Monday, July 7th, 2008
If one is a dividend growth investor, they are probably considered (or should be) the longest of the long-term investors. To the absolute amazement of other investors, once the stock is purchased, the dividend growth investor may not care what the price of that stock is as long as the dividends continue to grow.
The substantial gains that are reaped by re-investing the growing dividends from our favorite stocks lies in the exponential power of compounding - which often takes years to build into a noticeable contribution to a portfolio.
Because the re-investment process can seem unproductive and the dividend growth insignificant at first, it is easy for others to dismiss dividend growth investing as “too conservative” or even unprofitable. As much as we preach that slow and steady wins the race, even the most seasoned dividend growth investor can begin to question the effectiveness of the strategy from time to time.
A Real Life Example
Many times it takes a real life example of dividend growth investing to help to keep one motivated to continue the long , often boring, journey of building a portfolio of dividend growing common stocks.
The recent bid by InBev to take over Anheuser Busch (BUD) provided this motivating real-life example that what the essence of dividend growth investing is all about.
This is what the “end-game” of our dividend growth strategy should look like - it’s beautiful!
In 1980, Sean Gorham bought his first piece of a public company: a $500 investment in Anheuser-Busch, even though he had no connection to the brewer or its St. Louis roots. He’s reinvested the dividends, or the cash payout shareholders receive, over the years.
“I’ve always admired how well the company is run. They exude a very clean image and a very American image,” said Gorham, 48, an insurance agent who lives in York, Maine, about an hour northeast of Anheuser-Busch’s Merrimack, N.H., brewery. “It’s been one of the best investments I’ve had. … The dividend I get every year is more than what I originally paid for” the stock.
Anheuser-Busch stock began being traded in 1933 in the over-the-counter market, where brokers buy and sell among themselves rather than through a stock exchange. The company first was listed on the New York Stock Exchange on April 18, 1980, making it more widely accessible to individual investors.
In the past 28 years, Anheuser-Busch’s stock has split four times. So one share bought in 1980 is now 24 shares - how’s that for creating shareholder value.
It Takes Time And Commitment
Obviously this example is one that has taken nearly 30 years to develop, but the fruits of the labor are tremendous.
Given this example, an investor who today is 30 or even 40 years old could begin to build a portfolio of dividend growing common stocks and expect to receive an excellent income in retirement that grows each year - likely at a rate higher than inflation!
When one commits to the strategy of dividend growth investing, it requires an extreme amount of patience and discipline in the first few years. It may take as many as ten years of dividend growth before the re-invested dividends make significant contribution to the growth of the portfolio.
Reaching The Tipping Point
Many financial planners will dub a person’s working years as the “accumulation phase” of one’s life. This means that during these years (roughly from age 20-65) the purpose of investing is to accumulate assets that will allow the investor to hopefully maintain their current lifestyle in retirement.
During the first decade or two, accumulating assets is the most difficult as investors tend to have other “important” expenses such as purchasing a home, raising a family, retiring student loans and consumer debt etc.
While a full blown discussion on the time value of money is not necessary in this article, one must recognize that buying assets such as dividend growth stocks during the early years of the accumulation phase will allow for the advantages of compound growth to kick in and the tipping point will be reached faster.
The tipping point is the point where the return from investments begins to grow at a greater rate than expenses. You will notice that one does not say that investment income meets expenses because, it is known that expenses increase with inflation and (mortgage excluded) may actually have increased in retirement depending on medical needs etc.
Motivation To Follow A Proven Path
During the accumulation phase, success stories like the one above can prevent investors from straying from the proven path of investing in solid dividend growth stocks to fund a prosperous retirement.
Where do you get the motivation to stay committed to your investment strategy?
Resources: St. Louis Today
Posted in Investor Education | 5 Comments »
Friday, July 4th, 2008
Growing Dividend
As a spin-off of the successful Duke Energy, Spectra Energy Corp (NYSE:SE) has had a rather successful first 16 months in business and has recently declared an 8.7 percent increase in its quarterly cash dividend
on its common stock, from $0.23 to $0.25 per share. The dividend is payable September 15, 2008, to shareholders of record at the close of business August 15, 2008.
Spectra has what appears to be a very assertive, yet stable, long term growth plan that is focused on organic growth and project development. This includes a very lucrative joint venture with Conaco Phillips and already transports some 12% of the natural gas consumed in the United States.
With these facts in mind, let’s take a look at what the Chief Financial Officer (Soon to be CEO at the end of 2008) of Spectra Energy, Greg Ebel has to say to investors looking to purchase stock in the company:
I think the key reasons are, first and foremost, a home grown stable of expansion projects that give visibility on earnings growth to the better-than-the-pack earnings growth and opportunities they see. Also, solid dividend growth opportunity, sound financial management and overall a relatively safe harbor in what is a somewhat dodgy financial market situation and economic situation we see out there today.
A Closer Look At Spectra Energy
Spectra Energy is one of North America’s premier natural gas infrastructure companies serving three key links in the natural gas value chain: gathering and processing, transmission and storage, and distribution. With very solid transportation contracts into the foreseeable future, there is little concern for profitability and optimism for increasing shareholder value. However, any lagging demand for natural gas would certainly be a concern for the company moving forward.
Spectra Energy owns and operates critically important pipelines and related infrastructure connecting natural gas supply sources to premium markets. Based in Houston, Texas, the company operates in the United States and Canada approximately 18,000 miles of transmission pipeline, 265 billion cubic feet of storage, natural gas gathering and processing, natural gas liquids operations and local distribution assets.
Spectra Energy Corp also has a 50 percent ownership in DCP Midstream, the largest natural gas gatherer and processor in the United States.
Why Pipeline Stocks?
It has been said before, but pipeline stocks are like railroads for natural gas. Simply put, the demand for natural gas is up and correlates somewhat with oil prices, but the upside with pipelines is that they do not have the competition from other forms of transportation. In order to move and significant volume of natural gas a pipeline must be used.
Pipelines are traditionally managed very conservatively, as is Spectra Energy, and make their money through cost-of-service contracts and other required services. This means that cash flow is relatively stable and predictable when compared to the market as a whole. This can be referenced by viewing the Beta coefficients of pipeline stocks which show significantly less volatility than the broader markets.
I have stated before, and I will state again that pipelines are great recession proof stocks.
On top of preserving and likely growing capital, investors can collect a healthy (and growing) dividend yield.
Spectra’s current yield is 3.28%.
Spectra also boasts Return on Equity and Return on Investment numbers that are markedly abov ethe industry average at 17.1% and 5.76 % respectively.
For those of you looking to preserve capital during these rough market times and collect a solid dividend, I highly recommend pipeline stocks. Along, with Spectra Energy I suggest looking at Trans Canada Pipeline (TRP).
Full Disclosure: The Author does not own shares of Spectra Energy, but does own some Trans Canada Pipeline.
Posted in Dividend Hikes | 2 Comments »
Wednesday, June 18th, 2008
In a recent article by John Heinzl (Globe and Mail) he asks himself if, as a dividend growth investor, he and all other dividend investors are idiots? Heinzl outlines the feelings that we typically have every so often as dividend investors. That is, missing out on the “multibaggers” that everyone is talking about around the water cooler at work.
Here is a quote that sums up how us dividend investors might feel at the moment:
…Because when everyone else is doing the logical thing and shoveling money into growth stocks that are shooting to the moon, only a big fat idiot would stubbornly sit on a portfolio of boring dividend stocks that are, for the most part, doing jack squat.
It’s interesting that he mentions high flying stocks like Potash Corp. and Research in Motion as being the ones that he missed out on, while he talks about owning our favorite dividend growers - banks, insurers, pipelines and drug makers.
How Far Can You See?
When investing in dividend growth stocks , it isn’t about making a killing this week or this month.
- It is about investing for the long haul and watching your dividend income rise consistently year over year while your “investor” counterparts are searching for the next hot tip.
- It’s about holding onto that dividend paying stock and not worrying about the stock price, as long as that dividend keeps growing.
- It’s about protecting your hard-earned money from inflation and making your money work for you.
- It’s about knowing the company can’t fake a cash dividend.
- It’s about money in your pocket.
Over the long term we know (and Heinzl reiterates) that dividend growing common stock prices also out perform those stocks that pay stable or no dividends.
So What Now?
There is a famous saying from Warren Buffett that goes something like this:
“Be fearful when others are greedy, and greedy when others are fearful”
Of course this is easier said than done, otherwise we’d all be running a multi-billion dollar company like Berkshire Hathaway.
While it may take some serious resolve to start loading up on some of our favorite dividend payers, most notably banks stocks, sticking to a long term plan will make you rich in the long run.
So, to echo the words of Mr. Heinzl I’ll end with this quote:
Am I going to sell my dividend stocks to buy these high fliers now? Hell, no. If anything, I’ll be adding to my existing positions, and reinvesting the extra dividends in even more shares to take advantage of the magic of compounding.
So, don’t worry about the water cooler talk and stick to your plan. Soon enough you’ll be saying goodbye to the water cooler forever when the compounding effects of your rising dividend income begins to exceed your salary!
Here’s to your wealth!
Posted in Investment News | 6 Comments »
Tuesday, June 3rd, 2008
Time and time again I hear the same thing from friends and family about investing the way that I do. Most of them ask me why I invest in “boring” dividend paying stocks when all of the money to be made is in the high growth stocks.
To be completely honest, they are right…sort of.
Some people do find the less volatile dividend paying stocks boring, I find them exhilarating! As you may have noticed, I’m a huge fan of cash flow. Cash flow is the ticket to play the game of life and dividend growth stocks will eventually allow me to play the game on my own terms!
Yes, it is a long road and the process can be uneventful at times. And no, I’m not going to get rich overnight. However, I also won’t go broke overnight and I am compounding my future cash flow with every dividend payment that is reinvested.
Yes, there is money to be made in growth stocks. There are actually a lot of people making a lot of money in high growth stocks. However, that just isn’t my style and I’m not ashamed to admit it.
I like to have cash flow back to me so that I can make the decision whether or not to re-invest it into the company. I also like the fact that I don’t have to watch the market every day to see if my “high-growth” stock has tanked and left me with nothing!
I have nothing against traders and I actually learn a lot of useful techniques from very good stock traders. However, I have recognized that over the past 14 years an investment in the S&P 500 would have you receiving all of your original investment back just in dividends.
So I guess one could say that dividend stocks are boring, but I’ll give you one more thought to ponder before I get off of my dividend paying soap box!
Take a boring old dividend paying stock — or at least one that seems that way — paying 5% in dividends yearly and racking up a conservative 5% in capital appreciation. Begin with $1,000 and reinvest those dividends. After 30 boring years, you’ll possess a staggering $18,700! (Let’s multiply that number by 10X for a more realistic example)
$187,000 How boring is that?
Posted in Investment News | 4 Comments »
Sunday, June 1st, 2008
Welcome to readers from The Street.com and the Kirk Report. Please take a moment to visit our About Page to see why we love dividend stocks and subscribe to our blog using the Subscribe Form on the right side of the page.
I am a huge proponent of buying the best dividend paying stocks when they are value priced. However, if you aren’t sure about picking an individual stock and you still want to reap the rewards of Dividends, check out this list of some different Dividend Exchange Traded Funds (ETF’s).
The Vanguard Dividend Appreciation Fund (AMEX: VIG) is a one of the cheapest dividend ETFs, with an expense ratio of 0.26%. Some rivals charge as much as 0.60%. But fees aren’t everything here. VIG’s current yield — slightly less than 1.77% — is on the low side, as is its total return of roughly 7% since its inception in late April 2006.
VIG is benchmarked to the Mergent Dividend Achievers Select Index, a subset of the Mergent Dividend Achievers Index — a market-cap-weighted index of stocks with a consistent history of increasing dividends. Its holdings are highly concentrated in three sectors: consumer staples at 23%, financials at 20%, and industrials at 17% of assets. The top five stock holdings include Johnson & Johnson, GE, ExxonMobil, AIG, and IBM, each representing roughly 4% of assets.
Among other ETFs focusing on high-yielding equities, the iShares Dow Jones Select Dividend (NYSE: DVY), the first dividend ETF, has gathered more than $7 billion in assets. It invests in 100 of the highest dividend-yielding securities (excluding real estate investment trusts) in the Dow Jones U.S. Total Market Index.
First Trust Morningstar Dividend Leaders (AMEX: FDL) invests in the top 100 stocks of the Morningstar Dividend Leaders Index. These are the index’s highest-yielding stocks, ranked by the consistency with which they pay dividends and the ability to sustain those dividends going forward. Three securities — Citigroup, Bank of America, and Altria — together make up more than one-fourth of the fund.
State Street SPDR Dividend (AMEX: SDY) invests in the 50 highest dividend-yielding S&P Composite 1500 constituents. This index tracks equities that have consistently increased dividends every year for at least 25 years. Investing in these long-term dividend-paying stocks reduces the risk that the fund’s holdings will cut their dividends.
For Dividend Daredevils
More adventurous investors might consider the Claymore/Zacks Yield Hog ETF (AMEX: CVY), which aims to double the yield of other dividend-paying ETFs. The fund invests in high-yield securities such as preferred shares, master limited partnerships, closed-end funds, American Depository Receipts, and Real Estate Investment Trusts. It’s a riskier play, since the holdings don’t all have a long history of regular, stable dividends.
Paying the piper
Tax law changes in 2003 lowered the tax on most dividends to 15%, making dividend-paying stocks more appealing. This law is set to expire at the end of 2008, and if it does, dividend-paying stocks may become less desirable.
Courtesy of Motley Fool
Posted in Investor Education, Stock Studies | 2 Comments »
Saturday, May 10th, 2008
I recently had a conversation with a gentleman who really “gets” dividend investing and he provided me with a synopsis of what is going on on a macroscopic scale in the world today. He came up with a “fictitious” conversation that will hopefully make sense to you all. Maybe it will even assist you in determining that you should buy dividend stocks now?
A General Overview
The central banks around the world are dealing with a liquidity crisis by lowering interest rates or injecting money into the financial system.
The Fed has been the most aggressive in cutting rates and injecting dollars into the system, causing the U.S. dollar to fall.
To the U.S., this means that its exports become cheaper and imports become more expensive.
While the world is fighting a credit crunch, inflation is creeping higher. Over time, as the cost of goods and services increase, the value of the dollar is going to fall because people won’t be able to purchase as much with their dollars as they did previously.
The Conversation
(PS - I live in Canada,so the gas price is in liters or litres :))
“Wait a minute,” Bob said. “I recently read that both Canada’s and the U.S. CPI (consumer price index) is roughly two per cent.”
“You’re partially right,” I replied. “Core inflation is roughly two per cent, but it excludes certain items that are considered too volatile, including food and energy.”
“How can that be?” Bob asked. “Eve (Bob’s wife) told me eggs have jumped 62 per cent in price over the last two years and our food bill has increased more than four per cent over the last year.
“If memory serves me correctly, it cost 94 cents a litre to fill up my car last year.
“Now I am paying $1.18 per litre. If my math is correct, that’s roughly a 25 percent increase,” Bob said.
“Including food and energy, inflation in North America is running closer to four per cent,” I said.
“If oil and food commodities keep rising, then higher inflation and eventually rising interest rates will eventually follow. This is one reason why European countries are reluctant to cut their bank rates.”
A recent report from Bloomberg indicated that CPI in Ukraine was running at 19.4 per cent, in Vietnam it stood at 14.1 per cent, Russia was 12.6 per cent. Inflation in India is at 5.1 per cent and in China currently stands at 6.5 per cent.
These numbers are rising, not declining and there has been social unrest throughout the world because of rising food costs, even in some of the oil exporting nations.
“So what your are saying is that this sub-prime mess is temporarily forcing the central banks to reduce interest rates to help the economy get through this slowdown and credit crisis,” Bob said.
“But eventually, if food and oil costs remain high or continue to rise, interest rates will eventually follow suit.”
What this Means For Investors
(Hint: Buy Dividend Stocks)
As a result, the biggest dilemma savers face today is that at four per cent guaranteed investment rates on products, like GICs, they are only breaking even.
When you include income tax, these savers are likely losing money.
But an equity investor can invest in companies providing a four-per-cent dividend that also have growth potential at, or greater than, the rate of inflation.
So if inflation does rear its ugly head, ultra-conservative savers will be hurt, while with increasing dividends, equity investors will, at least, keep pace with inflation.
Posted in Investor Education | 3 Comments »
Friday, April 11th, 2008
What We Have Learned
It is very important when investing to not only evaluate a company against others in its sector or industry, but also against itself.
In previous articles, we have discussed the dividend payout ratio, free cash flow, Z-Score and Return on Invested Capital (ROIC). All of these metrics are used as a way to evaluate stocks against their peer group, but also against themselves at different points in time.
When we have narrowed a company down against its peers, it is then time to evaluate the stock against itself at different points in time. Doing this can help us to determine if a stock is selling at a reasonable price.
How To Use Average Dividend Yield
One of the greatest ways to evaluate a dividend stock against itself is to determine the average dividend yield that that stock has paid over the past number of years. If the stock has a higher than average yield, compared to its historical average, then it may indicate that it is a better time to purchase shares (all other factors being equal).
There is an excellent tutorial on calculating average dividend yield at DividendsMatter.com. I will highlight some of the main points here, but I highly suggest that you read the full tutorial.
First of all, I like to gather 10 years worth of data for the stock. This is easy to do because the stocks that I analyze have very long histories of paying dividends. The information we need is the high and the low stock price, and the dividend paid out for each of the last 10 years.
This data can be gathered from many sources, including the company website. However, I prefer to use Yahoo Finance because the dividend information can be filtered out from the stock price using this option.
This is all the historical information we need. Now, from this information, we can calculate the high yield and the low yield for each year. The high yield is calculated by taking the annual dividend and dividing by the low price. Similarly,the low yield is calculated by taking the annual dividend and dividing by the high price.
High Dividend Yield = Annual Dividend / Low Stock Price
Well Worth The Effort
The mathematics of the process is very elementary, but it does take some time to gather the information. This is certainly time well spent and I suggest that you practice on a couple of your favorite stocks.
You will find that buying high quality, dividend growth stocks at prices above their average dividend yield will give you a margin of safety and confidence to hold the stock through thick and thin.
Posted in Investor Education | 3 Comments »
