Back in March I reached the milestone of getting over $100 in dividends in a single month. It turns out I managed to reach that mark every month thereafter.
My next milestone for monthly dividend income was $200, which I originally did not anticipate reaching until early 2013. However, thanks to a few accelerated dividends that were paid this month instead of in Q1 2013, I have now received over $200 in dividends in December. This represents another important milestone on my road to building a sustainable and rising stream of dividend income.
Looking at my expected dividend payments going forward, there will be more variation from month to month than I experienced this year. I will reach $200 in Mar-Jun-Sep-Dec, whereas in most of the remaining months I will be below that mark. I do not make any special effort to buy stocks to "smooth out" my dividends across months; my main goal is to ensure the dividends keep growing over time.
Sticking with $100 increments, my next monthly dividend income milestone is $300. At this point it is difficult to predict when that might be reached, but it could be possible at the end of 2013.
Sunday, December 30, 2012
Wednesday, December 19, 2012
Book Review: Even Buffett Isn't Perfect
Even Buffett Isn't Perfect (2008) by Vahan Janjigian
Most books about Warren Buffett tend to focus on his long-term investing success and rarely offer much in the way of criticism. In contrast, the aim of this book was to discuss some of the inconsistencies and potentially problematic aspects of his approach to investing, with the goal of helping readers learn from Buffett's missteps. However, I was disappointed in how the author went about trying to achieve that goal.
A prime example is the first chapter, which discusses Buffett's views on diversification. The author argues that Buffett is inconsistent on the topic: Sometimes he has advocated that investors maintain a small portfolio of 5-10 stocks that they know really well, whereas there are other times he has advocated widespread diversification via passive investment in index funds. What the author does not seem to fully appreciate is that Buffett's views were addressed to different kinds of investors. If someone has the time, knowledge, and ability to thoroughly evaluate companies and actively manage a portfolio (which Buffett is capable of doing), then it makes sense to have a small portfolio that represents only the very best investment prospects. However, if an investor lacks those qualities and is not interested in active portfolio management, then it might make more sense to passively invest in index funds.
There are some other purported inconsistencies, such as whether Buffett invests more for value than for growth, and the extent to which he conducts due diligence when buying entire companies. The latter criticism is in reference to Buffett mentioning in letters that he has sometimes made acquisitions within a day or two of being contacted about the possibilities. In the last few chapters the author discusses Buffett in relation to corporate governance, stock options, and taxes, but these issues mainly serve as springboards for the author's personal opinions, which may or may not be any better than Buffett's. Overall, I did not come away with an improved understanding of Buffett's imperfections or how they might inform my investing strategy.
Note: I read this book in November 2012.
Most books about Warren Buffett tend to focus on his long-term investing success and rarely offer much in the way of criticism. In contrast, the aim of this book was to discuss some of the inconsistencies and potentially problematic aspects of his approach to investing, with the goal of helping readers learn from Buffett's missteps. However, I was disappointed in how the author went about trying to achieve that goal.
A prime example is the first chapter, which discusses Buffett's views on diversification. The author argues that Buffett is inconsistent on the topic: Sometimes he has advocated that investors maintain a small portfolio of 5-10 stocks that they know really well, whereas there are other times he has advocated widespread diversification via passive investment in index funds. What the author does not seem to fully appreciate is that Buffett's views were addressed to different kinds of investors. If someone has the time, knowledge, and ability to thoroughly evaluate companies and actively manage a portfolio (which Buffett is capable of doing), then it makes sense to have a small portfolio that represents only the very best investment prospects. However, if an investor lacks those qualities and is not interested in active portfolio management, then it might make more sense to passively invest in index funds.
There are some other purported inconsistencies, such as whether Buffett invests more for value than for growth, and the extent to which he conducts due diligence when buying entire companies. The latter criticism is in reference to Buffett mentioning in letters that he has sometimes made acquisitions within a day or two of being contacted about the possibilities. In the last few chapters the author discusses Buffett in relation to corporate governance, stock options, and taxes, but these issues mainly serve as springboards for the author's personal opinions, which may or may not be any better than Buffett's. Overall, I did not come away with an improved understanding of Buffett's imperfections or how they might inform my investing strategy.
Note: I read this book in November 2012.
Friday, December 7, 2012
Monthly Review: November 2012
Here is a review of what happened in November:
Dividends: I received a total of $137.95 in dividends from the following stocks:
Dividend Increases: I was pleased to see dividend increases announced for five(!) of my stocks (click on each stock to see my post about the increase):
Savings: This month I saved an estimated $1,640 (55.1%) of my net income, which is similar to the previous two months and results in year-to-date savings of $15,950. It is an estimate because of the difficulties in accounting for travel expenses associated with my recent work-related trips. I pay for my travel expenses upfront and then get reimbursed at a later date; for example, today I received the reimbursement check for a trip in mid-November. I have been using my reserve cash fund to temporarily take care of larger expenses such as airfare (the amount withdrawn from my reserve fund is restored when I get reimbursed), but I have not done that for smaller expenses (a few incidentals are not reimbursable), hence the estimate. It will be the same way with my December savings.
Transactions: I bought one stock in November (click on the transaction to see my post about it): I was happy to take advantage of an opportunity to average down on my NSC position. At this point it is as large as I feel comfortable having it, so I doubt I will add to it in the near future. This purchase increases my annual dividend income by $50.00. I did not sell any stocks for the 11th consecutive month.
Portfolio: My portfolio currently consists of 25 stocks and has a market value of $63,497.85 (including cash), which is a 3.6% increase over last month's value. The increase primarily reflects new capital, with the remainder split about evenly between dividends and capital gains.
Seeking Alpha: Due to travel and being generally busier than usual, I did not publish any new articles on the investing website Seeking Alpha. However, in November I earned $8.00 from page views of my previous articles, increasing my Q4 total to $100.07 and my year-to-date total to $679.67.
Looking Ahead: December will be an above-average month for dividends, in part because two of my companies (GD and ITW) have moved their next dividend payments up into December in case of a potential dividend tax hike in 2013. I am not expecting any dividend increases to be announced in December. My savings rate will take a hit due to some large annual expenses and holiday spending, but it should rebound in the new year. As in November, I only have enough new capital from savings to make one purchase, which I did at the start of December by increasing my position in INTC. It was my last purchase for 2012.
As regular readers of this blog are aware, I've been busy with travel for the past few weeks, which is the reason for the lack of blogging activity. My final work-related trip for 2012 is next week and it will be followed a few days later by a personal trip to see my family for the holidays. I am not a seasoned traveler, so having a total of 5 trips in 6 weeks has been a bit of a strain; also, the work-related trips have been rather intense (but in a positive way). As a result, my blogging and investing activities will remain minimal until the new year.
That said, I will take this opportunity to wish everyone a great time during the holidays! I hope our portfolios finish 2012 in good shape and our investing success continues into 2013. With 2012 being my first full year of dividend growth investing, I am quite pleased with the results (I plan to write an annual review in January). I am definitely looking forward to my second year and beyond!
Dividends: I received a total of $137.95 in dividends from the following stocks:
- ABT: $22.95
- GD: $10.20
- GIS: $23.10
- HRL: $15.00
- KMI: $14.40
- PG: $28.10
- T: $24.20
Dividend Increases: I was pleased to see dividend increases announced for five(!) of my stocks (click on each stock to see my post about the increase):
- BDX: 10% increase, $4.52 more in annual dividend income
- HRL: 13.3%, $8.00
- T: 2.3%, $2.20
- UNP: 15%, $3.60
- VOD: 7.2%, about $2.74
Savings: This month I saved an estimated $1,640 (55.1%) of my net income, which is similar to the previous two months and results in year-to-date savings of $15,950. It is an estimate because of the difficulties in accounting for travel expenses associated with my recent work-related trips. I pay for my travel expenses upfront and then get reimbursed at a later date; for example, today I received the reimbursement check for a trip in mid-November. I have been using my reserve cash fund to temporarily take care of larger expenses such as airfare (the amount withdrawn from my reserve fund is restored when I get reimbursed), but I have not done that for smaller expenses (a few incidentals are not reimbursable), hence the estimate. It will be the same way with my December savings.
Transactions: I bought one stock in November (click on the transaction to see my post about it): I was happy to take advantage of an opportunity to average down on my NSC position. At this point it is as large as I feel comfortable having it, so I doubt I will add to it in the near future. This purchase increases my annual dividend income by $50.00. I did not sell any stocks for the 11th consecutive month.
Portfolio: My portfolio currently consists of 25 stocks and has a market value of $63,497.85 (including cash), which is a 3.6% increase over last month's value. The increase primarily reflects new capital, with the remainder split about evenly between dividends and capital gains.
Seeking Alpha: Due to travel and being generally busier than usual, I did not publish any new articles on the investing website Seeking Alpha. However, in November I earned $8.00 from page views of my previous articles, increasing my Q4 total to $100.07 and my year-to-date total to $679.67.
Looking Ahead: December will be an above-average month for dividends, in part because two of my companies (GD and ITW) have moved their next dividend payments up into December in case of a potential dividend tax hike in 2013. I am not expecting any dividend increases to be announced in December. My savings rate will take a hit due to some large annual expenses and holiday spending, but it should rebound in the new year. As in November, I only have enough new capital from savings to make one purchase, which I did at the start of December by increasing my position in INTC. It was my last purchase for 2012.
As regular readers of this blog are aware, I've been busy with travel for the past few weeks, which is the reason for the lack of blogging activity. My final work-related trip for 2012 is next week and it will be followed a few days later by a personal trip to see my family for the holidays. I am not a seasoned traveler, so having a total of 5 trips in 6 weeks has been a bit of a strain; also, the work-related trips have been rather intense (but in a positive way). As a result, my blogging and investing activities will remain minimal until the new year.
That said, I will take this opportunity to wish everyone a great time during the holidays! I hope our portfolios finish 2012 in good shape and our investing success continues into 2013. With 2012 being my first full year of dividend growth investing, I am quite pleased with the results (I plan to write an annual review in January). I am definitely looking forward to my second year and beyond!
Monday, December 3, 2012
Stock Bought: INTC
Today I bought shares of Intel (INTC), the world's largest semiconductor chip maker. This is my third purchase of INTC this year, with previous purchases occurring in September and October.
The stock has declined recently due to concerns about earnings, PC sales, mobile market penetration, and the CEO stepping down. I think Mr. Market has overreacted to these issues, focusing too much on the short term and ignoring the company's long-term potential. Samir Patel recently wrote an excellent article on Intel at Seeking Alpha that provides a comprehensive look at the company and its prospects.
I continue to think that INTC is undervalued, with a P/E of 8.5 (its 5-year average P/E is 17.1), P/S of 1.8, and PEG of 0.8. I have seen a wide range of fair value estimates, but even the lowest values (such as $22.50 from S&P) give a margin of safety of at least 10%. The current dividend yield of 4.6% is well above historic levels and provides a nice reward for patient investors as they await a better appraisal of the stock by the market.
I bought 75 shares of INTC at the price of $19.56 per share, giving me a total of 190 shares at an average price of $21.17 per share and a 4.23% yield on cost. My previous cost basis was $22.22 per share, so this purchase reduced it by 4.7%, which is a nice example of averaging down. At the current dividend rate, I can expect to receive quarterly dividends from INTC of $42.75, which is $16.87 more than before this purchase. INTC will now contribute a total of $171.00 to my annual dividend income, which is $67.48 more than before. This purchase makes INTC the fourth-largest position in my portfolio, with a weight by market value of 5.8%.
This also happens to be my last purchase for 2012. It used up a good portion of my November savings and I have insufficient cash for another purchase. Now I can sit back and watch how the market reacts to the ongoing "fiscal cliff" issue as the year draws to a close. Actually, I probably will not be following the market too closely over the next few weeks due to my heavy travel schedule. I returned a few days ago from a work-related trip and tomorrow I leave for yet another one. I wanted to squeeze this post in before I go, though my monthly review for November will have to wait until the end of this week. As mentioned before, updates to my blog (and comments on other blogs) will likely be sporadic for a while.
The stock has declined recently due to concerns about earnings, PC sales, mobile market penetration, and the CEO stepping down. I think Mr. Market has overreacted to these issues, focusing too much on the short term and ignoring the company's long-term potential. Samir Patel recently wrote an excellent article on Intel at Seeking Alpha that provides a comprehensive look at the company and its prospects.
I continue to think that INTC is undervalued, with a P/E of 8.5 (its 5-year average P/E is 17.1), P/S of 1.8, and PEG of 0.8. I have seen a wide range of fair value estimates, but even the lowest values (such as $22.50 from S&P) give a margin of safety of at least 10%. The current dividend yield of 4.6% is well above historic levels and provides a nice reward for patient investors as they await a better appraisal of the stock by the market.
I bought 75 shares of INTC at the price of $19.56 per share, giving me a total of 190 shares at an average price of $21.17 per share and a 4.23% yield on cost. My previous cost basis was $22.22 per share, so this purchase reduced it by 4.7%, which is a nice example of averaging down. At the current dividend rate, I can expect to receive quarterly dividends from INTC of $42.75, which is $16.87 more than before this purchase. INTC will now contribute a total of $171.00 to my annual dividend income, which is $67.48 more than before. This purchase makes INTC the fourth-largest position in my portfolio, with a weight by market value of 5.8%.
This also happens to be my last purchase for 2012. It used up a good portion of my November savings and I have insufficient cash for another purchase. Now I can sit back and watch how the market reacts to the ongoing "fiscal cliff" issue as the year draws to a close. Actually, I probably will not be following the market too closely over the next few weeks due to my heavy travel schedule. I returned a few days ago from a work-related trip and tomorrow I leave for yet another one. I wanted to squeeze this post in before I go, though my monthly review for November will have to wait until the end of this week. As mentioned before, updates to my blog (and comments on other blogs) will likely be sporadic for a while.
Tuesday, November 20, 2012
Dividend Increase: BDX
Becton, Dickinson and Company (BDX) is increasing its quarterly dividend by 10%, from $0.45 to $0.495 per share, putting the company on track for its 41st consecutive year of dividend growth. It is great to see yet another double-digit percent increase for one of my stocks. Given that I own 25 shares of BDX, my quarterly dividend increases from $11.25 to $12.38, which will add an extra $4.52 to my annual dividend income. The increase will be effective with the last dividend payment in 2012. This dividend increase also boosts my yield on cost to 2.78%. There have been dividend increases (effective in 2012) for 24 of the 25 dividend growth stocks in my portfolio.
Dividend Increase: HRL
Hormel Foods (HRL) is increasing its quarterly dividend by 13.3%, from $0.15 to $0.17 per share, putting the company on track for its 47th consecutive year of dividend growth. It is fantastic to see a double-digit percent increase from a company with such a long dividend growth streak. Given that I own 100 shares of HRL, my quarterly dividend increases from $15.00 to $17.00, which will add an extra $8.00 to my annual dividend income. The increase will be effective with the first dividend payment in 2013. This dividend increase also boosts my yield on cost to 2.42%.
Monday, November 19, 2012
Dividend Increase: UNP
Union Pacific (UNP) is increasing its quarterly dividend by 15%, from $0.60 to $0.69 per share, putting the company on track for its 7th consecutive year of dividend growth. Given that I own 10 shares of UNP, my quarterly dividend increases from $6.00 to $6.90, which will add an extra $3.60 to my annual dividend income. The increase will be effective with the first dividend payment in 2013. This dividend increase also boosts my yield on cost to 2.61%.
Tuesday, November 13, 2012
Personal Update
I just wanted to let my blog readers know that posts will probably be infrequent or late during the next four weeks. I will be going on a series of important work-related trips that will take me out of town for a few days at a time. While I am away I probably will not be updating my blog. Each trip also requires a considerable amount of preparation, so my free time will be constrained even when I am not away. For that reason, I may not have much time to update my blog or keep up with other investing blogs. Thanks for understanding!
Dividend Increase: VOD
Vodafone Group (VOD) is increasing its "interim" dividend (the first semi-annual dividend for 2013) by 7.2%, from 3.05 to 3.27 pence per ordinary share. The exchange rate for the American Depositary Shares (1 ADS = 10 ordinary shares) will likely be determined sometime in January, but at the current exchange rate, this works out to an increase in U.S. dollars of about 9.8%. Given that I own 80 shares of VOD, my interim dividend will be about $40.73, to be paid sometime in February.
In related news, Vodafone is receiving a special dividend payment of about £2.4B from Verizon Wireless, of which £1.5B will be used to buy back shares. The company also reported an H1 net loss due to write-downs in troubled Spain and Italy. Southern Europe will likely continue to weigh on the company's operating results in the short term.
In related news, Vodafone is receiving a special dividend payment of about £2.4B from Verizon Wireless, of which £1.5B will be used to buy back shares. The company also reported an H1 net loss due to write-downs in troubled Spain and Italy. Southern Europe will likely continue to weigh on the company's operating results in the short term.
Friday, November 9, 2012
Stock Bought: NSC
Mr. Market was in a bad mood during the past few days, with major stock market indices declining by about 3% since Tuesday. Many reasons have been cited for the sell-off, such as negative reaction to the U.S. election results, fears about the looming fiscal cliff, and lousy economic news from Europe. While these macro-level issues are important, I think it is also important for investors to stay calm, maintain a long-term view, and consider taking advantage of Mr. Market's pessimism. As a dividend growth investor, I view these sell-offs as great opportunities to invest in high-quality dividend growth stocks that are trading at attractive valuations. The hard decision is not whether to buy, but what to buy, especially given my limited cash. I ultimately decided to increase my position in one of the most undervalued stocks in my portfolio.
Today I bought shares of Norfolk Southern (NSC), a major North American railroad company. This is the fourth time I have added to my position in NSC this year, with previous purchases occurring in January, March, and September.
NSC has declined over 20% in the past two months, mainly due to poor quarterly earnings (driven by a decline in coal volumes) and negative market sentiment. Today the stock fell another 2%, setting a new 52-week low. The company is undoubtedly going through a rough patch right now and analysts expect headwinds to persist into the first half of 2013. However, I continue to have a favorable view of the company's long-term growth prospects.
I also think the market has overreacted to recent events, pushing NSC even further into undervalued territory. The stock now has a P/E of 10.5 (its 5-year average P/E is 14.4), P/S of 1.7, and PEG of 0.9. Its current yield of 3.45% is well above the 5-year average of 2.40%. Using a Dividend Discount Model with a projected dividend growth rate of only 8% (which is below historic averages) and a discount rate of 11%, I calculate a fair value of $72 for NSC. Morningstar gives NSC a 4-star rating with a fair value of $85. S&P gives NSC a 4-star rating with a fair value of $67.60 and a 1-year price target of $85. Using the lowest of those estimates, NSC is currently undervalued by at least 14%.
I bought 25 shares of NSC at the price of $57.90 per share, giving me a total of 95 shares at an average price of $67.00 per share and a 2.97% yield on cost. My previous cost basis was $70.25 per share, so this purchase reduced it by 4.63%, which is a great instance of averaging down. At the current dividend rate, I can expect to receive quarterly dividends from NSC of $47.50, which is $12.50 more than before this purchase. NSC will now contribute a total of $190.00 to my annual dividend income, which is $50.00 more than before. This purchase makes NSC the largest position in my portfolio, with a weight by market value of 8.9%, which is about as large as I feel comfortable having it. Incidentally, my forward 12-month dividend total is now $2,000.
I will be sitting on the sidelines for the rest of November because I have insufficient cash for another purchase. For the next few months I anticipate being able to make only one purchase per month. On the one hand, it is unfortunate that I cannot put more money to work immediately. (In case you are wondering, if I did have more cash right now, then I would probably buy KMI and MCD.) On the other hand, it forces me to stagger my purchases over time, which could be advantageous if better opportunities arise later. Regardless, I think the most important thing is to stay disciplined by investing in good opportunities at regular intervals.
Today I bought shares of Norfolk Southern (NSC), a major North American railroad company. This is the fourth time I have added to my position in NSC this year, with previous purchases occurring in January, March, and September.
NSC has declined over 20% in the past two months, mainly due to poor quarterly earnings (driven by a decline in coal volumes) and negative market sentiment. Today the stock fell another 2%, setting a new 52-week low. The company is undoubtedly going through a rough patch right now and analysts expect headwinds to persist into the first half of 2013. However, I continue to have a favorable view of the company's long-term growth prospects.
I also think the market has overreacted to recent events, pushing NSC even further into undervalued territory. The stock now has a P/E of 10.5 (its 5-year average P/E is 14.4), P/S of 1.7, and PEG of 0.9. Its current yield of 3.45% is well above the 5-year average of 2.40%. Using a Dividend Discount Model with a projected dividend growth rate of only 8% (which is below historic averages) and a discount rate of 11%, I calculate a fair value of $72 for NSC. Morningstar gives NSC a 4-star rating with a fair value of $85. S&P gives NSC a 4-star rating with a fair value of $67.60 and a 1-year price target of $85. Using the lowest of those estimates, NSC is currently undervalued by at least 14%.
I bought 25 shares of NSC at the price of $57.90 per share, giving me a total of 95 shares at an average price of $67.00 per share and a 2.97% yield on cost. My previous cost basis was $70.25 per share, so this purchase reduced it by 4.63%, which is a great instance of averaging down. At the current dividend rate, I can expect to receive quarterly dividends from NSC of $47.50, which is $12.50 more than before this purchase. NSC will now contribute a total of $190.00 to my annual dividend income, which is $50.00 more than before. This purchase makes NSC the largest position in my portfolio, with a weight by market value of 8.9%, which is about as large as I feel comfortable having it. Incidentally, my forward 12-month dividend total is now $2,000.
I will be sitting on the sidelines for the rest of November because I have insufficient cash for another purchase. For the next few months I anticipate being able to make only one purchase per month. On the one hand, it is unfortunate that I cannot put more money to work immediately. (In case you are wondering, if I did have more cash right now, then I would probably buy KMI and MCD.) On the other hand, it forces me to stagger my purchases over time, which could be advantageous if better opportunities arise later. Regardless, I think the most important thing is to stay disciplined by investing in good opportunities at regular intervals.
Wednesday, November 7, 2012
Dividend Increase: T
AT&T (T) is increasing its quarterly dividend by 2.3%, from $0.44 to $0.45 per share, putting the company on track for its 29th consecutive year of dividend growth. Given that I own 55 shares of T, my quarterly dividend increases from $24.20 to $24.75, which will add an extra $2.20 to my annual dividend income. The increase will be effective with the first dividend payment in 2013. This dividend increase also boosts my yield on cost to 6.55%.
Saturday, November 3, 2012
Book Review: Value Investing Today
Value Investing Today (1998, 2nd ed.) by Charles H. Brandes
This book provides a decent introduction to value investing, which is the strategy of buying stocks at discounts to the intrinsic values of their underlying companies. The first part of the book is the strongest section, giving a compelling explanation for why value investing makes sense and citing some historical data that support aspects of the strategy. Subsequent parts of the book deal with how to find stocks at attractive valuations and manage a portfolio, although I must admit that I did not really learn anything that I could use to improve my own approach to valuation. The book also has a large part on investing in foreign stocks, which I found moderately informative but somewhat secondary to the main theme. Overall, this book is about average when compared with everything else I have read about value investing.
Note: I read this book in September 2012.
This book provides a decent introduction to value investing, which is the strategy of buying stocks at discounts to the intrinsic values of their underlying companies. The first part of the book is the strongest section, giving a compelling explanation for why value investing makes sense and citing some historical data that support aspects of the strategy. Subsequent parts of the book deal with how to find stocks at attractive valuations and manage a portfolio, although I must admit that I did not really learn anything that I could use to improve my own approach to valuation. The book also has a large part on investing in foreign stocks, which I found moderately informative but somewhat secondary to the main theme. Overall, this book is about average when compared with everything else I have read about value investing.
Note: I read this book in September 2012.
Thursday, November 1, 2012
Dividend News: ADM
Archer Daniels Midland (ADM) is not increasing its dividend this year. Today the company announced its fifth consecutive quarterly dividend of $0.175 per share. I am rather disappointed by this news.
I am aware that ADM's earnings were hurt this year due to the drought, so their financial position is not strong at the moment. Despite this weakness, just last week it was disclosed that ADM had built a 14.9% stake in Australian-based GrainCorp and has bid $2.76B to acquire the entire company. Given ADM's financial position, I seriously question whether such a large acquisition attempt is a prudent action at this time. The company has raised a bit of cash through a tentative deal to sell their stake in Gruma SAB, a Mexican company that manufactures corn flour and tortillas. Presumably, the lack of dividend increase is also designed to conserve cash for the potential acquisition of GrainCorp.
The lack of a dividend increase and the questionable acquisition attempt, along with the earnings volatility, are making me rethink my investment in ADM. When I bought the stock back in January, it seemed to be very undervalued, with a P/E of 8.57, P/S of 0.23, P/B of 1.06, and PEG of 1.17. I even remember seeing a F.A.S.T. Graph that showed the extent of the undervaluation. However, whatever margin of safety I had was completed eroded by the earnings collapse, such that my total return since January is -4.9%. It is not a big loss, but I question whether the potential future return from ADM outweighs the overall risk (of capital loss and lack of dividend growth).
In a post earlier this year I outlined some conditions under which I would consider selling a stock. Three of the conditions included the dividend being frozen, the company's fundamentals deteriorating, and the company making a change such as a major acquisition. Given that ADM meets multiple conditions, I will be giving serious consideration as to whether it should remain in my portfolio. Of course, there is always the possibility that I am overreacting to recent events, so I welcome any thoughts from readers.
I am aware that ADM's earnings were hurt this year due to the drought, so their financial position is not strong at the moment. Despite this weakness, just last week it was disclosed that ADM had built a 14.9% stake in Australian-based GrainCorp and has bid $2.76B to acquire the entire company. Given ADM's financial position, I seriously question whether such a large acquisition attempt is a prudent action at this time. The company has raised a bit of cash through a tentative deal to sell their stake in Gruma SAB, a Mexican company that manufactures corn flour and tortillas. Presumably, the lack of dividend increase is also designed to conserve cash for the potential acquisition of GrainCorp.
The lack of a dividend increase and the questionable acquisition attempt, along with the earnings volatility, are making me rethink my investment in ADM. When I bought the stock back in January, it seemed to be very undervalued, with a P/E of 8.57, P/S of 0.23, P/B of 1.06, and PEG of 1.17. I even remember seeing a F.A.S.T. Graph that showed the extent of the undervaluation. However, whatever margin of safety I had was completed eroded by the earnings collapse, such that my total return since January is -4.9%. It is not a big loss, but I question whether the potential future return from ADM outweighs the overall risk (of capital loss and lack of dividend growth).
In a post earlier this year I outlined some conditions under which I would consider selling a stock. Three of the conditions included the dividend being frozen, the company's fundamentals deteriorating, and the company making a change such as a major acquisition. Given that ADM meets multiple conditions, I will be giving serious consideration as to whether it should remain in my portfolio. Of course, there is always the possibility that I am overreacting to recent events, so I welcome any thoughts from readers.
Monthly Review: October 2012
Here is a review of what happened in October:
Dividends: I received a total of $124.52 in dividends from the following stocks:
Dividend Increases: I was pleased to see a dividend increase announced for one of my stocks (click on the stock to see my post about the increase):
Savings: This month I saved $1,662 (55.9%) of my net income, which is almost identical to what I saved in September and results in year-to-date savings of $14,310.
Transactions: I bought three stocks this month (click on the transactions to see my posts about them): It was one of my busiest months for purchases this year. KMI and CMI are new positions that increase my portfolio's exposure to the energy and industrial sectors, respectively. My purchase of INTC increases the position I started in September. These purchases will increase my annual dividend income by $132.60. I did not sell any stocks for the 10th consecutive month.
Portfolio: My portfolio currently consists of 25 stocks and has a market value of $61,285.58 (including cash), which is a 1.4% increase over last month's value. The increase reflects gains from new capital and dividends being partially offset by capital losses on some existing positions.
Seeking Alpha: I published two new articles on the investing website Seeking Alpha (click on the titles to go to the articles):
Looking Ahead: November will be a slightly better month for dividends and my savings rate should remain stable. As noted above, I am expecting a few dividend increases to be announced, which is exciting. Given that I depleted my cash in October, the new capital from savings will enable me to make just one purchase this month, although I have not yet made up my mind about what I am going to buy.
Dividends: I received a total of $124.52 in dividends from the following stocks:
- CNI: $6.47
- GPC: $24.75
- ITW: $15.20
- KO: $15.30
- MDT: $14.30
- PM: $42.50
- UNP: $6.00
Dividend Increases: I was pleased to see a dividend increase announced for one of my stocks (click on the stock to see my post about the increase):
- KMI: 2.9% increase, $1.60 more in annual dividend income
Savings: This month I saved $1,662 (55.9%) of my net income, which is almost identical to what I saved in September and results in year-to-date savings of $14,310.
Transactions: I bought three stocks this month (click on the transactions to see my posts about them): It was one of my busiest months for purchases this year. KMI and CMI are new positions that increase my portfolio's exposure to the energy and industrial sectors, respectively. My purchase of INTC increases the position I started in September. These purchases will increase my annual dividend income by $132.60. I did not sell any stocks for the 10th consecutive month.
Portfolio: My portfolio currently consists of 25 stocks and has a market value of $61,285.58 (including cash), which is a 1.4% increase over last month's value. The increase reflects gains from new capital and dividends being partially offset by capital losses on some existing positions.
Seeking Alpha: I published two new articles on the investing website Seeking Alpha (click on the titles to go to the articles):
- Examining Another Dividend-Growth Large-Cap Fallacy
- Dividend Growth Analysis: Rate Versus Length Of Streak
Looking Ahead: November will be a slightly better month for dividends and my savings rate should remain stable. As noted above, I am expecting a few dividend increases to be announced, which is exciting. Given that I depleted my cash in October, the new capital from savings will enable me to make just one purchase this month, although I have not yet made up my mind about what I am going to buy.
Sunday, October 21, 2012
Book Review: Markets Never Forget (But People Do)
Markets Never Forget (But People Do) (2011) by Ken Fisher
This book can be considered a sequel to the author's previous book, Debunkery, which I read and reviewed earlier this year. The main thesis of this book is that people tend to forget about (or ignore) market history, which results in misconceptions and improbable projections about the relationship between market performance and various economic and political factors. To give some examples from the book:
Note: I read this book in September 2012.
This book can be considered a sequel to the author's previous book, Debunkery, which I read and reviewed earlier this year. The main thesis of this book is that people tend to forget about (or ignore) market history, which results in misconceptions and improbable projections about the relationship between market performance and various economic and political factors. To give some examples from the book:
- In the past few years there has been plenty of talk about the risk of a "double-dip recession," even though it is an improbable event, reflecting less than 10% of past recessions.
- People tend to forget that major drops in the market are often followed soon after by strong rebounds, producing a V-shaped pattern.
- Even though the market's average annual return has been around 10%, it is actually rare for the return in a given year to be around 10%.
- If you are a perma-bear, then you will be wrong more often than right because the market has positive annual returns about two-thirds of the time.
Note: I read this book in September 2012.
Saturday, October 20, 2012
Revisiting Black Monday After 25 Years
Yesterday marked the 25th anniversary of Black Monday (October 19, 1987), when world stock markets plunged and the Dow Jones Industrial Average fell by 22% in a single day. Nightly Business Report has posted the video of that night's broadcast on their website. It provides a fascinating historical look at what happened that day and how people reacted.
Wednesday, October 17, 2012
Dividend Increase: KMI
Kinder Morgan, Inc. (KMI) is increasing its quarterly dividend by 2.9%, from $0.35 to $0.36 per share. Its dividend has been increased every quarter in 2012, resulting in an overall increase of 20% compared with the last quarter of 2011. Given that I own 40 shares of KMI, my quarterly dividend increases from $14.00 to $14.40, which will add an extra $1.60 to my annual dividend income. This dividend increase also boosts my yield on cost to 4.11%. Thus far this year, there have been dividend increases for 23 of the 25 dividend growth stocks in my portfolio.
Dividend News: ABT
There has been some uncertainty about what will happen to the dividend of Abbott Laboratories (ABT) once the company splits at the end of this year. Some clarification was provided on today's earnings call:
The dividend has always been an important component of Abbott's investment identity. We had previously indicated that we expected to combine dividend of the 2 companies to be at least equal to Abbott's pre-separation annual dividend. And we expect AbbVie to be even more focused on shareholder returns in the pharma dividends, paying a larger portion of the dividend.Assuming those dividend rates are approved, the combined dividend increase will be 5.9%, which is rather modest, but it will come a quarter earlier than usual. Note that AbbVie will trade under the ticker ABBV.
With this in mind, today, we're announcing that we expect AbbVie to pay an annual dividend of $1.60 per share, starting with the quarterly dividend to be paid in February. This, like all dividends, will be subject to approval by the future AbbVie board in January 2013. We're also announcing that we expect the new Abbott dividend to be $0.56 per share, in line with its peer group and growth prospects, again, starting with the dividend to be paid in February and again, subject to approval by the Abbott board.
In the end, this combined annual dividend rate of $2.16 for the 2 companies exceeds the current annual dividend rate of $2.04. And this increase is expected to be implemented one quarter earlier than in past years.
Tuesday, October 16, 2012
Dividend Growth Analysis: Rate Versus Length Of Streak
A new article of mine has been published on the investing website Seeking Alpha. The article is entitled Dividend Growth Analysis: Rate Versus Length Of Streak and it looks at the relationship between dividend growth rate and length of the dividend growth streak.
Thursday, October 11, 2012
Stock Bought: INTC
Today I bought shares of Intel (INTC), the world's largest semiconductor chip maker. I wrote about INTC last month when I started a position in the stock. Its price has continued to trend down over the past few weeks, making the stock even more undervalued than before. The company reports its quarterly earnings on October 16, but I do not like to guess how the market will react to earnings, so I deemed it best to take advantage of the buying opportunity already in front of me.
I bought 50 shares of INTC at the price of $21.70 per share, giving me a total of 115 shares at an average price of exactly $22.22 per share (some nice symmetry there) and a 4.03% yield on cost. At the current dividend rate, I can expect to receive quarterly dividends of $25.88, which is $11.25 more than before this purchase. INTC will now contribute a total of $103.52 to my annual dividend income, an increase of $45.00.
My three purchases this week used up all my cash, so I will be waiting on the sidelines until I have new capital at the start of November. On the one hand, this means I will not be able to take advantage of any dips due to earnings that "miss" analyst estimates in the coming weeks. On the other hand, desirable dips might not happen (such was the case in July) and the opportunities that resulted in my recent purchases might be gone by the end of the month. I am continuing to teach myself that it is better to capitalize on good opportunities when they are present than to speculate about future opportunities that may not come to fruition.
I bought 50 shares of INTC at the price of $21.70 per share, giving me a total of 115 shares at an average price of exactly $22.22 per share (some nice symmetry there) and a 4.03% yield on cost. At the current dividend rate, I can expect to receive quarterly dividends of $25.88, which is $11.25 more than before this purchase. INTC will now contribute a total of $103.52 to my annual dividend income, an increase of $45.00.
My three purchases this week used up all my cash, so I will be waiting on the sidelines until I have new capital at the start of November. On the one hand, this means I will not be able to take advantage of any dips due to earnings that "miss" analyst estimates in the coming weeks. On the other hand, desirable dips might not happen (such was the case in July) and the opportunities that resulted in my recent purchases might be gone by the end of the month. I am continuing to teach myself that it is better to capitalize on good opportunities when they are present than to speculate about future opportunities that may not come to fruition.
Wednesday, October 10, 2012
Stock Bought: CMI
For my second purchase today I bought shares of Cummins (CMI), a world leader in the design and manufacture of diesel and natural gas engines. The company is at the forefront of developing better engine technology that meets stricter emission standards and is poised to take advantage of the increasing use of natural gas as a fuel source for vehicles.
I recently posted a quantitative comparison of CMI with one of its competitors in the heavy machinery industry, arguing that it is undervalued despite having solid fundamentals. Here is a recap:
I bought 15 shares of CMI at the price of $88.00 per share, giving me a 2.26% yield on cost. At the current dividend rate, I can expect to receive quarterly dividends of $7.50, which will add a total of $30.00 to my annual dividend income. Cummins is now the 25th stock in my portfolio. I had been waiting for an opportunity to initiate a position in CMI below $90, so I was glad to get it today. The company reports its quarterly earnings on October 30, which could lead to more price action at the end of the month. If the stock is still trading around the current level in early November (when I will have new capital), then I would consider increasing my position.
I recently posted a quantitative comparison of CMI with one of its competitors in the heavy machinery industry, arguing that it is undervalued despite having solid fundamentals. Here is a recap:
- Its 5-year historic growth rates for revenue and earnings are 9.70% and 21.87%, respectively, with low double-digit earnings growth expected over the next few years.
- The company has a great balance sheet, with debt/capital of 9.60%, debt/equity of 12.34%, a current ratio over 2, and ample interest coverage.
- The company has increased its dividend for 7 consecutive years, with an impressive 5-year dividend growth rate of 32.10% and a payout ratio of just 20%. This year's dividend increase was 25%.
- CMI has a P/E of 8.74 (its 5-year average P/E is 15.10), P/S of 0.91, and PEG of 0.76. Using a Dividend Discount Model with a below-average dividend growth rate of 10% and a discount rate of 12%, I calculate a fair value of $110 per share, which implies a 20% margin of safety at the current stock price.
I bought 15 shares of CMI at the price of $88.00 per share, giving me a 2.26% yield on cost. At the current dividend rate, I can expect to receive quarterly dividends of $7.50, which will add a total of $30.00 to my annual dividend income. Cummins is now the 25th stock in my portfolio. I had been waiting for an opportunity to initiate a position in CMI below $90, so I was glad to get it today. The company reports its quarterly earnings on October 30, which could lead to more price action at the end of the month. If the stock is still trading around the current level in early November (when I will have new capital), then I would consider increasing my position.
Stock Bought: KMI
For my first purchase today I bought shares of Kinder Morgan (KMI), the third-largest energy company in North America. The company operates an extensive network of pipelines for transporting natural gas, crude oil, and petroleum products. Its business model is similar to a toll road in that the company collects volume-based fees for transporting raw materials, with limited exposure to the fluctuating prices of those commodities. This results in stable and growing cash flows as energy needs increase over time, and the company's massive asset footprint will likely help it dominate the midstream energy industry for many years to come.
The Kinder Morgan group of companies has an interesting corporate structure. The General Partner (GP) is Kinder Morgan, Inc. (KMI), which pays dividends based on distributions it receives from two Limited Partners (LPs). The first LP is Kinder Morgan Energy Partners, which is represented by two entities that differ only in that KMP gives cash distributions (similar to dividends) and KMR gives share dividends. The second LP is the recently acquired El Paso Pipeline Partners, which is represented by a single entity, EPB, that gives cash distributions. KMP and EPB are examples of Master Limited Partnerships (MLPs), which often have high yields but come with some tax complications. KMI is a C-corporation that provides a way of investing in MLPs without the extra tax issues. Moreover, because of its Incentive Distribution Rights as GP, KMI should be capable of greater dividend growth over time than the LPs.
KMI became a publicly traded stock in early 2011, so it does not have much of a dividend history at this point. However, the company has increased its dividend in 4 of the past 5 quarters and management has expressed a commitment to dividend growth. In fact, management is targeting a dividend growth rate of at least 10% for the next several years, which is not unrealistic given the 14% distribution growth rate for KMP over the past 16 years. In addition, Richard Kinder (the CEO) and other management own about 28% of KMI stock, so it is in their interest to maintain a solid dividend.
It is difficult to come up with a valuation for KMI because of the unique characteristics of the MLPs for which it is the GP. In addition, its balance sheet is difficult to assess because the company still has to "drop down" assets from its purchase of El Paso Pipeline Partners. However, using a Dividend Discount Model with a dividend growth rate of 10% (matching their target) and a discount rate of 14%, I calculate a fair value of $38.50 per share, which is slightly above the current stock price.
I bought 40 shares of KMI at the price of $34.85 per share, giving me a 4.00% yield on cost. (I set my limit price with the goal of getting that YOC.) At the current dividend rate, I can expect to receive quarterly dividends of $14.00, which will add a total of $56.00 to my annual dividend income. The stock will go ex-dividend later this month, so I will receive my first dividend payment in November. Kinder Morgan is now the 24th stock in my portfolio, adding some nice diversification in the energy sector.
The Kinder Morgan group of companies has an interesting corporate structure. The General Partner (GP) is Kinder Morgan, Inc. (KMI), which pays dividends based on distributions it receives from two Limited Partners (LPs). The first LP is Kinder Morgan Energy Partners, which is represented by two entities that differ only in that KMP gives cash distributions (similar to dividends) and KMR gives share dividends. The second LP is the recently acquired El Paso Pipeline Partners, which is represented by a single entity, EPB, that gives cash distributions. KMP and EPB are examples of Master Limited Partnerships (MLPs), which often have high yields but come with some tax complications. KMI is a C-corporation that provides a way of investing in MLPs without the extra tax issues. Moreover, because of its Incentive Distribution Rights as GP, KMI should be capable of greater dividend growth over time than the LPs.
KMI became a publicly traded stock in early 2011, so it does not have much of a dividend history at this point. However, the company has increased its dividend in 4 of the past 5 quarters and management has expressed a commitment to dividend growth. In fact, management is targeting a dividend growth rate of at least 10% for the next several years, which is not unrealistic given the 14% distribution growth rate for KMP over the past 16 years. In addition, Richard Kinder (the CEO) and other management own about 28% of KMI stock, so it is in their interest to maintain a solid dividend.
It is difficult to come up with a valuation for KMI because of the unique characteristics of the MLPs for which it is the GP. In addition, its balance sheet is difficult to assess because the company still has to "drop down" assets from its purchase of El Paso Pipeline Partners. However, using a Dividend Discount Model with a dividend growth rate of 10% (matching their target) and a discount rate of 14%, I calculate a fair value of $38.50 per share, which is slightly above the current stock price.
I bought 40 shares of KMI at the price of $34.85 per share, giving me a 4.00% yield on cost. (I set my limit price with the goal of getting that YOC.) At the current dividend rate, I can expect to receive quarterly dividends of $14.00, which will add a total of $56.00 to my annual dividend income. The stock will go ex-dividend later this month, so I will receive my first dividend payment in November. Kinder Morgan is now the 24th stock in my portfolio, adding some nice diversification in the energy sector.
Friday, October 5, 2012
Examining Another Dividend-Growth Large-Cap Fallacy
A new article of mine has been published on the investing website Seeking Alpha. The article is entitled Examining Another Dividend-Growth Large-Cap Fallacy and it looks at the relationship between market capitalization and dividend growth rate among dividend growth stocks.
Tuesday, October 2, 2012
Stock Thoughts: CMI vs. CAT
In my ongoing quest to find undervalued dividend growth stocks I have focused recently on two industrial companies that manufacture and distribute heavy machinery: Cummins (CMI) and Caterpillar (CAT). Cummins designs and produces diesel and natural gas engines, as well as various engine-related components. Caterpillar also builds engines, but it has a more diverse product array that includes construction/mining machines and industrial gas turbines.
The purpose of this post is to organize, compare, and share some of the quantitative information I have compiled on the two companies. It is intended to be a quick, side-by-side numerical snapshot rather than a comprehensive analysis. I will start with some stock price information (as of October 2):
Both stocks are trading more than 25% below their 52-week highs, suggesting they have fallen out of favor recently. This becomes more evident upon examination of various price ratios:
The current P/E, P/S, and P/B ratios are below their 5-year averages, indicating that both stocks are undervalued. It seems as though the market has historically given a higher valuation to CAT than to CMI. This observation, coupled with the PEG ratios and various fair value estimates I have seen, suggests that CAT might be slightly more undervalued than CMI. The next table shows recent growth rates:
Here we see that CMI has had superior revenue and earnings growth in recent years, but CAT is expected to have higher growth going forward (which is a reason for its lower PEG ratio). However, it is notoriously difficult to accurately predict future growth, so I consider the projections to be in the same ballpark for both companies. Next are some measures of management effectiveness:
ROA and ROE are acceptable for both companies. The comparison becomes more interesting when you look at some balance sheet details:
CMI has a strong balance sheet with low debt, a high current ratio, and excellent interest coverage. In contrast, CAT has a mediocre balance sheet with a considerable amount of debt. Given that these companies operate in a cyclical industry, I place great weight on the balance sheet. As a dividend growth investor, I also give a lot of weight to the dividend:
The yields and payout ratios are similar, but CMI has had much stronger dividend growth in recent years, although CAT has a much longer dividend growth streak. I find myself more impressed by the recent dividend growth from CMI.
Summary and Conclusions: This purely quantitative comparison shows that CMI and CAT are similar in many respects, the main one being that both stocks are undervalued. Using a Dividend Discount Model with a 10% dividend growth rate and 12% discount rate, I get a fair value of $110 for CMI and $114 for CAT. These values imply there is a margin of safety of at least 15% at current prices.
Even though I did not show any historical trend data, both companies recovered quickly from the recession and seem to be doing well. However, CAT recently lowered its guidance out to 2015, which may hint at some future earnings instability (CMI reduced its short-term guidance earlier this year). Despite near-term economic pressures, I think both companies would represent suitable long-term investments, especially when worldwide economic growth picks up.
That said, if I were to choose just one of them as an investment, then I would probably go with CMI. From a quantitative perspective, I like its strong balance sheet and recent dividend growth. From a qualitative perspective, I like the company's leadership in developing better engine technology that meets stricter emission standards. The increasing use of natural gas as a fuel source should also benefit the company. For these reasons, I am considering CMI as a potential addition to my portfolio.
The purpose of this post is to organize, compare, and share some of the quantitative information I have compiled on the two companies. It is intended to be a quick, side-by-side numerical snapshot rather than a comprehensive analysis. I will start with some stock price information (as of October 2):
Summary and Conclusions: This purely quantitative comparison shows that CMI and CAT are similar in many respects, the main one being that both stocks are undervalued. Using a Dividend Discount Model with a 10% dividend growth rate and 12% discount rate, I get a fair value of $110 for CMI and $114 for CAT. These values imply there is a margin of safety of at least 15% at current prices.
Even though I did not show any historical trend data, both companies recovered quickly from the recession and seem to be doing well. However, CAT recently lowered its guidance out to 2015, which may hint at some future earnings instability (CMI reduced its short-term guidance earlier this year). Despite near-term economic pressures, I think both companies would represent suitable long-term investments, especially when worldwide economic growth picks up.
That said, if I were to choose just one of them as an investment, then I would probably go with CMI. From a quantitative perspective, I like its strong balance sheet and recent dividend growth. From a qualitative perspective, I like the company's leadership in developing better engine technology that meets stricter emission standards. The increasing use of natural gas as a fuel source should also benefit the company. For these reasons, I am considering CMI as a potential addition to my portfolio.
Monthly Review: September 2012
Here is a review of what happened in September:
Dividends: I received a total of $134.48 in dividends from the following stocks:
Dividend Increases: I was pleased to see dividend increases announced for two of my stocks (click on each stock to see my post about the increase): These are my two largest dividend payers, so I am happy to get double-digit percent increases. Thus far this year, there have been dividend increases for 20 of the 23 dividend growth stocks in my portfolio. I expect increases for the remaining three stocks (ADM, BDX, and UNP) to be announced in November.
Savings: This month I saved $1,668 (56.1%) of my net income, which results in year-to-date savings of $12,648. I achieved my goal of $12,000 in savings for 2012! When I set the goal at the start of the year, I did not have a reliable estimate of how much I could save each month. It feels great to know that I was able to save more than I anticipated. I am curious to see how much my total savings will be at the end of the year.
Transactions: I bought two stocks this month (click on the transactions to see my posts about them): As discussed in my posts, I consider these to be good purchases from a valuation standpoint. The first purchase increases my position in NSC, making the railroad stock the third-largest position in my portfolio. The second purchase is my first new position in several months and I think a high-quality technology stock such as INTC adds some nice diversification to my portfolio. These purchases will increase my annual dividend income by $98.52. I did not sell any stocks for the 9th consecutive month.
Portfolio: My portfolio currently consists of 23 stocks and has a market value of $60,437.16 (including cash), which is a 2.4% increase over last month's value. About 72% of the increase came from new capital and the rest was due to capital gains and dividends.
Seeking Alpha: I published one new article on the investing website Seeking Alpha (click on the title to go to the article): Curiously, this turned out to be my least popular article in terms of page views, even though it seemed to get a good reception in the comment section. Oh well! In September I earned a total of $44.37 from this article and additional page views of my previous articles. My Q3 total is $235.66 (which will be paid in October) and my year-to-date total is $579.60.
Looking Ahead: October will be a decent month for dividends, only slightly less than what I received in September. My savings rate should be good. My two recent purchases used up a modest amount of cash, but once I add the new capital from my September savings, I will have enough cash to make two purchases. A lot of earnings will be reported in the second half of October, so I am tempted to wait and see which stocks dip on "disappointing" earnings. However, if a good opportunity comes up between now and then, I might take advantage of it.
Dividends: I received a total of $134.48 in dividends from the following stocks:
- ADM: $10.50
- BDX: $11.25
- CVX: $18.00
- JNJ: $21.35
- MCD: $35.00
- NSC: $25.00
- UTX: $13.38
Dividend Increases: I was pleased to see dividend increases announced for two of my stocks (click on each stock to see my post about the increase): These are my two largest dividend payers, so I am happy to get double-digit percent increases. Thus far this year, there have been dividend increases for 20 of the 23 dividend growth stocks in my portfolio. I expect increases for the remaining three stocks (ADM, BDX, and UNP) to be announced in November.
Savings: This month I saved $1,668 (56.1%) of my net income, which results in year-to-date savings of $12,648. I achieved my goal of $12,000 in savings for 2012! When I set the goal at the start of the year, I did not have a reliable estimate of how much I could save each month. It feels great to know that I was able to save more than I anticipated. I am curious to see how much my total savings will be at the end of the year.
Transactions: I bought two stocks this month (click on the transactions to see my posts about them): As discussed in my posts, I consider these to be good purchases from a valuation standpoint. The first purchase increases my position in NSC, making the railroad stock the third-largest position in my portfolio. The second purchase is my first new position in several months and I think a high-quality technology stock such as INTC adds some nice diversification to my portfolio. These purchases will increase my annual dividend income by $98.52. I did not sell any stocks for the 9th consecutive month.
Portfolio: My portfolio currently consists of 23 stocks and has a market value of $60,437.16 (including cash), which is a 2.4% increase over last month's value. About 72% of the increase came from new capital and the rest was due to capital gains and dividends.
Seeking Alpha: I published one new article on the investing website Seeking Alpha (click on the title to go to the article): Curiously, this turned out to be my least popular article in terms of page views, even though it seemed to get a good reception in the comment section. Oh well! In September I earned a total of $44.37 from this article and additional page views of my previous articles. My Q3 total is $235.66 (which will be paid in October) and my year-to-date total is $579.60.
Looking Ahead: October will be a decent month for dividends, only slightly less than what I received in September. My savings rate should be good. My two recent purchases used up a modest amount of cash, but once I add the new capital from my September savings, I will have enough cash to make two purchases. A lot of earnings will be reported in the second half of October, so I am tempted to wait and see which stocks dip on "disappointing" earnings. However, if a good opportunity comes up between now and then, I might take advantage of it.
Monday, September 24, 2012
Stock Bought: INTC
Today I bought shares of Intel (INTC), the world's largest semiconductor chip maker. The company dominates the market for microprocessors in personal computers (PCs) and continues to be a leader in technological product development.
Intel has produced solid operating results in recent years, with 5-year growth rates of 8.8% for revenue and 22.7% for earnings, high margins, strong cash flows, and good returns on equity. The company's financial position is excellent, with $13.7B in cash, $7.2B in debt, debt/capital of 13.4%, debt/equity of 14.8%, 189x interest coverage, and a current ratio of 2.4. It has an A+ credit rating from S&P and a safety rating of 1 from Value Line.
For a tech company, Intel has a pretty good dividend history. The company has increased its dividend for 9 consecutive years and has a 5-year dividend growth rate of 14.4%. The most recent dividend increase was 7.1%, announced in May. The payout ratio is a modest 38%.
Regarding valuation, I consider Intel to be undervalued with a P/E of 9.6 (its 5-year average P/E is 17.1), P/S of 2.1, and PEG of 0.9. Using a Dividend Discount Model with a below-average dividend growth rate of 9% and a discount rate of 12%, I calculate a fair value over $32 per share, which I think is a reasonable estimate.
Intel's stock price has been beaten down in recent months, reaching a 10-month low today. The stock is trading 20% below its 52-week high set in early May. The drop in stock price reflects the perception that PC sales are on the decline and the recognition that Intel has yet to gain much market share in mobile devices. In addition, earlier this month the company lowered its quarterly revenue outlook. I think the fears about PCs being replaced by tablets and smart phones are overblown. There are many workplaces (such as my own) that will likely continue using PCs for many years, in part because they are much more powerful than mobile devices. I also think the concerns about Intel's lack of presence in the mobile market are overdone. To put a positive spin on it, given that the company has yet to gain much market share in the area, there is plenty of room for future growth. Intel invests heavily in R&D and has top-notch fabrication facilities, so I think it is only a matter of time before they make significant inroads in the mobile market.
I bought 65 shares of INTC at the price of $22.62 per share, giving me a 3.96% yield on cost. At the current dividend rate, I can expect to receive quarterly dividends of $14.63, which will add a total of $58.52 to my annual dividend income. Intel is now the 23rd stock in my portfolio and my first new position since April. Even though I am wary of the technology sector in general, Intel is a solid, profitable company that I feel comfortable having in my portfolio. For that reason, I would consider increasing my position on a further decline in the stock price.
I am pleased that I was able to find a second great opportunity to deploy cash this month (the first being my purchase of NSC last week). I think I am getting better at appreciating that it is a "market of stocks" rather than a stock market, so regardless of what the broader market is doing, it is best to stay focused on finding individual dividend growth stocks that are available at attractive valuations.
Intel has produced solid operating results in recent years, with 5-year growth rates of 8.8% for revenue and 22.7% for earnings, high margins, strong cash flows, and good returns on equity. The company's financial position is excellent, with $13.7B in cash, $7.2B in debt, debt/capital of 13.4%, debt/equity of 14.8%, 189x interest coverage, and a current ratio of 2.4. It has an A+ credit rating from S&P and a safety rating of 1 from Value Line.
For a tech company, Intel has a pretty good dividend history. The company has increased its dividend for 9 consecutive years and has a 5-year dividend growth rate of 14.4%. The most recent dividend increase was 7.1%, announced in May. The payout ratio is a modest 38%.
Regarding valuation, I consider Intel to be undervalued with a P/E of 9.6 (its 5-year average P/E is 17.1), P/S of 2.1, and PEG of 0.9. Using a Dividend Discount Model with a below-average dividend growth rate of 9% and a discount rate of 12%, I calculate a fair value over $32 per share, which I think is a reasonable estimate.
Intel's stock price has been beaten down in recent months, reaching a 10-month low today. The stock is trading 20% below its 52-week high set in early May. The drop in stock price reflects the perception that PC sales are on the decline and the recognition that Intel has yet to gain much market share in mobile devices. In addition, earlier this month the company lowered its quarterly revenue outlook. I think the fears about PCs being replaced by tablets and smart phones are overblown. There are many workplaces (such as my own) that will likely continue using PCs for many years, in part because they are much more powerful than mobile devices. I also think the concerns about Intel's lack of presence in the mobile market are overdone. To put a positive spin on it, given that the company has yet to gain much market share in the area, there is plenty of room for future growth. Intel invests heavily in R&D and has top-notch fabrication facilities, so I think it is only a matter of time before they make significant inroads in the mobile market.
I bought 65 shares of INTC at the price of $22.62 per share, giving me a 3.96% yield on cost. At the current dividend rate, I can expect to receive quarterly dividends of $14.63, which will add a total of $58.52 to my annual dividend income. Intel is now the 23rd stock in my portfolio and my first new position since April. Even though I am wary of the technology sector in general, Intel is a solid, profitable company that I feel comfortable having in my portfolio. For that reason, I would consider increasing my position on a further decline in the stock price.
I am pleased that I was able to find a second great opportunity to deploy cash this month (the first being my purchase of NSC last week). I think I am getting better at appreciating that it is a "market of stocks" rather than a stock market, so regardless of what the broader market is doing, it is best to stay focused on finding individual dividend growth stocks that are available at attractive valuations.
Thursday, September 20, 2012
Dividend Increase: MCD
McDonald's (MCD) is increasing its quarterly dividend by 10.0%, from $0.70 to $0.77 per share, putting the company on track for its 36th consecutive year of dividend growth. Given that I own 50 shares of MCD, my quarterly dividend increases from $35.00 to $38.50, which will add an extra $14.00 to my annual dividend income. This dividend increase also boosts my yield on cost to 3.45%. Thus far this year, there have been dividend increases for 19 of the 22 dividend growth stocks in my portfolio. I'm lovin' it!
On an unrelated note, this is my 100th post since starting this blog. I have found this blog to be great for keeping track of my investments, staying disciplined about my investing strategy, and interacting with like-minded investors. Thank you to everyone who has visited (my total visit count recently passed 20,000) and shared their thoughts about investing!
On an unrelated note, this is my 100th post since starting this blog. I have found this blog to be great for keeping track of my investments, staying disciplined about my investing strategy, and interacting with like-minded investors. Thank you to everyone who has visited (my total visit count recently passed 20,000) and shared their thoughts about investing!
Stock Bought: NSC
Today I bought shares of Norfolk Southern (NSC), a major North American railroad company. This is the third time I have added to my position in NSC this year, with previous purchases occurring in January and March.
NSC dropped over 9% today after the company lowered its Q3 earnings outlook (other railroad stocks also fell on the news). Continued declines in coal and merchandise shipments are expected to reduce revenues, although these effects will be partially offset by growth in intermodal volumes. While this news is disappointing, I consider it to be a short-term problem that will not dampen the company's long-term growth prospects. Coal volumes have been lower this year due to unusually warm winter weather, but this trend will likely flatten out or reverse once we return to more normal winter temperatures.
Despite the warning about earnings, I think management continues to have a positive view of the company's future. A strong indicator is the fact that NSC has increased its dividend twice this year, by 9.3% in January and by 6.4% in August. Note that the August dividend increase occurred after coal volumes had already been declining for several months. I think the company has responsible management and they would not grow the dividend in this manner if they were worried about future earnings.
From a valuation standpoint, I consider NSC to be undervalued with a P/E of 11.3 (its historic P/E is about 14.4), P/S of 1.9, and PEG of 0.88. Even if one were to lower future earnings expectations, the PEG would still likely be near 1. Today's drop in stock price pushed NSC over the 3% yield point ($66.67) and if you look at its historic yield over the past 10 years, it rarely stays above 3% for a long time. Using a Dividend Discount Model with a projected dividend growth rate of only 8% (which is well below historic averages) and a discount rate of 11%, I calculate a fair value of $72 for NSC, which I think is an extremely conservative estimate.
I bought 20 shares of NSC at the price of $65.98 per share, giving me a total of 70 shares at an average price of $70.25 per share and a 2.83% yield on cost. Note that I was able to average down from my previous cost basis of $71.96. At the current dividend rate, I can expect to receive quarterly dividends from NSC of $35.00, which is $10.00 more than what I was getting before this purchase. NSC will now contribute a total of $140.00 to my annual dividend income, which is $40.00 more than before. This purchase makes NSC the second-largest position in my portfolio, slightly behind MCD and slightly ahead of PM in market value.
It was nice to deploy some cash after a summertime lull. With the market near an all-time high, it has been difficult to find undervalued stocks. For that reason, it seemed appropriate to take advantage of the major drop in NSC today to lower my cost basis and increase my ownership of a great company. I still have enough cash on hand to make two more purchases, so hopefully Mr. Market gives me more good buying opportunities.
NSC dropped over 9% today after the company lowered its Q3 earnings outlook (other railroad stocks also fell on the news). Continued declines in coal and merchandise shipments are expected to reduce revenues, although these effects will be partially offset by growth in intermodal volumes. While this news is disappointing, I consider it to be a short-term problem that will not dampen the company's long-term growth prospects. Coal volumes have been lower this year due to unusually warm winter weather, but this trend will likely flatten out or reverse once we return to more normal winter temperatures.
Despite the warning about earnings, I think management continues to have a positive view of the company's future. A strong indicator is the fact that NSC has increased its dividend twice this year, by 9.3% in January and by 6.4% in August. Note that the August dividend increase occurred after coal volumes had already been declining for several months. I think the company has responsible management and they would not grow the dividend in this manner if they were worried about future earnings.
From a valuation standpoint, I consider NSC to be undervalued with a P/E of 11.3 (its historic P/E is about 14.4), P/S of 1.9, and PEG of 0.88. Even if one were to lower future earnings expectations, the PEG would still likely be near 1. Today's drop in stock price pushed NSC over the 3% yield point ($66.67) and if you look at its historic yield over the past 10 years, it rarely stays above 3% for a long time. Using a Dividend Discount Model with a projected dividend growth rate of only 8% (which is well below historic averages) and a discount rate of 11%, I calculate a fair value of $72 for NSC, which I think is an extremely conservative estimate.
I bought 20 shares of NSC at the price of $65.98 per share, giving me a total of 70 shares at an average price of $70.25 per share and a 2.83% yield on cost. Note that I was able to average down from my previous cost basis of $71.96. At the current dividend rate, I can expect to receive quarterly dividends from NSC of $35.00, which is $10.00 more than what I was getting before this purchase. NSC will now contribute a total of $140.00 to my annual dividend income, which is $40.00 more than before. This purchase makes NSC the second-largest position in my portfolio, slightly behind MCD and slightly ahead of PM in market value.
It was nice to deploy some cash after a summertime lull. With the market near an all-time high, it has been difficult to find undervalued stocks. For that reason, it seemed appropriate to take advantage of the major drop in NSC today to lower my cost basis and increase my ownership of a great company. I still have enough cash on hand to make two more purchases, so hopefully Mr. Market gives me more good buying opportunities.
Saturday, September 15, 2012
Book Review: Get Rich with Dividends
Get Rich with Dividends (2012) by Marc Lichtenfeld
The author of this book advocates buying dividend growth stocks as long-term investments and automatically reinvesting the dividends. After 10 years, he argues that this strategy can produce 11% yields (on cost) and 12% average annual total returns, which he calls his "10-11-12 system." This sounds great on the surface, but there are several problems with the book that make it a poor guide to dividend growth investing:
Note: I read this book in September 2012.
The author of this book advocates buying dividend growth stocks as long-term investments and automatically reinvesting the dividends. After 10 years, he argues that this strategy can produce 11% yields (on cost) and 12% average annual total returns, which he calls his "10-11-12 system." This sounds great on the surface, but there are several problems with the book that make it a poor guide to dividend growth investing:
- His "10-11-12 system" is overly simplistic and represents more of a goal than a systematic approach to dividend growth investing. He suggests that investors need to focus on just three things: initial yield, dividend growth rate, and payout ratio. Almost nothing is said about assessing the quality of the underlying business. The topic of valuation is completely ignored, which I consider to be a major fault.
- He presents several tables showing projections of dividend income and total return over 20-year periods under various circumstances, many of which are unrealistic. For example, there is a bear market projection in which stocks slowly lose value year after year, yet the dividend growth rate is a stable 10% over the 20 years. While this results in phenomenal growth of the dividend income stream, it also results in stocks having current yields by Year 20 of 20% or higher, which is simply not going to happen for the blue-chip stocks under consideration, especially if their operating results allow them to maintain 10% dividend growth rates. Thus, I think some of his projections are wishful thinking that ignore the nuances of reality.
- He basically advocates a buy-and-forget approach to investing. He gives little to no advice on how to monitor companies or manage a portfolio (aside from recommending that a stock be sold if its dividend is cut). He does the reader a disservice by conveying the impression that a company that has raised its dividend for 25 years is pretty much guaranteed to raise it for another 25 years; he even calls dividend growth stocks "Perpetual Dividend Raisers," as though their dividend growth will never end, which is unrealistic.
- The secondary title of the book is "A Proven System for Earning Double-Digit Returns" but the author never actually proves it. That is, he presents some historical data showing how well dividend stocks have done in the past and projections of how his system might perform in the future, but he provides no proof that his system can produce the results he claims in actual practice. There is a chapter in which he discusses the "Perpetual Income Portfolio" that he manages, but he reports neither its long-term returns nor the stocks in it. (He provides a completely useless table showing just the dividend yields of the stocks in the portfolio -- without indicating the stocks!) If he has truly been able to prove his system works in practice, then his credibility would have been strengthened by reporting the results of his portfolio in the book.
- There are also some errors in the text that undermine the author's credibility. For example, "yield" is often used for yield on cost, muddling the distinction between current yield and yield on cost. In a section that addresses inflation, he argues that one should seek a current yield that beats inflation, which is erroneous thinking because what matters is whether the dividend growth rate -- not the yield -- beats the inflation rate. At one point he also provides a definition of standard deviation that is just plain wrong.
- More generally, the writing style is too verbose. For example, there is an 11-page chapter with the sole purpose of describing a few lists/indices of dividend growth stocks, such as the S&P Dividend Aristocrats. That information could have been summarized in less than two pages. Despite the book being 180 pages, I think a good editor could have easily shortened it to less than 150 pages.
Note: I read this book in September 2012.
Wednesday, September 12, 2012
Dividend Increase: PM
Philip Morris International (PM) is increasing its quarterly dividend by 10.4%, from $0.77 to $0.85 per share, putting the company on track for its 5th consecutive year of dividend growth. Given that I own 50 shares of PM, my quarterly dividend increases from $38.50 to $42.50, which will add an extra $16.00 to my annual dividend income. This dividend increase also boosts my yield on cost to 5.05%. Thus far this year, there have been dividend increases for 18 of the 22 dividend growth stocks in my portfolio.
Thursday, September 6, 2012
Milestone: Portfolio Value Reaches $60,000
Today my portfolio's value reached $60,000 for the very first time, closing at $60,463.02, thanks to a broad market rally and a recent influx of new capital from my August savings. The previous milestone of $50,000 was reached in March, which implies a $10,000 increase over the past six months. Even though my primary focus is on dividends, I also care about capital preservation and total return, both of which are reflected in my portfolio's value.
The next milestone is $70,000 (I figure that $10,000 increments are reasonable), but I probably won't reach it until next year.
The next milestone is $70,000 (I figure that $10,000 increments are reasonable), but I probably won't reach it until next year.
Appreciating The Small Steps Of Dividend Growth Investing
A new article of mine has been published on the investing website Seeking Alpha. The article is entitled Appreciating The Small Steps Of Dividend Growth Investing and it discusses productive ways in which investors can think about the small dividends received in the early years of investing. I would like to thank my fellow bloggers for inspiring some of the ideas in the article.
Saturday, September 1, 2012
Monthly Review: August 2012
Here is a review of what happened in August:
Dividends: I received a total of $195.31 in dividends from the following stocks:
Dividend Increases: I was pleased to see dividend increases announced for two of my stocks (click on each stock to see my post about the increase): The increase from NSC was its second in 2012, which is great. Thus far this year, there have been dividend increases for 17 of the 22 dividend growth stocks in my portfolio.
Stock Splits: Coca-Cola (KO) had a 2-for-1 stock split in August, so I now own 60 shares. It was the 11th split in the stock's history and the first in 16 years.
Savings: This month I saved $1,048 (35.2%) of my net income, which results in year-to-date savings of $10,980 and puts me 91.5% of the way toward my goal of $12,000 in savings for 2012. The below-average savings occurred because of travel costs, partly from my road trip to visit friends at the start of August, but mainly for a flight to visit my family at Christmas, which I decided to book well in advance. All of my family and a few close friends live about 2,000 miles away from me, and the travel burden (including its cost) usually falls on me. I currently do not have any additional travel plans for the rest of the year except for a work-related trip in November, but I will get fully reimbursed for that.
Transactions: I did not buy any stocks this month. I also did not sell any stocks for the 8th consecutive month.
Portfolio: My portfolio currently consists of 22 stocks and has a market value of $59,044.02 (including cash), which is a 4.4% increase over last month's value. About 80% of the increase came from new capital and the rest was due to capital gains and dividends.
Seeking Alpha: I published one new article on the investing website Seeking Alpha (click on the title to go to the article): Interestingly, this article turned out to be more popular than either of the two previous articles that laid the foundation for it. In August I earned a total of $83.02 from this article and additional page views of my previous articles. My Q3 total is currently $191.29 and my year-to-date total is $535.23.
Looking Ahead: September will be a solid month for dividends, although not as high as in August. My savings rate should also be pretty good. Due to my lack of purchases during the summer, I have a fair amount of cash on hand. Once I add the new capital from my August savings, I will have enough cash to make at least three purchases. I keep wondering whether a broad market correction is likely in the near future, which makes me hesitant to take any immediate action, but I realize I am running the risk of trying to time the market. For that reason, regardless of what the market does, I will continue to focus on the valuations of individual stocks and be ready to take advantage of any dips.
Dividends: I received a total of $195.31 in dividends from the following stocks:
- ABT: $22.95
- GD: $10.20
- GIS: $23.10
- HRL: $7.50
- PG: $28.10
- T: $24.20
- VOD: $79.26
Dividend Increases: I was pleased to see dividend increases announced for two of my stocks (click on each stock to see my post about the increase): The increase from NSC was its second in 2012, which is great. Thus far this year, there have been dividend increases for 17 of the 22 dividend growth stocks in my portfolio.
Stock Splits: Coca-Cola (KO) had a 2-for-1 stock split in August, so I now own 60 shares. It was the 11th split in the stock's history and the first in 16 years.
Savings: This month I saved $1,048 (35.2%) of my net income, which results in year-to-date savings of $10,980 and puts me 91.5% of the way toward my goal of $12,000 in savings for 2012. The below-average savings occurred because of travel costs, partly from my road trip to visit friends at the start of August, but mainly for a flight to visit my family at Christmas, which I decided to book well in advance. All of my family and a few close friends live about 2,000 miles away from me, and the travel burden (including its cost) usually falls on me. I currently do not have any additional travel plans for the rest of the year except for a work-related trip in November, but I will get fully reimbursed for that.
Transactions: I did not buy any stocks this month. I also did not sell any stocks for the 8th consecutive month.
Portfolio: My portfolio currently consists of 22 stocks and has a market value of $59,044.02 (including cash), which is a 4.4% increase over last month's value. About 80% of the increase came from new capital and the rest was due to capital gains and dividends.
Seeking Alpha: I published one new article on the investing website Seeking Alpha (click on the title to go to the article): Interestingly, this article turned out to be more popular than either of the two previous articles that laid the foundation for it. In August I earned a total of $83.02 from this article and additional page views of my previous articles. My Q3 total is currently $191.29 and my year-to-date total is $535.23.
Looking Ahead: September will be a solid month for dividends, although not as high as in August. My savings rate should also be pretty good. Due to my lack of purchases during the summer, I have a fair amount of cash on hand. Once I add the new capital from my August savings, I will have enough cash to make at least three purchases. I keep wondering whether a broad market correction is likely in the near future, which makes me hesitant to take any immediate action, but I realize I am running the risk of trying to time the market. For that reason, regardless of what the market does, I will continue to focus on the valuations of individual stocks and be ready to take advantage of any dips.
Monday, August 27, 2012
Selective Dividend Reinvestment Can Boost Long-Term Dividend Income
A new article of mine has been published on the investing website Seeking Alpha. The article is entitled Selective Dividend Reinvestment Can Boost Long-Term Dividend Income and it presents the results of simulations that address the relationship between dividend reinvestment and stock price variability.
Saturday, August 25, 2012
Name Change
I have decided to change the name of this blog and my username to "Dividend Growth Machine." The primary reason is that it was awkward to write under two different pseudonyms, one for my blog and one for my articles at Seeking Alpha. By using the same name in both places, my online presence in the investing world will be more consistent. A secondary reason is that I think the new name more accurately reflects my investing strategy, which is to build a long-term compounding machine that will produce a sustainable and growing stream of dividend income.
Accompanying the name change was a revision to the URL for this blog, which is now http://dgmachine.blogspot.com/. This had the unfortunate effect of making previous links invalid, so if you have an existing link to my blog (e.g., on a blogroll), it will need to be updated. Sorry about the inconvenience! I went through all my previous posts and updated internal links, but if you spot a broken link, please let me know by commenting on the relevant post. Thanks!
Accompanying the name change was a revision to the URL for this blog, which is now http://dgmachine.blogspot.com/. This had the unfortunate effect of making previous links invalid, so if you have an existing link to my blog (e.g., on a blogroll), it will need to be updated. Sorry about the inconvenience! I went through all my previous posts and updated internal links, but if you spot a broken link, please let me know by commenting on the relevant post. Thanks!
Book Review: The Dividend Toolkit
The Dividend Toolkit (2012) by Matt Alden
I was already familiar with the author of this e-book from his blog, Dividend Monk, which I visit regularly for his excellent stock analyses. The book is a guide for enabling an individual investor to build and manage a portfolio of dividend growth stocks. It is divided into six "core" sections and six "advanced" sections that address various topics of relevance to dividend growth investors.
The core sections begin with a discussion of living simply and building wealth, which addresses the psychological advantages of dividend growth investing and how it represents an effective wealth-building strategy. The compounding power of dividend growth investing is illustrated in the next section, which provides easy-to-understand numerical examples. The third section, entitled "Explore a Corporation," delves into how corporations are formed and how they operate and grow over time, using the fictitious example of a cafe business. I think it is the best introduction to the basics of a corporation that I have ever read. The next section covers some investing basics, including definitions of common stock metrics and a good explanation of why absolute stock price is irrelevant; what matters is the stock price relative to the company's value.
The fifth and sixth core sections focus more specifically on dividend growth investing. The author provides eight excellent reasons for investing in dividend growth companies, covers some important dividend metrics, and gives a detailed example of the long-term compounding of a dividend income stream. He then discusses how to build and manage a dividend growth portfolio, highlighting the traits an investor should seek in a core position and considering how an investor might go about diversifying his portfolio.
The more advanced sections include an analysis of stock/bond asset allocation, a consideration of problems with index investing that includes a thorough discussion of shareholder rights, an overview of MLPs and REITs, and three sections associated with stock analysis. Regarding the last point, the author explains how to quickly and effectively analyze dividend growth stocks both quantitatively (e.g., assessing valuation metrics) and qualitatively (e.g., assessing competitive advantages). The analytical method is too comprehensive to summarize here, so I will simply note that it is superb and better than any other that I have encountered in the many investing books I have read. One of the highlights of the quantitative analysis is the coverage of discounted cash flow (DCF) analysis and the dividend discount model (DDM). Not only does the author clearly explain how they work, but he implements them in spreadsheets that accompany the book and are very easy to use. I have now started doing DCF and DDM calculations as part of my own stock research.
In summary, this book is an excellent guide for dividend growth investors. It covers basic and advanced topics in a comprehensive yet readily understandable manner. I recommend the book to anyone who is interested in becoming a successful investor by building a sustainable and growing stream of income from dividends.
Note: I read this book in August 2012.
I was already familiar with the author of this e-book from his blog, Dividend Monk, which I visit regularly for his excellent stock analyses. The book is a guide for enabling an individual investor to build and manage a portfolio of dividend growth stocks. It is divided into six "core" sections and six "advanced" sections that address various topics of relevance to dividend growth investors.
The core sections begin with a discussion of living simply and building wealth, which addresses the psychological advantages of dividend growth investing and how it represents an effective wealth-building strategy. The compounding power of dividend growth investing is illustrated in the next section, which provides easy-to-understand numerical examples. The third section, entitled "Explore a Corporation," delves into how corporations are formed and how they operate and grow over time, using the fictitious example of a cafe business. I think it is the best introduction to the basics of a corporation that I have ever read. The next section covers some investing basics, including definitions of common stock metrics and a good explanation of why absolute stock price is irrelevant; what matters is the stock price relative to the company's value.
The fifth and sixth core sections focus more specifically on dividend growth investing. The author provides eight excellent reasons for investing in dividend growth companies, covers some important dividend metrics, and gives a detailed example of the long-term compounding of a dividend income stream. He then discusses how to build and manage a dividend growth portfolio, highlighting the traits an investor should seek in a core position and considering how an investor might go about diversifying his portfolio.
The more advanced sections include an analysis of stock/bond asset allocation, a consideration of problems with index investing that includes a thorough discussion of shareholder rights, an overview of MLPs and REITs, and three sections associated with stock analysis. Regarding the last point, the author explains how to quickly and effectively analyze dividend growth stocks both quantitatively (e.g., assessing valuation metrics) and qualitatively (e.g., assessing competitive advantages). The analytical method is too comprehensive to summarize here, so I will simply note that it is superb and better than any other that I have encountered in the many investing books I have read. One of the highlights of the quantitative analysis is the coverage of discounted cash flow (DCF) analysis and the dividend discount model (DDM). Not only does the author clearly explain how they work, but he implements them in spreadsheets that accompany the book and are very easy to use. I have now started doing DCF and DDM calculations as part of my own stock research.
In summary, this book is an excellent guide for dividend growth investors. It covers basic and advanced topics in a comprehensive yet readily understandable manner. I recommend the book to anyone who is interested in becoming a successful investor by building a sustainable and growing stream of income from dividends.
Note: I read this book in August 2012.
Sunday, August 19, 2012
Book Review: Margin of Safety
Margin of Safety (1991) by Seth A. Klarman
This book is widely regarded as a classic text on value investing. The basic approach involves buying a stock or a bond at a discount to its intrinsic value, then holding onto it until that value is realized in the market. A key factor is the discount, which reflects how much the security is undervalued and determines the margin of safety for the investment. The greater the discount, the greater the margin of safety because the upside potential will substantially outweigh the downside risk. The author discusses the value investing approach and the concept of margin of safety not only in relation to common stocks and bonds, but also in the context of special cases, such as financially distressed and bankrupt securities.
What I found most influential was the general commentary about investing and "where most investors stumble," which is the title of the first part of the book. He notes that the first step toward investing success is distinguishing between speculation and investment. Speculation involves trying to predict future price movements from technical analysis, which the author considers a waste of time. Investment involves recognizing that stocks reflect fractional ownership of underlying businesses and making decisions based on fundamental analysis of the perceived values of those businesses. Investors can be successful by taking advantage of market inefficiencies, such as cases of undervaluation. The author notes that "value investing is predicated on the efficient-market hypothesis being wrong" and backs it up with compelling arguments.
The author also discusses how investors can be derailed by their emotions (greed and fear) and get caught up in the "short-term, relative-performance derby" of trying to beat the market -- the latter being a major reason why many institutional investors routinely deliver mediocre returns to clients. His discussion of how institutional investors handicap themselves is quite interesting. With respect to valuing businesses, he makes the important point that investors should not focus on the precision of fundamental-based model analyses, but seek a range of value with a conservative emphasis.
In summary, the book provides some good insights into the value investing philosophy and investing more generally. It is not really a how-to guide, but the basic principles outlined in the text -- margin of safety being the main one -- should steer investors toward suitable opportunities for achieving satisfactory returns while minimizing risk. It is worth noting that the author has demonstrated the success of his approach in practice: As manager of the Baupost Group, he has achieved an average annual return of nearly 20% since 1982.
Note: I read this book in July 2012.
This book is widely regarded as a classic text on value investing. The basic approach involves buying a stock or a bond at a discount to its intrinsic value, then holding onto it until that value is realized in the market. A key factor is the discount, which reflects how much the security is undervalued and determines the margin of safety for the investment. The greater the discount, the greater the margin of safety because the upside potential will substantially outweigh the downside risk. The author discusses the value investing approach and the concept of margin of safety not only in relation to common stocks and bonds, but also in the context of special cases, such as financially distressed and bankrupt securities.
What I found most influential was the general commentary about investing and "where most investors stumble," which is the title of the first part of the book. He notes that the first step toward investing success is distinguishing between speculation and investment. Speculation involves trying to predict future price movements from technical analysis, which the author considers a waste of time. Investment involves recognizing that stocks reflect fractional ownership of underlying businesses and making decisions based on fundamental analysis of the perceived values of those businesses. Investors can be successful by taking advantage of market inefficiencies, such as cases of undervaluation. The author notes that "value investing is predicated on the efficient-market hypothesis being wrong" and backs it up with compelling arguments.
The author also discusses how investors can be derailed by their emotions (greed and fear) and get caught up in the "short-term, relative-performance derby" of trying to beat the market -- the latter being a major reason why many institutional investors routinely deliver mediocre returns to clients. His discussion of how institutional investors handicap themselves is quite interesting. With respect to valuing businesses, he makes the important point that investors should not focus on the precision of fundamental-based model analyses, but seek a range of value with a conservative emphasis.
In summary, the book provides some good insights into the value investing philosophy and investing more generally. It is not really a how-to guide, but the basic principles outlined in the text -- margin of safety being the main one -- should steer investors toward suitable opportunities for achieving satisfactory returns while minimizing risk. It is worth noting that the author has demonstrated the success of his approach in practice: As manager of the Baupost Group, he has achieved an average annual return of nearly 20% since 1982.
Note: I read this book in July 2012.
Wednesday, August 15, 2012
Milestone: $1,000 in Dividends in a Single Year
Thanks to an above-average month and a trio of dividend payments today, I have now received over $1,000 in dividends thus far in 2012. I consider this to be an important milestone on the road to building a sustainable and growing dividend income stream. It suggests that my investing strategy is working and I am making great progress toward my goal of receiving $1,300 in dividends this year. It is remarkable to reflect on the fact that I have an extra $1,000 in income -- which is a non-negligible amount -- simply from investing in the stocks of high-quality, profitable companies with good dividend policies. Reaching this milestone helps to drive home the point that dividend growth investing is a sensible strategy for generating income.
Tuesday, August 7, 2012
Monthly Review: July 2012
Here is a review of what happened in July:
Dividends: I received a total of $119.48 in dividends from the following stocks:
Dividend Increases: No dividend increases were announced in July for any of my stocks.
Savings: This month I saved $1,626 (54.7%) of my net income, which represents a nice rebound in my savings rate after two below-average months. This results in year-to-date savings of $9,932, which puts me 82.8% of the way toward my goal of $12,000 in savings for 2012. I was also pleasantly surprised to get a small pay raise ($54 per month), so my net income is now slightly higher.
Transactions: I bought one stock this month (click on the transaction to see my post about it): This purchase doubles my position in HRL and will increase my annual dividend income by $30. I did not sell any stocks for the 7th consecutive month.
Portfolio: My portfolio currently consists of 22 stocks and has a market value of $56,536.73 (including cash), which is a 4.3% increase over last month's value. A little less than half of the increase came from capital gains and the rest came from dividends and new capital.
Seeking Alpha: I published two new articles on the investing website Seeking Alpha (click on the titles to go to the articles):
Looking Ahead: I anticipate that August will be my best month for dividends in 2012, mainly because I will be receiving my first semi-annual dividend from VOD. My savings rate will probably be decent, although I went on a road trip to visit friends at the start of the month (hence the delay in posting this review), so travel expenses will lower my savings a bit. Due to my strong savings in July and the quarterly income from Seeking Alpha, I will have enough cash to make two or three purchases in August. However, I do not see much in the way of great buying opportunities in the market at the moment. I may consider adding to one or two existing positions in my portfolio, but for the time being I am inclined to wait for a broad market dip.
Dividends: I received a total of $119.48 in dividends from the following stocks:
- CNI: $6.23
- GPC: $24.75
- ITW: $14.40
- KO: $15.30
- MDT: $14.30
- PM: $38.50
- UNP: $6.00
Dividend Increases: No dividend increases were announced in July for any of my stocks.
Savings: This month I saved $1,626 (54.7%) of my net income, which represents a nice rebound in my savings rate after two below-average months. This results in year-to-date savings of $9,932, which puts me 82.8% of the way toward my goal of $12,000 in savings for 2012. I was also pleasantly surprised to get a small pay raise ($54 per month), so my net income is now slightly higher.
Transactions: I bought one stock this month (click on the transaction to see my post about it): This purchase doubles my position in HRL and will increase my annual dividend income by $30. I did not sell any stocks for the 7th consecutive month.
Portfolio: My portfolio currently consists of 22 stocks and has a market value of $56,536.73 (including cash), which is a 4.3% increase over last month's value. A little less than half of the increase came from capital gains and the rest came from dividends and new capital.
Seeking Alpha: I published two new articles on the investing website Seeking Alpha (click on the titles to go to the articles):
- Illustrating The Factors That Affect Dividend Growth Investing
- Investigating How Stock Price Variability Can Benefit Dividend Growth Investors
Looking Ahead: I anticipate that August will be my best month for dividends in 2012, mainly because I will be receiving my first semi-annual dividend from VOD. My savings rate will probably be decent, although I went on a road trip to visit friends at the start of the month (hence the delay in posting this review), so travel expenses will lower my savings a bit. Due to my strong savings in July and the quarterly income from Seeking Alpha, I will have enough cash to make two or three purchases in August. However, I do not see much in the way of great buying opportunities in the market at the moment. I may consider adding to one or two existing positions in my portfolio, but for the time being I am inclined to wait for a broad market dip.
Dividend Increase: ITW
Illinois Tool Works (ITW) is increasing its quarterly dividend by 5.6%, from $0.36 to $0.38 per share, putting the company on track for its 49th consecutive year of dividend growth. Given that I own 40 shares of ITW, my quarterly dividend increases from $14.40 to $15.20, which will add an extra $3.20 to my annual dividend income. This dividend increase also boosts my yield on cost to 3.55%. Thus far this year, there have been dividend increases for 17 of the 22 dividend growth stocks in my portfolio.
Wednesday, August 1, 2012
Dividend Increase: NSC
Norfolk Southern (NSC) is increasing its quarterly dividend by 6.4%, from $0.47 to $0.50 per share. This is the second increase in 2012; the first increase was 9.3% back in January. Since mid-2010, the company has raised its dividend every two quarters, which is great. Given that I own 50 shares of NSC, my quarterly dividend increases from $23.50 to $25.00, which will add an extra $6.00 to my annual dividend income. This dividend increase also boosts my yield on cost to 2.76%. Thus far this year, there have been dividend increases for 16 of the 22 dividend growth stocks in my portfolio. However, this is the first stock with a second increase during 2012.
Book Review: The End of Wall Street
The End of Wall Street (2010) by Roger Lowenstein
I read this book about the 2008 financial crisis soon after I finished The Big Short by Michael Lewis, which deals with the same topic but from a different perspective. This book addresses the main causes and consequences of the crisis, covering the proliferation of mortgage-backed securities, the increasingly dangerous lending practices of financial institutions, the greed of big banks, and the ignorance of regulators. Two particularly bad practices involved (a) lending to people who provided no documentation of either income or assets, and (b) having loans start with low, short-term "teaser" rates that subsequently were adjusted to much higher rates that borrowers could not pay. These predatory subprime lending practices led to an astounding number of defaults and foreclosures when the housing bubble finally burst. In addition, they resulted in massive losses for financial institutions that invested heavily in mortgage-backed securities and other products that were nearly worthless despite having "AAA" ratings (which is one reason why I do not rely much on the opinions of rating agencies).
In contrast with Lewis, whose book focused on the personalities and actions of a few astute hedge fund managers who profited from the crisis, Lowenstein offers insight into the minds of the big names who were directly involved in mortgage-related lending, banking, or investing. For that reason, I thought this book provided a more well-rounded view of the situation and how it unfolded. Finally, consistent with Lowenstein's previous books (Buffett: The Making of an American Capitalist and When Genius Failed: The Rise and Fall of Long-Term Capital Management), the quality of the writing was excellent and made for an enjoyable reading experience.
Note: I read this book in July 2012.
I read this book about the 2008 financial crisis soon after I finished The Big Short by Michael Lewis, which deals with the same topic but from a different perspective. This book addresses the main causes and consequences of the crisis, covering the proliferation of mortgage-backed securities, the increasingly dangerous lending practices of financial institutions, the greed of big banks, and the ignorance of regulators. Two particularly bad practices involved (a) lending to people who provided no documentation of either income or assets, and (b) having loans start with low, short-term "teaser" rates that subsequently were adjusted to much higher rates that borrowers could not pay. These predatory subprime lending practices led to an astounding number of defaults and foreclosures when the housing bubble finally burst. In addition, they resulted in massive losses for financial institutions that invested heavily in mortgage-backed securities and other products that were nearly worthless despite having "AAA" ratings (which is one reason why I do not rely much on the opinions of rating agencies).
In contrast with Lewis, whose book focused on the personalities and actions of a few astute hedge fund managers who profited from the crisis, Lowenstein offers insight into the minds of the big names who were directly involved in mortgage-related lending, banking, or investing. For that reason, I thought this book provided a more well-rounded view of the situation and how it unfolded. Finally, consistent with Lowenstein's previous books (Buffett: The Making of an American Capitalist and When Genius Failed: The Rise and Fall of Long-Term Capital Management), the quality of the writing was excellent and made for an enjoyable reading experience.
Note: I read this book in July 2012.
Tuesday, July 24, 2012
Stock Bought: HRL
Today I bought shares of Hormel Foods (HRL), a well-known manufacturer of food and meat products. I wrote about several appealing features of the company in the post for my initial purchase back in April.
I was motivated to add to my position in HRL because the stock's price has dropped recently, falling 9% in less than one month. The stock is now trading at its lowest point since early October 2011. I consider HRL to be fairly valued with a P/E of 16.0 (its historic P/E is around 16.8), PEG of 1.7, and P/S of 0.9. Even though I generally aim to buy undervalued stocks, I will also buy fairly valued stocks of high-quality companies, of which HRL is a prime example.
Additional motivations for this purchase were related to the ongoing problems in Europe, the drought in the U.S., and slow economic growth in the U.S. I watched a recent interview in which Jeffrey Ettinger, the CEO of Hormel Foods, was asked how Europe would affect the company's business. He remarked that it would have very little impact because the company has a minimal presence in Europe; the vast majority of its business is conducted in North America. In another interview, he was asked how the U.S. drought would affect the company's margins because feed prices are increasing. He indicated that the company was doing okay for the time being because of its hedging practices. Finally, regarding the U.S. economy, I think the company would continue to fare well in a recessionary environment because consumers may be more likely to eat at home than go out. Moreover, the company has very little debt, so it is in good financial shape for weathering any downturn. For all these reasons, I like Hormel Foods as a long-term investment, especially in light of current domestic and global conditions.
I bought 50 shares of HRL at the price of $27.84 per share, giving me a total of 100 shares at an average price of exactly $28.00 per share and a 2.13% yield on cost. As I mentioned before, the yield is lower than I prefer, but it is the only negative aspect of the stock and outweighed by its many positive aspects. At the current dividend rate, I can expect to receive quarterly dividends from HRL of $15.00, which is double the $7.50 I was getting before this purchase. The stock went ex-dividend last week, so the higher dividend will not take effect until the fall, but my lower cost basis more than makes up for the single-quarter dividend difference. HRL will now contribute a total of $60.00 to my annual dividend income, which is $30.00 more than before. Even though I now have a decent-sized position in HRL, I would consider making an additional purchase if the stock's price were to fall further in the coming months.
I was motivated to add to my position in HRL because the stock's price has dropped recently, falling 9% in less than one month. The stock is now trading at its lowest point since early October 2011. I consider HRL to be fairly valued with a P/E of 16.0 (its historic P/E is around 16.8), PEG of 1.7, and P/S of 0.9. Even though I generally aim to buy undervalued stocks, I will also buy fairly valued stocks of high-quality companies, of which HRL is a prime example.
Additional motivations for this purchase were related to the ongoing problems in Europe, the drought in the U.S., and slow economic growth in the U.S. I watched a recent interview in which Jeffrey Ettinger, the CEO of Hormel Foods, was asked how Europe would affect the company's business. He remarked that it would have very little impact because the company has a minimal presence in Europe; the vast majority of its business is conducted in North America. In another interview, he was asked how the U.S. drought would affect the company's margins because feed prices are increasing. He indicated that the company was doing okay for the time being because of its hedging practices. Finally, regarding the U.S. economy, I think the company would continue to fare well in a recessionary environment because consumers may be more likely to eat at home than go out. Moreover, the company has very little debt, so it is in good financial shape for weathering any downturn. For all these reasons, I like Hormel Foods as a long-term investment, especially in light of current domestic and global conditions.
I bought 50 shares of HRL at the price of $27.84 per share, giving me a total of 100 shares at an average price of exactly $28.00 per share and a 2.13% yield on cost. As I mentioned before, the yield is lower than I prefer, but it is the only negative aspect of the stock and outweighed by its many positive aspects. At the current dividend rate, I can expect to receive quarterly dividends from HRL of $15.00, which is double the $7.50 I was getting before this purchase. The stock went ex-dividend last week, so the higher dividend will not take effect until the fall, but my lower cost basis more than makes up for the single-quarter dividend difference. HRL will now contribute a total of $60.00 to my annual dividend income, which is $30.00 more than before. Even though I now have a decent-sized position in HRL, I would consider making an additional purchase if the stock's price were to fall further in the coming months.
Saturday, July 21, 2012
Book Review: The Big Short
The Big Short (2010) by Michael Lewis
This book addresses the 2008 financial crisis by discussing how a few relatively unknown hedge fund managers recognized the impending crisis and profited from it by shorting mortgage-backed securities and the stocks of the financial institutions that owned them. It was interesting to read about how these managers saw the warning signs surrounding the subprime mortgage industry that others (government regulators, rating agencies, major banks, etc.) either failed to see or chose to ignore. There were also some details regarding how the managers went about profiting from the greedy and irresponsible actions of major banks. The book's focus on the personalities and individual decisions of the managers made for an interesting and provocative read. However, if I were to offer one criticism of the book, it would be that it covers the financial crisis from a single perspective (albeit a unique one), providing limited insight into what the people responsible for the crisis were thinking and doing at the time.
Note: I read this book in July 2012.
This book addresses the 2008 financial crisis by discussing how a few relatively unknown hedge fund managers recognized the impending crisis and profited from it by shorting mortgage-backed securities and the stocks of the financial institutions that owned them. It was interesting to read about how these managers saw the warning signs surrounding the subprime mortgage industry that others (government regulators, rating agencies, major banks, etc.) either failed to see or chose to ignore. There were also some details regarding how the managers went about profiting from the greedy and irresponsible actions of major banks. The book's focus on the personalities and individual decisions of the managers made for an interesting and provocative read. However, if I were to offer one criticism of the book, it would be that it covers the financial crisis from a single perspective (albeit a unique one), providing limited insight into what the people responsible for the crisis were thinking and doing at the time.
Note: I read this book in July 2012.
Monday, July 16, 2012
Book Review: When Genius Failed
When Genius Failed: The Rise and Fall of Long-Term Capital Management (2000) by Roger Lowenstein
This book provides a compelling account of the people and events surrounding the dramatic rise and epic fall of Long-Term Capital Management (LTCM), a hedge fund that existed for a short period in the 1990s.
The first half of the book covers the rise of LTCM, explaining how top bond traders and esteemed academics came together and started the fund, using their combined knowledge and skills to engage in trading strategies involving bond, stock, and merger arbitrage. During the fund's first four years, from May 1994 to April 1998, it produced impressive double-digit returns with very low volatility, leading to an influx of new capital and great acclaim for the fund's principals.
The second half of the book covers the fall of LTCM, explaining how a combination of excessive leverage and overconfidence in precise mathematical models based on historic norms resulted in an accelerating downward spiral when the activity in various global markets failed to conform to model predictions. In a span of less than five months, from May 1998 to September 1998, the fund suffered catastrophic losses (billions of dollars) that threatened to disrupt the global financial system because of the fund's massive size and exposure. The situation was contained when the Federal Reserve helped coordinate a hasty bailout by several major financial institutions. After making up some of its losses, the fund was shut down in 2000.
I enjoyed reading this book, which could be considered a real-life financial thriller story. It was interesting to find out some of the things that went on behind the scenes and how such a massive failure could happen. From a practical standpoint, the book highlighted the dangers of using leverage and being overconfident in one's decisions.
Note: I read this book in July 2012.
This book provides a compelling account of the people and events surrounding the dramatic rise and epic fall of Long-Term Capital Management (LTCM), a hedge fund that existed for a short period in the 1990s.
The first half of the book covers the rise of LTCM, explaining how top bond traders and esteemed academics came together and started the fund, using their combined knowledge and skills to engage in trading strategies involving bond, stock, and merger arbitrage. During the fund's first four years, from May 1994 to April 1998, it produced impressive double-digit returns with very low volatility, leading to an influx of new capital and great acclaim for the fund's principals.
The second half of the book covers the fall of LTCM, explaining how a combination of excessive leverage and overconfidence in precise mathematical models based on historic norms resulted in an accelerating downward spiral when the activity in various global markets failed to conform to model predictions. In a span of less than five months, from May 1998 to September 1998, the fund suffered catastrophic losses (billions of dollars) that threatened to disrupt the global financial system because of the fund's massive size and exposure. The situation was contained when the Federal Reserve helped coordinate a hasty bailout by several major financial institutions. After making up some of its losses, the fund was shut down in 2000.
I enjoyed reading this book, which could be considered a real-life financial thriller story. It was interesting to find out some of the things that went on behind the scenes and how such a massive failure could happen. From a practical standpoint, the book highlighted the dangers of using leverage and being overconfident in one's decisions.
Note: I read this book in July 2012.
Friday, July 13, 2012
Book Review: The Essential Buffett
The Essential Buffett (2001) by Robert G. Hagstrom
The author discusses an approach called "focus investing" that draws on the thinking and investing style of well-known investor Warren Buffett. He starts the book with three lessons about investing in Chapter 1, which are: (1) analyze stocks as businesses; (2) manage a focused, low-turnover portfolio; and (3) differentiate between investment and speculation. He goes on to give some background on Buffett and the history of Berkshire Hathaway in Chapter 2, followed by a discussion in Chapter 3 of how Buffett was influenced by Benjamin Graham, Philip Fisher, and Charlie Munger.
The middle chapters in the book deal with focus investing. Chapter 4 presents 12 "Tenets of the Warren Buffett Way" that address business, management, financial, and market aspects of investing. Chapter 5 provides some "golden rules" for focus investing, such as having a concentrated portfolio with only the very best companies that you intend to hold for the long term amid market volatility. (The preceding sentence covers all the golden rules.) Chapter 6 reviews the records of some well-known focus investors and Chapter 7 has a brief discussion of the emotional side of investing. The book concludes with speculation in Chapter 8 about how focus investing can be applied to tech, small-cap, and international stocks. Unfortunately, the arguments are not compelling and the examples fall flat (e.g., America Online is touted as a strong company consistent with the Buffett tenets).
Overall, I thought the book was interesting and the focus investing approach seems reasonable for the most part. However, I would argue that focus investing is more closely related to the approach of Philip Fisher than that of Buffett.
Note: I read this book in June 2012.
The author discusses an approach called "focus investing" that draws on the thinking and investing style of well-known investor Warren Buffett. He starts the book with three lessons about investing in Chapter 1, which are: (1) analyze stocks as businesses; (2) manage a focused, low-turnover portfolio; and (3) differentiate between investment and speculation. He goes on to give some background on Buffett and the history of Berkshire Hathaway in Chapter 2, followed by a discussion in Chapter 3 of how Buffett was influenced by Benjamin Graham, Philip Fisher, and Charlie Munger.
The middle chapters in the book deal with focus investing. Chapter 4 presents 12 "Tenets of the Warren Buffett Way" that address business, management, financial, and market aspects of investing. Chapter 5 provides some "golden rules" for focus investing, such as having a concentrated portfolio with only the very best companies that you intend to hold for the long term amid market volatility. (The preceding sentence covers all the golden rules.) Chapter 6 reviews the records of some well-known focus investors and Chapter 7 has a brief discussion of the emotional side of investing. The book concludes with speculation in Chapter 8 about how focus investing can be applied to tech, small-cap, and international stocks. Unfortunately, the arguments are not compelling and the examples fall flat (e.g., America Online is touted as a strong company consistent with the Buffett tenets).
Overall, I thought the book was interesting and the focus investing approach seems reasonable for the most part. However, I would argue that focus investing is more closely related to the approach of Philip Fisher than that of Buffett.
Note: I read this book in June 2012.
Wednesday, July 11, 2012
Investigating How Stock Price Variability Can Benefit Dividend Growth Investors
A new article of mine has been published on the investing website Seeking Alpha. The article is entitled Investigating How Stock Price Variability Can Benefit Dividend Growth Investors and it presents the results of random walk simulations of stock price changes over time and their implications for the long-term compounding of a dividend income stream.
Note that my articles appear under the username "Dividend Growth Machine."
Note that my articles appear under the username "Dividend Growth Machine."
Thursday, July 5, 2012
Illustrating The Factors That Affect Dividend Growth Investing
A new article of mine has been published on the investing website Seeking Alpha. The article is entitled Illustrating The Factors That Affect Dividend Growth Investing and it shows in graphical form how the long-term compounding of the dividend income stream is affected by six factors: dividend reinvestment, dividend growth, capital appreciation, new capital investment, taxes, and time.
Note that my articles appear under the username "Dividend Growth Machine."
Note that my articles appear under the username "Dividend Growth Machine."
Tuesday, July 3, 2012
Monthly Review: June 2012
Here is a review of what happened in June:
Dividends: I received a total of $131.60 in dividends from the following stocks:
Dividend Increases: I was pleased to see dividend increases announced for three of my stocks (click on each stock to see my post about the increase): These are all good-sized increases, so I am quite pleased. Thus far this year, there have been dividend increases for 16 of the 22 dividend growth stocks in my portfolio.
Savings: This month I saved $916 (31.4%) of my net income, which is my lowest monthly total thus far this year. I mentioned in previous posts that I anticipated my savings rate would take a hit in June due to some large annual expenses and travel costs (I went on a road trip to visit some friends at the start of the month). This results in year-to-date savings of $8,306, which puts me 69.2% of the way toward my goal of $12,000 in savings for 2012. Thus, in spite of lower savings in May and June, I remain on track to meet my goal.
Transactions: This was the first month of 2012 in which I did not buy any stocks. (I did not sell any stocks for the sixth consecutive month.) There are two main reasons why I stayed on the sidelines. First, I anticipated my low savings for June, so I wanted to conserve my limited cash. Second, even though I did have sufficient cash on hand to make one purchase, I could not make up my mind as to what to buy. I decided it might be best to exercise some patience and wait until I had a stronger sense of what I wanted.
Portfolio: My portfolio currently consists of 22 stocks and has a market value of $54,207.63 (including cash), which is a 4.5% increase compared with last month's value of $51,861.12. About half of the increase came from capital gains and the other half came from dividends and new capital.
Seeking Alpha: I did not publish any new articles on the investing website Seeking Alpha in June. However, I did earn $6.59 from additional page views of my previous articles, raising my Q2 total (to be paid in July) to $343.94.
Looking Ahead: July will be a good month for dividends, although I am not expecting any dividend increases to be announced for my stocks. I anticipate a substantial rebound in my savings rate, which will be nice after two below-average months. Given that I did not buy any stocks in June, I will have enough cash to make two purchases in July. However, I may wait until the second half of the month to see whether any good buying opportunities arise when companies report earnings.
Dividends: I received a total of $131.60 in dividends from the following stocks:
- ADM: $10.50
- BDX: $11.25
- CVX: $18.00
- JNJ: $21.35
- MCD: $35.00
- NSC: $23.50
- UTX: $12.00
Dividend Increases: I was pleased to see dividend increases announced for three of my stocks (click on each stock to see my post about the increase): These are all good-sized increases, so I am quite pleased. Thus far this year, there have been dividend increases for 16 of the 22 dividend growth stocks in my portfolio.
Savings: This month I saved $916 (31.4%) of my net income, which is my lowest monthly total thus far this year. I mentioned in previous posts that I anticipated my savings rate would take a hit in June due to some large annual expenses and travel costs (I went on a road trip to visit some friends at the start of the month). This results in year-to-date savings of $8,306, which puts me 69.2% of the way toward my goal of $12,000 in savings for 2012. Thus, in spite of lower savings in May and June, I remain on track to meet my goal.
Transactions: This was the first month of 2012 in which I did not buy any stocks. (I did not sell any stocks for the sixth consecutive month.) There are two main reasons why I stayed on the sidelines. First, I anticipated my low savings for June, so I wanted to conserve my limited cash. Second, even though I did have sufficient cash on hand to make one purchase, I could not make up my mind as to what to buy. I decided it might be best to exercise some patience and wait until I had a stronger sense of what I wanted.
Portfolio: My portfolio currently consists of 22 stocks and has a market value of $54,207.63 (including cash), which is a 4.5% increase compared with last month's value of $51,861.12. About half of the increase came from capital gains and the other half came from dividends and new capital.
Seeking Alpha: I did not publish any new articles on the investing website Seeking Alpha in June. However, I did earn $6.59 from additional page views of my previous articles, raising my Q2 total (to be paid in July) to $343.94.
Looking Ahead: July will be a good month for dividends, although I am not expecting any dividend increases to be announced for my stocks. I anticipate a substantial rebound in my savings rate, which will be nice after two below-average months. Given that I did not buy any stocks in June, I will have enough cash to make two purchases in July. However, I may wait until the second half of the month to see whether any good buying opportunities arise when companies report earnings.
Sunday, July 1, 2012
150th Anniversary For Union Pacific
One of the companies in my portfolio, Union Pacific (UNP), is celebrating its 150th anniversary today. It was on July 1, 1862, that Abraham Lincoln signed the Pacific Railway Act that established the company and initiated the construction of the first transcontinental railroad.
With all the events and changes that have taken place over the past 150 years, I find it remarkable that Union Pacific not only still exists today, but is a strong enterprise that continues to grow. There are not many companies that have that kind of staying power. It is also worth noting that even though its current dividend growth streak is just 6 years, the company has paid dividends for 112 consecutive years, which is another great feat.
I hope Union Pacific keeps on rolling for another 150 years!
With all the events and changes that have taken place over the past 150 years, I find it remarkable that Union Pacific not only still exists today, but is a strong enterprise that continues to grow. There are not many companies that have that kind of staying power. It is also worth noting that even though its current dividend growth streak is just 6 years, the company has paid dividends for 112 consecutive years, which is another great feat.
I hope Union Pacific keeps on rolling for another 150 years!
Tuesday, June 26, 2012
Dividend Increase: GIS
General Mills (GIS) is increasing its quarterly dividend by 8.2%, from $0.305 to $0.33 per share, putting the company on track for its 9th consecutive year of dividend growth. Given that I own 70 shares of GIS, my quarterly dividend increases from $21.35 to $23.10, which will add an extra $7.00 to my annual dividend income. This dividend increase also boosts my yield on cost to 3.36%. Thus far this year, there have been dividend increases for 16 of the 22 dividend growth stocks in my portfolio.
Monday, June 25, 2012
Book Review: The Neatest Little Guide To Stock Market Investing
The Neatest Little Guide To Stock Market Investing (2010) by Jason Kelly
This was the first book I read about investing in the stock market. The author provides a fairly well-rounded, beginner-level introduction to investing, which is what I needed at that point. In Chapter 1 he discusses the nature of stocks and the market, and provides a brief overview of key terminology. In Chapter 2 he covers the investing styles of well-known "Masters" such as Benjamin Graham, Philip Fisher, Warren Buffett, Peter Lynch, William O'Neil, and Bill Miller, indicating points of agreement among them. In Chapter 3 he discusses value and growth measures that have some validity based on historical analyses, then in Chapter 4 he provides an overview of a few strategies for building a portfolio, including discussion of leverage and technical analysis. Chapters 5 and 6 cover how to choose a discount broker, place an order, screen for stocks, and where to find useful information in print and online. In Chapter 7 he presents a detailed approach to building a core portfolio that includes several criteria (most of which are useful and sensible) and a worksheet for analyzing stocks based on those criteria. The buying and selling of stocks are addressed and some general advice is given for dealing with market fluctuations. Overall, the book is a concise and informative guide to stock market investing that helped get me started, even though the eventual strategy I settled on (dividend growth investing) differs in many respects from the approach presented in the book.
Note: I read this book in the spring of 2011.
This was the first book I read about investing in the stock market. The author provides a fairly well-rounded, beginner-level introduction to investing, which is what I needed at that point. In Chapter 1 he discusses the nature of stocks and the market, and provides a brief overview of key terminology. In Chapter 2 he covers the investing styles of well-known "Masters" such as Benjamin Graham, Philip Fisher, Warren Buffett, Peter Lynch, William O'Neil, and Bill Miller, indicating points of agreement among them. In Chapter 3 he discusses value and growth measures that have some validity based on historical analyses, then in Chapter 4 he provides an overview of a few strategies for building a portfolio, including discussion of leverage and technical analysis. Chapters 5 and 6 cover how to choose a discount broker, place an order, screen for stocks, and where to find useful information in print and online. In Chapter 7 he presents a detailed approach to building a core portfolio that includes several criteria (most of which are useful and sensible) and a worksheet for analyzing stocks based on those criteria. The buying and selling of stocks are addressed and some general advice is given for dealing with market fluctuations. Overall, the book is a concise and informative guide to stock market investing that helped get me started, even though the eventual strategy I settled on (dividend growth investing) differs in many respects from the approach presented in the book.
Note: I read this book in the spring of 2011.
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