The stock market is a very interesting place, because for every transaction you have a buyer and a seller who both think are smarter than the other person. Unfortunately, only one of them ends up making money. As a dividend investor, I am exposed to opinions all the time.
I usually choose to ignore other’s opinions. I suggest you also implement a filter on who to listen to. I will explain why in this article.
My strategy is based on purchasing shares in undervalued dividend stocks, that have a history of growing distributions. I make these purchases after analyzing these companies one at a time, and find a catalyst that would help each company to potentially earn more in the future. This could include the ability to increase prices ahead of costs, cut costs through increasing efficiencies, expand in new markets etc. The rising profits at the company level could then fuel future dividend growth. I spend my free time reading about companies I own, and reading about companies I want to own, while waiting for prices to get down to a reasonable level before I invest. I also spend time thinking about my investments, monitoring them, and asking myself if the companies will still be relevant 20 years from now.
My financial well-being in retirement is based on my own efforts to do the work and choose stocks wisely. This is why I am more prone to be overly conservative, because I would rather be safe than sorry. However, this provides me the incentive to not only avoid losing principal at all costs, but also avoid getting into dogs that use my capital but fail to shower me with a growing pile of cash every year. I have confidence in my work as a result of the process I have, following the stocks I follow and monitoring my investments. I know that I won’t win every single time, and I know I would probably do many stupid things along the way. That is ok, as long as I learn from them and on the aggregate I am ahead.
I view others opinions as merely obstacles that prevent me from executing my own strategy. There are many negatives associated with taking someone’s opinions to heart:
- If you get conflicting arguments against a stock you strongly believe in, you might get hesitant and fail to pull the trigger. Any time I buy a stock there is always a reason not to buy it and someone to point that reason in my face. As an investor however, my goal is not to be right but to make money. Very often these “reasons” not to invest are merely useless pieces of random information that won’t affect the profits of the company you are investing in. For example, tobacco has been known for its harmful effects on health, yet companies like Altria (MO) have delivered some of the best returns to investors over the past 20 – 30 - 50 years. The thing that mattered is that hiking cigarette prices and cutting costs outweighed decreasing number of smokers. Actually some of the best times to buy a security is when everyone hates investing in it. Back in 2008 – 2009 everyone was expecting the world as we know it to end, and for a while it did seem that way. Yet in hindsight, this was the time to put every dollar you could get your hands on quality dividend growth stocks selling at ridiculously cheap valuations. I did buy a lot of stocks back in 2008 – 2009, but in hindsight I should have bought more.
- The person who is criticizing you might not know what they are talking about. Very frequently I get in touch with someone who is biased based on limited amount of homework they have done. Quite often, these individuals might have overheard something, and might have decided for themselves that it is the truth, and would not hesitate to present their opinion. For example, since 2009, people have been scared of hyperinflation because the Fed had pumped billions of dollars into the economy. As I had explained earlier, the government simply stepped into the economy, to substitute the private sector that was afraid to do much. Yet, a reader told me that they won’t read my site anymore, because I was wrong. I wish them well, but I can’t let what my readers might or might not think influence my investing strategy.
- The person who is giving you their opinion might be out there to sell you something. Any time I talk about dividend investing, someone always tells me that it is a bad strategy because they think so. One financial adviser routinely bashes dividend investing (link to my rebuttal), but I assume he does that because he feels threatened that self-directed investors would not need someone to hold their hands in exchange for a percentage of their assets every year.
- The person who is criticizing you might be focusing on minutiae (missing the forest for the trees). For example, I often hear things that illustrate that the person I discuss investments with is focused on recent events that they might have heard on the radio, TV, newspapers etc. These items might be great for selling newspapers, but that might not make them relevant to an investor. Back in early 2008, everyone was convinced that Oil was going to $200/barrel, that the US dollar was toast and therefore companies should have international exposure. After Lehman failed, the rest of the world was not doing well relative to the US dollar, and therefore international exposure was bad. For any serious long-term investor, currency fluctuations in the global operations of multinationals like Phillip Morris International (PM) are mostly a wash. Do not let them influence your decision to buy or sell a stock. In addition, companies that fail to meet or exceed Wall Street estimates by a penny and sell-off, provide another example of minutiae or irrelevant facts that you should mostly ignore in your decision making. If you hold Coca-Cola (KO) for the next 20 years, would it matter if it had one bad quarter in 2014 where it missed Wall Street consensus by 1 penny?
- There are always two sides to an argument – For example, some investors want to concentrate their portfolios in less than 10 stocks, others want to hold as many stocks as possible, while a third group might fall somewhere in the middle. For example, I fall closer to the group that espouses owning as many companies that are of good quality, if they are purchased at fair prices and offer the possibility for long term dividend wealth creation. I am totally fine with the fact that investors would disagree with me on holding positions in 50 – 60 securities. This is because what I do is meant to accomplish my goals, and not what Joe thinks of my strategy. As an investor, you should do what you are comfortable with, as long as you have a good reason and have done the homework on the topic. If you built your portfolio of 40 stocks over the past decade, but none of them are buys today, it might make perfect sense to purchase 10 - 20 additional quality companies that are available at reasonable prices. Otherwise, you might find yourself with too much cash on hand, which could cause pressure that you are missing out, especially if prices start rising.
- The persons you are talking with, might not understand your strategy or have a different strategy. For example, when I purchased shares of IBM after it fell in October, a reader posted an analysis of the company from another source. The other source mentioned that the stock should not be acquired. I replied to the reader that I do not care about this other analysis, because I was following my strategy. One should not never others opinions influence their decisions, particularly if they have done the work needed to have their initial conviction in the first place.
If you have done the work, someone who doesn't agree with you should not have an impact on your decision. In fact, some of my best bets have been at a time when the majority of investors disagreed with me. Actually, since 2009, it seemed that almost everyone disagreed with me on buying stocks.
However, if I found out new and material information about my investment, I should evaluate whether it impacts my analysis or not. But if you let random people's opinions influence your decisions, then you are doing yourself a disservice.
- They might be bad investors. The thing is that I do not take others opinions into consideration, because I never know if the person has done their homework, what their level of experience is, and whether they are using facts, or whether they are simply biased against something for whatever reason. However, I do review these opinions especially if they come from someone who I regard as knowledgeable. Those are not only the Warren Buffett, Charlie Munger, and Peter Lynch of the world however. It could be an ordinary investor, who can also provide some you with a nice dose of common sense when you most need it. These investors are rare, but once you find them, hold on to them for their opinion. If I learn a fact that I have not come across during my analysis of a stock, I would seriously consider it, and determine how it impacts the probabilistic outcome of my investment, if it came from a reputable source. I do not subscribe to conspiracy theories on investment matters however. For anyone else who is untested, you would do well for yourself if you ignore them, after applying your BS filter.
The truth however is that sometimes, investors make mistakes. I make my fair share of mistakes on a monthly basis. Input from other smart investors can catch any blind spots in my research. However, if I had done a good job in analyzing securities, any “opinions” I receive should not bring anything new to the table. If they do bring something new and material, then I should definitely evaluate them. For example, when I was first starting out as a dividend investor in 2007-2008, I analyzed Realty Income (O) and determined that it was a terrible investment. This was because I was doing the mistake of looking at earnings per share, and hadn't even heard about Funds From Operations (FFO). After I learned about my mistake, I did some work researching this new theory on valuing REITs and determining for myself whether it made sense. I realized I was wrong, and in a subsequent analysis decided it was an attractive investment. As you gain experience in investing, you would notice certain recurring opinion themes you need to ignore at all times, such as conspiracy theories or constant doom and gloom. However, you should also be able to distinguish opinion that are well grounded in facts, which require further investigation on your part.
Another example includes my attitude towards taxation and investing. For as long as possible, my attitude has been that my goal is to earn money first, and only then worry about taxes. However, after reviewing my tax situation for several years I realized I was wrong to ignore taxation issues. If I have to sell a stock, I sell it regardless if it would produce long or short-term gain, since I don't want to turn gains into losses. However, I am trying to max out 401 (k) and IRA accounts today, in order to gain the most in tax benefits. My goal is to then convert those amounts slowly into a Roth IRA after I retire. I was inspired by blogger J Money on gaining the most in tax deductions today. However, I think I came up with the idea to perform a Roth IRA rollover and pay low taxes on it myself. I think.
Another example includes my recent monitoring of Procter & Gamble (PG). I have been accumulating the stock of this dividend king for several years. However, while it has been able to increase dividends every year for over 5 decades, it has been unable to increase earnings per share since earning $4.26/share in 2009. This means that dividend growth has been running on fumes over the past four years, while I have been patiently hoping for earnings growth to materialize. This means that I should not be buying more shares in this company for the time being. I would still be holding on to my shares, as the risk of dividend cut looks remote. At this point it looks as if future dividend growth would likely exceed inflation only slightly. As a long-term investor, you sometimes have to be able to change your mind, when presented with facts that might run contrary to your opinions too. I think that Procter & Gamble is a core holding for any dividend investor, but if the company cannot grow earnings per share over the next decade, I would not add any money there and would use the dividend checks elsewhere. If they cut the dividend, I would close my position one minute after the announcement.
This is why investing is more of an art than science – you can probably ignore the opinions of the people that haven’t done any homework, but you should be aware of differing opinions that bring a material fact you haven’t previously considered. By practicing the art of stock picking for a long time, you would likely be able to distinguish which one deserves your attention, and which group doesn't.
Full Disclosure: Long PG, O, IBM
Relevant Articles:
- Check the Complete Article Archive
- Dividend Investing is not a black or white process
- Dividend Investing – Science versus Intuition
- Dividend Investing Goals for 2013
- My Dividend Retirement Plan
Monday, December 9, 2013
Saturday, December 7, 2013
The Best Articles on Dividend Investing for November
For your weekend reading enjoyment, I have highlighted a few interesting articles from the archives, which I find to be relevant today. The first five articles have been written and posted on this site, while the last five have been selected from other authors. I tend to post anywhere between three to four articles to my site every week. I usually try to write at least one or two articles that contain timeless information concerning dividend investing. This could include information about my strategy, or other pieces of information, which could be useful to dividend investors.
Below, I have highlighted a few articles posted on this site, which many readers have found interesting:
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:
Thank you for reading Dividend Growth Investor site. I am also on Twitter, if you are interested in following me on another platform, where I post about recent trades I have made.
- Early Warning Signs of a Dividend Cut
- Why I Don't Compare My Portfolio's Performance To The S&P 500
- Which Is Best: DRIP Or Collect And Invest?
- REIT Interest-Rate Concerns May Be Overblown
- Reasons to Love Dividends
Thank you for reading Dividend Growth Investor site. I am also on Twitter, if you are interested in following me on another platform, where I post about recent trades I have made.
Friday, December 6, 2013
Becton Dickinson (BDX) Dividend Stock Analysis
Becton, Dickinson and Company (BDX), a medical technology company, develops, manufactures, and sells medical devices, instrument systems, and reagents worldwide. This dividend champion has been able to boost distributions for 42 years in a row.
The company’s last dividend increase was in November 2012 when the Board of Directors approved a 10% increase to 54.50 cents/share. The company’s peer group includes Medtronic (MDT), Baxter International (BAX) and St. Jude Medical (STJ).
Over the past decade this dividend growth stock has delivered an annualized total return of 12.40% to its loyal shareholders.
The company has managed to deliver an 8.70% average increase in annual EPS since 2004. Analysts expect Becton Dickinson to earn $6.26 per share in 2014 and $6.84 per share in 2015. In comparison, the company earned $4.67/share in 2013. The company’s earnings were reduced by a one-time charge of $1.06/share related to a lawsuit filed against the company by Retractable Technologies.
Becton Dickinson has also managed to repurchase plenty of shares over the past decade, bringing the number of shares from 263 million in 2003 to 200 million in 2013.
Becton Dickinson operates in three segments:
Medical (Over 50% of sales)
BD Medical produces a broad array of medical devices that are used in a wide range of healthcare settings. The primary customers served by BD Medical are hospitals and clinics; physicians’ office practices; consumers and retail pharmacies; governmental and nonprofit public health agencies; pharmaceutical companies; and healthcare workers.
Diagnostics (almost one third of sales)
BD Diagnostics provides products for the safe collection and transport of diagnostics specimens, as well as instruments and reagent systems to detect a broad range of infectious diseases, healthcare-associated infections (“HAIs”) and cancers. BD Diagnostics serves hospitals, laboratories and clinics; reference laboratories; blood banks; healthcare workers; public health agencies; physicians’ office practices; and industrial and food microbiology laboratories.
Biosciences (Approximately 14% of sales)
BD Biosciences produces research and clinical tools that facilitate the study of cells, and the components of cells, to gain a better understanding of normal and disease processes. That information is used to aid the discovery and development of new drugs and vaccines, and to improve the diagnosis and management of diseases. The primary customers served by BD Biosciences are research and clinical laboratories; academic and government institutions; pharmaceutical and biotechnology companies; hospitals; and blood banks.
I like the fact that almost half of revenues is derived from items that are essential and disposable, and which creates the need for customers to repeatedly keep buying more syringes and needles to name a few. I like that the Diagnostics segment is also characterized by recurring revenue streams, as the customers would face high switching costs if they move to another competition. Becton Dickinson’s scale allows it to compete effectively in the Medical segment.
Becton Dickinson should be able to generate higher sales in due to the sustainable demand for its diabetes products, disease testing products, and cell analysis products. The company generates almost 60% of its sales from international operations, which is expected to increase as it grows its presence in emerging markets. Becton Dickinson is also active on the acquisition front and is investing heavily in research and development, which should benefit the company through new product launches. Becton Dickinson has a solid long-term potential for its business, due to its strong position and due to the bullish prospects for its industry. The company enjoys strong demand for its products and a more favorable pricing than other competitors in its industry.
While the company is expected to face higher costs by $55 million from the implementation of the new medical device tax in 2013, it should be able to benefit from increased healthcare spending in the US and internationally.
The return on equity has remained high above 20% over the past decade. I generally want to see at least a stable return on equity over time.
The annual dividend payment has increased by 16.80% per year over the past decade, which is higher than the growth in EPS. The past three dividend announcements were for a hike of 10% in dividends each time. Going forward, I would expect dividend growth to closely approximate 10%.
A 10% growth in distributions translates into the dividend payment doubling every seven years on average. If we look at historical data, going as far back as 1975, one would notice that the company has actually managed to double distributions every six years on average.
The dividend payout ratio has increased from 27% in 2004 to 42% in 2012. This is a short-term spike, caused by one-time accounting items discussed above. On a forward 2014 earnings basis, the dividend payout ratio is approximately 35%. A lower payout is always a plus, since it leaves room for consistent dividend growth minimizing the impact of short-term fluctuations in earnings.
Currently Becton Dickinson is attractively valued at 17.40 times forward earnings, yields 2% and has a sustainable distribution. I recently initiated a small starter position in the stock. I find it much easier to monitor a company I am interested in, if I have some skin in the game. As a long-term dividend investor in the accumulation stage, I get excited if the companies I am interested in are on sale, because I get to buy more shares with my limited amounts of capital. Although this price is a low probability event, I plan on adding to my position on dips below $88/share, equivalent to an entry yield of 2.50%.
Full Disclosure: Long BDX and MDT
Relevant Articles:
- Check the Complete Article Archive
- The importance of pricing and valuation in dividend investing
- My Retirement Strategy for Tax-Free Income
- Do not despise the days of small beginnings
- Three Characteristics of Successful Dividend Investors
The company’s last dividend increase was in November 2012 when the Board of Directors approved a 10% increase to 54.50 cents/share. The company’s peer group includes Medtronic (MDT), Baxter International (BAX) and St. Jude Medical (STJ).
Over the past decade this dividend growth stock has delivered an annualized total return of 12.40% to its loyal shareholders.
The company has managed to deliver an 8.70% average increase in annual EPS since 2004. Analysts expect Becton Dickinson to earn $6.26 per share in 2014 and $6.84 per share in 2015. In comparison, the company earned $4.67/share in 2013. The company’s earnings were reduced by a one-time charge of $1.06/share related to a lawsuit filed against the company by Retractable Technologies.
Becton Dickinson has also managed to repurchase plenty of shares over the past decade, bringing the number of shares from 263 million in 2003 to 200 million in 2013.
Becton Dickinson operates in three segments:
Medical (Over 50% of sales)
BD Medical produces a broad array of medical devices that are used in a wide range of healthcare settings. The primary customers served by BD Medical are hospitals and clinics; physicians’ office practices; consumers and retail pharmacies; governmental and nonprofit public health agencies; pharmaceutical companies; and healthcare workers.
Diagnostics (almost one third of sales)
BD Diagnostics provides products for the safe collection and transport of diagnostics specimens, as well as instruments and reagent systems to detect a broad range of infectious diseases, healthcare-associated infections (“HAIs”) and cancers. BD Diagnostics serves hospitals, laboratories and clinics; reference laboratories; blood banks; healthcare workers; public health agencies; physicians’ office practices; and industrial and food microbiology laboratories.
Biosciences (Approximately 14% of sales)
BD Biosciences produces research and clinical tools that facilitate the study of cells, and the components of cells, to gain a better understanding of normal and disease processes. That information is used to aid the discovery and development of new drugs and vaccines, and to improve the diagnosis and management of diseases. The primary customers served by BD Biosciences are research and clinical laboratories; academic and government institutions; pharmaceutical and biotechnology companies; hospitals; and blood banks.
I like the fact that almost half of revenues is derived from items that are essential and disposable, and which creates the need for customers to repeatedly keep buying more syringes and needles to name a few. I like that the Diagnostics segment is also characterized by recurring revenue streams, as the customers would face high switching costs if they move to another competition. Becton Dickinson’s scale allows it to compete effectively in the Medical segment.
Becton Dickinson should be able to generate higher sales in due to the sustainable demand for its diabetes products, disease testing products, and cell analysis products. The company generates almost 60% of its sales from international operations, which is expected to increase as it grows its presence in emerging markets. Becton Dickinson is also active on the acquisition front and is investing heavily in research and development, which should benefit the company through new product launches. Becton Dickinson has a solid long-term potential for its business, due to its strong position and due to the bullish prospects for its industry. The company enjoys strong demand for its products and a more favorable pricing than other competitors in its industry.
While the company is expected to face higher costs by $55 million from the implementation of the new medical device tax in 2013, it should be able to benefit from increased healthcare spending in the US and internationally.
The return on equity has remained high above 20% over the past decade. I generally want to see at least a stable return on equity over time.
The annual dividend payment has increased by 16.80% per year over the past decade, which is higher than the growth in EPS. The past three dividend announcements were for a hike of 10% in dividends each time. Going forward, I would expect dividend growth to closely approximate 10%.
A 10% growth in distributions translates into the dividend payment doubling every seven years on average. If we look at historical data, going as far back as 1975, one would notice that the company has actually managed to double distributions every six years on average.
The dividend payout ratio has increased from 27% in 2004 to 42% in 2012. This is a short-term spike, caused by one-time accounting items discussed above. On a forward 2014 earnings basis, the dividend payout ratio is approximately 35%. A lower payout is always a plus, since it leaves room for consistent dividend growth minimizing the impact of short-term fluctuations in earnings.
Currently Becton Dickinson is attractively valued at 17.40 times forward earnings, yields 2% and has a sustainable distribution. I recently initiated a small starter position in the stock. I find it much easier to monitor a company I am interested in, if I have some skin in the game. As a long-term dividend investor in the accumulation stage, I get excited if the companies I am interested in are on sale, because I get to buy more shares with my limited amounts of capital. Although this price is a low probability event, I plan on adding to my position on dips below $88/share, equivalent to an entry yield of 2.50%.
Full Disclosure: Long BDX and MDT
Relevant Articles:
- Check the Complete Article Archive
- The importance of pricing and valuation in dividend investing
- My Retirement Strategy for Tax-Free Income
- Do not despise the days of small beginnings
- Three Characteristics of Successful Dividend Investors
Wednesday, December 4, 2013
Warren Buffet’s Favorite Exercise
I like learning from super investors of the world. When I think about super investors, the first thought that comes to mind is Warren Buffett.
Buffett’s favorite exercise is going to a certain year, looking at the top 10 - 20 companies by market capitalization, and then determining whether they are still around or not. This fits in perfectly with the long-term investment strategy of the Oracle of Omaha, where he tries to select companies that are still going to be around and doing well 15 – 20 years into the future.
Buffett’s favorite exercise is going to a certain year, looking at the top 10 - 20 companies by market capitalization, and then determining whether they are still around or not. This fits in perfectly with the long-term investment strategy of the Oracle of Omaha, where he tries to select companies that are still going to be around and doing well 15 – 20 years into the future.
In a Fortune interview from 1996, his friend Bill Gates recounted the following:
"He introduced me to an intriguing analytic exercise that he does. He'll choose a year--say, 1970--and examine the ten highest market-capitalization companies from around then. Then he'll go forward to 1990 and look at how those companies fared. His enthusiasm for the exercise was contagious. I stayed the whole day, and before he drove off with his friends, I even agreed to fly out to Nebraska to watch a football game with him"
For example, using the Standard & Poor's, I looked at the top ten companies in the index as of 1983:
Thirty years later, only two of these companies went bankrupt (Eastman Kodak and General Motors), while the rest did well for their shareholders. The past 30 years were a tumultuous period for all of the companies however, as it was characterized by a flurry of mergers, acquisitions, reorganizations and changing of business focus.
For example, using the Standard & Poor's, I looked at the top ten companies in the index as of 1983:
Year
|
Company
|
%
|
Mkt Cap
|
% OF
|
1983
|
Int'l
Bus. Machines (IBM)
|
1
|
74,346
|
6.09
|
1983
|
Exxon
Corp (XOM)
|
2
|
32,114
|
2.63
|
1983
|
General
Electric (GE)
|
3
|
26,626
|
2.18
|
1983
|
General
Motors (GM)
|
4
|
23,414
|
1.92
|
1983
|
American
Tel & Tel (T) (new)
|
5
|
17,234
|
1.41
|
1983
|
Stand'd
Oil,Indiana
|
6
|
14,848
|
1.22
|
1983
|
Schlumberger,
Ltd (SLB)
|
7
|
14,503
|
1.19
|
1983
|
Sears,
Roebuck
|
8
|
13,150
|
1.08
|
1983
|
Eastman
Kodak
|
9
|
12,603
|
1.03
|
1983
|
duPont(EI)deNemours
|
10
|
12,405
|
1.02
|
Thirty years later, only two of these companies went bankrupt (Eastman Kodak and General Motors), while the rest did well for their shareholders. The past 30 years were a tumultuous period for all of the companies however, as it was characterized by a flurry of mergers, acquisitions, reorganizations and changing of business focus.
For example, at one point in 1993, International Business Machines (IBM) was very close to falling on the wrong path.
In another example, Sears had acquired and then spun-off a handful of companies before merging with Kmart in 2004 to form Sears Holdings (SHLD).
An investor who put $1000 equally in each of those ten leading blue chips at the time, did very well 30 years later if they held patiently all the stock they received and reinvested their dividends.
The AT&T you see listed is the long-distance operations of the original Ma Bell, after the split of the 7 regional baby bells. The company was acquired by SBC (one of the 7 baby bells that were split from Ma Bell in 1984) in 2005. Subsequently, SBC changed its name to the AT&T (T) we know today.
Exxon managed to merge with Mobil in 1999, and formed Exxon Mobil (XOM). This was quite interesting, because both companies originated from the break-up of Standard Oil Trust in 1911. You might notice Standard Oil of Indiana in the list, which was also a descendant of the Standard Oil Trust, and was later renamed Amoco. The company was acquired by BP in 1998.
In my investing, I look at the dividend kings, not as a list of recommendation per se, but for learning perspective. It is always a good idea to try and understand how some companies managed to boost earnings, so that they could increase dividends to shareholders for over 50 years in a row. For example, companies like Procter & Gamble (PG) were able to use their scale to their advantage in the new medium of television starting in the 1950s. Then the company managed to ride the wave of prosperity after the fall of the Soviet Union in the 1990s.
Relevant Articles:
- Why Warren Buffett purchased Exxon Mobil stock?
- Warren Buffett Investing Resource Page
- How Warren Buffett made his fortune
- Check the Complete Article Archive
The AT&T you see listed is the long-distance operations of the original Ma Bell, after the split of the 7 regional baby bells. The company was acquired by SBC (one of the 7 baby bells that were split from Ma Bell in 1984) in 2005. Subsequently, SBC changed its name to the AT&T (T) we know today.
Exxon managed to merge with Mobil in 1999, and formed Exxon Mobil (XOM). This was quite interesting, because both companies originated from the break-up of Standard Oil Trust in 1911. You might notice Standard Oil of Indiana in the list, which was also a descendant of the Standard Oil Trust, and was later renamed Amoco. The company was acquired by BP in 1998.
In my investing, I look at the dividend kings, not as a list of recommendation per se, but for learning perspective. It is always a good idea to try and understand how some companies managed to boost earnings, so that they could increase dividends to shareholders for over 50 years in a row. For example, companies like Procter & Gamble (PG) were able to use their scale to their advantage in the new medium of television starting in the 1950s. Then the company managed to ride the wave of prosperity after the fall of the Soviet Union in the 1990s.
Relevant Articles:
- Why Warren Buffett purchased Exxon Mobil stock?
- Warren Buffett Investing Resource Page
- How Warren Buffett made his fortune
- Check the Complete Article Archive
Monday, December 2, 2013
Nine Quality Dividend Stocks Purchased for the Roth IRA in November
Back in September, I started making contributions for my Roth IRA. I bought shares the following ten companies in September, these nine in October, and a few more in November. The purpose of this series of posts is to prove that it is possible to create a diversified dividend portfolio even if you do not have a lot of starting capital, while also keeping costs as low as possible. The low costs were possible because I used Sharebuilder, which allows you to make 12 purchases per month for $12. The first month after you sign up is a trial month, meaning that all twelve transactions are free. Therefore, if you make 12 trades/month for three months, the most you are going to pay is $24. That comes down to less than 0.50% of the investment amount, if you contribute the 2013 maximum contribution of $5,500. If you were putting more money than that to work however, the initial set up cost would be an even much lower percentage.
The more challenging part of the portfolio building process was uncovering quality dividend stocks, which were also attractively valued. Given the fact that stocks are hitting all-time-highs every day, it is difficult to find quality companies that are not overvalued.
As a result, I was able to purchase shares in the following dividend paying companies in November:
Philip Morris International Inc. (PM), through its subsidiaries, manufactures and sells cigarettes and other tobacco products. The company has consistently raised dividends since being spun off from parents Altria Group (MO) in 2008. Over the past 5 years, PMI has managed to boost distributions by 13%/year. The company is really cheap at 16.20 times earnings and yields 4.40%. This is my second largest holding, which is why it does not make sense from a diversification standpoint to keep adding money there for me. Check my analysis of Philip Morris International.
General Mills, Inc. (GIS) produces and markets branded consumer foods in the United States and internationally. I initiated a small position in the stock. This dividend achiever has raised distributions for 10 years in a row. Over the past decade, General Mills has managed to boost dividends by 8.70%/year. The company is selling for 17.40 times forward earnings, and yields 3%. Check my analysis of General Mills.
Target Corporation (TGT) operates general merchandise stores in the United States. This dividend champion has raised distributions for 46 consecutive years in a row. Over the past decade, Target has managed to boost dividends by 18.60%/year. The company is selling for 17.20 times earnings and yields 2.70%. The big opportunity behind the company is international expansion, which could reward shareholders immensely, if it is done right. Check my analysis of Target.
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 raised distributions for 31 years in a row. Over the past decade, Exxon Mobil has managed to raise dividends by 9%/year, and has also managed to repurchase stock consistently for decades. Currently, the stock is trading at 12.25 times earnings and yields 2.70%. The stock popped on news Warren Buffett initiated a large position in it, which is why adding to Exxon on dips might be a good strategy. Check my analysis of Exxon Mobil.
The Toronto-Dominion Bank (TD), together with its subsidiaries, provides financial and banking services in North America and internationally. The stock is selling for 13 times earnings and yields 3.60%. The company started raising dividends in 2011, after freezing them in 2008.
Royal Bank of Canada (RY), a diversified financial service company, provides personal and commercial banking, wealth management, insurance, corporate and investment banking, and transaction processing services worldwide. The stock is selling for 12.10 times earnings and yields 3.90%. The company started raising dividends in 2011, after freezing them in 2007.
Canadian Imperial Bank of Commerce (CM) provides various financial products and services in Canada and internationally. The stock is selling for 10.20 times earnings and yields 4.30%. The company started raising dividends in 2011, after freezing them in 2007.
The Bank of Nova Scotia (BNS), together with its subsidiaries, provides various personal, commercial, corporate, and investment banking services in Canada and internationally. The stock is selling for 12 times earnings and yields 3.90%. The company started raising dividends in 2011, after freezing them in 2008.
Bank of Montreal (BMO), together with its subsidiaries, provides various retail banking, wealth management, and investment banking products and services in North America and internationally. The stock is selling for 11 times earnings and yields 4%. The company started raising dividends in 2013, after freezing them in 2007.
Overall, I am very bullish on Canadian banks for the very long term. None of the five largest Canadian banks cut dividends during the financial crisis, although they did freeze them for a few years. I think that the Canadian economy is in a unique position to deliver population growth, economic growth, that would trickle down to bolster long-term earnings for the largest banks in the country. This is a bet that Canada in 50 years will be very prosperous, which would trickle down to huge amount of rising dividends from those banks. In addition, while Canadian dividends face a 15% withholding for taxable accounts, there is no withholding in retirement accounts such as Roth IRA's. I plan on writing an article specifically outlining my thesis behind a core long-term holding of these five Canadian banks. Please stay tuned.
UPDATE 2/5/2014 : Sharebuilder is still withholding Canadian taxes on dividends, despite the fact that it is in a ROTH IRA. They seemed unwilling to accommodate my needs as a client, which is why I would not recommend them for buying Canadian dividend paying stocks in tax-deferred accounts.
With this, my allocations for 2013 Roth IRA are complete. I would wait to make my 2014 Roth IRA, until I make my SEP IRA contributions in the first quarter of 2014. Given the fact that I am trying to put away as much as possible in tax-deferred accounts, ( 401K, Sep and Roth IRA’s), I am not going to be able to make as many investments in taxable accounts as before. Therefore, my dividend income would grow merely as a result of organic dividend increases and dividend reinvestment. I expect this to lead to a 10% annual increase in dividends for the next five years. Let’s see if this can be done.
Full Disclosure: Long all companies mentioned in this article
Relevant Articles:
- Check the Complete Article Archive
- Why Warren Buffett purchased Exxon Mobil stock?
- Roth IRA’s for Dividend Investors
- Six things I learned from the financial crisis
- My Retirement Strategy for Tax-Free Income
The more challenging part of the portfolio building process was uncovering quality dividend stocks, which were also attractively valued. Given the fact that stocks are hitting all-time-highs every day, it is difficult to find quality companies that are not overvalued.
As a result, I was able to purchase shares in the following dividend paying companies in November:
Philip Morris International Inc. (PM), through its subsidiaries, manufactures and sells cigarettes and other tobacco products. The company has consistently raised dividends since being spun off from parents Altria Group (MO) in 2008. Over the past 5 years, PMI has managed to boost distributions by 13%/year. The company is really cheap at 16.20 times earnings and yields 4.40%. This is my second largest holding, which is why it does not make sense from a diversification standpoint to keep adding money there for me. Check my analysis of Philip Morris International.
General Mills, Inc. (GIS) produces and markets branded consumer foods in the United States and internationally. I initiated a small position in the stock. This dividend achiever has raised distributions for 10 years in a row. Over the past decade, General Mills has managed to boost dividends by 8.70%/year. The company is selling for 17.40 times forward earnings, and yields 3%. Check my analysis of General Mills.
Target Corporation (TGT) operates general merchandise stores in the United States. This dividend champion has raised distributions for 46 consecutive years in a row. Over the past decade, Target has managed to boost dividends by 18.60%/year. The company is selling for 17.20 times earnings and yields 2.70%. The big opportunity behind the company is international expansion, which could reward shareholders immensely, if it is done right. Check my analysis of Target.
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 raised distributions for 31 years in a row. Over the past decade, Exxon Mobil has managed to raise dividends by 9%/year, and has also managed to repurchase stock consistently for decades. Currently, the stock is trading at 12.25 times earnings and yields 2.70%. The stock popped on news Warren Buffett initiated a large position in it, which is why adding to Exxon on dips might be a good strategy. Check my analysis of Exxon Mobil.
The Toronto-Dominion Bank (TD), together with its subsidiaries, provides financial and banking services in North America and internationally. The stock is selling for 13 times earnings and yields 3.60%. The company started raising dividends in 2011, after freezing them in 2008.
Royal Bank of Canada (RY), a diversified financial service company, provides personal and commercial banking, wealth management, insurance, corporate and investment banking, and transaction processing services worldwide. The stock is selling for 12.10 times earnings and yields 3.90%. The company started raising dividends in 2011, after freezing them in 2007.
Canadian Imperial Bank of Commerce (CM) provides various financial products and services in Canada and internationally. The stock is selling for 10.20 times earnings and yields 4.30%. The company started raising dividends in 2011, after freezing them in 2007.
The Bank of Nova Scotia (BNS), together with its subsidiaries, provides various personal, commercial, corporate, and investment banking services in Canada and internationally. The stock is selling for 12 times earnings and yields 3.90%. The company started raising dividends in 2011, after freezing them in 2008.
Bank of Montreal (BMO), together with its subsidiaries, provides various retail banking, wealth management, and investment banking products and services in North America and internationally. The stock is selling for 11 times earnings and yields 4%. The company started raising dividends in 2013, after freezing them in 2007.
Overall, I am very bullish on Canadian banks for the very long term. None of the five largest Canadian banks cut dividends during the financial crisis, although they did freeze them for a few years. I think that the Canadian economy is in a unique position to deliver population growth, economic growth, that would trickle down to bolster long-term earnings for the largest banks in the country. This is a bet that Canada in 50 years will be very prosperous, which would trickle down to huge amount of rising dividends from those banks. In addition, while Canadian dividends face a 15% withholding for taxable accounts, there is no withholding in retirement accounts such as Roth IRA's. I plan on writing an article specifically outlining my thesis behind a core long-term holding of these five Canadian banks. Please stay tuned.
UPDATE 2/5/2014 : Sharebuilder is still withholding Canadian taxes on dividends, despite the fact that it is in a ROTH IRA. They seemed unwilling to accommodate my needs as a client, which is why I would not recommend them for buying Canadian dividend paying stocks in tax-deferred accounts.
With this, my allocations for 2013 Roth IRA are complete. I would wait to make my 2014 Roth IRA, until I make my SEP IRA contributions in the first quarter of 2014. Given the fact that I am trying to put away as much as possible in tax-deferred accounts, ( 401K, Sep and Roth IRA’s), I am not going to be able to make as many investments in taxable accounts as before. Therefore, my dividend income would grow merely as a result of organic dividend increases and dividend reinvestment. I expect this to lead to a 10% annual increase in dividends for the next five years. Let’s see if this can be done.
Full Disclosure: Long all companies mentioned in this article
Relevant Articles:
- Check the Complete Article Archive
- Why Warren Buffett purchased Exxon Mobil stock?
- Roth IRA’s for Dividend Investors
- Six things I learned from the financial crisis
- My Retirement Strategy for Tax-Free Income
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