Saturday, March 31, 2012

March Recap

Unfortunately I didn't win the Mega Millions jackpot worth over $600 million yesterday.  Luckily my backup plan is working well.  In March I purchased two positions; my portfolio now consists of 24 dividend growth stocks + one fixed income position.  The stock market continues to fly high which makes finding bargain stocks difficult.  I've been slowly investing my cash as I expect to receive a yearly bonus the end of April or early May.

New Purchases:
1) 49 shares Realty Income Preferred Series F (O-PF) providing $81.12 annual income.  O-PF was purchased at $25.46/share + commission.
2) 13 shares McDonald's (MCD) providing $36.40 annual income.  MCD was purchased at $95.92/share + commission.
3) .497 shares Southside Bancshares (SBSI) providing $.36 annual income.  This was a dividend reinvestment.


Dividends Received: $283.25
Intel (INTC) - $27.72
ConocoPhillips (COP) - $23.76
Emerson Electric (EMR) - $11.20
Chevron (CVX) - $23.49
Johnson & Johnson (JNJ) - $22.80
Exchange Income Corp (EIFZF) - $17.38
Southside Bancshares (SBSI) - $10.80
Avista (AVA) - $30.16
Unisource Energy (UNS) - $45.58
Pepsi (PEP) - $41.20
LTC Properties (LTC) - $29.16

Dividend Increases:
1) RTN: $.43 to $.50 per quarter.  $15.96 annually
2) SBSI: $.18 to $.20 per quarter.  $4.84 annually

New Capital:
$860 in March. $300 added to ROTH IRA, $560 added to taxable account.  Once again I'm under budget, this blog is helping me keep on track with my spending.  I had a lot of unusual expenses including $12 for a pan, $33 for a shirt, $5 for sewing, $10 to fix a flat tire, and the rest of misc expenses going to taxes.  I had to dip into my emergency fund to pay taxes, I will replenish the money in the coming months.  It should be squared away by May.

None, however I am thinking of selling a covered call on INTC.  INTC is now yielding less than 3%.  Pretty crazy o.O

I expect to make 1 or 2 purchases in April, we'll see.

Thursday, March 29, 2012

Southside Bancshares Increases Dividend

Today Southside Bancshares (SBSI) announced it has increased its quarterly dividend 16.7%.  Actually it made two announcements, the first is that a 21 for 20 stock split is coming.  This will increase shares by 5% but lower the current quarterly dividend from $.18 to $.1714.  However in a second announcement the quarterly dividend was raised to $.20 per quarter representing 16.7% dividend growth. 

Right now my 60 shares pay me $43.20/year which will turn into 63 shares paying me $50.40/year

SBSI is small bank located in Texas.  It has an awesome dividend policy including regular dividend increases (17 straight years), stock dividends (stock splits) and special dividends to boot.  Annually SBSI rewards shareholders with 5% stock split, but keeps the quarterly dividend the same.  Its really just a phantom dividend increase of exactly 5%.  Using today (and history) as evidence, SBSI is a company which rewards shareholders handsomely.   I will add to my position on dips.

Sunday, March 25, 2012

Where My Portfolio is Headed

I'm currently sitting on 24 positions in my dividend growth portfolio.  The goal is to hold 30-35 companies representing all sectors.  What I notice right now is the following:

-I have nothing from the Materials sector
-I only have one position in Financials and Consumer Discretionary
-I need to beef up Health Care
-I need more foreign holdings

The plan is to slowly make new purchases to rectify these shortcomings.  I have 6 slots open before I reach 30 without counting spinoffs from COP and ABT.  My goal is up to 35 so I can include spinoffs and other future opportunities. Below is how I anticipate rounding out my portfolio, it is always subject to change depending on future developments.

1) Materials Sector - A few weeks ago I researched the sector and concluded APD would best fit my objectives.  With the recent div. increase APD now yields about 2.8% which makes it a good candidate for my strategy.  Unfortunately APD is kind of pricey, I can wait.  Alternate: CMP

2) Consumer Discretionary Sector - My only holding here is MCD.  The best candidate I could find to augment MCD is GPC which has over 50 years of dividend increases and a yield north of 3%.  GPC is also pretty pricey right now.  Alternate: None

3) Financial Sector - I am weary of this sector after the meltdown a couple years ago.  I'm sorry but I cannot trust large banks.  Who knows what they are holding or what they are doing.  I do, however, feel comfortable with small banks and foreign banks, namely Canadian.  I'm also open to insurance companies, there are many choices.  Right now I hold SBSI.  I'm thinking of adding AFL, BMO, BNS, or RY.  I need to look at Canadian banks in depth, but Canada is known to be a banking safe haven. 

4) Health Care Sector - Currently hold ABT and JNJ.  I haven't made a new purchase in this sector in quite a while.  I've looked at potential candidates for a third company and concluded MDT would be ideal.  It is currently yielding about 2.5%, I'll wait for a better yield.  Alternate: OMI

5) Foreign Stocks - I would like to increase my foreign holdings.  I only hold EIFZF (EIF on the Toronto Stock Exchange) from Canada.  The problem I usually encounter is two fold: I don't want my dividends withheld, and I want quarterly or monthly payments.  There aren't many options outside Canada and the U.K.  I am leaning toward Canadian banks listed above and also like UL and EMRAF. 

6) MLP - Oil pipelines come to mind for MLPs.  What ever company I choose, it will not be a pure natural gas pipeline (I already have that in BWP and TCP).  SXL and KMP have shown weakness as of late.  I was tempted to make a purchase the past few weeks.

I like the direction my portfolio is headed.  It's a good time to be in dividend stocks.

Thursday, March 22, 2012

New Purchase - MCD

The latest addition to my portfolio is McDonald's.  This morning I decided I needed to get some egg mcmuffins to satisfy my craving.  I love those things.  While eating my breakfast I checked premarket trading and noticed MCD was down.  I put in a limit order for MCD while eating egg mcmuffins which is kind of funny now that I think about it.  Anyways I bought 13 shares which were purchased at $95.92 + commissions.  This amounts to an entry yield of about 2.9% and will pay me $36.40/year.

Everytime I go to McDonalds there are plenty of customers. Their business plan is obviously working. Even in Thailand the restaurant was busy. The burgers and fries tasted the same as in the states, it was awesome. When I was flying home from Kuwait last year I had to stay overnight at an airbase with a McDonald's. Guess what? It was packed. Everywhere I go there is a McDonald's and people are happy to pay for their food. 

I've stated this before; I've wanted to be a McDonald's stock holder for a long time.  I had many chances in 2011, but never pulled the trigger.  I consider MCD to be one the premier dividend growth stocks in the same league as PM, CVX, JNJ, PG, and KO.  In the past MCD has grown its dividend at a tremendous rate which I foresee slowing down.  I'm okay with that.

While I'm not ecstatic about the share price I paid, I feel it is reasonable.  I'd like to add to this position in the future and would welcome further price declines.

Wednesday, March 21, 2012

Raytheon Increases Dividend

Raytheon (RTN) announced it has raised its dividend 16.3% from $.43 to $.50 per quarter.  This marks 8 consecutive years of increases placing RTN in the dividend challengers category of dividend growth stocks.  16.3% is a huge number and by far the best increase my portfolio has seen in 2012.

Raytheon is a defense contractor best known for manufacturing missiles.  In addition to missiles/air defense, RTN has a number of other businesses including radar solutions, surveillance systems, biometrics, cyber security, and other specialized electronics.  I serve in the US Army and am weary of putting large percentages of my portfolio in defense contractors.  I have first hand knowledge that the military is downsizing which is a reflection of ending the Iraq war and winding down Afghanistan.  With this in mind I also realize the need for defense contractors will not go away.  Our country needs to defend itself, companies like RTN help make us the best.  I also like GD and LMT from the industry.

Saturday, March 17, 2012

MLPs and Taxation

I've been interested in master limited partnerships since I first discovered them in 2010.  I spent a lot of time researching these investments until I was comfortable enough to pull the trigger.  Initially my concerns with MLPs were:

#1: I heard they made filing taxes complex
#2: K-1 tax documents are sent late in the tax season
#3: I was afraid I would need to purchase a more expensive version of turbo tax for the K-1s
#4: MLPs are not suitable for ROTH IRAs because of the possibility of owing taxes even in a retirement account.

I decided that in 2011 I would purchase 2 MLPs and find out for myself the answers to these questions.  I love MLPs for the high yields, distribution growth, and tax sheltering.  Here is my experience.

#1: I heard they made filing taxes complex - I recently did my taxes on Turbo Tax.  With my regular dividend stocks I was able to import all the information directly from my broker's website.  I didn't have to manually enter anything.  With my two MLPs I did have to enter them manually.  Supposedly it is possible to import K-1s, I couldn't figure out how to do it.  Regardless, I don't understand what the fuss is all about.  It took me about 15 mins or so to enter the K-1s, it's not rocket science.  I had to google a partnership federal identification number for one of them, but that was it.  This concern is overblown.  Is it additional work? Yes.  Is it hard? No. 

#2: K-1 tax documents are sent late in the tax season - I was able to access K-1s on Feb. 27 & 29 respectively for the two MLPs I own.  This is mid tax season, other K-1s might come out later I can't say.  It would be best to check before purchasing a MLP just in case.  I owe Uncle Sam and my state taxes this year.  Being unable to file taxes until March is a moot point for me.  I wouldn't have done my taxes until now anyways.

#3: I was afraid I would need to purchase a more expensive version of turbo tax for the K-1s - Nope, the version needed for stocks can handle MLPs as well.

#4: MLPs are not suitable for ROTH IRAs because of the possibility of owing taxes even in a retirement account. - Although I do not own MLPs in my ROTH this is true because of the possibility of unrelated business income tax.  An MLP must generate 90% of income from "qualified" sources; if it generates too much from unqualified sources UBIT must be paid even in retirement accounts.  The investor is safe up to $1000, and from what I've read you would have to own a lot of units for this to trigger. 

I do agree that MLPs are not suitable for retirement accounts, but for a different reason.  Putting an MLP in a retirement account negates the best feature of the investment.  You are able to defer taxes on distributions until you sell the units or until the cost basis reaches zero (distributions reduce your cost basis).  It's tax deferment within a taxable account!  Why put this in an account that is already tax advantaged?  It doesn't make sense.  Not at all.

In 2011 I received $1,779.32 of dividend income.  $856.85 or 48.2% of this income was either tax free in my ROTH or tax deferred through MLPs.  I already pay Uncle Sam enough, he doesn't need more of my money.  Being a federal employee it almost feels like I am paying myself, I'll take any tax advantages I can get.

Now that I have a better understand of Master Limited Partnerships I will continue to purchase them.  Right now I'm concentrated in natural gas.  In the future I'll be looking to add oil and diversified pipelines.

Monday, March 12, 2012

On The Radar

I am planning to make one more purchase in March.  Currently the stocks I am paying close attention to are NSC, MCD, and GIS.  I'm hoping to see a dip sometime soon for an opportunity to pickup one of these names at slightly lower prices.  Right now I am leaning towards Norfolk Southern.  I like the price it is currently at.  I've wanted McDonald's in my portfolio for a long time but have missed many opportunities to pick up shares.  I like it at 95 which may or may not happen.  I eat a lot of General Mills products and could see myself making a purchase; I almost did last month.  Right now I'm weighing my options, and taking time to see what unfolds.

One of the stocks or rather MLPs on my Watch List W.P. Carey (WPC) is planning a merger and to restructure as a REIT.  WPC is a rare non-pipeline company set up as a MLP.  Changing to a REIT means they will have to up the dividend/distrubition to 90%+ earnings (it's currently 66%), but will lose the amazing tax sheltering.  I'm not too happy about this; I will leave it in my Watch List for now but have no plans to buy.  It became kind of pricey the past few months anyways.

Last year I sheltered almost half my dividend income using a ROTH IRA and MLPs in my taxable account.  It's very relevant when tax season comes along.  I'll talk more about this soon.

Thursday, March 8, 2012

New Purchase - O-PF

Yesterday I purchased 49 shares Realty Income preferred series F (O-PF) at a cost of $25.46/ share + commissions.  The purchase will pay me $6.76/month starting in April which is $81.12 annualized on a 6.46% yield.  This purchase was for asset allocation purposes as my stock portfolio has outpaced my fixed income assets.

The par value for the shares is $25 so I did pay a small premium, but less than 2%.  Normally I'd try to buy below par value, unfortunately it is difficult to do so in today's market.  Series F was recently issued after Realty Income called series D to save on interest payments.  The good part is that series F isn't callable until 2017, that's 5 years at a bare minimum.  The shares are also cumulative, but I do not expect a default.  I would be comfortable holding the common stock O; naturally an O-PF default doesn't concern me.  It's always better to have cumulative shares just in case.

The good news about this particular purchase is that Realty Income preferred shares compare very favorably to the common shares.  O currently sports a 4.69% yield growing at a measly 2.84% 5 yr CAGR.  It grew by only 0.87% in the past 12 months; not impressive.  O-PF on the other hand offers no dividend growth but has a healthy 6.51% yield.  With that being said, at some point in the future interest rates are going to rise and preferred stocks are going to be slaughtered.  At least in price.  They are interest rate sensitive.  As always I'm more focused on income than market value, I don't plan to sell this unless it gets called.

Now that my allocations are in order I'll continue to buy more dividend growth stocks.

Too easy.

Tuesday, March 6, 2012

Asset Allocation

Looking at my blog you probably wouldn't think I hold any fixed income.  Surprise!  10% of  my investments are infact fixed.  I hold them in my thrift savings plan (federal employee 401k) account which I don't really talk about.  I have an aggressive allocation of 90% stocks, 10% fixed income.  Here's why:

#1:  I believe in dividend growth investing.  The concept simply makes sense and is easy to execute.  Buy and monitor stock in companies who pay a decent yield and will increase dividends faster than the inflation rate.  Over time the 2.75%, 3%, 4% yields will grow to a substantial YOC.  My timeline for retirement is 16 years.  3% caterpillars have a long time to morph into butterflies.

#2:  Interest rates are historically low.  Low interest rates mean bond yields are also low.  I actually like bonds because of the safety they provide, but right now it is hard to justifiy ownership.  Why own an asset that is guaranteed to be eaten away by inflation when you can get something else with a similar yield that can outpace?  I'm not bold enough to go 100% stocks, which is why I maintain the 90/10 ratio.  If rates were higher I'd have no problem being 75/25 (possibly higher depending).  Yes, certain flavors of fixed income such as TIPS can meet inflation.  But can they beat it?

#3:  I am young.  Conventional wisdom says more stocks, less bonds while you are young.  I do follow this advise.  Not so much for additional risk/reward, but because investments that makes the most sense to me are dividend growth stocks. 

Why not further diversify with precious metals, specifically gold?  There is no doubt gold has performed extremely well the past few years.  Everyone loves gold right now, I even supervise a young soldier who invests $100/mo in a gold fund.  Gold is a good store of value, but would pay me absolutely nothing.  You'd have to sell it to pay bills; the exact opposite of my goal.  As a side note, I always encourage my Joes to save and invest even if it's something I personally wouldn't buy such as a gold fund.

Eventually I will be over allocated to stocks unless I buy fixed income in my brokerage accounts.  It's only a matter of time.  Once in a while I'll need to make purchases to maintain the balance I want.  I'll probably continue to avoid bonds due to low yields, but have thought about preferred stock and possibly junk bond etfs.  Look for me to purchase fixed income soon, maybe this month.

Saturday, March 3, 2012

Focus on Basic Materials

This week I will be taking a look at dividend growth stocks in the basic materials sector.  This sector describes companies involved with the discovery, development, and processing of raw materials such as metals, chemicals, and forestry products.  I currently do not have any stocks from this sector in my portfolio, I thought it would be worthwhile to do some research.

I used a stock screener to get started.  I screened for P/E less than 20, Est. long term growth greater than 5%, yield greater than 2.5%, dividend growth greater than 5%, payout ratio less than 60%.  I then checked the results to get rid of any companies who cut or froze their dividend in the past 5 years.  Here are the remaining stocks:

Air Products and Chemicals (APD)
Dividend Increases: 29 years (champion)
Mkt Cap: 19.35B Large Cap
Beta: 1.29

Air Products and Chemicals produces gases, chemicals, and equipment for sale worldwide.  APD operates in 4 segments: Merchant Gases (40%); Tonnage Gases (33%); Electronics and Performance Materials (23%); and Equipment and Energy (4%).  It has a diverse catalog of products such as oxygen, helium, argon, carbon dioxide, specialty gases, equipment for natural gas liquefaction, equipment for air separation, and materials to manufacture LCD screens.  It serves a variety of industries such as medical, glass making, pulp and paper, metal manufacturing, industrial cleaning, petrochemical, and electronics.  This company is diversified.  Sales by region: U.S. 38%, Europe 31%, Asia 24%, Canada/Latin America 7%.

I expect APD to grow in the low double digits or high single digits.  Frankly this company isn't sexy, but sells products needed in a wide variety of industries and is shareholder friendly.  To fuel growth, APD is targeting emerging markets in Asia and Russia.  Air Products is seeing increasing margins and profits; its future looks bright.  I would like to be an investor in APD, the only thing holding me back is the share price.  I've come close to buying APD in the past, but at this point in time I'm waiting for a pullback.  It has a high beta which could be an advantage in a declining market for investors looking to add shares at better valuations. 

Compass Minerals Intl. (CMP)
Dividend Increases: 9 years (challenger)
Mkt Cap: 2.36B Mid Cap
Beta: .7

Compass Minerals produces salt and specialty fertilizers for U.S., U.K., and Canadian markets.  About 48% of sales come from highway deicing compounds, 33% consumer and industrial salts, and 18% specialty fertilizers.  U.S. demand for highway salts typically increases 1-2% per year with prices increasing 3-4% to boot.  CMP expands existing mines and also uses an acquisition strategy to meet demand.  Compass recently announced it has purchased rights to expand a salt mine in Ontario.  In addition to salt mines, Compass uses solar and mechanical technology to extract minerals.  CMP has a records management business in the U.K. making use of an old salt mine 500 ft underground to store documents for other businesses.  It contributes 1% of sales.

This is a boring but necessary business.  Having lived in snowy parts of the country, I recognize clear roads are essential to our way of life.  In my opinion CMP is attractively priced right now, a rarity in this market.  We've had a mild winter this year, which could explain why this particular stock is still attractive.  I like the growth and dividend growth potential of this company coupled with its yield and low payout ratio.  I'm definitely adding CMP to my watch list.

Only two companies made my list today.  I am aware of other dividend champions in the materials sector such as RPM, NUE, and BMS.  These are fairly popular among dividend growth investors, but did not pass my screens for one reason or another.  Added CMP to my Watch List page.