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

Build Diversity: Part 1 Industrials - 02 Mar 2014 18:02

Tags: build_diversity industrials

Back in January I did a post on Regional Banks and it inspired me to start a new blog series called “Build Diversity”. Many naysayers to the dividend growth strategy continually state that the selection of dividend growth companies is very limiting and the largest risk is lack of diversification. This blog series is intended to disprove naysayers and help a new investor identify potential DGI companies while building a diversified portfolio.

All stock information will be culled from David Fish’s “Dividend Champions List” at http://dripinvesting.org/ which provides a list of all stocks that have continually grown their annual dividend payouts for 5 years or more in a row

To kick-off the series we will start with industrials. Industrials have never been known to rock the world with stellar high dividend yields but what they lack in yield they make up in large dividend growth increases year to year.

To start with a list we will use basic search criteria of:

  • min div yield near 2% or greater
  • payout ratio less than 65%
  • debt to equity ratio less than 1
Company Symbol Yrs of Div Growth Div Yield Payout Ratio TTM P/E Debt/Equity
3M Company MMM 56 2.67% 52.53% 19.69124424 0.32
Applied Industrial Tech AIT 5 1.98% 36.90% 18.64 0.00
Crane Company CR 9 1.90% 32.61% 17.16 0.29
Cummins Inc. CMI 8 1.97% 33.11% 16.81 0.25
Emerson Electric EMR 57 2.61% 61.87% 23.72 0.53
Illinois Tool Works ITW 39 2.13% 34.85% 16.36 0.49
Stanley Black & Decker SWK 46 2.58% 55.10% 21.32 0.67

Our search yielded 7 great stocks and each brings something special to the table. The highest yielding stocks (MMM, EMR, ITW, SWK) are also the elder statesman with a minimum of 39 years of consecutive annual dividend growth. But our young guns (AIT, CR, CMI) bring low payout ratios, debt/equity, and P/E ratios.

Company 1 Yr DGR 3 Yr DGR 5 Yr DGR 10 Yr DGR
3M Company 7.63% 6.55% 4.90% 6.76%
Applied Industrial Tech 9.52% 12.86% 8.92% 15.74%
Crane Company 7.41% 10.49% 8.83% 11.23%
Cummins Inc. 25.00% 37.00% 30.26% 22.32%
Emerson Electric 3.11% 7.13% 6.18% 7.71%
Illinois Tool Works 6.85% 7.10% 6.29% 12.87%
Stanley Black & Decker 10.00% 13.90% 9.46% 6.75%

Looking at average dividend growth all candidates have shown impressive long term averages and Cummins is really knocking it out with a 10 year average of 22%. But, seeing averages can be misleading. Looking at year to year growth, especially during the 2008/2009 market crash, could be more telling on how well these companies react to adversity.

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Of the 7 companies, only AIT failed to raise their dividend during the crisis in 2009. While impressive for the remaining companies the most impressive was CMI with a whopping 16% as well as Illinois Tool Works & Emerson Electric providing more than 7% growth though both did slowdown in the following year to only 2.42% & 1.89%.

Our quick look at Industrials have yielded some nice examples to add to your portfolio. Results yielded low risk long term dividend payers like 3M and also offers some rapid growth like Cummins Inc. Like any investment you should research further before purchasing any equity as this report is nothing more than a result of some surface level values and ratios.

3M Company (MMM): 3M Company operates as a diversified technology company worldwide. Its business segments include: General Industrial , Safety and Graphics, Electronics and Energy, Health Care, an Consumer Markets.

Applied Industrial Tech (AIT): Applied Industrial Technologies, Inc. distributes industrial products for maintenance, repair, and operational needs, as well as original equipment manufacturing

Crane Company (CR): Crane Co. manufactures and sells engineered industrial products in the United States and internationally. It operates in four segments: Aerospace & Electronics, Engineered Materials, Merchandising Systems, and Fluid Handling.

Cummins Inc. (CMI): Cummins Inc. designs, manufactures, distributes, and services diesel and natural gas engines, and engine-related component products. It operates in four segments: Engine, Components, Power Generation, and Distribution.

Emerson Electric (EMR): Emerson Electric Co., a diversified technology company, designs and supplies products and technology, and delivers engineering services and solutions to the industrial, commercial, and consumer markets worldwide.

Illinois Tool Works (ITW): Illinois Tool Works Inc. produces and sells engineered fasteners and components, equipment and consumable systems, and specialty products. The company operates through seven segments: Automotive OEM; Test & Measurement and Electronics; Food Equipment; Polymers & Fluids; Welding; Construction Products; and Specialty Products.

Stanley Black & Decker (SWK): Stanley Black & Decker, Inc. provides power and hand tools, mechanical access solutions, and electronic security and monitoring systems for various industrial applications. - Comments: 0

Progression on Goals - 01 Mar 2014 18:59

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February was a nice step in meeting every item of my 2014 goals all in thanks to Mr. Market, decent dividend increases from Dr. Pepper Snapple (DPS) & Hasbro (HAS) and finally pulling the trigger on my first buy of the year (HCP Inc).

Last month I spoke about challenges of being in a sandwich generation and the loss of my annual bonus. Some good that came out was that my wife found a very flexible part-time job. It is only a couple hours a day and at minimum wage. But she can take time off whenever she needs to leaving her the flexibility for taking care of aging parents and replacing my loss of a bonus.

Unfortunately things at my place of employment are getting worse. Just went through a large layoff (I survived) and it just may be the tip of the iceberg for more. Yet there is silver lining, the severity of my employment status has inspired my family to dig deep to find more money saving ideas.

For the most part I have little control over my employment so I will continue to focus on what I can control such as my DGI portfolio. It is for scenarios like this that originally inspired my move to dividend growth.

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- Comments: 0

Defensive Addition to My Portfolio - 22 Feb 2014 21:33

Tags: hcp reit

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Over the last 9 months REITs (Real Estate Investment Trusts) have been in a sell-off. This sell-off has finally motivated me to buy my first REIT in an effort to diversify my portfolio. In addition to increasing my portfolio diversity I also have the goal of picking a defensive stock in the case of a significant market drop by owning an alternative investment in the form of property. A REIT is easier than actually buying property and the headaches that come with it as well as also being more liquid.

I settled with a purchase of 54 shares in HCP at a price of $37 per share and a dividend yield of 5.8%. HCP’s health care property investments are the most diverse in their industry and tenant income source is just as diverse as it is spread (almost evenly) between Private investment, Medicare, & Medicaid.

Additionally HCP has increased its dividend for 29 straight years, has a 10 year dividend growth average of 2.4%, and is the only REIT currently a member of the S&P 500 Dividend Aristocrats Index. HCP is quite proud of its inclusion in the index and heavily advertises as such, of which helps attract new investment when HCP requires capital for property growth. - Comments: 0

Summary of First Quarter Increases - 15 Feb 2014 12:45

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In the first quarter I expected 6 stocks to increase dividends and to date I have 1 miss in Triangle Capital (TCAP).

Though TCAP did not raise their dividend they did issue a special dividend of $0.30 per share payable in two installments of March and June ($0.15 per share in each installment). While not a regular increase it is still a bump of 13% more than last years overall payment. TCAP has already been on my 2 year watch list as they had no increases last year which gives them another 10 months to recover with growth.

Financially TCAP continues to manage their portfolio and position themselves for future growth and one of the primary reasons I am giving them a full two years to get back on the div growth wagon. The second half of 2013 saw extensive loan repayments. TCAP's ability to identify strong investment candidates and to quickly turn the repayment money back into their portfolio will be key to maintaining my faith in management.

Rounding out the remainder of expected increases we had Dr. Pepper Snapple (DPS) 7.9%, PPL Corp (PPL) 1.4%, and Hasbro (HAS) 7.5%. Of course the quarter is not over and next month I am expecting news from Air Products (APD) and Waste Management (WM). - Comments: 0

DG Investing in a Taxable or Deferred Account? - 05 Feb 2014 15:23

Tags: 401k inflation ira roth taxes

I occasionally get asked if using a tax deferred account (such as an IRA) is better than a taxable account for dividend growth investing and my answer is always the same; it depends.

There is no absolute right answer and much depends on your goals and where you are in life. If your goal is to create an income flow during retirement then a Roth IRA or Roth 401K is your best solution.

If you are saving to build an emergency fund then a taxable account is your best solution as you can easily access your income stream without paying early withdrawal penalties. But this all depends on your age and how far along you are towards your goal. The closer you are to your goal or nearing retirement age (within 10 years) it would make sense to start placing all or some of your future investments into a tax deferred account while you still qualify. The ability to grow dividends at an even faster rate would be yet another tool to help combat inflation during your retirement years.

Besides growing your earnings in a tax free or deferred IRA or 401K there is an additional benefit that may be realized that investors should not overlook. Some U.S. States have a classification of being “tax friendly”. Tax friendly states, such as Pennsylvania, do not tax distributions from 401(k)s, IRAs, deferred-compensation plans or other retirement accounts. If you think a Roth account solves this think again. A Roth may help with federal taxes but States are under no obligation so “tax un-friendly” states such as Connecticut are not shy about taxing Roth distributions. If you are fortunate enough to live in or plan to move to a tax friendly State then consider having some of your investments in a tax deferred account.

Not sure if your state is tax friendly? Check out this neat tool from Kiplinger’s that summarizes all 50 States. Kiplinger's State by State Tax Guide Link - Comments: 0

Goals Have Become Challenging - 01 Feb 2014 17:02

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It is amazing how thing change in just a month. First off I can officially say I am now part of the sandwich generation. Recently (and unfortunately) my aging in-laws require care that my wife needs to provide on a daily basis and top it off the oldest of my three children is only two years away from college.

At my place of employment one of my fears came true in that there will be no annual bonuses this March. I was really counting on that to meet my investing goal $6K of new stock purchases. My wife could get a full or even part-time job to compensate but that commitment would take away from the time she cares for her parents of which I will not deny her that. We will just have to dig a little deeper to figure out how to fund the goal.

Speaking of goals January was not polite overall. With the markets down it places both my 401K & IRA behind the curve. There are still 11 months left in the year so still time to recover. On the positive side my efforts at the start of the year to reestablish a 10% cash position in both funds has limited the downside.

On the dividend growth side I neither purchased nor sold any stocks but have accumulated $2K in cash for future purchases. Dividend payouts remained steady with no decreases but expect increase announcements starting in February. My expectations for dividends & growth was the only goal meeting my expectations and further reinforces how steady a DGI portfolio can make ones financial efforts.

Though I never buy stocks in the first month of a new year I am seeing buying opportunities with the recent market pullbacks. As of today I see buying opportunities with General Mills (GIS), McDonalds (MCD), HCP Inc. (HCP), Proctor & Gamble (PG), Dr. Pepper Snapple (DPS), Chevron (CVX), and Ensco plc (ESV). If prices continue to drop I see even more with Cummings (CMI), Coca-Cola (KO), Johnson & Johnson (JNJ), and Target, (TG).

While it looks like a tough start to the year for the overall market I definitely see DGI opportunities that meet my long term goals. If January is any indicator for the remainder of the year then 2014 may be a great opportunity for investing. Now I just need to dig deep and find opportunities to unlock some money to invest.

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- Comments: 0

Less to Invest but Peace of Mind - 19 Jan 2014 13:16

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Over the last 10 years I have been notified 3 times that my personal information may have been compromised and Target now makes the 4th. Private businesses inability to adequately secure my data over the years just re-enforces the belief that in this digital age nothing is secure.

It will be interesting to see how the Target fiasco with more than 70 million transactions of data being stolen will play out. Short term I believe they will be the poster child of cyber hacking and will pay out reparations or services provided that will be more excessive than other retailers recently hacked. Being the poster child I'm sure sales will suffer but only for a couple of quarters as most have short memories and after a year this will be a thing of the past. But, in the meantime Target has to suck it up and keep a stiff upper lip throughout. I would not be shocked if the dividend remains static this year but would be surprised if it decreases or halted.

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That aside, I can no longer stick my head in the sand and think all businesses have my back in regards to securing personal data and have to assume some responsibility. On this note, I started a subscription to protect my identity and financial position in life. I signed up with Identity Guard for $14.99 a month that not just monitors but also provides $1 million of insurance protection and recovery assistance.

As I have posted in the past, spare money is never easy to come by and I'm always looking for ways to save and invest of which this commitment will take away from that effort. Yet, the positive is peace of mind protection. - Comments: 0

Getting a raise every month this quarter :) - 08 Jan 2014 00:16

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I love the first two quarters of a new year as two thirds of my holding announce dividend increases!

So now I sit here waiting patiently for the news announcements to be released. Kind of reminds me of being a kid again having to wait for Christmas. Gotta love this anticipation and feeling over getting a bunch of raises over the next six months.

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- Comments: 0

Regional Banks have a place in my portfolio - 04 Jan 2014 21:04

Tags: banks bhb build_diversity efsi fmao lark nwfl sbsi

Bank of the Ozarks (OZRK) is officially the first company of 2014 to announce a dividend increase. OZRK is a local regional bank that declared a 4.8% increase in their annual dividend.

It is not surprising that the news did little to excite markets. Local or regional banks are thinly traded small cap stocks that barely register on Wall Street’s radar screen. Though listed on major exchanges they have low daily trading volumes and you never hear of anyone becoming a millionaire from gains in stock prices from these little financials.

There are positives to investing in small regional banks. Unlike their larger brethren they are not exposed to massive financial scandals or undermining of the economy. They exist as part of our community by providing financial services to you and most of your neighbors. They sponsor little league teams or help with the Women’s Auxiliary Club. They have personal relationships with other businesses in the community helping them grow their businesses. And many have been serving their communities for more than 100 years.

So if stock price gains are slow why invest? Surely there are better investments. But, if you are a dividend growth investor these can be little gems of steadiness in your portfolio. Many pay dividends and even grow their dividends year to year. Most likely not the fastest dividend growth rate in your portfolio but when you factor in their low stock price volatility they act similar to utilities and provide some steadiness during market down times.

David Fish’s “Dividend Champions List” from http://dripinvesting.org/ provides a list of all stocks that have continually grown their annual dividend payouts for 5 years or more in a row. Of the 482 listings 50 are represented by banks. Of the 50 bank listings 45 are small cap regionals. And to break it down even further 18 of those companies have a dividend yield greater than 3%.

From that list I chose 6 nice little gems:

Company Symbol Yrs of Div Growth 12/31 Price Div Yield TTM P/E Beta Location Mkt Cap
Landmark Bancorp Inc. LARK 12 19.60 3.69% 10.54 0.05 Kansas 61.18M
Eagle Financial Services EFSI 27 22.50 3.38% 11.08 0.19 Virginia 77.38M
Norwood Financial NWFL 16 26.90 4.46% 12.12 0.05 Pennsylvania 98.84M
Farmers and Merchants Bancorp FMAO 9 22.06 3.81% 11.20 0.29 Ohio 106.44M
Bar Harbor Bankshares BHB 10 39.99 3.20% 12.38 0.44 Maine 157.48M
Southside Bancshares SBSI 19 27.34 3.07% 14.24 0.72 Texas 482.23M

The price chart below depicts the tight trading range over the last eight years and even the financial crash in 2009 had little effect on share value.

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With the exception of LARK and SBSI, the dividend growth rate from year to year falls into a median range of a 5.5% increase year to year. Some years obviously were better than others but long term a 5% to 5.5% average growth rate is not too shabby.

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As stated earlier, regional banks with their low volatility in stock prices make these very similar to utility stocks but with an average dividend growth rate of 5%-5.5% a year makes it by far a better long term investment. I am of the opinion if you are looking to reduce risk within your portfolio through diversification then consider adding some regional banks and not limit yourself to utility stocks. In the long run your passive income stream will thank you. - Comments: 0

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


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