Friday, August 30, 2013

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

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


Wednesday, August 28, 2013

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.

Sunday, August 25, 2013

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!

Thursday, August 15, 2013

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.

Monday, August 12, 2013

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.

Thursday, August 8, 2013

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! 

Tuesday, August 6, 2013

Sold BWP - New Purchase O & SO

BWP was sold as a limit order, it appears two separate orders were needed to fully execute.  Makes no difference since I was charged just one commission.

I decided it was the right time to part ways with Boardwalk Pipeline Partners (BWP).  The distribution was frozen a while back and I think it is likely to stay frozen for quite a while.  That was my main motivation for seeking other opportunities.  Right now the distribution coverage is thin making it impractical to boost payouts.  BWP must pay Loews (the general partner) hefty incentive distributions rights from this point forward again making increases unlikely.  Boardwalk has a number of expansion projects in the works, but nothing seems to be a catalyst short term.  Also I didn't get the feeling BWP management wants to increase payouts at the moment.  They refused to even discuss it on the recent conference call.  Time to move on.

Overall I booked a small capital gain with Boardwalk, but did enjoy massive distributions.  It's kind of sad to see this one go since it's one of my oldest positions and also a reliable payer.  Selling these units meant I had the daunting task of replacing $257.72 worth of annual income.  That's a serious chunk of my passive income stream!

With the proceeds from the BWP sale, plus some additional capital, I chose to start a position with Realty Income Corporation and increase my stake in the Southern Company.  These two purchases combined keeps my passive stream intact.  I'm not too concerned about portfolio worth, but will not tolerate an income decline if I can help it.  That was the overarching goal that needed to be addressed here. 

Both O & SO are very shareholder friendly and extremely high quality.  Investors can expect regular dividend increases with both companies, although typically small.  Realty Income calls itself "The Monthly Dividend Company", it's pretty obvious where their loyalty lies.  I also love me some monthly dividends which is a rare treat among US dividend stocks.  SO can also be counted on in the income department and is one of the highest quality utilities around. 

I think both these stocks are trading around fair value at the moment.  Neither is especially attractive from the value angle.  On the other hand equities are basically at all times highs.  I'll accept fair value considering what I have to work with.  I believe both Southern and Realty Income will make nice long term holdings.  Hopefully I will never have to sell.

I'm likely finished purchasing REITs for the time being, but may reconsider if prices sour.  I would be interested in purchasing additional shares of SO however, hopefully I'll get an opportunity to average down.

Chances are I'll do one more purchase this month since I still have plenty of cash collecting dust.  Top candidates are currently Coca-Cola and Chevron.

Sunday, August 4, 2013


I find budgets to be boring, yet I have to follow a spending plan in order to accumulate income producing assets.  I don't have an inheritance or any kind of outside help.  I must do this on my own and I must live below my means.  Here's the plan:

$3,350 - Take Home Pay

$630 - Rent
$10 - Renters Insurance
$60 - Utilities
$50 - Internet
$10 - Cell Phone
$90 - Car Insurance
$275 - Gasoline
$60 - Haircuts
$250 - Groceries
$415 - Fun Money
$200 - Miscellaneous (car maintenance, clothes, presents, etc.)

$225 - Car Savings Account (I do not have a car note)
$250 - Wedding Savings Account
These items represent money that WILL be spent, just not right now.  Since it will eventually be spent, I cannot include it in my savings rate.

$800 - Brokerage Account
$25 - Lending Club

Savings Rate: 24.6%  (825/3,350)

The income side of the equation is especially strong at the moment.  This is the most money I've made in my entire life!   $3,350/month net is about $50k/year gross.  I'm a high roller now!

I see two areas for potential improvement: car insurance, and gas.  Seeing as how I'm over the age of 25 and have a pristine driving record, 90 bucks a month seems too high for insurance.  I ought to do some comparison shopping.  Gas is a tough one.  While my SUV does guzzle gas, I think I'll need the 4X4 for winter ski trips.  I may get a different vehicle next year, it remains to be seen.  Other than that I think I'm doing great.  I'll have to finagle a couple larges purchases somewhere in there as I need to purchase a season ski pass and plan to buy a new firearm. 

If interested, my past budgets (while I've been blogging) can be viewed here: South Korea, North Carolina

Saturday, August 3, 2013

Why I Stopped Investing in the TSP (401K)

July contributions:

June contributions:

As you can see, service matching is now gone.  Since the free money hitting my account has been discontinued, I see no reason whatsoever to put my hard earned money into the TSP. 

The thrift savings plan has a choice of 5 different mutual funds plus some lifecycle funds.  The federal government is trying to do us a favor because these 5 funds do in fact have lower expense ratios than anything else I've seen.  But you cannot buy individual stocks or bonds.  I do not have the choice of owning shares of Coca-Cola or Johnson & Johnson in this account.  I cannot buy individual bonds or preferred stocks when rates rise.  In short, you cannot be an income investor with the TSP. 

Instead of parking $126 a month into the TSP, it's going to be deposited into my brokerage accounts from this point forward.  I will lose a small tax advantage but will gain freedom of choice, and I don't need to wait to age 59.5 to enjoy delayed gratification.

The capital built within my TSP will likely be rolled into an IRA or used to buy an annuity many years from now when I transition out of the military.