Man, it's great to be back in the States! It has been a joy to catch up with my family and friends. At my new assignment government housing is not available to me. I already found a place off base and will move in tomorrow. It's 2 miles away from work to save time & gas, and it's also reasonably priced. They even gave me $450 off the first months rent and a couple other perks for being in the military. Long term I think I will make money living off base, but in the short term I need to buy furniture. Ouch furniture is costly. I'm going to fork over some cash to buy a new bed, everything else can be used for all I care. For the next few months my savings rate will be pretty low, but I think past that I'll be able to save more than I originally projected!
DOW: 14,910 /// S&P 500: 1,606 /// 10-YR BOND: 2.48%
New Purchases:
1) 17 shares XOM at $89.52: $42.84 annual income
2) 23 shares WPC at $65.525: $75.44 annual income (the dividend has since increased)
Sales:
none
Dividends Received: $486.53
ConocoPhillips (COP) $39.60
Intel (INTC) $41.40
Southern Co (SO) $14.72
Southside Bancshares (SBSI) $14.28
iShares Emr Mkt Bnd (EMB) $2.46
Chevron (CVX) $29.00
Emerson Electric (EMR) $22.55
Lorillard (LO) $46.20
Norfolk Southern (NSC) $28.50
Johnson & Johnson (JNJ) $39.60
Avista (AVA) $47.89
Exchange Income Corp (EIFZF) $17.57
McDonald's (MCD) $43.12
Realty Income Series F (O-PF) $6.76
LTC Properties (LTC) $26.06
Owens & Minor (OMI) $21.36
Pepsi (PEP) $45.40
Dividend Increases:
1) WPC: $.82 to $.84 per quarter. $1.84 annual income
New Deposits:
$500 to ROTH IRA, $500 to taxable account
Lending Club:
No deposits for June. Saving money for furniture and moving expenses.
Other:
none
Sunday, June 30, 2013
Friday, June 28, 2013
How I Value Dividend Stocks
I'll try to explain my method as clearly as possible since a number of readers have asked me about this. I'm going to walk you through step by step, with pictures, to show you how I calculate the fair value for an individual dividend stock. Again the final number will be a fair value, not necessarily a target buy price.
I use the average of four valuation techniques. Two are forward looking, two are based on historical facts. I'll run through the calculation with XOM since it was one of my latest purchases.
Dividend Discount Model:
You can use google to learn about the theory if you want, I'm not going to get into that. However, it will tell me what the expected future dividend payouts are worth in today's dollars. Quite useful to an income investor such as myself. This is forward looking.
XOM has a FV of $62.92 based on DDM. XOM didn't do very good here. Fortunately I don't use this technique exclusively.
Discounted Cash Flow Model:
This valuation technique is also forward looking and can be used for all types of c-corps, not just dividend stocks. If a stock has EPS of X that is expected to grow Y% per year, what is it worth in today's dollars? DCF has an answer to that question. If you want more information about DCF, please google it. This post is going to be long enough as it is.
XOM did great with the DCF calculation. Again this is only one calculation. Let's not get too excited yet. $125.33
Average P/E:
Most if not all value investors place at least some faith in the P/E ratio. It's a quick way to gauge a company's valuation. That's great and all, but just knowing the P/E ratio won't tell me much. Is a 15 p/e good for XOM? What about a 10 p/e? Well one way of answering that question is to see what the historical p/e for XOM typically is. If XOM has a historical p/e of 10, I would argue that when the current p/e is 10 it is fairly valued. Anything less than 10 is attractive, while anything over 10 could be considered be over valued.
The goal here is figure out an actual dollar amount. Saying "over valued" or "under valued" isn't good enough. I want to break it all down into one number.
So if XOM had a P/E of 11.4 (historical average) I would consider it fairly valued. If it had a 11.4 P/E right now (based on the current EPS) it would be a $112.06 stock. Indeed XOM does look undervalued here. Now I have a number!
Average Yield:
This method is very similar to the average p/e. Dividend stocks are often bought because they provide income! If the current yield is high, investors will snatch up shares. If XOM yielded 5% right now, everyone and their brother would be buying as much as they could. I know I would. XOM wouldn't stay at a 5% yield for very long. Think about that. It's a key driver, along with EPS and dividend growth, of why income stocks tend to appreciate in value over time. When a stock has a high yield it is worth more to an income investor.
So how do we know what a decent yield for XOM is? Average yield. I consider the average yield to be another indication of fair value, just like average p/e. If you can get in at the historical yield you are not over paying because XOM is an income instrument. Now we have to put it into a number.
If XOM yielded 2.3% right now (the historical average or another way of saying fairly valued), the stock price would be $109.56.
Calculated FV for XOM Stock:
Take the average of the four calculations and you'll get $102.46. The last time I performed the calculation is was closer to 103. I bet the low current p/e dragged down the historical average a little, while the high current yield increase the historical yield a tiny bit since the last time I crunched the numbers. I only do them once per quarter, it is quite tedious.
These are the four methods I find most useful. The ones that fit my strategy as a hybrid income & value investor. I don't want to dwell on the past, yet I cannot predict the future. I find great comfort in the history of fantastic, proven companies. Can the streak continue? How accurate are analysts? I try to take all that into account.
This is not an exact science, and should be considered an estimate! Be aware that p/e's expand and compress over time. Be aware that interest rates might affect dividend stocks because they are income instruments. If I could get a 6-7% yield on bonds backed by the full faith of the US government, I'd have to think long and hard about buying an equity with a 2.8% yield. At 10%, bonds are a no-brainer. I like to use a 5 year period because it encompasses the great recession. Using a 10 year period might be a better historical comparison. Then again a business can change drastically over 10 years. There are other useful techniques. Some people use the graham number. I don't. It's up to you!
I use the average of four valuation techniques. Two are forward looking, two are based on historical facts. I'll run through the calculation with XOM since it was one of my latest purchases.
Dividend Discount Model:
You can use google to learn about the theory if you want, I'm not going to get into that. However, it will tell me what the expected future dividend payouts are worth in today's dollars. Quite useful to an income investor such as myself. This is forward looking.
 |
| Current Dividend. I used yahoo.com |
 |
| 5 Year Dividend Growth. I used fidelity.com |
 |
| Input the first two values. I use a 10% discount rate with the exception of utilities and telecoms. This is a spreadsheet setup by JC at http://www.passive-income-pursuit.com/ |
Discounted Cash Flow Model:
This valuation technique is also forward looking and can be used for all types of c-corps, not just dividend stocks. If a stock has EPS of X that is expected to grow Y% per year, what is it worth in today's dollars? DCF has an answer to that question. If you want more information about DCF, please google it. This post is going to be long enough as it is.
 |
| EPS taken from yahoo.com |
 |
| This number is derived from analysts expectations and taken from fidelity.com |
 |
| Again I use a 10% discount rate. I used a free online calculator at the following website: http://moneychimp.com/articles/valuation/dcf.htm |
XOM did great with the DCF calculation. Again this is only one calculation. Let's not get too excited yet. $125.33
Average P/E:
Most if not all value investors place at least some faith in the P/E ratio. It's a quick way to gauge a company's valuation. That's great and all, but just knowing the P/E ratio won't tell me much. Is a 15 p/e good for XOM? What about a 10 p/e? Well one way of answering that question is to see what the historical p/e for XOM typically is. If XOM has a historical p/e of 10, I would argue that when the current p/e is 10 it is fairly valued. Anything less than 10 is attractive, while anything over 10 could be considered be over valued.
The goal here is figure out an actual dollar amount. Saying "over valued" or "under valued" isn't good enough. I want to break it all down into one number.
 |
| You can see the 5 year average P/E is 11.4 Since XOM has a current P/E of 9.1, it is obviously under valued according to this technique. That's not good enough, I need a number. I'm going to assume 11.4 means fairly valued and extrapolate a price using the current EPS. Taken from Morningstar.com |
 |
| XOM has a current EPS of 9.83 Taken from yahoo.com |
So if XOM had a P/E of 11.4 (historical average) I would consider it fairly valued. If it had a 11.4 P/E right now (based on the current EPS) it would be a $112.06 stock. Indeed XOM does look undervalued here. Now I have a number!
Average Yield:
This method is very similar to the average p/e. Dividend stocks are often bought because they provide income! If the current yield is high, investors will snatch up shares. If XOM yielded 5% right now, everyone and their brother would be buying as much as they could. I know I would. XOM wouldn't stay at a 5% yield for very long. Think about that. It's a key driver, along with EPS and dividend growth, of why income stocks tend to appreciate in value over time. When a stock has a high yield it is worth more to an income investor.
So how do we know what a decent yield for XOM is? Average yield. I consider the average yield to be another indication of fair value, just like average p/e. If you can get in at the historical yield you are not over paying because XOM is an income instrument. Now we have to put it into a number.
 |
| It is quite obvious that XOM normally offers a lower yield than it does today. An indication that it is under valued. This picture was taken from Morningstar.com |
|
| Current Dividend. I used yahoo.com |
Calculated FV for XOM Stock:
Take the average of the four calculations and you'll get $102.46. The last time I performed the calculation is was closer to 103. I bet the low current p/e dragged down the historical average a little, while the high current yield increase the historical yield a tiny bit since the last time I crunched the numbers. I only do them once per quarter, it is quite tedious.
These are the four methods I find most useful. The ones that fit my strategy as a hybrid income & value investor. I don't want to dwell on the past, yet I cannot predict the future. I find great comfort in the history of fantastic, proven companies. Can the streak continue? How accurate are analysts? I try to take all that into account.
This is not an exact science, and should be considered an estimate! Be aware that p/e's expand and compress over time. Be aware that interest rates might affect dividend stocks because they are income instruments. If I could get a 6-7% yield on bonds backed by the full faith of the US government, I'd have to think long and hard about buying an equity with a 2.8% yield. At 10%, bonds are a no-brainer. I like to use a 5 year period because it encompasses the great recession. Using a 10 year period might be a better historical comparison. Then again a business can change drastically over 10 years. There are other useful techniques. Some people use the graham number. I don't. It's up to you!
Tuesday, June 25, 2013
Keeping Tabs on my Companies
I decided to look around youtube a bit and post a few videos on my blog. I get tired of reading articles, sometimes it's fun to mix it up with something more visual. I hope readers will learn something or perhaps be mildly entertained.
A fun video produced by Raytheon. Man, I want to try one of those suits!
A 40th anniversary interview with W.P. Carey's CEO. I like WPC's historical operating results and long term focus.
Meet Alex Gorsky, JNJ's newest CEO.
Southern Company's 2013 annual meeting. I've never been to an annual meeting so I found this to be pretty informative (but long). The main takeaways are SO's track record of operational performance, superior dividend policy, and commitment to research (which is unique for an utility).
Thursday, June 20, 2013
New Purchase - XOM & WPC
Anyone who follows the stock market knows equities took a huge tumble the past couple days. REITs in particular were absolutely crushed. Pulverized is a good description. My portfolio lost thousands of dollars on paper, yet my income remains intact (and growing). This is why I do not care how much my portfolio is worth. Why should I care about capital gains if I never plan to sell? If I cared about total return, I would literally be pulling my hair out right now. No thanks, I don't need that kind of stress. Focusing on income allows me to sleep at night knowing everything is proceeding according to plan.
We have to accept volatility as long term equity investors. It can get way worse than this. Anyone remember August 2011...? My way to cope with volatility is to be indifferent to total return. It works for me, although I know it sounds crazy to most people.
Anyways, last night I entered a couple buys orders not knowing equities were about to be spanked. One for XOM, the other for WPC. I did not expect either, let alone both, to fill.
The first buy I'll discuss is Exxon Mobil. I'm pretty sure everyone knows this company. It's either the largest or second largest company in the world going back and forth with Apple. I don't feel I need to explain this purchase in great detail. All I'll say is that I came up with a fair value of $103 and was able to purchase shares at a discount to that price. When I calculate buy prices, I use the average of four valuation techniques: DDM, DCF, average yield, & average p/e. I feel this purchase will be a long term winner, plus the 2.8% YOC isn't bad either. The bottom line is that my passive income grew with this purchase. I'm now a little closer to an early retirement.
The second purchase is a company that has been sitting on my watch list for a few years: W.P. Carey. WPC is a REIT with unique characteristics that I find extremely appealing. Although I may have jumped the gun buying a REIT right now (perhaps I should have let the dust settle), I feel this company is a top shelf triple net play along with O and NNN. I would like to own all three, but honestly WPC is probably my favorite. It doesn't pay monthly like O, but it does offer worldwide diversification and also receives revenue managing the CPA & CWI lines of private REITs. This is my first entry into the world real estate market.
W.P. Carey was structured as an MLP for most of the time I have been watching it. Back in September 2012 it merged with one of its privately managed REITs, CPA 15, and then was able to restructure as REIT itself (and dramatically increase the dividend). It now does sale lease backs like O or NNN, but on a global scale. It owns properties in Europe as well as North America. It also manages a line of private (not publicly traded) REITs for high net worth clients. These are known as CPA 16 and CPA 17. Again these properties encompass more than just the US with investments extending past even Europe and North America into Asian countries including Thailand, Malaysia, and Japan. The world is WPC's oyster.
A few properties WPC owns and leases to the occupant:
WPC has been operating for over 40 years and has a 16 year streak of dividend growth. In fact, WPC has increased payouts the past 48 quarters (that's every quarter for 12 freaking years!) A streak that long is something of a rarity for a REIT and includes the great recession. What it tells me is that management is top notch and is committed to rewarding shareholders.
I've always had a difficult time valuing REITs. Honestly I don't know if I paid too much. I'm not convinced today was the best time to buy a REIT either. Interest rates are rising. However REITs will be a part of my early retirement strategy since I will not be getting into physical real estate and WPC is one I really wanted. It's way off the 52 week high, I guess I can take solace knowing I didn't buy at $79. On a side note, my parents rent out a house and are having major problems with the renter which is causing headache after headache. My dad is constantly on the phone dealing with problems when he should be going for a bike ride or otherwise enjoying retirement. It's a tough situation and they are looking to cash out.
This purchase came with 5.0% YOC and will get me a little closer to the promise land just like the XOM purchase.
EDIT: WPC announced its 49th consecutive quarterly dividend increase while I was typing this post earlier today. My YOC is now 5.1%, that didn't take long.
We have to accept volatility as long term equity investors. It can get way worse than this. Anyone remember August 2011...? My way to cope with volatility is to be indifferent to total return. It works for me, although I know it sounds crazy to most people.
Anyways, last night I entered a couple buys orders not knowing equities were about to be spanked. One for XOM, the other for WPC. I did not expect either, let alone both, to fill.
The first buy I'll discuss is Exxon Mobil. I'm pretty sure everyone knows this company. It's either the largest or second largest company in the world going back and forth with Apple. I don't feel I need to explain this purchase in great detail. All I'll say is that I came up with a fair value of $103 and was able to purchase shares at a discount to that price. When I calculate buy prices, I use the average of four valuation techniques: DDM, DCF, average yield, & average p/e. I feel this purchase will be a long term winner, plus the 2.8% YOC isn't bad either. The bottom line is that my passive income grew with this purchase. I'm now a little closer to an early retirement.
The second purchase is a company that has been sitting on my watch list for a few years: W.P. Carey. WPC is a REIT with unique characteristics that I find extremely appealing. Although I may have jumped the gun buying a REIT right now (perhaps I should have let the dust settle), I feel this company is a top shelf triple net play along with O and NNN. I would like to own all three, but honestly WPC is probably my favorite. It doesn't pay monthly like O, but it does offer worldwide diversification and also receives revenue managing the CPA & CWI lines of private REITs. This is my first entry into the world real estate market.
W.P. Carey was structured as an MLP for most of the time I have been watching it. Back in September 2012 it merged with one of its privately managed REITs, CPA 15, and then was able to restructure as REIT itself (and dramatically increase the dividend). It now does sale lease backs like O or NNN, but on a global scale. It owns properties in Europe as well as North America. It also manages a line of private (not publicly traded) REITs for high net worth clients. These are known as CPA 16 and CPA 17. Again these properties encompass more than just the US with investments extending past even Europe and North America into Asian countries including Thailand, Malaysia, and Japan. The world is WPC's oyster.
A few properties WPC owns and leases to the occupant:
 |
| Distribution Center in the Netherlands |
 |
| New York Times HQ |
 |
| Google, Inc. Venice, CA |
I've always had a difficult time valuing REITs. Honestly I don't know if I paid too much. I'm not convinced today was the best time to buy a REIT either. Interest rates are rising. However REITs will be a part of my early retirement strategy since I will not be getting into physical real estate and WPC is one I really wanted. It's way off the 52 week high, I guess I can take solace knowing I didn't buy at $79. On a side note, my parents rent out a house and are having major problems with the renter which is causing headache after headache. My dad is constantly on the phone dealing with problems when he should be going for a bike ride or otherwise enjoying retirement. It's a tough situation and they are looking to cash out.
This purchase came with 5.0% YOC and will get me a little closer to the promise land just like the XOM purchase.
EDIT: WPC announced its 49th consecutive quarterly dividend increase while I was typing this post earlier today. My YOC is now 5.1%, that didn't take long.
Tuesday, June 11, 2013
Lending Club Update
57%B, 40%C, 3%D
I've been investing with Lending Club for about 9 months now... taking it slow. I decided not to get overly excited, not to jump in feet first. Maybe I should have. This is working.
I have yet to have any notes miss a payment, have not collected any type of late fee, or have anything negative happen at all. My only observation is that notes are being funded faster and faster. I think the word about LC is out. It is becoming harder and harder to put money to work. My screen is pretty strict, I only lend to the best available borrowers. In a way I feel like the notes I invest in should be rated "A", but somehow slip through the cracks and pay a "B" or "C" interest rate. I think that is what's going on here.
Sometimes nothing will show up in my screen for weeks at a time. I've had to loosen my standards a bit here and there to get money invested. An undesirable reality. But in the end, the people I lend to are making their payments and I get to collect interest. Pretty neat!
Still I wonder if LC will be around 20 years from now. What will happen when interest rates rise? When will the defaults start to happen? How financially stable is Lending Club itself?
I can't deny that 14% interest is remarkable!
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