:
- Check the Complete Article Archive
- Dividends versus Share Buybacks/Stock repurchases
- Should Dividend Investors be Defensive about these five stocks?
- Lockheed Martin Corporation (LMT) Dividend Stock Analysis
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