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

Change to Watch List - 30 Sep 2013 22:13

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In a matter of just 3 weeks Sturm Ruger (RGR) saw its stock price surge 19.5% going from $52 to $63 per share. The sharp increase placed RGR on thin ice for staying on the Watch List. As a backup to RGR I added BP to My Watch List.

Currently I have BP rated with a high level of risk for the simple fact of potential legal liabilities and the lack of historical dividend increases. But with a couple years of dividend growth, a 27% payout ratio, and a yield just north of 5% does make this something to keep an eye on. - Comments: 0

End of a Quarter, Start of My DGI - 28 Sep 2013 22:30

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It is the end of my first quarter and received all of my dividends. Luckily I was able to save an additional $200 and just transferred it to my brokerage account and combine that with some leftover funds from rebalancing my portfolio to a DGI strategy leaves me with enough to invest in 2 or 3 securities over the next two months.

Now that the first quarter is behind me I can start tracking and updating how much dividend growth occurs from quarter to quarter of which I’m off to a head start as Microsoft (MSFT) announced a 21.7% increase in their dividend that starts in December.

In the quarter ahead my attention will be on Seagate Technologies (STX) to see if they announce a dividend increase in November or December. STX payout ratio is currently 32% leaving lots of room for growth. On the other hand this is a technology stock and dividend payments (never mind growth) is still something new for this sector so I see the odds of a dividend increase at 50/50.

With no dividend increase it will leave me with a tough decision. STX has been a stellar performer, they announced a dividend increase right after I bought the stock pushing the yield up at that time to 6% (now currently 3.49%). Additionally STX has also returned a 70% increase in stock price.

Selling STX may be my first test of trusting dividend growth criteria versus looking at the potential for stock price growth. This will also present a scenario that is currently not part of my strategy. If I sell then what do I buy? Do I stick with the 3% criteria? If I do then I lose the dividend growth. Right now my knee jerk reaction would be to invest in a DG stock paying at least 3.5% to compensate. Of course December is still three months away so still some time to strategize what-if scenarios. - Comments: 0

Risk Part 2 – Equity Diversity - 20 Sep 2013 21:20

Tags: diverse diversity risk

A fact with Dividend Growth Investing is that it is 100% invested in stock equities. Though historical stock performance can provide some patterns it cannot accurately predict the future on how stock markets perform. The lack of uncertainty exposes you to some level of risk if stocks perform poorly.

Some might argue that while investment cost is a concern it is not the top priority for DGI. As long as a portfolio continues to receive income and income growth through dividends the downward stock prices are not a major impact. Or more simply…”Why do I care if equity prices rise or fall as long as I keep getting my dividend checks?” While this may be a valid statement it does not address unforeseen risks.

No one has a crystal ball and there are too many external factors that can influence the stock market. For example, what if a drastically higher corporate tax is applied by the I.R.S? The increased tax expense may require companies to decrease dividend payments and invest the capital back into the company to sustain growth and compensate for the excessive taxation. Of course this is not a real scenario but only one of many what-if topics that could derail your investments and DGI strategy.

As much as I enjoy, support, and strongly believe in the benefits of DGI I would be wrong to say that it should be your only investment. Much like stocks, you should diversify your equity investments to reduce risk and preserve equity. Of course if you are a young investor starting out this probably is not feasible as you have limited financial savings but equity preservation should be a part of your long term investing plan.

Examples of some investments you can use to diversify your equity:

Cash

  • Bank Savings Account
  • Bank Certificate of Deposit
  • Money Market Account

Bonds

  • U.S. Government Debt
  • Foreign Government Debt
  • U.S. Corporate Debt
  • Foreign Corporate Debt
  • Municipal Bonds

Hard Investments

  • Real Estate / Rental Property
  • Precious Metals

Other Investments

  • Annuities
  • Preferred Stocks

I do not recommend investing in all the items above but simply listed potential alternatives. Never invest blindly, if you wish to diversify then investigate each one and become well versed on the good & bad or talk to a financial analyst if you do not have the time.

The next question is if you diversify how much? I do not believe there is one single answer to this question. It depends on your personal situation. The best I can share is my situation where I have 7% in cash, 78% in stocks and 15% in bonds. Since I am in my mid-forties I believe I can withstand a decent level of exposure to risk and still have enough time to recover. My current house has 90% equity and should be paid off in 3 years so I see no reason to add rental property. Additionally, I am one of the lucky few who will receive a small pension which provides further security in later years so I feel extremely comfortable maintaining my 78% stock exposure up to retirement. - Comments: 0

Risk Part 1 – Stock Diversity - 19 Sep 2013 21:08

Tags: diversification diversity risk

(This post is the first of a 2 part blog to identify potential risks in your portfolio.)

As a DGI investor it is easy to get caught up in the wrong numbers. In a constant pursuit to find the best combination of dividend yield and growth it is not hard falling into the trap of continually buying the same stock or set of stocks in the same sector placing a large percentage of your investment into one basket.

Exposing most of your portfolio to a single stock, sector or industry is one of the most risky items you can financially take on. All of the modern stock market crashes had specific sectors or industries at their core.

  • 1987 – Banking Industry
  • 2001 – Technology Sector
  • 2008 – Financial Sector

If your portfolio was heavily weighted during any of the crashes your portfolio would have been in ruins. Of course some would argue that the overall markets dropped like a rock in each of these incidents but it was worse for these specific stocks as you not only lost equity value but also income as they slashed or eliminated dividend payments during that time.

Need another example? You do not need a stock market crash to be exposed to loss. In 2012 the S&P 500 gained 13.4%, a good year by any means. But, there was one sector that was suffering…basic materials. As China went through its massive growth cycle basic material stocks were booming, especially those involved with coal, iron, steel, and other base metals. These stocks were sporting high yields & fantastic dividend & earnings growth rates. Once China growth had slowed the basic materials sector was hit hard in late 2012 and most of 2013. Companies such as Cliff’s Natural Resources dropped their dividend 76% and all the while their stock price dropped like a rock.

As a DGI investor you need to be diligent in balancing of your portfolio weighting in relation to individual stocks, industries, or sectors. I have yet to figure out if there is a magic weighting but for now I have the following plan but as my portfolio grows in size I’m sure these numbers will decrease:

  1. No more than 15% of my portfolio weighted to an individual sector
  2. No more than 10% of my portfolio to one industry
  3. No more than 7% of my portfolio to one stock

Of course if you are a new investor just starting out this is most likely not feasible but you should have a plan that with each investment you build the diversification. That is why in my watch list I always use a target weighting to determine how much I want to spend and to place me on track for a diversified portfolio. - Comments: 0

Meredith Corporation (MDP) - 16 Sep 2013 23:23

Tags: mdp meredith stock_review_2013

Meredith Corporation (MDP) is one of the leading publishing media companies in the U.S. and of course I wouldn’t be writing about it if it did not have Dividend Growth characteristics.

MDP has been increasing its annual dividend payout for 20 straight years with some impressive growth rates and meets all of my basic search criteria.

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Dividend Growth Rates
1-Yr 3-Yr 5-Yr 10-Yr
13.4% 11.9% 13.9% 28.4%

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Dividend Growth Rate Debt/Equity Ratio
Criteria MDP Criteria MDP
>= 7.2% 13.4% < 1 0.41
Dividend Yield Payout Ratio
Criteria MDP Criteria MDP
> 3% 3.67% < 70% 57.6%

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Over the last 3 years MDP has been increasing dividends faster than earnings growth. The company moved from a 34.8% payout rdatio in 2011 to a 57.6% payout ratio in 2013. Looking at the last 4 years of EPS reporting, earnings appear erratic and adds confusion if future dividend increases are sustainable.

2013 EPS 2012 EPS 2011 EPS 2010 EPS
2.74 2.31 2.84 2.78

If we take the numbers as face value MDP has a very limited upside for dividend growth but before we throw in the towel we should dig a little deeper.

mdp.jpg

MDP is most famous for its magazine publications Better Homes & Gardens, Ladies' Home Journal and Family Circle. They have been reading staples for almost every Mom over the decades.

MDP’s publication business consists of 18 National & 6 Latino brand magazines and nearly 100 special interest publications. But MDP is much more than just publications; it also has 13 broadcast stations, websites, mobile & tablet apps, and videos. The combination of all these elements position MDP more as a content provider than a publisher

The company’s primary objective is to remain the leading media & marketing company serving American women. This is a pretty tall order considering their largest competitor is the Hearst Corporation who is one of the largest media companies in North America. To stay relevant, beat the competition and maintain the American Woman’s interest the company has been laser focused over the last three years with strategic acquisitions.

Key Acquisitions
. 2013 – Parenting and Baby Talk magazines
. 2012 – web app AllRecipes.com and FamilyFun magazine
. 2011 – EatingWell Media Group and EveryDay with Rachel Ray

The number of acquisitions and cost of folding them into the MDP family does explain some of the erratic earnings over the last few years. Going forward, the additional products should add to revenue growth. Yet, I would be cautious and want to see 2014 earnings to determine if revenue is truly growing again and can support dividend growth rates that exceed 7%.

Looking at the recent stock price of approximately $44 per share it carries a trailing P/E of 16.19 and a forward P/E of 13.54. The 5 year average P/E has been 12.92 so the current stock price looks to be slightly over-valued.

In summary, MDP is currently paying a nice dividend yield with a long history of growth but has weakness with an increasing payout ratio and weak EPS growth. The real strength of the company lies in its ability to create content and deliver it on any media format.

Investing now is a small gamble that they can execute web and electronic media delivery to grow their business. If they provide mediocre execution during that time then you are probably looking at a few good years of dividend growth (7 to 10%) and then a slower growth rate (2 to 4%). If they provide strong execution then they will be able to maintain their aggressive dividend growth for many years to come.

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

Dividend Growth Investing Benefits Youth - 15 Sep 2013 13:37

Tags: calculator

Because DGI has the word DIVIDEND in it many people associate with basic dividend investing.

Basic dividend investing is typically associated with portfolios of people in retirement where they take their lifetime of accumulated wealth and invest in bonds, dividend paying stocks, and annuities to generate an income stream to supplement social security and/or pension. Because of this there is a misunderstanding that you need a large investment (more than $250K) for DGI to work.

The reality is you do not need a large sum at all! Instead the largest investment you need is time (10+ years) for the power of re-investing (compounding) and dividend growth to create your wealth.

When I started my professional career I had a huge advantage. I got to live at home with my parents for the first five years with little debt and virtually no financial commitments. I easily could have saved one year of salary in that time but instead squandered it away on lavish spending and good times. Looking back all it would take was two years of aggressive savings to accumulate $15,000 (a small salary even in the late 1980s) and I still would have had three years of living with my parents to spend my money anyway I wished.

Putting that $15,000 to work in a DGI portfolio with 3% yield, 10% div growth and not contributing anything other than re-investment of dividends would have resulted in an income stream as follows:

Annual Dividend Income at…

  • Age 21 - $450
  • Age 35 - $2,490
  • Age 45 - $8,454
  • Age 55- $28,699
  • Age 60 - $52,877

At age 60, the dividend would represent a large % of my base per-retirement salary and, when combined with my 401K, would allow me to retire early and not collect social security.

Of course I did not discover DGI until I was in my 40s but I still have time on my side and it’s just that the benefits will not be as large. The lesson here is that the investment of time is a lot easier than the investment of cash so DGI benefits the young more than those near or in retirement.

Since time is a critical investment I made a basic calculator for estimating potential DGI income in out years. It is not perfect as it assumes a consistent growth rate and does not adjust for when you stop re-investing dividends but is still useful for planning your goals. - Comments: 0

Helmerich & Payne (HP) - 12 Sep 2013 23:06

Tags: drilling helmerich&payne hp oil&gas stock_review_2013

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Are you interested in investing into the shale oil boom but nervous about the risk? A safer alternative could be investing in companies that service the industry such as Helmerich & Payne (HP). HP is the leading U.S. provider for land contract drilling services. Their drilling techniques use directional and horizontal drilling, critical for shale fields.

HP has long been a dividend growth player with 41 consecutive years of growth with the most recent annual increase coming in at 7.7%.

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Dividend Growth Rates
1-Yr 3-Yr 5-Yr 10-Yr
7.7% 11.9% 9.2% 6.1%

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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 HP Criteria HP
>= 7.2% 7.7% < 1 0.05
Dividend Yield Payout Ratio
Criteria HP Criteria HP
> 3% 3.01% < 70% 30%

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2013 earnings have been strong with HP already reporting $5.33 per share and they still have one quarter left to report which should place EPS in the $7+ range. Compared to 2012 earnings of $5.34 EPS this represents a 40% improvement year over year.

HP rig assets consisted primarily of U.S. based land rigs and year over year increases average about 13%.
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2012 Rigs 2011 Rigs 2010 Rigs
U.S. Land 282 248 220
Offshore 9 9 9
International Land 29 24 28
Total Rigs 320 281 257

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Looking at the balance sheet, HP’s efforts to dramatically decrease long term debt has been successful as the debt to equity ratio is down to an all-time low of .05.

LTDEBT%20CHART.png

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HP also has maintained a backlog of services of $3.6B in 2012 and $3.8B. Combined with the decrease in debt liabilities it becomes easier to see how solid their earnings have become.

One item in the 2012 annual financial statement that jumped out at me was a large increase in accounts receivable $460M in 2011 to $620M in 2012. But there was also a dramatic increase in annual revenue from 2011 to 2012 and when you create an “AR/Revenue” ratio both years are 18% so no cause for alarms.

The one area of weakness I found with HP was their source of earnings. 59% of HP's annual earnings come from only 10 major oil & gas exploration companies. If just one of these companies cancels a drilling contract it would greatly impact earnings.

In summary, HP is currently operating in a boom U.S. shale market with strong a balance sheet and backlog of orders. Their dividend rate looks to be secure and their long history of dividend growth should continue.

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

Sturm, Ruger & Company (RGR) - 02 Sep 2013 13:11

Tags: gun rgr stock_review_2013

RGR.jpg

Sturm, Ruger & Company (RGR) has been making a bang lately on the market. A gun manufacturer since 1949, RGR is blowing away analysts EPS forecasts quarter after quarter. In fact, RGR has beaten the high end EPS estimates for 9 straight quarters with the last exceeding estimates by 35% reporting Q2 2013 of $1.63 per share vs. an estimate of $1.18 per share. With next Q3 2013 estimates at $1.46 per share it looks like it will become 10 quarters in a row.

Considering the amount of institutional & mutual fund investor stock ownership (79%) I do find it astounding how many misses there have been. Some of the problem is that RGR provides no financial guidance and even points it out as item #3 in their Investment Community Communications (http://www.ruger.com/corporate/PDF/InvestorCommunicationPolicy.pdf). But one could argue that without the guidance analysts just aren’t doing their homework and are doing a disservice to both their companies and clients.

On the dividend front RGR has been growing at just as a rapid pace as their earnings and the only downside is the limited history of consecutive years of growth which stands at just under 5 years. My normal criterion is at least 10 years of dividend history but for the potential of a high dividend growth it may be a risk worth taking.

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Dividend Growth Rates
1-Yr 3-Yr 5-Yr 10-Yr
201% 61% n/a 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 RGR Criteria RGR
>= 7.2% 201% < 1 0
Dividend Yield Payout Ratio
Criteria RGR Criteria RGR
> 3% 5.0% < 70% 40%

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The 1 year dividend growth listed at 201% is actually deceiving. At the end of 2012 there was the high probability of the Bush Tax Cuts expiring sending taxable qualified dividends shooting up from a tax rate of 15% to as high as 39%. In response many companies issued special dividend to reward shareholders before the tax expired of which RGR issued a special dividend of $4.50 per share in Q4 2012. Luckily the 15% tax rate (for the most part) was retained.

A deeper look in RGR’s dividend growth yielded something odd. RGR does not declare a fixed annual dividend rate payable each quarter and each quarter pays a different dividend amount. Instead it looks as though RGR has been trying to find a reasonable payout ratio and seems to have settled at ratio of around 40% for the last two years. By basing each quarterly dividend on a payout ratio of earnings would explain the fluctuations seen in dividend rates from quarter to quarter. What this translates into is that dividend payments are directly attributable to earnings growth so the better the company performs the better your dividend and vice-versa. To determine if the dividend growth is sustainable we need to analyze earnings growth.

Earnings from 2009 to 2012 have seen noticeable earning jumps but there is caution to 2012 earnings. In the last quarter of 2012 the terrible massacre of children occurred in Newton, Connecticut. This event spurred a national debate on tightening gun control laws and in turn caused a rush of existing gun owners to purchase guns before new laws were enacted. Even the CEO of RGR attributed the large bump in Q4 sales to this phenomenon in their 2012 annual report.

2012 EPS 2011 EPS 2010 EPS 2009 EPS
3.60 2.09 1.46 1.42

Looking further into the 2012 annual report there was another figure that was quite interesting, $427.1M in order backlogs and for the year they only processed $369.6M in orders. Going into 2013 the rush for gun orders continued to over flow into Q1 and Q2 numbers further expanding their backlog to $590M.

The National Instant Check System (NICS) used for background checks has become a good leading indicator into gun sales. In July the FBI reported 1.284 million NICS checks, a decrease year over year as July 2012 had 1.301 million and is a good signal that gun demand is starting to wane.

Sifting through 2013 Q1 & Q2 sales numbers an interesting statistic that jumps out is that 31% of sales is for brand new models. RGR has been aggressively increasing R&D spending at a rate that almost doubled in three years and is starting to see a payoff in sales.

Research & Development Spending
2012 2011 2009
$5.9M $4M $3.2M

In August 2013, the company announced its plans to expand manufacturing capacity by opening a new facility in Mayodan, North Carolina. Interestingly this new facility will not be used to help reduce the existing order backlog but will only produce new products not yet announced and the company expects the new facility to begin producing in early 2014. This is actually a very smart and conservative approach as the company will only be investing in new machinery & tooling in one facility instead of duplicating machinery & tooling used for existing product lines at their New Hampshire and Arizona facilities allowing then to work down the backlog while the NC plant handles new incoming orders.

There will be some cost deferred with the opening of the NC facility. The state of North Carolina is providing $9M in incentives and the town of Mayodan & Rockingham County are currently considering another $1.7M in local tax incentives over a period of 14 years.

Looking at the balance sheet RGR has maintained one impressive number over the years, zero long term debt. With zero long term debt I expected to see solid financials and the only area of concern was the Current Ratio which dipped to 1.6 in 2012

Current Ratio
2012 2011 2009
1.6 3 3.2

With no debt and high gross profit margins I expected a current ratio greater than 2.5. I credit the significant drop in 2012 to the Q4 2012 special dividend of $4.50 a share which siphoned off cash from the books thus lowering the ratio. With the NC facility investment I see this as a slight drag on the 2013 current ratio but still higher than 2012 and a slow and steady return to a normal ratio for a company with no long term debt.

Looking at the recent stock price of approximately $52 per share it carries a trailing P/E of 11.09 and a forward P/E of 14.96. The 5 year average P/E has been 12.78 so the current stock price looks to be appropriately valued but it looks like it is underestimated for 2014 as analysts do not seem to be taking into account the significant backlog of orders. I’d expect 2014 earnings to be in line with 2013 keeping the dividend yield at 5% but because of the nature of the earnings growth I would discount it and treat it more like 3.5% and plan year over year growth from the discount which I would expect the yield to return to in 2015.

In summary, I consider the 5% yield a temporary anomaly and for future growth I’m using a base 3.5% rate with a 10% per year growth. The company has strengths in gross profit margins and no long term debt. For weaknesses there is lack of long term consistent dividend growth and significant drop in current ratio. As long as the company continues to aggressively increase R&D funding and increases its cash position I would consider this a worthy investment in lieu of the risks and would be a buyer at current price levels and an aggressive buyer if share price drops below $49 per share.

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


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