Follow the dividend investment decisions of a person who has no background in financial investment and wishes to take control of their financial future to retire at 60.

Recent Buys - 08 Oct 2013 15:37

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With the recent minor pullback in the markets (thank you debt ceiling crisis) I took advantage of the situation to diversify my portfolio.

As of September I held zero shares in the energy sector but that has changed. I picked up a decent amount of shares of Chevron (CVX) and started a small position in BP (BP). The two purchases have increased my annual dividend by $115.

Chevron sounds like it was a no brainer but when deciding between Chevron or Exxon/Mobil it is not an easy choice. Both are excellent companies and you cannot go wrong purchasing either. At the end of the day I went with CVX and its higher yield and I was nervous about how much Exxon/Mobil has invested into natural gas.

BP was an entirely different story. With a dividend yield north of 5% it makes one stop in their tracks. But high yields do not come without risk the largest of which is BP still dealing with the Gulf oil spill settlements. Another risk was that BP has only recently started to increase their dividend again so any hiccup down the road may cause the dividend payment to become static. To adjust for the risk I only started with a small investment (24 shares). - Comments: 0

My Watch List Explained - 05 Oct 2013 14:47

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A watch list is crucial for any investor and each investor tracks key values or ratios to what is perceived as important. It allows investors to keep an eye on changes to potential investments that may represent a buying opportunity.

One of my fears entering into dividend growth investing is I will fall back into my bad habit of trying to time the market and only buy stocks at a price that represents a discount or value. While this type of thinking does lead to some hidden gems it can hinder my portfolio as I may not invest for long stretches of time limiting my ability to capture dividend growth and to diversify at a decent pace.

To get over the fear (or bad habit), I have structured my watch list to align with my portfolio strategy. My portfolio strategy is to initially invest with a 3% dividend yield and minimum growth rate of 9%. This criterion is then used to calculate a max price point or buy price for an individual stock and then adjust it for any perceived risks. Once a buy price is established it is then measured by the % of how much over or under it is versus the current stock price. The result tells me how much of a discount the stock price is in relation to my portfolio strategy.

This approach has resulted in more regularly investment periods, a larger population of stocks, and eliminated trying to time the market which historically for me has never panned out (probably because I cannot predict the future).

So how does your watch list work? - Comments: 0

Kids Are So Much Smarter Today - 01 Oct 2013 11:10

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My 11 year old son approached me last week asking about stocks and if he can invest. At first I was taken back by the comment but after seeing how serious he was about the subject my mood changed from surprised to pride.

I sat with him and explained the risks of investing and he just soaked it all in. After explaining market basics we then went over the differences between stock price gains/loss and income (i.e. dividends) and how this was different from his savings account.

It did not take long for him to grasp the value aspect of dividend investing so we next talked about how much money he was willing to invest. He decided to cash out his life savings ($317) and I promised him that I would match him dollar for dollar. This brought his total up to $634. Our next task was to find brokerage for a custodial account, we ended up at Sharebuilder.com as there was no minimum balance required and they would credit him $50 after his first trade.

Next was to show him a list of dividend paying stocks and after a few days he came back with three selections. McDonalds, Proctor & Gamble and an electric company PPL. When asked of my opinion I gave him approval and of course asked him why those three. His response was, "I love McDonalds, almost everything around our house has P&G on the label, and everyone uses electricity." He also said when he gets more money he wants to buy a water company because everyone drinks water. Not a bad response from an 11 year old and it showed me just how aware of his surroundings he is. At that age I couldn't get past baseball, comic books, & fishing. When the heck did kids get so darn smart?

The bank transfer should clear in a week so I'll sit with him and guide him through his first buy. Once he buys his first stock he plans on sharing with his math teacher so they can go over the stock & dividend yield. This should be a great life lesson for applying math concepts like calculating & using percentages and ratios.

As he gets older I'll start teaching him how to tear apart a financial statement but I'm probably getting ahead of myself :) - Comments: 0

Change to Watch List - 30 Sep 2013 22:13

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In a matter of just 3 weeks Sturm Ruger (RGR) saw its stock price surge 19.5% going from $52 to $63 per share. The sharp increase placed RGR on thin ice for staying on the Watch List. As a backup to RGR I added BP to My Watch List.

Currently I have BP rated with a high level of risk for the simple fact of potential legal liabilities and the lack of historical dividend increases. But with a couple years of dividend growth, a 27% payout ratio, and a yield just north of 5% does make this something to keep an eye on. - Comments: 0

End of a Quarter, Start of My DGI - 28 Sep 2013 22:30

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It is the end of my first quarter and received all of my dividends. Luckily I was able to save an additional $200 and just transferred it to my brokerage account and combine that with some leftover funds from rebalancing my portfolio to a DGI strategy leaves me with enough to invest in 2 or 3 securities over the next two months.

Now that the first quarter is behind me I can start tracking and updating how much dividend growth occurs from quarter to quarter of which I’m off to a head start as Microsoft (MSFT) announced a 21.7% increase in their dividend that starts in December.

In the quarter ahead my attention will be on Seagate Technologies (STX) to see if they announce a dividend increase in November or December. STX payout ratio is currently 32% leaving lots of room for growth. On the other hand this is a technology stock and dividend payments (never mind growth) is still something new for this sector so I see the odds of a dividend increase at 50/50.

With no dividend increase it will leave me with a tough decision. STX has been a stellar performer, they announced a dividend increase right after I bought the stock pushing the yield up at that time to 6% (now currently 3.49%). Additionally STX has also returned a 70% increase in stock price.

Selling STX may be my first test of trusting dividend growth criteria versus looking at the potential for stock price growth. This will also present a scenario that is currently not part of my strategy. If I sell then what do I buy? Do I stick with the 3% criteria? If I do then I lose the dividend growth. Right now my knee jerk reaction would be to invest in a DG stock paying at least 3.5% to compensate. Of course December is still three months away so still some time to strategize what-if scenarios. - Comments: 0

Risk Part 2 – Equity Diversity - 20 Sep 2013 21:20

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A fact with Dividend Growth Investing is that it is 100% invested in stock equities. Though historical stock performance can provide some patterns it cannot accurately predict the future on how stock markets perform. The lack of uncertainty exposes you to some level of risk if stocks perform poorly.

Some might argue that while investment cost is a concern it is not the top priority for DGI. As long as a portfolio continues to receive income and income growth through dividends the downward stock prices are not a major impact. Or more simply…”Why do I care if equity prices rise or fall as long as I keep getting my dividend checks?” While this may be a valid statement it does not address unforeseen risks.

No one has a crystal ball and there are too many external factors that can influence the stock market. For example, what if a drastically higher corporate tax is applied by the I.R.S? The increased tax expense may require companies to decrease dividend payments and invest the capital back into the company to sustain growth and compensate for the excessive taxation. Of course this is not a real scenario but only one of many what-if topics that could derail your investments and DGI strategy.

As much as I enjoy, support, and strongly believe in the benefits of DGI I would be wrong to say that it should be your only investment. Much like stocks, you should diversify your equity investments to reduce risk and preserve equity. Of course if you are a young investor starting out this probably is not feasible as you have limited financial savings but equity preservation should be a part of your long term investing plan.

Examples of some investments you can use to diversify your equity:

Cash

  • Bank Savings Account
  • Bank Certificate of Deposit
  • Money Market Account

Bonds

  • U.S. Government Debt
  • Foreign Government Debt
  • U.S. Corporate Debt
  • Foreign Corporate Debt
  • Municipal Bonds

Hard Investments

  • Real Estate / Rental Property
  • Precious Metals

Other Investments

  • Annuities
  • Preferred Stocks

I do not recommend investing in all the items above but simply listed potential alternatives. Never invest blindly, if you wish to diversify then investigate each one and become well versed on the good & bad or talk to a financial analyst if you do not have the time.

The next question is if you diversify how much? I do not believe there is one single answer to this question. It depends on your personal situation. The best I can share is my situation where I have 7% in cash, 78% in stocks and 15% in bonds. Since I am in my mid-forties I believe I can withstand a decent level of exposure to risk and still have enough time to recover. My current house has 90% equity and should be paid off in 3 years so I see no reason to add rental property. Additionally, I am one of the lucky few who will receive a small pension which provides further security in later years so I feel extremely comfortable maintaining my 78% stock exposure up to retirement. - Comments: 0

Risk Part 1 – Stock Diversity - 19 Sep 2013 21:08

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(This post is the first of a 2 part blog to identify potential risks in your portfolio.)

As a DGI investor it is easy to get caught up in the wrong numbers. In a constant pursuit to find the best combination of dividend yield and growth it is not hard falling into the trap of continually buying the same stock or set of stocks in the same sector placing a large percentage of your investment into one basket.

Exposing most of your portfolio to a single stock, sector or industry is one of the most risky items you can financially take on. All of the modern stock market crashes had specific sectors or industries at their core.

  • 1987 – Banking Industry
  • 2001 – Technology Sector
  • 2008 – Financial Sector

If your portfolio was heavily weighted during any of the crashes your portfolio would have been in ruins. Of course some would argue that the overall markets dropped like a rock in each of these incidents but it was worse for these specific stocks as you not only lost equity value but also income as they slashed or eliminated dividend payments during that time.

Need another example? You do not need a stock market crash to be exposed to loss. In 2012 the S&P 500 gained 13.4%, a good year by any means. But, there was one sector that was suffering…basic materials. As China went through its massive growth cycle basic material stocks were booming, especially those involved with coal, iron, steel, and other base metals. These stocks were sporting high yields & fantastic dividend & earnings growth rates. Once China growth had slowed the basic materials sector was hit hard in late 2012 and most of 2013. Companies such as Cliff’s Natural Resources dropped their dividend 76% and all the while their stock price dropped like a rock.

As a DGI investor you need to be diligent in balancing of your portfolio weighting in relation to individual stocks, industries, or sectors. I have yet to figure out if there is a magic weighting but for now I have the following plan but as my portfolio grows in size I’m sure these numbers will decrease:

  1. No more than 15% of my portfolio weighted to an individual sector
  2. No more than 10% of my portfolio to one industry
  3. No more than 7% of my portfolio to one stock

Of course if you are a new investor just starting out this is most likely not feasible but you should have a plan that with each investment you build the diversification. That is why in my watch list I always use a target weighting to determine how much I want to spend and to place me on track for a diversified portfolio. - Comments: 0

Meredith Corporation (MDP) - 16 Sep 2013 23:23

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Meredith Corporation (MDP) is one of the leading publishing media companies in the U.S. and of course I wouldn’t be writing about it if it did not have Dividend Growth characteristics.

MDP has been increasing its annual dividend payout for 20 straight years with some impressive growth rates and meets all of my basic search criteria.

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

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Dividend Growth Rate Debt/Equity Ratio
Criteria MDP Criteria MDP
>= 7.2% 13.4% < 1 0.41
Dividend Yield Payout Ratio
Criteria MDP Criteria MDP
> 3% 3.67% < 70% 57.6%

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Over the last 3 years MDP has been increasing dividends faster than earnings growth. The company moved from a 34.8% payout rdatio in 2011 to a 57.6% payout ratio in 2013. Looking at the last 4 years of EPS reporting, earnings appear erratic and adds confusion if future dividend increases are sustainable.

2013 EPS 2012 EPS 2011 EPS 2010 EPS
2.74 2.31 2.84 2.78

If we take the numbers as face value MDP has a very limited upside for dividend growth but before we throw in the towel we should dig a little deeper.

mdp.jpg

MDP is most famous for its magazine publications Better Homes & Gardens, Ladies' Home Journal and Family Circle. They have been reading staples for almost every Mom over the decades.

MDP’s publication business consists of 18 National & 6 Latino brand magazines and nearly 100 special interest publications. But MDP is much more than just publications; it also has 13 broadcast stations, websites, mobile & tablet apps, and videos. The combination of all these elements position MDP more as a content provider than a publisher

The company’s primary objective is to remain the leading media & marketing company serving American women. This is a pretty tall order considering their largest competitor is the Hearst Corporation who is one of the largest media companies in North America. To stay relevant, beat the competition and maintain the American Woman’s interest the company has been laser focused over the last three years with strategic acquisitions.

Key Acquisitions
. 2013 – Parenting and Baby Talk magazines
. 2012 – web app AllRecipes.com and FamilyFun magazine
. 2011 – EatingWell Media Group and EveryDay with Rachel Ray

The number of acquisitions and cost of folding them into the MDP family does explain some of the erratic earnings over the last few years. Going forward, the additional products should add to revenue growth. Yet, I would be cautious and want to see 2014 earnings to determine if revenue is truly growing again and can support dividend growth rates that exceed 7%.

Looking at the recent stock price of approximately $44 per share it carries a trailing P/E of 16.19 and a forward P/E of 13.54. The 5 year average P/E has been 12.92 so the current stock price looks to be slightly over-valued.

In summary, MDP is currently paying a nice dividend yield with a long history of growth but has weakness with an increasing payout ratio and weak EPS growth. The real strength of the company lies in its ability to create content and deliver it on any media format.

Investing now is a small gamble that they can execute web and electronic media delivery to grow their business. If they provide mediocre execution during that time then you are probably looking at a few good years of dividend growth (7 to 10%) and then a slower growth rate (2 to 4%). If they provide strong execution then they will be able to maintain their aggressive dividend growth for many years to come.

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

Dividend Growth Investing Benefits Youth - 15 Sep 2013 13:37

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Because DGI has the word DIVIDEND in it many people associate with basic dividend investing.

Basic dividend investing is typically associated with portfolios of people in retirement where they take their lifetime of accumulated wealth and invest in bonds, dividend paying stocks, and annuities to generate an income stream to supplement social security and/or pension. Because of this there is a misunderstanding that you need a large investment (more than $250K) for DGI to work.

The reality is you do not need a large sum at all! Instead the largest investment you need is time (10+ years) for the power of re-investing (compounding) and dividend growth to create your wealth.

When I started my professional career I had a huge advantage. I got to live at home with my parents for the first five years with little debt and virtually no financial commitments. I easily could have saved one year of salary in that time but instead squandered it away on lavish spending and good times. Looking back all it would take was two years of aggressive savings to accumulate $15,000 (a small salary even in the late 1980s) and I still would have had three years of living with my parents to spend my money anyway I wished.

Putting that $15,000 to work in a DGI portfolio with 3% yield, 10% div growth and not contributing anything other than re-investment of dividends would have resulted in an income stream as follows:

Annual Dividend Income at…

  • Age 21 - $450
  • Age 35 - $2,490
  • Age 45 - $8,454
  • Age 55- $28,699
  • Age 60 - $52,877

At age 60, the dividend would represent a large % of my base per-retirement salary and, when combined with my 401K, would allow me to retire early and not collect social security.

Of course I did not discover DGI until I was in my 40s but I still have time on my side and it’s just that the benefits will not be as large. The lesson here is that the investment of time is a lot easier than the investment of cash so DGI benefits the young more than those near or in retirement.

Since time is a critical investment I made a basic calculator for estimating potential DGI income in out years. It is not perfect as it assumes a consistent growth rate and does not adjust for when you stop re-investing dividends but is still useful for planning your goals. - Comments: 0

Helmerich & Payne (HP) - 12 Sep 2013 23:06

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Are you interested in investing into the shale oil boom but nervous about the risk? A safer alternative could be investing in companies that service the industry such as Helmerich & Payne (HP). HP is the leading U.S. provider for land contract drilling services. Their drilling techniques use directional and horizontal drilling, critical for shale fields.

HP has long been a dividend growth player with 41 consecutive years of growth with the most recent annual increase coming in at 7.7%.

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Dividend Growth Rates
1-Yr 3-Yr 5-Yr 10-Yr
7.7% 11.9% 9.2% 6.1%

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Looking at some of my screening criteria for a DG stock we see some solid numbers:

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Dividend Growth Rate Debt/Equity Ratio
Criteria HP Criteria HP
>= 7.2% 7.7% < 1 0.05
Dividend Yield Payout Ratio
Criteria HP Criteria HP
> 3% 3.01% < 70% 30%

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2013 earnings have been strong with HP already reporting $5.33 per share and they still have one quarter left to report which should place EPS in the $7+ range. Compared to 2012 earnings of $5.34 EPS this represents a 40% improvement year over year.

HP rig assets consisted primarily of U.S. based land rigs and year over year increases average about 13%.
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2012 Rigs 2011 Rigs 2010 Rigs
U.S. Land 282 248 220
Offshore 9 9 9
International Land 29 24 28
Total Rigs 320 281 257

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Looking at the balance sheet, HP’s efforts to dramatically decrease long term debt has been successful as the debt to equity ratio is down to an all-time low of .05.

LTDEBT%20CHART.png

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HP also has maintained a backlog of services of $3.6B in 2012 and $3.8B. Combined with the decrease in debt liabilities it becomes easier to see how solid their earnings have become.

One item in the 2012 annual financial statement that jumped out at me was a large increase in accounts receivable $460M in 2011 to $620M in 2012. But there was also a dramatic increase in annual revenue from 2011 to 2012 and when you create an “AR/Revenue” ratio both years are 18% so no cause for alarms.

The one area of weakness I found with HP was their source of earnings. 59% of HP's annual earnings come from only 10 major oil & gas exploration companies. If just one of these companies cancels a drilling contract it would greatly impact earnings.

In summary, HP is currently operating in a boom U.S. shale market with strong a balance sheet and backlog of orders. Their dividend rate looks to be secure and their long history of dividend growth should continue.

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

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