October Recap

It seems like the months are just flying by.  The stock market retreated a bit recently which has been more than welcome!  I've been toying with the idea of dripping stocks next year, but utimately couldn't justify it.  I'm going to continue to selectively reinvest dividends into what I deem to be the best companies and/or best value.

DOW: 13,107 /// S&P 500: 1,412 /// 10-YR BOND: 1.75%

New Purchases:
1) KMI: 36 shares at $35.10.  $50.40 income per year (the dividend has since increased)
2) LO: 17 shares at $115.54.  $105.40 income per year
3) APD: 16 shares at $77.54.  $40.96 income per year

Sales:
none

Dividends Received:  $194.89
Coca-Cola (KO) - $19.89
H.J. Heinz (HNZ) - $12.36
Illinois Toolworks (ITW) - $11.02
Philip Morris (PM) - $66.30
Corporate Office Prop. Pref L (OFC-PL) - $22.59
Exchange Income Corp (EIFZF) - $17.60
Realty Income Pref F (O-PF) - $6.76
LTC Properties (LTC) - $26.06
Toronto-Dominion Bank (TD) - $12.31

Dividend Increases:
1) SNH: $.38 to $.39 per quarter.  $2.24 per year
2) KMI: $.35 to $.36 per quarter.  $1.44 per year

New Deposits: $1,210
$300 to ROTH IRA; $910 to taxable account

Lending Club:
Added $50.  So far no problems, everything is current.  I'm still learning the system and not comfortable putting a lot of money in this yet.

Options/Bonus:
$4.51 from OFC-PL.  This was the first payment for series L, which included some days from the previous quarter since it is a new issue.  I only included the normal amount in my monthly totals.  The extra couple bucks will not be accounted for in my quarterly updates either because it will not happen again (isn't sustainable).

Stock Market Closed On Monday

US stock markets will be closed Monday and possibly Tuesday in the face of Hurricane Sandy.  Hurricane Sandy is currently a category 1 "megastorm" putting 50 million people at risk along the East Coast.  NYC is in the path which is why the markets will be closed. 

Natural disasters are sometimes golden buying opportunities.  Average investors are prone to panic at any hint of bad news, I wouldn't be surprised to see stock markets opening lower when trading resumes.  Natural disasters happen from time to time, it's normal.  Barring cataclysmic events, hurricanes don't concern me (although I hope nobody gets hurt).  I've made it through two typhoons here in Korea this year.

I'll be monitoring news the next couple days and will put in a couple limit orders in case Mr. Market overreacts.


Edit 10/31/2012:  I deleted a statement I made the other day because this hurricane turned out to be worse than I originally thought.  I've been through category 1 typhoons (same thing as hurricane, just depends on the ocean) this year and while it's not exactly fun I never felt truly threatened.  They had me stay at work through one of them to supervise soldiers, and monitor the equipment as well as wind speeds.  There are procedures I have to follow depending on wind.  I witnessed trees snapping and debris all over the road the next day.  Roads were closed and we were stuck up there on top of a mountain.  Not fun.  I didn't have to deal with flooding or my posessions being ruined. 

I don't want more natural disasters to occur, but I hope that I'll be sent to help clean up if it happens in the future.  I really hope to get a humanitarian mission like that sometime.  I know soldiers who were ordered to go help Haiti, I want to do something equally as awesome!

Quality or Value?

As a long term investor, is it better to simply invest in the highest quality and best companies knowing the stocks are usually priced at a premium?  Or does it make more sense to invest in companies that are undervalued but not as high quality?  I've been contemplating this a lot lately.

I want to own companies for 20, 30, maybe even 50 years.  That's the holding period I have in mind.  Does it really matter if I overpay a little bit for shares of Procter & Gamble knowing they will still be around and still paying dividends decades from now?  Shouldn't I place my trust and money in a company like Johnson & Johnson that will continually pay me rising dividends and will likely never fail even if the P/E is high?  Why do I even invest in lower quality companies that might not be around far into the future?  Should I even hold companies like Southside Bancshares (SBSI) or Intel (INTC)?  This is my retirement (hopefully early) we are talking about! 

In the perfect scenario the best companies would also be undervalued.  While these scenarios are no brainers they are also very rare.  If you want to be an owner of Coca-Cola, arguably one of the greatest companies in the world, be ready to pay a little extra for the privilege.  KO is rarely on sale.  My calculations put a fair value price at $30.  It hasn't been at that price since October 2010.  Two years ago!  Good luck finding Coke at 30 bucks...

What I've done in the past is keep a list of all the stocks I want to own and buy them when they are under or fairly valued.  The problem I have is that even within this list of great companies, I believe some great companies are greater than others.  These are my core stocks which include ABT, JNJ, KMI, KO, MCD, PEP, PG, and PM.  Coincidentally these are the same stocks that hardly ever go on sale, but the ones I strongly feel should anchor my retirement plan.

I've been thinking about beefing up these core stocks regardless of price.  Why do I consider KO to be a core stock if I won't even allocate a decent amount to it?  Sounds hypocritical.  These 8 stocks should be my 8 largest holdings.

I'm looking for ideas and input.  What do you think?

New Purchase - APD

Air Products & Chemicals is the 30th stock in my portfolio and the first from the basic materials sector.  I've researched many materials stocks and concluded APD would best fit my objectives.  I've been looking to add this one for quite a while and have had a number of different limit orders which never filled for one reason or another.  Over the weekend I placed a new order which triggered at $77.54.  I bought 16 shares that come with a 3.28% yield after commissions.

To be fair, all is not rosy at Air Products right now.  The company had a subpar year which is why it's trading at the 52 week low.  Earnings are mostly flat; sales were lower in a number of segments; management admits mistakes (which I actually appreciate, I like honesty).  2013 is forecasted to be another slow year, although better than 2012, with mild earnings growth.  The success of this company is impacted by the U.S. and world economy more than the typical dividend growth stocks I buy.  APD is currently planning a number of new projects throughout the world but seems to focus mainly in China.  There are projects in other countries such as South Korea, Belgium, UK and US.  Overall it appears earnings should be up next year in the 5-8% range.  Obviously this is just a forecast.

I like Air Products for a number of reasons.  First of all I think it offers a lot of value at today's prices.  It has a reasonable P/E of 14.3 and an attractive yield with a 30 history of dividend growth.  I have a target price of $83 on this stock and was able to pick up shares less than that.  The fact that I can get a quality dividend champion trading at 52 week lows validates my thoughts.  In my opinion, APD is the best dividend growth stock from the materials sector.  This is for my strategy; I require a yield of at least 2.75%. 

It is interesting to note that when I wrote about Air Products back in March it had a high beta of 1.29.  Since that time the beta has actually decreased to about 1.16.  I typically prefer low beta stocks, but it's not a rule set in stone.  If the world economy does pick up APD should do very very well.  I also like the fact that APD operates a number of different businesses serving a wide variety of industries.  This company is not a one trick pony. 

Some of Air Products biggest competitors include Praxair (PX) and Airgas (ARG).  Both of these stocks are dividend contenders but have low yields around 2%.  Not my cup of tea but could fit different investment strategies.

Kinder Morgan Increases Dividend

Well that didn't take long!  I started a KMI position less than two weeks ago and it already boosted its dividend.  This increase is only 1 cent, but I'll take it.  A 1 cent increase does not impress me, however Kinder Morgan Inc managed to raise its dividend each quarter in 2012.  In total the payouts per share are 20% higher than they were one year ago.  That's impressive, especially when you consider it is currently paying around a 4% yield.  Maintaining a dividend growth rate of 20% is probably not realistic but I do expect double digit future increases.  I listened to the conference call and KMI appears to have many growth and expansion opportunities which could lead to higher cash payouts.

New Purchase - LO

Last night I purchased 17 shares of Lorillard at $115.54 which will pay me $105.40 per year.  It ends up being a yield of 5.34% including commissions, no complaints there :)  This purchase pushes my total annualized dividend income over $4200 meaning from this point forward I'll average $350 in passive income per month.  I'm pretty excited about that.

It's actually my second choice in the tobacco industry as I do prefer Philip Morris.  That said I cannot control market prices and right now I find PM to be a bit pricey and LO to be priced right.  I believe I'm getting some value with this one and would be willing to pay more than I did.  Of course I don't know where this stock or the market is headed short term.  Would I find a better price if I wait?  Hell if I know...  All I can do is buy a stock when it hits my target price!

As I stated in a previous post this month, I like Lorillard for a variety of reasons.  Obviously the yield is pretty strong with this one.  Beyond the yield and the decent price I think I'm getting there is a business behind the stock.  This business is in a cash cow industry that sells top notch addictive products.  LO is geared towards menthol cigarettes.  However they have been making a push into non menthol which is a bigger market.  They also sell electronic cigarettes which I find interesting.  Believe it or not people use those things!  In addition Lorillard is extremely shareholder friendly.  I anticipate double digit dividend growth as well as share buy backs.

In my personal life I've battled nicotine addiction with mixed results.  It's an extremely difficult habit to break.  One month I'm doing good, the next thing I know I've had a little too much bourbon and I'm doing my chimney impression.  The hard part is that I do enjoy smoking...  I know there is legislation and talks about label changes, this and that.  At the end of the day it's my right to smoke.  When I'm listening to recorded bugle music; saluting the flag every morning; I often reflect on the great freedoms we have in this country.  I think tobacco is here to stay.

New Purchase - KMI

I bought 36 shares of Kinder Morgan, Inc. at $35.10.  This is my first investment in Kinder Morgan which has been a long time coming.  I decided to buy shares of the general partner instead of the limited partner for the higher dividend growth.  KMI intends to boosts dividends by 12% per year through 2015 which is obviously a very high rate.  This stock is currently paying about a 4% yield to boot. 

To be honest it's very difficult to value KMI.  I'm not exactly sure if I'm over paying or under paying.  What I do know is that I want to own a slice of this company, and I like the yield it's currently paying.  CEO and founder, Richard Kinder, owns about a quarter of all KMI shares.  His annual salary is $1 with no stock options or bonus incentives.  The reason he oversees the company is to make wise decisions that will increase his dividend stream and the value of his stake.  The guy is a multi-billionaire and knows what he's doing.  If it's good enough for Richard it's good enough for me!

In the past year Kinder Morgan acquired El Paso pipelines which I see as being beneficial to KMI.  So now we're looking at KMP, KMR, and EPB all paying incentive distribution rights to KMI.  Right now it looks like they need to finish asset drop downs, but I wouldn't be surprised if we see more acquisitions in the future.  According to the website, it's currently the third largest energy company in North America with total enterprise value greater than 100 billion.  I'm taking that to mean only XOM and CVX are bigger.  They operate 75,000 miles of pipeline throughout the US and Canada. 

I'll be on the lookout for opportunities to increase this position and I might add KMP as well.

Senior Housing Properties Increases Dividend

SNH increased its quarterly dividend to $.39 per share marking the 9th straight year of increases.  This boost is only 2.63% which sounds low, but I'm actually pretty happy with it.  Sources tell me inflation has been around 1.9% so far in 2012 meaning SNH is able to slightly increase my purchasing power.  With a low yielding stock I would expect more, with a super high yielder I can't complain.  High yield with inflation protection is what my hopes were with SNH, so far it has delivered.  Of course there will likely be times in the future with higher inflation and SNH might not fare so well.

New Watch List Additions

It is becoming increasingly difficult to find value these days.  Most of my favorite stocks are trading at levels higher than I am willing to pay.  I've already increased my stake in companies I've identified as under valued which has lead me to search for new opportunities.  I scoured the CCC lists and came up with 3 companies that fit my objectives.  All three are either under or fairly valued right now.

Hasbro (HAS):
14.3 P/E / 7.4% Projected Growth / 116% Debt to Equity
3.81% Yield / 17.6% Div Growth / 47% Payout Ratio / 9 Yrs Increases

Most of us are probably already familiar with Hasbro, they sell toys and games.  I grew up with popular Hasbro products such as Transformers, Monopoly, and Mr. Potato Head.  It's funny how some of these products like My Little Pony go back in style.  I was reading about a subset of American males who are infatuated with My Little Pony and call themselves "bronies."  There was an article in the Army Times about bronies in the military, it was a hoot.  We joke about this all the time at work, who would have thought?  All jokes aside Hasbro is a serious company in the business of entertaining people.  It is currently under valued and very shareholder friendly.  It has a great dividend growth rate with room for additional increases.  I would expect that long term the dividend growth would slow down some to be more in line with EPS growth.  It does carry quite a bit of debt, which is something to watch out for.  A toy company is not my first choice for a core holding, but I could see starting a small to medium sized position with HAS.


Lorillard (LO):
14.6 P/E / 9.2% Projected Growth / -166% Debt to Equity (negative equity)
5.24% Yield / 27.8% Div Growth / 70% Payout Ratio / 5 Yrs Increases

Lorillard is a fine company in the tobacco industry that would compliment my Philip Morris holding.  LO is best known for its Newport brand of menthol cigarettes.  I have seen Newport making a push into the non mentholated market with its red label.  Before I left for Korea I noticed Newport red label was running specials and many smokers were indeed lured in by the low prices.  LO sells products mostly in the United States and doesn't seem to focus on international sales.  It has a huge stock buyback program which has lead to negative equity and quite a bit of debt.  This is pretty common in the tobacco industry.  It is something to keep an eye on, but not too concerning.  For dividend investors LO could be be a goldmine.  It offers a high yield, high dividend growth, and future EPS growth to keep the machine rolling.  It's currently trading in the fair value range.


Republic Services (RSG):
15.3 P/E / 6.6% Projected Growth / 93% Debt to Equity
3.37% Yield / 6.7% Div Growth / 48% Payout Ratio / 10 Yrs Increases

RSG is a trash collection service whose biggest competitor is Waste Management.  To be honest I'm more familiar with WM since it was our trash collector when I was growing up.  RSG is a bit smaller than WM and has a noticeably lower yield.  However it also has lower debt, a better payout ratio, and is projected to grow at a slightly higher rate.  Republic grows its business through an acquisition strategy; it buys smaller companies and integrates them under the RSG umbrella.  In fact if you look at its balance sheet you'll notice it has a huge amount of goodwill from all the past acquisitions.  RSG and WM are commonly put in the industrials sector of stocks.  To me its more like a utility.  I like WM for its yield and RSG because it's more financially sound.  RSG is slightly undervalued at this point in time.

What do you guys think?  Are you familiar with these companies?

Trying out F.A.S.T. Graphs

I read a few articles at Seeking Alpha the other day and noticed a lot of people use F.A.S.T. graphs as a quick way to gauge stock valuations.  I've seen these charts in the past, but never really looked at it closely.  This afternoon I went to http://www.fastgraphs.com/ and signed up for a 2 week trial.  I ran my whole portfolio their service.  Here is what I've found:

Over Valued:

EIFZF, PM, UNS

_______________________________________________________________________________________________________

Fairly Valued:

AVA, EMR, GIS, HNZ, ITW, KO, LTC, OMI, PEP, PG, SBSI, SNH, T

_______________________________________________________________________________________________________

Under Valued:

ABT, COP, JNJ, NSC

_______________________________________________________________________________________________________

Significantly Under Valued:

BWP, CVX, INTC, LINE, RTN, TD

_______________________________________________________________________________________________________


I really like FAST graphs as a tool to quickly determine valuations.  The fact that they cover foreign stocks like TD and EIFZF is just fantastic.  They also have a technique which is used to value MLPs and REITs.  Awesome!  In the past I've mostly looked at P/Es, yields, dividend discount calculators, market conditions, and my gut feeling (I've been watching these stocks for a few years) to determine entry prices.  FAST Graphs takes it a little further into a format which is easy to use and a bit more scientific.  Taking emotions and hunches out of investing is good.

The downside is that this service is not free :(  I really hate to add $10 a month to my budget, but I think in this case it's worth it.

Check it out guys!  You can sign up for a 2 week trial and cancel if you don't like it!

Quarterly Progress Update

Third quarter 2012 is now in the history books I just updated my progress page with the latest figures.  In total my dividend portfolio paid out $979.25 with was about $65 more than the previous quarter.  In my view the market is not offering the same value it has in the past which has lead me to keep a pile of cash ready for corrections.  Unfortunately this strategy has not worked very well, the market keeps on going up.  I thought DOW 13,000 was too high.  Now its 13,600 and climbing.  Timing the market is easier said than done.

Seeing everything in the green feels good but it can also make us over confident.  I have to remind myself that price gains are only on paper while dividends are real cash hitting my account every month.  That's why I don't really care what the value of my portfolio is.  The only thing that matters to me is the amount of dividends I receive, if those dividends are sustainable, and if those dividends are likely to increase in the future at a rate greater than inflation.  Of course I want to obtain the best yield for my money which is why I follow markets and stock prices in the first place.

2012 has been a crappy year for putting new money to work.  I'd much rather have another 2011 even with the crazy volatility.  I do expect the stock market will rise over time, it's just annoying when it actually happens.  o.O

Linn Energy IPO to Create C-Corp Shares

Well this is interesting, I've never seen anything like this one before.  Linn Energy (LINE) is going to introduce a new way to invest which will be called LinnCo (LNCO).  From what I gather LNCO's only assets will be units of LINE, but will be set up as a corporation.  So if you like LINE but don't want to fool around with K-1's this could make some sense.  Seeing that LNCO will be a corporation it's going to have to pay corporate taxes (which can run up to 35%) but will pay regular dividends and issue a 1099.  Intriguing!

This is not like KMI at all.  LINE is technically not a MLP because there is no general partner or incentive distribution rights.  It is set up as a LLC meaning it pays distributions, you file a K-1, it's a pass through entity, and you own units not shares.  One of the main attractions to KMI is that you can invest in the general partner and reap the rewards of the MLP structure in a big way.  This isn't possible with Linn.  I'm not saying either is better, just different.

I haven't made up my mind if I'll buy LNCO shares or not, but if I do it's going in my ROTH.  The main downside here is that the dividend will obviously be lower and you don't get the built in tax sheltering.  For those who like Linn, LNCO will make tax time a little easier and will have a place in retirement accounts.

What do you all think?  Am I understanding LinnCo correctly?

October Shopping List

The stock market continues to fly high making it difficult to find quality dividend stocks trading at attractive valuations. The usual dividend stalwarts such as KO, ABT, WMT, CL, and CVX are no longer on sale, yet I have money to invest and will continue depositing more funds from my day job. I'm going to buy something, this is a list of what I'm currently looking at.

●Genuine Parts Company: I've had my eye on GPC for a while, but it never quite reached the entry price I had in mind. I came very close to pulling the trigger a few months ago when it went down to around $58. I like Genuine Parts because it would help diversify my portfolio into an industry that I'm currently lacking plus it has proven itself to be a shareholder friendly company over the years. After revisiting GPC, I determined a 3.3% entry yield would be a decent place to start an investment. I'm interested in this stock below $60, it's pretty close right now.

3.24% yield / 52% payout ratio / 56 years of increases / 15.93 P/E
 

●Kinder Morgan, Inc: KMI is an American success story that wasn't available to the public until last year. It's one of those stocks I feel will be worth more many from years now but is difficult to value due to its business model. If you plug the numbers into a dividend discount calculator you'll see that it's way undervalued because it has a nice current yield and is expected to grow dividends at a rapid pace. It kind of tells you it's almost too good to be true (I had the same sort of feeling when I bought shares of PM last year). This one will be a steal if they can continue raising dividends like they say. The dividend growth is the wild card here; I like KMI's chances seeing that they recently acquired El Paso Pipelines. With that in mind I'm going to target a 4.0% yield which means a price of $35. I plan to put this one in my ROTH and keep regular MLPs in my taxable account. I'd like to make the purchase soon to make sure I get the Q4 dividend, it should go ex later this month.

3.94% yield / 1,078% payout ratio (isn't meaningful) / 2 years of increases / 281.9 P/E
 

●Norfolk Southern: NSC took a nose dive the past few weeks after it cut its future guidance. This drop has been well documented by internet bloggers and has been a consensus buy across the board. Anytime I get can a 3% yield with NSC I'll consider adding to my position, but at the same time I don't want one stock dominating my portfolio and odds of retirement success (which is why I've leaving INTC off this list). Since I already have a sizable stake with this railroad, I'm going to target a price that will lower my cost basis. My next price point is at the 3.25% yield or $61.50/share since we don't really know when the bleeding will stop.

3.14% yield / 34% payout ratio / 11 years of increases / 10.90 P/E

My plans are constantly changing, but chances are I'll pick up one or two of these names this month. In fact I think I'll put in a limit order for KMI right now just in case.