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

Merry Christmas Everyone - 23 Dec 2015 11:57

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Happy Holidays! I wish everyone the best and want to take the time to thank everyone for their patronage & help.

While investing is a favorite topic of ours, I would like to take the time to ask readers to remember those who are not in the same position as we and less fortunate. Please be charitable and bring a smile to someone that needs it.

Have a wonderful Christmas and hope you get all of your Stocking stuffers you asked Santa for:)

- Ken K. - Comments: 0

New Buy CMI - 16 Dec 2015 23:26

Tags: cmi cummins

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The big headline in news for 2015 was the dramatic drop in oil. Not a single oil producer has been spared and all have seen a significant drop in their share price. Another area that has been quietly getting whittled down and not getting as much attention (I argue it should) has been U.S. Industrials. U.S. Industrials have seen downward pressure on their share prices due to a slow down in China's economy and a strong U.S. dollar.

Cummins (CMI) however falls a bit into both camps and its share price has been hammered over the year dropping from a high of $145 down to the current price of $87. That is a 40% year to date drop!

An economic slowdown will without a doubt hurt CMI's 2016 sales and earnings. Analysts 2016 earning range from a 5% to 12% decrease in earnings. The forecasted decrease in earnings will change their dividend payout ratio from 33% to 47% which is still pretty respectable. Additionally, CMI is not sitting on their laurels. They already have a cost reduction plan in place to address the reduction and I'd expect no less from a company that has aggressively managed their financials over the last decade.

CMI's 40% price drop has driven its dividend yield to over 4%. I do not see this as a value trap but more of an oversold position. CMI is not a one trick pony, they have a diversified business and their diesel engines can be found in construction equipment, on highway vehicles (like Dodge trucks), military vehicles, trains, marine vehicles, and power generation equipment. CMI is also involved with emissions control and natural gas engines both of which have promising growth markets. Finally do not forget the aftermarket spares business to support all those engines!

With CMI's share price near its 52 week low I pulled the trigger and bought 11 shares at $86.86/share. This purchase will net me an additional $42.90 a year in income. I'm sacrificing short term dividend growth in exchange for a high yield and the promise of dividend growing at an accelerated rate down the road (2017 and beyond). It was hard to let CMI slip by at these prices for such a well run company, if the market continues to punish them I may just have to buy more. - Comments: 0

Cost of Family - 15 Dec 2015 01:54

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The best investment I ever made was the decision my wife and I made to start a family. With three loving children and 17 years of child raising under our belts I am a firm believer you can’t place a dollar on the unconditional love as well as all of joy and sorrow.

However, while I cannot place a dollar value on having a family I can determine the cost. I tallied up all the expenses over the years and discovered that each child on average costs $10,176 annually after taxes. With my oldest about to enter college I’m sure that number will increase but for now it is the basis I have to work with. Since I have three children my annual total costs is a whopping $30,528. From a pre-tax perspective it represents a little over $38,000 of my gross salary.

Another decision my wife and I made that we have no regrets was for her to leave the workforce and take care of our children fulltime after the birth of our third child. That was 14 years ago and she only recently returned to working part-time for minimum wage earlier in 2015. Her attention and caring of our children was without a doubt the biggest contributor as to why our children have been happy and successful to date. Similar to starting a family, it is impossible place a dollar value on her contribution but can determine a cost. To support an adult dependent it costs on average $9,600 annually after taxes or $12,000 before taxes.

Adding it all up; four dependents cost $40,128 annually after taxes and $50,000 before taxes! This sounds expensive (and it is) we still found ways to sock away a little cash to invest and save. It is not easy, there is lots of coupon cutting and the occasional vacation had to be sacrificed but we managed. With only one income there were definitely some tough and financially scary years. Through it all we somehow kept the kids fed, clothed, educated, healthy and happy.

No-one said raising a family was easy and to be successful self-sacrifice is a must. That is why I truly admire fellow bloggers who are raising a family but are working to save and invest for a better future. Its an incredible challenge to overcome.

There are also quite a few successful savers & bloggers with no children who have stories of climbing out of debt and amassing a small fortune or on the road towards financial independence through aggressive saving and investing. While I respect these folks for eliminating debt and turning around their lives I cannot admire them as I do not see it as that difficult. You simply dig deep, cut costs, and save regularly. Not a hard formula.

If I decided to forego a family I’d be looking at an additional $40,000 to invest annually and since my wife would have remained in the workforce that number would probably have been closer to $60,000. If we add up just the contributions over the last 14 years that comes to $840,000! If we assume a 5% annual return then that investment would be worth closer to $1.3 million!

If you are thinking about starting a family but are afraid of the costs don’t worry. An amazing thing happens when you become a parent, you learn self-sacrifice and how to manage real challenges. The education and experience from raising a family is so immense and will continually re-pay you in the future more than money ever will. If you are looking for inspiration here is a list of bloggers who are saving and investing while raising a family:

DRIP Portfolio Update - 13 Dec 2015 23:29

Tags: drip

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The last quarter of 2015 has been a wild ride with the market swinging up and down like a yo-yo making it difficult to figure which prices are really down or up but a couple have been steady to make some changes to my DRIP Portfolio.

Microsoft (MSFT) has long been a favorite of mine. The company announced strong earnings and another great dividend increase causing the stock price to shoot into the mid $50s from the mid to upper $40s. I still love MSFT as a dividend grower but the rise in share price has changed my opinions on the effectiveness of DRIP'g. I believe I can use the cash better towards other values and as such removed the DRIP designation.

Omega Healthcare Investors (OHI) has not been as lucky as MSFT. REIT stocks in general have been under price pressure with a looming Fed rate increase. OHI is down 26% for the year and it had little to do with performance. OHI still continues to execute and increase dividends but if the market wishes to punish OHI then I am obliged to take advantage by adding it to the DRIP Portfolio.

I had high hopes for General Motors (GM) to continue languishing around $30 per share as most investors still have not forgiven them for their bankruptcy. Their most recent earnings increase though is starting to make investors warm up to GM once again and share prices have since increased 10%. As such GM missed the cut for being added to the DRIP portfolio so I'll continue to receive their dividend and invest in other opportunities.

Holding DRIP Start
CMI - Cummins Jun 2015
HCP - HCP, Inc. Jun 2015
MHLD – Maiden Holdings Mar 2015
MSFT - Microsoft removed
PG - Procter & Gamble Aug 2015
QCOM - Qualcomm Mar 2015
THO – Thor Industries Mar 2015
New OHI - Omega Healthcare Investors Dec 2015

Internet Finds of the Week - 28 Nov 2015 12:03

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Interesting Articles from Last Week

The 10 Investing Commandments

Neither Bull nor Bear

How Wall Street Hijacks Your Money

Employees Pay 130% more for Health Care than a Decade Ago
This might be understated for some. I looked at my pay stubs for the last 6 years and the amount deducted for insurance increased annually in the range of 12% to 14%. This is one of the factors making you feel that you have less money to invest or spend than in years past.

Video of the Week

Gotta love the New York Stock Exchange for embracing Technicolor. I kept expecting Bugs Bunny or Daffy Duck to pop out and do something funny but alas it was not to be.

I’ll keep on sharing internet finds when I can, Enjoy the Links :) - Comments: 0

Turning the Corner to Dividend Growth - 24 Nov 2015 20:19

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I have now completed 4 full years of dividend growth investing and feel that I am finally making that turn onto Dividend Growth Street!

When I started this journey I had a specific goal to replace 20% of my income with dividends by the time I retired. With a small

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accumulation of investment money and a 15 year plan I knew exactly how much my dividend income had to increase by each and every year, 50% in the first year and then 15% each year until my goal.

Every year I had to contribute significant new funds to meet the growth rate and also to make up for the occasional investing mistake. Then came the summer of 2015. My oldest child was entering her senior year in high school and my wife and I decided to redirect all available funds to shore up our children’s college savings. Starting in June of 2015, no additional money was being used to fund the Dividend Growth Portfolio. To make matters more complex, I have a total of three children all 2 years apart so the college funding will continue for a full six more years! It is for a good cause but at what price? Thankfully the wife and I were smart enough to put college savings aside when our children were first born so the damage could have been worse.

Considering I have needed to add a decent amount of funds each and every year to meet my income growth goals I really started to wonder if I’m putting my retirement at jeopardy for the sake of my children. Did I finally become one of THOSE parents? After looking at my portfolio for 2015 I noticed something interesting, I met my 2015 goal of increasing dividends 15% without adding any new money since June.

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Holy cow, in just the fourth year of investing, the portfolio is growing organically at a significant rate. 71% of the portfolio growth was met through companies growing their dividends and reinvesting those dividends back into shares of more dividend growth companies. Of course it is not 100% organic growth but still extremely positive to stay on or near to plan while investing in my children. With a little luck, I could get a bonus or even a promotion during the next six years to add some new funds to the Dividend Growth Portfolio to keep it on track.

The next few years will be interesting to watch. After all the hard work of budgeting, saving and investing it is starting to take a life onto its own and I feel my investment vehicle making that final turn onto Dividend Growth Street. Cannot wait for the day when the turn is complete and I can just cruise down the street with no worries. - Comments: 0

Internet Finds of the Week - 21 Nov 2015 16:22

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In regards to dividend payments, Free Cash Flow is the backbone to any dividend program and to ignore free cash flow as dividend growth investor introduces massive risk. On this note I have found a wonderful video that explains free cash flow for all the newbies to dividend investing.

Also in case you missed these here are two interesting articles released earlier in the week:

Don’t Focus on Net Worth by fellow blogger Roadmap2Retire

Don't confuse 'saving' with 'not spending'

ConAgra to spin off frozen-potato business

I’ll keep on sharing internet finds when I can, Enjoy the Links :) - Comments: 0

Breathe a Little Easier with Donaldson - 21 Nov 2015 01:15

Tags: dci donaldson stock_review_2015

Donaldson Company (DCI) is an often overlooked Dividend Champion but after a recent pullback, due to lower sales & income, there is an opportunity to buy into this steady grower. DCI was often overlooked due to its low dividend yield (below 2%) but the recent pullback in share price has increased the yield to 2.34% and may be more tempting for your portfolio.

DCI is a manufacturer of air & liquid filters with a diverse business operating in two segments, engine products and industrial products. Within those sectors they serve 23 different industries with no customer representing 10% or more of total sales which translates into a broad and diverse customer base.

In regards to dividends, DCI has 29 consecutive years of dividend growth and looks to continue that streak into 2016 and beyond. DCI’s recently raised its quarterly dividend to 0.17 or 3% which is well below their traditional growth rates but opportunities exist to see a return to higher growth rates.

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FINANCIALS

Overall DCI has some declining financials but they still represent a conservatively managed company with significant profit margins. Net sales for 2015 were down 4% but the larger concern was a 20% drop in Net Income from $260M to $208M. The debt ratio of 0.57 had been steadily increasing over the last three years from 0.38 but is still manageable and respectable.

  • Net Sales $2371M
  • Net Income $208M
  • Current Ratio 1.84
  • Gross Profit Rate 34%
  • Return on Assets 11%
  • Payout Ratio 43.75%
  • Debt Ratio 0.57

GROWTH

Throughout DCI’s 29 year consecutive dividend growth run they have operated under the belief that if they invest steadily in themselves that everything else will fall into a place. It is a model that has continually paid off even in low earning years such as 2001, 2009 and 2010 and though history cannot predict the future it does give promise that DCI can overcome 2015’s dismal financial performance.

In 2015 DCI continued its model of continually investing back into the company. The Capex to Depreciation ratio was 1.4 with capital expenditure spending of $94M significantly outpaced depreciation of $67M.

Research and development costs were $60M and was followed up with $106M in acquisitions. With Capex, R&D, and acquisitions this represent a total of $193M being poured back into the company for future growth. Additionally, DCI invested $256M in stock buybacks increasing the overall investment towards future growth to $449M.

Conclusion

DCI’s investments should add $10-$20M to 2016 net income and combined with the stock repurchase plan my dividend growth target is 9-12%.

In regards to financials, I would like to see stock buybacks reduced by $100M and use that cash to shore up cash on hand to increase their current ratio from 1.84 to 2.

I'd consider this a buying opportunity as long as the dividend yield stays above 2% and the company maintains internal investments into 2016. - Comments: 0

Internet Finds of the Week - 14 Nov 2015 22:31

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Found this 56 year old video from the NYSE over on YouTube. While it may make you chuckle (including what was considered a big raise back in 1959) I find it amazing that the message is still the same these many years later…

Steady savings and investment in dividend paying stocks is your best bet towards a secure future.

Also in case you missed these here are two interesting articles released earlier in the week:

4 Lessons We Learned While Digging Out of Debt

Are You Too Young To Care About Dividends?

Not sure if this will be a regular future post but will definitely share internet finds when I can, Enjoy the Links :) - Comments: 0

Annual Report Financial Analysis – Follow-up - 11 Nov 2015 23:25

Tags: annual_report financial_statements

Back in August I posted a 4 part series blog on performing an analysis on the financial statements found in most Annual Reports or 10K filings. In that series, we categorized the analysis (using the standards taught in basic accounting classes) into 4 buckets; Liquidity, Profitability, Credit Risk, and Share Holder Value.

While these 4 categories are standard I find myself continually performing a secondary financial analysis for growth potential. As such I am now updating this series to include the 5th category of Growth and have also updated the excel template
for anyone that wishes to use it.

The new growth category is broken into 2 sections; Historical Growth and Future Growth. Historical Growth is a collection of trending data that used to be part of the Profitability & Shareholder Value analysis but I have since relocated them. The Historical Growth trends include:

  • Net Sales Growth Trend
  • Net Income Growth Trend
  • Dividends Growth Trend

The Future Growth analysis consists of only two measures. The first is just a % trend analysis of research and development costs and is somewhat self-explanatory. The second measure is a ratio called the Capital Expenditure to Depreciation & Amortization (Capex Ratio for short).

The Capex Ratio is calculated by dividing Capital Expenditures by Depreciation & Amortization and both values can easily be found on the Cash Flow statement.

Capex Ratio = Capital Expenditures / Depreciation & Amortization

Note: Some companies combine depreciation & amortization into one value while others list the two separately, for the items listed separately the formula would be:

Capex Ratio = Capital Expenditures / Depreciation + Amortization

The resulting ratio value then corresponds to growth
Value Meaning
<0.9 Assets are aging
0.9 to 1.1 Assets are being kept current (maintenance & modernization)
1.1 to 1.4 Assets are being procured for growth
>1.4 Assets are being procured for aggressive growth

Of course a one year analysis can be misleading so do your homework and look at a minimum of 3 years of data. - Comments: 0

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