Thursday, June 20, 2013

Dividend Increase: MDT

Medtronic (MDT) is increasing its quarterly dividend by 7.7%, from $0.26 to $0.28 per share, putting the company on track for its 36th consecutive year of dividend growth (news release). Given that I own 55 shares of MDT, my quarterly dividend increases from $14.30 to $15.40 and my yield on cost becomes 3.46%. The extra $4.40 in annual dividend income raises my forward 12-month dividend total to $2,417. Thus far this year, there have been dividend increases for 18 of the 28 stocks in my portfolio.

Sunday, June 9, 2013

Book Review: Contrarian Investment Strategies

Contrarian Investment Strategies: The Psychological Edge (2012) by David Dreman

This book provides a great overview of the psychology of investing and how success can be achieved using a contrarian (value-oriented) approach. It is divided into five parts:
  • Part I looks at bubbles, panics, and other stock market manias, drawing attention to their common characteristics and showing that they do not change much over time. The author discusses how investor behavior in such situations can be partly explained by psychological findings about how affect (emotion) and cognitive biases influence decision making.
  • Part II focuses on the "new dark ages" of investing by giving some history related to the Efficient Market Hypothesis (EMH). The author uses examples of market crashes to challenge EMH assumptions about liquidity, leverage, and volatility. The main conclusion is that EMH does not have much support when it is scrutinized closely and applied to reality.
  • Part III examines the difficulties and flaws of market forecasting, demonstrating that analysts and experts are bad at estimating future company earnings and stock returns. There is an interesting quantitative and psychological analysis of how positive and negative earnings "surprises" are related to subsequent stock returns.
  • Part IV discusses how investors can find success by following contrarian investment strategies and buying stocks that are out of favor. It is demonstrated that strategies based on (a) low P/E, (b) low P/CF, (c) low P/B, (d) high yield, or (e) low price-to-industry [i.e., a company being undervalued relative to its competitors] all provide superior returns in historical backtesting. The author attributes this success to what he calls the Investor Overreaction Hypothesis (IOH), which is the idea that out-of-favor stocks mired in pessimism tend to become undervalued, but subsequent developments (earnings surprises and fundamental improvement) lead to positive reappraisals that result in regression toward the mean over time. This part also includes an extended discussion of the price-to-industry strategy, commentary on high-frequency trading, and thoughts about risk.
  • Part V concludes with commentary about recent market and economic events (e.g., the housing bubble and financial crisis), as well as topics such as free trade and inflation.
Overall, I think the book is an excellent resource for investors. In my review of the author's 1977 book, Psychology and the Stock Market, I noted that he provided "one of the most compelling counterarguments to EMH that I have ever read." In this book he builds an even stronger case against EMH from both psychological and value-based perspectives, showing that it does not fit well with reality. The book should be required reading for anyone who believes in EMH and related ideas, such as Modern Portfolio Theory (MPT) and the Capital Asset Pricing Model (CAPM). Moreover, anyone who takes a value-oriented approach to investing (as I do) will likely be interested in the analyses of the contrarian investment strategies described in the book.

Note: I read this book in January 2013 and re-read parts of it in May 2013.

Sunday, June 2, 2013

Monthly Review: May 2013

It was a relatively quiet and uneventful month for my investing. Here is a review of what happened in May:

Dividends: I received a total of $164.63 in dividends from the following stocks:
  • ABBV: $18.00
  • ABT: $6.30
  • GD: $11.20
  • GIS: $23.10
  • HRL: $17.00
  • KMI: $34.20
  • PG: $30.08
  • T: $24.75
This represents a 44.0% increase compared with the same month a year ago, which is pretty good. My year-to-date dividend total is now $825.54 and my forward 12-month dividend total is $2,412.60.

Dividend Increases: I was pleased to see a dividend increase announced for one of my stocks (click on the stock to see my post about the increase):
  • VOD: 7.0% increase
There was a possibility that a dividend increase might be announced early by INTC (last year's increase was announced in May), but that did not happen, so I will have to wait until their next dividend is declared in late July. Thus far this year, there have been dividend increases for 17 of the 28 stocks in my portfolio. The mean increase has been 9.6%.

Savings: This month I saved $1,117 (38.4%) of my net job income, which is lower than in previous months. The decrease was mainly due to payment of the deposit for my new apartment and an uptick in discretionary spending -- I bought new shoes for everyday use (my current pair is worn out) and a few household items in advance for my new apartment. Excluding those expenses, my savings would have been similar to the previous two months. Thus far this year, my mean monthly savings has been $1,394 (48.0%).

Transactions: None

Portfolio: My portfolio (taxable account and Roth IRA together) currently consists of 28 stocks and has a market value of $84,625.90 (including cash), which is a 0.3% decrease over last month's value. Interestingly, I was sitting on an increase until the last day of the month, when there was a sizable dip that pushed my portfolio down. The decrease was due to a moderate sell-off in defensive stocks (e.g., consumer staples and healthcare) during May, which are weighted heavily in my portfolio.

Seeking Alpha: This month I did not publish any new articles on the investing website Seeking Alpha. However, I received $20.80 from page views of my previous articles, increasing my Q2 total to $273.82 and my year-to-date total to $707.77.

Looking Ahead: In June I will receive well over $200 in dividends, which will be nice. I expect dividend increases to be announced by MDT and UTX*. My savings rate is difficult to estimate for June, given my big move at the end of the month. I will be incurring some moving expenses at that time, although I will be reimbursed for a portion of them later. In preparation for my move I have been sifting through stuff to determine what I no longer need and can either sell or donate. I managed to get $100 by selling a bunch of books, CDs, and DVDs to second-hand stores, and I donated a large box of books to my local public library (it has been a great free resource for me, so it is nice to give something back). As I continue to be financially conservative for my move, I will not be adding any new capital in June, so I do not anticipate any transactions. Thus, I will likely continue sitting on the sidelines.

*Edit: I forgot that UTX usually increases its dividend every five quarters, so the next announcement might come in September. Thanks to an anonymous commentator for bringing this to my attention.