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.

Friday, August 22, 2014

Why keep at it?


One picture is where I want to be in life.

The other picture is where I am at (literally).

I was recently reminded this past weekend while where on a trip for my wife's birthday.  That reminder was the vision of spending more time with my family, traveling and doing things I enjoy (love nature.)  You see my work building (the next picture) is right next door to a dump.  It is a huge mountain of construction debris so while unpleasant to look at, it luckily doesn't smell in the summer.  

What it does remind me of is my goal to not have to sit in a concrete building every day away from sunlight in a thing called a cubicle earning money for other people.  If I remain committed to spending less and saving more I will end up at the first picture. 

Take a simple example on the power a dividend champ could do (calculations borrowed from Dividend Life.)  If I just plunk down $1000 in a company that pays a 3% yield and grows it by 10% a year or even better a 2% yield that grows it's dividend by 20% a year watch the power of reinvesting those dividends and growth combined.  This doesn't take into account any taxes or inflation but gets the point across.

Year
3% Yield @ 10% Growth
2% Yield @ 20% Growth
1
1,030
1,020
2
1,065
1,045
3
1,104
1,076
4
1,149
1,113
5
1,201
1,160
6
1,260
1,220
7
1,329
1,295
8
1,409
1,391
9
1,503
1,516
10
1,613
1,681
11
1,744
1,902
12
1,899
2,207
13
2,087
2,638
14
2,315
3,267
15
2,594
4,224
16
2,940
5,748
17
3,375
8,320
18
3,927
12,966
19
4,640
22,083
20
5,575
41,836

Now that I look at this I can see why TJX is so attractive to people (if they keep it up for 20 years.)  Both are neck in neck until that 10 year and then that 2% yield dominates the table.  

So imagine after 20 years all the people who save a couple of hundred dollars a month and keep investing that over the same period.  Savings + Compounding + Dividend Growth = Financial Independence.  When that happens instead of going to work and watching that landfill get higher I would spend my time working to reduce waste and donate time to my favorite charity.

In the end it doesn't matter which scenario you pick.  Just so long as that money you save is invested in stocks that perpetually raise their dividends and pay a high enough beginning yield you will eventually be able to live a life that is your own.  Now things are turned around and the corporations are making money for you (the shareholder).

Are you doing well with your saving?  Even if it is a little give me a shout.


Full Disclosure: I do not own any stocks mentioned in this article.

Monday, August 18, 2014

Analysis of TJX Companies, Inc.

T.J. Maxx is probably one of my favorite frugal stores to shop at.  I recently added 2 dress shirts to my collection that now is at 24 shirts.  These bargain shirts I purchase are always on the clearance rack and have always cost $10 or less.  Some of my favorites are more than a decade old and are still going strong.  If a button pops off I just sew it back on and keep it going.  My wife also gets kids clothes are other apparel off of their clearance racks ever season to keep the kids clothed.  She was also looking at purses and mentioned several high end purses for just a little over $100.  Wow compared with normal retail of $300+ that is truly a bargain.  I have heard other bloggers talk about it so finally decided to take a look at it.

The TJX Companies, INC is an off price retailer of apparel and home good (think towels and small - medium size décor.)    They operate my favorite store, T.J. Maxx, Marshalls and the HomeGoods stores in the US and other stores in Canada and Europe.  While I have shopped at all three I do prefer TJ.  While this is not high in my ranking (144 out of 550 Triple C champs) it is not in the tail end either.  Most likely I have looked past this is the low yield of 1.32 percent.

As always I am short on time and just happen to be off today to do a little R&R with the kids before they go back to school.  I worked on this some last night and hope to finish up this morning.  My goal is to keep the time spend on blogging to around an hour per post so I can maximize the time with my family.  Let's take a look at my ranking categories and see how TJX looks.

Value
The current P/E for TJX is sitting around 18.  That usually lines up for companies I am looking at with a P/E below 20.  They are doing pretty good compared to the rest of the Retail/Wholesale industry that is sitting around a ratio of 86.3.  The TTM price-to-sales is at 1.35 for July.  This is pretty good for a retailer and I like to see as close to 1 as possible.  Sales are pretty good in my book if it is below 2.  The TTM is a good metric to look at in cyclical industries such as this as it will include the good months (Christmas season) and the slow months.  Future estimates are also lining up with a buy signal as they will be dropping down into the 14 range for this year and next.

Growth
The 5 year growth rate is pretty awesome at 20.80%.  This and other growth factors puts it in the top 100 for this category.  Although it just squeaks in at 92.  The rest of the industry has been dragging with a -10.13%.  But looking at the 1 year growth rate for compared to the industry it is a pretty level field at 10.9% for TJX and 10.14% for the industry.  It might be slowing down a bit has it has missed earnings for both quarters this year.  Prior to this year it beat or met yearnings for several years back.  Earnings-per-share (TTM) is at 2.86 currently.  This isn't bad and they (ShareBuilder data) are estimating it should be 11.40 for the end of their current fiscal year.  That is stellar so we will have to watch the news.  What is odd is then next year is back down to 3.15 EPS.  That does set off my spidy senses.  If anyone knows why let me know.



Quality
Quality is ranking pretty high at 384.  The big driver of that ranking is the most recent quarter Price/Book ratio of 8.72.  That is pretty high but since this is the first Retail-Apparel company I have looked at, this may be the norm.  I usually don't consider companies above 2 so I would have to do more research to determine if this is fair.  The debt-to-equity ratio is looking good though.  At .30 that tells me they are not carrying much debt (but there still is some).   On Yahoo it says the Total D/E is 29.75.  That is kinda confusing for me as it doesn't match the U.S Dividend Champions spreadsheet unless the spreadsheet is the ratio number and Yahoo's is a percent.  Ug so much data.

Yield
This contender is pretty low at .70 cents/share or a 1.30% yield.  Unfortunately this is way below what I need to jump start my portfolio.  The Payout ratio is at 20% which is well below the 75% cap I use.  So there is plenty of room for double digit dividend growth (if they choose).  With a five year dividend growth rate of 21.2 percent they most certainly are choosing.  If they keep that up then after 9 years or so it will have surpassed something of my taste (3% yield) that only grows at 10%.  I think sales would have to stay brisk for an extended period of time.  Would a hiccup in the recovery  cause sales to drop or would more people flock to stores like these for bargains?


Overall
Out of the new 550 dividend companies I look at TJX comes in at 149th place.  Not bad but not what I normally look at (top 100).  With a sales and earnings report scheduled for Tuesday, August 19, 2014 all of this may change.  A bad report may drop the price and make the entry price more consumable for me.  Plus a good drop would boost the yield and with a growth rate like that I could definitely settle in for the long term (assuming it stays that way.)


Thanks for reading and if you have any other retailer I should be looking at let me know.


Full Disclosure: I do not own this stock.

Jeans image courtesy of By Worakit Sirijinda/FreeDigitalPhotos.net

Wednesday, August 13, 2014

Oil In My Pocket

The Buy
On August 5th I bought 12 shares of ConocoPhillips at $80 or an initial yield of 3.65%.  After my review of COP and looking at my alternatives I decided this was a good buy for the price.  This purchase will increase my annual revenue by a good $35 dollars.  This brings my number of positions up to lucky number 13 in my taxable account.  While I did not have enough cash from July I do have some cash saved from earlier in the year to use for the next couple of months.  When that runs out hopefully I will have my budget in better shape and have saved more.

COP
ConocoPhillips is a major international company in the energy field.  Their diversification in the many areas of energy production and transportation play well nicely with the energy companies I already hold.  This I my first energy conglomerate while the others I hold are more specialized.  Dividend Life did a compare on the stability of the dividend vs. XOM.  XOM won out so maybe that will be my next purchase.  It does rank up there but wasn't as high as COP.  I take the stock split and dividend hike as a sign of good growth.  Either way both are good buys.

Conclusion

Following all the great advice from fellow bloggers out there I will keep on investing whatever I have in the most cost effective way.  That investing whether it is $5,000 or $100 will be done the same way by adequately researching and ranking the great dividend payers out there.

Thanks for reading!

Should I stick in this sector and purchase XOM next or move on to other areas?

Full Disclosure: Long COP