DOW Breaks 14,000

For the first time since 2007 the DOW has surpassed 14,000.  Stocks have been on fire!  It's safe to say the market is fully valued (or close to it) which makes my job more difficult as a value investor.  As always, there are still companies trading at attractive valuations.  GD and TD come to mind.  But I have to ask myself if buying equities at these levels is the best decision. 

The stock run up is great... but it has also tilted my allocations past the 90:10 stocks:fixed income that I aim for.  There are many vehicles available to investors beyond common stocks.  Many flavors of fixed income offer conservative investors higher current yields than dividend growth stocks tend to offer.  A 3% yield growing at 7% per year is fantastic, but it's going to take 10 years for the YOC to reach 6%.  Here are a couple fixed income securities I'm considering for my next purchase that come standard with yields in the 5-6% range:

ARU: Ares Capital 5.875% Senior Notes
This is an exchanged traded debt that will mature in 2022 and is callable starting October 2015.  Now I realize that bonds are seen as being scary right now.  I agree.  My strategy is to keep the duration to the short or intermediate term.  Locking in for 20+ years is crazy in this environment.  The FED has already proclaimed that interest rates are going to be low the next couple years.  Beyond that we don't know.  What I do know is that this bond matures in a little less than 10 years.  In two more years it will be an 8 year bond, it doesn't stay at 10.  As time goes on the bond duration shortens, but my interest rate is locked in.  The yield curve will work in my favor and help me from losing my shorts (not that I really care since I plan to hold it till it matures and get my money back). 

Ares Capital is a BDC whose common stock trades under ARCC.  This exchange traded debt is currently trading around $25 which is its par value.  S&P rates it as BBB (investment grade).  I like the yield on this one. 

PBI-A: Pitney Bowes 5.25% Notes
This one is very similar to ARU.  It's a 10 year note maturing in 2022, callable starting November 2015, and is rated BBB.  The yield is a little lower, but perhaps the underlying company is a little more reliable.  Most dividend investors are aware of Pitney Bowes.  Most of us know the high dividend on the common stock is a concern.  I wouldn't be comfortable holding the stock, but the bond is a different story.  PBI just needs to stay in business for the bond to do its job.  Dividend increases, decreases, and freezes are not as important to the fixed income investor.  I can lock in a yield over 5% for the next 10 years.  The 10 year treasury current pays less than 2%.  Quite a nice premium for taking additional risk.  PBI-A is currently trading around par value.

GS-PI: Goldman Sachs 5.95% Non Cum Preferred
This is a new issue from Goldman Sachs that is currently trading under par value.  S&P rates this as BB+ which is very high for a preferred stock.  Since preferred are lower in the capital structure they typically have lower ratings, but higher yields when compared to bonds.  Virtually all bank preferreds are non cumulative.  This one is no exception.  Goldman Sachs is probably the biggest bunch of shysters I can think of in American business, but I invest to make money, not to debate ethics.  This issue is currently offering a nice yield at a price under par, plus it isn't callable for 5 years.


I'm a fan of exchange traded debts and preferred stocks for a few reasons.  They are easier to buy and sell compared to traditional bonds.  They typically make quarterly payments instead of semiannual.  An investor can buy odd dollar lots instead of $1,000 lots.  The commissions are usually lower.  A downside is the limited selection to choose from. 

With stocks approaching all time highs, other types of investments are looking more and more attractive.  I've already boosted my lending club deposits...

January Recap

January was a hot month for stocks, but unfortunately that makes it more difficult to find companies trading at discounts.  I still plan to make a purchase every month, but I don't mind keeping a little cash on hand for dips or market corrections.  I'm currently looking at defense stocks such as RTN and GD.  RTN is creeping up on my buy price.

2013 is off to a good start.  Lorillard did a 3 for 1 stock split.  ABT spun off ABBV.  I'm pleased with the spinoff, as I'd rather just own the diversified health care portion.  With the spinoff I'm free to sell my Abbvie shares when the time is right.  I like what I see with the new ABT, it's kind of like a mini JNJ.  Unfortunately the yield is very low right now, but I may pick up some shares in the future.

 DOW: 13,861 /// S&P 500: 1,498 /// 10-YR BOND 1.99%

New Purchases:
1) 11 shares LO at $113.74 ($37.91 after split) - $68.20 annual income

Sales:
none

Dividends Received: $195.17
Pepsi (PEP) - $43.00
Philip Morris (PM) - $66.30
Corporate Office Properties series L (OFC-PL) - $22.58
Realty Income series F (O-PF) - $6.76
Exchange Income Corporation (EIFZF) - $18.13
LTC Properties (LTC) - $26.06
Toronto-Dominion Bank (TD) - $12.34

Dividend Increases:
1) KMI: $.36 to $.37 per quarter.  $2.92 annual income

New Deposits: $1,035
$1,000 to ROTH, $35 to taxable account

Lending Club:
Added $50

Option/Bonus:
1) 54 shares Abbvie (ABBV) from spinoff
2) 56 shares Lorillard (LO) from a 3:1 stock split

Lending Club Update

Lending Club is still performing above my expectations.  It's mind boggling to receive an expected double digit interest rate while 10 year treasuries are paying less than 2%.  The best part is the simplicity, I can't imagine anything easier to use.  I can log in, use a saved search, then make an investment in less than a minute.  So easy a third grader could do it.

At this point, I'm considering stepping up contributions.  I've been adding a modest $50/month which has worked well.  With the stock market approaching all time highs coupled with unbelievably low interest rates, lending club is looking more and more attractive.  I think this is where new money will go for my fixed income allocation. 

Sorry preferred stocks, sorry bonds; you do not offer this kind of return.

Useful Links

I've been talking a lot about valuing stocks this month, let me share the resources I use.  If you have other recommendations, please let me know! 

Dividend Discount Calculator.  This is a free tool that lets you input constant, 2 stage, 3 stage, or 4 stage dividend growth.  Quite useful to a dividend investor such as myself!
http://www.bargainbininvesting.com/tools/dividend-valuation-tool.html

Discounted Cash Flow Calculator.  Another free tool to value stocks.  I like this particular one because it offers two stages.
http://moneychimp.com/articles/valuation/dcf.htm

Morningstar.com Fair Value Estimate.  I'm not exactly sure how this is calculated, but I do trust morningstar.  I like this as a comparison.  You can also find historical data and tons of other free information at this site.  5 year average P/E and yield are just a few clicks away. 
http://www.morningstar.com/

Enjoy my mad paint skills:

F.A.S.T. Graphs.  This is the best valuation tool I've ever used.  Bar none.  It does cost $10/month which is unfortunate because most of the bloggers on here are tightwads, myself included.  I recommend doing the 14 day trial and cancelling before payment.  Instead of maintaining a monthly subscription, I might just do quarterly reviews.  If I do go this route, it will be after earnings season to make sure the data is current.
http://www.fastgraphs.com/


Do you have better resources?  If so, please share!

New Purchase - LO

I purchased 11 shares of Lorillard at $113.74 plus commissions.  Lorillard is doing a 3 for 1 stock split within the next week; this purchase came with due bills (I will receive the extra shares).  At this purchase price I can expect to receive $68.20 annual dividends on a 5.45% yield before transaction costs.  I anticipate a dividend hike before the next payment, we'll have to see what happens there.

Tobacco stocks offer dividend growth investors the rare combination of high current yield coupled with high expected dividend growth.  It's the best of both worlds and LO is no exception.  Lorillard is best known for its Newport brand of menthol cigarettes, which has been gaining market share the past few years.  They have also expanded into electronic cigarettes with Blue e.cigs and sell budget smokes with a couple off labels.  Lorillard claims to be the oldest publicly traded company on the NYSE with its founding in 1760.  That's over 250 years of continuous operation. 

I just started working night shift which will be great for buying stocks.  There isn't as much to do at night so I can just sit there and see what opportunities the US markets present... in real time.  I'm pretty happy with the purchase price on this one as I have a buy price of $115 and have it fairly valued at $125.  Morningstar has it listed at $122 which helps to validate my beliefs.

Smoke 'em if you got 'em!

Quarterly Progress Update

Fourth quarter 2012 has come to a close, it's time for me to update my progress page.  In Q4, I received a total of $1,100.15 worth of dividends.  This includes a few accelerated dividends from December, but excludes all special dividends.  I may add a separate line for special dividends to keep track of that too. 

Q4 was the first quarter I have ever broken $1,000!  All told it was about a $120 worth of progress which was mostly due to new purchases, although at this point some of the past purchases I made are entirely from reinvested dividends.  My life time total for dividends has now surpassed $5,650.  If this isn't proof that dividend growth and income investing works, then I don't know what is.

In 2012 I tried to focus less on high yield and instead concentrate on companies who are likely to increase distributions at a faster rate.  Most of the high yielders I did buy was just shuffling money around to better position my portfolio.  You can see that YOC of my portfolio actually went down last year, even with all the dividend increases I enjoyed.  I expect the trend to continue in 2013.  The sweet spot I'm looking for are companies that pay 3-3.5% and are expected to grow dividends in the 7-10% range.  I am weary of companies with super high dividend growth, say 15+%, as maintaining the expected rate is next to impossible long term.  Projecting high dividend growth more than a few years in the future is a slippery slope.  Compounding can work against us too!

For 2013 I will again be looking to add companies growing distributions at a healthy pace.  This is not to say I'll abandon utilities and telecoms as I believe these types of companies have a place in diversified income portfolios. 


Fun 2012 Statistics:

Total Dividends Received: $3,805.23
Total Deposits: $21,865 (I will NOT be able to maintain this pace in 2013!)
New Companies Purchased: 11
Existing Companies Added To: 6
Total # of Purchases: 25
Total # Sales: 4
Sales I regret: 1 (PSX, the company either lied or misspoke about the 5% div increase, drat!)
% Companies that increased div: 100%
Best Dividend Increases: NSC 16.9% / SBSI 16.7% / RTN 16.3%
Worst Dividend Increases: BWP 1.0% / T 2.3% / UNS 2.4%
Tax Sheltered Dividends (ROTH + MLP in taxable): 48.8%
Best purchase of the year(?): EMR at $45.55
Worst purchase of the year(?): INTC at $23.86

Valuing KMI

Those who have been following my blog the past few months know one of my favorite companies is Kinder Morgan, Inc (KMI).  As much as I like the management, business model, future prospects, and dividend, trying to value this stock is giving me fits.  I'm going to go through methods I normally use to put a number to a stock.  Suggestions would be most appreciated.

Base Stats:
Ticker: KMI
Share Price: $36.53
Dividend: $1.44 (3.94%)
P/E (ttm): 212.4
P/E (fwd): 26.9
P/B: 2.59
LT EPS Growth: 25%

Discounted Cash Flow Model:  $46.44
I used EPS of 1.36 (based off fwd p/e), growth of 25% for 5 years, growth of 4% after 5 years, discount rate of 11%.

Dividend Discount Model: $78.48
I used $1.44 dividend, 9% DGR, 11% discount rate

Graham Number: $20.43
(22.5*1.36*13.64)^.5

5 Year Average P/E: N/A
Wasn't publicly traded the past 5 years

5 Year Average Dividend Yield: N/A
Wasn't publicly traded the past 5 years

Fast Graphs:  N/A
Fast Graph looks like nonsense.  Wasn't publicly traded the past 5 years

Morningstar Ratings: ***

How are you guys valuing this stock?  My numbers are all over the place.  What is your target buy price and why?