Dividend Increase: NVS

Novartis (NVS) is increasing its annual dividend by 2.2%, from CHF 2.25 to CHF 2.30 per share, putting the company on track for its 16th consecutive year of dividend growth in CHF (press release). I will not know the exact dividend amount in USD until I receive the payment. Thus far this year, there have been dividend increases for 11 of the 27 dividend growth stocks in my portfolio.

Video About Finance and Investing

This week I came across an online video about finance and investing that others might find interesting and educational. It is a 43-minute presentation by Bill Ackman, the founder and CEO of the hedge fund Pershing Square Capital Management. He provides an excellent introduction to a variety of business, finance, and investing topics, including:

• How a business gets started and grows over time, using a lemonade stand as an example
• The interpretation of financial statements such as the balance sheet
• The differences between debt and equity
• Understanding why and how a company goes public
• Desirable characteristics of companies being considered for investment
• Understanding rates of return and the long-term effect of compounding
• The psychology of investing and dealing with market volatility
• Knowing when you are in a suitable financial position to start investing
• How to select a money manager if you do not want to invest on your own

Ackman explains these topics in simple terms that even beginner investors should be able to understand. I think his investing advice is sensible, perhaps because his recommendations fit well with my own investing strategy. Overall, I think the video is very educational and worth watching.

Stock Bought: MSFT

Today I bought shares of Microsoft (MSFT), the world's largest software maker. This is my second purchase of MSFT, with the first purchase occurring in January. For reasons discussed in my earlier post, I still consider MSFT to be undervalued by at least 20%, so I decided to take advantage of the opportunity in front of me and increase my position.

I bought 60 shares of MSFT at the price of $27.45 per share, giving me a 3.34% yield on cost. At the current dividend rate, I can expect to receive quarterly dividends of $13.80, which will add a total of $55.20 to my annual dividend income. The stock went ex-dividend earlier this week, so I will not receive the next dividend payment, but the lower cost basis -- relative to where the stock was trading the day before the ex-dividend date -- more than compensates for the missed dividend. This purchase was made in my Roth IRA, so dividends and capital gains will not be taxed. When the positions in my taxable account and Roth IRA are considered together, I now have 115 shares of MSFT and will receive combined quarterly dividends of $26.45. My forward 12-month dividend total is now $2,278.

MSFT is the first stock in my Roth IRA, where I require a minimum dividend yield of 3%. The purchase used about one-third of the cash in that account, so I have cash remaining for two more similar-sized purchases. The broad market decline during the past two days has created some buying opportunities that are tempting me, so I might make another purchase soon. Even though INTC had a nice drop today, I do not plan to buy more tech stocks for a while, given that my MSFT and INTC positions together make up 9% of my portfolio. However, I am confident that I can find good opportunities in other sectors.

Dividend Increase: KO

Coca-Cola (KO) is increasing its quarterly dividend by 9.8%, from $0.255 to $0.28 per share, putting the company on track for its 51st consecutive year of dividend growth (press release). Given that I own 60 shares of KO, my quarterly dividend increases from $15.30 to $16.80, which will add an extra $6.00 to my annual dividend income. This dividend increase also boosts my yield on cost to 3.38%. Thus far this year, there have been dividend increases for 10 of the 27 dividend growth stocks in my portfolio.

Stock Bought: VOD

Today I bought shares of Vodafone Group (VOD), a multinational telecom company headquartered in the United Kingdom. This is my third purchase of VOD, with previous purchases occurring in March and May of 2012.

Vodafone's recent operating results have been mediocre, mainly due to sustained weakness in Europe. However, its business is doing better elsewhere, with continued growth in emerging markets such as Turkey and India, and gains in the U.S. through its 45% stake in Verizon Wireless. Back in November 2012, Vodafone increased its "interim" dividend (the first semi-annual dividend for 2013) by 7.2%, putting the company on track for its 14th consecutive year of dividend growth (in British pounds; due to exchange rate fluctuations, they have a shorter streak in U.S. dollars). At the same time, the company received a dividend payment of about £2.4B from Verizon Wireless, of which £1.5B will be used for share buybacks.

I consider VOD to be an attractively valued stock. It does not currently have a meaningful P/E ratio because of a net loss due to write-downs in troubled Spain and Italy. Although that might be considered a red flag, note that the company has a stable balance sheet and sufficient free cash flow to cover its dividend. Other valuation metrics include a PEG of 1.5, P/S of 1.7, and P/B of 1.1, all of which point to modest undervaluation. Using a Dividend Discount Model with a dividend growth rate of 5% and a discount rate of 11% (which equals the current yield plus the dividend growth rate), I calculate a fair value of $26.23. Morningstar gives a fair value of $32.00 and a 4-star rating, whereas S&P gives a fair value of $24.80 and a 4-star rating. The average of those three estimates is a fair value of $27.68, which implies an 11% margin of safety at the current price. More conservatively, one could argue that the stock is fairly valued. The stock is trading 18% below its 52-week high and today it crossed the 6% dividend yield mark when its price dropped more than 2.5% to a new 52-week low.

I bought 45 shares of VOD at the price of $24.65 per share, giving me a total of 125 shares at an average price of $26.07 per share and a 5.71% yield on cost. My previous cost basis was $26.87 per share, so this purchase reduced it by 3.0%, which is a nice example of averaging down. (Incidentally, VOD is one of only three stocks in my portfolio for which I can average down.) This purchase increases my annual dividend income by $67.46, resulting in a forward 12-month dividend total of $2,217.

This was a relatively small purchase that used up nearly all the cash in my taxable account. However, I still have $5,000 in my Roth IRA to be invested, so my next few purchases will be in that account. If the stocks on my watch list are dragged down in a broad market decline like we had today, then I might make another purchase soon.

Dividend Increase: GPC

Genuine Parts Company (GPC) is increasing its quarterly dividend by 8.6%, from $0.495 to $0.5375 per share, putting the company on track for its 57th consecutive year of dividend growth (press release). Given that I own 50 shares of GPC, my quarterly dividend increases from $24.75 to $26.88, which will add an extra $8.52 to my annual dividend income. This dividend increase also boosts my yield on cost to 3.99%. Thus far this year, there have been dividend increases for 9 of the 27 dividend growth stocks in my portfolio.

Book Review: Tap Dancing to Work

Tap Dancing to Work (2012) by Carol J. Loomis

This book is a compilation of articles about Warren Buffett that were published in Fortune magazine from 1966 to 2012. Many of the articles are prefaced with introductions by Carol Loomis, a longtime writer for the magazine and a friend of Buffett. The articles are organized in chronological order and deal with a variety of topics, ranging from Buffett's views on the stock market to his experiences with companies such as Capital Cities/ABC, Salomon Brothers, and Coca-Cola. As someone who already knew a lot about Buffett from reading his annual shareholder letters and other material, I will confess that there was not much in this book that I did not already know, so it was boring at times. The main exceptions were the articles about Buffett's recent philanthropic efforts and his relationship with Bill Gates, which I thought were interesting. Overall, I did not get much out of this book, and I think it would have been better as a newly written narrative than as a somewhat disjoint compilation of magazine articles. Readers who are interested in learning more about Buffett might prefer the excellent biography from 1995 by Roger Lowenstein, Buffett: The Making of an American Capitalist.

Note: I read this book in January 2013.

Book Review: Psychology and the Stock Market

Psychology and the Stock Market (1977) by David N. Dreman

Even though it was published over 35 years ago, this book provides a good overview of the role that psychology plays in the stock market. Part I addresses the poor performance of professional investors and the rise and fall of technical analysis. Part II takes a look at various bubbles and manias that have occurred throughout stock market history, showing that they tend to have common characteristics. Part III delves into the psychology behind the poor performance and bubbles by discussing the follies of groupthink, which is the lack of independent critical thinking among many investors that leads to herd-like behaviors such as panic selling. I appreciated how the author drew upon a great deal of social psychology research to support his groupthink idea. Part IV deals with the efficient market hypothesis (EMH) and the question of whether an investor can beat the market. It provides one of the most compelling counterarguments to EMH that I have ever read, highlighting psychological evidence that destroys EMH assumptions about investors being completely rational, informed, and unbiased in their decision-making. Believers in EMH should find themselves questioning their beliefs after reading this book.

Note: I read this book in November 2012.

Monthly Review: January 2013

We are now in 2013, which marks the start of my second full year of dividend growth investing and the second year for this blog. As discussed in a recent post, the only change with regard to my investing is that I started a Roth IRA, which will be a smaller, tax-efficient extension of my current dividend growth machine. The only change with regard to the blog is that the tables on my Portfolio, Dividends, and Savings pages have been changed to Google Docs spreadsheets, which will make them a bit easier to read and update. Aside from that, it will be business as usual for the next few months.

Here is a review of what happened in January:

Dividends: I received a total of $80.54 in dividends from the following stocks:

• CNI: $6.39
• GPC: $24.75
• PM: $42.50
• UNP: $6.90

This was a light month for dividends because two of my stocks (ITW and MDT) accelerated their Q1 2013 dividend payments into December 2012 over concerns about possible tax increases. As a result, my dividend total was 9.2% lower this month compared with the same month a year ago. However, going forward I expect to have year-over-year increases in dividends each month.

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

• KMI: 2.8% increase, $1.60 more in annual dividend income
• CNI: 14.7%, $4.40

Thus far this year, there have been dividend increases for 8 of the 27 dividend growth stocks in my portfolio. Some of the increases were announced in late 2012 but did not take effect until 2013.

Savings: This month I saved $1,228 (42.2%) of my net job income. My savings were decreased by higher discretionary spending (I bought some clothes and a new blender) and the payment of annual membership dues for professional societies associated with my work. In addition, my net job income was slightly lower due to higher payroll taxes.

Transactions: I sold one stock and bought two stocks during the month (click on each transaction to see my post about it):

• 60 shares of ADM (sale)
• 55 shares of MSFT (purchase)
• 10 shares of VFC (purchase)

These transactions have the net effect of increasing my annual dividend income by $43.40. My 12-month forward dividend total is $2,138.

Portfolio: My portfolio currently consists of 27 stocks and has a market value of $71,148.69 (including cash), which is a 9.2% increase over last month's value. It was my best month ever for capital gains, which represented 73.7% of the increase. The remaining portion came predominantly from new capital.

Seeking Alpha: After not writing anything for a while, I finally published a new article on the investing website Seeking Alpha:

• A Real Dividend Growth Machine: 2012 Review

As the title suggests, the article is a review of my investing performance last year. I was pleasantly surprised by the popularity of the article, which received over 16,000 page views. For comparison, my previous two articles each had around 4,000 page views. I ended up earning $176.25 from page views in January, which will be paid later as part of my Q1 2013 total. This month I also received my Q4 2012 payment of $107.21.

Looking Ahead: February will be a better month for dividends, with a substantial year-over-year increase. I am expecting dividend increases to be announced by GPC, KO, and NVS. The Board of Directors for NVS has already proposed a dividend increase, but it has to be approved by shareholders at the AGM on February 22. My savings rate should improve in February due to lower expenses than in January. As discussed in the post about my Roth IRA, my next few purchases will be in that account. I have already funded it with $5,000, but I do not plan to invest all the money at once. I will likely continue making one purchase each month (aside from any purchases made to offset sales, as was the case in January). Also, my February and March savings will go toward replacing some money I borrowed from my cash reserve to make the maximum contribution to my Roth IRA for 2012. Thus, my investing will proceed as usual, provided I can find some attractively valued stocks in the current market environment. In particular, I will be looking for stocks with yields above 3% that I can purchase for my Roth IRA.

Roth IRA

This week I started a Roth IRA as a supplement to the taxable account in which I currently hold all my stocks. For readers who don't know, a Roth IRA is a retirement account in which contributions are made with after-tax money (currently up to $5,500 per year), all dividends and capital gains within the account are tax free, and withdrawals are tax free (after age 59 and a half). The tax-free status of the Roth IRA is its main advantage over a taxable account, where dividends and capital gains are currently subject to a 15% tax rate. In a Seeking Alpha article that explored different factors that affect the long-term compounding of dividend income, I showed that dividend growth is slowed by taxes, so it is beneficial to hold stocks in tax-advantaged accounts.

I had been thinking about starting a Roth IRA for a while, but I held off because of uncertainty about my future employment -- there was a nontrivial possibility that I would be either unemployed later this year or working in a different country. Fortunately, that uncertainty disappeared a few weeks ago when I managed to get a new job (starting in the summer), as discussed in a recent post. With greater clarity about my employment and income, I decided it was time for the Roth IRA.

My plan is to fully fund my Roth IRA each year and use the money to buy dividend growth stocks, making the account a tax-advantaged extension of my current portfolio. The only difference between investment decisions for my Roth IRA and taxable accounts will be with respect to dividend yield. I currently require a 2% minimum yield for stocks in my taxable account, whereas I will require a 3% minimum yield in my Roth IRA. The rationale is to keep higher-yielding stocks in the latter account to take greater advantage of its tax benefits.

I have already made a contribution to my Roth IRA, putting in the full $5,000 allowed for 2012 (which can be done prior to April 15). It was easiest to do it in one shot, but that meant supplementing my January savings with about $3,000 from my emergency cash reserve. I will replace that money with my February and March savings. Later this year I will contribute the $5,500 allowed for 2013.

Once I start my new job I plan to rollover the two retirement plans I have with my current employer into my Roth IRA. The first is a 403(b) with TIAA-CREF that has about $14,000 and the second is a 401(k) with Vanguard that has about $6,000. These amounts solely reflect employer contributions over the past five years and the money is currently invested in target date funds. I will have to pay some taxes because the rollover money comes from pre-tax contributions; my calculations show that I will stay in my current marginal income tax bracket if I do it this year, whereas I would be in a higher tax bracket next year because of the higher salary at my new job. Even though the tax hit will hurt, it is a one-time expense that I will save for in advance. The upshot of the rollover is that it will add nearly $20,000 to my Roth IRA, which will allow me to buy a lot of dividend growth stocks. Thus, by the end of this year, I could potentially have around $30,000 in my Roth IRA ($5,000 from my 2012 contribution, $5,500 from my 2013 contribution, and about $20,000 from rollovers).

In case you are wondering, the taxable account with all my current dividend growth stocks will continue to grow over time. My next few purchases will be in my Roth IRA, but once my 2013 contribution is made and I have covered all my moving expenses during the summer, I will resume adding new capital to the taxable account from my monthly savings. Some readers may recall that last year I saved over $17,000 for investment. If I manage to maintain or increase that amount going forward, then I would be able to add over $10,000 to my taxable account each year, after my Roth IRA contribution. Given its higher starting balance and larger contributions, my taxable account will produce the majority of my dividend income over time.

The last point leads to an important question regarding investing and retirement: What if I want to retire early? If I retire before I'm 60, then I would only be able to withdraw direct contributions from my Roth IRA, which would entail selling some stocks. I would not be able to withdraw any earnings, such as dividends, without incurring penalties. This sounds like a disadvantage, but only if you ignore the fact that I will also have a much larger taxable account. If my taxable account produces enough dividend income to retire early, then I wouldn't need to worry about age restrictions on my Roth IRA. When I do turn 60 (actually, 59.5), I would gain access to a second, tax-free dividend income stream. Thus, I don't think having a Roth IRA will adversely affect me in the event of early retirement.

I will start reporting information about my Roth IRA on this blog once I make my first purchase. Given that it is separate from my taxable account, I will distinguish between them when reporting transactions, dividends, etc.