Tuesday, July 15, 2014

Weekly Purchase - DE

7 shares DE, 2.70% yield, $16.80 annual income
1 share GE, 3.35% yield, $.88 (FRIP purchase)

More Deere this week.

Weekly purchases are winding down for me. Two more then I revert back to bigger buys.  I'm still not convinced frequent small purchases is really better than large purchases.  But I will say it's fun!  The biggest advantage is psychological.  It's far easier to commit a few hundred bucks at a time than a few thousand.  There is some value in that, especially for new investors or those prone to hold too much cash.

Dividend Increases
ConocoPhillips (COP) raised quarterly dividends from $.69 to $.73 which equals a 5.8% raise.  5.8% is higher than inflation, not bad!  In the past COP announced dividend raises at irregular intervals so I'm quite pleased the company seems to have started a pattern of raises each July.  Irregular intervals cause me to worry.  I much prefer regular schedules I can count on.  This increase puts an extra $12.48 in my pocket over the course of a year which is just as good as many of these weekly purchases I've been doing.

Omega Healthcare Investors (OHI) announced quarterly dividends will be raised from $.50 to $.51.  This is the third OHI increase this year for a total of 6.3%.  6.3% easily beats inflation, so yeah I'm quite pleased!  OHI is a beast of a REIT growing FFO and FAD rapidly.  Glad I got in on this one.  I can now expect to rake in an extra $4.28 per year based on the new payment.

LO and RAI to Merge
Today we were informed Reynolds American plans to gobble up Lorillard for $50.50 cash and .2909 shares RAI stock.  Regulators still have to pass the merger, but I really don't care either way.

I'd have no problem taking the RAI stock and using the cash to buy more.  Reynolds is a fine tobacco company in its own right.  Quite a few investors seem to be spooked by a potential menthol ban.  I personally don't think it will happen (blatantly unAmerican to which I take offense, plus you need an iron stomach to hold tobacco stocks anyways), but if it was to occur RAI is better positioned than LO.  RAI doesn't rely as heavily on menthol cigarettes. It also sells dip and snus with awesome brands such as Camel, Kodiak, and Grizzly.  I wouldn't mind owning a piece of those businesses.  Not at all!

RAI = suitable replacement for LO.  Better diversity, higher current dividend yield, less reliance on menthol.  At the cost of lower dividend growth.  Overall I don't mind.

Or regulators kill the deal and I can continue owning LO with its higher dividend growth.  Not a problem.

If the deal does go through, Blu e cigs will sold.  Reynold's already owns Vuse (I didn't know that till today) which seems to be more popular than Blu anyways.  Not sure if Vuse is marketed nationally yet, but I see it all the time in Colorado.  More so than Blu, though my experience is anecdotal.  Also Maverick, Kool, and Winston get the axe.  Basically they keep only the best brands in Newport, Camel, Pall Mall, Kodiak, Grizzly, and Vuse.  Makes sense.

RAI or LO.  Rising dividends will continue hitting my account either way.  We'll see what happens.

Monday, July 7, 2014

Weekly Purchase - DE

6 shares DE, 2.66% yield, $14.40 annual income

I'm building a position in Deere & Company right now.  I think the company has a very bright future as the world population grows and modern farming techniques are adopted in other parts of the world.  It seems to me I could profit on a trend like that and also collect rising dividends in the process.

I'm looking to buy great companies with rich histories of taking care of shareholders.  Even then I cannot pay any price when acquiring parts of these businesses.  The cheaper I acquire shares the more shares I can buy with the same amount of capital and therefore collect more dividends.  I have a predetermined list of 50 companies I plan to own.  The only thing left is acquire the shares at favorable prices to the best of my ability.  I think DE shares should be worth $117 so yeah I believe I'm getting a nice discount with today's purchase.  I could be wrong about its fair value.  However I do prefer to at least have some idea about what shares might worth as opposed buying stocks based on stocks charts or even completely in the dark.  I find my system to be quite useful yet it isn't perfect.

With 24 shares, DE now has a dividend weight of 0.94%.  I could easily build up to a 50-55 share position as part of a balanced portfolio built for sleep well at night income generation.  Besides DE I'm looking to start new positions and to beef up holdings with dividend weights less than 1%.  At this point I'm keeping an eye on GPC (.56%), BP (.38%), GE (.78%), and XOM (.77%).  UL (.56%), KRFT (.93%), and ITW (.80%) are pretty much uninvestable  for new money as much as I'd like to add.

Today's purchase was commission free as I still have free trades available.  I plan to purchase income paying securities, most likely dividend stocks, on a weekly schedule for the rest of July.  Then I'll resume larger purchases.  I have extra free trades for August and beyond, but not enough to burn through them via weekly buys.


Midyear Financial Goals Update

1. Increase forward annual dividend income to $6,880 ($573 per month)
Starting the year at $5,680 I need $1,200 of progress.  Not including today's purchase my annual dividend income went up by $623 so far this year.  52% of $1,200 is slightly ahead of schedule half way through .

Looking ahead:  Monthly capital infusions have been better than expected allowing me to purchase more stock than previously thought.  Higher market prices have been working against me since I can't buy as many shares with the same amount of money.  Not only that, but I'm working on weightings which means I can't really buy high yielding stocks such as REITs or tobacco companies at the moment.  The typical stock I'm buying right now pays less than 3% making this goal somewhat problematic.  I also expect fewer dividend increases for the back half of the year.  Accomplishing this goal will be challenging, but I think it is possible if I want it bad enough.

Status: on track, but I need to increase my savings rate.

2. $20 monthly Lending Club interest
Last month I received $14.82 worth of Lending Club interest.  During December 2013 I received $8.75.  I'm very pleased with the progress.  I plan to change nothing.

Status: on track and looking good.

3. Average monthly brokerage deposits of $1,300
I averaged $1,717 so far this year.  I'm really doing well here.  A few things have changed since I crafted this goal late last year.  First off my employment income went up by a nice amount on the back of some decent raises.  Second of all I have taken steps to reduce fixed monthly expenses.  I switched car insurance, I ditched cable and bought a digital antenna, and started using cash back credit cards for everyday purchases.  Small things like that do add up!  Also my rent went up by less than $1 per month and I fully funded my savings account for a future vehicle.  Yep.  When it comes time to purchase a new vehicle (used obviously) I will be paying cash.  The money has already been saved, and it feels awesome!

Looking ahead:  I think I could easily save upwards of $2,000 per month later this year.  Right now I'm working through some large expenditures and will likely only deposit $1,700 per month for the time being.  I need new tires for my vehicle, I just bought a new smart phone, I still need to buy my season ski pass, I'm buying snowboard boots, and will continue getting preventative maintenance done on my truck here and there.  Once I get through that, savings will pick up.

Status: on track and looking good.

Monday, June 30, 2014

June Recap

The last stock market correction was two years ago.  I find myself wanting to hone my skills as an income investor and that means not panicking when stock prices sour.  I need a test, some practice, just to make sure I'm at peace with my chosen strategy.  I don't check my accounts at all except to buy new shares or track dividend payments on personal spreadsheets.  Even then I intentionally avert my eyes from the part of the computer screen that displays portfolio value.   I calculate portfolio values once per month when I do monthly recaps though it's for my readers not for me.  In my head I remind myself the value of my stocks do not matter, only the income stream it produces.  I do whatever I can to keep myself in the correct state of mind and focus on what's truly important (replacing employment income with dividend income).  Mental tricks.  Hopefully I will have trained myself by the time the markets inevitably correct.  I need a test; I feel rusty.

LTC Properties became the second holding to pay over $1,000 dividend income.  Next up is Philip Morris perhaps as soon as January next year. The only other thought worth noting is that June was the second commission free month in a row.  That streak will end in July when I do a purchase in my ROTH IRA account.

DOW: 16,827 /// S&P 500: 1,960 /// 10-YR BOND: 2.52%

New Purchases:
1) 3 shares DE at $91.32: $7.20 annual income
2) 4 shares BAX at $73.68: $8.32
3) 3 shares DE at $90.21: $7.20
4) 4 shares BAX at $73.74: $8.32
5) 3 shares DE at $91.17: $7.20
6) 5 shares PG at $78.69: $12.88
7) FRIP: 2 shares GE: $1.76

Sales:
none

Dividends Received: $617.93
ConocoPhillips (COP) $53.82
Walmart (WMT) $15.36
Southside Bancshares (SBSI) $15.84
iShares Emer Mkt Bnd (EMB) $2.46
Southern Company (SO) $33.60
Chevron (CVX) $60.99
Emerson Electric (EMR) $23.65
Exxon Mobil (XOM) $11.73
Johnson & Johnson (JNJ) $42.00
Lorillard (LO) $51.67
Norfolk Southern (NSC) $30.78
Target (TGT) $27.95
Unilever (UL) $8.55
Avista (AVA) $49.85
McDonald's (MCD) $49.41
Realty Income (O) $15.69
Realty Income Series F (O-PF) $6.76
BP (BP) $5.85
LTC Properties (LTC) $28.58
Owens & Minor (OMI) $25.75
Pepsi (PEP) $57.64

Dividend Increases:
1) O: $.1824792 to $.1827917 per month: $.36 annual income*
2) TGT: $.43 to $.52 per quarter: $23.40
3) WPC: $.895 to $.90 per quarter: $.44*
*: second increase this year

New Deposits:
$1,700 to taxable account, $100 to lending club

Lending Club Interest:
$14.82

Recent Buys

5 shares PG, 3.27% yield, $12.88 annual income

I think PG is decent buy right now for long term investors.  Awesome company.  In fact this company is so awesome it has increased dividends the past 58 years.  Go ahead, start a corporation from scratch right now and try to match that feat.  You probably have betters odds of winning the lottery...  Procter & Gamble was able to achieve greatness because of branding, innovation, and catering to consumer needs.  Huge moat.

A 3.27% yield for PG is pretty solid in my opinion.  I bought shares in June 2011 for a little over 65 bucks a share.  Guess what the yield was when I did the purchase...  3.20%.  Then I bought more in July 2011 on a nice dip and scored a 3.38% starting yield.  The current yield is nothing to sneeze at especially in comparison to other dividend growth stocks which are obviously over valued.  The only thing about PG as an income source is that its payout ratio crept up in recent years.  I'll have to monitor that, but dividends are by no means in danger at this point.  Worst case scenario is that dividend growth slows down a bit.

PG now has a dividend weight of 3.76% for me.  I'll consider adding more at these levels until it gets over 4%.  I want core stocks (PG, PEP, KO, JNJ, CVX, MCD, PM) to have dividend weights of 3-4%.  I'm underweight JNJ and overweight PM, other than that it looks good.



3 shares DE, 2.63% yield, $7.20 annual income
4 shares BAX, 2.82% yield, $8.32
1 share GE, 3.27% yield, $.88 (FRIP purchase)

With these purchases GE now has a dividend weight of 0.78%, 0.71% for DE, and 1.77% for BAX.

It makes sense to add these stocks are current levels not only because of weightings, but also because they appear slightly (BAX, GE) to moderately (DE) undervalued.  GE is creeping down towards $26.  Gotta love that, but it would obviously be better closer to $25.  DE is hanging around $90-92, which I appreciate since I plan to add more.  BAX's stock price went down since I bought it the other week.  Good news for accumulators.

I'm looking to increase ownership in these businesses next month if Mr. Market continues playing nice.  We'll see what unfolds.

Monday, June 16, 2014

Weekly Purchase - DE

3 shares DE, 2.66% yield, $7.20 annual income

I continue to see value with Deere.  Between today's purchase and TGT's improved dividend rate, my portfolio is set to pay $6,267.72 on an annualized basis or $522 per month.  Deere dividends make up 0.59% of that amount which I intend to just about triple.  I have to hope DE's share price keeps falling so I could acquire more shares (and therefore more income) for the same amount of invested capital.   Worst case scenario DE's share price goes up forcing me to look elsewhere.  I want lower prices during active accumulation and it's a shame the stock market hasn't really cooperated the past few years.

Other than Deere, I'm also considering BAX, GE, PG, and TGT for potential purchases.  I should gain a new GE share tomorrow through Scottrade's FRIP program.

I will away from home without access to blogger the next week and a half or so.  I plan to continue buying income securities as usual, but will have to post the transactions at a later date.

I hope you all have an awesome week!

Sunday, June 15, 2014

Which Household Products Stock Is Most Attractive?

CL, CLX, KMB, PG, UL.  Titans of dividend growth investing.


Key Brands
Long term investors are attracted to companies with brand power that sell every day products consumers have to buy whether the economy is reaching new heights or we're stuck in the middle of a recession.  While I don't know which brand of smart phones consumers will favor 20 years from now, or what social media site will be all the rage.  I can tell you with certainty we will still brush our teeth, do laundry, wash our hair, and clean are homes.  Companies that sell these types of products are boring and will not make you rich over night.  In fact they usually command a higher than average valuation, which makes sense because the stock market loves certainty. 

What sets these companies apart from other consumer staples stocks (in my my mind) is the very nature of the products sold.  With cigarettes (MO, PM, LO) you have to deal with declining smoking rates and draconian government interference.  Sodas (KO, PEP) seem to face headwinds as consumers become more health conscious and move away from sugary beverages.  Staples retailers such as WMT appear to be doing well right now, but the industry is littered with failing businesses (K-Mart anyone?).  Look at the products and brands these household products companies sell.  If you're looking for a high quality company to hold the next 2-3 decades, here are some ideas:

Colgate-Palmolive (CL): Colgate, Palmolive, Softsoap, Fabuloso, Irish Spring, Speed Stick.
Clorox (CLX): Clorox, Pine-sol, Liquid Plumr, Kingsford, Glad, Brita, K.C. Masterpiece, Hidden Valley.
Kimberly-Clark (KMB): Kleenex, Scott, Huggies, Kotex, Depend, Poise, Viva, Cottonelle.  KMB has a professional division which include products such as napkins you might find at a food court and also has a healthcare business it plans to spin off into a separate company.
Procter & Gamble (PG): Tide, Gillette, Duracell, Crest, Pantene, Old Spice, Ivory, Charmin, Tampax, Pampers, Mr. Clean, Bounty, Swiffer, Febreze, Dawn, Cascade, Ariel, Gain, Pepto Bismal, Scope, Oral-B, Metamucil, Vicks, Bounce, Head & Shoulders, Herbal Essences, Cover Girl, Olay.  PG recently sold its Iams pet food business in an attempt to improve margins.
Unilever (UN/UL): Dove, Axe, Lux, Ponds, St. Ives, Surf, Tressemme, Vaseline, VO5, Ben & Jerry's, Bertolli, Hellman's, Knorr, Lipton.  Unilever is moving away from foods.  It is currently selling Ragu spaghetti sauce and sold Skippy peanut butter last year.

Valuation
CL: 20.6 times forward earnings
CLX: 20.1 
KMB: 16.8 
PG: 17.6 
UL: 18.5 
Colgate and Clorox are clearly the most expensive from the group based on current prices and forward earnings guidance.  I don't follow CLX and I'm actually really surprised to see it's almost as expensive as Colgate!  KMB stock should provide the most earnings per invested dollar.  Always important.

Capital Structure
CL:  80.3% debt / AA credit rating
CLX: 98.0% debt / A- 
KMB: 57.5% debt / A 
PG: 34.4% debt / AA 
UL: 44.5% debt / A+ 
As you can see from the credit ratings, all these companies are high quality and will not be going out of business anytime soon.  PG has the best balance sheet which is also backed by its AA credit rating.  CLX's use of heavy leverage is the reason I don't follow the company.  In general I prefer low leverage since I'm a conservative investor.  That said, if I was going to lever the hell out of a business, it would be something stable like a consumer products or an utility company.  Investors who are more daring might not be as concerned.

Growth (3-5 yr EPS growth estimates)
CL: 8.9%
CLX: 6.4%
KMB: 6.9%
PG: 8.4%
UL: 1.5%
This all important metric is what will fuel higher dividend payments in years to come for income investors like myself.  It will also fuel capital gains/total return for traders & those who plan to fund a retirement with asset sales.  I took the listed numbers from Fidelity.com, but it's important to note analysts are sometimes a bit too optimistic.  I look at it from more a relative basis meaning I would expect CL earnings to grow faster than the others, and UL's earnings to improve at the slowest rate.  With that in mind, analysts aren't terrible and they certainly have more insight than I do!  Anyways Colgate is expected to grow the fastest which might explain the high p/e.  Not looking so good for UL.  Deal breaker.

Dividend Safety
CL: 50.3% payout ratio
CLX: 68.0%
KMB: 58.2%
PG: 63.3%
UL: 66.4%
To calculate payout ratios I didn't use the standard trailing twelve month earnings you'll see plastered all over finance sites.  Those numbers are filled with one time restructuring costs, one time settlements, asset sales, and a bunch of other junk that will not affect a business moving forward.  Basically I don't trust those numbers and I want to use something better.  Instead I used Fidelity's adjusted actuals which strips out the one time events.  For example, Starbucks (SBUX) has a p/e ratio of 381 using the standard GAAP number.  Does that sound reasonable to you?  My way it has a p/e ratio of 30.5  Anyways the same principles work with payout ratios or anything based on trailing EPS. 

Dividends from each of these companies are safe at current levels, but as a whole I expect EPS growth to match or slightly outpace dividend growth from this point forward.  That trend seems to already ready be under way with lackluster increases from KMB and CLX this year.  Colgate has a bit more wiggle room.

Dividend Payments
CL: 2.12% yield / 51 year dividend growth streak
CLX: 3.28% / 37 years
KMB: 3.04% / 42 years
PG: 3.23% / 58 years
UL: 3.46% / 34 years
Since I invest for the sole purpose of building an income stream, I need to get paid!  Overall it's really easy to find a yield over 3% in this industry.  Take your pick with the exception of Colgate.  

A reader (thanks Mark!) emailed me evidence showing Unilever actually has a 34 year streak in British pounds.  Anyways these companies are all dividend champions with crazy streaks compared to average dividend stocks.

Conclusion
At current levels I'm most interested in KMB and PG.  PG most of all.

PG has a reasonable valuation compared to peers, a rock solid balance sheet, decent EPS growth expectations, and a safe dividend paying more than 3%.  I will consider adding additional PG shares to my portfolio if prices remain under $82.  Hopefully under $80... better yet $75.

I think CLX and UL are the worst options given current prices.

Finally valuations and expectations do change over time.  That's why I periodically check up on companies and recalculate fair values.  I did grab some Unilever shares a few months ago when its p/e ratio was lower and growth estimates were more optimistic.  I'm still not impressed with Clorox.  No plans to add it to my portfolio or watch list at this time.  Perhaps another day...

Tuesday, June 10, 2014

The Most Expensive Stocks I Follow

#1) Automatic Data Processing
ADP looks especially hideous right now.  At 22.8 times forward earnings, it's pretty hard to justify buying new shares of this business. ADP recently lost its AAA credit rating which didn't seem to phase the stock price one bit.  I was hoping the credit downgrade might spook investors into selling (so I could pick up some shares).  Guess I'll have to keep waiting for an opportunity to add this one.  That day may never come...

#2) Colgate
CL is a fantastic company, and you can expect to pay a premium if you want to own shares of this business.  At 20.6 times forward earnings the premium price is getting a bit stretched... even by CL standards.  I already own PG & UL and don't have room for this one anyways.

#3) Aqua America
Man, I'd really really like to grab shares of WTR, but at 19.7 times forward earnings, that dream will not become a reality anytime soon. I'm saving a spot in my portfolio for WTR, and if it declines 10-15% I might get interested.

#4) American States Water
This company is slightly cheaper than WTR with a 19.6 forward p/e, but then you have to consider its PEG ratio is an absolutely terrible 20.6.  That's outrageously bad.  Apparently water utilities will have to be put on hold for a while.  Yuck!

#5) Sysco
A 19.5 forward p/e for SYY?  No thanks.  The only saving grace here is that it does have a juicy yield of 3.1%, unfortunately that's really low by Sysco standards.

#6) Air Products & Chemicals (APD) 19.4 times forward earnings
#7) Walgreens (WAG) 19.1 times forward earnings.  Does have a PEG ratio of 1.5 to make up for it.
#8) Compass Minerals (CMP) 18.7 times forward earnings
#9) Dominion Resources (D) 18.7 times forward earnings
#10) Coca-Cola (KO) 18.3 times forward earnings

I didn't include REITS or MLPs in this list.