Peter Lynch Articles For Worth Magazine

I wanted to share a nice collection of articles, written by Peter Lynch for Worth Magazine in the 1990's. Peter Lynch is probably one of the best-known stock pickers of our time and certainly among the most successful. He was portfolio manager of Fidelity Investments' Magellan Fund for 13 years, starting out in 1977 with $20 million in assets and winding up his tenure in 1990, with more than 1 million shareholders and assets in excess of $14 billion. During that period, Lynch delivered an average annual return of just over 29 percent.

Lynch has served as executive vice president and director of Fidelity Management & Research Company and managing director of FMR Corp. He has also written three bestselling books on investing: "One Up on Wall Street," "Beating the Street," and his latest, "Learn to Earn: A Beginner's Guide to the Basics of Investing and Business,"

I wanted to share these articles with you. I believe that most investors are not even aware that they exist. I believe these articles could be a good addition to your knowledge base, if you have read the author's books. The articles provide a more real-time view of his investing thought process, as he was doing it, and without the benefit of hindsight.

You can download the articles in a PDF format by clicking on this link here: Peter Lynch Articles For Worth Magazine

As I mentioned, I found them online, so I am linking to the source. However, that link may be taken down at any moment.

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Five Dividend Growth Stocks Raising Shareholder Distributions

I review the list of dividend increases every week, as part of my review process. I focus my attention on companies that raised dividends in the current week, and have at least a ten-year track record of annual dividend increases.

Only a company with a strong cash flow generating business can afford to grow dividends for a long period of time. Therefore, a business growing dividends for at least a decade is worth looking at for further research.

There were five companies that fit the criteria. You can view the five companies in the table below:

You can also read a little more about these companies in my summary below. I also included some information below on Ross Stores (ROST), which suspended dividends last week.

Flowers Foods, Inc. (FLO) produces and markets packaged bakery products in the United States.
The company raised its quarterly dividend by 5.30% to 20 cents/share. This marked the 19th consecutive annual dividend increase for this dividend achiever. During the past decade, the company has managed to increase dividends at an annualized rate of 9.60%.

The company is expected to earn $1.06/share in 2020. The company earned $0.66/share in 2010.
Right now the stock is selling for 21.60 times forward earnings and yields 3.50%.

The Clorox Company (CLX) manufactures and markets consumer and professional products worldwide. It operates through four segments: Cleaning, Household, Lifestyle, and International.
Clorox increased quarterly dividends by 4.70% to $1.11/share. This marked the 43rd consecutive year of annual dividend increased for this dividend champion. During the past decade, Clorox has managed to increase dividends at an annualized rate of 7.70%.

The company is expected to earn $6.60/share in 2020. The company earned $4.24/share in 2010.
Right now the stock sells for 30 times forward earnings and yields 2.25%.

Northrop Grumman Corporation (NOC) operates as a security company. The company operates through Aeronautics Systems, Defense Systems, Mission Systems, and Space Systems segments.
Northrop Grumman hiked its quarterly dividend by 9.85% to 1.45/share. This marked the 17th consecutive annual dividend increase for this dividend achiever. Over the past decade, the company has managed to increase dividends at an annualized rate of 13%.

Northrop Grumman is expected to earn $22.57/share in 2020. The company earned $6.82/share in 2010.

The stock sells for 14.45 times forward earnings and yields 1.80%.

Medtronic plc (MDT) develops, manufactures, distributes, and sells device-based medical therapies to hospitals, physicians, clinicians, and patients worldwide. It operates in four segments: Cardiac and Vascular Group, Minimally Invasive Therapies Group, Restorative Therapies Group, and Diabetes Group.

Medtronic increased its quarterly dividend by 7.40% to 58 cents/share, marking the 43rd consecutive annual dividend increase for this dividend champion. Medtronic has managed to increase dividends at an annualized rate of 10.20% during the past decade.

Medtronic is expected to earn $5.14/share in 2020. The company earned $2.79/share in 2010.
The stock sells for 18.40 times forward earnings and yields 2.45%.

Chubb Limited (CB) provides insurance and reinsurance products worldwide.

The company raised its quarterly dividend by 4% to 78 cents/share. This even marked the 27th consecutive annual dividend increase for this dividend champion. Chubb has managed to grow dividends at an annualized rate of 9.90% during the past decade.

The company is expected to earn $9.64/share in 2020. The company earned $9.11/share in 2010.

The stock sells for 12.15 times forward earnings and yields 2.70%.

Last week, I also had a dividend suspension from Ross Stores (ROST). The company followed the lead of TJX Companies (TJX) and is conserving cash in this environment. At least Ross Stores did a press release, and did not bury the dividend suspension in their quarterly report. Ross Stores just joined the dividend aristocrats index in early 2020, so this is a disappointment. They have to wait until 2046 before they will be eligible to join again.

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Disney's Dividend Suspension Increased My Dividend Income

Earlier this month, Walt Disney (DIS) suspended dividends for the first half of 2020. The company had just become a dividend achiever and had a ten year history of annual dividend increases under its belt. I viewed it as a great brand, with a strong moat and as a buy and hold forever type of a company.

However, I also have a strategy that helps me avoid big mistakes and manage risk. In order to avoid falling in love with a company whose best days may be behind it, I sell after a dividend cut or a suspension. I buy a stock with the intent of seeing it prosper, earning more income, growing to be more valuable and sharing a higher dividend with me over time. Only companies that have stood the test of time manage to even establish a lengthy track record of annual dividend increases through the ups and downs of several economic cycles. When management teams with a track record of dividend increases cut dividends, this tells me that something is different and I admit that I was wrong. I can always go back and initiate a position if a dividend is initiated and increased later.

After selling the stock, I realized that I am going to miss out on an annual income of $1.76 for each share that I owned.

All is not lost however. Just because a stock I own stopped paying dividends or reduced them, that doesn't mean I am not going to earn dividend income from that investment. I can always sell ( which I do after a dividend cut or a dividend suspension).

In my case, I managed to get a decent amount of money for my Disney stock, after I sold it.

I like to keep my money invested, because I believe that time in the market beats timing the market. I looked around and wanted to find a company that is in a similar part of the economy, in order to maintain sector allocations. I was able to redeploy the funds into Comcast. I informed the subscribers to my newsletter about this switch. I also added a sprinkle of Verizon and AT&T to juice things up a little.

For every share of Disney that I sold, I bought 2 shares of Comcast and 1/3 share of AT&T and 1/3 share of Verizon.

Let's do a few calculations to illustrate the point I am making.

Imagine that I owned 90 shares of Disney before the dividend cut.

By selling my shares of Disney, I lost annual future dividend income of $1.76/share for a total of $158.40. Well, I lost that future dividend income, because Disney suspended dividends. But in reality, I was expecting that much in annual dividend income from my Disney position, before the suspension.

By buying shares in Comcast, I added $0.92/share to my annual dividend income. 180 shares of Comcast generate a dividend income of $165.60/year.

Verizon pays $2.46/share in annual dividend income, while AT&T pays $2.08/share. Owning 30 shares of Verizon and 30 shares of AT&T results in an annual dividend income of $136.20/year.

If you add $165.60/year to $136.20/year you end up with $301.80/year.

In essence, I doubled my dividend income by selling Disney.

However, I do not like it when I grow my dividend income by selling a lower yielding stock, and replacing it with a higher yielding ones.

First, the risk is that the companies I bought end up not growing their dividend income, or even cutting it. Disney may turn out to have had a temporary issue, and comes roaring back. Or it turns out Disney ends up becoming the next Netflix. If I sold one stock to buy another, I may increase my income, but my total returns could be lower than simply staying put.

Second, the issue is that no two companies are the same. Therefore, getting into the habit of selling one company to buy another may turn the portfolio into a riskier and more concentrated one. We do not want to affect the risk profile of the portfolio, nor do we want to potentially end up overweighting or underweighting sectors ( if this were to happen). Speaking of risk and risk profile, we should not forget that there are largely 3 types of dividend growth stocks. One is low yield/high growth, those in the sweet spot of yield/growth and those with a higher yield and lower growth. We do not want to overweight one of these three types, because the portfolio profile and future growth will be affected. We want a nice balance, as each of those comes with its own sets of risks and opportunities.

Third, this strategy may teach investors that it is ok to just sell their lowest yielding stocks, in order to reach their dividend income goals faster. As we discussed in the paragraph above, this can affect your risk profile. Replacing lower yielding stocks to buy higher yielding ones could be a justification to chase yield. You may end up with a lot of higher yielding companies, which may be concentrated in a few sectors. Or they may be from different sectors, but have exposure to the same type of risks such as interest rates or regulation. These higher yielding companies may also have lower growth, which may result in inability to maintain purchasing power of your income in retirement. The higher yielding companies may have higher payout ratios, which may stifle growth in earnings and may expose those companies to a higher risk of a dividend cut during the next recession.

Basically, replacing dividend stocks can be a mistake if done without a good reason. And it can turn otherwise wise long-term investors into antsy active traders. I usually agree and stay put through any issues, for as long as the dividend is at least maintained. If a dividend is cut or eliminated however, I admit that I have been incorrect, and sell. After all, when I buy a stock, I expect it to keep growing earnings and dividends. If it stops growing those dividends and cuts them, then my initial expectations were wrong. If I am proven to be wrong, I see no reason to sit tight and hope for something that may or may not materialize. So I sell.

In my investing, I prefer to generate growth in dividend income organically. This occurs when a company earns more money over time, and decides to increase dividends from this source. This is a more sustainable strategy for future dividend increases. It is also preferable, because once you retire and stop contributing to your portfolio, you will need dividend income to grow above the rate of inflation. This is why organic dividend growth is so important.

The next preference goes to dividend reinvestment, which is the process where we deploy dividends received back into the portfolio. This step helps turbocharge dividend income and compound net worth in the accumulation process.

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Seven Dividend Growth Stocks Rewarding Shareholders With Raises

As part of my review process, I monitor the list of dividend increases every week. I use several different resources to come up with a list of dividend increases for the week. I then narrow the list down to include only these companies that have a minimum streak of annual dividend increases. In this case, I focus on companies that raised dividends for at least a decade.

There were seven dividend growth stocks that raised dividends last week. One of them, MSA Safety is a newly minted dividend king.

The companies that increased dividends over the past week include:

Company	Symbol	Yield	New Rate	Increase	P/E	Years Annual Increases	10 year Dividend Growth
NACCO Industries	NC	2.87%	0.1925	1.32%	6.11	35	13.47%
MSA Safety	MSA	1.50%	0.4300	2.38%	26.40	50	5.50%
Chesapeake Utilities	CPK	2.11%	0.4400	8.64%	20.48	17	6.49%
Microchip Technology	MCHP	1.76%	0.3675	0.14%	15.19	20	0.75%
RLI Corp	RLI	1.39%	0.2400	4.35%	30.00	45	5.55%
Cardinal Health	CAH	3.97%	0.4859	1.00%	9.29	24	14.33%
Farmers & Merchants Bancorp	FMCB	2.04%	7.2500	1.40%	9.90	55	2.68%

This is not an automatic list to buy of course. I would review each company, and determine if it makes sense from a fundamentals point of view. This would include reviewing trends in earnings, dividends, payout ratios, revenues, and gaining an understand of the company's business model.

The job is not done just by reviewing fundamentals however. The investor also needs to come up with a conclusion whether the stock is fairly valued at the moment. If it is not, then the investor may come up with a price at which the security may be attractive.

The other thing to consider is that valuation is relative. When evaluating companies, we compare them to other companies with promising fundamental and valuation characteristics. Then, we strive to pick the company or companies with the best values in the investors opportunity set.

While this sounds like a lot of work on the surface, with practice, it becomes almost a second nature.

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Dividend Increases Outpace Dividend Cuts in 2020

It has been a turbulent five months since the beginning of the year. The Corona-virus has swept the world, leading to millions of infections, and tens of thousands of people dying from the virus. A large part of the developed world is on a  government imposed lock-down, which has devastated economic output, and led to high unemployment in the US.

Last month, I shared my thoughts on the current health crisis in " My Take on Covid-19 Dividend Cuts". I wanted to provide you with an update, based on the updated data that I discussed in the article.

The number of dividend cuts has definitely increased this year, there is not doubt about it. The first companies to get impacted by the lock-downs were cyclical companies that usually get impacted during a recession. As a result, it was no surprise that companies like airlines, automakers and cruise ship companies cut or eliminated dividends. They did the same thing during the 2007 - 2009 financial crisis as well. There were a lot of dividend cuts in the REITs sector during the Global Financial Crisis, so this crisis is or won't be an exception either. So far, the financial companies like the major banks have largely held up. But their dividends could be in danger as homeowners cannot pay mortgages, or consumer increasingly start defaulting on consumer loans whose collateral value may be impacted in a recession.

Now, there are a few companies, whose cuts surprised me, but that's what makes investing such a challenging endeavor. These include Disney (DIS) and  TJX Companies (TJX). I am surprised that most major oil and gas companies have managed to maintain their dividends for so long after the energy market collapsed in 2014 - 2016, and the only major cut was with Royal Dutch Shell last month.

The other problem is that when things are bad, the media tends to focus on the negative, and ignores the positive. I do not want to put my head in the sand, but I also think that by focusing on the negative, it is easier to confuse people that things are worse than they are. I am strictly speaking about dividends, I am not an expert epidemiologist.

So to summarize, it looks like dividend cuts are getting more coverage, and more dividend cuts are happening, because cyclical companies that usually cut dividends in a recession are facing their first recession in many years.

As dividend growth investors however, we are looking at quality companies, with long streaks of annual dividend increases. Only a certain type of company can afford to grow dividends annually for ten years in a row. We are looking for quality.

I dug a little, and found out the dividend declaration data for companies in the S&P 500. There are 500 companies included in this index. These are the largest and most successful US companies that are listed on a stock market. The index includes 11 industries, and is owned by millions of Americans in their retirement plans.

Based on the data so far, it looks like there had been 205 dividend actions on the S&P 500 so far this year through mid-May.

There were 151 companies on the S&P 500 that increased dividends so far this year.

There were 35 companies on the S&P 500 that suspended dividends, while 17 companies decreased dividends.

It looks like there were two companies that initiated a dividend this year.

If you look at the data, and crunch some numbers, you will see that the rate of dividend increases so far outpaced dividend cuts by a factor of 3:1.

You can view the data, organized by Sector and Type of action ( Decrease, Increase, Initial, Suspension). Source: Standard & Poor's

You can also view the detailed data per individual company in the spreadsheet you can download from here: File Data

As you may see, I am still optimistic about things. It is easy to be optimistic, when the data agree with your strategy. After all, for my dividend portfolio that I share with my premium newsletter, I have had 16 dividend increases so far in 2020 and two dividend cuts or suspension. Since the launch in July 2018 we've had just these two suspensions and 67 dividend increases.

That doesn't mean that things cannot and will not get worse, before they get better. It is possible that it takes the economy longer to recover than any of us anticipate. Stocks may go lower from here in price, as earnings are decimated, and unemployment soars. It is possible that dividends can get cut further from here.

As you can see, the pace of dividend increases on the S&P 500 has been slowing down since March, while the pace of dividend cuts and suspensions has been increasing.

Either way, I will keep sticking to my regular monthly investing plan. I will buy stock in companies I find to be attractively valued whenever I have money to invest. I will reinvest dividends received. If I have a dividend cut, I will most likely sell the stock, and replace it with another stock. This plan worked during the last recession. This plan also worked during the Great Depression.

The hard part is sticking to the plan, when the world around you seems to be collapsing. That's where many investors fail. But hopefully, we will stick to our plans, and ultimately prevail.

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