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 4.77% 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
4.77%
Annual Withdrawal
$1
Annual Inflation Rage
3%
Number of years withdrawing
40
Balance after 40 years
$6,448,603

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.  The 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.

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?

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

Monday, August 11, 2014

July 2014 Budget

Updated Budget
It has been a few to many days since my last post.  I have been spending several evenings working out a better budget because my previous one had some flaws in it.  Listening to readers I think I have come up with a better one (fixed vs. variable).  This fixed budget assumes I will get at least 2 paychecks a month.  These two paychecks should be able to cover all of my expenses.  Anything else is a bonus which would go to savings for investing, vacation or to cover unexpected expenses like I incurred this month.

For each month there are certain things that are fixed so those remain.  One of the fixed items that sprang into life this month are braces for my son.  He is getting older and the longer you wait the harder it is for the orthodontist to move bone.  It was a hefty $1,000 down payment and then $145 for the next two years.  That is what I owe after insurance.  So for July you will see the down payment and then going forward it is a fixed expense.  When I have enough money saved up in my Health Savings Account (HSA) I may request a reimbursement.  For now it is coming out of my pocket.

Saving is still set at an amount that will cover my car insurance, water and sewer bills each quarter.  There is a little baked into this as well for other expenses that reoccur yearly like school fees for my kids.

Where Did It Go?
After I added all of my fixed expenses (the needs) there was not much left for guilt free spending money or investing going forward.  I will do my best to squeeze what I can from the miscellaneous category (toilet paper, toothpaste, etc.) as that is about the only area I can reduce.  Utilities are pretty consistent and we only run our air conditioning on the hottest of days.  I would be fine getting rid of TV (but not internet) as I don't watch much.  However my family has blocked me on this one.  The best I could do this year was renegotiate my package to a lower rate.  I got HBO free for a year, a land-line phone and the price went down $15/month.  I must admit I am watching more TV than I used to because of HBO.

Needs
Food was $56 over budget.  I was expecting this to be at least a hundred lower as we ate out for a week during vacation and that was all placed under GFSM category.  The price of food is just getting ridiculous.  No wonder those with less have a hard time just surviving.  My gas budget was under as I did not place the vacation gas under needs.  Utilities was under as well because there was no water or sewer bill this month.  I wonder if I should not count those 2 under utilities as they are just quarterly and I pay those from my savings.  That may paint a better picture.  What do you think?  Needs gets the big red X mostly because of the down payment on my son's braces.  I had not foreseen this so had not saved for it.  I was just expecting insurance to pay and then a monthly payment.  The remaining categories I classify as needs were close to the budget so nothing worth mentioning there.

Guilt Free Spending Money
Had to give it a big red one as well.  Under my new budget I basically have nothing left over to play with.  I have hinted at this to the family but haven't shown them the numbers yet.  Luckily I had saved for vacation so this category is covered.  I also wonder if I should include things like vacation that I planned for and saved.  I am not really spending money I earned this month for things like that.  What do you think?

Investing
So what if there is something leftover?  Anything that is will go to investing.  I still have my paycheck being split so $200 went into my cash account.  This may be stopped since I can't even afford that anymore.  This means I may have to look into alternatives that offer no fees for investing.  Investing something is better than nothing right?

Overall Budget
With $2,893 dollars coming out of savings to pay bills I get the red X award for the month.  Granted this was before my new budget but wanted to use it on July to test it out.   


Am I OK with this new budget?
I sure am.  This is probably the first time in my life I have a budget that means something.  I have always had problems in Quicken with their budgeting tool so never really had one.  Even my previous budget had to many flaws in it to be useable. 


No longer will I spend more than I make each month.  As always things change and so will this budget.  But for now I have a plan and that puts my mind at ease.  Is the family happy with the fact that we won't be able to eat out anymore or go places (that aren't free?)  They are but hopefully they will understand and apply this learning.  I cannot, I cannot, I cannot go back into credit card debt.  Hopefully the family will understand that and as a result be happy knowing they have what they need without owing anyone.

Wednesday, August 6, 2014

My first award (The Liebster)

What is this thing?
Thank you for this prestigious award Living at Home.  Did some quick reading on this award and it is a way for other bloggers to spread the word about new blogs that they enjoy.  The jist is to answer some questions and then formulate your own for another blogger to answer.  Almost like an e-chain letter.  One of the nice things is it bumps you up on the search engines via the chain.

The questions (and my answers)
  • If you won a mini-lottery would do choose $1 million in cold hard cash today or one penny that doubles every day for the next 30 days?  Basically, you start with a penny on day one.  At the end of day two you have two pennies.  Day there it’s four pennies, day four it’s eight pennies, and so on.
    • Good article which I have already read.  The answer is of course 30 days.  The risk of me passing away in 30 days is pretty slim so that is the better option for me.  If I had a terminal illness or was in my 80's I might choose the cool $1 million.

  • Would you rather make memories or money now?
    • Tough question which I have written about a little in my post on my last vacation and the cost of it.  That is another trick question.  The most successful people in life balance both.  You must plan for the future (including your financials) but must also live in the now.  Life is time so you must use it wisely.  I balance it by setting savings goals for investing and setting aside funds to enjoy life.

  • How often do you check up on your investments?
    • I log into my brokerage account a couple of times a week.  Mostly to do research so I would not call that checking up on my investments.  I don't worry about the prices as the companies I invest in are for the long term.

  • What are your career goals?
    • Use my skillset to work for a company that truly helps mankind.  Will mostly be a not for profit so that is why I am building up my portfolio now to help with income.

  • Have you ever slipped on a banana peel?
    • Can't say that I have.  In fact I do not know of anyone who ever has except when playing Mario Cart.


Part 2 of the Award
Now the next step is to some up with some nominations and questions of my own.

Questions
  1. Why is the sky blue?
  2. If everyone knows saving is good and you should not spend more that you make why is America the way it is?
  3. If you were an old billionaire (say $10 billion) would how would you split up your money between family and other things important to you?
  4. Is a house a worth it?  I don't see many supper frugal people blog about owning one.
  5. How much time do you research stocks you invest in?

Nominations

There is one that I just started reading and it looks like he has not posted about the award yet.  It is the Dividend SWAN.  He is a fellow dividend investment blogger.