Tuesday, February 11, 2014

Weekly Purchase - WMT (Stick with Quality)


7 shares WMT, 2.56% yield, $13.16 annual income

I went with Walmart this week.  I'm pleased to add a few additional shares of this company to my holdings, but that's not really on my mind today.

Avoiding disaster with high quality companies... that's whats on my mind.

Back in August I sold Boardwalk Pipeline Partners LP (BWP) when it became apparent distributions would remain frozen.  At the time this decision wasn't easy.  After all I had held it for two and half years during which it provided 6 distribution boosts and sent me hundreds of dollars in steady income.  $761.26 to be exact!

It turns out this company was in even worse shape than I imagined.  Yesterday it cut quarterly distributions from $.5325 to $.10 per quarter.  That's a 82% reduction folks.  OUCH!

 Look at this chart:
Sold BWP at $30.42 on 8/6/2013, today it trades for $13.43
Had I continued holding, my income stream would have been crushed and to make matters even worse principle would have evaporated right before my eyes.  You can't replace an income stream once you lose 56% of your principle!  This has to be my best sell ever, and there are many lessons to be learned here.  The most valuable of which is to stick with quality and always keep an eye on your holdings. PG, KO, PEP, MCD, CVX, JNJ.  Those are all high quality companies that have been raising dividends for decades.  They aren't sexy and they won't make you rich overnight.  But nobody ever went broke buying Procter & Gamble, and nobody ever went broke buying Johnson & Johnson!  They all have huge moats and treat shareholders like royalty.  3 of those companies have raised dividends for over 50 years... think about how hard that would be to replicate... damn near impossible if you started today!  Monitor companies and keep an eye out for warning signs.  Many times (not always) the writing is on the walls. 

Boardwalk warning signs I was able to identify before the meltdown:
-Frozen dividends:  A huge warning sign that should never be completely ignored.
-Thin distribution coverage:  Dividends and future dividend increases are paid with cash.  BWP couldn't afford to pay more even if it wanted to.
-Management refused to discuss dividend increases on conference calls:  Pretty fishy coming from a company on the CCC lists that had done a crap ton of increases in the past.

You can go back and read my August 2013 post about the sale, I'm not hiding anything here. 

Don't let the CCC lists or high yield fool you, a 5 year dividend growth streak isn't all that impressive.  Stick with quality!

12 comments:

  1. That was very much a great sell. good job!!

    ReplyDelete
    Replies
    1. Knowing when to sell is hard, but probably more important than knowing when to buy. I won't always get things right, I guess I did with this one however. I'll take it!

      Thanks for commenting, it's appreciated!

      Delete
  2. Congrats on getting out. I have learned my lesson by hanging onto TWGP. Dividend quality is extremely important and a freeze is a major red flag.

    ReplyDelete
    Replies
    1. I agree with you AAI. Sometimes I feel I need to chase speculative stocks for extra income or extra capital gains or extra whatever. Pretty silly when all I really need to do is stick with my chosen strategy.

      Glad to see you stopped by. I hope all is well with you and your wife.

      Delete
  3. Nice move! I am really thinking about selling my position in Linn Energy. It's my only MLP and I find myself thinking about it more than my other positions. I only have a small amount, but figured I'd sleep better at night by splitting the proceeds between WMT and KO or two other champs...albeit taking a small hit on income for a short time.

    I wonder if we'll see a cut with SNH in the near future. I'm feeling pretty happy about selling after the freeze. I'm thinking about potentially axing one other company in my portfolio. Only issue then is if I dump LINE and then that other company, I'll have made 3 sales in a couple months. While I don't want to be a trader, I feel like my strategy has refined a bit over the last two years.

    I may have a post brewing. I'll give you a shout out on it. Nice purchase with WMT! You've inspired me to write about another topic.

    ReplyDelete
    Replies
    1. My portfolio wasn't affected by the BWP blow up, but it is weighing heavily on me right now. I'm currently putting serious thought into exiting all speculative positions. That would be LNCO and EIFZF. Not sure how I could replace them with high quality and keep my income stream intact. I'm looking at tobacco stocks and REITs as potential replacements, but even then I'll need to pump extra $$ into them to keep my income stream whole.

      I'd rather be safe than sorry.

      Delete
  4. I agree with you on the high quality companies. It seems like quite a few of the high yielding energy companies are falling through trap doors recently. XOM, CVX, KO, and like you said PG are on my radar. I could be wrong but even KMI is starting to make me nervous.

    ReplyDelete
    Replies
    1. I'm with you on KMI. That company has always made me slightly nervous and it has a higher weighting within my portfolio right now than I'd like. I don't have a reason to sell at the moment, but I will keep an eye on it.

      Delete
  5. Quality tends to win out. Great move on the Boardwalk sell as that proved very prescient and reiterates the importance of staying on top of your holdings. Especially those that might be a bit lower on the quality scale from the KO, JNJ, PG, XOM, WMT. I wanted to add some WMT but there's just not enough capital. Anyone want to give me a 0% loan?

    ReplyDelete
    Replies
    1. I decided to exit all speculative positions... it's time. From this point forward I'll only consider low yield (defined as below 2%) for risk taking. It might take a bit to exit Exchange Income Corporation because it is a thinly traded pink sheet stock, but LNCO is already gone. Not sure if I'll have time to do a proper post on this turn of events (my time is extremely limited right now), but that is where I stand.

      Best wishes!

      Delete
  6. I have nothing against quality. But have everything against overly popular stocks. The problem with stocks of quality is that many of these stocks tend to be very popular. Most of the great value stocks cannot and will not be found on the most popular list.

    ReplyDelete
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    ReplyDelete