WE MOVED :) BE SURE TO VISIT OUR NEW SITE AT https://sdgrowth.wordpress.com/


New Purchase CMI - 31 May 2015 15:10

Tags:

Picked up some shares of Cummins Inc. (CMI) on Friday 5/29 which increases my annual dividend by $43. I have been watching CMI for sometime as I needed to increase my exposure to industrial but did not have the free cash till just recently. Though CMI only yields 2.2% its their dividend growth rate and low payout ratio are enticing. CMI's low debt to capital and consistent earnings growth make it more attractive than its larger competitor Caterpillar (CAT).

CMI's 5 year average dividend growth rate has been 32% but it most recent earning growth was only 16% so it is unrealistic to assume the dividend growth rate can maintain such a high rate. Realistically going forward an anticipated 9% dividend growth rate is achievable while keeping their payout ratio less the 40% (currently at 33%). - Comments: 0

GE Selling Financial Arm - Jury is Still Out - 11 Apr 2015 13:04

Tags:

On Friday April 10, 2015, GE announced it is exiting the financial industry by divesting the last of its financial division for $26B. The markets immediate reaction was to drive the stock price up just north of 10% as investors were pleased to see GE returning to its industrial roots. But is it the right move?

I've been a shareholder of GE for sometime so the news was important to me. The signal that sends worries down my spine was Jeff Immelt signaling most of the proceeds will be returned to shareholders in the form of share buybacks. On the surface this sounds shareholder friendly but from my perspective this is the worst use of money.

The finance arm of GE made a lot of money for GE and what will fill that gap? This is such a short term gain and I'm looking for an investment that has legs to keep it growing for the next 20 or more years.

What I want to hear is hear is how they will improve margins and grow revenue. Without these how do you maintain long term dividend growth. I realize it is early so I'll wait and see if they develop a strategy but for now if Jeff Immelt or GE's board of directors are reading this post here are some ideas on how to spend $26B:

1. Pay down expensive long term debt
There is about $7B in long term debt with rates just above 5%

2. Issue a special dividend to shareholders
How about 25 cents per share

3. Make acquisitions with better margins and growth rates
Here are few examples:

  • AO Smith Corp (AOS) market cap $5.8B
  • Calgon Carbon Corporation (CCC) market cap $1.14B
  • Federal Signal Corp (FSS) market cap $1.01B
  • OSI Systems (OSIS) market cap 1.47B

So there its. GE you are officially on notice! You have till the end of the year to come up with a strategy of how how you will use the proceeds to improve the business and not manipulate share data.

In regards to discloser I have no positions, plan to buy or interests in AOS, CCC, FSS, or OSIS. - Comments: 0

1st Quarter Portfolio Growth Update - 03 Apr 2015 11:27

Tags:

Quarterly Dividend Growth
% from Div Growth -3.28%
% from New Investments 1.01%
% from Reinvested Div 2.77%
% from Special Dividends 0%
% Overall Growth 0.51%
growth_chart_5.png

Though the charts may show an ugly picture the 1st quarter had tremendous of growth opportunities but like many others the portfolio was not immune to the collapse of oil prices.

On that note we will start with the bad and get the pain over with quick. The collapse in oil prices caused two of my holdings to reduce dividend payouts and it cut my annual dividend by $170. Ouch! It could have been worse but here is a great example of diversification. Energy stocks only represented 8% of my portfolio and vastly limited my annual income loss to only 6%.

Now here is the good. I had five positions increase their annual payouts. Staring out there was Maiden Holdings (MHLD) who bumped up their dividend payout by 18.18%. After increasing my position last November by an additional 100 shares this was a nice boost.

Hasbro (HAS) continues to be a stalwart as they increased their payout by 6.97%.

Qualcomm (QCOM) is living up to their commitments of returning to shareholders as they bumped up the payout by 14.28%.

General Mills (GIS) continues to be amazing with consistent raises in the 7-8% and did not disappoint with their 7.31% raise.

Finally there is Waste Management (WM) with a 2.66% increase. While not spectacular it still beats the inflation rate and the primary reason I hold WM is as a defensive position.

Next quarter will be the last to feel the effects of the oil industry so I'm looking to the 3rd quarter to reset my growth on an upward path. - Comments: 0

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

Tags:

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:

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:

Plant_Flower_Clipart_Pictures.png

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:

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

Is DGI the Perfect Answer to Inflation? - 24 Jan 2015 14:48

Tags:

Finding an investment product that can provide an income and at the same time continually rise to exceed the inflation rate is a primary goal for many retirees or soon to be retirees.

Finding such a vehicle is a daunting task. Fixed Income (bonds, preferred stock & fixed annuities) while low risk, operates just as it names describes. They provide a fixed income over time with no increases. It is predictable but cannot combat inflation.

Investing in stocks on the other hand does have the potential to grow and beat inflation. In the world of stocks, the dividend growth investing (DGI) strategy claims that a stock that continually grows their dividend is a sound hedge against inflation. But is this really the case? To prove this theory I analyzed a small basket of DG stocks that have been paying dividends for 25 or more years:

  • Aflac (AFL)
  • AT&T (T)
  • Coca-Cola (KO)
  • Emerson Electric (EMR)
  • ExxonMobil (XOM)
  • Johnson & Johnson (JNJ)
  • Leggett & Platt (LEG)
  • McDonalds (MCD)
  • Procter & Gamble (PG)
  • Wal-Mart (WMT)

Note: Considered posting graphs for all stocks but that would have made this post pretty busy so instead contrasting graphs of PG & WMT will be used. If anyone would like the data for the other stocks leave a post and it will be provided.

Of all the stocks, only WMT has consistently increased annual dividends at a rate that beat inflation. This is rather surprising as they are so closely tied to the economy. Other than WMT, each position failed to increase their dividend that exceeded the inflation for at least one year. The primary data points discovered were:

Average Inflation non-beat; once every 8 years (7.88 yrs to be exact)
Average dividend growth to inflation rate growth during the non-beat; -5%

PGinflat.png
WMTinflat.png

While not perfect, DGI is pretty darn effective! Though one could argue that the years that they did beat inflation, the dividend growth exceeded the inflation rate by such a large amount that it compensates for any one-time loses giving your long term growth rate a positive factor and this is a sound statement.

But, what if your income did not meet or was just meeting your expenses at the start of retirement? You may have been planning on that growth from the start and the years you do not beat inflation could hurt. With people living longer it is not unreasonable to assume a 30 year retirement of which there will be 3 times during that period where income growth will fail to beat the inflation rate.

While DGI is extremely effective it is not a 100% solution. Question now is; are their alternatives that can reduce the risk?

Diversify with Real Estate Investment Trusts

REITS tend to be influenced by different factors than the overall market and has growth at different cycles. In theory this should also apply to their dividend growth. To confirm this I analyzed:

  • Realty Income Corp (O)
  • HCP Inc (HCP)

The two REITs dividend growth also failed beat inflation once every 8 years but that 8 year cycle was completely different. When our basket of stocks failed to match the inflation rate REITs beat it and vice-versa.

Another factor discovered is the amount they failed to beat the inflation rate was much lower on average; -1.3% versus -5% for our basket of stocks.

By diversifying with REITs we reduce risk and spread losses out over different years leading to the conclusion that some REIT positions are necessary components for DGI.

Are there other alternatives? Most likely…wish to share? I'm willing to listen & learn. - Comments: 0

2015 Annual Goals - 17 Jan 2015 12:43

Tags:

Physically writing (or typing) out my goals has been extremely successful. I do not know if this works for everyone but it does work for me. That said it is time again to set my annual goals for 2015:

Grow dividend income by 15% - This will be extremely difficult. My oldest child starts college in 2016 and I plan on stashing most of my extra cash for this expense so there will be little to invest with. I will need to constantly keep myself in check to make sure I’m not chasing yield instead of growth.

Reinvest 100% of Dividends – I realize carrying over some dividends is a nice buffer in case the market crashes early in a year but my analysis evolves around individual companies and not markets. I make no claim to understanding markets so this is more of a goal to avoid market timing temptations.

Read 3 Books on Investing - It never hurts to read and expand your knowledge or learn of different perspectives. When you feel smarter than your peers is when you are most likely to fail! Be humble, continue to learn and challenge preconceived notions.

Recognize or admit when I am speculating - This has been an investing weakness of mine during my DGI career. While not technically measurable it is something I need to strive for.

Increase my 401K balance by 10% - This is part of my long term plan. I have laid out exactly what my balance needs to be every year to meet my long term goal. If the market sours or trades sideways it just means I have to invest more to stay on track.

Increase my IRA balance by 5% - Similar to the 401K goal this is part of my long term plan. I no longer contribute to the IRA but if it doesn’t meet the 5% goal I may find myself contributing.

Increase my blog posts to 36 - I realize few (if any) actually visit the site to read my posts. Some of that is the platform I work on is not popular among financial bloggers and some is due the fact I do not advertise that it exists. So why bother? For me it is like an investing diary. It helps me keep track of what I have learned, mistakes I made and at times express my views or opinions.

Take my Son fishing at least 6 times - 2014 taught me one important lesson, when you are executing your goals the stress in your life starts to diminish giving you more free time. I plan to capture that free time by connecting with my family. - Comments: 0

Happy New Year and Summary of 2014 Goals - 01 Jan 2015 14:00

Tags:

Happy New Year to everyone and I wish you the best for 2015.

So 2014 has finally ended and it has been an interesting year filled with ups an downs in the markets and even a surprise with the collapse of oil prices.

Throughout the year I have improved on my DGI skills but more importantly I did hit a point of significant personal satisfaction. Some DG investors believe life begins when they can solely live off their passive income. But what I discovered is you can start enjoying your life before that happens.

In early 2014 I set up a detailed plan of long term goals with targets set for every year up to those goals, as well as immediate year goals, and a set of strategies to achieve those goals over the next 30 years. I spent the first half of 2014 re-aligning my finances, personal life and work schedule to the new strategies (DGI being one) and spent the second half of 2014 executing the strategies.

By early November I realized everything was executing to plan and I no longer had to micro-manage but instead sustain. Sustaining a plan is a lot easier than formulating and putting into play. It was as if a huge burden was lifted and I suddenly find myself with a lot more personal time to enjoy.

Now I cannot wait for 2015 as I plan to go after things I love to do; time with the family, swimming, fishing, hiking, revisiting an old hobby, and even working on my house. These are the type of activities I believed I would have living off of a passive income during retirement but looks like I get to enjoy them much earlier.

While I'm still required to keep a full-time job, it seems much of the anxiety over what tomorrow will bring is not as much of a concern. My best guess is because I now have a way out of the rat race and I can actually see the strategy working, it's removing risk from my life and hence removing stress. Wow! What a feeling, I should have done this years ago.

Well enough waxing poetic, so here is a summary of how I did on my 2014 goals!

1. Contribute $6,000 to new DGI purchases ACHIEVED!
This is not usually a goal but I knew 2014 would be my last year adding significant cash as my children will be starting college soon and extra cash over the next 10 years will be a luxury. This goal was more to make me stretch to find extra savings through better money management & budgeting. I actually beat this and found an additional $700!

2. Re-invest $2,000 into DGI purchases ACHIEVED!
This came down to the wire but I finally completed re-investing with my last purchase of Qualcomm (QCOM) in December.

3. Increase forward DGI yield by 20% ACHIEVED!
I actually beat this by 5% points so I felt really good on this front.

4. Increase 401K balance by a minimum 10% ACHIEVED!
Not tied in with DGI goals but is part of my long term goal (I have specific price targets set that the 401K must meet every year). I actually beat this by 5%

5. Increase IRA balance by 5% ACHIEVED!
Not tied in with DGI goals but is part of my long term goal (I have specific price targets set that the IRA must meet every year). I actually beat this goal by 7%

6. Have 10% cash reserves in IRA/401K ACHIEVED!
This takes a load off my shoulders from a risk perspective.

Well that was 2014 in a nutshell for me and I'll follow-up this post with my 2015 goals.

Happy New Year! - Comments: 0

page 4 of 4« previous1234

Unless otherwise stated, the content of this page is licensed under Creative Commons Attribution-ShareAlike 3.0 License