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.
Monday, September 24, 2012
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.
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