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.
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