Sunday, June 21, 2015

Taking a Step Backwards



This past 12 months or so have been a year of learning. 

I stepped away from my photography hobby because of burn out. I just lost interest. I’m starting to get the interest back little by little. The picture above was me messing around with iPhone silhouettes. Just watching the sun go down and enjoying the light.

I also learned a lot about investing. My dividend growth portfolio will take a hit to income this year because I'm correcting mistakes make over the last couple of years. I'm taking a step backwards so that I can put the portfolio back on the right track.


One of my mistakes was buying high flying stocks. They had good trends going up and up - until I bought them. Then they’d turn south and keep heading south by as much as 40%! 

My biggest lesson here is to watch out for stocks setting new 52-week highs. Instead, be patient. The stocks will go on sale sooner rather than later. And, the nice thing about stocks going down is their yield goes up! Too many times I bought a high flying stock with a yield in the twos - 2.5% for example - only to see the stock go on sale and the yield increase to the threes! If only I had waited a handful of months!

Another important investing lesson is to graph the earnings per share and the dividend payment. Looking at lists of numbers on spreadsheets is fairly meaningless. Percent growth rates can look impressive but, those numbers take on a completely different meaning when graphed out.

Take a look at these five-year dividend and earnings graphs to see what I mean. Blue lines are quarterly earnings per share while the green lines are dividend payments.



Comcast (CMCSA) is the cable company everybody loves to hate but, few companies match its consistent earnings and dividend growth. 



National Oilwell Varco (NOV) and Helmerich & Payne (HP) are two energy stocks in my portfolio. Energy is on sale right now and one of these companies is on my buy list and the other isn’t. Can you tell which one? Hint, I’m buying for dividend income. NOV’s income has declined just as much as HP but, their income is still above their dividend payments while HP’s income is well below.





My last example is a former favorite and still a holding. Copa Airlines (CPA) has had some great trends when the only thing you look at is columns of numbers on a spreadsheet. But, once those numbers are put into a graph, they show their true ugliness. This is not the kind of stock I want to continue buying. They’ve recently reduced their dividend so I’ll probably sell this one.

Sunday, January 18, 2015

My Dividend Growth Portfolio 2014 Review

Background

I’m a dividend growth investor. That means I’m looking for a certain type of growth company that not only pays out a dividend, but the dividend will increase year after year. With the right mix of dividend yield and dividend growth, it’s possible to grow the yield to 10% on my original cost within 10 years.

What does this mean in real numbers? 

In July 2011 we rolled my wife’s 401k into an IRA. The beginning balance was $216,508. The goal of this portfolio is to generate a 10% yield in 10 years. 10% of $216,508 equals a dividend income of $21,651 by July 2021.

If the typical dividend yield is 2.5%, then how do we get to 10%?

It’s not enough that a company pays a dividend but, the dividend must grow every year.

We rolled the 401k into an IRA in July 2011 but, we didn’t start converting the cash into dividend growth stocks until August of 2012. The conversion was finally complete in 2013. At the end of 2013 the portfolio had a 2.6% average dividend yield.

With this late start, I will need to reach my 10% income goal in 8 years instead of 10. Starting from 2.6%, I will need to double my income two times - from 2.6% to 5% in the first four years and 5% to 10% in the second four years. 

We can use the rule of 72 to figure out how much the dividend needs to grow. 72 divided by 4 years results in a dividend growth rate of 18%. My portfolio will need to have an average dividend growth rate of 18% to double the income every 4 years.

This graph provides a good visual for what my goal trend like looks like and how well I’m doing (or not doing) to meet that goal.

Actual dividend income (light blue line) versus my dividend goal (dark blue line)



The graph looks really good up to 2014 but, my income may remain flat in 2015 due to replacing some high yield dividend companies over the past six months. INTC, COH, TIS and TGH were large parts of my portfolio in 2014 but, none had raised their dividends in the last 7 to 10 quarters. That’s grounds to be replaced. 

I finished selling off those companies in January 2015 and will be replacing them with companies in the hard hit energy and oil sectors or touched by the energy downturn - CPA, CMI, HP and NOV.

I finished 2014 with a dividend growth rate average of 16.5% and a yield on cost of 3.5%. With some of the changes I mentioned above, I should be able to increase my dividend growth rate to 19%. CMI is one of my two favorite stocks in the buy zone right now. I’m hoping the railroads will take a hit in stock price too so that I can buy more of my second favorite stock - UNP.

This chart shows actual dividend income results versus my target, as well as my current yield on cost - 3.5%.


Patience, my biggest lesson learned in 2014

Speaking of waiting to buy UNP, that’s my biggest lesson learned in 2014. I listened to those guys that tell you it’s better to be fully invested than to sit on the sidelines waiting for a stock to fall into a buy zone. 

There are two major problems with that theory. First, this theory leads you to believe it’s okay to buy high quality companies even when their prices are at or near 52 week highs. And second, buying into a company that’s at or near it’s highest stock price also means you are buying in at the lowest possible dividend yield.

When you buy stocks at their highs, they eventually fall. On several of my purchases, AAPL, CPA and HP are good examples. I watched stocks drop 30% to 40% or more right after making a sizable purchase. It didn’t upset me that I “lost” money on those buys. What upset me the most is that I left money on the table. I could have waited and bought many more shares at a much better price. Better yet, if I had waited for the stock to move off it's highs, my starting yield would be been 3% or 4% rather than 2.5%. A better starting yield is the best possible way to get a jump start on the 10% in 10 years goal.

I own stock in less than 20 companies but, I have over 50 high quality companies on my watch list. Every month some sector is out of favor so I always have three to five stocks at or below their 200 day average. These are my personal dogs of the dow and the companies I will consider buying when I have cash available.

Saturday, September 6, 2014

August 2014 Portfolio Review

My Portfolio Constitution says I will do these reviews twice a year. I might have to amend that to just once a year! I'm in maintenance mode. I've planted my seeds and now I'm watching them grow. I trim a little here and add a little fertilizer there. The portfolio is growing slow and steady. What should a write about?!

Let me start with a recap of my goal


  • The target dividend income is 10% yield on cost. The cost is $211,281 and so a 10% yield (or income) will be $21,128.
  • The starting date of this portfolio s the date we rolled my wife's 401(k) into an IRA - July 2011.
  • The target date is 10 years from the start date - July 2021.
  • So, my goal is to build $21,128 of dividend income by July 2021.
  • Put another way, the average yield for high quality companies is 2.5%. 2.5% of $211,281 is $5,282. In 5 years, I will need to double that amount to $10,500 and in 5 more years double it again to $21,128.

Earnings Per Share


Steadily increasing earnings per share (EPS) is often followed by steadily increasing share prices and dividend payments. I’m looking for companies that will double their earnings every 5 to 10 years.

Using the Rule of 72 as a rough guide for estimating an investment’s doubling time, 72 / 10 years = a minimum EPS growth rate target of 7.2%. The companies in my portfolio have future EPS growth rate estimates of 5% to 19%. The weighted portfolio average is 12% estimated annual EPS growth. No portfolio problems here.


Dividend Growth Rate


I’m looking for a combination of Yield and Dividend Growth Rate (DGR) that will provide a 10% yield on cost in about 10 years. If a starting yield is 2.5% on the day I buy a stock, then the dividend will need to double to 5% in 5 years and double again to 10% in 5 more years.

Using the Rule of 72 as a guide, 72 divided by 5 years tells me I need to look for a minimum DGR of 15%. The weighted portfolio DGR has improved from 16.8% to 17.9% and the Yield on Cost is up from 2.68% to 2.89%. This combination of yield and dividend growth rate will get me to a 10% yield on cost in about 9 years.

I will look to improve my holdings, specifically looking to improve my starting yield while maintaining the dividend growth rate. One way to do this is to sell off some of my Apple holdings and move a portion into McDonald's.

Apple has a nice run up these past few months and my portfolio is overweight in the stock. You'll notice too that Apple doesn't really fit into my DGR model. It's combination of Yield and DGR will provide a 10% yield on cost in about 17 years.

On the other hand, McDonald's should reach that same goal in 7 years!


Diversification


I plan to own about 20 stocks with no more than 15% of the portfolio in any one company. And no stock should contribute more than 10% of income. I have been selling some holdings lately that exceeded those numbers, such as Lorillard (LO), Coach (COH) and Apple (AAPL).

My wife’s IRA now has 15 stocks in five sectors. Last year, all of our holdings were Large Caps. I've since added some Small and Mid Cap holdings - Copa Airlines (CPA), Textainer Holdings (TGH), Orchids Paper Products (TIS) and AmTrust Financial Services (AFSI).

I've recently sold about 1/3 of my Apple (AAPL, Technology Sector) holdings and will use the cash to buy a mixture of McDonald's (MCD, Consumer Discretionary Sector), Helmerich & Payne (HP, Energy Sector) and BlackRock (BLK, Financial Sector) to bring still more diversification to my portfolio.


August 2014 Holdings


Monthly Income


The Monthly Dividend Income graph below shows how much dividend income varies from month to month.

One of the changes I made this year is to turn off automatic Dividend Reinvestment (DRiP). I now collect the dividends as cash. Once I accumulate $1000 or more than I choose which existing stock or new stock to invest it in.


Annual Income


The Annual Dividend Income graph below shows how I expect the income to grow over the years. The yellow line is a plot of my goal. The blue line is a plot of actual income. The 2014 goal is $6700. Actual income is estimated to be $7100, slightly ahead of schedule.



Wednesday, July 2, 2014

Does This Website Have a Purpose?

My fellow Scott Randolph asked me recently, “Whats the deal with this website? Does it have a purpose?”

Damn good question, Scott. I’ve been thinking the same thing myself for months and your question forces me to put some thoughts down onto paper.

This website started with posts of kids pictures, recipes, genealogy and such but, Facebook, Twitter, Pinterest, Snapchat and the like are faster and more fun than a blog post.

I tried turning this into a photography blog, and to jumpstart my creativity I did a 365 project. That's a project here a person takes at least one photo ever single day for a year. It certainly improved my creativity and thoughtfulness but, it also killed my desire to take any more photos. So I put the camera down for a few years.

Next, I tried turning the website into some sort of financial guide. I’ve made more than my share of investment mistakes but, now that I have a really good idea what direction to take, I’d like to share some my new found wisdom with my kids. My hope, like that of any parent, is that our kids avoid many of the mistakes we made. Unfortunately, I find writing about investments incredibly boring!

So, while my web log has turned into a cobweb log, I’ve been super busy with the wife, kids and family dog.

Skittles and I took an obedience class earlier this year. We had so much fun I’m planning on signing us up for agility classes in the fall.


Then in May I pulled out the camera gear for some family fun. Brian and Philip, my twin boys, played in a travel lacrosse team this summer. Watching the games was great fun but, even more so, I found that I love taking sports action shots!




Brianna, my daughter turned 16 in June and we took her to the Whitewater Center. Here are two of my favorite photos…







Trina and I celebrated our 25th wedding anniversary on June 24th. We spent a week with the kinds in the NC mountains, hiking and visiting waterfalls. 








I really enjoy nature photography but, you know what, I like action in my nature photography even more!





That’s what I’ve been up to for much of the past year but, back to Scott’s original question, does this website have a purpose?

Nope, not one bit, at least for the moment!