Monday, September 29, 2014

Recent Dividend Announcements


I had 2 announcements come my way last week for stocks in my taxed portfolio. The first was from AGNC - American capital Agency Corp announcing the quarterly dividend will be remaining at $.65/share. The second was by Windstream Holdings. They also maintained their dividend of $.25/share.
AGNC is a real estate investment trust investing primarily in agency mortgage-backed securities. Because it is a REIT it is paying a high yield of 11.77%. It has been maintaining this since the cut in September of 2013. It has only been cutting the dividend so I do not see good things in the future. I bought this in my early days of investing and was only chasing yield at the time. Needless to say it has grown at all for me and the stock price has remained the same. I only have a few shares so I will reevaluate this if the dividend ever gets cut.
Windstream Holdings (WIN) is my largest position in my taxed portfolio. It's current yield (8.9%)is a little bit lower than AGNC but still pretty high (especially since it is not a REIT or MLP). This should have been a warning as well but like AGNC I bought into it when I was not knowledgeable on dividend investing. I have written about Windstream before so read that for more information I have gathered on them. They have been sitting at $.25/share since 2006 and their stock has improved recently. Some of it from there split announcement and some because the utility industry has performed well this year. This one I am watching closes and will be reevaluating during my yearly checkup as my portfolio is to heavily weighted on this guy.
Full Disclosure: Long on AGNC and WIN.
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Wednesday, September 24, 2014

August 2014 Budget

I have been slow at writing this for a good reason.  I am not proud to share with all of you that for the 3rd month in a row my expenses exceeded my income.  I did not include my dividend income this month but plan on doing so in the future (and probably revising past months for this year.)  What is going on you say?  Well lets break it apart as always and see where I saved and where I could have done better.

Needs
As my kids would tell me "Sad face".  This month I am about $600 over budget.  Fixed things like mortgages, home insurance, car loan, braces were right on budget (and aren't going away any time soon.)   Below are the 3 categories that could be variable each month.

Category
Budget
Actual
Utilities
$825
$962
Groceries
$900
$937
Misc.
$650
$1076
Total Over

$600

Utilities
This month in addition to my gas, electric, phone and cable was my quarterly water payment.  That is a whopping $335 dollars or $112/month.  I do budget for this and my sewer payment (also quarterly and coming in September).  How should I show this as it throws off my expenses even though I am saving for it?  

Groceries
I am creating my meal plan and cutting back on eating out to a hand full of times per month.  Even with that I was over my generous new budget of $900.  That is $225 a week on food.  One of my problems is we forget stuff on the list and end up going to the store twice a week.  This may be leading to additional purchases.

Miscellaneous
A massive $426 over in this category.  What the heck am I buying?  Oh yeah back to school shopping which accounted for almost $367 and another $340 to doctor's bills resulting from a few minor family illnesses (my insurance covers nothing but preventative care until I meet the deductible).  I know school happens same time every year so I need to start budgeting for that (and saving over the year for it).  As for the healthcare costs once I build up funds in my company sponsored HSA (Health Savings Account) I will be able to use that to pay for these expenses.

What about Guild Free Spending Money?
Like I mentioned in last month's budget post there is not much room for this at the time.  I have massively scaled back the family fun that costs money opting for hikes and the occasional pizza or chinese.  However this was my wife's birthday month so we did splurge and take a weekend vacation.  All of that quickly added up to $900.  Well needless to say I had to dip into my savings for the last time to pay this off.

I did not add any capital for investing this month.  Still have some cash to invest but I am :-(  Not having good news to share sure does make blogging tough.  I read allot of positive stuff out there but not too much in the "I blew all my earnings this month" area.  Do people like me exist out there?  I think Dividend Swan is in a similar boat.  If you know of any good blogs similar to my story I could benefit from let me know.


Image By supakitmod and courtesy of www.FreeDigitalPhotos.net

Wednesday, September 17, 2014

Horizon Flat Again

So I own a few shares of Horizon Technology Finance Corp. They recently announced the monthly dividend of .115/share. This has been the same since they went to monthly payouts in 2013. This purchase was back before I knew too much so I bought it based on 3 things.
  1. High dividend yield. Currently around 9.65
  2. Dividend frequency. Thought it would build compound faster at a monthly rate
  3. Share price. Thought I could buy more shares initially which would help in the long run. But it doesn't lead to greater returns in the long run. My post on does price matter shows some good examples.
What I know today that would have deterred me from this stock.
  1. Do more research when the yield is higher than 4%. Sometimes there are reasons and sometimes it is a sign of a bad or declining company.
  2. The payout ratio has been way above 100% since 2012. A good investor should focus on companies that keep this below 75% unless it is a REIT or MLP. Horizon is a finance company loaning out money to various types of companies. Not sure if this is typical for this type of company but do you really want to own a company borrowing money to pay you a dividend.
  3. The dividend hasn't grown at all in recent years. Unless we have negative inflation this will not keep up with it. It is also another warning sign that the company isn't generating enough profits and passing them along to shareholders. At least they haven't cut it yet :-0
For now I don't have too much money invested in it. So I will stay long on HRZN until the dividend is cut. All signs point to yes but we will just have to wait and see.

Full Disclosure: Long on HRZN

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Saturday, September 13, 2014

August 2014 Dividends

It is almost the middle of September and I am finally getting around to posting last month's dividends.  Boy does time fly when you go to work Monday-Friday and then spend time with your family in the evenings.  Once the weekend hits we try to do something fun on Saturday and then Sunday is church and catch up.  Sometimes I do miss the days when I was actually bored and had to think of things to do.  If I had taken that time in my youth when I was bored and read about dividend investing and saving money things would be different now.  The earlier you start investing the better off you are in the long run.  Time is an investors best friend.




So there are the numbers.  Another good month for the IRA with $136 dollars of income I can't touch until much later in life.  I am still including it as seeing those dividends grow is a morale booster for me.  My IRA is about 4 times the size of my taxable account so it will always outpace the one I hold at www.sharebuilder.com.

Regarding the taxable account I still debate if I should include that on my income statement.  I have it automatically reinvesting right back into the same companies that pay them out.  I never see that money but just an ever increasing number of shares.  What do you think?  Should I include it?  In August I did add COP so that will boost it by $8 bucks a quarter down the road.  For now it produced a whopping $26.27.  That is enough to take the family to McDonald's for dinner.  I WILL TAKE IT!

Well I am off to go make some waffles and bacon for breakfast for the family and I.  Have a good weekend!

Full Disclosure: Long on COP

Wednesday, September 10, 2014

Does Price Matter?

Brain Churn
While reading Dividend Mantra's Price and Value post a question popped in my head.  If I was new to investing and had say $1000 dollars to invest would it be better to buy 10 shares at $100 of a company or 100 shares of a different company at $10?  Some assumptions to make were each grew at the same rate for the dividend growth rate and the companies were equally valued (qualitative and quantitative.)  The reason for this is as a beginning investor my capital is sometimes limited so I want to buy valuable stocks but also want my portfolio to grow as fast as possible.

Using one of my favorite tools for screening I turn to the U.S.DividendChampions spreadsheet maintained by Dave Fish.  I thought about what price range would be attractive to newbies and what price would be hard for them to bite at.  The prices chosen were $20 or less also known as the "cheap stocks" and those that were priced over $80 "Who wants to own just 1 share."

Sorting through all 553 Champions, Contenders, and Challengers these were the averages to use in the calculations.
Stock Price
Average Price
Average Yield
Average Dividend
Average Dividend Growth Rate
<=20
14.77
3.63
.51
8.9
>=80
124.90
1.93
2.35
15.1

Now before you read further take a guess who will come out ahead in 10 years and then after 20 (hint.)

I turned to one of the calculators on www.buyupside.com.  So with a thousand dollars lets buy some stocks and see how that investment looks over 10 years.  For simplicity I kept the stock annual growth rate the same.  The goal is to show the power of dividend compounding in conjunction with the entry price.

Cheap Stocks (10 years)



Who wants to own just 1 share (10 years)


The cheap stocks win!  Their value after ten years of reinvesting is $2,468 vs. $2,235 for the high priced stocks.  To be honest that was a toss-up in my mind before running the calculation.  High yield but a lower dividend growth rate against the higher priced stocks with a lower yield but a good DFG of 15.1.  My guess for 20 years would be that the big boys overtake the cheapsters. 

Cheap Stocks (20 years)


Who wants to own just 1 share (20 years)


This time around the big guys (Who wants to own just one share?) win.  $7,273 vs. $7,909.  You can see this in the annualized return as well.  The big guys outperformed the by .47%.  Give it another ten years and the difference between the two will grow further.  My only concern is that a 15.1 growth rate on the dividends is pretty high to last multiple decades.  I suppose if you actively maintained your portfolio and dropped any that lagged and bought newcomers you might achieve this.  The 8.9% for the cheap stocks is much more realistic.  Plus you get the high yield. 

Conclusion
So does price matter?  I think the answer is no when you exclude the stock price annual growth rate.  And as dividend investors we don't care about price, right?  We buy and hold those lovely shares and collect the dividends they produce.  So for us what does matter is the entry point yield and the dividend growth over time.  Having that initial dividend income and watching it grow and compound is a magical sight.  I continue to do these types of scenarios to keep me on the path.  Right now I don't see much action but in 10+ years it will be awesome.


So depending on your retirement horizon you could break that down further.  Entry point yield is more important and will produce higher returns if your horizon is around 10 years.  I did not look to much into the industry for the cheapsters.  Might be a topic for the future. For longer periods favor stocks with higher dividend growth rates.  Surprisingly those appear to be the higher priced stocks as well.  Correlation?

Monday, September 1, 2014

If I Had A Million Dollars

I am not sure why but when I woke up this morning the song If I Had A Million Dollars by the Barenaked Ladies was going through my head.  Always thinking about money and what it can buy for you I decided to take a look at a couple of ways of investing it.  I wouldn't be buying any houses, cars, or refrigerators with it.  Instead what if I invested it in an S&P 500  index fund or in individual stocks.

S&P 500 Index Fund
First you would need to pick one with the lowest cost.  Vanguard 500 Index fund is usually what comes to my mind.  Whenever I have a choice at work I always pick the ones with the lowest expenses.  Vanguards are the best and this one is only .05%.  The fund looks to track the performance of the S&P 500 Index.  It is a passive fund that looks to replicate the index.  So as the index shifts in sectors so would this fund. 

The admiral fund (VFIAX) was created on 11/13/2000 according to their website.  Unfortunately this has been a rough decade for the stock market.  Therefore any of my forecasts we will be using the dismal return rate since inception of 4.77%.  But don't forget on top of that is that expense of .05% each and every year.  For simplicity I will just knock that off the top and we will use 4.72% as the return each year.

Using the www.buyupside.com calculator this is what the portfolio would look like when I reach age 80.  For withdrawal I am using the fixed dollar amount of $23,231.  This would not be enough for my family and I to live off of but is still a nice chunk of change.  I will explain where that number came from later.

Starting Balance
$1,000,000
Annual Rate of Return
4.72%
Annual Withdrawal
$23,131
Annual Inflation Rage
3%
Number of years withdrawing
40
Balance after 40 years
$2,187,405

So if I were to collect one million dollars and buy into an index fund when I turn 80 I would have a little over 2 million dollars left.  This isn't bad at all and if I live another 10 years to the ripe old age of 90 it would grow a little more and I would be able to leave a sizable inheritance to my kids.  Now they couldn't live off of it for their whole lives since I would have to divide it among my 4 kids equally.  It would give them something to kick start there FI quest though.

VS. The Dividend Champions

Bring in the Dividend Champions.  If I were to take that money and buy a little of each company in the list (about 107 companies) and collect the dividends it would be about $23,131.  I just took the average price of 65.28 of the stocks which would buy me about 15318 shares.  Now the average dividend for the champions is $1.51 per share.  This is where I got the $23,131 in annual income that I mentioned above.  In the calculator I bumped the rate of return back up to 5.01% (See Dividend Life's comment  below) as any commission would be a onetime thing and would be negligible.  I did have to withdraw something for the calculator to work so I figured one dollar for a soft serve at one of the companies I would own would be a good treat.

Starting Balance
$1,000,000
Annual Rate of Return
5.01%
Annual Withdrawal
$23131
Annual Inflation Rage
3%
Number of years withdrawing
40
Balance after 40 years
$2,688,268

Boy look at that nest egg when you don't take from it.  I didn't even factor in the dividend growth rate which is averaging  7.9 percent for the champions.  This well offsets inflation and would give me either an ever increasing check every year or money to put back into buying more stocks.  Regardless when I pass my kids would each have there own million dollars to do the same for them and their kids.  The cycle would continue indefinitely because of the power of dividends.  This assumes I do a good job of teaching my kids about investing and living below your means.  It is a little more and the dividend growth rate would help boost the return rate if I put any thing above the 23k back into the market.  Still it shows the power that diviends have on returns.  A little more to give to the kids to help them along will grow for them over the years.

So if I had a million dollars I would take care of business myself and choose option 2.  Why chase the roller coaster that is stock prices when you can have the income dividends provide.  The dividend champions have been giving back the stock holders for 25 or more years.  That definitely lowers the risk that this stream of income would ever be cut even during bad years.  So why do others choose bonds or just go for stock appreciation?  I for one and sticking with the div machine.

What option would you choose?

*Updated option 2 thanks to comment by Dividend Life

Thursday, August 28, 2014

Analysis of Horace Mann Educators Corp.

With the kids back to school and my younger kids not wanting to stay in their beds at night it has been difficult to write.  Getting up earlier means getting to bed earlier (if I want to stay healthy.)  With the current situation I am down to about 1/2 hour of free time just to catch up with my wife and relax a little.  Hopefully everyone will get back into a rhythm and I will have more time to dedicate to one of my favorite activities, investing.  For my July ranking there was a large number of insurance companies in the top 25.  Horace Mann Educators Corp. was one I had not heard of and ranked pretty high on the DFG scale.  Let's take a closer look as to why.

The website has it has the Forbes 2014 America's MOST TRUSTWORTHY Companies 2 years in a row.  It was founded by teachers for teachers.  The name comes from the father of American public education system, Horace Mann.  It provides different type of insurance to educators and educational institutions (think school districts, etc.)  With more than 7 billion in assets they aren't doing too bad as a company.  Progressive Insurance says it has over 15 billion in annual premiums for comparison.  Unfortunately PGR cut their dividend in 2013 so they are off the list.

Value
There seems to be quite a few insurance companies with good valuations even in this market.  Yahoo has the Trailing P/E at 11.16 with the Forward P/E up a little at 11.55.  I usually look for value under 20 P/E but I am thinking to narrow it down to companies under 18.  The price to anything is hovering around 1 which is also what I like to see.  Lots of sales with the TTM at 1.18 and PEG at .93.   The Property & Casualty Insurance industry stats have the P/E at 18.9.  All good signs HMN is undervalued.

Growth
Wow had to double check this one but it has a 58% growth rate over the past 5 years.  Slows down a bit when looking into the future with the forecast at 12.7% over the next five years.  This is not bad for an insurance company of this size.  Earnings over the past twelve months is not bad at 2.53 with things a little better next year with an estimate of 2.58.  When you look at the stock price this is pretty decent but my ranking looks at a flat number right now so it almost knocked it out of the top 100 for growth.

Quality
How does management do is one way of looking at quality.  Managing the finances well usually leads to a good next category.  So when this is ranked higher I typically expect to see good things when looking at the numbers for yield.  Price-to-book was 1.01 for the most recent quarter and the Debt-to-Equity ratio was also low at .22.  All good numbers and not only point to quality but a good value as well.  This company you buy has less risk with a low amount of debt on its books.  With the way industry does business the P/B is usually low.  It is around 1.9 so HMN beats that out.

Yield
I do look for good companies with the highest yield possible.  HMN was at 3.20% today beating the industry average of 2.0%.  That .92 cents a share will continue to buy me candy bars well into the future.  Looking into the past they have been aggressive with dividend increases.  Over the last 5 years it has been double digit happiness of 16.2%.  The big concern is it is just a Challenger.  Having cut dividends in the great recession timeframe (2008) is a definite warning sign.  Have they changed their ways?



Overall
There is nothing I can find about this company that I don't like except for the dividend CUT in 2008.  Maybe I should stick to Contenders or Champions as they have a longer track record and have gone through a few cycles.  If I were to invest in them I would keep my eye open for any news or lack of cash flow that would signal a cut coming.   With the payout ratio at 32.90% that is unlikely.  Plenty of room for the dividend growth rate to stay in the double digits as long as the economy doesn't tank.  I wonder what the ratio was in 2008?  If anyone knows where to find that data let me know.

Insurance industry looking good to you or wait?

Full Disclosure: I do not own this stock.

Image from the Horacemann website.