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

Dividend Tax Considerations - 17 Aug 2013 13:26

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One of the best tax moves in the U.S. has been the reduction in qualified dividend payments to a standard rate of 15% (20% for those in the highest in tax bracket).

Initiated during the Bush Presidency in 2003 and extend throughout President Obama’s terms, the change in the dividend tax rate policy has motivated more companies to issue dividends during that time period rewarding shareholders. Of course there are the counter arguments that the dividend tax rate only benefits the rich but as interest rates on savings have remained near zero and the constant reminder people are struggling to fund retirements this argument has been slowly dying off.

Over the years more dividend paying companies have led to the increase in popularity of dividend growth investing. And retirees are learning to embrace a new income stream at a lower tax bracket which has helped provide another solution to funding retirement. A lower tax rate may have been one of the motivators why you became a growth investor but if you are new to this investment style you should be aware that there may be other countries that can tax your dividend.

Just because a stock is listed on a U.S. stock exchange does not mean that all dividends are only taxed by the U.S. There are quite a few foreign stocks also traded and the originating countries may have a tax rate that can hurt you dividend growth. Some countries such as the U.K. have a 0% rate while others such as Switzerland have a rate as high as 35%. Understanding a foreign countries tax rate is essential when evaluating both a dividend payment as well as growth potential, to assist here is a link to a table of dividend tax rates by country.

Additionally, if you are not careful when filing your income tax you could be double taxed (once by the foreign country and once by the U.S.). When filing your annual income tax return there is a credit allowed for foreign taxes to avoid the double taxation (IRS tax credit link http://www.irs.gov/taxtopics/tc856.html). - Comments: 0

Norfolk Southern Corp (NSC) - 13 Aug 2013 22:47

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No matter how old we get there is always a kid in all of us and I am no exception. As a kid I was fascinated with model trains and when a childhood fascination collides with another favorite hobby (investing) I just cannot help myself.

Norfolk Southern (symbol NSC) is a railroad company operating on the East Coast. For the last 12 years they have been increasing their dividend payout at a significant pace and with a current yield of 2.84% one cannot help but take notice.

Dividend Growth Rates
1-Yr 3-Yr 5-Yr 10-Yr
16.9% 12.6% 15.1% 22.3%

The kid in me cannot stop being giddy as what is better than big trains and rising dividends. But the adult in me has to step in and ruin the fun. Looking at some basic numbers NSC meets most of my screening criteria for a DG stock:

Dividend Growth Rate Debt/Equity Ratio
Criteria NSC Criteria NSC
>= 7.2% 16.9% < 1 .83
Dividend Yield Payout Ratio
Criteria NSC Criteria NSC
> 3% 2.84% < 70% 38%

Though dividend was slightly lower than my criteria the growth rate was more than enough to compensate. The big question left was if the dividend growth rate was sustainable and for how long which required a deeper dive.

Earnings from 2011 to 2012 actually decreased by 1% sending the first warning signal something might be amiss. After further research the decline was attributable to a decrease in demand for coal which makes up 26% of NSC revenue which was -16.7%. NSC revenue is classified into three main revenue streams:
2012 Revenue M$ 2011 Revenue M$
Coal 2879 3458
General Merchandise 5920 5584
Intermodal 2241 2130

Luckily increased revenue from General Merchandise & Intermodal helped offset some of the loss for 2012. Looking at the first six months of 2013 NSC saw another 17% decline in coal revenue and is on pace to see annual revenues decrease by an additional 2% (pushing the payout ratio up from 38 to 39%).

During 2012 & 2013 NSC has been investing in intermodal deliveries as an alternative and have yielded a 6% increase in 2012 and is on pace for a 7% increase for 2013.

Unfortunately, competitor CSX, which operates in the same area, also has revenue based on a similar structure and allocation as NSC so CSX has also seen steady declines in coal revenue. Like NSC they are also pursuing growth in intermodal business.

Assuming coal demand levels off by the end of 2013 and natural gas remains affordable then revenue growth will primarily come from general merchandise and intermodal shipping. Add to the issue that NSC and CSX are pursuing growth in the same intermodal business that minimizes overall future growth to approximately to 4-5% annually.

With a payout ratio of only 38% and combining it with a 4-5% EPS growth rate, dividend growth could continue at a 10% pace annually for the next 9 years before it hits my limit of a 70% payout. Considering how well NSC manages its financials it does question if they would increase dividends at that rate or hold at a certain payout ratio. Last month NSC announced a 4% dividend increase (well below its average) so my inclination is that they will hold at a payout ratio of 50% or lower.

As much as I would love to buy into a railroad for diversification, and to satisfy the kid in me, I believe now is the wrong time to buy NSC. For now keep watching and see how management reacts to revenue and dividend growth.

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

Dividends - DRIP, Hold, or Do Nothing? - 10 Aug 2013 13:57

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As a new investor you may be asked by your brokerage if you wish to enroll in a free dividend re-investment program or as it is often referred to as DRIP investing.

A DRIP program is very simple in its nature, when a company issues you a dividend payment your brokerage account will automatically take that payment and buy additional shares of the same company. This concept is often referred to as compounding. Compounding in itself is a powerful savings tool but is it right for your portfolio?

Compounding works best when your investment vehicle has a consistent price. With a money market, savings account or bank C.D. this works very easy. Each unit is valued at $1 so when you reinvest the investment value is always constant at a purchase price of $1.

Dividend yield for stocks are much different. Stock dividend yields are calculated as the dividend payout divided by the price of the stock. Since stock prices are changing daily the dividend yield will fluctuate, the higher the stock price the lower the dividend. When stock prices increase faster than dividend payouts you begin to lose some of your growth momentum and DRIP programs actually hold back your portfolio from peak growth performance as they may be buying when stock price is rapidly increasing. A strategy common among dividend growth investors is to let your dividend payments accumulate and invest when a growth value opportunity presents itself.

Does this mean that DRIP investing has no place in your portfolio? Absolutely not, there are some stock investments where a DRIP works wonderfully if they have what is referred to as a low Beta. Beta is a measure of a stock's volatility in relation to the market. By definition, the market has a beta of 1.0, and individual stocks are scored according to how much their stock price goes up or down in comparison to the market. A stock with small price swings has a low beta (less than 1) and wild price swings have a high beta (greater than 1). Companies that have a beta less than 0.4 typically make for very good DRIP programs. Examples of companies that sport a low Beta are usually utility companies.

So that leaves two reinvestment strategies:

  1. DRIP for companies with a Beta that is less than 0.4
  2. Hold & accumulate for buying opportunities for companies with a Beta greater 0.4

Another topic new investors need to be aware of is whether there is a time when not to reinvest dividends. There are times when you should not reinvest and it will vary by person so I will attempt to address a few:

  • 10% of your portfolio is not in cash – Having a 10% position in cash offers you two significant advantages. First it gives you capital to take advantage of opportunities with a significant position. Second, it provides risk relief in falling markets.
  • Your retired – Dividend payouts may be required to replace income by supplementing Social Security payments.
  • Unemployed – This is similar to being retired where you attempt to replace income loss by supplementing unemployment benefits with your dividend income stream. With a little luck this may hold you over until you get a new job and prevent you from selling any portfolio assets.

I have heard some folks not re-investing on a hunch (or fear) that a stock market crash is imminent. This is often referred to as market timing which is something few people ever get right (including professional investors). My advice is to not worry about market timing and instead focus on your portfolio growth while balancing it for risk through diversification and maintaining a 10% cash balance. - Comments: 0

McDonald's Corp (MCD) - 09 Aug 2013 19:52

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McDonald's (symbol MCD) has long been a staple in many Dividend Growth Investor (DGI) portfolios. When you look at its historical dividend growth MCD rewarded shareholders extremely well over the years. The fact that they have increased dividends for 36 straight years it is no surprise as to why it is a dividend favorite among investors.

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

A more detailed look at some numbers and ratios MCD meets many of the criteria I look for in a Dividend Growth stock:

Dividend Growth Rate Debt/Equity Ratio
Criteria MCD Criteria MCD
>= 7.2% 13.4% < 1 .84
Dividend Yield Payout Ratio
Criteria MCD Criteria MCD
> 3% 3.1% < 70% 56%

The main competitors are Burger King (BKW) and Wendys (WEN). Looking at BKW & WEN they currently have P/E Ratios of 45.98 and 214 versus 17.87 for MCD making it look like the value of the three. But the average P/E for MCD over the last five years has been 16.5 so it is slightly over-valued at its current price of $97.90 per share.

An area of concern has been the surge of small specialty hamburger chains such as Five Guys Burger, In-N-Out Burgers, and Jake’s Wayback. But I see this more of a problem with WEN and to some extent BKW. What is insulating MCD from the specialty burger onslaught is its virtual size. MCD currently has 34,480 restaurants in over 118 countries and when we compare to BKW with 12,997 and WEN with 6,560 restaurants it is easy to see how massive of a scale MCD’s operations are in comparison.

Additionally, 58% of MCDs restaurant are in foreign countries where they do not have to compete with the recent U.S. surge of specialty burger joints. Growth has primarily been in the Asia-Pacific area where it has increased 6.6% from 2011 to 2012 going from 8,865 to 9,454 restaurants and is seven times more penetrated than its closest competitor (BKW has 1,010 restaurants in Asia). Of course as the U.S. dollar strengthens this can turn into a weakness due to currency exchanges.

On the earnings front, earnings per share growth slowed to 5% in 2012 and estimates for 2013 range from 4-5% growth. A fear going forward is if the 13.4% dividend growth rate is sustainable. With a payout ratio of only 56% and combining it with a 4-5% EPS growth rate, dividend growth should continue at a decent pace (7-10% annually) for the next 7 years before it hits my limit of a 70% payout. Personally I do not see MCD management being content with such a slow growth rate over an extended period of time. Their focus on keeping a modern fresh menu and increasing franchise fees should increase growth rates as early as 2014.

Overall, though slightly overvalued, I would not hesitate initiating a small position of MCD in my portfolio and if the stock price drops back to its average P/E of 16.5 (approximately $90 per share) I would increase my investment amount.

Note: I do not own this stock at time of this writing but do have a buy interest. - Comments: 0

First Blog Post! - 08 Aug 2013 21:25

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This is the first blog post of The Simple Dividend Growth Investor and would like to welcome all readers. Though I have invested in the stock market for many years this is my first foray into Dividend Growth Investing. I used the better part of 2012 to figure out what worked and can now apply My Rules of what I have learned and possibly even refine as I receive feedback.

Going forward I will be sharing my humble stock analysis as well as quarterly adjustments that I make to My Portfolio, which stocks are currently on My Watch List as well as Daily Dividend Growth News of companies increasing their dividend payouts.

So on that note I'll use a phrase from a good friend…"Lets kick it brother!" - Comments: 0

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