Dividend Increase: O

Realty Income (O) is increasing its monthly dividend by 0.2%, from $0.1818542 to $0.1821667 per share, which represents the company's 74th dividend increase since 1994 (news release [PDF]). Effective with January's payment, this counts as a dividend increase for 2014. Given that I own 110 shares of O, my monthly dividend increases from $20.00 to $20.04 and my yield on cost becomes 5.61%. The extra $0.48 in annual dividend income keeps my forward 12-month dividend total at $3,912.

Holiday Notice

I just wanted to let readers know that I will be away over the next two weeks to visit family and friends for the holidays. I will still have internet access, but I will not be spending much time on investing activities, so I might be silent on the blogging front for a while. However, if I happen to buy something before the end of the month, then I will write a quick post about it. I wish everyone all the best as 2013 comes to a close and I look forward to sharing my investing progress with you in 2014. Happy holidays!

Dividend Increase: T

AT&T (T) is increasing its quarterly dividend by 2.2%, from $0.45 to $0.46 per share, putting the company on track for its 30th consecutive year of dividend growth (news release). Given that I own 55 shares of T, my quarterly dividend increases from $24.75 to $25.30 and my yield on cost becomes 6.70%. The extra $2.20 in annual dividend income raises my forward 12-month dividend total to $3,912.

Stock Bought: MCD

Today I bought shares of McDonald's (MCD), one of the largest restaurant chains in the world. My most recent previous purchase of MCD occurred over a year and a half ago (May 8, 2012), so I was pleased to get an opportunity to increase my position.

McDonald's has experienced sluggish sales growth in 2013, which has weighed on its stock price and was reflected in the most recent dividend increase being only 5.2% (announced on September 18). However, the company has taken steps to address this short-term weakness. It introduced new menu items (e.g., Mighty Wings) over the past year, revamped its dollar menu (now called the "Dollar Menu & More"), and is working on improving efficiency. Store modernization continues to occur; in fact, a McDonald's near my workplace recently finished extensive interior and exterior renovations. It looks great inside and I noticed new technology at the counter, such as electronic displays for the menu (instead of printed placards) and for orders (the order number appears on a screen when it is ready for pick-up). Outside of the U.S., the company continues its expansion in China, announcing a significant hiring initiative earlier this year. For these reasons, I continue to be optimistic about the company's growth prospects.

I think MCD is slightly undervalued to fairly valued at the current price. It has a P/E of 17.1 (vs. a 5-year historical average of 16.8), P/S of 3.4 (vs. 3.3), P/B of 6.2 (vs. 5.7), and dividend yield of 3.4% (vs. 2.9%). Using a Dividend Discount Model with a dividend growth rate of 7% (lower than the 5-year historical rate and Value Line's estimate of 9%) and a discount rate equal to the current yield plus the dividend growth rate, I calculate a fair value of $101.48. Morningstar gives a fair value of $105.00 and a 4-star rating. The average of those two estimates is $103.24, which implies an 8% margin of safety at my purchase price.

I bought 15 shares of MCD at the price of $94.84 per share plus commission, giving me a 3.40% yield on cost. (I had set a limit order a few days ago that was executed this morning before a much greater intraday decline occurred.) At the current dividend rate, I can expect to receive quarterly dividends of $12.15 from this purchase, which will add a total of $48.60 to my annual dividend income. This purchase was made in my Roth IRA using rollover money. I now have a total of 65 shares of MCD and I will receive combined quarterly dividends of $52.65. My forward 12-month dividend total increases to $3,910.

To celebrate this purchase, today I bought a Big Mac meal on my way home from work. :)

I would consider making another similar-sized purchase of MCD if the stock price declines further. It is one of the few consumer-related stocks that is trading at a decent valuation right now. I noticed that the REITs continue to sell off -- it sure is tempting to buy more of them! However, a few of the non-REIT stocks on my watch list are near my target prices, and I might buy another one before the month ends.

Dividend Increase: VTR

Ventas (VTR) is increasing its quarterly dividend by 8.2%, from $0.67 to $0.725 per share (news release). The dividend increase is effective with the December payment and represents the second increase in 2013 (there was an 8.1% increase back in February). Given that I own 40 shares of VTR, my quarterly dividend increases from $26.80 to $29.00 and my yield on cost becomes 5.17%. The extra $8.80 in annual dividend income raises my forward 12-month dividend total to $3,861.

Stock Bought: ARCP

I mentioned previously that I made two purchases last Thursday, the first being KMI. For my second purchase I bought shares of American Realty Capital Properties (ARCP), an equity REIT that has undergone tremendous growth over the past year. It will become the world's largest net lease REIT once its pending merger with Cole Real Estate Investments is completed in the first half of 2014. The company will own over 3,700 properties that are geographically diverse and leased to major tenants such as Walgreens, AT&T, CVS, Dollar General, and FedEx. The occupancy rate is 99% and investment grade credit ratings are held by 47% of tenants (by rent).

There is not much information available about ARCP because it is a relatively new company and has changed substantially in a short time period. Only five analysts cover the company (versus an average of 21 analysts for its peers) and it is not a member of the S&P 500 (yet). It has not been around long enough to establish much of a dividend track record that would attract income investors. For those reasons, its stock seems undervalued at the current price. It has a P/FFO of just 11.4 (using the low point of the company's FFO guidance for 2014), which is less than peer ratios. It has a dividend yield above 7%, which is greater than peer yields. Beyond peer comparisons, I admit that it is difficult to come up with a fair value estimate for ARCP and get a firm handle on its risk profile. However, based on everything I have read, the stock appears to be undervalued at the moment and represents a compelling risk/reward opportunity.

Interested readers can find additional information about ARCP in two recent articles on Seeking Alpha and in an investor presentation about the Cole merger from last month:

• American Realty Capital Properties: A 'Monthly Dividend Alternative' To Realty Income by Achilles Research, published December 4, 2013
• American Realty Capital Properties 7% Dividend Is Nothing But Net by Brad Thomas, published November 22, 2013
• Revised ARCP/Merger Presentation, November 12, 2013 (PDF file)

I bought 170 shares of ARCP at the price of $12.92 per share plus commission, giving me a 7.25% yield on cost. At the current dividend rate, I can expect to receive monthly dividends of $13.32 from this purchase, which will add a total of $159.80 to my annual dividend income. This purchase was made in my Roth IRA using rollover money. ARCP becomes the 35th stock in my portfolio and the 4th REIT, giving me further diversification in the real estate sector. My forward 12-month dividend total increases to $3,852.

At this point I have a nice set of four REITs in my Roth IRA that make up 9.7% of my overall portfolio by market value. I mentioned in a previous post that I would cap my REIT exposure at 10%, so I will be looking at non-REIT opportunities for my next few purchases. I hope to make one or two more purchases before the end of the year, but it will depend on what Mr. Market decides to do with the stocks on my watch list.

Stock Bought: KMI

Yesterday I made two purchases; I will report one now and the other this weekend, when I have more time. For my first purchase I bought shares of Kinder Morgan, Inc. (KMI), the fourth-largest energy company in North America and operator of an extensive network of pipelines for transporting natural gas, crude oil, and petroleum products. This was my fifth purchase of KMI in 2013.

The stock price declined sharply this week after management released its financial expectations for 2014 (news release). Management expects high, mid, and low single-digit percent dividend/distribution growth for KMI, KMP, and EPB, respectively, in 2014. There seem to be two reasons for the sell-off among those stocks. First, the dividend/distribution growth projections were apparently lower than expected by some analysts. Second, the relatively flat revenue and distribution projections for EPB were disappointing to some investors. I think the sell-off was an over-reaction and the Kinder Morgan family of companies remains well-positioned for the future. I deemed KMI to be undervalued before the sell-off, so this decline made it even more undervalued (in my opinion).

I bought 50 shares of KMI at the price of $32.835 per share plus commission, giving me a 4.97% yield on cost for this purchase and reducing the cost basis of KMI in my taxable account (which is where I bought these shares) by 4.3%. I combined $1,475 of new capital with existing cash in the account to make the purchase. At the current dividend rate, I can expect to receive quarterly dividends of $20.50 from this purchase, which will add a total of $82.00 to my annual dividend income. I now have a total of 275 shares of KMI (130 in my taxable account and 145 in my Roth IRA) and I will receive combined quarterly dividends of $112.75. My forward 12-month dividend total increases to $3,693. Kinder Morgan is now the largest position in my portfolio (7.0% weight), with NSC dropping to second place. Given its size in my portfolio, I will likely refrain from buying additional shares of KMI for a while.

Stock Bought: VTR

Today I bought shares of Ventas (VTR), a diversified healthcare REIT. The company owns over 1,400 properties and its net operating income (NOI) comes from seniors housing (27%), seniors housing operating assets (27%), skilled nursing facilities (20%), medical office buildings (17%), hospitals (7%), and loan assets (3%). Over half of its NOI comes from triple-net leases and 84% of revenue comes from private pay sources. Ventas is well-positioned to capitalize on the higher healthcare needs of the increasing population of seniors in the United States over the next few decades.

Ventas has a pretty good dividend track record. The 5- and 10-year dividend growth rates are 5.5% and 9.6%, respectively, and the most recent dividend increase was 8.1%, announced in February 2013. The company does not appear on the Dividend Champions, Contenders, and Challengers list because it froze its dividend in 2009, breaking a string of dividend increases that dated back to 2001. However, with a current streak of four consecutive years of dividend growth, Ventas will rejoin the Dividend Challengers with an increase in 2014. The company is in a good position for future dividend growth, with high single-digit percent growth in funds from operations (FFO) and a payout ratio (based on FFO) of just 65%, which is relatively low among REITs.

The company has a stable balance sheet, with a debt/capitalization ratio of 49% and adequate interest coverage. It has investment grade credit ratings from all the major agencies, allowing it to issue debt at low interest rates to fund new acquisitions. Value Line gives the company financial strength and safety ratings of B+ and 3, respectively.

I think VTR is undervalued at the current price. It has a P/FFO of 13.5 (using the estimated FFO for 2013), a P/S of 6.0 (vs. a 5-year historical average of 7.0), P/B of 1.8 (vs. 2.5), and dividend yield of 4.8% (vs. 4.4%). Using a Dividend Discount Model with a dividend growth rate of 5.5% (matching the 5-year historical rate) and a discount rate equal to the current yield plus the dividend growth rate, I calculate a fair value of $58.97. Morningstar gives a more generous fair value of $70.00 and a 4-star rating. The average of those two estimates is $64.49, which implies a 13% margin of safety at my purchase price.

Interested readers can find additional information about Ventas in two recent articles on Seeking Alpha and in an investor presentation from last month:

• Ventas: Get Blue Chip Quality Without Paying For It by Dane Bowler, published December 2, 2013
• Ventas Is 'Pound For Pound' One Of The Best REITs Around by Brad Thomas, published October 15, 2013
• Ventas Presentation - NAREIT REITWorld, November 2013 (PDF file)

I bought 40 shares of VTR at the price of $55.90 per share plus commission, giving me a 4.78% yield on cost. At the current dividend rate, I can expect to receive quarterly dividends of $26.80 from this purchase, which will add a total of $107.20 to my annual dividend income. The next dividend should be declared any day now and paid in late December, so I will not have to wait long for my first payment. This purchase was made in my Roth IRA using rollover money. Ventas becomes the 34th stock in my portfolio and the third REIT; I think it nicely complements my HCP position in the specialty area of healthcare REITs. My forward 12-month dividend total increases to $3,611.

Monthly Review: November 2013

November was busy as usual at work. The semester ends in about two weeks and I am looking forward to the break. On the investing front, I mentioned previously that by mid-month I completed the rollover and conversion of funds from two retirement plans with my former employer to my Roth IRA. This gave me a little over $25,000 in cash to invest, which I started to do during the month. In fact, it turned out to be one of the most active months in my investing history. Here is a review of what happened in November:

Dividends: I received a total of $240.96 in dividends from 9 stocks, as indicated on my Dividends page. This represents a 74.7% increase compared with the same month a year ago. My year-to-date dividend total is now $2,144.04, which is 30.0% higher than my year-end dividend total for 2012.

Dividend Increases: I was pleased to see dividend increases announced for the following stocks (click on each stock to see my post about the increase):

• HRL: 17.6% increase, $12.00 more in annual dividend income
• BDX: 10.1%, $5.00

Dividend increases occurred for 32 of the 33 stocks in my portfolio in 2013, with the single exception being INTC. The mean and median dividend increases were 11.7% and 10.1%, respectively, with a total of 18 double-digit percent increases.

Contributions: I contributed $2,275 in new capital for investment, which was deposited in my taxable account. My year-to-date contribution total is $17,490, which is an average of $1,590 per month. I excluded the rollover money from my contribution total to avoid distorting the results, but it is included when calculating my portfolio's annualized return.

Transactions: I made six(!) purchases during the month (click on the transactions to see my posts about them):

• 60 shares of KMI [R]
• 20 shares of CVX
• 55 shares of O [R]
• 30 shares of TGT [R]
• 40 shares of HCP [R]
• 55 shares of O [R] (again)

I was pleased that I had opportunities to invest some of my rollover money right away. Many REITs are attractively valued at the moment, so I started a position in O and averaged down on my position in HCP. The energy sector also has some good investment opportunities, so I increased my positions in KMI and CVX. Finally, an earnings-related sell-off gave me a nice entry point for TGT. These purchases will increase my annual dividend income by a whopping $554.00. My forward 12-month dividend total is $3,503.

Portfolio: My portfolio (taxable account and Roth IRA together) consists of 33 stocks and has a market value of $129,209.60 (including cash), which is a 29.3% increase over last month's value. Not surprisingly, the bulk of the increase is attributable to the influx of rollover money. The combined value of my 403(b) and 401(a) retirement plans is $4,287.60, all of which is invested in a low-cost S&P 500 index fund.

Seeking Alpha: I did not publish any new articles on the investing website Seeking Alpha. However, I earned $12.19 from page views of previous articles in November, increasing my year-to-date total to $1,140.68.

Looking Ahead: December will be great for dividends, thanks to many stocks in my portfolio paying out in that month. It is possible that a dividend increase (effective in 2014) will be announced soon by T; beyond that, I am not expecting any other announcements until the new year. I will likely contribute some new capital to my taxable account, although given my above-average expenses in December, it might be less than $2,000 (but enough for one purchase). I still have plenty of rollover money left to invest, so I will likely put more of it to work. I continue to like the valuations of REITs; in the interests of diversification I am looking at companies that I do not currently own (specifically, ARCP and VTR). In other areas, I would not mind increasing my positions in CVX, MCD, PM, or TGT. The only potential new position in my sights is IBM. As always, I will post about any purchases soon after they happen.

Dividend Increase: BDX

It turns out I did not have to wait long for the last dividend increase of 2013 to be announced:

Becton, Dickinson and Company (BDX) is increasing its quarterly dividend by 10.1%, from $0.495 to $0.545 per share, putting the company on track for its 42nd consecutive fiscal year of dividend growth (news release). Given that I own 25 shares of BDX, my quarterly dividend increases from $12.38 to $13.63 and my yield on cost becomes 3.06%. The extra $5.00 in annual dividend income raises my forward 12-month dividend total to $3,503.

In summary, 32 of the 33 stocks in my portfolio had dividend increases that took effect in 2013, with the lone holdout being INTC. The mean and median dividend increases were 11.7% and 10.1%, respectively, with a total of 18 double-digit percent increases. For comparison with last year, 24 of the 25 stocks in my portfolio (at the time) had dividend increases that took effect in 2012, with mean and median increases of 10.4% and 8.5%, with a total of 12 double-digit percent increases. Overall, I think this shows that my portfolio continues to maintain a strong rate of organic dividend growth.

Dividend Increase: HRL

Hormel Foods (HRL) is increasing its quarterly dividend by 17.6%, from $0.17 to $0.20 per share, putting the company on track for its 48th consecutive year of dividend growth (news release). Given that I own 100 shares of HRL, my quarterly dividend increases from $17.00 to $20.00 and my yield on cost becomes 2.84%. The extra $12.00 in annual dividend income raises my forward 12-month dividend total to $3,498. This is the second dividend increase among the stocks in my portfolio that takes effect in 2014. There have been dividend increases for 31 of the 33 stocks in my portfolio in 2013; an increase from BDX should be announced any day now and there will be no increase from INTC this year.

Stock Bought: O (Again)

For my second purchase today I bought shares of Realty Income (O), a large and diversified retail REIT. I provided some information about O in a post last week when I started my position. The continued decline in the stock price motivated me to average down by doubling my position.

I bought 55 shares of O at the price of $38.44 per share plus commission, giving me a 5.66% yield on cost and reducing my cost basis by over 1% to below $39 per share. At the current dividend rate, I can expect to receive monthly dividends of $10.00 from this purchase, which will add a total of $120.00 to my annual dividend income. This purchase was made in my Roth IRA using rollover money. I now have a total of 110 shares of O and I will receive combined monthly dividends of $20.00. My forward 12-month dividend total increases to $3,486.

What can I say? I continue to think there are good buying opportunities in the REIT sector, so I figured I might as well take advantage of them. That said, HCP and O are now relatively large, equal-weight positions in my portfolio (3.4% and 3.3% weights, respectively), motivating me to look more closely at other REITs from this point forward. However, I'll likely cap my REIT exposure at a combined weight of no more than 10% of my portfolio. I'm investing rollover money more quickly than I anticipated, but I'm happy to do so if I can find stocks trading at attractive valuations.

Stock Bought: HCP

For my first purchase today I bought shares of HCP, Inc. (HCP), a large and diversified healthcare REIT. I provided some information about HCP in an article on Seeking Alpha when I started my position in August. The continued decline in the stock price (HCP now has a P/FFO below 13) motivated me to average down by increasing my position.

I bought 40 shares of HCP at the price of $37.68 per share plus commission, giving me a 5.55% yield on cost and reducing my cost basis by over 2% to below $40 per share. At the current dividend rate, I can expect to receive quarterly dividends of $21.00 from this purchase, which will add a total of $84.00 to my annual dividend income. This purchase was made in my Roth IRA using rollover money. I now have a total of 115 shares of HCP and I will receive combined quarterly dividends of $60.38. My forward 12-month dividend total increases to $3,366.

Stock Bought: TGT

Having already made two purchases for my Roth IRA in November, I did not plan on buying anything else this month. However, Mr. Market came knocking on my door this morning with an opportunity that I decided to jump on.

Today I bought shares of Target Corporation (TGT), operator of over 1,800 retail stores selling general merchandise in the United States and now Canada. Target is generally viewed as a more upscale version of its largest competitor, Wal-Mart Stores (WMT).

Target has achieved satisfactory operating results over the past several years, with 5-year growth rates of 3.0% for revenue and 6.3% for earnings. Recent growth has been slowed by Target's expansion into Canada, where it has encountered some difficulties, but I think the company will overcome these short-term growing pains within a year or two. Target's financial position is decent, with a debt/equity ratio of 91%, debt/cap ratio of 45%, 6.9x interest coverage, and a current ratio of 0.9. Value Line gives the company a financial strength rating of A and a safety rating of 2.

Target has an impressive dividend growth record. The company is a Dividend Champion, having increased its dividend for 46 consecutive years. The 5-year dividend growth rate is 20.5% and the most recent increase was 19.4% in August 2013. With a payout ratio of 41% and stable cash flows, I think the dividend can continue to grow in spite of short-term earnings weakness. The company has also excelled at share repurchases, reducing the number of outstanding shares by about 28% since 2004.

I think TGT is slightly undervalued to fairly valued at the current price. It has a P/E of 15.3 (vs. a 5-year historical average of 13.6), P/S of 0.6 (vs. 0.5), P/B of 2.5 (vs. 2.4), and dividend yield of 2.7% (vs. 1.8%). Note that these numbers have not been updated to reflect the results reported by the company earlier today. Using a Dividend Discount Model with a dividend growth rate of 10% (half of the 5-year historical rate) and a discount rate equal to the current yield plus the dividend growth rate, I calculate a fair value of $70.07. Morningstar gives a fair value of $64.00 and a 3-star rating. S&P Capital IQ gives a fair value of $73.20 and a 4-star rating. The average of those three estimates is $69.09, which implies an 8% margin of safety at my purchase price, hence my conclusion that the stock is slightly undervalued to fairly valued. Today the stock price dropped 3.5% because the company missed earnings and revenue estimates for the latest quarter, but as noted above, I regard this as short-term weakness. Value Line's analyst expects earnings to "ramp up at a solid pace" starting in fiscal 2014 and S&P Capital IQ sees above-average growth from fiscal 2015 onward.

I bought 30 shares of TGT at the price of $63.70 per share (no commission paid due to a free trade -- my last one), giving me a 2.70% yield on cost. At the current dividend rate, I can expect to receive quarterly dividends of $12.90 from this purchase, which will add a total of $51.60 to my annual dividend income. The stock went ex-dividend a few days ago, so I will not receive the next dividend payment. However, my lower cost basis due to today's price dip is equivalent to about 6.5 quarterly dividend payments, which more than compensates for the missed payment. This purchase was made in my Roth IRA using rollover money. Target becomes the 33rd stock in my portfolio and gives me more diversification in the retail sector, where it is approximately equal-weight with my WMT position. My forward 12-month dividend total increases to $3,282.

I am tempted to say that I am done buying stocks for the month, but Mr. Market could surprise me again. In case you are wondering, I noticed the sell-off in PM today and the after-hours sell-off in ROST, both of which are stocks in my portfolio. I already have a fair-sized position in PM, though, and ROST would need to fall further to become attractively valued, so I do not plan on adding to those positions right away.

Stock Bought: O

Yesterday I bought shares of Realty Income (O), an equity REIT with a geographically diverse collection of over 3,800 properties. The company owns free-standing properties that are leased primarily to retail businesses, typically under triple-net leases (tenants pay taxes, maintenance, and insurance). Its properties are 98% occupied and major tenants (by rental revenue) include FedEx, Walgreens, Family Dollar, LA Fitness, AMC Theatres, and Diageo.

Realty Income bills itself as "The Monthly Dividend Company" due to its track record of having paid 520 consecutive monthly dividends. The company is a Dividend Contender, having increased its dividend for 19 consecutive years. In fact, there have been 73 dividend increases since the stock was listed on the NYSE in 1994. With the exception of a 19% dividend increase earlier this year (reflecting the acquisition of American Realty Capital Trust), the dividend growth rate tends to be low, with 5- and 10-year rates of 1.5% and 4.2%, respectively. However, the high dividend yield (over 5.5%) helps to compensate for the weak dividend growth. The company's payout ratio (based on funds from operations, FFO) is about 92%.

The company has a stable balance sheet that should support continued dividend payments and modest growth. Debt/capital is 44% and interest coverage is 2.2x. Notably, 100% of Realty Income's debt is fixed-rate, so its interest payments will not be affected by rising interest rates. However, the company is still sensitive to rising interest rates because it often issues new debt to help fund acquisitions; this is a common practice among REITs and represents the main reason why the entire sector has fallen over the past several months. Debt issuance is affected by credit ratings (companies with higher investment grade ratings can issue debt at lower interest rates) and S&P recently upgraded the company's credit rating to BBB+. In addition, Value Line increased their financial strength rating to A (with a safety rating of 2).

I think O is fairly valued at the current price. It has a P/FFO of 16.5 (using the low point of the company's FFO guidance for full-year 2013), which matches Value Line's estimate of the average annual P/FFO for the next few years. Other useful valuation metrics include a P/S of 10.1 (vs. a 5-year historical average of 9.4), P/B of 1.8 (vs. 2.5), and dividend yield of 5.55% (vs. 5.6%). Using a Dividend Discount Model with a dividend growth rate of just 1.5% (matching the 5-year historical rate) and a discount rate equal to the current yield plus the dividend growth rate, I calculate a fair value of $39.91. Morningstar gives a fair value of $44.00 and a 3-star rating. The average of those two estimates is $41.95, which implies a 6% margin of safety at my purchase price. Overall, I think it is reasonable to conclude that O represents decent value in the current market, but not a bargain.

I bought 55 shares of O at the price of $39.32 per share (no commission paid due to a free trade), giving me a 5.55% yield on cost. The fact that the stock price promptly fell another 1% after I made my purchase shows why I am not a day trader. At the current dividend rate, I can expect to receive monthly dividends of $10.00 from this purchase, which will add a total of $120.00 to my annual dividend income. The stock goes ex-dividend next week, so the first dividends from this purchase will be paid in December. This purchase was made in my Roth IRA using rollover money. Realty Income becomes the 32nd stock in my portfolio and the 2nd REIT (the other being HCP), giving me a bit of diversification in the real estate sector. My forward 12-month dividend total increases to $3,231.

This month I have made two purchases in my Roth IRA and one purchase in my taxable account, consistent with the plan I laid out in a previous post. If O's stock price falls a few more percentage points, then I would consider increasing my position. However, I am also on the lookout for other REITs that might be good candidates for my Roth IRA.

In case any readers are wondering why I did not write a Seeking Alpha article about O (given that I wrote articles when I started my positions in HCP, WMT, and XOM), there are two reasons. First, I simply do not have much spare time at the moment, especially with the fall semester coming to an end. Second, O is one of the most-covered REITs on SA, and I am not sure how much useful information I would be able to add. Hopefully this blog post partially compensates for the absence of an article.

Stock Bought: CVX

For my second purchase today I bought shares of Chevron (CVX), one of the largest integrated oil and gas companies in the world. My only previous purchase of CVX occurred nearly two years ago (November 23, 2011) and I have been wanting to increase my position for some time.

I think CVX is moderately undervalued at the current price. It has a P/E of 9.8 (vs. a 5-year historical average of 9.3), P/S of 1.1 (vs. 0.8), P/B of 1.6 (vs. 1.7), and dividend yield of 3.35% (vs. 3.2%). Using a Dividend Discount Model with a dividend growth rate of 8.5% (slightly lower than recent dividend increases) and a discount rate equal to the current yield plus the dividend growth rate, I calculate a fair value of $129.70. Morningstar gives a fair value of $130.00 and a 4-star rating. The average of those two estimates is $129.85, which implies an 8% margin of safety at my purchase price.

I bought 20 shares of CVX at the price of $119.54 per share plus commission, giving me a 3.34% yield on cost. At the current dividend rate, I can expect to receive quarterly dividends of $20.00 from this purchase, which will add a total of $80.00 to my annual dividend income. The stock happens to go ex-dividend tomorrow, so the first dividends from this purchase will be paid in less than a month. This purchase was made in my taxable account using accumulated dividends and $2,275 of new capital. I now have a total of 40 shares of CVX and I will receive combined quarterly dividends of $40.00. My forward 12-month dividend total increases to $3,111. Chevron is now the fourth-largest position in my portfolio (3.7% weight).

As mentioned in a recent post, I plan to use the rollover money in my Roth IRA to make two purchases per month. After buying shares of KMI earlier today, that leaves one more purchase for November. The next purchase for my taxable account will not be until December.

Stock Bought: KMI

For my first purchase today I bought shares of Kinder Morgan, Inc. (KMI), the third-largest energy company in North America and operator of an extensive network of pipelines for transporting natural gas, crude oil, and petroleum products. My most recent previous purchase of KMI was in September 2013.

I continue to think that KMI is undervalued. Using a Dividend Discount Model with a dividend growth rate of 10% (which is the company's long-term target) and a discount rate equal to the current yield plus the dividend growth rate, I calculate a fair value of $37.84. Morningstar gives a fair value of $41.00 and a 4-star rating. The average of those two estimates is $39.42, which implies a 13% margin of safety at my purchase price.

I bought 60 shares of KMI at the price of $34.40 per share (no commission paid; I had a free trade), giving me a 4.77% yield on cost. At the current dividend rate, I can expect to receive quarterly dividends of $24.60 from this purchase, which will add a total of $98.40 to my annual dividend income. This purchase was made in my Roth IRA using rollover money and it reduced my cost basis by a little over 2%. I now have a total of 225 shares of KMI (80 in my taxable account and 145 in my Roth IRA) and I will receive combined quarterly dividends of $92.25. My forward 12-month dividend total increases to $3,031. Kinder Morgan remains the second-largest position in my portfolio (6.0% weight).

Rollover and Conversion to Roth IRA Completed; New Milestone Reached

A few weeks ago I posted an update about rolling over the money from two retirement plans held with my former employer into an IRA, then converting that into my existing Roth IRA. I am pleased to report that the entire process has now been completed. As a result, I added a little over $25,000 to my Roth IRA, more than tripling its size. Note that I already set aside sufficient external money for the estimated taxes on the conversion, which I will be paying soon.

In the meantime, I now find myself in the unusual position of having over 20% of my overall portfolio in cash. Even though I am eager to put the rollover money to work, I do not see much in the way of attractively valued dividend growth stocks at the moment. The value investor inside of me cringes at the thought of buying overvalued stocks simply because I have money to invest. For that reason, I will not be investing the money all at once. However, I will not attempt to time the market, either.

I have decided that a reasonable course of action is to invest the money at regular intervals in whichever stocks happen to be fairly valued or undervalued at the time. With over $25,000 at my disposal, my tentative approach will be to make two purchases per month over the next five or six months, with each purchase being in the range of $2,000 to $2,500. The only constraint is that a stock has to be either fairly valued or undervalued by my judgment in order to be purchased. If the market happens to take a sudden downturn and more than two opportunities become available in a month, then I would accelerate the purchasing schedule.

Note that these purchases will all occur in my Roth IRA. Let's not forget that I will also be contributing new capital to my taxable account on a monthly basis (I have not made my November contribution yet). The amount will vary a bit from month to month, but it will likely average over $2,000. Thus, I will have sufficient cash to make a third (and possibly a fourth) purchase every month.

That's the plan as it currently stands. Incidentally, thanks to the rollover money, my portfolio reached a new milestone today, closing above $125,000 for the very first time ($125,862.52). Continuing with $25,000 increments, the next milestone will be $150,000.

Milestone history for portfolio value:

• $125,000: November 2013
• $100,000: October 2013
• $90,000: August 2013
• $80,000: March 2013
• $70,000: January 2013
• $60,000: September 2012
• $50,000: March 2012

Monthly Review: October 2013

Here is a review of what happened in October:

Dividends: I received a total of $137.87 in dividends from 7 stocks, as indicated on my Dividends page. This represents a 10.7% increase compared with the same month a year ago. My year-to-date dividend total is now $1,903.08, which is 15.4% higher than my year-end dividend total for 2012.

Dividend Increases: I was pleased to see dividend increases announced for the following stocks (click on each stock to see my post about the increase):

• UTX: 10.1% increase, $5.40 more in annual dividend income
• ABT: 57.1%, $14.40
• KMI: 2.5%, $6.60
• VFC: 20.7%, $7.20

Note that it was the fourth increase from KMI this year, resulting in an overall increase of 13.9% in 2013. It was great to see the massive dividend increases from ABT and VFC. Thus far this year, there have been dividend increases for 29 of the 31 stocks in my portfolio. The mean increase has been 11.6%.

Stock Splits: It was rare to see stock splits announced for two stocks during the month (click on each stock to see my post about the split):

• VFC: 4-for-1 stock split, resulting in 40 shares instead of 10
• CNI: 2-for-1 stock split, resulting in 40 shares instead of 20

Stock splits do not really matter to me because they do not change the values of the stocks. For example, owning 50 shares of a stock trading at $100 per share is no different than owning 100 shares of the same stock trading at $50 per share after a 2-for-1 split; in each case, the total value of the shares is $5,000. However, I am aware that stock splits have positive psychological effects on some investors and can make options trading more convenient, so I generally view them as positive events.

Contributions: I contributed $2,800 in new capital for investment, which was divided between my taxable account and Roth IRA. My year-to-date contribution total is $15,215, which is an average of $1,522 per month. I have now maxed out my Roth IRA for 2013 (which has a contribution limit of $5,500), so my November and December contributions will go into my taxable account.

Transactions: I made two purchases during the month (click on the transactions to see my posts about them):

• 15 shares of XOM [R]
• 25 shares of WMT

I was pleased to double my position in XOM and start a position in WMT. These purchases will increase my annual dividend income by $84.80. My forward 12-month dividend total is $2,932.

Portfolio: My portfolio (taxable account and Roth IRA together) consists of 31 stocks and has a market value of $99,914.18 (including cash), which is a 7.3% increase over last month's value. The unusually large increase reflects strong capital gains and an above-average influx of new capital. As noted in a milestone post, my portfolio's value closed above $100,000 for the first time in late October.

Starting with this month's review, there is a new addition to my Portfolio page. Below the portfolio table is information about the retirement plans with my new employer, which I discussed in a previous post. The combined value of the 403(b) and 401(a) plans is $3,014.45, all of which is invested in a low-cost index fund that tracks the S&P 500. At some point in the future I will likely modify my fund allocations, but for the time being I have decided to keep things as simple as possible.

Seeking Alpha: This month I published two new articles on the investing website Seeking Alpha:

• Wal-Mart Stores: A Retail Heavyweight For My Dividend Growth Machine
• A Real Dividend Growth Machine: Q3 2013 Review

The WMT article was a bit of a flop, getting about 3,400 page views, which is the lowest of any article I have written. The quarterly review had a better reception, getting over 9,800 page views. I earned $157.48 from page views in October, pushing my year-to-date total past the $1,000 mark to $1,128.49. It is pretty amazing that I increased my income by over $1,000 by writing just 9 articles this year. Obviously, I could make more money by writing more often, but I do not want to fall into the high-frequency/low-quality trap that affects some authors. Moreover, I simply do not have much "spare time" outside of my job to write investing articles, over and above monitoring my investments and keeping this blog up-to-date. Thus, I will likely continue to average about one article per month.

Looking Ahead: November will yield a nice batch of dividends and result in a substantial year-over-year increase. I expect the last dividend increase effective in 2013 to be announced by BDX, leaving INTC as the lone stock in my portfolio that did not increase its dividend this year. As mentioned previously, I plan to continue holding INTC into early 2014. I also expect dividend increases for 2014 to be announced in November by HRL and T. I should be able to contribute around $2,500 in new capital to my taxable account in November, which will allow for either one large purchase or two smaller ones.

In a recent post I mentioned that I had initiated the rollover of money from my former employer's retirement plans to an IRA. The money from TIAA-CREF has already been deposited and I expect the money from Vanguard to be deposited within the next few days. Once that happens, I will arrange the conversion of the Rollover IRA into my existing Roth IRA, which I assume will not take long to do. Thus, the rollover-and-conversion process is still on track to be completed by mid-November, which will result in a sizable chunk of money becoming available for investment in my Roth IRA. I might put some of that money to work by the end of the month, but it will depend on whether I can find attractively valued stocks. It's slim pickings on my watch list at the moment.

Milestone: Portfolio Value Reaches $100,000

Today my portfolio's value reached $100,000 for the very first time, closing at $100,291.68. It occurred as a result of some large capital gains this week, with two notable examples being MSFT (up 6% today) and NSC (my largest holding, up about 10% this week). This milestone comes just two and a half months after reaching $90,000 in mid-August. My secondary investing goal is to achieve a satisfactory total return on my investments, and a steadily increasing portfolio value is an indication of progress toward that goal.

It was nice to hit the six-figure mark before the end of 2013; quite frankly, I was surprised it happened so quickly. Now that I've crossed that threshold, I think it makes sense to set milestones by larger increments, and $25,000 seems reasonable. Thus, the next milestone will be $125,000. I anticipate reaching it fairly soon because the rollover money discussed in a recent post should hit my Roth IRA in November. It will be interesting to see what my portfolio value will be at the end of the year.

Milestone history for portfolio value:

• $100,000: October 2013
• $90,000: August 2013
• $80,000: March 2013
• $70,000: January 2013
• $60,000: September 2012
• $50,000: March 2012

Update on Rollover IRA

Some readers might remember this post from early February where I talked about opening a Roth IRA. At that time I knew I was going to be moving and changing jobs mid-year, so I mentioned that later in the year I was going to rollover the two retirement plans associated with my previous employer into my Roth IRA. Now that I've settled down financially after my move, I've set the wheels in motion for the rollover.

I've opened a Rollover IRA with Scottrade (the brokerage I use for my other accounts) and I've initiated direct rollovers of the 403(b) plan held by TIAA-CREF and the 401(k) plan held by Vanguard. Once those institutions have verified some information, they will send checks to Scottrade that will be deposited in my Rollover IRA. I was told it would take about 1-2 weeks for that to happen. After the funds are deposited, I will then convert (or merge) my Rollover IRA into my existing Roth IRA. My hope is that the rollover and conversion will be completed by mid-November, at which point I will have a sizable chunk of money in my Roth IRA to reinvest.

The move of pre-tax money into my post-tax Roth IRA will result in the money being treated as taxable income for 2013. Even though I do not like taking a big tax hit, it is a one-time expense that makes financial sense. Using various online calculators, I determined that the taxes I pay now will be much smaller than the taxes I would likely pay on withdrawals from a traditional IRA in 30+ years. By converting to a Roth IRA, I can look forward to making tax-free withdrawals in the future from an account that will benefit from 30+ years of tax-free compounding. Besides, I have already set aside enough money to pay the estimated taxes on the rollover money, so it will not affect my current rate of new capital investment.

I will post another update once the rollover and conversion have been completed.

Stock Split: CNI

Coming on the heels of yesterday's stock-split announcement from VFC, Canadian National Railway (CNI) has announced a 2-for-1 stock split that will take effect by the end of November (news release). Once that happens, I will own 40 shares of CNI at an adjusted cost basis of $37.675 per share.

Dividend Increase and Stock Split: VFC

VF Corporation (VFC) is increasing its quarterly dividend by 20.7%, from $0.87 to $1.05 per share, putting the company on track for its 41st consecutive year of dividend growth (news release). Given that I own 10 shares of VFC, my quarterly dividend increases from $8.70 to $10.50 and my yield on cost becomes 2.90%. The extra $7.20 in annual dividend income raises my forward 12-month dividend total to $2,932. Thus far this year, there have been dividend increases for 29 of the 31 stocks in my portfolio.

The company also announced a 4-for-1 stock split that will take effect by the end of the year. Once that happens, I will own 40 shares of VFC at an adjusted cost basis of $36.25 per share.

Dividend Increase: KMI

Kinder Morgan, Inc. (KMI) is increasing its quarterly dividend by 2.5%, from $0.40 to $0.41 per share (news release). This is the fourth increase from KMI this year, resulting in an overall increase of 13.9% in 2013. Given that I own 165 shares of KMI, my quarterly dividend increases from $66.00 to $67.65 and my yield on cost becomes 4.45%. The extra $6.60 in annual dividend income raises my forward 12-month dividend total to $2,925. Thus far this year, there have been dividend increases for 28 of the 31 stocks in my portfolio.

Dividend Increase: ABT

Abbott Laboratories (ABT) is increasing its quarterly dividend by 57.1% (that's not a typo), from $0.14 to $0.22 per share, putting the company on track for its 42nd consecutive year of dividend growth (news release). ABT was removed from the Dividend Champions list after it split into two companies -- the other being AbbVie (ABBV) -- but management considers its dividend growth streak to still be intact: "This will mark the 42nd consecutive year that Abbott has increased its dividend payout and demonstrates Abbott’s continued commitment to increasing its return of cash to shareholders while investing for long-term growth." Given that I own 45 shares of ABT, my quarterly dividend increases from $6.30 to $9.90 and my yield on cost becomes 3.46%. The extra $14.40 in annual dividend income raises my forward 12-month dividend total to $2,919. Thus far this year, there have been dividend increases for 28 of the 31 stocks in my portfolio. This dividend increase is not included in that total; it actually counts as the first increase for 2014 because it takes effect with the February payment.

A Real Dividend Growth Machine: Q3 2013 Review

A new article of mine has been published on the investing website Seeking Alpha. The article is entitled A Real Dividend Growth Machine: Q3 2013 Review and it provides a review of my dividend growth investing progress in the third quarter of 2013.

Dividend Increase: UTX

United Technologies (UTX) is increasing its quarterly dividend by 10.1%, from $0.535 to $0.589 per share, putting the company on track for its 20th consecutive year of dividend growth (news release). Given that I own 25 shares of UTX, my quarterly dividend increases from $13.38 to $14.73 and my yield on cost becomes 3.30%. The extra $5.40 in annual dividend income raises my forward 12-month dividend total to $2,904. Thus far this year, there have been dividend increases for 28 of the 31 stocks in my portfolio.

Monthly Review: September 2013

September was a busy month at work. Teaching took up a lot of my time, but I also finished getting my lab ready for research and the first experiments were started. I do not have much in the way of lab personnel right now (just one undergraduate student working in the lab on a part-time basis), so I am doing nearly everything by myself. It will probably be this way for the rest of this academic year, then hopefully I will get a graduate student and more undergraduate students working with me. However, it is refreshing and motivational to finally have complete independence and control over my research, so I do not mind being an essentially one-man operation at this point.

On the investing front, here is a review of what happened in September:

Dividends: I received a total of $248.29 in dividends from 11 stocks, as indicated on my Dividends page. This represents a solid 84.6% increase compared with the same month a year ago. My year-to-date dividend total is now $1,765.21, which surpasses my year-end dividend total for 2012. I'm on track to bring in about $2,400 in dividends in 2013.

Dividend Increases: I was pleased to see dividend increases announced for the following stocks (click on each stock to see my post about the increase):

• PM: 10.6% increase, $18.00 more in annual dividend income
• MSFT: 21.7%, $23.00
• MCD: 5.2%, $8.00

These dividend increases are what make dividend growth investing so great. I did not have to do anything to get them -- I did not sell cigarettes, software, or burgers. I did not have to work harder at my own job. I just had to be a shareholder of these companies, which results in me being paid a portion of their profits. Thanks to these increases, next year I'll get nearly $50 more in dividends for doing nothing but continuing to hold the stocks. Thus far this year, there have been dividend increases for 26 of the 30 stocks in my portfolio. The mean increase has been 11.0%.

Contributions: As mentioned in a recent post, from now on I will be reporting contributions of new capital instead of savings. A Contributions page has replaced what used to be the Savings page on the blog. In September I contributed $2,165 in new capital for investment, which was divided between my taxable account and Roth IRA. My year-to-date contribution total is $15,215, which is an average of $1,522 per month. The monthly average is essentially identical to last year's monthly average, which is remarkable given that I went a few months earlier this year without any contributions. Fortunately, a few above-average contributions made up the difference.

Transactions: I made two purchases during the month (click on the transactions to see my posts about them):

• 35 shares of KMI [R]
• 15 shares of XOM

I was happy to take advantage of a dip in KMI to increase my position. I was also pleased to get an opportunity to start a position in XOM. These purchases will increase my annual dividend income by $93.80. My forward 12-month dividend total is $2,814. (My purchases at the start of October have since increased that total.)

Portfolio: My portfolio (taxable account and Roth IRA together) consists of 30 stocks and has a market value of $93,148.24 (including cash), which is a 5.5% increase over last month's value. The unusually large increase reflects strong capital gains and an above-average influx of new capital.

Seeking Alpha: This month I published one new article on the investing website Seeking Alpha:

• Exxon Mobil: The Energy Giant Joins My Dividend Growth Machine

The article managed to get nearly 6,000 page views by the end of the month. I earned $77.76 from page views in September, increasing my Q3 total to $252.70 (to be paid in mid-October) and my year-to-date total to $971.01.

Looking Ahead: October will yield a relatively low dividend total due to fewer companies in my portfolio paying out in that month. I expect dividend increases to be announced by two companies, UTX and VFC. (I had previously anticipated that UTX would make an announcement in September, but I had mixed up my calendar dates.) At the start of October I contributed $2,800 to my brokerage accounts, maxing out the 2013 contribution to my Roth IRA. I also went ahead and invested that new capital right away, doubling my position in XOM and starting a position in WMT. Thus, there will be no more investing activity in October, but I look forward to seeing what the market has to offer in November.

From Savings To Contributions

As some readers noticed, I had not updated my Savings page for a couple of months. The main reason was that my savings could not be determined accurately for a while. Prior to my mid-summer move to start a new job, I had put aside a few thousand dollars because I knew I would not have any job income in July or in the first half of August. During those months I used my savings to pay for moving-related expenses and to cover my living expenses. In mid-August I received some reimbursements for my moving expenses and at the end of August I finally received the first paycheck from my new job, although the paycheck was for only the last two weeks of August. (My new job officially started in mid-August.) At the end of September I received my first full-month paycheck. Consequently, there was a lot of variability in my income and expenses from July to September, making it difficult to determine accurate savings numbers.

Going forward, it will continue to be difficult to determine my savings on a monthly basis because of how I am paid at my new job. My entire salary is paid over the nine-month academic year (I work at a university), which starts in mid-August and ends in mid-May. As a result, I receive a half-month paycheck for August, full-month paychecks for September through April, a half-month paycheck for May, and then no paychecks for June or July. (In case you're wondering, I inquired about whether my salary could be spread out over the entire calendar year, but the answer was no.) Thus, my monthly job income will vary during the year and there will be massive fluctuations in my monthly savings rate, making it an uninformative measure. Moreover, my savings will no longer correspond directly to new capital available for investment because I will be setting aside some of my savings each month to cover my expenses during the no-income months of June and July.

Given that it no longer makes sense to report my monthly savings, I have decided to switch to reporting my monthly contributions of new capital for investment. Up until early 2013, there was a nearly 1:1 correspondence between savings and contributions, but for the reasons discussed above, that will not be the case from now on. Thus, I have replaced my Savings page with a Contributions page that indicates exactly how much new capital I added to my brokerage accounts in previous months. There will be fluctuations in contributions from month to month because they depend on my savings, but I feel this information will be more useful because it is directly linked to my investing activities. I will now be including a note about contributions in my monthly reviews, starting with my September review (which will be posted in a day or two).

Stock Bought: WMT

On Tuesday I bought shares of Wal-Mart Stores (WMT), the largest retailer in the world by revenue. Some of my research is summarized in an article about WMT that was published today at Seeking Alpha.

I bought 25 shares of WMT at the price of $73.44 per share plus commission, giving me a 2.55% yield on cost. At the current dividend rate, I can expect to receive quarterly dividends of $11.75 from this purchase, which will add a total of $47.00 to my annual dividend income. My forward 12-month dividend total increases to $2,899. This purchase was made in my taxable account by combining new capital with accumulated dividends. (In fact, some of the dividends that I received on Tuesday were used for this purchase -- now that's rapid selective dividend reinvestment!) WMT becomes the 31st stock in my dividend growth portfolio.

October got off to a quick start on the investing front, with same-day purchases of WMT and XOM. Those purchases used up all the new capital I had just added to my accounts, so there will be no more purchases this month. I plan to sit back and watch as earnings roll in over the next few weeks.

Wal-Mart Stores: A Retail Heavyweight For My Dividend Growth Machine

A new article of mine has been published on the investing website Seeking Alpha. The article is entitled Wal-Mart Stores: A Retail Heavyweight For My Dividend Growth Machine and it provides an overview of WMT, which I purchased two days ago for my dividend growth portfolio.

Stock Bought: XOM (Again)

Today I bought more shares of Exxon Mobil (XOM), the largest publicly traded oil and gas company in the world. Last week I published an article about XOM on Seeking Alpha that summarized some information gathered during my research.

I bought 15 shares of XOM at the price of $85.90 per share plus commission, giving me a 2.92% yield on cost. At the current dividend rate, I can expect to receive quarterly dividends of $9.45 from this purchase, which will add a total of $37.80 to my annual dividend income. My forward 12-month dividend total increases to $2,852. This purchase was made in my Roth IRA with new capital that maxed out my contribution for 2013. I now have a total of 30 shares of XOM (15 in my taxable account and 15 in my Roth IRA) and I will receive combined quarterly dividends of $18.90.

When my monthly paycheck hit my bank account yesterday, I determined how much money could be allocated toward investments and transferred $2,800 in new capital to my brokerage, of which $1,235 went into my Roth IRA and $1,565 went into my taxable account. When I looked at my watch list today, I saw that XOM was trading slightly lower than where I had purchased it last week, so I decided to go ahead and double my position. I am now satisfied with the overall size of my XOM position, which is about equal weight (in terms of both market value and dividends) with my CVX position.

I also noticed that another stock on my watch list had reached my target price, so I made a second purchase today, using the new capital in my taxable account. It is a new position in my portfolio and I plan to write an article about it soon for Seeking Alpha. In the meantime, can you guess what stock it is?

Update: A few readers guessed correctly that I started a position in WMT. I just finished submitting an article about WMT to Seeking Alpha that will hopefully be published in the next day or two.

Stock Bought: XOM

On Tuesday I bought shares of Exxon Mobil (XOM), the largest publicly traded oil and gas company in the world. I have summarized some of my research in an article about XOM that was published today at Seeking Alpha.

I bought 15 shares of XOM at the price of $87.40 per share plus commission, giving me a 2.87% yield on cost. At the current dividend rate, I can expect to receive quarterly dividends of $9.45 from this purchase, which will add a total of $37.80 to my annual dividend income. My forward 12-month dividend total increases to $2,814. This purchase was made in my taxable account by combining some new capital with accumulated dividends. Exxon Mobil is now the 30th stock in my dividend growth portfolio.

It was nice to make a second purchase this month and to increase my portfolio's diversification in the energy sector. I would not mind buying more shares of XOM if the stock price stays in this area, but a few other stocks on my watch list are also in (or near) attractively valued territory. On Monday I should be getting my first full-month paycheck from my new job, so I look forward to seeing how much of it I will be able to allocate toward investments in October.

Exxon Mobil: The Energy Giant Joins My Dividend Growth Machine

A new article of mine has been published on the investing website Seeking Alpha. The article is entitled Exxon Mobil: The Energy Giant Joins My Dividend Growth Machine and it provides an overview of XOM, which I purchased a few days ago for my dividend growth portfolio.

Dividend Increase: MCD

McDonald's (MCD) is increasing its quarterly dividend by 5.2%, from $0.77 to $0.81 per share, putting the company on track for its 38th consecutive year of dividend growth (news release). Given that I own 50 shares of MCD, my quarterly dividend increases from $38.50 to $40.50 and my yield on cost becomes 3.63%. The extra $8.00 in annual dividend income raises my forward 12-month dividend total to $2,776. Thus far this year, there have been dividend increases for 25 of the 29 stocks in my portfolio.

Dividend Increase: MSFT

Microsoft (MSFT) is increasing its quarterly dividend by 21.7%, from $0.23 to $0.28 per share, putting the company on track for its 11th consecutive year of dividend growth (news release). The company also announced a new $40 billion share repurchase program. Given that I own 115 shares of MSFT, my quarterly dividend increases from $26.45 to $32.20 and my yield on cost becomes 4.14%. The extra $23.00 in annual dividend income raises my forward 12-month dividend total to $2,768. Thus far this year, there have been dividend increases for 24 of the 29 stocks in my portfolio.

My New Employer's Retirement Program

As regular readers of this blog are aware, a short while ago I started a new job. Last week I enrolled in my new employer's retirement program and the first contributions should occur at the end of this month. The retirement program will represent a part of my investing going forward, so I wanted to share some of the details about the program.

The retirement program involves two accounts. The first account is a 403(b) defined contribution retirement plan, to which my employer will make contributions equal to 10% of my annual pre-tax salary (note that these contributions are separate from my salary). The second account is a 401(a) mandatory retirement plan, to which I am required to contribute 4% of my annual pre-tax salary (these contributions are deducted from my salary). As someone who maintains a relatively high savings rate and likes the freedom of deciding where, when, and how to invest my savings, I do not like having to make mandatory contributions. However, I suppose one could view it as an acceptable tradeoff for getting larger contributions from my employer, even though the two types of contributions are separate; that is, they are not "matching" contributions that occur in some 401(k) plans. Thus, total contributions equal to 14% of my annual pre-tax salary will go into the two accounts; based on my current salary, that works out to a little over $10,000 per year.

Regarding investment options, my choices are rather limited. There are four "tiers" of investments available to me:

1. Target-date funds: A mix of various stock and bond funds based on an individual's age. For someone my age (31 years old), a typical mix is 90% stocks and 10% bonds. The mix becomes more conservative over time, with a decreasing percentage of stocks and an increasing percentage of bonds.
2. Index funds: Passively managed funds that track various stock and bond market indices.
3. Actively managed funds: Funds managed by investment professionals and usually geared toward specific investing styles (e.g., value vs. growth, domestic vs. international, etc.). Fees are higher than in the other tiers, even though higher returns are by no means guaranteed. In fact, history shows that most actively managed funds tend to underperform passively managed market index funds.
4. Brokerage account: Provides a much broader selection of investment possibilities, except it is restricted to investment in mutual funds and there are transaction fees. The purchase of individual stocks is not permitted.

Given these options, I decided to focus on index funds. Unfortunately, there are only five funds available for investment. Fortunately, they are all Vanguard funds with very low expense ratios. The funds are listed in the table below, with each ticker symbol linked to Vanguard's web page for the fund.

Symbol	Name	Index Tracked	Expense Ratio
VINIX	Vanguard Institutional Index Fund	S&P 500 Index (Large-Cap Stocks)	0.04%
VIEIX	Vanguard Extended Market Index Fund	S&P Completion Index (Small- and Mid-Cap Stocks)	0.12%
VFWSX	Vanguard FTSE All-World ex-US Index Fund	FTSE All-World ex US Index (International Stocks)	0.12%
VBTIX	Vanguard Total Bond Market Index Fund	Barclays U.S. Aggregate Float Adjusted Index (U.S. Bonds)	0.07%
VIPIX	Vanguard Inflation-Protected Securities Fund	Inflation-Indexed U.S. Bonds (i.e., TIPS)	0.07%

I am not keen on the bond funds for two reasons. First, as a young investor with a long time horizon, there is not much need for bonds in my portfolio. I do not mind taking the "riskier" approach of having the bulk of my investments in stocks. Second, the two bond funds focus on U.S. bonds, and anyone paying attention to the news this year knows there is a lot of talk about rising interest rates in the U.S. When interest rates rise, bond values fall, so bond funds do not strike me as good investments for the next few years.

Regarding the stock funds, I tend to view the domestic vs. international categorization as a misleading dichotomy. Many U.S.-based companies, especially the large-cap ones, do business in dozens or hundreds of countries around the world, including both developed and emerging markets. For that reason, I see no compelling need to own an international stock fund.

Given that large-cap U.S. companies represent the most stable stocks in which to invest, and the S&P 500 companies have produced a decent rate of return for decades, I decided to allocate 100% of the contributions in both retirement accounts to VINIX, which tracks the S&P 500 index. I get exposure to a diversified group of some of the best companies in the world while paying the lowest expense ratio of all available investment options.

Of course, I am free to change my investment allocation in the future, so this decision is not set in stone. Each year I will take some time to re-evaluate my investment options and decide whether an alternative allocation is preferable. For example, after interest rates eventually rise and plateau, it might be worthwhile allocating a portion of my contributions to a bond fund. For the time being, though, I will simply let my retirement accounts track the S&P 500 index.

Once the first contributions are made to my retirement accounts, I will start reporting their status in my monthly reviews, most likely beginning with my October review.

Dividend Increase: PM

Philip Morris International (PM) is increasing its quarterly dividend by 10.6%, from $0.85 to $0.94 per share, putting the company on track for its 6th consecutive year of dividend growth (news release). Given that I own 50 shares of PM, my quarterly dividend increases from $42.50 to $47.00 and my yield on cost becomes 5.58%. The extra $18.00 in annual dividend income raises my forward 12-month dividend total to $2,745. Thus far this year, there have been dividend increases for 23 of the 29 stocks in my portfolio.

Surpassed Last Year's Dividend Total

A quick note: Thanks to some dividends I received today, my year-to-date dividend total ($1,674.93) has now surpassed last year's total ($1,649.63). I still have a few more dividends to collect in September, plus an entire quarter's worth of dividends to finish the year. It looks like I might be able to reach a dividend total of $2,400 in 2013, which works out to an average of $200 per month.

Stock Bought: KMI

Today I bought shares of Kinder Morgan, Inc. (KMI), the third-largest energy company in North America and operator of an extensive network of pipelines for transporting natural gas, crude oil, and petroleum products. My most recent previous purchase of KMI was in July 2013.

I had not been planning to increase my position in KMI (it was already the second-largest holding in my portfolio), but today the stock price suddenly fell over 5%, apparently because some hedge fund person voiced a negative view of KMI and its associated entities. I think the decline pushed the stock into undervalued territory. Using a Dividend Discount Model with a dividend growth rate of 10% (which is the company's long-term target) and a discount rate equal to the current yield plus the dividend growth rate, I calculate a fair value of $39.17. Morningstar gives a fair value of $41.00 and a 3-star rating. The average of those two estimates is $40.09, which implies an 11% margin of safety at my purchase price.

I bought 35 shares of KMI at the price of $35.61 per share plus commission, giving me a 4.47% yield on cost. At the current dividend rate, I can expect to receive quarterly dividends of $14.00 from this purchase, which will add a total of $56.00 to my annual dividend income. This purchase was made in my Roth IRA by combining $1,215 in new capital with accumulated dividends. I normally prefer to make slightly larger purchases, but I can only contribute another $1,235 to my Roth IRA before I reach the limit for 2013, so I left some room for one more contribution and purchase down the road. I now have a total of 165 shares of KMI (80 in my taxable account and 85 in my Roth IRA) and I will receive combined quarterly dividends of $66.00. My forward 12-month dividend total increases to $2,727. After this purchase, KMI remains the second-largest holding in my portfolio with a weight of 6.5%.

As mentioned in my monthly review, I will likely contribute about $1,000 to my taxable account that I can combine with accumulated dividends to make a purchase. I am satisfied with the size of my KMI position, so I will buy something else -- perhaps a new stock for my portfolio.

Monthly Review: August 2013

August was a busy month for me, especially once the university's fall semester started in the third week. Prior to that, I had several new-faculty orientation tasks to do and events to attend, then I began teaching. Given that it is my first time teaching, I have had to put a lot of time and effort into lecture preparation and related activities. It has left me with barely any time to do research, although that is okay for the moment because I am still waiting on some lab-related things. However, my lab should be up and running in about a week or two, so I will need to find a balance between teaching and research. Overall, things are coming along well at my new job, but it is keeping me busier than I have ever been.

On the investing front, here is a review of what happened in August:

Dividends: I received a total of $316.26 in dividends from 9 stocks, as indicated on my Dividends page. This represents a nice 61.9% increase compared with the same month a year ago. As noted in a milestone post, it is also the first time I have received over $300 in dividends in a single month. My year-to-date dividend total is now $1,516.92.

Dividend Increases: I was pleased to see dividend increases announced for the following stocks (click on each stock to see my post about the increase):

• UNP: 14.5% increase, $4.00 more in annual dividend income
• ITW: 10.5%, $6.40

I am always happy to see double-digit percent increases. Thus far this year, there have been dividend increases for 22 of the 29 stocks in my portfolio. The mean increase has been 10.8%.

Savings: Given that my new job did not officially start until mid-August, I did not have any income for the first half of the month, which skews my savings rate. For reasons I will discuss in a forthcoming post, it will not make much sense to track my savings on a monthly basis going forward, but I will start reporting an alternative measure that is more meaningful for investing purposes.

Transactions: I made two purchases during the month (click on the transactions to see my posts about them):

• 35 shares of HCP
• 40 shares of HCP

I decided to take advantage of the recent sell-off among REITs to build a medium-sized position in HCP, a diversified healthcare REIT. (I have also been watching several other REITs.) Both purchases were made in my Roth IRA by contributing $3,050 in new capital. These purchases will increase my annual dividend income by $157.52. My forward 12-month dividend total is now $2,671.

Portfolio: My portfolio (taxable account and Roth IRA together) currently consists of 29 stocks and has a market value of $88,325.30 (including cash), which is a 0.9% increase over last month's value. The above-average contribution of new capital just managed to compensate for capital losses that occurred during the month. Early in the month I managed to hit a portfolio value of $90,000 for the first time, as noted in a milestone post.

Seeking Alpha: This month I published one new article on the investing website Seeking Alpha:

• HCP, Inc: A Healthcare REIT For My Dividend Growth Machine

It was my first time writing a single-stock analysis, which I did to help organize some of my research and thoughts about HCP around the time I made my purchases. Interestingly, the pattern of pageviews was very different for this article compared with my previous articles. Usually, I get a spike in pageviews on the first day or two after the article is published, then they rapidly fall off and become negligible. For my HCP article, I had a below-average spike on the first day (about 2,500 pageviews), but a more gradual decline in pageviews over the following three weeks, so by the end of the month I had a respectable 5,000 pageviews for the article. I earned $62.93 from pageviews in August, increasing my Q3 total to $174.94 and my year-to-date total to $893.25.

Looking Ahead: I expect a good dividend total and a solid year-over-year increase in September. During the month my year-to-date dividend total will surpass my annual dividend total from 2012. September will hopefully be a good month for dividend increases because I am expecting announcements from four companies: MCD, MSFT, PM, and UTX. At the start of September I contributed $1,215 to my Roth IRA and made a purchase with those funds today (to be discussed in a forthcoming post). I will likely contribute about $1,000 to my taxable account that I can combine with accumulated dividends to make a purchase. It is refreshing to see some undervalued to fairly valued investment opportunities that are currently at or near my price targets: KMI, KO, MCD, O, PM, WMT, and XOM. I purchased one of them today for my Roth IRA and I might soon decide to purchase one of the others for my taxable account.

Implications of the Verizon Wireless deal for Vodafone shareholders

Today it was announced that Vodafone (VOD) will be selling its 45% stake in Verizon Wireless to Verizon Communications (VZ) for $130 billion. There is a lengthy press release with details, but I wanted to break down some of the implications of this deal for VOD shareholders such as myself. Note that what follows is my interpretation of the press release, which I cannot guarantee is completely accurate (feel free to leave a comment if I have misinterpreted or miscalculated anything). In addition, some of the numbers depend on fluctuating exchange rates and share prices, so the final numbers will likely be slightly different.

Overview: VOD shareholders will receive a "Return of Value" of $84 billion (71% of the net proceeds), which is equivalent to 112 pence per ordinary share. Of that total, $23.9 billion (28.5% of the Return of Value) will be in cash and the remaining $60.1 billion (71.5% of the Return of Value) will be in VZ shares. At the current exchange rate of £1 = $1.56, the Return of Value equals $1.75 per ordinary share. However, 1 ADR share = 10 ordinary shares, so the Return of Value equals $17.47 per ADR share.

Cash payment: Given that 28.5% of the Return of Value will be in cash (effectively a special dividend), shareholders will receive a payment of $4.97 per VOD ADR share.

Verizon shares: Given that 71.5% of the Return of Value will be in VZ shares, shareholders will get $12.50 in VZ shares per VOD ADR share. The exact number of shares received will depend on the price at which VZ shares are trading before the deal is completed, but the transaction is structured such that the price will not be less than $47 or more than $51 per share. Thus, VOD shareholders would own VZ shares in addition to their VOD shares. Verizon pays a decent dividend and today the company increased its quarterly dividend by 2.9% to $0.53 per share.

VOD dividend increase: VOD shareholders still get to keep their VOD shares and receive dividends for them. In the press release, Vodafone announced they plan to increase their dividend by 8% for 2014 and the Board "intends to grow it annually thereafter."

My Return of Value: Given that I own 125 shares of VOD, I should receive a special dividend of around $621 ($4.97 x 125) and between 30 ($12.50 x 125 / $51) and 33 ($12.50 x 125 / $47) shares of VZ. At the current dividend rate for VZ, that would result in quarterly dividends of $15.90-17.49 or annual dividend income of $63.60-69.96. Plus, I will continue to receive higher semi-annual dividends from VOD. Finally, I will likely see further capital appreciation of my VOD shares.

The deal is expected to be completed and the Return of Value realized in the first quarter of 2014. All in all, it sounds like a pretty good deal for VOD shareholders. Once the deal is completed, I will likely hold my VOD and VZ shares, unless I find compelling reasons to sell either or both positions.

Stock Bought: HCP

Today I bought shares of HCP, Inc. (HCP), a real estate investment trust (REIT) that has a diversified portfolio of healthcare properties. I wrote about HCP in a recent article at Seeking Alpha shortly before starting a position in the stock last week. The sell-off among REITs continued in a strong way this week, giving me a nice opportunity to average down on my nascent position.

I bought 40 shares of HCP at the price of $39.25 per share plus commission, giving me a 5.33% yield on cost. At the current dividend rate, I can expect to receive quarterly dividends of $21.00 from this purchase, which will add a total of $84.00 to my annual dividend income. My forward 12-month dividend total increases to $2,671. As I mentioned above, this purchase allowed me to average down, lowering my cost basis by 3.3% and raising my overall yield on cost to 5.17%. I now hold a total of 75 shares of HCP in my Roth IRA, which will provide me with quarterly dividends of $39.38.

I am satisfied with the size of my HCP position (portfolio weight of 3.3%), so I will not be looking to buy more shares anytime soon. However, I am closely watching other REITs and would like to diversify by adding a non-healthcare REIT to my portfolio. The most likely candidate is Realty Income (O), which has finally fallen back down into fair value territory. I lack sufficient cash for additional purchases this month, though, so I will have to wait and see where things stand in September.

I don't mind sitting on the sidelines for a bit because the workload at my new job is ratcheting up. The semester does not start until next week, but I already find myself very busy with a variety of things to do. Once the semester actually starts, things will probably get worse and my time will be even more constrained. As a result, I will likely be silent on the blogging front until my next monthly review.

Milestone: $300 in Dividends in a Single Month

It was in December 2012 that I reached the milestone of getting over $200 in dividends in a single month. Not surprisingly, due to quarterly payment schedules I also hit that mark in March and June of this year. Thanks to a cluster of dividend payments yesterday and a massive dividend from VOD about a week ago, I have now received over $300 in dividends in August. This represents another important milestone on my road to building a sustainable and rising stream of dividend income.

Sticking with $100 increments, my next monthly dividend income milestone is $400. It is difficult to predict when I might reach it, but August 2014 seems most probable at this time.

Milestone history for dividends in a single month:

• $100: March 2012
• $200: December 2012
• $300: August 2013

Milestone: Portfolio Value Reaches $90,000

Today my portfolio's value reached $90,000 for the very first time, closing at $90,823.42. It occurred as a result of another contribution to my Roth IRA, in preparation for another possible purchase this month. This milestone comes five months after reaching $80,000 in March. My secondary investing goal is to achieve a satisfactory total return on my investments, and a steadily increasing portfolio value is an indication of progress toward that goal. (Of course, the regular addition of new capital also helps!)

The next milestone is a big one: $100,000. Depending on how stocks perform over the next few months and the amount of new capital I am able to invest, I might be able to reach it by the end of the year. If not, then I should definitely get there in early 2014.

Edit: Here is the milestone history for portfolio value:

• $50,000: March 2012
• $60,000: September 2012
• $70,000: January 2013
• $80,000: March 2013
• $90,000: August 2013

Stock Bought: HCP

Yesterday I bought shares of HCP, Inc. (HCP), a real estate investment trust (REIT) that has a diversified portfolio of healthcare properties. I provided some quantitative data on HCP in a comparison of healthcare REITs that I posted earlier this week. Instead of posting a brief analysis of the stock here, I decided to try something different and wrote an article about HCP for Seeking Alpha that was published today.

I bought 35 shares of HCP at the price of $41.80 per share plus commission, giving me a 5.00% yield on cost. (I set my limit price specifically to get that yield on cost.) At the current dividend rate, I can expect to receive quarterly dividends of $18.38 from this purchase, which will add a total of $73.52 to my annual dividend income. My forward 12-month dividend total increases to $2,587. The stock went ex-dividend at the start of August, so I will not receive my first dividend payment until November. This purchase was made in my Roth IRA, which is a particularly good place for holding a REIT because the dividends would be taxed as ordinary income in my taxable account. I funded the purchase by contributing $1,400 to my Roth IRA, much of which came from the moving expense reimbursement I received earlier this week.

I am glad that my portfolio finally has some exposure to real estate. I will be continuing to explore this sector, with the goal of eventually owning a diversified group of 3-5 REITs that specialize in different categories. I have not yet decided what I will buy next for my portfolio, but funds have become available for another purchase. Yesterday I received my moving-related salary supplement, about half of which will soon become new capital for investment. Depending on what opportunities I see, I might make two purchases this month!

Personal update: The delayed paperwork needed to officially start my new job (see my July review) has finally been approved and should be delivered next week, which is great news.

HCP, Inc: A Healthcare REIT For My Dividend Growth Machine

A new article of mine has been published on the investing website Seeking Alpha. The article is entitled HCP, Inc: A Healthcare REIT For My Dividend Growth Machine and it provides an overview of HCP, which I purchased yesterday for my dividend growth portfolio.

Stock Thoughts: Healthcare REITs

In my search for attractively valued investment opportunities, my attention has been drawn to real estate investment trusts (REITs). I have been interested in diversifying my portfolio and gaining exposure to real estate by investing in REITs, especially those that consistently grow their dividends. However, as a value-oriented dividend growth investor, I would prefer not to pay the premium valuations that the highest quality REITs often command. Fortunately, over the past two months there has been a strong sell-off among REITs, mainly due to fears of rising interest rates when the Federal Reserve tapers its quantitative easing. As a result of the sell-off, many REITs are now trading at attractive valuations, motivating me to look more closely at what is available.

I decided to focus my research on healthcare REITs; that is, companies that own healthcare-related properties such as skilled nursing facilities, senior housing, medical office buildings, and hospitals. A major reason for this decision is that many of these specialties, such as skilled nursing and senior housing, are likely to benefit from the aging population in the U.S. The figure below (taken from an HCP presentation) shows the projected U.S. population growth of individuals 65 years or older until 2050. This strong demographic trend bodes well for healthcare REITs.

Among the 12 healthcare REITs listed by NAREIT, 5 are on the Dividend Champions, Contenders, and Challengers list for having at least 5 consecutive years of dividend growth. These REITs are HCP (HCP), Health Care REIT (HCN), National Health Investors (NHI), Omega Healthcare Investors (OHI), and Universal Health Realty Income Trust (UHT). In the remainder of this post I will compare some quantitative data from these REITs.

Properties: The table below shows the percentages of properties in different categories owned by each REIT.

HCP seems to be the most diversified; HCN, NHI, and UHT are somewhat less diversified, each having at least 50% of their properties in a single category; OHI is the least diversified, being focused almost entirely on skilled nursing.

Dividends: The table below indicates the current dividend yield, the 5-year historic yield (from Morningstar), the payout ratio (based on funds from operations, FFO), the dividend growth streak in years, and the 5-year dividend growth rate (DGR).

All 5 stocks have yields near or above 5%, which is great. However, in each case the current yield is below the historic yield. Even though REITs are required to pay out a high proportion of their net income, it is worthwhile considering their payout ratios. HCP and OHI both have payout ratios below 80%, which provides more of a buffer against an operational decline compared with the others.

HCP and UHT are both Dividend Champions, having increased their dividends for more than 25 consecutive years. In my research I discovered that HCN froze its dividend from mid-2000 to early 2004, NHI cut and then briefly suspended its dividend in 2000 and 2001, and OHI suspended its dividend from 2001 to late 2003. Even though NHI and OHI have re-established decent dividend growth streaks, those past suspensions are worth keeping in mind. Regarding DGRs, OHI has done very well in recent years; HCN and NHI have been decent; HCP and UHT have been weak.

Balance sheets: The table below provides some information about debt and credit (taken from NAREIT) and Value Line safety ratings if available.

NHI has the best debt ratios, whereas HCP has the best credit rating. Long-term debt has increased over the past few years in all cases (not shown in the table), likely due to unusually low interest rates.

Valuations: The table below indicates the current price of each stock (as of August 7, 2013), the P/FFO ratio (which is more appropriate to use for valuing REITs than the P/E ratio), the current and historic P/B values, Morningstar stars and fair value estimates if available, and Dividend Discount Model (DDM) fair value estimates. The DDM estimates used the 5-year DGR and a discount rate equal to the current yield plus the 5-year DGR. The margin of safety (MoS) reflects the percent discount of the current price from the DDM fair value estimate.

Based on P/FFO, one might consider OHI to be moderately undervalued; HCP and UHT to be slightly undervalued to fairly valued; HCN and NHI to be fairly valued to slightly overvalued. Based on P/B, OHI actually appears overvalued (as does NHI), whereas the others seem to be fairly valued. The DDM calculations give a small margin of safety to each stock; given that none of the margins are greater than 10%, it would be conservative to judge all 5 stocks as fairly valued by that measure. Interestingly, if one uses Morningstar's fair value estimate, HCP is undervalued by at least 20%.

Summary: Of the healthcare REITs briefly surveyed here, there are two that I consider to be more attractive investment opportunities than the others: HCP and OHI. Regarding HCP, I like its long dividend growth track record, low payout ratio, relatively high credit rating, fair valuation, and good property diversification; however, I dislike its weak dividend growth rate. It is considered a "blue chip" REIT partly because it is "arguably the best-diversified landlord in healthcare" (according to Josh Peters of Morningstar). Regarding OHI, I like its high current yield, relatively high dividend growth rate, low payout ratio, and fair to undervaluation; however, I dislike its lower credit rating, past dividend suspension, and lack of property diversification. It is considered a "pure play" REIT because of its focus on skilled nursing facilities, offering more risk but possibly more reward than others. Brad Thomas, a REIT industry expert who writes for Seeking Alpha, has favorable opinions on both names and wrote a recent article on OHI.

Thus, if I were to invest in a healthcare REIT, then I would likely choose either HCP or OHI. I have also been looking at non-healthcare REITs. Two of the more popular names among dividend growth investors are Realty Income (O) and Digital Realty Trust (DLR). I consider O to be a well-run blue chip REIT with a solid dividend growth record, but I desire a better valuation. I consider DLR to be undervalued despite strong recent growth, but it has a higher risk/reward ratio than other REITs due to its technology emphasis. I will continue examining these and other names as I explore the REIT space. Note that if I decide to invest in a REIT, then it will likely be in my Roth IRA because REIT dividends would be taxed as ordinary income in my taxable account.