Follow the dividend investment decisions of a person who has no background in financial investment and wishes to take control of their financial future.

2014 Goals - 29 Dec 2013 14:42

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1. Contribute $6,000 to new DGI purchases
This will be a tough one. I am the sole earner for a family of five and extra money is never easy to come by. I am hoping that my continued search for money saving ideas yields $1500, a combination of tax refund and annual bonus check adds $3000, that just leaves a challenging $1500 to find. If my company decides to eliminate or drastically reduce the bonus I may have to have discussions with my wife about getting a full or part-time job (she has not worked since 2001). My wife going back to work was always in the cards when my oldest starts college but this may just accelerate things by two years.
2. Re-invest $2,000 into DGI purchases
This is more of a discipline goal than anything else. For 2014 I should be on pace for $2000 in dividends so I just need to not let things sit idle.
3. Increase forward DGI yield by 20%
This is really a combination of goals 1 & 2 as well as counting on a portfolio dividend growth rate of 7%. Sounds easy but at least 2 of my investments are for income only and provide no growth.
4. Increase 401K balance by a minimum 10%
To achieve this I need to maintain my existing 401K contribution rate and I’ll need at least a 4% growth of my existing 401K balance.
5. Increase IRA balance by 5%
I have no plans to contribute and money to my IRA so this will need to be accomplished through price appreciation
6. Have 10% cash reserves in IRA/401K
With the run-up in the stock market in 2012 & 2013 my cash reserves have fallen to a woeful 4% allocation. To maintain my risk reduction, things need to change. My plan is to direct my 401K contributions to cash and any paid dividend/capital gains by existing mutual fund holdings will also be directed to cash. I am hoping that by this time next year I will hit my cash allocation goal. - Comments: 0

Quarterly Portfolio Update - 27 Dec 2013 15:35

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Quarterly Dividend Growth
% from Div Growth 3.56%
% from New Investments 18%
% from Reinvested Div 0.00%
% Overall Growth 21.56%

This is my second quarter utilizing a DGI strategy and time to measure growth. In early November I completed the remainder of my portfolio rebalancing with the purchase of Ensco Plc (ESV). I was also able to re-invest the last quarter dividends by buying additional shares of the utility company PPL to level off my diversification into utilities but that purchase did not contribute to this quarter for dividend growth.

For the quarter there were four stocks that contributed to passive growth; Microsoft (MSFT), Seagate (STX), BP Plc (BP), and Prospect Capital (PSEC).

MSFT continues its historical dividend growth but surprised investor with the size of the increase which came in at a whopping 21.7% increase. Personally I was expecting between 9-12% so this was a nice Christmas present. Additionally MSFT has been firing on all cylinders in the last quarter of 2013 with brisk sales of enterprise solutions, Xbox One, Surface 2, and Windows Phone products. A year ago I saw the potential of Windows 8 commonality across devices and jumped on MSFT for this reason and so glad I jumped in when I did. Even though MSFT has seen a run-up in share price this year I still like the stock as long as it yields at least 3%.

STX continues to be a star in my portfolio as they increased their dividend by 13.16% and I’m looking at a capital gain of 120% in just one year. Though the stock has become expensive for me to consider adding additional shares I do not plan on selling as their strategy for SDD, HDD, and cloud storage appears strong and I foresee continued dividend growth going forward.

BP has slowly been coming off of its Gulf disaster and starting to see light at the end of the tunnel by rewarding investors with a 5.15% increase in dividends. While this is below my minimum 7% growth rate I purchased BP with the hope that as more of the liability of the Gulf incident decreases the dividend increases will start to exceed my minimum.

PSEC increases were minimal from month to month but I bought this as a high income dividend payer positioned for a rising interest rate environment and to date PSEC has not disappointed.

As far as additional contributions I only managed to save $140 this quarter. In my house we have quite a few computers (3 kids plus me & the Missus) so I switched to a free anti-virus software package which detected more viruses, malware, and tracking cookies than our current software. By not renewing our software it saved $140 which I redirected to the portfolio. - Comments: 0

Time for Planning - 18 Dec 2013 13:07

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At the start of November I made my last purchase of 2013 with Ensco Plc. At this point I am fully invested into my DGI portfolio and have no additional cash. Nothing to do for a few months but sit back and collect dividends while determining what to buy next.

This downtime comes a great moment that allows for re-evaluation of all my financial positions, goals, and strategies for the coming years. A quick glance and I noticed my 401K is grossly deficient with a cash position leaving me exposed to risk so my first goal for 2014 is to return to a 10% cash position within my 401K.

Over the next few weeks I'll start slaving away looking at expenses (both current and retirement) and remaining debt to determine what my savings rate/balances should be.

Another area I will take time to analyze will be my exposure to risk in all of my investments. For my DGI portfolio I feel pretty confident on my diversification but there are a couple of areas I still need to get into but just do not have the money.

One area of risk I desperately need to plan for is the scenario of a layoff. Where I work there are already rumors spreading of a significant first quarter 2014 layoff and even if I miss that one I can foresee annual layoffs up to 2018. I hope that my DGI portfolio can buffer some of the loss but my current portfolio does not even come close to my monthly salary. As I am the sole income earner for my family this would be devastating! I will need to think long and hard on this one. - Comments: 0

Minimum Growth Rate - 27 Nov 2013 13:10

Tags: growth inflation

One screen for dividend growth stocks is the percentage growth rate. But. what happens if a stock (after you purchase) fails to increase at your preferred rate?

Most DGI folks have rules when to sell, usually if a company decreases or eliminates a dividend or even fails to increase a dividend (0% growth). But what if the dividend only grew 3%, you planned on 7% and you still like the business, do you sell?

In this case I actually use two rules, the first is to hold the stock for an additional year (sometimes two depending on circumstances) and see where the dividend growth moves from there. Every stock is bound to have a bad year and most growth rates are based on averages so a 3% one year may result in a 15% gain the next giving you an average of 9%. You must be flexible to accommodate for averages.

The second rule I have is to establish a minimum growth rate. Your selected growth rate is usually a preferred rate and may not always be achievable especially if the economy is on a slow growth path. So again to remain flexible you should have upper and lower limits for dividend growth.

To calculate a minimum growth rate for my portfolio I use a percentage based on the average U.S. inflation rate over the last 10 years plus 2%. A problem I have with yearly inflation rates is that they are averages. Inflation rates fluctuate from month to month so for my calculation I use the "Max" inflation rate for each year. Based on this theory my minimum growth rate stands at 5.6%. If a stock cannot maintain this rate it becomes a candidate for a potential sell (note that I said "potential").

Year Ave Max Min Div Growth (Max+2%)
2013 1.51% 2% 1% 4%
2012 2.08% 2.9% 1.4% 4.9%
2011 3.16% 3.9% 1.6% 5.9%
2010 1.62% 2.6% 1.1% 4.6%
2009 -0.35% 2.7% -2.1% 4.7%
2008 3.85% 5.6% 0.1% 7.6%
2007 2.86% 4.3% 2% 6.3%
2006 3.23% 4.3% 1.3% 6.3%
2005 3.38% 4.7% 2.5% 6.7%
2004 2.68% 3.5% 1.7% 5.5%
2003 2.27% 3% 1.8% 5%
10 Yr Ave 2.39% 3.59% 1.12% 5.59%

This second rule is for my overall portfolio. If I see my portfolio of stocks not meeting this growth rate I begin the search for new "buys" while reviewing my list for potential "sells". That said, I may have some stocks with a growth rate of 2% and others at 12% as long as the portfolio dividend grows between a min 5.6% and a preferred 7.2% annually then life is good. - Comments: 0

Watch List Updated (finally) - 25 Nov 2013 22:19

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After all of my recent purchases my watch list was becoming woefully useless so with a little elbow grease it has been cleaned up.

First to go were companies I already purchased like Chevron, PPL, and General Mills, which I still have sights on buying more General Mills.

Second to go were sector stocks I no longer needed. After evaluating my diversification I eliminated energy stocks HP, Exxon Mobil, and Sunoco Logistics.

The last set of stocks to go were items that became just too pricey. First up was Sturm-Roger which went crazy from August to October as its price shot from $52 to $77 per share a whopping 48% jump made this a tad pricey. The last stock to be removed was Meredith Corp. which went from $42 to $52 a share in just two months. A 28% jump for an industry I think is in a slow death spiral made me lose my appetite.

Quite a few removals but a few were added to address some diversification concerns (desperately needed some industrials) so Cummins and Union Pacific were added. A long term prospect I have my eye on was also added so say hello to Steris Corp. Yes the dividend yield on the new additions are below my 3% requirement but for the diversity it will make sleep a little better at night. - Comments: 0

Dividends = Pride of Ownership - 23 Nov 2013 16:05

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While I love the steady and rising passive income from dividends it is not my favorite aspect of dividend investing. What I enjoy most is that being able to receive a dividend validates me as both an investor and business owner.

When I was in High School it was mandatory to take a basic financial class. The class focused primarily on income, debt, and budgeting. Near the end of the class we were introduced to the different saving/investments available and one of those instruments were common shares of stock. Though we were not taught how to analyze a stock we were given the basic definition that it was an investment in exchange for a percentage of company ownership.

Dividend investing has reminded me of that basic definition I learned many decades ago. It validates my ability of understanding a company (both financially and business wise), making a sound investment, and feeling the pride that I am a part business owner in some of the biggest corporations. This is much different than trying to speculate if a stock price will rise or fall of which I was mediocre at.

Being an owner in a company I expect to financially share in a company’s success (as should any owner). Dividends are what meet my expectation of wealth sharing. Why more shareholders of companies do not share this view is really mystifying. If a friend or relative asks you to invest in their new business idea the first question you would ask is "What is in it for me?" If the answer is anything less than XX% of profits you would send them packing.

Investing via stocks is no different than investing in your friend or relatives business idea. Owning stock in a company that shares wealth makes you the ultimate silent partner in a business and as the business is more successful the more wealth is shared with you. How can you not love this? - Comments: 0

Impulse Buy - 09 Nov 2013 22:38

Tags: ensco esv

Last week I did something out of character. Normally I track a potential stock on a watch list, tear apart its annual report, and monitor its performance over time before I make a buy decision. Instead I made an impulse buy and bought a small position (20 shares) in Ensco PLC (ESV). This purchase completes my diversification with energy and has increased my annual dividend by $60.

ESV is a contract drilling company based in the U.K. that specializes in offshore drilling contracts. Their financials are strong but historical consecutive dividend increases were weak with only 3 consecutive years. After the market close on 11/5, ESV announced a 50% dividend increase increasing their annual dividend yield to just over 5%.

Originally I had been tracking and targeting Helmerich & Payne (HP) as my last energy investment but its stock price shot up from $66 to $78. Out of fear that ESV could do the same I placed a buy order on the next market open.

After having time to tear apart the annual report I now feel confident about my purchase. Yet, I was surprised at how quickly I assessed the stock and made an impulse decision and this was a bit troublesome. On the positive side it was limited to a small investment but would I do it again in the future? I honestly do not know. Assuming I may, I will need to adjust my appetite in relation to risk for these types of purchases so I am adjusting my rules that any impulse buy must be limited to small purchases of $1,000 or less. - Comments: 0

Steris Corporation (STE) - 30 Oct 2013 00:25

Tags: healthcare ste steris stock_review_2013

ste.jpg

One of the more difficult challenges with Dividend Growth Investing (DGI) is finding the next Dividend Aristocrat (stocks growing dividends 25 or more years in a row) before they become an Aristocrat.

The reward for finding a future dividend grower early are large consecutive growth periods (greater than 10%) over a long period of time. The only down side is a low starting yield but the growth rate over a long period of time compensates (exceedingly).

In my attempt to find a future aristocrat I decided to search in the low end of mid-cap stocks (stocks with a market cap of $2B to $3B) often an area overlooked when it comes to DGI. In my search I came across Steris Corporation.

Steris Corporation (STE) specializes in the manufacture a sale of sterilization equipment, supplies and lab services. They primarily serve the healthcare industry but they also provide decontamination equipment to the defense industry.

STE has been growing its dividend payout since 2005. My normal criterion is at least 10 years of dividend history but with 8 years of growth we need to run the numbers to see if it has what it takes for the long haul.

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Dividend Growth Rates
1-Yr 3-Yr 5-Yr 10-Yr
12.5% 20.6% 26.8% n/a

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Looking at some of my screening criteria for a DG stock we see some solid numbers:

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Dividend Growth Rate Debt/Equity Ratio
Criteria STE Criteria STE
>= 7.2% 12.5% < 1 0.53
Dividend Yield Payout Ratio
Criteria STE Criteria STE
> 3% 1.8% < 70% 30.66%

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The only weakness on the initial screen is that the current dividend rate of 1.8% is significantly below the 3% criteria. Depending on your time horizon this may be an obstacle but if your timeline is 15 to 20 years and you could be looking at a 14% dividend on cost.

Looking at earnings over the last 6 years we have positive earnings growth since 2008 with the exception of 2011. In 2011 there was a $110M liability related to its product SYSTEM 1 rebate program.

2013 EPS 2012 EPS 2011 EPS 2010 EPS 2009 EPS 2008 EPS
2.72 2.31 .85 2.16 1.86 1.2

The balance sheet is fairly strong as reflected with a debt/equity ratio of .529 and a current ratio of 3.19. The only area of risk was the jump in long term debt from $210M in 2012 to $492M in 2013 but further investigation identified that the additional debt was incurred to close on 4 acquisitions.

Digging into the company’s assets is where you will find the real hidden treasure in this company. In 2012 patents were valued at $43.2M but in 2013 patent value jumped to $169.5M. The large increase was a combination of aggressive R&D spending (12% of operating costs) and key acquisitions over the last few years.

Research & Development Spending
2013 2012 2011
$41.3M $36M $34.3M

As of the 2013 annual report, the company held 328 United States patents and 823 foreign patents and had 82 United States patent applications and 282 foreign patent applications pending. STE has been quietly becoming an Intellectual Property juggernaut allowing it to compete with companies 5 times its size.

Looking at the recent stock price of approximately $46 per share it is currently trading at its 52 week high and carries a trailing P/E of 17.3 and a forward P/E of 16.68. The 5 year average P/E has been 19.86 so the current stock price looks to be appropriately undervalued to what the market has historically valued. On the growth front, anticipate significant increases from lab services and sterilization supplies in mature markets such as the U.S. and Europe while sterilization equipment should experience growth in developing healthcare markets.

In summary, the company has tremendous strengths in their intellectual capital and strong balance sheet. For weaknesses there is lack of communication from the CEO to a vision or strategy on capturing growth in Latin America and Asia. In regards to risk there is the danger of the company not translating its intellectual property into future revenue growth. I would consider this a worthy investment in lieu of the risks and if they continue their aggressive R&D investments and key acquisitions we could be seeing a dividend aristocrat in the making. Even though the stock price is trading at its 52 week high I see a great long term value in both equity & dividend growth and would be a buyer at current price levels.

Note: I do not own this stock at time of this writing. - Comments: 0

The Best Financial Gifts For Children Is Not Money - 20 Oct 2013 14:54

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I’m sure there will be some backlash on this one but the best financial gifts you can give your children does not involve handing over a pile of cash. As a parent I have three simple goals for my children:

  1. teach them how to survive in today’s world
  2. help ensure their survival
  3. love’em till the end of time

These are pretty simplistic but work for me. Two of the goals involve survival and part of surviving in modern times involves financial security. Here are the financial gifts I have or will be giving my children.

Education

Budgeting (Age 8+)
Do not be shy about sharing your paycheck and monthly bills (commitments) with your children. It exposes them how to balance the needs and wants of the household. Kids are smarter than we give them credit for and grasp the concept quickly. It helps them understand that money is not an unlimited resource and planning is required to survive.

Savings (Age 10+)
Explain to your children what you are saving for and why. It is important they understand the concept of planning for major purchases, emergencies, and retirement. Planning for emergencies is always a great topic, what a child or even young adult perceive as an emergency is entirely different than you would expect. With my children I express it in little emergencies & big emergencies. Where little emergencies are like your car breaking down and big emergencies are when you cannot collect a paycheck and pay the bills.

Investing (Age 12+)
To most kids savings is very simple; you put it in a bank (piggy or commercial). From their perspective things like the stock market are only in the movies or for the incredibly rich. Share what investing techniques you are using to reach your saving goals. Why a bank, why the stock market, what are bonds, and so-on.

Saving Priorities (Age 18+)
A young working adult comes into something they never had before; a steady income. With a steady income for savings they need to understand which saving goals have more priority than others.

  1. Emergency savings
  2. Saving for a major purchase (house, wedding, etc…)
  3. Retirement

I realize the retirement zealots will scream bloody murder that retirement should be number 1 as time is the best ally for ensuring a funded retirement (and I agree). But so much can go wrong between when your child first starts working and retirement. Being able to manage emergencies so they do not impact their retirement is just as or more critical. Of course I will preach how dividend growth investing can help with both emergency & retirement savings.

Loans & Credit (Age 18+)
With a steady income stream comes the potential to borrow money. It is important to teach your child the different types of lending or credit debt so they can make proper decisions about debt. What is a mortgage, yield & interest, payments, early payoffs, auto loans, etc…

At the end of the day all of these life lessons are creating financial literacy for our children. If you expect a local high school to teach these things to your children do not count on it. I find it amazing that teaching financial literacy is not a mandatory class or set of classes during high school. A recent study by Champlain College summarized the issue and provides for an interesting read on the financial literacy of our youth of which I was not surprised to see my home state with a grade of F.

Living at Home

Allowing your children to live at home is probably the greatest gift to give your children as it gives them a tremendous head start. But there are horror stories about children living at home and in some cases never leaving. To make this work parents and children each need to change. Talk to your child about why they want to live in your home. If the answer is simply, ”I can’t afford to live on my own” then it is the wrong answer. Instead ask them to lay out some goals that start with the phrase “I want to live at home for X years to save for…”.

Also let them know why you want them to live at home. They need to understand that living at home is truly a gift and here is why you are offering such a gift.


With a little luck I hope to offer my children the opportunity to live at home and give the advice to save 60% of their salary for the first two years and to not touch it unless a big emergency or retirement comes along. After the first two years, they can begin saving the next 2 to 3 years for whatever they want in life. I strongly believe a Dividend Growth Portfolio can create an income stream latter in life that can help with emergencies and retirement.

Whether or not they heed the advice is another story but at least offering them the opportunity to live at home & save to start a new life is the best gift I can think of. - Comments: 0

Recent Buy - 16 Oct 2013 00:40

Tags: ppl

On the road to diversifying my portfolio by adding to my position of PPL with an additional 20 shares which will contribute $29 annually.

This pulls up my investment in utilities to 3.5% of my portfolio. 3.5% meets my target allocation as it is more of a defensive position than one of growth. - Comments: 0

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