December Recap

2013 is now in the books.  Crazy year for investing!  Stocks went through the roof while gold and bonds were horrendous.  Luckily I'm not interested in gold and have kept my fixed income exposure low.  Precious metals do not pay passive income and therefore do not fit my strategy or goals.  In the future I will use bonds as a major passive income source but will have to wait for higher interest rates in order to justify holding them over dividend growth stocks. That time will come eventually.

Anyways I really enjoyed the holiday season.  This time last year I was stationed in South Korea and felt lonely and isolated being away from my loved ones.  I haven't been home for Christmas in 5 years you can imagine how joyous this holiday season was for us!

I am interested in investing and chronicle my adventures with it on this blog, but I hope everyone understands money is a small part of life.  I'm not pursuing financial independence to get rich so I can buy a bunch of crap to impress people.  It's about maximizing happiness and buying freedom.

DOW: 16,577 /// S&P 500: 1,848 /// 10-YR BOND: 3.03%

New Purchases:
1) 60 shares LEG at $29.23: $72.00 annual income
2) 25 shares CVX at $119.78: $100.00

Sales:
1) 54 shares ABBV at $52.25: ($86.40) annual income

Dividends Received: $546.65
ConocoPhillips (COP) $41.40
Intel (INTC) $20.70
iShares Emer Mkt Bnd (EMB) $2.43
Southern Co (SO) $32.48
Southside Bancshares (SBSI) $15.00
Chevron (CVX) $29.00
Emerson Electric (EMR) $23.65
Exxon Mobil (XOM) $10.71
Johnson & Johnson (JNJ) $39.60
Lorillard (LO) $46.20
Norfolk Southern (NSC) $29.64
Target (TGT) $8.60
Avista (AVA) $47.89
Exchange Income Corp. (EIFZF) $16.89
Coca-Cola (KO) $40.60
Realty Income (O) $15.64
Realty Income Series F (O-PF) $6.76
McDonald's (MCD) $45.36
Linn Energy (LINE) $24.16
LTC Properties (LTC) $28.58
Owens & Minor (OMI) $21.36

Dividend Increases:
1) TD: $.85 to $.86 per quarter (Canadian). ~$1.48 annual income
2) WPC: $.86 to $.87 per quarter. $.92
3) T: $.45 to $.46 per quarter. $7.32
4) O: $0.1818542 to $0.1821667 per month. $.36

New Deposits:
$1,500 to taxable account, $25 to Lending Club

Lending Club Interest:
$8.75

Special Dividends:
1) SBSI: $7.14 I appreciate companies who want to give shareholders extra payments (especially right before Christmas!!) as it truly demonstrates shareholder loyalty.  Unfortunately I cannot include special dividends towards my monthly or quarterly progress because it's not income I can expect on a regular basis.  However SBSI has been paying them for over a decade, even during the great recession and tech bubble.

January Shopping List

2013 was a great year for my passive income machine, but unfortunately must come to an end pretty soon.  A new calender year means I will have the opportunity to deposit fresh funds into my ROTH IRA account.  That's where my January deposit is headed.  I prefer to place real estate investment trusts and Canadian corporations in my ROTH.  REITs pay mostly ordinary (fully taxable) dividends while I can side step Canadian dividend withholding tax (15% last time I checked!) all together simply by opting to include those companies in an account designated as an IRA. 

●HCP, Inc. (HCP)
HCP stock looks cheap right now.  The company expects to report 2013 FFO per share of $2.97 to $3.03.  Using the middle of that range, the P/FFO is smidgeon over 12 at the moment.  It has a very respectable dividend growth history of 28 years.  In addition, the next dividend increase should be announced in January which would push the streak to 29.  FFO per share grew approximately 8% this year leading me to believe stock holders might enjoy a 5-10% dividend boost.  Did I mention stock in this company currently yields 5.8% and is part of the growing healthcare REIT industry?  Quite a lot to like with HCP.

Two factors seem to have pushed share price lower recently: higher interest rates and a CEO change.  Interest rates are going up.  A 10 year US treasury bond currently yields 3.01%.  On 12/31/2012 bonds with the same duration yielded 1.76%.  Holy crap!

One year chart of the 10 year T-Note

I view FED tapering/higher interest rates as a valid concern for REIT investors.  Higher interest rates will affect cash available for dividends because existing debt has to mature eventually forcing companies to issue new debt at less favorable rates, plus new properties financed at higher rates might not be as beneficial to FFO.  On the other hand HCP has a better credit rating (investment grade) than most of its peers and rising rates usually means a healthy economy, perhaps complete with increased property acquisition potential.  I believe REITs will still provide income investors with dividend growth in a rising rate environment, but you have to wonder what will happen to share price.  Total return investors might want to look elsewhere.

Anyways HCP is a bit too diversified for my tastes (I don't want to invest in medical office/hospitals/life science buildings) a fact I can over look because rent is rent, the value is there, and its income generation capacity is strong.  If the current prices holds, odds are I grab some shares of this business next month.

----Canadian Equities----

●Toronto Dominion Bank (TD) still appears undervalued and I'd be willing to pay up to $95 per share.  The share price is currently attractive in part because of exchange rates.  As the US dollar strengthens, it makes shares of foreign companies cheaper.  Great for new purchases, but also makes dividends smaller on the shares I already own.  I also like Bank of Nova Scotia here and think it might be even more undervalued than TD.  I'd be more inclined to go with TD simply because of portfolio weightings.  BNS is a higher % of my portfolio, plus I recently turned the BNS DRIP on so it will grow automatically.  Both have performed well as income stocks.  TD has the edge in dividend growth, BNS has the edge in current yield.  In fact TD announced three(!) dividend boosts this year.  TD currently yields 3.5%, BNS 3.8%.

●Telus (TU) would be a nice addition because I haven't purchased a telecom since 2011.  I already own more than enough AT&T.  Verizon appears expensive plus there seems to be a lot of moving parts with the Vodafone deal.  I may be looking north to our good friends in Canada for my next move in the sector.  First of all TU yields about 3.9%.  That's nice and all, but I expect decent yields from telecoms.  What sets Telus apart from its dividend growth peers is that it plans to increase dividends twice per year through 2016 for a combined total around 10%.  This company is very open about it, refreshing!  It's difficult to find decent dividend growth in the telecom sector, TU indeed delivers.  It has good EPS growth prospects and a reasonable payout ratio to support it.  Telus isn't particularly levered and sports a solid capital structure compared to BCE, RCI, and VZ.  Pretty similar to AT&T is that regard.  Rogers Communications and Telus appear equivalent for dividend growth potential until balance sheets are compared.  TU is much more secure.

It appears Telus has a 9 year dividend growth streak in its native currency, yet it does not appear on the CCC lists.  Perhaps it slipped through the cracks due to exchange rates?  Anyways I'm open to starting a position around $33 so I'd need a small dip.



I hope everyone is enjoying the holidays!  Merry Christmas!

2014 Financial Goals

1. Increase forward annual dividend income to $6,880 ($573 per month)

This is a rather ambitious goal which represents a $100 per month improvement compared to where I'm at right now.  It can come from new stock purchases, bond purchases, ETFs, preferred stocks, dividend increases, DRIPs, or FRIPs; it matters not.  My over arching goal is to grow passive income high enough to replace employment income so that one day I can spend my time on other activities besides work!  To put the number into context, I was able to increase my forward income by $1,080 ($90/mo) this year.  I think I can do better in 2014.

2. $20 monthly Lending Club interest

I continue to be a fan of peer to peer lending and have become quite comfortable with Lending Club the past year or so.  Unfortunately LC cannot support a large investment based on my current screen, but I have been testing a few parameters to broaden the note pool.  I think I could achieve this goal if I were to deposit somewhere between $50-$75 per month.  Lending Club deposits compete with brokerage deposits so I might be reaching a bit with this one.

3. Average monthly brokerage deposits of $1,300

I averaged about $1,335 this year and expect 2014 to be about the same.  The difference being my salary and regular savings will go up, but my tax return will not be used towards investments (I need tires/new computer).

Salary:  Last I heard, the military will be getting a base pay raise of 1% starting January.  Likely our housing and food allowances will go up too, but we're still waiting on the house & senate to do their jobs.  Automatic raises might come out anywhere between $50-$100 per month, it's only designed to keep up with inflation.  However I will get a heftier automatic raise starting in June and might also be promoted.

Budget:  I don't see a lot of room for additional savings without sacrificing quality of life.  I can only think of two items worth mentioning.  I am shopping car insurance and believe I can get better rates.  That, and when our lease expires we'll be looking to save a bit on housing.  There are cheaper places available down the street which seem to be just as pleasant.  Enough about budgets... yawn!

Side Income:  I'm always interested in generating side income because a budget can only go so low and my salary is for the most part out of my control.  I've tried a bunch of ideas in the past, few seemed worthwhile.  I might entertain a regular old part time job during summer months.  If we want something bad enough, we have to do whatever it takes.  How bad do I want to be financially independent at a young age?

Well that's it.  I thought about a few other goals, but really my journey to financial independence is about building passive income and doing whatever it takes to deposit enough funds into my accounts to make that dream a reality!

Here's to achieving our dreams, 2014 and beyond!

Oh, I found out that we will NOT be deploying to Afghanistan.  It's a long story, but I'm just glad to know one way or the other.  Well maybe it's a little disappointing because I wanted to follow through on the oath I took years ago (plus combat pay is fantastic) but I'm just happy to get my life back.  Days get pretty hectic training up to go to war as you might imagine.  A box full of my personal items is currently sitting somewhere in Afghanistan as the shipping container with our equipment was already sent.  That's how close we were to going!  Anyways, our Colonel took time out of his day to explain the situation to us and apologized for the constant changes.  I really appreciated that. 

UPDATE 12/20/2013:
Today I switched auto insurance companies.  The new policy has better coverage AND a 37% lower premium.  Boy was I being swindled!  Would have done this earlier, but was expecting to put my vehicle in storage for a while.

Housing allowance went up way more than expected (about $115/mo), still waiting on the 2014 food allowance increase (might be $10/mo or so).  Base pay is set to increase by 1.0% as far as I know (roughly $25/mo for me).  Military pay is public knowledge, you can figure it out for any service member with only basic facts.  Nothing to hide here.

It's looking good on the deposit front!

Replaced ABBV with CVX

I need to make this a brief post, but I went ahead and replaced ABBV with CVX today.  ABBV was never meant to be a long term position for me, I knew this all along because I'm simply not comfortable with pure pharma stocks.  I'm not saying Abbvie is a bad company, rather it's just not for me.  Chevron, however, is one of my core stocks that I'd be comfortable holding through thick and thin.  I've been meaning to acquire additional CVX shares for quite some time now.  I get to kill two birds with one stone here.

Some may be wondering why I would choose to make this move only a few weeks before the new tax year.  I could wait a mere 19 days before selling and then settle capital gains taxes during 2015.  A very valid point.  Basically I'm disappointed with myself in that I've had to sell so many positions this year.  I want a clean slate for 2014 and am willing to take some bumps and bruises now in order for that to happen.  I will owe approximately $225 worth of capital gains taxes for the ABBV sale, it's not the end of the world.

I lose $86.40 annual income with the loss of my Abbvie shares.  I gain $100.00 annual income with 25 additional Chevron shares.  CVX currently yields more than ABBV (since when? jeez!) plus I added additional capital to the purchase for good measure.  That's where the income difference comes from.

Symbol: CVX
Core Position: Yes
Speculative Position: No
Expectations: Steady income; 7% annual dividend growth
Automatic Sell: Dividend cut
Consider Selling:  Frozen dividend, business fundamentally changes, management becomes untrustworthy, fundamentals deteriorate, wildly over valued stock price, or position fails to meet expectations. 

I hope you all enjoy your weekends.  Don't take your time on this earth for granted!

Abbvie Fails To Raise Dividend

ABBV dividend history

Today Abbvie Inc. (ABBV) announced it's holding the dividend steady for the fifth straight quarter.  I have mixed feelings about this announcement.   On one hand, there is room for an increase and I thought the dividend growth culture from the old Abbott (40 year streak prior to spinoff) would continue with both of its offspring.  On the other hand, I've known from the beginning that ABBV wouldn't be a long term hold for me (These are spinoff shares, I did not buy them directly). 

Here is a quote from my January 2013 recap:
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.

I dislike pure pharmaceutical stocks, especially ones with looming patent expirations that represent massive portions of earnings.  That is exactly what the blockbuster drug Humira will be for ABBV in a few short years.  Maybe Abbvie has a strong pipeline or can find innovative ways to ward off generic competition, but all that remains to be seen.  Plus it's not like Humira sales will evaporate over night, I'd like to think it would be more of a slow decline.  However, I have a hard time understanding the branded drug business and really and it's not my cup of tea.  I can read about new drug breakthroughs all I want, but I'll never understand what it all means. I don't have expertise or any experience to draw from in this area.  With that in mind, I much prefer medical device companies or diversified drug manufacturers such as JNJ or ABT.

Dividends
Here is what management said in the October conference call regarding dividends:
..the dividend is a very, very important piece of our investor identity. We have set the dividend in a very competitive payout ratio relative to our peers. And we've been pretty clear that we intend to grow that dividend over time probably more modestly in 2014, given some of the challenges with the lipid business but growing it nonetheless. And I think you can expect to see that payout ratio creep up as a result.

It is clear ABBV wants to reward shareholders with growing dividends, so why did they fail to actually raise it?  You'd think management might want to do it with this announcement (one year in business) to coincide with the 5th payment in order to show investors they are serious.  That is exactly what ABT did.  My theory is Abbvie might be looking to grow dividends on the same schedule as the old ABT.  The old Abbott announced increases during the month of February.  Is that why Abbvie is holding out?

At this point I am leaning towards replacing my ABBV shares.  As I stated many times the past year, I never thought Abbvie (or any pure pharma company) is suitable as a long term hold for me.  Now the yield has fallen to 3%.  Questions about dividend growth are even more concerning.  Humira is set to lose patent protection in only a couple years, that is most concerning of all!  I know I'm going to sell these shares eventually, should I do it now?

I don't want to pay capital gains tax which is a major reason not to sell. Look at this puppy:

ABBV is held in a taxable account.  I don't want to realize this level of capital gains.

Do you think Abbvie will raise dividends next quarter?  Should I sell?  Own any shares?

December Thoughts

2014 IRA contributions limits remain at $5,500
IRAs are a great place to park funds because dividends (and the occasional capital gain) grow tax free.  I prefer the ROTH variant because I plan to access funds prior to age 59.5.  The main advantage is that past contributions can be withdrawn anytime without penalty in a ROTH (not so with a traditional IRA).  I have been thinking about pursuing part time work as little as 4-5 years from now if I can build my passive income to around $1,000/month.  Life is not about working for money!  I regularly day dream about moving to the beaches of Thailand or being a full time ski bum.  Perhaps "work" as a ski instructor would be suitable!  Anyways that's why I choose a ROTH.

FRIPs
I really like Scottrade's FRIP program and I plan to take advantage of it.  My Scottrade account is still young and I do not have a sizable income stream in place yet.  In fact tomorrow's payment from TGT will be the first dividend to ever hit this account.  However I am directing all new taxable deposits and all taxable dividends from my Fidelity account over to Scottrade.  It will grow over time and FRIP is going to be the vehicle for reinvestment.  Two examples demonstrating how I'll use FRIP: 

#1:  I am currently happy with the size of my KMI position and am not interested in buying another $1,500 chunk of this company all at once.  There's no incentive to DRIP KMI since it doesn't offer a discount.  KMI is currently trading around $32-$33 and would be a great candidate for new money despite the fact it's already a large position for me.  FRIP.  I already have enough PM shares, but if it trades under $80 I want more.  FRIP it.  With FRIP (unlike DRIP) I can direct reinvestment to whatever offers the best value and since I'm only getting 1-2 shares at a time it won't screw up weightings.

#2:  I haven't bought shares of General Mills or Abbot Labs going on 3 years.  However I'm not interested in using $1,500 of new funds to purchase GIS over $50 or ABT over $37 which is where they currently trade.  Unfortunately both those positions are smaller than I'd like them to be.  How can I solve that problem?  FRIP.  I could use reinvestment to shore up under weight positions not suitable for new money 1-2 shares at a time.  Great method to maintain portfolio balance while actually having a say over purchase price.

I see FRIP as a superior program over DRIP, although any applicable discounts unfortunately do not apply.

DRIPs
I turned on the OHI and BNS DRIPs in my Fidelity ROTH.  Omega offers a 1% discount on dividend reinvestment, Scotia Bank 2%, I'll take it.  At one point I planned to DRIP TD, but they discontinued their discount maybe a year ago.  That is something I'll have to keep an eye on with Omega and BNS.  It can change over time.

TD set to split shares 2:1 next month, announces third 2013 dividend raise
Investors don't really gain anything from a stock split.   However I do not want my companies pulling a Google on me.  Google currently trades at $1,078.  How am I supposed to invest $1,750 into something priced that high like I recently did with LEG?  Stock splits alleviate this problem.  They are also good for options in case I ever decide to start selling covered calls.

I'm pretty sure the American shares of TD will split just like the Canadian shares.  I ought to look this up though.  Toronto-Dominion will be 4th company I hold to split its share price.  The others being KO (2:1), SBSI (21:20 twice), and LO (3:1).

TD also announced a small dividend raise of $.01(Can $) per share.  This particular raise was small, but completely unexpected.  I wasn't anticipating a raise until next quarter, I hope it's still on the table.

Your vote counts
One of our privileges as stock owners is the right to vote in company matters.  I voted "yes" to the Linn Energy BRY acquisition, and "yes" to the W.P. Carey CPA 16 acquisition.  Make sure to voice your opinion in the companies you own and follow when it's time to vote!  If you don't understand the issue at hand, consider siding with management's recommendation.  Management are the stewards of our capital, if you own shares you have to trust them.

New Purchase - LEG

I'm pleased to announce Leggett & Platt, Inc (LEG) as the newest addition to my income portfolio.  These 60 shares came with a 4.1% yield and will boost my forward income by $72.00 per year.  I was hoping to acquire shares of this company at $29 or below, but felt I ought to get in now since it's close enough and goes ex next week.  If you back out the $.30 dividend, I'm effectively paying $28.93 per share.

I lack holdings in the consumer discretionary sector, Leggett & Platt will help fill that void and increase my portfolio diversification.  Actually LEG is pretty interesting in that regard.  Technically it's classified as consumer disc., but is almost an industrial stock.  LEG is the parent company for a number of businesses (in a similar vein as say ITW) but is most famous for manufacturing bed springs, bed frames, and other home furnishings.  I happened to have bought a new bed set a few months back.  The metal frame was clearly labeled as a LEG product and the springs (I bought a Simmons) are likely to be a LEG product as well.  Beyond the residential furnishing segment (which include other offerings such as carpet pads), Leggett's three other segments are Industrial Materials, Commercial Fixturing and Components, and Specialized Products.  I don't feel the need to list each business, but it is clear this company has hands in a wide variety of industries and is well diversified.  Quite a lot going on here and there should be plenty room for future acquisitions and portfolio optimization.

According to analysts, LEG is set to grow long term EPS by 15% per year.  That would be a nice growth story, but unfortunately I find analysts expectations are often too optimistic.  I am not counting on growth that high, that's for sure!  LEG has many qualities I look for in a long term holding to include a 42 year streak of dividend growth, reasonable debt, robust growth opportunities, and a solid valuation.  I spent some time listening to conference calls and am comfortable with the management team as well (dividend raises are ingrained in the culture).  It's also a mid cap stock which is a breath of fresh air from all the huge companies I tend to purchase.

The down side with LEG is that the dividend growth tends to be low and the payout ratio is a bit high.  While I think dividend growth will eventually pick up as EPS improves, I'm content collecting a 4% yield growing at the rate of inflation for now.  Actually that sounds just fine!

Symbol: LEG
Core Position: No
Speculative Position: No
Expectations: Steady income; 3% annual dividend growth
Automatic Sell: Frozen dividend; dividend cut
Consider Selling:  Business fundamentally changes, management becomes untrustworthy, fundamentals deteriorate, wildly over valued stock price, or position fails to meet expectations.

November Recap

November was a pretty solid month, nothing unusual to report other than the equity markets are on fire.  If you would have told me the DOW would surpass 16,000 this time last year I wouldn't have believed you.  My plan is to continue purchasing income paying securities on a monthly basis and also increase my cash reserves.  

DOW: 16,086 /// S&P 500: 1,806 /// 10-YR BOND:  2.74%

New Purchases:
1) 58 shares OHI at $31.45: $111.36 annual income
2) 27 shares TGT at $63.88: $46.44

Sales:
1) 56 shares SNH at $23.40: ($87.36) annual income

Dividends Received: $386.71
AT&T (T) $82.35
General Mills (GIS) $26.81
iShares Emer Mkt Bnd (EMB) $2.62
Air Products (APD) $22.01
Linn Energy (LINE) $24.16
Abbott Labs (ABT) $7.56
Abbvie (ABBV) $21.60
Exchange Income Corp (EIFZF) $17.17
Kinder Morgan Inc (KMI) $62.73
Procter & Gamble (PG) $46.92
Realty Income (O) $15.64
Realty Income series F (O-PF) $6.76
Senior Housing Properties (SNH) $21.84
LTC Properties (LTC) $28.58

Dividend Increases:
1) SBSI: $.20 to $.21 per quarter. $2.88 annual income
2) EMR: $.41 to $.43 per quarter. $4.40

New Deposits:
$2,000 to taxable account, $50 to lending club

Lending Club interest:
$8.95

New Purchase - TGT

As I stated in an earlier post this month, I am interested in adding additional shares of Target to my portfolio at $64 or less.  TGT stock took a noticeable tumble today when it missed Wall Street's expectations in an earnings release and also lowered future guidance.  Target is currently opening new stores in Canada, it appears costs associated with that expansion are negatively affecting current earnings.  However I like its plan to expand abroad and Canada seems like a great market to kick off international growth.  At any rate, shares of Target were trading below my buy price so I took action.  These 27 additional shares will pay me $46.44 per year on a 2.68% yield.  Not the greatest starting yield, but I like TGT's future growth & dividend growth prospects.  It's currently sitting on a dividend growth streak of 46 consecutive years(!!!) which helps demonstrate just how successful and high quality this business really is.  In general, I'm leery of retail stocks and do not plan to weight them heavily.  That said, both WMT & TGT tickle my fancy and they both have a place in my portfolio.  I will probably not expand my retail holdings past those two names as the retail sector is littered with failed or failing businesses such as Sears and K-Mart.  No doubt this is a competitive industry.

November has been a fairly strong month for deposits as I received my travel money from a mission last month.  A few weeks ago I decided to put additional capital into OHI in order to piggy back on a commission that was going to be paid anyway.  Today's TGT purchase is also larger than normal for the same reason.  Just trying to keep my transaction costs as low as possible.  I'll have a few hundred bucks left over to increase my cash position for greener pastures as well.

The DOW cracked 16,000 today and is sitting at all times highs...

Symbol: TGT
Core Position: No
Speculative Position: No
Expectations: Steady income; 7% annual dividend growth
Automatic Sell: Frozen dividend; dividend cut
Consider Selling:  Business fundamentally changes, management becomes untrustworthy, fundamentals deteriorate, wildly over valued stock price, or position fails to meet expectations.

$10,000 Worth of Dividends (so far)

$10,000 Dividends
Friday's payments from Abbvie, Abbott Labs, Kinder Morgan, Procter & Gamble, and Realty Income pushed my lifetime dividend total over $10,000.  I have been income investing a bit over 3 years now, boy it sure goes by fast.  Prior to investing solely for income I was part of the total return camp for well over a decade.  I had owned mutual funds since high school (some individual stocks too), though I started taking saving & investing seriously when I joined the military in 2008.  The great recession was a big test for total return investors, and I discovered I couldn't handle total return investing psychologically.  If the financial meltdown never happened I'd probably still be indexing and still think individual stocks are for suckers.

In a way I'm glad the great recession happened when it did.  It lead me down the path towards income investing which allows me to sleep well at night and meshes better with my long term goals... I never felt comfortable with the 4% rule!  Anyways my investment assets are approaching $175,000 these days, the thought of losing 40% of that number would send chills down the old total return investor in me.  I found a better path, although it is clearly not for everyone. 

DOW 16,000?
Holy Moses!  If I had debt (I don't), I'd consider paying down debt as an option along with investing as a use for excess capital from my day job.  It's a tough market out there for value investors.  Even though I don't care about capital gains I still want to preserve my invested capital.  That's where value investing comes in.  If I stick to purchasing a diversified set of undervalued or fairly valued high quality equities, capital preservation will take care of itself.  Capital preservation is the reason I focus on value and also on high quality companies.

I prefer low purchase prices and the market is simply not cooperating.  Yet I still have capital to invest, November has been very frustrating so far.  I placed limit orders on both CVX and LEG this month.  Turns out my chosen purchase price for both companies was about $.25 off.  Missed out both times and I didn't have the opportunity to make adjustments during trading hours.  At this point I still need to put money to work or else I will not be able to increase my passive income stream.  I'm going to purchase something, right now I'm still interested in CVX & LEG.  DE will also be thrown into the mix.  Don't think I've bought a stock from the industrial sector all year o.O

Turn Over = Too High
It's a shame I've had to sell so many positions this year.  I've been forced into selling HNZ, BWP, INTC, and recently SNH due to dividend freezes (HNZ was bought out, nothing I could do there).  4 sells in one year is way too much.  In the future I plan to focus more on quality companies that are as close to a sure bet as possible when it comes to dividend increases.  Perhaps next year I'll have to do a bit more portfolio retooling as I do question some of my picks from years passed when I was interested in high yield over high quality.  Maybe a few decades from now I will have mastered the art of dividend growth investing.  Favoring high yield is a beginners mistake, I'm learning as I go.

Replaced SNH With OHI

Dividend growth companies successfully executing their business plans see rising earnings (or FFO in the case of a REIT) and are able to pass part of that success onto investors in the form of a dividend raise.  On the other hand, dividend freezes and dividend cuts typically indicate something is wrong with a business, especially if said company had a respectable streak in place.  A few weeks ago Senior Housing Properties (SNH) announced a dividend freeze and effectively ended a dividend growth streak of 9 years.  SNH is currently repositioning itself by selling a number of properties.  Some properties have already been sold, others are still on the market.  Regardless, the board of directors chose to halt the SNH dividend growth streak during this transition phase as the dividend coverage is thin.  Kind of a shame the streak fell just short of a decade.

SNH's reasons for holding the dividend steady are actually pretty decent in my opinion.  It does not appear to be a business in trouble, and a convincing argument could be made to continue holding.  However at the end of the day, I need to realize a rising income stream.  That's my goal and the reason I even bother to invest.  I could tolerate a freeze from a company like a General Mills or a Bank of Nova Scotia.  Each has been paying uninterrupted dividends well over a 100 years.  With something like SNH I am less forgiving, plus it's not hard to find a replacement.  I'm moving on!

With this sale I lost $87.36 worth of annual income.

I'm going with Omega Healthcare Investors (OHI) as the replacement.  This is a company executing its business plan aggressively and with a lot of success.  OHI has been able to grow FFO at a rapid pace and in turn the dividend growth has also been excellent.  Dividend growth has averaged low double digits in recent years and is also sitting on a 11 year streak. 

There are quite a few similarities between SNH and OHI.  Both are healthcare REITs, with similar yields, and similar market caps.  They even pay dividends during the same month.  But I also notice a few differences between the two.  First of all OHI is far more aggressive.  They are expanding rapidly and leveraging cash flow with a higher debt load.  I think that is exactly what a REIT should be doing while interest rates are so low.  Omega is almost exclusively focused on the skilled nursing segment within the healthcare property realm, another fact I find intriguing.  I anticipate increasing demand for these types of properties as the baby boomer generation ages.  Baby boomers are eventually going to need long term care facilities and there are millions and millions of boomers.  When I think of healthcare REITs, long term care facilities are what I have in mind.  I'm not as interested in hospitals or medical office buildings that can also be included within the healthcare REIT industry.

I used to proceeds from the SNH sale as well as some cash collecting dust in my ROTH to fund this purchase.  These shares are set to pay me $111.36 on an annual basis.  I think OHI offers a decent value at the moment, but the share price has increased tremendously over the past couple years.  It's a shame I passed on OHI over the years, it has delivered an outstanding operational performance. 

Symbol: OHI
Core Position: No
Speculative Position: No*
Expectations: Steady income; 3% annual dividend growth
Automatic Sell: Frozen dividend; dividend cut
Consider Selling:  Business fundamentally changes, management becomes untrustworthy, fundamentals deteriorate, wildly over valued stock price, or position fails to meet expectations.
 * I currently do not consider OHI to be speculative, but perhaps borderline.*

ARCP was the other replacement candidate under consideration.  As of today ARCP is trading around $12.50... I find the value (and yield) compelling.  However I worry that particular REIT is expanding too quickly and is gobbling up more than it can chew.  I was reading about 3 massive acquisitions and frankly I'm just not sure I can digest it all.  I may consider ARCP again down the road; too many moving parts for now.

5 Dividend Growth Stocks For November

Target Corporation (TGT) is a dividend champion with a 46 year streak of increasing dividends.  Hard to argue with a track record like that, Target is high quality.  I have a fair value of $71 on shares of this business, and would be interested in picking up additional shares at $64 or below.  Purchasing under $64 ensures I have a 10% margin of safety as calculating fair values can never be an exact science.  The best I can do is estimate using available facts.  Regardless, I am underweight retail stocks and would rather own both WMT and TGT.  Although I see Walmart as the stronger company, I don't feel the need to only choose one!

Wal-Mart Stores (WMT) is another dividend champion I want to buy.  It has an ongoing dividend growth streak of 39 consecutive years and also dominates the retail space.  WMT is one of the highest quality companies I can think of.  I have a fair value of $83.50 on Walmart, and would be interested in grabbing additional shares at $75 or below to ensure a margin of safety.  I recently visited a Neighborhood Walmart store in my area and was pleasantly surprised with what I found.  WMT plans to expand internationally and I think the Neighborhood Walmarts will also be a hit.

Leggett & Platt, Inc. (LEG) has a dividend growth streak of 42 years.  My calculations tell me this stock is worth $32, therefore I am interested in adding LEG to my portfolio at $29 or below.  I currently do not own any LEG, but became interested in this particular company a few months back when I purchased a new bed.  Guess what they produce?  Metal bed frames that raise your bed off the floor (among other products).  Boring companies that produce boring products like bed frames are right up my alley!  I love it!  LEG is projected to grow EPS fairly rapidly and currently sports a 4% yield.  However the payout ratio is a tad high and I only anticipate dividend growth of 3-4% for the time being.

Chevron Corporation (CVX) is yet another dividend champion, this time with a 26 year streak.  I calculate a fair value of $127.50 which compels me to consider a purchase at $114.50 or cheaper.  CVX is one of my core holdings, and I'm ashamed to say I haven't bought any shares in well over 2 years.  I've had many opportunities to add CVX shares at discounted prices, yet I failed to take action.  Should I continue to disappoint myself, or should I just buy some dang shares?  I'm willing to break the 10% margin of safety in order to increase a core holding.  It's currently trading at $118... close enough?

Abbott Laboratories (ABT) used to be a dividend champion with a 40 year streak.  That streak ended when it spun off the new pharmaceutical company Abbvie earlier this year.  Last month ABT rewarded patient investors with a massive 57% dividend boost.  That boost telegraphed the new ABT's intentions regarding dividend growth.  For the first time in almost two years I am interested in buying more shares of this health care company!  It is difficult to calculate a fair value on Abbott because the new business cannot really be compared to historical data.  Since I am unable to calculate a fair value on my own, I will have to defer to Morningstar with its $40 fair value calculation.  I am interested in grabbing ABT shares at the 2.5% yield threshold which equates to a $35.25 share price.  I believe Abbott has positioned itself for an easier path to sustained growth now that concerns over Humira patent expiration are a thing of the past.

As it stands right now all these stocks are trading at prices a little bit higher than I want to pay.  That's not too surprising since the stock market is near all time levels.  All 5 candidates are within striking range of my target purchase price so I plan to be on the lookout.  With a little help from Mr. Market I'll have a better menu from which to place an order, in fact I'm going to place a limit order on CVX right now.

October Recap

Pretty solid month although I worry the stock market might have gotten ahead of itself.  My plan was to put some money to work and also increase my cash position for greener pastures.  Mission accomplished.  Nothing major to report investing wise other than I'll be looking to replace SNH during November. 

I've been extremely busy getting ready to deploy to Afghanistan.  That's why my blog activity was so low.  Other than that I'm hoping for snow so I can enjoy some Colorado skiing (best in the world?) and a white Christmas before I ship off in a few months.

DOW: 15,546 /// S&P 500: 1,757 /// 10-YR BOND: 2.54%

New Purchases:
1) 20 shares TGT at $62.32: $34.40 annual income

Sales:
none

Dividends Received: $410.32
Baxter Int (BAX) $10.78
Coca-Cola (KO) $40.60
iShares Emer Mkt Bnd (EMB) $2.61
Illinois Tool Works (ITW) $12.18
Philip Morris Int. (PM) $97.76
Corporate Office Properties series L (OFC-PL) $22.58
Exchange Income Corp. (EIFZF) $17.30
Realty Income (O) $15.64
Realty Income Series F (O-PF) $6.76
W.P. Carey (WPC) $19.78
Linn Energy (LINE) $24.16
Kraft Foods Group (KRFT) $14.28
Bank of Nova Scotia (BNS) $36.77
LTC Properties (LTC) $28.58
Raytheon (RTN) $31.35
Toronto-Dominion Bank (TD) $30.06

Dividend Increases:
1) LTC: $.155 to $.17 per month.  $30.24 annual income
2) KRFT: $.50 to $.525 per quarter. $2.72
3) ABT: $.14 to $.22 per quarter. $17.28
4) KMI: $.40 to $.41 per quarter. $6.12

New Deposits:
$1,365 to taxable account; $25 to Lending Club

Lending Club Interest:
$8.75

October Dividend Increases

LTC Properties (LTC) raised its dividend 9.7% from $.155 to $.17 per month.  Obviously I'm very pleased to see a hefty increase on a holding that is already high yield.  High yield + high dividend growth is a potent combination, I need to find more companies like this.  However LTC tends to increase dividends at irregular intervals meaning it's not automatic like a PG or JNJ.  Anyways I like the management here and expect to enjoy additional increases over time with LTC.

Kraft Foods Group (KRFT) raised its dividend 5.0% from $.50 to $.525 per quarter.  This was the first ever dividend boost for the post spinoff Kraft.  Earlier this year the KRFT CEO stated the company was targeting mid single digit dividend growth.  5% is exactly on par so there is nothing to complain about here.  I want to add more KRFT shares, but unfortunately I find the share price to be fully valued at the moment.

Abbott Laboratories (ABT) announced a 57.1% dividend increase from $.14 to $.22 per quarter starting Q1 2014.  This is by far the largest increase my portfolio has ever seen, holy cow!  ABT used to be a dividend champion (with a 40 year streak) before it split into two companies earlier this year.  It is technically no longer a dividend champion but I decided not to penalize the company because the total ABT + ABBV combined dividends is larger than the old company.  Anyhow the new ABT's stance on dividend growth is now crystal clear.  I plan to accumulate more shares and probably even elevate ABT back to core holding status as it was before the Abbvie spinoff.

Kinder Morgan, INC (KMI) boosted its dividend 2.5% from $.40 to $.41 per quarter.  While that number might seem rather low, KMI tends to do similar increases every quarter.  I'll take any increase I can get.  Each and every dividend increase puts more money in my pocket and moves me a baby step closer to financial independence. 

Senior Housing Properties (SNH) FROZE its dividend at $.39 per quarter.  I need to spend some time and figure out what the heck is going on here; freezes are almost always unacceptable!  If a company can't even a muster the usual 2.5% raise it tells me something is wrong.  I don't intend to sell positions very often, but I am likely to do so here.  On the bright side, it shouldn't be terribly difficult to find a replacement REIT with a similar yield.  I haven't had much time to do research the past few weeks.  More to follow on the unfortunate SNH turn of events.

New Purchase - TGT

I'll be out of town on a mission the next few weeks and I don't think I'll have internet access while away from home.  I decided to put some money to work right now by buying a few shares of Target.  TGT is the 37th equity position in my portfolio and I'm very pleased to add another high quality dividend champion to the lineup.  This purchase came with a 2.76% yield and will pad my annual passive income stream by $34.40.  I was not charged a commission since I still have free trades from my new Scottrade account.

Symbol: TGT
Core Position: No
Speculative Position: No
Expectations:  7% dividend growth; steady income
Automatic Sell: Dividend is frozen/cut. 
Consider Selling:  Business fundamentally changes, management becomes untrustworthy, fundamentals deteriorate, stock price is wildly over valued, or position fails to meet expectations.

I also entered a lowball XOM limit order in case the market tanks while I'm out of the loop.  Anyone following the news knows we are in the middle of a government shutdown, this could very well be an extremely volatile period for stocks.  Since I will not have the luxury of being able to follow the markets closely for the time being, I must rely on limit orders.  Anyways if XOM hits $80.60 I'll own more shares.

September Recap

I feel like I've been on autopilot for a long time and somehow managed to stray from my frugal roots.  This month I challenged myself to see if I could increase my savings rate.  All I did was drive less, eat at fewer restaurants, and curb energy drinks.  It feels good to save additional capital and be motivated again!

DOW: 15,130 /// S&P 500: 1,682 /// 10-YR BOND 2.62%

New Purchases:
1) 26 shares PM at $83.84.  $88.40 annual income (the dividend has since increased)
2) 36 shares KMI at $34.66.  $57.60
3) 22 shares BAX at $66.84.  $43.12

Sales:
1) 92 shares INTC at $22.98 ($82.80) annual income

Dividends Received: $539.90
Intel (INTC) $41.40
ConocoPhillips (COP) $41.40
Southside Bancshares (SBSI) $14.28
Southern Co (SO) $14.72
iShares Emer Mkt Bnd (EMB) $2.76
Chevron (CVX) $29.00
Emerson Electric (EMR) $22.55
Exxon Mobil (XOM) $10.71
Johnson & Johnson (JNJ) $39.60
Lorillard (LO) $46.20
Norfolk Southern (NSC) $29.64
Avista (AVA) $47.89
Exchange Income Corp. (EIFZF) $17.28
Linn Energy (LINE) $24.16
Realty Income (O) $15.61
Realty Income Series F (O-PF) $6.76
McDonald's (MCD) $43.12
LTC Properties (LTC) $26.06
Owens & Minor (OMI) $21.36
Pepsi (PEP) $45.40

Dividend Increases:
1) O: $.1815417 to $.1818542 per month.  $.36 annual income
2) PM: $.85 to $.94 per quarter.  $37.44
3) MCD: $.77 to $.81 per quarter.  $8.96
4) WPC: $.84 to $.86 per quarter.  $1.84

New Deposits:
$1,100 to taxable account; $50 to Lending Club

Lending Club Interest:
$7.22

Could I Semi-Retire in 5 Years?

I believe I might be able to pull off an early exit from full time work within the next five years.  Man it would be awesome to own more of my time!  Here's how it might look.

Passive Income Stream: 
I currently expect to receive about $460 per month (on average) from my investments.  This figure includes dividends from the portfolio listed on this public blog plus a small amount of interest from Lending Club.  I believe that by early 2018, this figure will balloon to $800-$1,000 per month based on conservative dividend growth assumptions (4.5% dividend growth), and a moderately aggressive savings target ($1,000 per month + annual tax return).  I might hit the high end of the target if my name is called for another combat zone deployment. 

Army Reserve/National Guard: 
Pay: $400 for one weekend per month; full time pay two weeks per year.
Benefits: Inexpensive healthcare, pension, military perks
Other: Transfer accumulated service, opportunity to lace my boots

Not Enough: 
I'm up to roughly $1,200 - $1,400 income per month so far, have health insurance, and am working towards a pension.  Not a bad place to be, but unfortunately I can't live off a sum this small.  I would need to find supplemental income sources.

Option 1: 
Work I enjoy/part time job.  This could be seasonal work as a ski instructor or maybe as a raft guide.  Can't get any better than that as far as paid work goes.  I might have to settle for a lousy $10/hour job if the fun jobs don't pan out.  Maybe 20 hours per week doing something like retail or as a Subway cashier if it comes to that.  I would only need to earn enough to cover the rest of my bills, perhaps $800 - $900 per month or so.  My stress level would be tiny plus I would own the majority of my time. 

Option 2:
Between the Montgomery GI Bill and the Army College Fund in my contract, I am set to receive roughly $65,000 of college money.  I don't want to get into the details (because it doesn't matter), but basically I would choose the old option and would receive this amount over a three year period.  I'm not really interested in furthering my education... however, I am open to receiving ~$22,000 per year for taking 10 credit hours of underwater basket weaving at a cheap community college, then pocketing the rest.  Lasts three years tops.

Possibilities! hmm...

New Purchase - BAX

I thought I was finished buying shares for September, this purchase was not planned...

This BAX purchase will bolster my annual passive income stream by $43.12 on a 2.93% yield.  I was not charged a commission, since I received free trades as a bonus for singing up for a new Scottrade account.  I like BAX a lot at current levels ever since it took a rather large share price hit the other day.  This purchase will meet my expectations if it can boost annual dividend payments by 7% (hopefully supported by 6-7% earnings growth).

It appears the reason for this particular stock decline was based on a downgrade.  Apparently disruptive products from competing companies are thought to have diminished BAX's market share (product is 16% revenue) faster than expected based on telephone surveys.   Analysts believe competition will continue taking market share for the foreseeable future.  Analysts usually do have insight on the stocks they follow, however the upgrades/downgrades are meant for the short term investor in most cases.  Long term I like Baxter.

I thought this stock was undervalued before all this happened, I think it's now even more undervalued.  While the competition and BAX's debt load are something to keep an eye on, I like this company, the sector it is a part of, and more importantly the valuation on its common stock shares.  I do not see Baxter as a core holding, however I do plan to accumulate more shares as long as the company continues to pay higher dividends. 

New Scottrade Account

Time to diversify brokers.

Although I will receive 3 free trades, this move wasn't meant to play broker favorites or attempt to benefit from bonus perks.  I am simply more comfortable diversifying my wealth across a variety of financial organizations.  Up to this point my wealth was divided between a taxable Fidelity account, tax-exempt Fidelity Roth IRA, taxable Lending Club account, tax-deferred Thrift Savings Plan account, and taxable bank account.  If one organization goes under, I want to be able to access capital from other sources while lawyers sort out the mess.  This is especially relevant to stock brokers where the bulk of my assets happen to be parked!

Enter Scottrade.  I was specifically looking for a second brokerage with the following characteristics:
-A reputable company that has been in business for a minimum of 20 years.
-Above average customer service.
-Low trading fees.
-Physical branches (minor consideration).

Scottrade has been in business since 1980 (33 years), has over 500 branches including one in my city, and offers exceptional customer service according to the reviews I read.  Stock commissions are very low at $7 per trade and compares favorably to my current broker at $7.95/trade (Fidelity).  I would note that I have had absolutely zero problems with Fidelity.  I highly recommend Fidelity and will continue to use their brokerage service for my Roth IRA.  Fidelity also has physical branches in my neck of the woods.   Honestly Fidelity's trading platform and research tools seem to be a few steps ahead of Scottrade, and I love quick responses to my questions they are happy to provide.  I can't speak highly enough about Fidelity!

The plan for my new Scottrade account:
-All new taxable deposits go here
-Funnel all taxable dividend & interest payments to this account
-Transfer the ~$6,000 cash left in my taxable Fidelity account over here
-Shares already held in my taxable Fidelity account are to remain in that account
-Treat all the accounts as one; don't need to rebuy companies I already own

It's going to be a pain when it comes time to update my blog.  However, I think this move will allow me to sleep well at night and be better prepared for the future.



If I happen to make a purchase the next few weeks, it will probably be at Fidelity.  The cash transfers are still pending!

New Purchase - KMI

I decided to go ahead and grab some additional Kinder Morgan shares while they are cheap.  This purchase will boost my annual income by $57.60, not bad!  I now have a significant stake in KMI and am unlikely to increase the weighting going forward.  Similar to PM, both the yield and dividend growth is strong here. 

As most of you know, Kinder Morgan has been under attack by Hedgeye analyst Kevin Kaiser, the same same guy who bashed Linn Energy a few months ago.  I believe the scheme here is to drum up negative attention to make profits on short positions.  Hedgeye is actually pretty clever in my opinion, they are intentionally picking on difficult to understand MLPs.  MLPs are pretty good targets for scare tactics because I don't think most investors bother to do much research.  Does the average investor listen to conference calls, read annual reports, or check financial statements?  I think not.  Pretty easy to scare retirees who bought KMP on a recommendation as a safe income source. 

So maybe KMI continues to slide, I sure don't know.  But I think I got in at a price that will serve me well over the long term.  It's not the best price I've ever gotten with Kinder, however it will reduce my average cost basis.  I'll take that. 

I'm probably not going to buy anything else this month with the possible exception of TGT or maybe BAX.  I'm watching TGT very closely.

How Buffet really made his billions! Haha!!

So I found this ridiculous ad while checking my watch list today...

Sorry I can't resist!

 

Ok enough, haha! 

Here's what I'll do if I win the Lottery

Just for the fun of it, here's how I would invest my money if I happen win the lotto.

75% Equities
I would use this portion to fund my day to day living & travel expenses via dividends.  The main point with this portion is to never ever, under any circumstance spend principle.  I'd go with a portfolio of 50 dividend growth stocks which would be very similar to what I have in place right now.  The stocks would the same ones listed on my portfolio page minus ABBV, EIFZF, INTC, and LINE.  I'd go with solid companies including ADP, BDX, CL, GD, GE, GPC, LMT, MDT, MMM, MO, RSG, TGT, VZ, WEC to round out the remaining slots. 

20% Fixed Income
Capital designated towards this allocation would be used for the purpose of reinvestment and charity donations.  I'd go with a mix of ETFs covering a wide range of choices including US government bonds, municipal bonds, corporate bonds, foreign bonds, and preferred stocks.  Since I am not interested in setting up individual bonds ladders, ETFs are good enough to get the job done here.  Interest received would be used as follows:
-50% into equities
-30% back into fixed income
-20% donated to charity.  I'd pick a disabled veteran charity since those courageous citizens are near and dear to my heart.

5% Doomsday Scenario
This allocation would be used for historically poor investments such as precious metals and cash.  Also real estate, although I don't consider it a poor investment.  These are the sort of assets you want to own if the unthinkable happens.  These are true sleep well at night assets that tend to be tangible and not based on man made financial systems.
-Guns & Ammunition.  Perhaps the most important component to doomsday scenario preparation used for self defense and hunting.  I'd probably throw in body armor, helmets, night vision, gas masks, chemical suits and other gear I have been trained to use as well. 
-Physical Gold and Silver.  Great store of value which has been used as currency for 1000's of years.
-Physical Land & Real Estate.  I'd pick a nice spot up in the mountains to call home.  I don't think I'd bother owning more than 1 house even if I was filthy rich.  Too many headaches.
-CDs.  FDIC insured accounts at respectable banks simply for the peace of mind.

The mega millions drawing is for 130 million dollars next Tuesday.  A man can dream right?  I bought one ticket. 

Recent Dividend Increases

Realty Income
O raised its monthly dividend from $.1815417 to $.1818542 per share representing a .17% increase.  While certainly a small amount, I will take an increase any time I can get one.  This increase will boost my monthly income by $.03 and my annual income by only $.36.  At least O has my best interest at heart and is likely to do quarterly raises for a while.

Philip Morris
PM raised its quarterly dividend by 10.59% from $.85 to $.94.  I am quite pleased with this double digit increase since PM is my top holding and I was expecting a lower boost for 2013.  Because I now control 104 shares, this raise will pad my annual income by a whopping $37.44 and is just as useful as a new purchase.  I really couldn't be happier!  I look forward to the day when increases from my other positions become as meaningful as this one.

Looking Forward
I expect McDonald's to unveil a higher dividend rate sometime within the next few weeks, and am also on the lookout with a few other holdings to include WPC.  Since most of the 2013 increases have already been announced, it's safe to say this has been a great year.

Hope you all have a nice weekend.  It's Miller time!

Sale - INTC / Purchase - PM

 

Figuring out what to do with INTC has been on my mind for a while.  I'm obviously not happy with the dividend freeze and a freeze is reason enough to consider a sale.  I'm also concerned about poor operational performance and a general trend of declining PC sales.  Intel has been trying to pick up the slack by expanding into mobile, which we all know has been a disappointment so far.  If mobile doesn't work out, this company could be in huge trouble.  I've held shares of this stock for two and half years.  You can bet my patience is wearing thin.

On the other hand, the new mobile products hitting the market seem to be a step ahead of the competition.  INTC has a real opportunity to make a splash soon.  Still, I wonder if grabbing control of the mobile processing market (with the lower margins) would be enough to offset the declining PC business over time?  Or maybe it will be a massive success?  My hunch is that Intel will end up doing well in mobile.  With all the r&d, they damned well better be!  Throw in a decent valuation, and it might be worth sticking around to find out.

Tough call.

I decided to replace 92 shares, and see what happens with the other 92 shares.  As you can probably tell I'm still torn with INTC; valid arguments can be made either way.

I used the proceeds from this sale to fund a Philip Morris purchase.  PM is one of my core stocks and has been a fantastic holding the past few years.  I think we have a dividend contender in the making here, maybe even a dividend champion years down the road!  This purchase price is near the 52 week low and came standard with a 4.06% yield before commission.  I think a 4% yield is a great buy point for PM and certainly more attractive than INTC with all the question marks surrounding that company.

Philip Morris is due for a dividend increase later this month.  I don't know if we'll see a 20% boost like a few years ago, but I'm happy with a 6% raise.  That's enough to beat inflation and improve my purchasing power.

 

PM is now overweight within my portfolio at approximately a 6.7% weighting.  Nothing to be especially concerned about, and it ought to work itself out organically as I build up to 50 positions.

Lending Club Year One

I opened my Lending Club account with $250 September 2012.  So far the results have been great!  The people I'm lending to are indeed keeping up with their payments.  This allows the borrower to pay off debt, and I get to collect a nice stream of interest income.  It's a great arrangement and the best part is that I feel like I'm helping people.  Look at a traditional credit card; it's not uncommon for the payments to last up to 20-30 years.  The notes I'm funding last 3 years then, poof, the debt is gone.  Perhaps one day some of my borrowers who are consolidating & paying off debt will become LC investors themselves or perhaps even strive to build a passive income stream with dividend stocks & fixed income instruments!

The Good

Hard to argue with a 14% interest rate!  Very difficult to top with virtually any other type of investment.

FOLIOfn is a service for LC investors to buy and sell notes on a secondary market.  I have found this service to be a tremendous asset.  Last month the payment on one of my loans was 17 days late (no big deal, I expect this sort of thing to happen).  I managed to sell this very note on the secondary market for a slight discount of maybe 3-4% off principle.  Nice!  Non performing loans can be sold reducing my risk.  Great feature.

I'm helping people.  Look at this borrower, who put extra on his loan presumably to pay off debt.

This borrower is paying off debt early.  Who ever you are, know that I'm rooting for you!

The Bad

I'm approaching the point where a borrower might be more likely to default.  After a year or so, personal finances can change drastically for any number of reasons.  Unfortunately bad things will happen to people.  It is something I am prepared for and I'm not sure that hefty interest rate will hold long term.  I will have to periodically review my notes although I don't spend much time with LC because it is only a small investment.

The Ugly

New notes are becoming harder and harder to find.  Apparently the word on Lending Club is out, this investment is becoming crowded!  What that means to me is that I'm not able to get a meaningful amount of money invested.  There just aren't enough loans unless I want to broaden my screen to allow lower quality.  I'd actually like to ramp up my monthly deposits with LC, but for now I'll have to wait for this situation to change.

Interest rates on new loans are lower than they were a year ago.  B & C notes are in some cases paying a whole percentage point less these days.  Be aware that LC might not be quite as lucrative as it once was.  This is a serious negative, although I don't know how it affects lower grade notes under C.

August Recap

Overall I'm very satisfied with August.  I replaced one position stuck in a distribution freeze and managed to add companies likely to raise dividends going forward.  Throw in some decent dividend increases plus a more attractively valued market and I'm a happy camper.

I will start to consider MSFT since Ballmer is going to retire, and GE after the financial business is spun off.

DOW: 14,810 /// S&P 500: 1,633 /// 10-YR BOND: 2.75%

New Purchases:
1) 86 shares O at $42.64: $187.32 annual income
2) 35 shares SO at $43.78: $71.05
3) 32 shares KO at $39.09: $35.84
4) 21 shares WMT at $72.38: $39.48

Sales:
1) 121 units BWP at $30.42: ($257.72) annual income

Dividends Received: $448.73
AT&T (T) $82.35
General Mills (GIS) $26.81
iShares Emer Mkt Bnd (EMB) $2.73
Raytheon (RTN) $31.35
Air Products (APD) $22.01
Linn Energy (LINE) $24.16
Abbott Labs (ABT) $7.56
Abbvie (ABBV) $21.60
Boardwalk Pipeline (BWP) $64.43
Exchange Income Corp (EIFZF) $17.35
Kinder Morgan Inc (KMI) $46.80
Procter & Gamble (PG) $46.92
Realty Income series F (O-PF) $6.76
Senior Housing Properties (SNH) $21.84
LTC Properties (LTC) $26.06

Dividend Increases:
1) ITW: $.38 to $.42 per quarter. $4.64 annual income
2) BNS: $.60 to $.62 per quarter (Canadian). ~$4.96
3) TD: $.81 to $.85 per quarter (Canadian). ~$5.92

New Deposits:
$1,500 to ROTH IRA.  I had an unexpected windfall related to my recent move which allowed me to save more than usual and take care of some large purchases.

Lending Club:
Added $25

Other:
none

New Purchase - WMT

This purchase will add $39.48 to my annual income and comes with a 2.58% yield after commission.  Since I wasn't planning to put more capital to work in August, I might not buy something in September.  However if the markets continue to slide towards a better valuation I could always change my mind.

September Watch List

Over the weekend I had time to recalculate fair value estimates of my favorite companies.  Yeah the market seems to be over valued right now, but surprisingly I uncovered a number of attractive choices.  I found 4 companies currently trading at least 10% lower than my calculated fair value: DRI, LO, NSC, & WMT.  Three additional companies are currently trading between 5-9% discounts: BAX, BDX, & CVX.  Many are trading close to my calculated fair value including dividend champions such as MCD and XOM.

Honestly the choices aren't bad if you can delete 2010 and 2011 reference points from your mind.  Many times I think back to prices from yesteryear and conclude nothing is attractive in the current market.  I am consciously trying to eliminate those types of thoughts from my head.  This is 2013 and I must work with 2013 prices.  I find that periodically recalculating fair value estimates is a good exercise.  With this round of calculations I didn't run any Canadian stocks or REITs since my ROTH is now maxed out for the remainder of 2013.

3 Stocks for September:
#1 Wal-Mart Stores (WMT):  I believe WMT is trading at a nice discount to its fair value plus it's one of the highest quality companies around.  For the same reason as my recent KO purchase, I want to add high quality names that will surely remain in my portfolio for decades when markets are heated.  Also I currently do not own WMT (or any retailer for that matter), which is a travesty since it belongs in my portfolio.  I decided to lower my minimum entry yield to 2.5% qualifying Wal-Mart as a potential buy.  I'm definitely eager to own a slice of this business and hope it's still paying 2.5% next month.  I have enough cash on hand to do the purchase right now and would consider pulling the trigger on a dip.

#2 Chevron (CVX): I need to go ahead and buy some Chevron already!  How long can this stock be at the top of my watch list without actually making the purchase?  As with WMT, CVX is high quality and the type of company I want to lean on when I see DOW 15,000.  Throw in a price less than my fair value estimate and it looks pretty darn good.

#3 Baxter International (BAX): This is currently my third choice.  I'm always looking to secure pieces of medical device companies to bolster to my passive income stream.  I believe the future is very bright for health care stocks which is why I'm bullish on Baxter.  Becton Dickinson seems to be slightly more attractive from the valuation stand point, however the yield is too low to make a meaningful contribution to my passive income stream.  I view BAX as a tier lower on the quality scale compared to WMT & CVX which is why it clocks in at number 3.

Hope you all had a wonderful weekend!  I'm hiking all the way up Pikes Peak next week, wish me luck!

New Purchase - KO

32 additional shares of KO were purchased today which will boost my passive income stream by $35.84 per year.  This purchase came with a 2.85% yield after commissions which I find fairly attractive for Coca-Cola.  It's pretty obvious why an income investor would consider owning shares of this company.  KO might be the best known company in the world for rewarding loyal shareholders, therefore I don't feel the need to explain this particular purchase in great detail.

Did I get in at a great price and outstanding value?  No.  Is KO likely to make me rich quick?  No.  However, it is one of but a handful of companies I consider to be core holdings.  When the markets are heated, as they are right now, I think it's a good idea to snatch up the highest quality companies around.  The margin of safety is low with practically everything on my watch list; might as well grab something I know I'll hold for decades.  That was my main motivation.  I also like XOM or CVX if I was forced to make another purchase this month. 

KO currently has a p/e of about 20.6, not very spectacular to say the least.  If you use operating earnings it drops to 19.1.  The forward p/e is 17.2.  I think it's worth checking out operating earnings because sometimes one time events skew valuations.  For example, JNJ was listed as having a 25 p/e not too long ago.  People thought the shares were ridiculously expensive.  But there were a bunch of one time events/write offs in 2012 that nobody ever seemed to mention.  With the recent earnings report, those write offs are no longer ttm.  All the sudden its p/e dropped to 20.  The difference between a 25 p/e and a 20 p/e is massive!  Perhaps the KO valuation isn't as bad as it seems at first glance, but I'm not saying it's cheap! 

The bottom line is that I expect KO's 50+ year streak of dividend growth to continue.  I want to be a part of it for many years (possibly decades) to come meaning what I pay right now probably won't matter much in 10-20 years.

Random Thoughts

Are stocks in a bubble?
The hot topic on last weekend's camping trip was stock bubbles.  My best friend contends the stock market rose too quickly causing a bubble that we are currently experiencing.  Is there any truth to that claim?  I argued that price alone is not the cause of a bubble, but rather excessive valuations.  I looked around the internet and discovered historical S&P 500 P/E data varies quite a bit.  I saw data ranging from 15 to 17.  You'd think the number would be concrete, why do sources vary?  The S&P 500 started in 1957 which might be the source of the controversy.  Anyways the average P/E is currently 19.28, clearly higher than the historical norm regardless of source. 

Consider that when the mortgage bubble hit its height in October 2007 the S&P 500 P/E was 27.31. The market crashed shortly after.  When the dotcom bubble hit its height in March 2000 the P/E ratio was 43.22.  Can you imagine? With a 19.28 P/E right now, the market does appear to be over valued.  I know there are other widely used methods such as the CAPE ratio/Shiller P/E, but the bottom line is: a correction of 10-15% would put the stock market back in line with historical valuations. However, I don't think it's fair to say we are in a bubble!

Illinois Tool Works increases its dividend by 10.5%
Good news for holders of this company.  A double digit increase is really fantastic and a lot better than last year.  I hope to add additional shares at some point, but the low yield always compels me to look elsewhere.  I might have to accept a 2.5% entry yield with one, since I don't think ITW is going back down to prices at my initial purchase.  In fact, I am seriously considering lowering my minimum yield to snatch up companies like this.  With 14+ years remaining to accumulate income producing assets, I ought to think about adding more dividend growth.  I see ITW as a long term holding.

Potential Buys for August
Currently paying close attention to XOM, CVX, KMI, and KO.  I like Exxon at these prices, but hope for a chance to scoop up shares a little bit lower.  I'd also like to pick up more Coca-Cola on further weakness.  KO will likely pay 2 more dividends this year; it would be nice to collect on that.  I bought shares around $32 in 2011 then $36 in 2012.  Adding around $38-39 seems to be the next logical step as this one is never cheap.  Here's to hoping we get that elusive correction and the opportunity to score some good deals!

Ammunition is hard to find!
I'm back from Korea and in the market for a new fire arm.  While shopping, I noticed we are currently experiencing a shortage of bullets.  Wal-Mart is sold out... at all three locations I checked!  Holy Crap!  I don't know if this is just a Colorado phenomenon or if this is nationwide.  I was chatting with a few gun dealers and it sounds like it's going to be a while until shelves are stocked again.  Perhaps it would be a good time to pick up some stock in ammunition manufacturers.  Clearly there is pent up demand, at least in my state.  I'm not familiar with the industry, and am not aware of dividend growth stocks either.  Something to research for another day.

Investing Tactics I use to Minimize my Tax Bill

Every investor should think about the tax implications of their investment choices.  Following a sound tax minimization strategy will keep more money in your pocket and help boost profits.  Here are some specific tactics I use (or will use in the future) as part of my tax saving strategy.

ROTH IRA Investments:
1) Corporate Bonds:  Interest gained on corporate bonds is fully taxable according to your tax bracket.  Same with interest on foreign bonds and also CDs.  Note that these types of bond mutual funds pay non-qualified dividends.

2) REIT Preferred Stocks:  These dividend payments are non-qualified just like REIT common stock dividends.  The difference is that preferred dividends are typically 100% non-qualified without the return of capital component. 

3) Canadian Corporations:  The last time I checked, Canada withholds a 15% dividend tax on US investors.  An easy way to get around this pesky withholding tax is to place Canadian corporations in a ROTH.  It is my understanding that this applies to corporations only (not Canadian royalty trusts), however I do not have any experience or references to back up that claim.

4) REITs:  Real Estate Investment Trusts pay non-qualified dividends.  Since this income will be taxed at your full marginal rate, IRAs make sense here.  However, many people fail to realize that part of the typical REIT dividend is classified as a return of capital.  You will not be taxed on the full dividend in most cases.  Here is an example:

Realty Income's dividend was 25% ROC for tax purposes in 2012.  The other 75% was fully taxable at the marginal rate.  With that in mind, REITs are well suited for a ROTH, but not the highest priority.

Taxable Account Investments:
1) Municipal Bonds:  Muni interest is always exempt from federal tax and sometimes state/local tax too.  No reason what so ever to put these types of investments in a tax advantaged account!

2) Master Limited Partnerships:  To be honest, the tax implications here are fairly complex.  "Experts" do not always agree.  In my experience, MLPs pay a return of capital which is not taxable but instead reduces the cost basis of the position.  There are some other things going on, but effectively income taxes can be deferred until the asset is sold.  Since MLPs are inherently tax advantaged, it makes sense to hold them in taxable account in order to delay the tax bill as long as possible (perhaps decades).  Also under certain circumstances, it is possible to owe a tax bill with a MLP held in an IRA.  Best to avoid that scenario.

3) Most Foreign Stocks: Most foreign countries slap a withholding tax on dividends paid to US investors.  However, it is possible to claim a credit on this withholding during income tax season.  In order to claim the credit, it would be wise to place foreign stocks in a taxable account (I don't believe it can be claimed in an IRA).  Some countries, the UK for example, do not withhold dividends at all.  As described above, Canadian Corporations can be held in a IRA/ROTH to avoid the annoyance all together.

4) Government/Agency Bonds*:  Investors can side step state and local taxes with government bonds interest which is taxed at the federal level only.  This tax saving feature is redundant in retirement accounts*!  Be sure to do your homework with government agency bonds as some have tax advantages, some do not.
*Certain states do not levy income taxes.  Tax saving benefits of government bonds isn't applicable for residents of those particular states.

5) Dividend Stocks & Non-REIT Preferred Stocks: Take advantage of qualified dividends by placing them in a taxable account.

6) Speculative/High Risk Stocks:  Personally, I would put speculative ideas such as FB, AAPL, TSLA, LINE/LNCO, and most tech stocks in a taxable account in case of a capital loss.  Ideas do not always pan out, at least realizing capital losses in a taxable account would soften my tax burden.  Realizing capital losses in an IRA is not beneficial in any way!