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

An Intro to How I Select Stocks - 28 Mar 2015 13:57

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How to select and buy a stock is a tough process and for me it was something I had to work hard at before I settled down with a method that works for me. Jumping to the end solution, I do not buy a stock until I have done a complete and thorough analysis. The effort of doing this is not measured in minutes but in days.

Because of the effort put into a detailed analysis there is no way to be on top of every single company. Instead, I have split up my selection approach into four steps. I will save the details of the steps for future posts but here is the overall approach:

Step 1. The Initial Stock Screen - This is nothing more than plugging in my favorite financial ratios and key financials into a stock screening tool offered on many financial websites or brokers. I call these potential buys.

Step 2. The Watch List - Once I have an initial list of potential stocks I weed the list down a bit further by plugging my preferred valuation calculations. Anything that does not get within 10% of my calculation gets dropped from the list. For the remaining candidates I establish a buy price range that represents an opportunity to buy and continue to monitor. If a stock price falls into the price range I move on to Step 3.

Step 3. The Scrub - Now it is time to break out the calculators, spreadsheets, and web searches. The most powerful asset to start this process is the annual report. From the annual report you can analyze and trend the financial statements but it doesn’t stop there. The annual report also gives insights to risks, product positioning, and financial notes. Next is to perform a compare/contrast to major competitors. For example, if revenues are decreasing and the competition’s is rising then there may be a concern that the competition is winning (or stealing) customers from the business you are analyzing.

Step 4. Rinse and Repeat - How often do I perform steps 1-3? Once a month regularly! And steps 1-3 are not limited to new purchases. I also use the process for analyzing my existing portfolio positions to ensure nothing has changed.

Is this successful for me? Absolutely, I now have the discipline to follow these steps month in and month out. Other investors may or may not agree with my approach and that is fine but the one trait that all investors should have is patience and discipline to execute their method for stock selection.

I can trace back every single stock loss I ever had (and there were quite a few!) to only performing steps 1 and 2 and not following up with the last two steps. There was no one to blame for the losses except myself. It was my past laziness that cost thousands of dollars! Hopefully my hard learned lesson pays off for a new investor and they start off disciplined with managing their financial investments. - Comments: 0

A CEO That Gets It! - 21 Mar 2015 12:10

Tags: annual_report ceo_letter

Same Old, Same Old

As an investor, sometimes I get so wrapped up in analyzing financials and market trends I gloss over the CEOs “Letter to the Shareholders” at the front of their annual report.

Some of my attitude is due to the stereotype that CEOs are arrogant and overpaid that exist to; profit their wallets, stoke their ego and/or to please major Wall Street investors. Then there is my jaded attitude after reading so many CEO letters that I expect all to be the same where they preach the company motto and mention how things will get better.

Here is a great example. United Technologies (UTX) recently appointed a new CEO who penned their 2014 annual report letter to shareholders. Here is an expert from that letter:

”It is an honor to write to you for the first time as United Technologies’ President and Chief Executive Officer, and I am extremely proud and excited to lead this exceptional company.
-Gregory Hayes CEO”

This is the standard type of stuff that makes me yawn with boredom. The way I perceived the message was: ”I received this massive and strong thing (the company) and I promise you Wall Street that I won’t screw it up.”

Like I said earlier, at times I am a little jaded over these letters. Personally I have nothing against UTX and think it has been an awesome investment over the last 20 years. It is just the financials that motivate me more than their CEO.

The Visionary

But not all CEOs are the same. Some defy the stereotype and deliver incredibly powerful or visionary statements. Take for example Amazon’s (AMZN) Annual Report:

”I’m so proud of what all the teams here at Amazon have accomplished on behalf of customers this past year. Amazonians around the world are polishing products and services to a degree that is beyond what’s expected or required, taking the long view, reinventing normal, and getting customers to say “Wow.”
Jeffrey P. Bezos - CEO“

His intensity on customer satisfaction is like this year in and year out. I now understand why so many can get caught up in his enthusiasm and drive and invest in AMZN even though the stock price is so incredibly lofty (the price to book ratio is just over 16).

He Gets It!

As impressive as a visionary CEO may be, I finally found a CEO that understands every shareholder is a part owner in the business. It does not matter if the investor is from Wall Street or Main Street, whether they have 1 share or 10,000 shares or if they are the company founder or a hard working dad. We are all owners in the company. Look at this quote from Thor Industries (THO) 2014 Annual Report:

”As the CEO and Executive Chairman of your Company, we are committed to the future success of your Company as we continue to build great products, satisfy our dealers and retail customers and, ultimately, deliver solid results for our shareholders.
-Peter Orthwein COB and Robert Martin CEO“

Finally a CEO that gets it! Peter Orthwein is not just proud of his company or the goals they are achieving but is humble enough to admit that he is leading YOUR company. It is refreshing to see this attitude when so many CEOs today receive exorbitant compensation and come off as disconnected from the small or Main Street investor. Luckily, I am a current shareholder of THO and this just adds to the reasons of why I invested in THO. In all fairness to disclosure I am also a shareholder in UTX but not AMZN. - Comments: 0

DRIP can be a Strategy Too! - 14 Mar 2015 13:40

Tags: drip

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It is no secret I like all of my dividends to pool into a large amount to help me purchase positions in other companies where I see better growth opportunities or to help diversify my portfolio. But now that my portfolio is fairly diversified (27 positions) I had to rethink my strategy.

Within my portfolio I am seeing value buys in relation to dividend growth & price. When your portfolio positions are telling you there are bargains it makes you stop and think. Since my broker offers a commission free dividend reinvestment program (DRIP) I decided to DRIP some positions.

One might argue I could continue to pool all my dividends and simply increase my position by a larger amount to capitalize but that theory presents two problems for me. The first is that this is not commission free and commissions could eat away at long term gains.

The second problem is portfolio weightings, if I buy larger positions the portfolio will start to become over-weight in just a few positions. This would definitely contradict my risk aversion strategy and is not appealing.

Using a DRIP solves both of my concerns, it allows for commission free purchases and to slowly increase my position all the while still being able to capitalize on the buy opportunity. Of my 27 positions here are the ones I started a DRIP program with:

MHLD – Maiden Holdings
MSFT - Microsoft
QCOM - Qualcomm
THO – Thor Industries

Small Cap Dividend Growers - 08 Mar 2015 21:43

Tags: bhb mhld micro_cap small_cap span tess weys

Without a doubt, the rock stars of dividend growth are large cap and mid-cap companies like Procter & Gamble, Johnson & Johnson, 3M, and Coca-Cola. It is for good reasons they get top billing and are investing darlings. They are well known names, with conservative financials, strong well positioned products and have been growing dividends for decades.

But large companies are not the only source for dividend growers. Small & micro-cap companies also have their growers and there are advantages and disadvantages of having them in your portfolio.

Advantages

  • Small company stocks typically are thinly traded and are not subjected to wild price swings during market corrections or run-ups, this is reflected in their low beta. This low beta can help add some stability to your portfolio during these times.
  • Small companies with strong management and conservative financials tend to operate and at times dominate their local market or niche service. In other words, they have a strong moat locally instead of nationally.
  • Conservatively run small companies typically do not have a strong future for massive equity returns in their stock price. Instead they focus more on how to return value to shareholders and it is not uncommon to see the “Special Dividends” issued every so often.

Disadvantages

  • Being small usually translates into a small customer base. Some companies may have 20 to 40% of earnings from a single customer. If that single customer leaves the effects would be devastating.
  • Some small businesses are tied to the local economy and not the national economy. While the rest of the economy may be booming your local might be collapsing. Detroit is an excellent example of a failing local economy in relation to a recovering national economy.
  • Their niche market may be seasonal or cyclical so you have stomach earning swings. Snow removal equipment is a good example.
  • If they are thinly traded and you have too large of a position you may not be able to effectively sell all of your shares in a single transaction.

My favorites

Due to the disadvantages identified above, I would not make small companies a significant percentage of my portfolio but I would allocate 10% to 15%. Is this the correct allocation amount? I am not sure as I will have to back test a model for the right % mix. But regardless, here are my 2015 favorites of which I personally own two (BHB & MHLD).

Bar Harbor Bank (BHB)

Dividend Yield 3.44%
5yr CAGR 5.5%
Yrs of Dividend Growth 12
Market Cap $194M
Beta 0.68

Bar Harbor is a local Maine bank with 15 branches, a well-managed balance sheet and has been around since 1887. They review dividend payouts quarterly and have had 15 straight quarters of dividend growth.

Besides a strong financial statement and dividend growth record, what I really appreciate, and see as their biggest strength, is the board of directors. All of the directors are local business (or former) owners. The businesses they represent are varied from Real Estate, to Funeral Homes, to Car Dealerships. Essentially the board members have such connections with the local community and economy that they understand the pulse of Maine's economy and as such make decisions to guide the bank to consistent profitability.

Maiden Holdings (MHLD)

Dividend Yield 3.7%
5yr CAGR 14.96%
Yrs of Dividend Growth 7
Market Cap $1.03BM
Beta 0.84

MHLD is an insurance company based in Bermuda that provides reinsurance solutions to regional and specialty insurers primarily in the United States and Europe. It operates in three segments: Diversified Reinsurance, AmTrust Quota Share Reinsurance, and ACAC Quota Share.

What I really like about this company is their continued focus on growing earnings and being extremely shareholder friendly. MHLD is a re-insurer and what usually makes me nervous with insurance companies is their ability to execute risk management and how or where they keep their investments.

MHLD has been implementing a strategy to exit high risk segments and entering predictable and stable operating segments. This strategy has paid off over the last three years as we have seen earning grow from $0.39 per share in 2011 to $1.53 per share in 2014.

In regards to investments, it is fairly common for insurance companies to invest in fixed income and MHLD is no different. The concern here is when interest rates rise bond prices will fall creating a potential loss. Fortunately, for MHLD, most of their fixed income bonds have a maturity of less than 10 years and only 2.2% of their bonds have a maturity greater than 10 years so if rates do rise losses will be minimal.

Span-America Medical Systems (SPAN)

Dividend Yield 3.16%
5yr CAGR 9.4%
Yrs of Dividend Growth 16
Market Cap $56M
Beta 0.02

Span-America Medical Systems manufactures and distributes various therapeutic support surfaces and related products for the medical, consumer, and industrial markets. It operates through two segments, Medical and Custom Products.

SPAN is nice entry into the healthcare field as its products can be found in hospitals, nursing homes, rehabilitation centers, convalescence homes, medical centers and specialized bedding for homes.

But the biggest drawback for SPAN is its size. With a market cap of $56M and just under 3M outstanding shares this is as far as you can get from a highly traded stock with an average daily trade volume of only 5600.

Tessco Technologies (TESS)

Dividend Yield 3.67%
5yr CAGR 43.1%
Yrs of Dividend Growth 6
Market Cap $178M
Beta 0.54

Tessco Technologies architects and delivers products and value chain solutions to organizations for building, operating, and maintaining wireless broadband systems.

Tessco is currently a mild turnaround story. TESS was a victim of having a large percentage of revenue coming from one customer and in this case AT&T. When AT&T parted ways with TESS revenue dropped from $752M in 2013 to $560M in 2014 or a 25% decrease. Investors took this news negatively and sent the stock plummeting from its high of $41.77 per share to its current price of just $21.78.

Unfortunately, investors took the AT&T loss and didn't look closer at the numbers. Business with AT&T had incredibly slim margins and consumed too many of Tessco’s assets. By parting ways, Tessco was able to redeploy its assets chasing higher margin business and focusing on a more profitable strategy that should start seeing results in late 2015.

With $11M cash on hand and only $2M in long term debt this should be the bottom of Tessco’s earning woes as they start moving forward. Additionally with a payout ratio of 57% and projected earnings growth of 30% the dividend looks fairly safe and can continue growth based on earnings growth.

Weyco Group (WEYS)

Dividend Yield 2.68%
5yr CAGR 5.3%
Yrs of Dividend Growth 33
Market Cap $305M
Beta 0.61

Weyco Group, together with its subsidiaries, is engaged in the distribution and retail of footwear. It operates in two segments, North American Wholesale and North American Retail. The company designs and markets footwear for men, women, and children under the Florsheim, Nunn Bush, Stacy Adams, BOGS, Rafters, and Umi brand names.

In short there is nothing exciting about Weyco’s business. They have conservative financials (including no long term debt) and specialize in shoes. These are not high fashion models or highly sought after new designer trends but simple and comfortable dress shoes, rain boots & sandals.

As long as there are special occasions, weddings and funerals Weyco will always be there to provide us with the footwear. Their brands are found at most retailers nationwide giving them a niche moat. - Comments: 0


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