Tuesday, December 31, 2013

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

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:

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.

Saturday, December 28, 2013

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!

Monday, December 16, 2013

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!

Friday, December 13, 2013

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!

Thursday, December 12, 2013

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.

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?

Monday, December 9, 2013

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.

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.

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.

Thursday, December 5, 2013

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.