Wednesday, August 5th, 2009
Just a few days into August and markets seem to have picked up where they left off in July.
Here’s a summary of market action and key developments from last month, including monthly benchmarks.
- Investors saw more data indicating that healing is underway in the global economy. Increased optimism paved the way for a fifth consecutive month of gains across world markets.
- International stocks advanced. The MSCI World Index returned 8.4% (in $US terms). Since March 9th, the MSCI Asia Index has risen about 58% in local currency terms.
- Commodity prices rose. Copper is up more than 80% year-to-date supported by increased demand from China. The S&P/TSX Composite Index benefited, adding 4%. The S&P/TSX has climbed 45% since hitting a five-year low on March 9th.
- In the U.S., stocks made up more ground. The Dow Jones Industrial Average (DJIA) had its best month since 2002, up 8.6% . The S&P 500 Index advanced for the fifth consecutive month (the longest streak since 2007) gaining 7.6% . The S&P 500 is now up more than 40% since March 9th and Monday, it closed above the 1,000 level for the first time since November 2008.
- Volatility continued to be a key theme in currency markets. After falling more than 6% against the U.S. dollar in June, the Canadian dollar appreciated by 7.4% versus its U.S. counterpart in July. This cut into returns on investments denominated in $US. Case in point, the 7.4% gain on the S&P 500 was essentially wiped out when converted back to C$.
With much of the latest economic news continuing to look less bad (over 70% of companies beat expectations last quarter and it appears US housing may have found a bottom), the economy looks to be on the mend.
However, we must realize that the rate of recovery that we are seeing is not normal and likely cannot be maintained long-term. That said, as an investor looking out 5+ years I belive valuations in the equity market are still low and the potential remains for double-digit returns heading forward over a 5+ year horizon.
Posted in Investment News | 2 Comments »
Monday, October 13th, 2008
Why Do We Invest When We Have No Control?
Even during the most trying times for the market, it is important to understand why it is that we are investing our hard earned cash into public companies of which we have little to no control over.
It’s true. We are buying pieces of companies, in the form of common stock, that we have no control over the operations of the company.
Basically, we are saying “Here, you guys take my money to invest in your business and I will sit back and wait for you to do a good job so that I can get a return on my investment”. When we think of it this way, investing in common stock makes little sense – if any sense at all.
Many investors prefer to invest in their own businesses whereby they have control over the operations of the company, and thus, the outcomes of the business. This makes intuitive sense, but what we as dividend growth investors are trying to do is to produce constantly growing retirement income of the completely passive variety.
So What’s The Difference?
The major difference is that while we lack control of the companies that we buy stocks in, we also relieve ourselves of the responsibility of running those companies profitably. This creates a passive and growing income stream.
We all know that running a businesses takes a lot of time, skill, effort, and energy – as well as a little luck. This is time, energy and skill that most of us do not have. However, we can participate in the efforts of others by purchasing dividend growth stocks and reaping our small, but growing, dividends.
Work One Time, Get Paid Forever
Theoretically, and many times practically as well, we can input one unit of work and get paid forever. Indeed, our main goal as dividend growth investors is to work once (evaluating and purchasing a dividend growth stock) and get paid forever in continuous dividends…ideally with annual raises!
The title of this article states that our retirement income is on sale. While this is true, we do have to be very careful to do our due diligence in bear markets to pick out stocks that have been unjustly beaten down and whose dividends and future earnings are likely to increase.
Easier Diversification
While having control over one’s own business can be profitable and offers the ability to make changes to react to market conditions, it also concentrates the investment.
As much as we preach about diversification and asset allocation in our stock portfolios, it is easy to forget the need for diversification when we talk about our own businesses.
Investing in the stocks of dividend growing companies allows for the diversification of funds among several high quality companies that meet the requirements of our dividend growth model. This diversification will allow for multiple consistently growing income streams which is an ideal way to fund retirement.
Why Now?
The current market has given us dividend growth investors the opportunity to identify our favorite dividend growth stocks and purchase them (some at prices we have not seen in our lifetime).
I’m not calling a bottom for stocks here, but I am confident that we are closer to a bottom than we are to a top at this point. Regardless of the direction of the market tomorrow, there are stocks out there that have been unjustly beaten down and are offering consistent and even growing dividends.
For more on how to find these stocks, check out my article on how to choose dividend growth stocks and then stop by The Dividend Network for stock analysis from the top dividend bloggers on the internet.
Posted in Investor Education | 7 Comments »
Friday, October 10th, 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.
Obviously, this is one metric of many that will help guide you in your quest to buy quality dividend growth stocks.
Please see: How To Choose Dividend Growth Stocks . for additional learning.
Posted in Investor Education | 3 Comments »
Tuesday, October 7th, 2008
Evaluating the dividend payout ratio lets us focus on companies that have enough internal growth to give us those dividend increases that we want each year.
As we know, these dividend increases will help our portfolio income beat inflation over time and provide us with a growing income in retirement.
How To Calculate The Payout Ratio
The dividend payout ratio is calculated by dividing the dividend paid by the net income per share.
Dividend Paid/Net Income per Share = Dividend Payout Ratio
Why The Payout Ratio Is Important
For the most part, we should be looking for stocks that have a dividend payout ratio somewhere between 40-60%. This allows a good portion of the profits to be paid to the shareholder as well as allowing for some of the profits to be plowed back into the company to create more internal growth.
The higher the dividend payout ratio, the less profits are invested back into the business to create future growth. In our dividend growth strategy, we look for companies that invest back into the business in order to create more growth that will allow for another increase in the dividend.
Can Companies Pay out More Than They Earn
As we mentioned before, dividend payout ratios of greater than 100% are possible, but very difficult to sustain and significantly hamper the growth of the business.
In tough economies temporary increases in the dividend payout ratio can be common because it can be very damaging to a stock if the company suspends or lowers the dividend.
High yields may look appealing at first, but we must ensure that the dividend is both sustainable and able to grow.
Posted in Investment News | 9 Comments »
Tuesday, September 30th, 2008
Where To Start Your Research
When starting your research for dividend growth stocks, much of the work has already been done for us. We just need to know where to find it!
Start out by reviewing the Dividend Aristocrats or Dividend Achievers lists to identify a broad category of stocks that have consistent dividend growth.
Once you have identified a list of stocks using the dividend achievers list, it is time to narrow it down to a few of the best dividend growth stocks.
Sector Selection
A general rule of thumb for dividend growth investors is to select one or two stocks in different sectors, such as insurance, utilities, financials, telecom, etc., with the higher than average dividend yield and a recent dividend increase.
Many dividend growth investors will require that the dividend increase be within the past year, the more recent the better. Dividend growth investors are of the philosophy that an increase in a company’s dividend means that the company is healthy and its future prospects are solid. Therefore, the amount that the dividend is increased should also be taken into consideration.
Dividend Growth Rate
The amount that a dividend is increased on a year to year basis is called the dividend growth rate. The philosophy of dividend investors is that the higher the dividend growth rate, the higher the prospect for the stock to increase in value.
For instance, Sun Life Financial (SLF) has a dividend growth rate of approximately 20% over the past 5 years. Over that same time, the stock has doubled in value from $20.00 per share to over $40.00 per share. If you had purchased Sun Life Financial 5 years ago at $20.00 per share, with the current dividend rate of $1.07, your yield on the purchase price would be 5.4%.
Not only would one be receiving these healthy dividends this year, but one could reasonably expect to get a 20% raise next year!
This is the basis of dividend growth investing; to produce consistent and inflation hedged income.
Due to the fact that the dividend growth rate can play such a significant factor in the future value and income potential of the stock, it is suggested that the investor find a middle ground when choosing stocks for a dividend growth portfolio.
The middle ground should consist of:
1.) A reasonable current yield, compared to its peers and itself historically.
2.) A recent dividend increase combined with increased earnings
3.) A high dividend growth rate compared to the industry.
Stocks selected from Mergent’s Dividend Achievers that display these factors should provide a great starting point to a dividend growth portfolio.
With the recent turmoil in the markets, now is an especially great time to search for financial services companies and banks that have strong balance sheets and are well capitalized. Consumer staples and health care stocks are also viewed as potential safe havens and opportunity stocks in this type of market.
I’d be happy to hear any comments or questions regarding this strategy and I hope to have more detailed information up here in the near future.
Posted in Stock Studies | 21 Comments »
Saturday, July 12th, 2008
The Board of Directors of Colgate-Palmolive Company (NYSE: CL) declared quarterly cash dividends of $.40 per common share, payable on August 15, 2008, to shareholders of record on July 24, 2008.
For those of you looking for a dividend that is as close to certain as you can get, look no further as Colgate-Palmolive has paid uninterrupted dividends on its common stock since 1895.
Colgate on the Defense
With the turmoil that has been the stock markets in the past weeks and months, many investors (at least those who haven’t gone to 100% cash) are turning to defensive stocks to assist in preserving capital. With a Beta of just 0.31, Colgate (CL) is one of the least volatile dividend stocks on the market.
In addition to a healthy dividend and price stability (in relation to the market), Colgate also offers some excellent growth numbers for a company of such extreme size. Colgate boasts a Return on Assets (ROA) of 17.03 and a Return on Investment (ROI) of 29.07; both of which trump the industry numbers quite handily.
Colgate Dividend Data
With many dividend stocks struggling with earning this year, the management of the company’s dividend payout ratio is of particular importance. Colgate has a dividend payout ratio of just 43.4% of earnings, which will allow for some flexibility in earnings capacity without sacrificing the dividend rate in the short term. A dividend payout ratio of below 60% is a relatively conservative guideline for investing in dividend growth stocks.
When investing in a good dividend growth stock, one of the criteria that I use is to set a purchase price for a stock when its dividend yield is around 25-30% above the 5-year average dividend yield. Colgate’s 5-year average dividend yield is 1.88% and the current yield is 2.27% – a yield that is 20% higher than average.
Another criteria that I use is that the dividend growth rate must be greater than that of the S&P 500. Otherwise a dividend growth investor would be more prudent buying the entire index to mitigate risk. The dividend growth rate for the S&P 500 is currently at 11.0%, while Colgate features a dividend growth rate of over 14% – a healthy 3% points higher than the index.
Buy What You Know -Colgate
Unless you have been living under a rock for the past century, you will recognize Colgate-Palmolive as a leading global consumer products company. The company is very successful in its focused niche markets of Oral Care, Personal Care, Home Care and Pet Nutrition.
Colgate sells its products in over 200 countries and territories around the world under some of the world’s most recognized brand names as Colgate, Palmolive, Mennen, Softsoap, Irish Spring, Protex, Sorriso, Kolynos, Elmex, Tom’s of Maine, Ajax, Axion, Soupline, and Suavitel, as well as Hill’s Science Diet and Hill’s Prescription Diet.
Stock Summary
As investors looking at Colgate (CL), we have a stock that is quite a bit less volatile than the broader market with a beta of just 0.31, a greater than average dividend yield at 2.27% that is growing at a faster pace than the index. In addition, the company has features an excellent return on investment and wide array of well branded products that people still need to buy regardless of economic conditions.
Full Disclosure: The author does not own shares of Colgate-Palmolive at the time of writing.
Posted in Investment News | 4 Comments »
Wednesday, July 2nd, 2008
I have regularly touted that income in the form of increasing stock dividends, from companies with a track record of increasing their dividends, is a great way to build inflation protected passive income.
Investing For Yourself
A new article from Morningstar Columnist, Josh Peters CFA, indicates the same sentiment. In the article he makes a strong case for those of us who are engaged in the Dividend Investing strategy to invest ourselves and cut out the middleman (Broker, Advisor, or Fund Manager). If we develop a clear and focused strategy to invest in dividend paying common stocks that we are committed to understand, then the choice is clear.
Cut out the middleman!
Are Fund Fees Worth The Cost?
He suggests, as I do, that the role of the mutual fund is to prevent the amateur investor from making large mistakes. However, in return, the manager is compensated through fees and fund expenses that diminish the returns of the retail investor…you and me.
I do advocate professional management for sectors that I do not understand such as certain small caps and international offerings that I either can’t cover due to lack of time or because there is a lack of information available to me.
Diversify What You Don’t Understand
You might want to consider, as I have, the inclusion of an International Dividend ETF in order to add some global allocation to your asset mix.
There is no shame in admitting when you don’t have the expertise, information, or smarts to understand a stock or a market. Heck, people who invest professionally (as in for a living) can’t absorb enough information to master every market, so how can we amateur investors be expected to do so? The answer is…we can’t!
You should check out the remainder of the morningstar article, it does present some great points.
Here’s to money!
Posted in Investment News | 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 | 7 Comments »
