The Latest Addition To My Dividend Growth Stock Portfolio

Last week I finally initiated a position in Simon Property Group (SPG). I’ve been watching this high-quality REIT closely but preferred to buy stocks of other companies during the last two years. Finally, it all came together: money burning in my pocket and pressure on SPG’s stock price which resulted in a high dividend yield and a compellingly attractive valuation. I think this is one of the only few low-risk, high-yield investment opportunities at the moment as the U.S. stock market continues to hit all-time highs.

The Business Sector

Sometimes a whole business sector faces challenges whether it’s a compliance issue, technological developments or fundamental questions about the business model. Some think this is the case with traditional retail. I don’t think a retail apocalypse is at hand and fears are overblown. Some REIT’s will just have a difficult time with struggling or bankrupt tenants and may cut their dividend because of a declining occupancy rate and their (increasing) debt load.

Why SPG Stands Out From The Rest

In their 2018 annual report we can read about their astounishing accomplishments:

“Through disciplined execution, our strategy has resulted in industry-leading results, year in and year out. Our Company has achieved growth and scale that few could have imagined possible and the following are just some of the impressive numbers to report over the last 25 years:
• Our annual funds from operations (“FFO”), an important industry measure, has grown from $150 million at the time of our IPO to more than $4.3 billion in 2018.
• We have increased the Company’s annual FFO generation by more than twenty- five times since our IPO.
• Total consolidated revenue has increased more than thirteen times from $424 million to approximately $5.7 billion.
• The gross market value of our portfolio has increased from $3.5 billion to more than $90 billion.
• From our IPO through year- end 2018, ownership of Simon Property Group (SPG) common stock provided a total return to shareholders of more than 2,750%, or a compound annual return of more than 14% compared to the S&P 500 compound annual return of 9% over the same period.”

Past results and averages are not the same as what the company will earn on the next dollar of capital it puts into the business. But it can be used as a guide especially for high-quality businesses or businesses run by high-quality management. Therefor I’m not too worried about the challenges of SPG. They’re able to gradually refinance their debt whether a recession sets in or not. And at low interest rates, because SPG is a S&P 500 A-rated company. They also have a very strong balance sheet with $7 billion in low-cost liquidity and $1.5 billion in retained cash flow. This gives SPG the ability to continuously invest in and improve their real estate portfolio, repay their debt, increase their dividend or even buyback shares. I believe the stock price has significantly come down without any real news with respect to the underlying business.

The Transaction

I bought 20 pieces of SPG at a price of $145.98. This means a P/AFFO slightly above 13. Their normal P/AFFO Ratio over 10 and 5 years is more or less 19. So I’m good on the valuation side. With purchasing SPG at this price I get a dividend yield of 5.75%. Their latest dividend raise was a small 2.4% from $2.05 to $2.10. SPG tends to increase their dividend twice a year.

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Their longer term dividend growth rate averages out to 10%. That’s very impressive! Their AFFO dividend payout ratio has only slightly increased from 67% to 72% over that same time frame. We can therefor conclude that the dividend is safely covered with funds from operations. During the Great Recession SPG lowered its dividend in 2009 and 2010 though. But over the last 10 years they’ve already managed to acquire the status of a Dividend Contender again. This shows what a quality business this is.

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There’s a fascinating text in the 2018 annual report of SPG about their dividend history. “We have paid more than $28 billion in dividends over our 25-year history as a public company, and at our current dividend rate, by the second quarter of 2019, we will have cumulatively paid more than $100.00 per share in dividends since our IPO. Especially considering that our IPO price was $22.25 per share—WOW!” That just sums it all up: WOW!

SPG is a high-quality REIT with a dividend yield of 5.75%, a payout ratio of 72% and a fortress-like balance sheet. With this buy I added $42 to my quarterly dividend income, which totals up to a FY $168. I’m very content with this new position. What’s not to like?

What did you buy lately? Please feel free to comment.

Happy investing!

 

 

October: A 72% Higher Dividend YoY!

Once again, I’m a bit behind with writing for this blog. Most of my time and energy went into my new job since October 1st. However, I’ve been watching the market closely during the last months. So with October, the last quarter sets in and we get a good idea of our annual progress in getting financial independent. It’s an exciting time to be a dividend growth investor. Valuations are through the roof and the most recent dividend growth numbers of many companies are lower than previous years. Once again, it all comes down to a thoughtful plan, sticking to it, and considering your progress towards attaining your goals. Let’s start right away!

The Numbers

My total dividend income for the month of October was $285.54. In this month I got several raises as compared to the dividend amounts in July. October included the usual small dividend increase of Realty Income (O), but also a 7% raise by Illinois Tool Works (ITW), a 12.5% higher dividend of JP Morgan (JPM), a 5% increase by Altria (MO) and a 2.6% dividend hike by Philip Morris (PM). My dividend income from my position in Altria (MO) also increased because of a larger position. This sums up to:

Bank of Nova Scotia (BNS) – $30.93

Iron Mountain (IRM) – $11.00

Illinois Tool Works (ITW) – $6.42

JP Morgan (JPM) – $5.40

Kimco Realty (KIM) – $70.00

Leggett & Platt (LEG) – $8.40

Altria (MO) – $81.48

Realty Income (O) – $3.86

Philip Morris (PM) – $31.59

Ventas (VTR) – $36.46

This makes the total amount of dividend income for October a nice $285.54. Just slightly below the $300 threshold. My dividend income for July 2019 was $275.02 so that’s an increase of a very small 4% QoQ. The total dividend for October 2018 was $166.05, so that’s an increase of 72% YoY. Just like I want to see it! Here is the graph YTD:

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Transactions during October

This month I sold my small position in Emerson Electric (EMR). This led to a 51% gain excluding a 4% annual dividend over 4 years. Let’s say, a gain of 65% in total. The dividend increases have been disappointing over this time frame. I think the company doensn’t have an unique position compared to their competitors. With this money I increased my position in Tanger Factory Outlets (SKT) with 29 stocks for $16.22 per share. I also bought an additional 14 stocks of Altria (MO) for a trading price of $46.12.

Looking Forward

My total dividend income YTD is $2,416.79. I consider this an unreal number compared to where I came from three years ago. The snowball is getting shape here. I would love to close this year passing the number of $3,000. How awesome would that be!

Please let me know which stocks you bought and whether October was a good month in terms of dividend income numbers. Thanks for reading.

Happy investing!

September Dividend Income: It Used To Be A Low-Growth Month. But Now +57% YoY!!!

The third quarter is in the books, folks. Time flies when you’re having fun. And while having fun, the compounding effect of investing and reinvesting our increasing dividends is getting bigger and bigger. That’s the real beauty of the dividend investing strategy. It will take care of itself, if and only if we select high-quality businesses. But how do we know whether a company is a high-quality business or not? Well, in 90% of the cases a 50-year streak of paying increasing dividends is a pretty good indicator to start with. It’s as simple as that. Let’s see how September worked out for me.

Income Numbers

The amount of dividend income for month 2019/09 was $153.28. In this month I got raises in dividend income from Bank of America (BAC), Cummins (CMI), Norfolk Southern (NSC), Realty Income (O), Stanley Black & Decker (SWK) and Union Pacific (UNP). That’s quite a list, don’t you think? I also got my first payment by Wells Fargo (WFC).

BAC paid me 30% more than three months ago. Wow! The payment by CMI was 15% higher in comparison with June this year. NSC gave me an extra 9.30% this month. O rewarded me with the traditional, but still very welcome small hike of 0.2%, whereas SWK increased their dividend with 4.5%. This month also included the second dividend raise by UNP, a nice 10.1% increase. A very good month, imho.

Breakdown of Dividend Income

My dividend income of $192.92 for this month was generated by:

Bank of America (BAC) – $7.02

BlackRock (BLK) – $13.20

Cummins (CMI) – $13.11

Emerson Electric (EMR) – $4.90

3M (MMM) – $37.44

Norfolk Southern (NSC) – $5.64

Realty Income (O) – $3.85

PepsiCo (PEP) – $8.60

Southern Company (SO) – $21.70

Stanley Black & Decker (SWK) – $8.28

Union Pacific (UNP) – $5.82

Wells Fargo (WFC) – $13.77

Exxon Mobil (XOM) – $49.59

Progress

My passive income for the month of June 2019 was $192.92. That means an increase of 26% QoQ; that’s pretty significant for my lowest month of every quarter. This month is now really getting somewhere. The progress YoY is even more meaningful; my dividend income for September last year was $122.98. So that’s an awesome increase of 57% YoY. ME LIKE! Let’s look at the graph YTD:

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Buys In September

During this month I bought 9 shares of Johnson & Johnson (JNJ) for a price of $128.22. You can read more about this purchase in my previous article. It still trades at an attractive valuation with a P/E of 15 and a dividend yield of 2.90%.

Dividend Income YTD 2019

Including this month I collected a nice $2,131.25 YTD. My total dividend income in 2018 was $1,793.09. It looks like I’m going to close the year with a FY dividend income just shy of $3,000. Too bad I won’t cross that mark. I really like passing those psychological meaningful round numbers. But that would still imply an increase in FY dividend income of 65% YoY. I could live with that. 😎

Thanks for stopping by and feel free to comment.

Happy investing!

October 2019 Buy Candidates

The Q3 reporting season will really get underway in mid-October. I’m always looking forward to this exciting time. First of all, you get an update on the business performance of the companies you own. Secondly, there’s always a good business underperforming relative to the short-term oriented market expectations which create attractive buy opportunities.

Last year, there was a fantastic opportunity to pick up a great company like Starbucks (SBUX) for a price around $50, which was equal to a P/E of 20 and a dividend yield of 2.70% at that time. Right now, it trades around $90, a P/E of 31 and a dvidend yield of 1.60%. I was able to benefit from the opportuinty in October last year, because I had some dry powder to invest in SBUX.

There’s no doubt about the strength of the U.S. economy at the moment, especially relative to the economies in Europe. But we also see some signs of a slowing economy for several quarters in a row. It’s very likely that some companies will report a large revenues and/or earning miss with current market conditions; and by that just scaring the hell out of this market. That’s why I’m considering to wait for the earnings season and buy stocks of companies that reported an unexpected miss.

Stocks which look attractive to me at this moment are Johnson & Johnson (JNJ), Altria (MO) and Simon Properties Group (SPG). Since yesterday I have a subscription to FastGraphs so I decided to post some screenshots. I’m planning to use these screenshots more frequently on my blog.

Johnson & Johnson (JNJ)

I just initiated a position in this company and am very eager to buy more shares. You can read more about this purchase right here. The price has stayed in the price range $127-132 in the last two weeks which comes down to a forward P/E of 15 and a dividend yield of 2.95%. Based on their average P/E ratio over 10 years the company is fairly valued. The average dividend growth rate over 10 years is 7%. That means a nice double of their dividend in 10 years using the 72-rule. Still, their dividend payout ratio remains attractively low at 44%. Oh yes, before I forget: J&J has increased their dividend for 56 following years which makes the company a true Dividend King.

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Altria (MO)

My position in this tobacco stock is already meaningful in comparison with my other stock positions. I currently own 97 shares for an average buy price of $53.88. It trades around $40 at the moment; that’s 25% lower and therefor an interesting buy candidate. MO has a streak of 49 years increasing their dividend, just year after year. The P/E ratio is less than 10 and a dividend yield of more than 8.3%! This means the business is historically very cheap and the market isn’t expecting anything good from this company right now.

The tobacco industry has had some negative media attention, because people have died from severe lung illnesses linked to vaping. Some questions still remain to be answered regarding these deaths though. I think the political and media pressure isn’t likely to go away any time soon. But hey, if there’s one company that knows how to deal with laws and regulations and find a workable solution for all parties (well, except for the addicted individuals maybe…) it’s Altria. Besides let’s not forget the government is reaping financial gains of the tobacco industry, whether it’s the traditional cigarretes or vaping products.

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Simon Property Group (SPG)

This high-quality REIT is here for another turn, just like in September it’s also a potential buy in October. They offer a 5.3% dividend yield and trade at an historically low AFFO of 14.5. Their dividend growth rate over 10 years sits around 10%. During the Great Recession SPG lowered its dividend in 2009 and 2010 though. They’ve already acquired the status of a Dividend Contender again. Their AFFO dividend payout ratio has increased from 67% to 71% over 10 years. This shows what a quality business this is. I’m not worried about their debt as SPG is able to refinance their debt at even lower interest rates than right now.

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These are my ideas for October if I’m mentally not strong enough to wait for the next earnings reports ☺️. What are you thinking of? Do you plan to save any extras to take advantage of price declines in the upcoming earnings round mid-October? Do you like the screenshots of FastGraphs?

Thanks for reading and please feel free to comment.

Happy investing!

Mental Models: Anchoring Bias

The investing community is well-known with all kinds of mental models which influence our decision-making and therefor our investing successes and failures. Charlie Munger eloquently introduced the concept of mental models and cognitive biases to investors in the 1990’s. During my years of investing I’ve read quite a lot about cognitive biases. I think we all did. Speaking for myself, I read and understand the impact, occurence and consequences of cognitive biases. But I‘m still an amateur in recognizing them in real-life and taking actions to prevent myself from making irrational decisions. One of my all-time pitfalls is anchoring bias.

What Is Anchoring Bias?

Anchoring is a cognitive bias that describes the common human tendency to rely too heavily on the first piece of information offered (the “anchor”) when making decisions. Once an anchor is set, subsequent judgments are made by adjusting away from that anchor, and there is a bias toward interpreting other information relative to the anchor.

Checking 52-week Lows And Highs

Just like most investors I selected different companies as “must haves” for my dividend stocks portfolio. My selection criteria are fundamentals like valuation multiples, dividend yields, payout ratios and growth rates of revenues, earnings and dividend. It’s a list of 25 to 30 businesses qualified from dividend contenders to dividend kings. The majority of these companies currently trade at a P/E of or higher than 20. I’m talking about Accenture (ACN), Automatic Data Processing (ADP), Home Depot (HD), McDonalds (MCD) and Microsoft (MSFT) for example. All high-quality businesses trading at high valuation multiples.

Several days a week I check the trading prices of the companies I selected. During my weekly run-through of companies and their market prices I automatically compare their current price with their 52-week lows and 52-week highs. This has become my proxy for determining if a selected company is an interesting pick or not. I know this is anchoring bias at work, because the 52-week low is implicitly my reference point for qualifying a business as cheap and the 52-week high as expensive. But that reference point is actually, in several ways, quite meaningless. Let me explain along three lines.

Price itself is no actionable information. As Buffett said: “Price is what you pay. Value is what you get.” The gap between these two is valuable information. Scrolling the list of companies and their trading prices is maybe fun to do on a Saturday night while hot girls are twerking in your local club, but the price alone is not a good determinant for whatever decision; price holds no value. 

Valuation is a spectrum. A company is undervalued or reasonably valued within a certain price range. Let’s put it simple: a stock is undervalued between $10-13 and reasonably valued at $14-15 if you think the fair value is $15. Of course multiple principles and metrics do apply such as which margin of safety you’d like to have, the debt ratios, dividend yield and free cash flow to name a few. Pinpointing on a random trading price such as a 52-week low leads to a false sense of accuracy. The stock in the simplified example above is a good buy at $10, but also at a price of $11. The use of a bandwith of prices, always relative to fair value, is a better indicator to buy a stock or not. In other words, the stock is a buy within a buy zone, a certain price range. As Keynes strikingly stated: “It’s better to be roughly right than precisely wrong”.

The stock price in relation to its 52-week low or high does say something about the current mood of Mr. Market. Waiting for the price to drop to the level of Mr. Market’s most depressive day during the last 52 weeks means you think you’re able to time the market. Like I wrote about the mental models and cognitive biases above: I read and know timing the market is impossible to do, but my actions in real-life prove it’s difficult for me to act in that way. So again, the reference point of the 52-week low is meaningless. That specific price wasn’t knowable or rational in advance. “Mr. Market is there to serve you, not to guide you” is a famous quote by Warren Buffett.

A Real-Life Example: Fasten Your Seatbelts

At the end of 2015 I had my eyes on Boeing (BA), because of their attractive dividend yield, large order book and low valuation multiple. Prospects were rosy for this company. The stock price went sideways for a couple of months within the price range of $130-140. During a short period of time in 2016 it even traded for as low as $115, a P/E of 15 and a dividend yield of 3.70% in other words, undoubtedly cheap. See the graph below.

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But I decided to sit on my hands, and wait till it hit $100. Why? “The beauty is, with $1,000 I can exactly buy 10 shares. Nice round numbers, 10 pieces of $100 each makes $1,000.” Sounds like a strategy right? 🙁 But the thing is, the price never dropped that low. In 2,5 years it went straight to $420, with one big price decline, as you can see in the graph, hitting $300. Opportunity missed at $115 you may think. Well, that’s for sure. But I also missed it at $125, $150, $200, $250 and even at $300. Let’s keep it simple:

I MISSED THIS OPPORTUNITY FOR THREE YEARS. 😩

I remember that run-up in price like yesterday. My thoughts were the price would certainly come down to $115 again. When it hit $150 in no time I had missed a $35 profit or 23% a share. “I can’t buy this stock right now, no way. That would be insane.” I promised myself to immediately buy shares, when the price dips back to 130. Then it went up all the way to $200. Hey, that’s a 75% profit in comparison with my psychological anchor of $115. “It wouldn’t be rational to buy it at this price. Let’s wait for the next price correction and it trades at $175. At that price, I’ll be all over it.” The stock price easily rose to $300 within six months. But the shareholder returns didn’t stop there. Management of Boeing (BA) declared one dividend raise after another. In February 2016 the quarterly dividend was $1.09. In the same month, but only two years later the quarterly dividend was raised to $1.72!

You can see how wanting an extra $15 dollar discount on every share ($115 – $100) has eventually cost me an unrealized profit of more or less $285 (400 – 115) and missing a yield on cost of more than 7% (4 * 2.055)/115. Not good…

Conclusions

If you’re going down the wrong path, it’s likely that the next decision to turn left or right isn’t a good decision either. What I mean by that is: a dominant focus on market prices with investing leads in many cases to more irrational behaviour. Holding on to low trading prices in the past isn’t a good buy strategy as no one is capable of timing the market. To wait for a further price decrease, is a risky thing to do if the business is significantly undervalued already. I’ve missed many investing opportunities by wanting another 10% discount to fair value or wanting a buy price closer to the 52-week low. Boeing (BA) is just one of them. I can think of Lockheed Martin (LMT), Nike (NKE), Parkin Haniffin (PF) and T. Rowe Price (TROW).

Although I have done my homework on many stocks and looked into their fundamentals as good as I can, I’m still too much price-oriented. Do you recognize this? What do you do to minimize your anchoring bias?

Happy investing!

Yes, I Finally Bought This Dividend King 👊🤘🏾🥂

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That’s how excited I felt when I bought shares of this fantastic business two weeks ago. It was somehow inevitable to buy shares of this dividend king and own it for a very, very long time. For three years I’ve watched the share price going up and down. But finally I laid my hands on this one. I’m talking about Johnson & Johnson (JNJ). The company with 135,000 employees who serve more than 1 billion patients each day.

I bought 9 stocks of Johnson & Johnson at a price of $128.22. At this price the stock yields 2.98%. They’re paying me $0.95 per quarter. So 9 shares equals a yearly $34.20. That’s certainly a nice yield and amount to begin with. It’s below my preferred step-in-yield of 4%, but J&J screams quality all over the place. So a lower yield is fine with me.

Their EPS (ttm) was $6.02 which means I bought the stock at a P/E (ttm) of 21.3 which seems on the high side. But J&J is also trading at approximately 15 times FY2019 earnings estimates of $8.60 per share. That’s more like a reasonable P/E.

They’ve increased their dividends for 57 in a row, which makes them a true dividend king. Another fun fact: JNJ has a streak of 35 consecutive years of adjusted operational earnings growth. Man, this is a high-quality business! In fact, the company is one of the only two companies with a AAA credit rating, the other one being Microsoft (MSFT). Their latest dividend raise was still a nice 5.6%. The 5-year yield on cost of JNJ sits around 3.85% according to GuruFocus.

The dividend payout ratio based on analysts consensus of earnings of $8.60 in 2019 and a ftm dividend of $3.80 comes down to 44%. This gives the company enough opportunities to continue increasing their dividends in the future. Over 20 years, they’ve managed to only increase their payout ratio about 10 percentage points. Talking about value creation and capital allocation! Many large and old corporations get inefficient along the way; they miss the boat, because they took things for granted for too long. But not with this giant: 25% of sales come from products launched in the past 5 years. That’s quite an achievement for such an established company.

GuruFocus states that the current return on capital (Joel Greenblatt) was 110.35%. This means the management of JNJ creates tremendous value for its shareholders. Their RoC is even ranked higher than 95% of the 1011 companies in the Drug Manufacturers industry. That is beyond comprehension, especially for such a large corporation. As a dividend growth investor I like dividend reliability and dividend growth. But, I also like to buy shares of better-than-average companies trading at below-average valuations. Buying JNJ at a forward P/E of 15, a RoC above 100% and a dividend yield of 3% means we’re into something good, folks.

In December 2018 the Board of Directors also announced they had authorized the repurchase of up to $5 billion of the company’s common stock.

I’m very excited about this purchase. It’s a new position for me and I will be watching the stock price closely to buy even more shares. The earnings streams are durable, reliable and stable because of their business diversification. Just like you want with a recession coming our way. J&J has been around for more than 130 years, so they weathered a countless number of economic and market cycles. I’m confident they will also ride this one brilliantly.

What did you buy lately and have you considered buying shares of JNJ?

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Watchlist For September 2019

After publishing my August results in terms of dividend income and growth figures, I decided to write down my watchlist for September. Many stocks appear to be overvalued at the moment, especially when you consider their most recent growth rates of revenues and earnings. But if you look closer, then you’re always able to discover some high-quality businesses trading at attractive valuation numbers. Here’s my shortlist:

Johnson & Johnson (JNJ): this one needs no introduction in the dividend investing community. Although the P/E seems to be on the high side, the forward P/E of 15 looks very attractive. Buying this beauty for a price below $130 immediately gives you a nice dividend yield to start with: 3%. Their latest dividend increase was 5.6% and I think management is targeting for such a dividend growth rate in the near future. There’s nothing wrong with that, while cruising through the next economic recession. Besides, they’ve increased their dividends for 56 years in a row; with this company in our portfolios, we’ll sleep well at night. I’ve always considered my portfolio as incomplete without JNJ. Adding this wonderful business to my nest with eggs means some extra dividend income in “my lower income” months. That would be nice.

Simon Property Group (SPG): another REIT? Yes, but one of the best, just like Realty Income (O). I don’t think a retail apocalypse is at hand. Look where Target (T) and Walmart (WMT) are trading at the moment in comparison to, let’s say, two years ago. I’m confident SPG will continue to do just fine in this low-interest environment and during the looming recession. They have a strong balance sheet and will also be able to refinance some of their debt if interest rates stay low. The extra cash could be used to ramp up their share buyback program. SPG also has a credit rating of A or likewise from other credit rating agencies. Their most recent dividend increase was 2.5%. SPG has a streak of 9 years increasing their dividend. This quality name trades at a high 5.5% dividend yield at the moment. Initiating a position in this company increases the amount of money I receive in the months with my highest dividend income.

Other candidates would be Abbvie (ABBV), Altria (MO) and Exxon Mobil (XOM). This would mean increasing my position, which doesn’t feel like the right thing to do as I consider these positions already full positions. Especially relative to other positions in my portfolio. I’m also checking out the big Canadian banks. Talking about steady compounders.

What are you up to? Which names are you looking at? And are you planning to add to or initiate a new position?

Please let me know.

Happy investing!