In the past week, I have dipped into my savings pool, and have also dipped into my margin by buying more Target (TGT). I was also thinking of buying more Exxon Mobil (XOM) and General Mills (GIS), but I stopped myself. Given the fact that Warren Buffett announced he had amassed a large position in Exxon Mobil, it was a good idea to just wait for the initial euphoria to calm down a little.
I realized that I need to replenish my savings pool, which should have 3 – 6 months of savings in cash. I also need to plan for my SEP IRA contribution in 2014, plus any estimated taxes I would owe for 2013. The SEP IRA is part of my plan to cut tax expenses as much as I can. As part of this tax minimization strategy, I am also funding a Roth each year. My funding for 2013 is complete, and I just finished up building the allocation for 2013 this week.
As a result, I should really not make much in terms of stock investments at least until early 2014. I have a put on Coca-Cola (KO) that I sold a few months, which could result in some cash outlay if exercised in January 2014.
I still am finding some value, like in the case of Target, Exxon Mobil and General Mills, where I would like to build out a decent sized position. I guess I would have to wait, which could probably mean that I face an above average risk of missing out if they keep going higher. Incidentally, my top two holdings are also attractively valued at the moment - Kinder Morgan Inc (KMI) and Philip Morris International (PM). Unfortunately, I have too much allocated to them already, which means I would have to hold off on adding to my positions there.
Target Corporation (TGT) operates general merchandise stores in the United States. This dividend champion has rewarded shareholders with higher dividends for 46 years in a row. Over the past decade, Target has managed to raise dividends by 18.60%/year. Currently, the stock is attractively valued at 16 times earnings and yields 2.60%. Check my analysis of Target for more details.
Exxon Mobil Corporation (XOM) engages in the exploration and production of crude oil and natural gas, and manufacture of petroleum products. This dividend champion has rewarded shareholders with higher dividends for 31 years in a row. Over the past decade, Exxon Mobil has managed to raise dividends by 9%/year. In addition, Exxon Mobil is one of the largest and most consistent share buyback programs in Corporate America. Between 2003 and 2013, the number of shares decreased from 6.66 billion to 4.64 billion. Currently, the stock is attractively valued at 12.50 times earnings and yields 2.60%. If you can wait until you get slightly better entry prices after the enthusiasm from Warren Buffett's recent purchase wanes, you might get better entry yields at 2.80% or so ( equivalent to a $90/share price). Check my analysis of Exxon Mobil for more details.
General Mills, Inc. (GIS) produces and markets branded consumer foods in the United States and internationally. This dividend achiever has rewarded shareholders with higher dividends for 10 years in a row. Over the past decade, General Mills has managed to raise dividends by 8.70%/year. Currently, the stock is attractively valued at 17.50 times forward earnings and yields 3%. Check my analysis of General Mills for more details.
The relentless rise in stock prices since 2009 have conditioned me to think that prices would only keep going up. As a result, I am, fearful that if I do not put money in stocks as soon as possible and keep cash instead, I am going to miss out. In reality, I need to step back for a couple months, and reassess the situation as an impartial observer.
This is not a call on the general levels in stock prices, as I do not know where they are going. It is mostly an observation which is specific to my own situation. I need to have cash on hand, since emergencies happen. Of course, I might still wake up one day and buy something if I find a compelling value, like I did with IBM last month.
If stock prices declined by 20% in the next month, I would likely be unable to participate fully in purchasing cheaper securities. However, if these stocks kept steady from there or falling further, I would be able to get a higher number of shares using the money I receive from various sources each month ( salary and dividends to name a few). Therefore, I do not believe I need a 30% allocation to fixed income or cash, merely as a tool to buy shares in case they drop in values. My disciplined strategy of buying stocks every month works wonderfully on the way down. It also works on the way up as well, as long as there is value to be uncovered.
My portfolio allocation is entirely in common stocks, with less than 1% in fixed income equivalents like CD’s. I definitely need to have some fixed income allocation, but current yields are making this a foolish proposition. There is absolutely no place to go if you have cash, other than investing in businesses and real estate, which pay distributions to income starved investors. That being said, having some cash on hand can be helpful in case of emergencies. Luckily, all of my investments generate cash flow, which is deposited into my central cash account. As a result, if I did absolutely nothing for 1 year, my cash from dividend payments would increase to 3 – 3.5% of portfolio value by end of 2014.
In conclusion, I plan on accumulating some cash in my accounts, in order to work on rebuilding emergency funds, saving up the amount for 2013 Sep IRA, and potentially buying up options that could be exercised. This means I might not buy more stocks in December and maybe even January, unless i see some compelling values. The great thing about being a dividend investor in quality companies is that you can afford to sit on your portfolio and do absolutely nothing, while it pumps out cold hard cash into your account every week, month, quarter, year.
Full Disclosure: Long TGT, XOM, GIS
Relevant Articles:
- Check the Complete Article Archive
- S&P Dividend Aristocrats Index – An Incomplete List for Dividend Investors
- Dividend Aristocrats List
- My Retirement Strategy for Tax-Free Income
- How to invest when the market is at all time highs?
Friday, November 22, 2013
Wednesday, November 20, 2013
International Dividend Stocks – Pros and Cons
Investors are always told to diversify. Diversification is the tool to protect investors from the unknown risks at the time of purchase. In my dividend portfolio, I always try to be diversified, meaning that I hold at least 30 - 40 individual securities representative of as many sectors that make sense. For some reason however, my portfolio only has a few companies traded internationally, which account for about 9% of its value.
International exposure is helpful, because different economies run on different market cycles. For example, if the economy in the US is stagnating, Asian countries might benefit from rise in economic output. In addition, some countries might benefit from increase in number of middle class consumers, which could bode well for earnings and stock prices and dividends.
By limiting themselves to only US companies, US investors might miss on international success stories that could benefit returns. With the increase in globalization, it is possible for a company to start small in one country, but then expand internationally. This could lead to increased profits, and hopefully dividends and stock prices. By increasing the pool of companies to look at, investors increase their chances of finding the next dividend gem for their portfolios.
Another positive fact of international dividend investing is diversifying away from the US dollar. By purchasing foreign assets, US investors will be receiving dividends denominated in Swiss francs, UK pounds, Canadian Dollars and others. This could be viewed as a positive by investors who believe that the US dollar will gradually lose purchasing power relative to these currencies over the long term.
While there are certain advantages to holding international dividend stocks, there are also a few disadvantages.
The first disadvantage includes that foreign stocks pay irregular dividends. Most pay distributions only once per year. Others pay dividends twice per year, by paying an interim and a final dividend. Often the interim dividend is 30%-40% of the total annual distribution, with the final dividend accounting for 60% - 70% of the annual distribution. British based telecom giant Vodafone Group (VOD) is a prime example of this. For 2013, the company paid an interim dividend of 3.27 pence/share, while for the final dividend the company paid 6.92 pence/share, or a total of 10.19 pence/share. This is why calculating the dividend yield could be tricky on a company like Vodafone, especially given that the new interim dividend has recently been increased to 3.53 pence/share.
Other companies like global food giant Nestle (NSRGY) pay dividends once per year, and withhold 15% for US residents. Check my analysis of Nestle.
Another disadvantage of foreign dividend stocks is the fact that few international companies follow a managed dividend policy like US companies. Most US corporations pay a stable and rising dividend, and avoid cutting distributions at all costs. Most foreign companies tend to pay a fluctuating dividend, which could vary greatly from year to year. This variability is caused by the fact that most foreign companies tend to target a certain dividend payout ratio. Since earnings per share fluctuate, so do dividend payments to shareholders of these non-US based companies. Investors also need to be careful in following dividend trends in the local currency, rather than the US dollar converted amounts. For example, for Unliever, it seems like distributions are declared in Euros, and then translated into pounds for PLC holders and dollars for ADR's traded on US markets. Therefore, anyone who followed the dividend trends in pounds or dollars, would be focusing on noise. Focus on the dividend trends in Euro's for Unilever.
Another disadvantage of owning foreign dividend stocks includes steep withholding taxes on distributions. These are typically withheld at source and could vary country by country. These taxes on dividend incomes charged to US investors could vary from 15% to as much as 25%. Investors can usually deduct taxes withheld fully if they are within 15%, using IRS form 1116. US investors who receive foreign dividends in retirement accounts however are still taxed on distributions receive, and cannot get them back. UK is one of the few countries which does not withhold taxes on dividend income paid to US investors. There are several companies which are headquartered in the UK and in another country such as the Netherlands or Australia. As a result, whenever you have a choice between the UK and the other country shares, always select the UK listed one.
Unilever is a prime example of this situation. There are two ADRs trading on NYSE. The Netherland based Unilever N.V. trades under ticker (UN). The UK based Unilever PLC trades under ticker (UL). Investors in both stocks get exactly the same dividends. The only difference is that investors in Unilever NV (UN) are subject to a 15% withholding tax, whereas investors in Unilever PLC (UL) are not. US investors still need to pay taxes on international dividends received however, if paid in taxable accounts.
In addition, some countries do not levy withholding taxes on dividends that are received in retirement accounts, such as Roth IRA's for example. The prime example includes Canada, which usually withholds 15% from dividends paid to US residents at source. However, if you placed those securities in retirement account, Canada would not tax these dividends.
Investors in international equities also need to be aware of the fact that these companies are likely not following US GAAP accounting rules. The whole world seems to have adopted IFRS, albeit it doesn’t seem to have a very consistent implementation. It seems as if each country has managed to implement its own version of IFRS. In addition, investors purchasing foreign shares on international exchanges might find it difficult to open brokerage accounts, wire funds in and out and need to be aware of taxation of dividends and capital gains. For example, Chinese markets are mostly closed to US investors. This means that you cannot go and purchase any Chinese stock that you wish. Other countries have currency controls in place, and might limit the amount of funds you can convert back to US dollars.
In conclusion, while there might be some benefit to receiving international dividends, there are also a lot of cons that investors need to be aware of. In general, I try to purchase US multinationals with long histories of dividend increases, which also have global operations. I have found that a large portion of US dividend companies revenues are derived from international operations, in some cases more than 50%. As a result, I do not have to deal with currency volatility, foreign withholding tax rates, setting up brokerage accounts in 20 different countries and international accounting rules.
For example, when I looked at the ten largest components of the S&P 500 index, I found out that they generate approximately 50% of their revenues from outside the US in 2012. This is significant, and it should probably make you think twice before using measures such as comparing current market capitalization to US GDP to past values of this indicator, as a tool that has any relevant predictive value.
Full Disclosure: Long UL, VOD, NSRGY, XOM, JNJ, CVX, PG, WFC
Relevant Articles:
- Check the Complete Article Archive
- International Over Diversification
- Four International Dividend Stocks to Consider
- Best International Dividend Stocks
- International Dividend Achievers for diversification
International exposure is helpful, because different economies run on different market cycles. For example, if the economy in the US is stagnating, Asian countries might benefit from rise in economic output. In addition, some countries might benefit from increase in number of middle class consumers, which could bode well for earnings and stock prices and dividends.
By limiting themselves to only US companies, US investors might miss on international success stories that could benefit returns. With the increase in globalization, it is possible for a company to start small in one country, but then expand internationally. This could lead to increased profits, and hopefully dividends and stock prices. By increasing the pool of companies to look at, investors increase their chances of finding the next dividend gem for their portfolios.
Another positive fact of international dividend investing is diversifying away from the US dollar. By purchasing foreign assets, US investors will be receiving dividends denominated in Swiss francs, UK pounds, Canadian Dollars and others. This could be viewed as a positive by investors who believe that the US dollar will gradually lose purchasing power relative to these currencies over the long term.
While there are certain advantages to holding international dividend stocks, there are also a few disadvantages.
The first disadvantage includes that foreign stocks pay irregular dividends. Most pay distributions only once per year. Others pay dividends twice per year, by paying an interim and a final dividend. Often the interim dividend is 30%-40% of the total annual distribution, with the final dividend accounting for 60% - 70% of the annual distribution. British based telecom giant Vodafone Group (VOD) is a prime example of this. For 2013, the company paid an interim dividend of 3.27 pence/share, while for the final dividend the company paid 6.92 pence/share, or a total of 10.19 pence/share. This is why calculating the dividend yield could be tricky on a company like Vodafone, especially given that the new interim dividend has recently been increased to 3.53 pence/share.
Other companies like global food giant Nestle (NSRGY) pay dividends once per year, and withhold 15% for US residents. Check my analysis of Nestle.
Another disadvantage of foreign dividend stocks is the fact that few international companies follow a managed dividend policy like US companies. Most US corporations pay a stable and rising dividend, and avoid cutting distributions at all costs. Most foreign companies tend to pay a fluctuating dividend, which could vary greatly from year to year. This variability is caused by the fact that most foreign companies tend to target a certain dividend payout ratio. Since earnings per share fluctuate, so do dividend payments to shareholders of these non-US based companies. Investors also need to be careful in following dividend trends in the local currency, rather than the US dollar converted amounts. For example, for Unliever, it seems like distributions are declared in Euros, and then translated into pounds for PLC holders and dollars for ADR's traded on US markets. Therefore, anyone who followed the dividend trends in pounds or dollars, would be focusing on noise. Focus on the dividend trends in Euro's for Unilever.
Another disadvantage of owning foreign dividend stocks includes steep withholding taxes on distributions. These are typically withheld at source and could vary country by country. These taxes on dividend incomes charged to US investors could vary from 15% to as much as 25%. Investors can usually deduct taxes withheld fully if they are within 15%, using IRS form 1116. US investors who receive foreign dividends in retirement accounts however are still taxed on distributions receive, and cannot get them back. UK is one of the few countries which does not withhold taxes on dividend income paid to US investors. There are several companies which are headquartered in the UK and in another country such as the Netherlands or Australia. As a result, whenever you have a choice between the UK and the other country shares, always select the UK listed one.
Unilever is a prime example of this situation. There are two ADRs trading on NYSE. The Netherland based Unilever N.V. trades under ticker (UN). The UK based Unilever PLC trades under ticker (UL). Investors in both stocks get exactly the same dividends. The only difference is that investors in Unilever NV (UN) are subject to a 15% withholding tax, whereas investors in Unilever PLC (UL) are not. US investors still need to pay taxes on international dividends received however, if paid in taxable accounts.
In addition, some countries do not levy withholding taxes on dividends that are received in retirement accounts, such as Roth IRA's for example. The prime example includes Canada, which usually withholds 15% from dividends paid to US residents at source. However, if you placed those securities in retirement account, Canada would not tax these dividends.
Investors in international equities also need to be aware of the fact that these companies are likely not following US GAAP accounting rules. The whole world seems to have adopted IFRS, albeit it doesn’t seem to have a very consistent implementation. It seems as if each country has managed to implement its own version of IFRS. In addition, investors purchasing foreign shares on international exchanges might find it difficult to open brokerage accounts, wire funds in and out and need to be aware of taxation of dividends and capital gains. For example, Chinese markets are mostly closed to US investors. This means that you cannot go and purchase any Chinese stock that you wish. Other countries have currency controls in place, and might limit the amount of funds you can convert back to US dollars.
In conclusion, while there might be some benefit to receiving international dividends, there are also a lot of cons that investors need to be aware of. In general, I try to purchase US multinationals with long histories of dividend increases, which also have global operations. I have found that a large portion of US dividend companies revenues are derived from international operations, in some cases more than 50%. As a result, I do not have to deal with currency volatility, foreign withholding tax rates, setting up brokerage accounts in 20 different countries and international accounting rules.
For example, when I looked at the ten largest components of the S&P 500 index, I found out that they generate approximately 50% of their revenues from outside the US in 2012. This is significant, and it should probably make you think twice before using measures such as comparing current market capitalization to US GDP to past values of this indicator, as a tool that has any relevant predictive value.
Full Disclosure: Long UL, VOD, NSRGY, XOM, JNJ, CVX, PG, WFC
Relevant Articles:
- Check the Complete Article Archive
- International Over Diversification
- Four International Dividend Stocks to Consider
- Best International Dividend Stocks
- International Dividend Achievers for diversification
Tuesday, November 19, 2013
Dividend Investing Is Not As Risky As It Is Portrayed Out To Be
There is always some risk in any decision you make in life. There are also risks in putting your hard earned money in companies who regularly increase distributions. Investing in dividend paying stocks could potentially result in the risk of permanent capital and income loss.
However, the reality for the average dividend paying stock is less than grim. This is because for the price of dividend paying stock, an investor receives a junior claim to the assets of a company, along with their proportionate share of profits until the end of the world. In simple words, the most you can lose with dividend paying stocks is the amount of funds you put “at risk”. However, as a dividend investor, you would likely receive dividend checks for years to come in most situations. These checks are essentially serving up as rebates on your cost, and ultimately reduce the cash amount you have put at risk in that particular investment. At the same time you still have your investment, meaning that you are essentially having your cake and eating it too. You can also use this cash that was distributed to you to acquire other income generating investments of your choice, or to spend it as you wish. Therefore, while the risk is limited, your reward is unlimited.
For example, if I purchased shares of Realty Income (O) today, I would have to pay $40/share. I would generate a yield of 5.50%, given the current annualized dividend of $2.182/share. The dividend is paid monthly at a rate of $0.1818542/share. This means that every single month, I would receive a rebate for my investment, equivalent to slightly less than half a percent.
If I simply let that money accumulate in my brokerage account for ten year, I would end up with a share of Realty Income plus approximately $21.82 in cash. This example means that by the mere act of doing nothing other than recognizing a quality asset that pays me to hold it, I would end up recovering more than half of my purchase price, without losing my share of any future claims against from asset. Yes, please read that last sentence again - I would have not only recovered half of my initial investment in the company by November 2023, but I would still own the claims to my share of future rent checks until Judgment Day.
Of course, if history is any guide, Realty Income would likely keep increasing dividends at a rate of 3% - 4%/year over the next decade. This means that the cash I receive over that period of time would be slightly more than $21.82/share.
If the dividend remained stagnant, after 18 years I would have received dividend rebates which are equivalent to the amount I paid for the shares in the first place. The stock price might go down to $20 or up to $80/share but I would not care about these stock price fluctuations even for a single second. This is as long as the underlying fundamentals are strong, and the company manages to generate sufficient stream of free cash flow from thousands of properties in the US in order to keep showering me with cash on a monthly basis.
Of course, the drawback of my analysis is the fact that $1 today has a greater purchasing power in comparison to a dollar ten or twenty years from now. However, if a company like Realty Income can manage to boost distributions over time and match the rate of inflation, if can provide a 100% return of investment in less than 18 years (while still owning that investment, and being able to allocate those dividends received elsewhere, therefore earning more dividend checks etc).
Another item to consider with long-range forecasts is their fallibility. However, if you find a company which can reasonably be expected to deliver growth over the next 20 years, holding on to this stock could be a very rewarding endeavor. This growth could materialize due to catalysts known today, such as demographics, health or other factors. For example, Coca-Cola (KO) is expected to earn $2.10/share in 2013. The company pays an annualized dividend of $1.12/share, which this dividend king has raised for 51 years in a row. If Coca-Cola manages to grow dividends by 7%/year over the next 2 decades, one could reasonably expect a dividend payment of approximately $4 - $4.50/share by 2033. If earnings per share followed a similar trajectory, Coke can reasonably be expected to earn $8 - $9/share by 2033. By applying a P/E range of 15 to 20 times earnings, this could translate into a stock price of anywhere from $120 to $180/share by 2033, as well as cumulative dividends of almost $50. Growth for Coca-Cola will likely be generated from the rapid increase in number of middle-class consumers in developing countries in the world, which would quench their thirst with one of the several hundred branded drinks that Coca-Cola Company offers.
Therefore, while an investor in Coca-Cola would have likely recovered their purchase price today exclusively from dividends alone, they should also not forget about the potential of capital gains. In the case of Coca-Cola, if my amateurish projections turn out to be closer to reality, investors could end up with a gain in net worth that exceeds the amount recovered through dividends.
All of the examples above do not take into effect the powerful nature of compounding. For example, let’s assume that you invested $100 today and earned a total return of 10%/year for 25 years. At the end of the period you would essentially generate as much in total returns in a year as the amount you initially invested.
Another risk with my analysis comes in the case of corporate failure. It would be much safer to generate your dividend income from many dividend paying companies, as opposed to just a few. That way, if one of these companies cuts or eliminates distributions when it falls on hard times, your overall dividend income would not be at a great risk. If you build an adequately diversified portfolio of at least 30 individual securities, chances are that the dividend income from this portfolio is much safer than the income from your day job. This is because if you are relying on just one company for income in your day job, but thirty or more companies for income with dividend investing.
Therefore, investors need to be very careful in their stock selection processes. For example, I learned from Warren Buffett to try and guesstimate 20 years into the future and try to decide if I believe the business I am investing in will still be around. It would be much easier to decide that companies like Nestle (NSRGY), Coca-Cola (KO) or General Mills (GIS) will be around in 20 years, because their products are characterized by repeated sales to customers, predictability of cashflows and pricing power. I cannot tell you however whether Apple (AAPL) or Samsung will be around in 20 years. After all, Blackberry (BBRY) went from being an $80 billion company in 2008 and the leader in smartphones, to a former shell of itself within five years.
Full Discllosure: Long O, KO, GIS, NSRGY
Relevant Articles:
- Check the Complete Article Archive
- Undervalued Dividend Stocks I purchased in the past week
- How to define risk in dividend paying stocks?
- No Risk Stock Market Investing
- Warren Buffett Investing Resource Page
However, the reality for the average dividend paying stock is less than grim. This is because for the price of dividend paying stock, an investor receives a junior claim to the assets of a company, along with their proportionate share of profits until the end of the world. In simple words, the most you can lose with dividend paying stocks is the amount of funds you put “at risk”. However, as a dividend investor, you would likely receive dividend checks for years to come in most situations. These checks are essentially serving up as rebates on your cost, and ultimately reduce the cash amount you have put at risk in that particular investment. At the same time you still have your investment, meaning that you are essentially having your cake and eating it too. You can also use this cash that was distributed to you to acquire other income generating investments of your choice, or to spend it as you wish. Therefore, while the risk is limited, your reward is unlimited.
For example, if I purchased shares of Realty Income (O) today, I would have to pay $40/share. I would generate a yield of 5.50%, given the current annualized dividend of $2.182/share. The dividend is paid monthly at a rate of $0.1818542/share. This means that every single month, I would receive a rebate for my investment, equivalent to slightly less than half a percent.
If I simply let that money accumulate in my brokerage account for ten year, I would end up with a share of Realty Income plus approximately $21.82 in cash. This example means that by the mere act of doing nothing other than recognizing a quality asset that pays me to hold it, I would end up recovering more than half of my purchase price, without losing my share of any future claims against from asset. Yes, please read that last sentence again - I would have not only recovered half of my initial investment in the company by November 2023, but I would still own the claims to my share of future rent checks until Judgment Day.
Of course, if history is any guide, Realty Income would likely keep increasing dividends at a rate of 3% - 4%/year over the next decade. This means that the cash I receive over that period of time would be slightly more than $21.82/share.
If the dividend remained stagnant, after 18 years I would have received dividend rebates which are equivalent to the amount I paid for the shares in the first place. The stock price might go down to $20 or up to $80/share but I would not care about these stock price fluctuations even for a single second. This is as long as the underlying fundamentals are strong, and the company manages to generate sufficient stream of free cash flow from thousands of properties in the US in order to keep showering me with cash on a monthly basis.
Of course, the drawback of my analysis is the fact that $1 today has a greater purchasing power in comparison to a dollar ten or twenty years from now. However, if a company like Realty Income can manage to boost distributions over time and match the rate of inflation, if can provide a 100% return of investment in less than 18 years (while still owning that investment, and being able to allocate those dividends received elsewhere, therefore earning more dividend checks etc).
Another item to consider with long-range forecasts is their fallibility. However, if you find a company which can reasonably be expected to deliver growth over the next 20 years, holding on to this stock could be a very rewarding endeavor. This growth could materialize due to catalysts known today, such as demographics, health or other factors. For example, Coca-Cola (KO) is expected to earn $2.10/share in 2013. The company pays an annualized dividend of $1.12/share, which this dividend king has raised for 51 years in a row. If Coca-Cola manages to grow dividends by 7%/year over the next 2 decades, one could reasonably expect a dividend payment of approximately $4 - $4.50/share by 2033. If earnings per share followed a similar trajectory, Coke can reasonably be expected to earn $8 - $9/share by 2033. By applying a P/E range of 15 to 20 times earnings, this could translate into a stock price of anywhere from $120 to $180/share by 2033, as well as cumulative dividends of almost $50. Growth for Coca-Cola will likely be generated from the rapid increase in number of middle-class consumers in developing countries in the world, which would quench their thirst with one of the several hundred branded drinks that Coca-Cola Company offers.
Therefore, while an investor in Coca-Cola would have likely recovered their purchase price today exclusively from dividends alone, they should also not forget about the potential of capital gains. In the case of Coca-Cola, if my amateurish projections turn out to be closer to reality, investors could end up with a gain in net worth that exceeds the amount recovered through dividends.
All of the examples above do not take into effect the powerful nature of compounding. For example, let’s assume that you invested $100 today and earned a total return of 10%/year for 25 years. At the end of the period you would essentially generate as much in total returns in a year as the amount you initially invested.
Another risk with my analysis comes in the case of corporate failure. It would be much safer to generate your dividend income from many dividend paying companies, as opposed to just a few. That way, if one of these companies cuts or eliminates distributions when it falls on hard times, your overall dividend income would not be at a great risk. If you build an adequately diversified portfolio of at least 30 individual securities, chances are that the dividend income from this portfolio is much safer than the income from your day job. This is because if you are relying on just one company for income in your day job, but thirty or more companies for income with dividend investing.
Therefore, investors need to be very careful in their stock selection processes. For example, I learned from Warren Buffett to try and guesstimate 20 years into the future and try to decide if I believe the business I am investing in will still be around. It would be much easier to decide that companies like Nestle (NSRGY), Coca-Cola (KO) or General Mills (GIS) will be around in 20 years, because their products are characterized by repeated sales to customers, predictability of cashflows and pricing power. I cannot tell you however whether Apple (AAPL) or Samsung will be around in 20 years. After all, Blackberry (BBRY) went from being an $80 billion company in 2008 and the leader in smartphones, to a former shell of itself within five years.
Full Discllosure: Long O, KO, GIS, NSRGY
Relevant Articles:
- Check the Complete Article Archive
- Undervalued Dividend Stocks I purchased in the past week
- How to define risk in dividend paying stocks?
- No Risk Stock Market Investing
- Warren Buffett Investing Resource Page
Monday, November 18, 2013
How to read my weekly dividend increase reports
As part of my process for uncovering undiscovered dividend gems, I focus on the list of companies that have increased their dividends. I usually look at the list of dividend increases for the week, and try to outline certain basic pieces of information such as amount of new dividend payment, percentage increase in distribution as well as what the new yield is going to be. After I obtain this information, I dive into valuation and trends in earnings per share and dividends per share. In addition, I check length of dividend increases, and rate of dividend increases over the past decade. There are two resources I use to check dividend increases:
Street Insider
WSJ Online
Whenever I review dividend stocks on my site however, I always try to analyze the information at a high level and reach out a conclusion on what to do next. Sometimes however, the conclusions I reach might need a little bit of extra information to be deciphered. Below, I have added a few short outcomes for my high level reviews of dividend increases.
1) Add subject to availability of funds
This is the highest review rating that I would assign to a stock. This means that I find the stock to be attractively valued at the moment and to have excellent future growth prospects. It also means that I have already analyzed the stock. This future growth would likely boost earnings, dividends and share prices. Unfortunately, I have a limited amount of funds to allocate each month. As a result I end up purchasing somewhere between one to three individuals securities per month. As a result, even if I find a stock attractively valued, I would not purchase it if there are other stocks that are cheaper at the moment.
2) Add on dips
This includes situations where I find the company to have excellent growth prospects for earnings and distributions, but the valuation is a little too rich for my taste. I have a strict entry criteria where I would never ever pay more than 20 times earnings for a company’s stock. In addition, I typically try to invest in companies which yield at least 2.50%. Sometimes a stock might yield more than 2.50%, but trade at more than 20 times earnings or yield less than 2.50% and trade at less than 20 times earnings. I typically require that both the P/E be below 20 and the yield be above 2.50%. Sometimes simply by waiting, a company could increase dividends, which would take the stock to my entry criteria. Wal-Mart (WMT) was such example in 2011- 2012. I monitor the shares every week, and would consider initiating or adding a position once the entry price is hit.
For example, in the past week, Automatic Data Processing raised its quarterly dividend by 10.30% to 48 cents/share. This marked the 39th consecutive annual dividend increase for this dividend champion. Over the past decade, ADP has managed to boost distributions by 13.10%/year. The new yields is 2.50%, but unfortunately it trades at above 20 times earnings. Therefore, I would consider buying it at prices below $63/share, which corresponds to a P/E of 20 times forward earnings of $3.15/share. The company has strong competitive advantages in dealing with small and mid-sized businesses, and should benefit if interest rates increase, as it's float would generate more cash. Check my analysis of ADP for more information about the company.
3) Research
This view covers situations where I find a company which is attractively priced, and has raised distributions for at least ten consecutive years. However, I might not have researched the company in detail yet. I typically like to see not only good valuation, long history of dividend increases and a ten year dividend growth above the rate of inflation, but also good earnings prospects. I like to get a feel of the company’s business, and determine whether the company can sustain future earnings and dividend increases. I try to be a disciplined investor, which is why I require to analyze a company in detail, before initiate a position in it. In addition, if I haven’t analyzed a stock that I already own for about one year, I would likely also put it on my list for further research.
For example, Sysco recently increased dividends by 3.60% to 29 cents/share. I owned Sysco (SYY) for several years, until I decided to pull the plug a couple years ago, since I saw earnings plateaued since reaching a high of $1.81/share in 2008. This meant that most of the dividend growth was running on fumes, meaning through expansion of the dividend payout ratio, which is never desirable. Last time I analyzed the stock in 2011, I still had hopes management can turn the ship around, and increase earnings per share. Shortly after they announced another pathetic dividend increase, I realized dividend growth might be going on borrowed time. I would need to do a more detailed research on the company, and determine if it can increase earnings.
4) Monitor
I usually add a stock on the list for further monitoring if the company has not raised dividends for ten years in a row or if it is too far away from my entry criteria. For example, a company that has raised distributions for 6 years probably has approximately three to four years before I could add it to my portfolio. As a result, I will monitor the rate of dividend increases, and if it gets closer to becoming a dividend achiever, I might add it to my list for further research. Another scenario includes situations where a company yields only 1% or so, and as a result it would not make sense to analyze it or put it on my list to purchase on dips, because it would require a 60% decrease in share price to even get there. A case in point is Costco (COST), which yields 1% and has only raised distributions for ten years in a row. Another company I am actively monitoring is Becton Dickinson (BDX), which yields slightly less than 2%, but has a relatively low P/E ratio of 17.50 times forward earnings and plenty of growth ahead.
5) Hold
I typically tend to avoid the remaining companies that have boosted distributions. I place them under a hold rating, but this is similar to do not touch. Some stocks could move from that hold category into stocks that should be researched. Other stocks could also move from being darlings to being just holds. The world of dividend investing is an ever evolving one, which is why investors need to keep their eyes close to the pulse of the market by following weekly dividend increases.
An example of such a stock is MDU Resources (MDU), which recently increased quarterly dividends by 2.90% to 17.75 cents/share. This marked the 23rd consecutive annual dividend increase for this dividend achiever. Unfortunately, over the past decade the dividend has been increased by 4.90%/year and the current yield is only 2.30%. The companies in this position are decent holds for current income, especially if you bought it at lower prices. However, you might also consider whether you might get better dividend growth and yield prospects elsewhere.
Full Disclosure: Long WMT and ADP
Relevant Articles:
- Check the Complete Article Archive
- How to Uncover Hidden Dividend Gems
- The Tradeoff between Dividend Yield and Dividend Growth
- A long streak of dividend growth is an indication of a business with exceptional fundamentals
- Three stages of dividend growth
Street Insider
WSJ Online
Whenever I review dividend stocks on my site however, I always try to analyze the information at a high level and reach out a conclusion on what to do next. Sometimes however, the conclusions I reach might need a little bit of extra information to be deciphered. Below, I have added a few short outcomes for my high level reviews of dividend increases.
1) Add subject to availability of funds
This is the highest review rating that I would assign to a stock. This means that I find the stock to be attractively valued at the moment and to have excellent future growth prospects. It also means that I have already analyzed the stock. This future growth would likely boost earnings, dividends and share prices. Unfortunately, I have a limited amount of funds to allocate each month. As a result I end up purchasing somewhere between one to three individuals securities per month. As a result, even if I find a stock attractively valued, I would not purchase it if there are other stocks that are cheaper at the moment.
2) Add on dips
This includes situations where I find the company to have excellent growth prospects for earnings and distributions, but the valuation is a little too rich for my taste. I have a strict entry criteria where I would never ever pay more than 20 times earnings for a company’s stock. In addition, I typically try to invest in companies which yield at least 2.50%. Sometimes a stock might yield more than 2.50%, but trade at more than 20 times earnings or yield less than 2.50% and trade at less than 20 times earnings. I typically require that both the P/E be below 20 and the yield be above 2.50%. Sometimes simply by waiting, a company could increase dividends, which would take the stock to my entry criteria. Wal-Mart (WMT) was such example in 2011- 2012. I monitor the shares every week, and would consider initiating or adding a position once the entry price is hit.
For example, in the past week, Automatic Data Processing raised its quarterly dividend by 10.30% to 48 cents/share. This marked the 39th consecutive annual dividend increase for this dividend champion. Over the past decade, ADP has managed to boost distributions by 13.10%/year. The new yields is 2.50%, but unfortunately it trades at above 20 times earnings. Therefore, I would consider buying it at prices below $63/share, which corresponds to a P/E of 20 times forward earnings of $3.15/share. The company has strong competitive advantages in dealing with small and mid-sized businesses, and should benefit if interest rates increase, as it's float would generate more cash. Check my analysis of ADP for more information about the company.
3) Research
This view covers situations where I find a company which is attractively priced, and has raised distributions for at least ten consecutive years. However, I might not have researched the company in detail yet. I typically like to see not only good valuation, long history of dividend increases and a ten year dividend growth above the rate of inflation, but also good earnings prospects. I like to get a feel of the company’s business, and determine whether the company can sustain future earnings and dividend increases. I try to be a disciplined investor, which is why I require to analyze a company in detail, before initiate a position in it. In addition, if I haven’t analyzed a stock that I already own for about one year, I would likely also put it on my list for further research.
For example, Sysco recently increased dividends by 3.60% to 29 cents/share. I owned Sysco (SYY) for several years, until I decided to pull the plug a couple years ago, since I saw earnings plateaued since reaching a high of $1.81/share in 2008. This meant that most of the dividend growth was running on fumes, meaning through expansion of the dividend payout ratio, which is never desirable. Last time I analyzed the stock in 2011, I still had hopes management can turn the ship around, and increase earnings per share. Shortly after they announced another pathetic dividend increase, I realized dividend growth might be going on borrowed time. I would need to do a more detailed research on the company, and determine if it can increase earnings.
4) Monitor
I usually add a stock on the list for further monitoring if the company has not raised dividends for ten years in a row or if it is too far away from my entry criteria. For example, a company that has raised distributions for 6 years probably has approximately three to four years before I could add it to my portfolio. As a result, I will monitor the rate of dividend increases, and if it gets closer to becoming a dividend achiever, I might add it to my list for further research. Another scenario includes situations where a company yields only 1% or so, and as a result it would not make sense to analyze it or put it on my list to purchase on dips, because it would require a 60% decrease in share price to even get there. A case in point is Costco (COST), which yields 1% and has only raised distributions for ten years in a row. Another company I am actively monitoring is Becton Dickinson (BDX), which yields slightly less than 2%, but has a relatively low P/E ratio of 17.50 times forward earnings and plenty of growth ahead.
5) Hold
I typically tend to avoid the remaining companies that have boosted distributions. I place them under a hold rating, but this is similar to do not touch. Some stocks could move from that hold category into stocks that should be researched. Other stocks could also move from being darlings to being just holds. The world of dividend investing is an ever evolving one, which is why investors need to keep their eyes close to the pulse of the market by following weekly dividend increases.
An example of such a stock is MDU Resources (MDU), which recently increased quarterly dividends by 2.90% to 17.75 cents/share. This marked the 23rd consecutive annual dividend increase for this dividend achiever. Unfortunately, over the past decade the dividend has been increased by 4.90%/year and the current yield is only 2.30%. The companies in this position are decent holds for current income, especially if you bought it at lower prices. However, you might also consider whether you might get better dividend growth and yield prospects elsewhere.
Full Disclosure: Long WMT and ADP
Relevant Articles:
- Check the Complete Article Archive
- How to Uncover Hidden Dividend Gems
- The Tradeoff between Dividend Yield and Dividend Growth
- A long streak of dividend growth is an indication of a business with exceptional fundamentals
- Three stages of dividend growth
Saturday, November 16, 2013
Warren Buffett Investing Resource Page
I am a big fan of Warren Buffett, who is the best investor who ever lived. I have studied everything about the Oracle of Omaha that I could get my hands on over the past few years. I also wanted to share the resources I have used to gain knowledge about the investing habits of Warren Buffett. I have organized them into articles I have written about him, books about him, resources such as letters to shareholders, speeches by this super investor, as well as articles from him.
Dividend Growth Investor Articles on Warren Buffett
Books About Warren Buffett
The Snowball: Warren Buffett and the Business of Life
Of Permanent Value: The Story of Warren Buffett/A Trilogy/2010 Edition/Three-volume set
Buffett: The Making of an American Capitalist
Berkshire Hathaway Letters to Shareholders
Tap Dancing to Work: Warren Buffett on Practically Everything, 1966-2012: A Fortune Magazine Book
Berkshire Hathaway Resources
Berkshire Hathaway Letters to Shareholders since 1977
Buffett Partnership Letters
2015 Berkshire Hathaway Meeting Notes (Value Walk)
2014 Berkshire Hathaway Meeting Notes (RBCPA)
2013 Berkshire Hathaway Meeting Notes (CSInvesting)
2012 Berkshire Hathaway Meeting Notes (Cove Street Capital)
2011 Berkshire Hathaway Meeting Notes (Innoculated Investor)
2010 Berkshire Hathaway Meeting Notes (Innoculated Investor)
2009 Berkshire Hathaway Meeting Notes (J.V. Bruni & Co)
2008 Berkshire Hathaway Meeting Notes (Max Capital)
2007 Berkshire Hathaway Meeting Notes (Tilson Funds)
2006 Berkshire Hathaway Meeting Notes (Value Investor Insight)
2005 Berkshire Hathaway Meeting Notes (Tilson Funds)
2004 Berkshire Hathaway Meeting Notes (Graham & Doddsville)
2003 Berkshire Hathaway Meeting Notes (Tilson Funds)
2002 Berkshire Hathaway Meeting Notes (Tilson Funds)
2001 Berkshire Hathaway Meeting Notes (Tilson Funds)
2000 Berkshire Hathaway Meeting Notes (The Street)
1999 Berkshire Hathaway Meeting Notes (Motley Fool)
1998 Berkshire Hathaway Meeting Notes (Geocities)
1996 Berkshire Hathaway Meeting Notes ( Burgundy Asset Management)
1994 Berkshire Hathaway Meeting Notes ( Burgundy Asset Management)
Speeches by Warren Buffett
Buffett's Lecture at Notre Dame in 1991 (source)
Buffett's Lecture at the University of Nebraska in 1994
Buffett's Talk with University of Florida Students in 1998
Buffett's Speech at Columbia University in 2002
Lecture with Wharton Students in 2003 and in 2004
Buffett's Lecture with Vanderbilt Students in 2005
The source of those lectures was Tilson Funds.
Dividend Growth Investor Articles on Warren Buffett
- The One Lesson About Warren Buffett's Success That No One Wants To Hear
- What would happen to Berkshire Hathaway after Warren Buffett is gone?
- How Ordinary Investors Can Generate Float Like Buffett
- How to Invest Like Warren Buffett
- Why Warren Buffett likes Investing in Bank Stocks
- What Attracted Warren Buffett to IBM?
- Warren Buffett is now working for me
- The Warren Buffett Argument Against Paying Dividends
- Why Warren Buffett purchased Exxon Mobil stock?
- How Warren Buffett built his fortune
- Warren Buffett on Dividends: Ideas from his 2013 Letter to Shareholders
- What does Buffett see in Heinz (HNZ)?
- Warren Buffett’s Dividend Stock Strategy
- Build your own Berkshire with dividend paying stocks
- Should you follow Buffett’s latest investments?
- Warren Buffett – A Closet Dividend Investor
- Seven dividend aristocrats that Buffett owns
- Buffett the dividend investor
- Berkshire Hathaway’s portfolio changes for 2Q 2009
- Buffett Partnership Letters
- Myths about Warren Buffett
- Warren Buffett’s Berkshire Hathaway Portfolio Changes
- What I learned from Warren Buffett’s Most Recent Letter to Shareholders
- Should you follow Warren Buffett’s latest moves?
- Warren Buffett – The Ultimate Dividend Investor
- Berkshire Hathaway Historical Total Return Performance
- Warren Buffet - The richest investor in the World
Books About Warren Buffett
The Snowball: Warren Buffett and the Business of Life
Of Permanent Value: The Story of Warren Buffett/A Trilogy/2010 Edition/Three-volume set
Buffett: The Making of an American Capitalist
Berkshire Hathaway Letters to Shareholders
Tap Dancing to Work: Warren Buffett on Practically Everything, 1966-2012: A Fortune Magazine Book
Berkshire Hathaway Resources
Berkshire Hathaway Letters to Shareholders since 1977
Buffett Partnership Letters
2015 Berkshire Hathaway Meeting Notes (Value Walk)
2014 Berkshire Hathaway Meeting Notes (RBCPA)
2013 Berkshire Hathaway Meeting Notes (CSInvesting)
2012 Berkshire Hathaway Meeting Notes (Cove Street Capital)
2011 Berkshire Hathaway Meeting Notes (Innoculated Investor)
2010 Berkshire Hathaway Meeting Notes (Innoculated Investor)
2009 Berkshire Hathaway Meeting Notes (J.V. Bruni & Co)
2008 Berkshire Hathaway Meeting Notes (Max Capital)
2007 Berkshire Hathaway Meeting Notes (Tilson Funds)
2006 Berkshire Hathaway Meeting Notes (Value Investor Insight)
2005 Berkshire Hathaway Meeting Notes (Tilson Funds)
2004 Berkshire Hathaway Meeting Notes (Graham & Doddsville)
2003 Berkshire Hathaway Meeting Notes (Tilson Funds)
2002 Berkshire Hathaway Meeting Notes (Tilson Funds)
2001 Berkshire Hathaway Meeting Notes (Tilson Funds)
2000 Berkshire Hathaway Meeting Notes (The Street)
1999 Berkshire Hathaway Meeting Notes (Motley Fool)
1998 Berkshire Hathaway Meeting Notes (Geocities)
1996 Berkshire Hathaway Meeting Notes ( Burgundy Asset Management)
1994 Berkshire Hathaway Meeting Notes ( Burgundy Asset Management)
Speeches by Warren Buffett
Buffett's Lecture at Notre Dame in 1991 (source)
Buffett's Lecture at the University of Nebraska in 1994
Buffett's Talk with University of Florida Students in 1998
Buffett's Speech at Columbia University in 2002
Lecture with Wharton Students in 2003 and in 2004
Buffett's Lecture with Vanderbilt Students in 2005
The source of those lectures was Tilson Funds.
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