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A Winning Investment Strategy
 We all want to succeed in everything that we do, including investing in the stock market. Though I have no analytical data to back it up, I am convinced that most people will lose money in the stock market over their lifetime. So why do so few people succeed at investing? Could it be that an individual's desire to succeed is a significant reason for their failure.
When discussing investing with various people, the conversation always follows a similar track. Usually, one of these:
- The person will mention a few stocks they did well with, then upon probing will admit overall they were down and they are looking for a new strategy to follow.
- The person will make a broad statement like 'I've pulled everything out of the market it is just too risky.' When pressed they admit to losing money not only this time but at other times when they abruptly exited the market.
- The person will concede that after significant losses they turned their money over to a professional.
Obviously, there are some success stories, and some of them are even believable. As the result of the 2008 market downturn, many people are more comfortable admitting losses because they know they are not alone. When you are losing 10% a year while the market is going up 20% a year, its harder to fess-up since you feel you are the only one losing money.
Why do so few people succeed at investing?All the pieces to answer this question were presented above. People want to succeed, but don't know how. So they try to follow someone (or something) that appears to be succeeding. A friend at work, or a talking head on a business show mentions a stock or strategy that is out performing the market, and the investor jumps on board. Unfortunately, he or she is late to the party and the run-up either stalls or reverses. Fearful of a greater loss the investor sells out and moves to the next hot stock or strategy. Eventually, they permanently exit the market or turn their money over to a professional that may, or may not, improve on their performance.
A Winning Investment StrategyPeople do make money in the market, but it is not by following the talking heads or a tip from a friend. Long-term success in the market is based on a sound fundamental investing strategy that the investor is so confident in, that he or she will follow it even when the market is declining with no bottom in sight. For me, this is a value-based dividend growth strategy. My goal is to generate a higher dividend income than the previous month through the purchase of select dividend growth stocks. Here are some of the things I look for in an investment:
I. Long History Of Consecutive Dividend IncreasesOne indication that a company will continue to increase their dividends in the future, is a long history of consecutive dividend increases. Companies such as Genuine Parts Co. (GPC), Procter & Gamble Co. (PG), Emerson Electric (EMR), 3M Company (MMM) and Coca-Cola Company (KO) have all increased their dividends for more than 50 years.
II. Strong Free Cash FlowJust because a company has a history of increasing its dividend each year, does not mean it will continue to do so in the future. We can't know what management is thinking, but we can look at the financial statements for clues of the sustainability of the dividend payment.
Dividends are paid with cash, so the first place I look is at the company's ratio of dividends to free cash flow (free cash flow payout). As a general rule, I prefer a number less than 70%. Companies such as Microsoft Corporation (MSFT), International Business Machines Corp. (IBM) and Aflac Inc. (AFL) all have free cash flow payouts of 30% or less.
III. Low Debt To Total Capital InvestedThe ability to generate enough cash to cover the dividend is only one part of the cash puzzle. One must ask, 'Is the cash already spoken for?' One of the larger uses for cash is in servicing debt. As a measure of debt levels, I prefer a company to limit its debt to total capital to no more than 45%. Many companies, such as Johnson & Johnson (JNJ), Walgreen Co. (WAG), General Dynamics (GD) and ConocoPhillips Co. (COP), operate at levels below 35% of debt to total capital.
IV. Excellent Dividend FundamentalsNot to over-state the obvious, but the company needs to be a good dividend investment. Put another way its dividend, over time, should significantly out-perform "safer" investments to compensate the investor for the equity risk. Companies such as Exxon Mobil Corporation (XOM), Occidental Petroleum Corporation (OXY) and Wal-Mart Stores, Inc. (WMT) all have at least two of these key dividend metrics: a strong dividend growth rate, longevity of dividend growth, consistent high growth and a short period to match the yield on the 20 year treasury.
V. Trading At A Fair ValueOnce we find everything we are looking for in a great dividend stock, there is one final question - 'Is the stock trading at a fair value?' Given the emotional nature of the market, a stock can be fairly priced today, over-valued tomorrow and under-valued the next day. You need to know what you are willing to pay for a stock going in. This is the area I will sometimes compromise in by paying a little more for great dividend fundamentals, but I know my limit prior to placing a buy order.
A great football coach once said 'It’s not the will to win that matters – everyone has that. It’s the will to prepare to win that matters.' Investing success doesn't just happen, we must pursue it and engage it.
Full Disclosure: Long GPC, PG, EMR, MMM, KO, MSFT, AFL, JNJ, GD, COP, XOM, WMT in my Dividend Growth Portfolio. See a list of all my dividend growth holdings here.
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- Warning Signs of an Imminent Dividend Cut
- 7 Higher-Yielding Consumer Stocks To Build Your Yield
Tags: [GPC] [PG] [EMR] [MMM] [KO] [MSFT] [IBM] [AFL] [JNJ] [WAG] [GD] [COP] [XOM] [OXY] [WMT]
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Johnson & Johnson (JNJ) Dividend Stock Analysis
Linked here is a detailed quantitative analysis of Johnson & Johnson (JNJ). Below are some highlights from the above linked analysis:
Company Description: Johnson & Johnson is a leader in the pharmaceutical, medical device and consumer products industries.
Fair Value: In calculating fair value, I consider the NPV MMA Differential Fair Value along with these four calculations of fair value, see page 2 of the linked PDF for a detailed description:
1. Avg. High Yield Price
2. 20-Year DCF Price
3. Avg. P/E Price
4. Graham Number
JNJ is trading at a premium to all four valuations above. The stock is trading at a 47.4% premium to its calculated fair value of $58.16. JNJ did not earn any Stars in this section.
Dividend Analytical Data: In this section there are three possible Stars and three key metrics, see page 2 of the linked PDF for a detailed description:
1. Free Cash Flow Payout
2. Debt To Total Capital
3. Key Metrics
4. Dividend Growth Rate
5. Years of Div. Growth
6. Rolling 4-yr Div. > 15%
JNJ earned two Stars in this section for 2.) and 3.) above. The stock earned a Star as a result of its most recent Debt to Total Capital being less than 45%. JNJ earned a Star for having an acceptable score in at least two of the four Key Metrics measured. The company has paid a cash dividend to shareholders every year since 1944 and has increased its dividend payments for 51 consecutive years.
Dividend Income vs. MMA: Why would you assume the equity risk and invest in a dividend stock if you could earn a better return in a much less risky money market account (MMA) or Treasury bond? This section compares the earning ability of this stock with a high yield MMA. Two items are considered in this section, see page 2 of the linked PDF for a detailed description:
1. NPV MMA Diff.
2. Years to > MMA
JNJ earned a Star in this section for its NPV MMA Diff. of the $1,137. This amount is in excess of the $500 target I look for in a stock that has increased dividends as long as JNJ has. The stock's current yield of 3.02% exceeds the 2.71% estimated 20-year average MMA rate.
Memberships and Peers: JNJ is a member of the S&P 500, a Dividend Aristocrat, a member of the Broad Dividend Achievers™ Index and a Dividend Champion. The company's peer group includes: The AbbVie Inc. (ABBV) with a 3.5% yield, Eli Lilly & Co. (LLY) with a 3.5% yield and Bristol-Myers Squibb Company (BMY) with a 3.5% yield.
Conclusion: JNJ did not earn any Stars in the Fair Value section, earned two Stars in the Dividend Analytical Data section and earned one Star in the Dividend Income vs. MMA section for a total of three Stars. This quantitatively ranks JNJ as a 3-Star Hold stock.
Using my D4L-PreScreen.xls model, I determined the share price would need to increase to $117.37 before JNJ's NPV MMA Differential decreased to the $500 minimum that I look for in a stock with 51 years of consecutive dividend increases. At that price the stock would yield 2.2%.
Resetting the D4L-PreScreen.xls model and solving for the dividend growth rate needed to generate the target $500 NPV MMA Differential, the calculated rate is 4.2%. This dividend growth rate is below the 7.3% used in this analysis, thus providing a significant margin of safety. JNJ has a risk rating of 1.75 which classifies it as a Medium risk stock.
JNJ is uniquely situated in the Healthcare industry enjoying a diverse revenue base and an excellent research pipeline. The company's many advantages include: products that are largely immune from economic cycles, minimal reliance on any single product category (or customer), substantial financial resources and a significant global presence.
In June 2012, JNJ acquired Synthes (a Swiss company that makes skeletal fixation implants and instruments) for $19.7 billion. This deal should provide important operating synergies, drive gains in medical devices and is projected to be EPS accretive EPS by $0.10-$0.15 in 2013. In addition, new drugs such as Xarelto and Zytiga should provided needed growth in the pharmaceuticals sector.
JNJ is currently trading well above my calculated fair value of $58.16. Also, its free cash flow payout of 71% is slightly above my target maximum of 70%. As such, I will likely wait for a more opportune time before adding to my position.
Disclaimer: Material presented here is for informational purposes only. The above quantitative stock analysis, including the Star rating, is mechanically calculated and is based on historical information. The analysis assumes the stock will perform in the future as it has in the past. This is generally never true. Before buying or selling any stock you should do your own research and reach your own conclusion. See my Disclaimer for more information.
Full Disclosure: At the time of this writing, I was long in JNJ (5.0% of my Dividend Growth Portfolio) and long in ABBV. See a list of all my dividend growth holdings here.
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Tags: [JNJ] [ABBV] [LLY] [BMY]
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Weekly Links: May 19, 2013
Each Sunday I highlight the Carnivals I participated in over the past week, along with any notable articles that I came across. For those readers not familiar with carnivals, it's where personal finance bloggers submit their best articles of the week with one blog serving as the host. The entries are separated into various categories such as Investing, Credit, Debt, Budgeting, Frugality, Wealth Building, Money Management, Financial Planning, Insurance, Taxes, The Economy, Real Estate, et. al. Below are the carnivals that I participated in this week, along with a link to my article:
Articles I enjoyed reading included (in no particular order):
- The Dividend Guy presented Hasbro – Made For Fun? or Getting Tired of the Same Toys?
- Disciplined Approach to Investing presented A Tired Bull Market
- Dividend Growth Stocks Investing presented Reinvesting Dividends
The DIV-Net Featured Articles
Articles from D4L-News:
High Dividends Are Tempting, But Don't Overpay
The downside of such an influx of investor interest is that many of Wall Street’s more ubiquitous dividend payers are sitting at relatively high valuations — in many cases, despite showing lagging revenue and earnings growth rates. The following 10 dividend-paying giants who might be getting a little ahead of themselves...
3 Safe Divdend Stocks
If you’re searching for dividend yields greater than 5%, you’re probably going to need to wade into the deeper end of the pool. Companies with those kinds of yields are usually in sectors that have fallen on hard times (like shipping) or investments that are inherently more volatile, like mREITs. These riskier plays may not be the best bet for income investors at or nearing retirement, but they’re not necessarily bad for everyone. Here’s a look at three possible winners...
Top BDCs Dividend Stocks
Business development companies -- or BDCs -- will be marching in the earnings season parade next week. What makes BDCs so attractive? Well, let's start with the model. The typical BDC will provide financing to small- and medium-sized businesses that often can't line up conventional funding through major commercial banks. In return for taking on the risk, BDCs can ask for reasonably high interest payments and even some equity exposure. A recent Barron's article claims that the annual loan-loss rate for BDCs is just 0.7%. Here are some of the BDCs...
Cheapest Healthcare Dividend Stocks
My major screening focus goes to cheap stocks, stocks with a low price to earnings ratio. Below is a list of the 20 cheapest healthcare dividend stocks with a forward P/E of less than 15. Health care plans companies are currently the cheapest choice in the list. Two high-yields are part of the results and fifteen companies are recommended to buy. Here are my favorite stocks...
Buffett's Long-Term, High-Dividend
Although sitting on positions for long time periods can have some negative underlying drivers (i.e. a stock has turned into a loser and is now being held with hopes it will come in the black again), long-term holdings in a fund manager's portfolio can show great conviction and belief in the growth prospects of a company and its stock price. Let's look at five of Warren Buffett's holdings that have stayed in his portfolio for at least a year and offer substantially high dividend yields...
Click Here More Dividend News
There are some really good articles here, please take time and read a few of them.
D4L-Premium Services Updated:
The D4L-Dashboard, Analytical Reports, D4L-Data, and The D4L-Newsletter (May edition) have been updated and are available at the D4L-Premium Services web site at: [Click Here] Not a subscriber? [Click Here] for for more information on the benefits of these services, sample reports, pricing and subscription information.
(Photo: Sachin Ghodke)
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13 Dividend Stocks Delivering What's Important
For many investors, there is no clear conviction as to how they should invest. Today’s investments are guided by what was read yesterday, and the popular media is constantly churning out new and different ideas. Granted it makes for some “interesting” reads, but it certainty is no way to run a portfolio. Time has proven the positive correlation between consistently raising dividends and stock performance.
Below are some companies that understand the importance of growing their cash dividends:
United-Guardian, Inc. (UG) researches, develops, manufactures, and markets cosmetic ingredients, personal care products, pharmaceuticals, medical and health care products, and specialty industrial products. May 16th the company increased its semi-annual dividend 12% to $0.47 per share. The yield based on the new payout is 3.8%.
ACE Limited (ACE) provides a range of insurance and reinsurance products to insureds worldwide. May 16th the company increased its quarterly dividend 4% to $0.51 per share. The dividend is payable August 13, 2013 to shareholders of record July 23, 2013. The yield based on the new payout is 2.2%.
KeyCorp (KEY) operates as the holding company for KeyBank National Association that provides various banking services in the United States. May 16th the company increased its quarterly dividend 10% to $0.055 per share. The dividend is payable June 14, 2013 to holders of record of common shares as of the close of business on May 28, 2013. The yield based on the new payout is 2.1%.
Republic Bancorp, Inc. (RBCAA) provides banking services to individuals and businesses in the United States. May 15th the company increased its quarterly dividend 7% to $0.176 per share of Class A Common Stock. The dividend is payable July 19, 2013 to shareholders of record as of June 21, 2013. The yield based on the new payout is 3.2%.
Macy's, Inc. (M) operates stores and Internet Websites in the United States. It operates Macy's and Bloomingdale's stores and Websites that sell a range of merchandise. May 15th the company increased its quarterly dividend 25% to $0.25 per share. The dividend is payable July 1, 2013, to shareholders of record at the close of business on June 14, 2013. The yield based on the new payout is 2.1%.
Northrop Grumman Corporation (NOC) provides systems, products, and solutions in aerospace, electronics, information systems, and technical service areas to government and commercial customers worldwide. May 15th the company increased its quarterly dividend 11% to $0.61 per share. The dividend is payable June 12, 2013, to shareholders of record as of the close of business May 28, 2013. The yield based on the new payout is 3.1%.
United Fire Group, Inc. (UFCS) engages in writing property, casualty, and life insurance products; and selling fixed annuities in the United States. May 15th the company increased its quarterly dividend 20% to $0.18 per share. The dividend is payable June 14, 2013, for shareholders of record as of May 31, 2013. The yield based on the new payout is 2.4%.
Packaging Corporation of America (PKG) engages in the manufacture and sale of containerboard and corrugated packaging products for industrial and consumer markets in the United States. May 15th the company increased its quarterly dividend 28% to $0.40 per share. The dividend is payable July 15, 2013 to shareholders of record as of June 14, 2013. The yield based on the new payout is 3.2%.
Safeway Inc. (SWY) operates as a food and drug retailer in North America. May 14th the company increased its quarterly dividend 14% to $0.20 per share. The dividend is payable July 11, 2013 to stockholders of record at the close of business on June 20, 2013. The yield based on the new payout is 3.1%.
NiSource Inc. (NI) through its subsidiaries, provides natural gas, electricity, and other products and services. May 14th the company increased its quarterly dividend 4.2% to $0.25 per share. The dividend is payable Aug. 20, 2013, to stockholders of record at the close of business July 31, 2013. The yield based on the new payout is 3.3%.
The Clorox Company (CLX) manufactures and markets consumer and professional products worldwide. May 13th the company increased its quarterly dividend 11% to $0.71 per share. The dividend is payable on Aug. 9, 2013, to stockholders of record as of July 24, 2013. The yield based on the new payout is 3.4%.
Protective Life Corporation (PL) provides financial services primarily in the United States. May 13th the company increased its quarterly dividend 11% to $0.20 per share. The dividend is payable June 10, 2013 to share owners of record at the close of business on May 24, 2013. The yield based on the new payout is 2.0%.
Questar Corporation (STR) operates as an integrated natural gas company in the United States. May 10th the company increased its quarterly dividend 6% to $0.18 per share. The dividend is payable June 10, 2013, to shareholders of record on May 24, 2013. Questar has increased the dividend for the last 41 consecutive years. The yield based on the new payout is 2.9%.
Selecting stocks with increasing dividends is critical for an income growth strategy. The above list contains stocks that recently raised their dividends; it is not a list of recommend buys. As always, due diligence should be performed before buying or selling any stock. For a list of stocks with a long string of consecutive cash dividend increases, see this list.
Full Disclosure: No position in the aforementioned securities. See a list of all my dividend growth holdings here.
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- 4 Dividend Stocks To Avoid The Social Security Blues
Tags: [NOC] [M] [CLX] [SWY] [NI] [KEY] [RBCAA] [UG] [ACE] [UFCS] [PKG] [PL] [STR]
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T. Rowe Price Group Inc. (TROW) Dividend Stock Analysis
Linked here is a detailed quantitative analysis of T. Rowe Price Group Inc. (TROW). Below are some highlights from the above linked analysis:
Company Description: T. Rowe Price Group Inc. operates one of the largest no-load mutual fund complexes in the United States.
Fair Value: In calculating fair value, I consider the NPV MMA Differential Fair Value along with these four calculations of fair value, see page 2 of the linked PDF for a detailed description:
1. Avg. High Yield Price
2. 20-Year DCF Price
3. Avg. P/E Price
4. Graham Number
TROW is trading at a premium to all four valuations above. The stock is trading at a 8.9% premium to its calculated fair value of $69.03. TROW did not earn any Stars in this section.
Dividend Analytical Data: In this section there are three possible Stars and three key metrics, see page 2 of the linked PDF for a detailed description:
1. Free Cash Flow Payout
2. Debt To Total Capital
3. Key Metrics
4. Dividend Growth Rate
5. Years of Div. Growth
6. Rolling 4-yr Div. > 15%
TROW earned three Stars in this section for 1.), 2.) and 3.) above. A Star was earned since the Free Cash Flow payout ratio was less than 60% and there were no negative Free Cash Flows over the last 10 years. The stock earned a Star as a result of its most recent Debt to Total Capital being less than 45%. TROW earned a Star for having an acceptable score in at least two of the four Key Metrics measured. The company has paid a cash dividend to shareholders every year since 1986 and has increased its dividend payments for 26 consecutive years.
Dividend Income vs. MMA: Why would you assume the equity risk and invest in a dividend stock if you could earn a better return in a much less risky money market account (MMA) or Treasury bond? This section compares the earning ability of this stock with a high yield MMA. Two items are considered in this section, see page 2 of the linked PDF for a detailed description:
1. NPV MMA Diff.
2. Years to > MMA
TROW earned a Star in this section for its NPV MMA Diff. of the $1,045. This amount is in excess of the $900 target I look for in a stock that has increased dividends as long as TROW has. If TROW grows its dividend at 10.7% per year, it will take 4 years to equal a MMA yielding an estimated 20-year average rate of 2.71%. TROW earned a check for the Key Metric 'Years to >MMA' since its 4 years is less than the 5 year target.
Memberships and Peers: TROW is a member of the S&P 500, a Dividend Aristocrat, a member of the Broad Dividend Achievers™ Index and a Dividend Champion. The company's peer group includes: The Federated Investors (FII) with a 4.0% yield, Eaton Vance (EV) with a 1.9% yield and BlackRock Inc. (BLK) with a 2.4% yield.
Conclusion: TROW did not earn any Stars in the Fair Value section, earned three Stars in the Dividend Analytical Data section and earned one Star in the Dividend Income vs. MMA section for a total of four Stars. This quantitatively ranks TROW as a 4-Star Strong stock.
Using my D4L-PreScreen.xls model, I determined the share price would need to decrease to $79.87 before TROW's NPV MMA Differential increased to the $900 minimum that I look for in a stock with 26 years of consecutive dividend increases. At that price the stock would yield 2.0%.
Resetting the D4L-PreScreen.xls model and solving for the dividend growth rate needed to generate the target $900 NPV MMA Differential, the calculated rate is 10.2%. This dividend growth rate is below the 10.7% used in this analysis, thus providing a margin of safety. TROW has a risk rating of 1.00 which classifies it as a Low risk stock.
With a well-respected brand and a strong market share, TROW is well-positioned as an asset manager. It consistently produces net client inflows based on the relative performance of its funds. TROW's target-date retirement funds should continue to be an attractive option with baby boomers now that they have reached retirement age.
The company has been able to generate more stable results than its peers with significant invested assets in retirement accounts and variable-annuities. This focus provides a much more stable investment base with lower turnover. The stock's current valuation is 9% above my calculated fair value of $69.03. I am watching this stock closely, but unwilling to buy at the current yield.
Disclaimer: Material presented here is for informational purposes only. The above quantitative stock analysis, including the Star rating, is mechanically calculated and is based on historical information. The analysis assumes the stock will perform in the future as it has in the past. This is generally never true. Before buying or selling any stock you should do your own research and reach your own conclusion. See my Disclaimer for more information.
Full Disclosure: At the time of this writing, I held no position in TROW (0.0% of my Dividend Growth Portfolio). See a list of all my dividend growth holdings here.
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Tags: [TROW] [FII] [EV] [BLK]
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