For the past month, I have been preparing the manuscript for THE TOP 40 DIVIDEND STOCKS FOR 2011. The process proceeds along two parallel paths:
--The screening and selection process for the Top 40 stocks themselves.
--The writing (or rewriting) of the text.
One significant change in the text next year is that I am adding a chapter on the role of dividend stocks in funding retirement. This new chapter is based on my five-article series on Financing Retirement that appeared here earlier this year. The series was very popular and generated significant comments. To convert the articles into a Chapter for THE TOP 40, I am rearranging and condensing the material. I am also working in new or refined concepts that that came up in the comments and in my responses to those comments.
I am also making textual changes to emphasize that the e-book is about dividend growth investing. The subtitle next year will be How to Accumulate Wealth or Generate Income from Dividend-Growth Stocks. References in the text to "Sensible Dividend Investors" are being changed to "Dividend Growth Investors." The e-book has always been about dividend growth investing (as opposed to, say, investing in preferred shares, whose payout rates do not grow). Now the text will be more consistent in reflecting that.
On the stock-selection side, I again this year started out with about 700 stocks. (I collect references to and recommendations of dividend stocks throughout the year.) I am about two-thirds done with paring this starting list down to the real contenders. I do this by applying several minimal requirements regarding yield, consistency of raising dividends, and the like. That will get the list down to around 200 stocks. Then another round of screening will pare the list further to the 75 or so stocks that actually have a realistic chance of being one of the Top 40.
I am aiming for a publication date in January. Some magazine articles or special issues about investing in 2011 are already hitting the shelves in stores. But I like to wait for the current year to end so that I can use full-year 2010 data in my analyses.
I will keep you posted on the progress of THE TOP 40 DIVIDEND STOCKS FOR 2011: How to Accumulate Wealth or Generate Income from Dividend-Growth Stocks every few weeks until the publication date.
Thursday, October 28, 2010
Thursday, October 14, 2010
Yield on Cost: How It Works
An important concept in income investing is yield on cost, but it is often misunderstood. Let’s look under the hood.
The basic idea is easy: Yield on cost is the income yield, right now, on money that you invested 10 minutes ago, a few months ago, or 10 years ago. It is determined by this simple formula:
Yield on Cost = Past 12 Months Income / Price You Paid.
I use the past 12 months’ income in this formula, because it is the only income we are sure about. (“Indicated” yield, based on the expected continuation of the most recent dividend payout, is also often used. I explain the nuances at the end of the article.)
Here’s an example taken from the latest Portfolio Review of my illustrative Dividend Portfolio. The review was conducted in August (read about it in this article: “Portfolio Forensics”), so the “Price Now” number is out of date, but it is perfect for illustration.
Stock MCD (McDonald's)
Date Bought 4/30/08 and 3/30/09
Price When Bought $60.06 and $53.93
Price Now $71.70
Price Return 19% and 32%
Current Yield 3.1%
Yield on Cost 3.7% and 4.1%
Action to Take Hold
You can see that I purchased McDonalds twice, in April 2008 and again in March 2009. The “Current Yield” shows MCD’s yield at the time of the review, based upon its price then. Note that it is the same for both purchases. That’s because current yield is based on current price. There's only one current price.
Current Yield = Past 12 Months Income / Current Price
In contrast, the “Yield on Cost” shows two yields, one for each purchase. That’s because yield on cost is based on the price you paid, not what the stock is selling for today. Note how my first purchase (2008) is now yielding 3.7%, while my second purchase (2009) is yielding even more, 4.1%. That is because the price went down between my two purchases. Each of the two purchases of MCD pays out the same dividend per share, obviously. But when you convert that dollar number into a percentage yield on cost, the divisor is different for each purchase, hence there are two yields on cost. The only way they would be identical is if the price had been identical when I made each of the two purchases.
This simple example allows me to illustrate several bedrock principles of dividend growth investing.
Each time the dividend increases, your yield on cost goes up. I went back and checked the then-current yield of MCD on the dates I made the two purchases. In 2008, it was $1.875 / $60.06 = 3.1%. In 2009, it was 1.75 / 53.93 = 3.2%. (Don’t be misled into thinking MCD lowered its dividend from 2008 to 2009. At the beginning of 2008, MCD switched from a single annual dividend to four quarterly dividends per year. The 2008 calculation “caught” an extra quarter of dividends, namely the first quarterly payment in March 2008.) Because of MCD’s annual dividend increases, my yield on cost on the two purchases has risen from 3.1% to 3.7% for the first purchase, and from 3.2% to 4.1% for the second purchase. The increase in yield on cost is a mathematical certainty if the dividend is increased, because the divisor (the price you paid) remains the same for as long as you own the stock.
Yield on cost is a measure of current performance, not past performance. Some people feel that yield on cost is a backwards-looking measure. That is incorrect. Because it is based on the most recent 12 months’ dividend payout—the last annual amount that we know for sure—yield on cost is a current measure of performance. Of course, today’s yield on cost “got there” because of past dividend increases, but it is a current performance metric.
Yield on cost is directly comparable to a bond’s yield. Bonds, as we know, are fixed-income investments. You pay $x for the bond, and its yield is stated and set for the term of the bond. It is a contractual obligation of the bond issuer, to whom you have lent money by buying the bond. So if you bought a bond yielding 4% in 2008, it is still yielding 4% to you. It will always yield 4% to you. It may pay a different yield to someone who buys it on the bond market today (because its price may have changed), but that has no impact on its yield to you. Its yield on cost will always equal its yield on the day you bought it.
Yield on cost can be considered to be your “personal” yield on a dividend-paying stock. It is dependent on the price you paid. The current yield stated in the newspaper or on Yahoo or Morningstar applies to someone who purchases the stock today. It is irrelevant to your yield on cost.
The dividend increases in a dividend-growth stock can cause its yield to surpass that of a bond which may have started out ahead. As just stated, if you buy a bond yielding 4% and hold it, it will always yield 4% to you. But the increasing dividends of a dividend-growth stock will cause its yield on cost—your personal yield—to inexorably climb, often reaching and then surpassing the annual income on a bond that originally paid more. In the year following my 2008 purchase of MCD, it paid $1.75 per share in dividends, or 2.9% based on my purchase price. In the past 12 months, it has paid me $2.20, or 3.7%. That’s a 26% increase in dollars in just a year. Looking ahead, MCD has already announced an increase in its dividend for the fourth quarter of this year (from $0.55 to $0.61) an 11% hike that will raise the dollars to me in the next 12 months to $2.44, for a yield on cost of 4.1% on my 2008 purchase. (This is the forward-looking “indicated” yield on cost; see the last paragraph of this article.)
Price and initial yield matter. My 2008 purchase at $60.06 had sunk to $53.93 by the time of my second purchase in 2009. Why would I buy more of a sinking stock? Because it was a better deal--a classic value-investing concept. I had long-term faith in McDonald’s the company. I still do. I wasn’t thrilled that its price drop had cost me 10% in capital losses. But I didn’t plan to sell it, and in dividend growth investing one focuses on the dividend stream. In the year between the two purchases, MCD had jacked up its dividend from $1.50 in calendar 2007 to $1.625 in 2008 (an 8% jump), and it would jack it up another 26% in 2009 to $2.05. I could not have expected that magnitude of increase, of course, but I certainly expected an increase—after all, MCD had been raising its dividend for 32 consecutive years.
Yield on cost and current yield gradually diverge from each other. If a stock’s price increases at exactly the same rate that the company increases the dividend each year, the current yield won’t budge. This fakes out some people, who equate yield on cost to current yield. As we have seen, they are quite different, as the yield on cost rises with each dividend increase. Some dividend-growth investors believe the increasing dividends are themselves a major reason that dividend-growth stocks tend to wallop all stocks in total return. The reasoning is that if the price decreases, the current yield increases, making the stock more attractive to income investors, who pile into the stock and drive its price back up—so the stock’s price tends to rise along with its dividend. It is not unusual to see a stock’s current yield stay pretty much the same year after year, even though its dividend is raised each year. The dividend increases are matched by approximately equal percentage increases in the price of the stock, so mathematically the current yield stays the same. MCD’s current yield is 2.9%, and its indicated current yield is 3.2%, both in the same range as when I bought it in 2008 and 2009. But my yields on cost, as already explained, are much higher.
If you don’t separate out new purchases from old ones, your “blended” yield on cost will often go down with a new purchase. A new purchase at, say, 3.1% current yield, when combined with an old purchase at, say, 4.1% yield on cost, will make the combined yield on cost lower. (At the moment of purchase, yield on cost and current yield are identical.) That’s why I track each purchase separately. It makes clear what is really happening: The new purchase has not diminished the yield on cost of a purchase made years ago. That never happens. What does happen is that the yield on cost of the original purchase continues to march upwards, while the new purchase starts at its current yield on the day of purchase, then commences its own upward march when the next dividend increase is declared.
Finally, a couple of points about the basic formulas.
(1) The formula for yield on cost could be Yield on Cost = (Last Quarter’s Dividends x 4) / Price You Paid. That formula differs from the one stated at the beginning of this article only in that it projects the current dividend payout rate forward (without presuming an increase). The proper name for this is “indicated” yield on cost.
(2) A similar change can be made in the formula for current yield, producing the “indicated” current yield.
The basic idea is easy: Yield on cost is the income yield, right now, on money that you invested 10 minutes ago, a few months ago, or 10 years ago. It is determined by this simple formula:
Yield on Cost = Past 12 Months Income / Price You Paid.
I use the past 12 months’ income in this formula, because it is the only income we are sure about. (“Indicated” yield, based on the expected continuation of the most recent dividend payout, is also often used. I explain the nuances at the end of the article.)
Here’s an example taken from the latest Portfolio Review of my illustrative Dividend Portfolio. The review was conducted in August (read about it in this article: “Portfolio Forensics”), so the “Price Now” number is out of date, but it is perfect for illustration.
Stock MCD (McDonald's)
Date Bought 4/30/08 and 3/30/09
Price When Bought $60.06 and $53.93
Price Now $71.70
Price Return 19% and 32%
Current Yield 3.1%
Yield on Cost 3.7% and 4.1%
Action to Take Hold
You can see that I purchased McDonalds twice, in April 2008 and again in March 2009. The “Current Yield” shows MCD’s yield at the time of the review, based upon its price then. Note that it is the same for both purchases. That’s because current yield is based on current price. There's only one current price.
Current Yield = Past 12 Months Income / Current Price
In contrast, the “Yield on Cost” shows two yields, one for each purchase. That’s because yield on cost is based on the price you paid, not what the stock is selling for today. Note how my first purchase (2008) is now yielding 3.7%, while my second purchase (2009) is yielding even more, 4.1%. That is because the price went down between my two purchases. Each of the two purchases of MCD pays out the same dividend per share, obviously. But when you convert that dollar number into a percentage yield on cost, the divisor is different for each purchase, hence there are two yields on cost. The only way they would be identical is if the price had been identical when I made each of the two purchases.
This simple example allows me to illustrate several bedrock principles of dividend growth investing.
Each time the dividend increases, your yield on cost goes up. I went back and checked the then-current yield of MCD on the dates I made the two purchases. In 2008, it was $1.875 / $60.06 = 3.1%. In 2009, it was 1.75 / 53.93 = 3.2%. (Don’t be misled into thinking MCD lowered its dividend from 2008 to 2009. At the beginning of 2008, MCD switched from a single annual dividend to four quarterly dividends per year. The 2008 calculation “caught” an extra quarter of dividends, namely the first quarterly payment in March 2008.) Because of MCD’s annual dividend increases, my yield on cost on the two purchases has risen from 3.1% to 3.7% for the first purchase, and from 3.2% to 4.1% for the second purchase. The increase in yield on cost is a mathematical certainty if the dividend is increased, because the divisor (the price you paid) remains the same for as long as you own the stock.
Yield on cost is a measure of current performance, not past performance. Some people feel that yield on cost is a backwards-looking measure. That is incorrect. Because it is based on the most recent 12 months’ dividend payout—the last annual amount that we know for sure—yield on cost is a current measure of performance. Of course, today’s yield on cost “got there” because of past dividend increases, but it is a current performance metric.
Yield on cost is directly comparable to a bond’s yield. Bonds, as we know, are fixed-income investments. You pay $x for the bond, and its yield is stated and set for the term of the bond. It is a contractual obligation of the bond issuer, to whom you have lent money by buying the bond. So if you bought a bond yielding 4% in 2008, it is still yielding 4% to you. It will always yield 4% to you. It may pay a different yield to someone who buys it on the bond market today (because its price may have changed), but that has no impact on its yield to you. Its yield on cost will always equal its yield on the day you bought it.
Yield on cost can be considered to be your “personal” yield on a dividend-paying stock. It is dependent on the price you paid. The current yield stated in the newspaper or on Yahoo or Morningstar applies to someone who purchases the stock today. It is irrelevant to your yield on cost.
The dividend increases in a dividend-growth stock can cause its yield to surpass that of a bond which may have started out ahead. As just stated, if you buy a bond yielding 4% and hold it, it will always yield 4% to you. But the increasing dividends of a dividend-growth stock will cause its yield on cost—your personal yield—to inexorably climb, often reaching and then surpassing the annual income on a bond that originally paid more. In the year following my 2008 purchase of MCD, it paid $1.75 per share in dividends, or 2.9% based on my purchase price. In the past 12 months, it has paid me $2.20, or 3.7%. That’s a 26% increase in dollars in just a year. Looking ahead, MCD has already announced an increase in its dividend for the fourth quarter of this year (from $0.55 to $0.61) an 11% hike that will raise the dollars to me in the next 12 months to $2.44, for a yield on cost of 4.1% on my 2008 purchase. (This is the forward-looking “indicated” yield on cost; see the last paragraph of this article.)
Price and initial yield matter. My 2008 purchase at $60.06 had sunk to $53.93 by the time of my second purchase in 2009. Why would I buy more of a sinking stock? Because it was a better deal--a classic value-investing concept. I had long-term faith in McDonald’s the company. I still do. I wasn’t thrilled that its price drop had cost me 10% in capital losses. But I didn’t plan to sell it, and in dividend growth investing one focuses on the dividend stream. In the year between the two purchases, MCD had jacked up its dividend from $1.50 in calendar 2007 to $1.625 in 2008 (an 8% jump), and it would jack it up another 26% in 2009 to $2.05. I could not have expected that magnitude of increase, of course, but I certainly expected an increase—after all, MCD had been raising its dividend for 32 consecutive years.
Yield on cost and current yield gradually diverge from each other. If a stock’s price increases at exactly the same rate that the company increases the dividend each year, the current yield won’t budge. This fakes out some people, who equate yield on cost to current yield. As we have seen, they are quite different, as the yield on cost rises with each dividend increase. Some dividend-growth investors believe the increasing dividends are themselves a major reason that dividend-growth stocks tend to wallop all stocks in total return. The reasoning is that if the price decreases, the current yield increases, making the stock more attractive to income investors, who pile into the stock and drive its price back up—so the stock’s price tends to rise along with its dividend. It is not unusual to see a stock’s current yield stay pretty much the same year after year, even though its dividend is raised each year. The dividend increases are matched by approximately equal percentage increases in the price of the stock, so mathematically the current yield stays the same. MCD’s current yield is 2.9%, and its indicated current yield is 3.2%, both in the same range as when I bought it in 2008 and 2009. But my yields on cost, as already explained, are much higher.
If you don’t separate out new purchases from old ones, your “blended” yield on cost will often go down with a new purchase. A new purchase at, say, 3.1% current yield, when combined with an old purchase at, say, 4.1% yield on cost, will make the combined yield on cost lower. (At the moment of purchase, yield on cost and current yield are identical.) That’s why I track each purchase separately. It makes clear what is really happening: The new purchase has not diminished the yield on cost of a purchase made years ago. That never happens. What does happen is that the yield on cost of the original purchase continues to march upwards, while the new purchase starts at its current yield on the day of purchase, then commences its own upward march when the next dividend increase is declared.
Finally, a couple of points about the basic formulas.
(1) The formula for yield on cost could be Yield on Cost = (Last Quarter’s Dividends x 4) / Price You Paid. That formula differs from the one stated at the beginning of this article only in that it projects the current dividend payout rate forward (without presuming an increase). The proper name for this is “indicated” yield on cost.
(2) A similar change can be made in the formula for current yield, producing the “indicated” current yield.
Monday, October 11, 2010
September Rally Continues into October; Have Re-entered the Market for Capital Gains
1. Summary
The market has been generally rising since the beginning of September. The rally has pulled the Timing Outlook to a strongly positive reading of 8.0, up from 6.0 last time.
For over four months, the S&P 500 had stayed stuck in a trading range of 1,040 to 1,130, essentially going sideways. The index finally passed through and stayed above 1130 on September 20, and it has stayed above that level ever since, slowly drifting upward in fits and starts. (See the chart below. Click on it to enlarge it.)
As frequent readers know, I require not only a positive Timing Outlook but also the satisfaction of a separate set of criteria to invest money in my Capital Gains Portfolio. The additional criteria, again, are:
• 9% rise over two weeks, with at least 7/10 days positive
• 3% rise over 3 weeks, with at least 10/15 days positive
• 4% rise over 4 weeks, with at least 14/20 days positive
• 5% rise over 5 weeks, with at least 17/25 days positive
• Etc.
The criteria were finally met on September 14, and I invested 10% of the portfolio’s funds on that day and another 10% a week later. There have been enough “down” days sprinkled in since then, however, to keep me from investing any more. This has cost me some gains as 80% of the portfolio sits in cash, but I will continue to require the additional margin of safety that the second criteria provide. Long term, that discipline has served me well.
Because I am hard at work on 2011’s edition of The Top 40 Dividend Stocks, I do not have up-to-date Easy-Rate™ sheets for capital-gains stocks. Therefore, for re-entering the market, I have purchased shares of SPY, one of the ETFs that tracks the S&P 500. I am following the market at the end of each day, and if the second set of criteria are satisfied, I will make another purchase.
The market’s action for the past three months is shown on the chart. It shows that the S&P 500 has risen about 11% since the beginning of September. It also shows the number of “down” days (red candlesticks) that frustrate the second criteria, even though the overall direction has been upwards.
My Dividend Portfolio remains 100% invested after the changes described last time. By the way, I have begun to work on the 2011 edition of The Top 40 Dividend Stocks. I will keep you up to date on its progress. I hope to release it in January.
2. Market Performance Since Last Outlook
(“now” figures are as of mid-morning, Monday, October 11, 2010)
Last Outlook (9/13/10): 6.0 (positive)
S&P 500 last time (9/13/10): 1122
S&P 500 now: 1167 Change: +4%
S&P 500 at beginning of 2010: 1115
S&P 500 now: 1167 Change in 2010: +5%
S&P 500 at close 3/9/09 (beginning of bull market): 677
S&P 500 now: 1167 Change since 3/9/09: +72%
3. Indicators in Detail
• Conference Board Index of Leading Economic Indicators: The most recent report (September 23) showed an increase in this index, the second in a row. I require three straight monthly increases or decreases to label this as positive or negative, so this indicator remains neutral. +5
• Fed Funds Rate: No change. With the Federal Funds rate near zero, this indicator remains positive. +10
• S&P 500 Market Valuation (P/E): Morningstar pegs the current P/E of the S&P 500 at 14.7, up from 13.7 last time, but still well within positive territory at any value below 17.4. +10
• Morningstar’s Market Valuation Graph. Morningstar’s proprietary market valuation graph is at 1.00, up from 0.96 last time and suggesting that the market is exactly at “fair value” right now. For our purposes, that means neutral. +5
• S&P 500 Short Term Technical Trend: This short-term technical indicator uses the two shorter simple moving averages (SMAs) of the S&P 500. The configuration (see the chart) is Index > 20-day > 50-day. That suggests rally mode, with the index “pulling up” the shorter SMA, which in turn is “pulling up” the longer SMA. Positive. +10
• S&P 500 Medium Term Technical Trend: The mid-term indicator remains ambiguous, as the 200-day SMA is still higher than the 50-day SMA. If (when) the 50-day crosses through and above the 200-day, that will be known as a “golden cross,’ which many consider to be one of the strongest technical indicators. Until then (if it happens), this indicator remains neutral. +5
• DJIA Short Term Technical Trend: This chart looks similar to the S&P 500 chart. Positive. +10
• DJIA Medium Term Technical Trend: On the Dow, the “golden cross” took place a few days ago. Positive. +10
• NASDAQ Short Term Technical Trend: The NASDAQ’s chart has the same configuration as the S&P’s for both trends. Positive. +10
• NASDAQ Medium Term Technical Trend: Neutral. +5
TOTAL POINTS: 80
NEW READING: 80 / 10 = 8.0 = POSITIVE
The market has been generally rising since the beginning of September. The rally has pulled the Timing Outlook to a strongly positive reading of 8.0, up from 6.0 last time.
For over four months, the S&P 500 had stayed stuck in a trading range of 1,040 to 1,130, essentially going sideways. The index finally passed through and stayed above 1130 on September 20, and it has stayed above that level ever since, slowly drifting upward in fits and starts. (See the chart below. Click on it to enlarge it.)
As frequent readers know, I require not only a positive Timing Outlook but also the satisfaction of a separate set of criteria to invest money in my Capital Gains Portfolio. The additional criteria, again, are:
• 9% rise over two weeks, with at least 7/10 days positive
• 3% rise over 3 weeks, with at least 10/15 days positive
• 4% rise over 4 weeks, with at least 14/20 days positive
• 5% rise over 5 weeks, with at least 17/25 days positive
• Etc.
The criteria were finally met on September 14, and I invested 10% of the portfolio’s funds on that day and another 10% a week later. There have been enough “down” days sprinkled in since then, however, to keep me from investing any more. This has cost me some gains as 80% of the portfolio sits in cash, but I will continue to require the additional margin of safety that the second criteria provide. Long term, that discipline has served me well.
Because I am hard at work on 2011’s edition of The Top 40 Dividend Stocks, I do not have up-to-date Easy-Rate™ sheets for capital-gains stocks. Therefore, for re-entering the market, I have purchased shares of SPY, one of the ETFs that tracks the S&P 500. I am following the market at the end of each day, and if the second set of criteria are satisfied, I will make another purchase.
The market’s action for the past three months is shown on the chart. It shows that the S&P 500 has risen about 11% since the beginning of September. It also shows the number of “down” days (red candlesticks) that frustrate the second criteria, even though the overall direction has been upwards.
My Dividend Portfolio remains 100% invested after the changes described last time. By the way, I have begun to work on the 2011 edition of The Top 40 Dividend Stocks. I will keep you up to date on its progress. I hope to release it in January.
2. Market Performance Since Last Outlook
(“now” figures are as of mid-morning, Monday, October 11, 2010)
Last Outlook (9/13/10): 6.0 (positive)
S&P 500 last time (9/13/10): 1122
S&P 500 now: 1167 Change: +4%
S&P 500 at beginning of 2010: 1115
S&P 500 now: 1167 Change in 2010: +5%
S&P 500 at close 3/9/09 (beginning of bull market): 677
S&P 500 now: 1167 Change since 3/9/09: +72%
3. Indicators in Detail
• Conference Board Index of Leading Economic Indicators: The most recent report (September 23) showed an increase in this index, the second in a row. I require three straight monthly increases or decreases to label this as positive or negative, so this indicator remains neutral. +5
• Fed Funds Rate: No change. With the Federal Funds rate near zero, this indicator remains positive. +10
• S&P 500 Market Valuation (P/E): Morningstar pegs the current P/E of the S&P 500 at 14.7, up from 13.7 last time, but still well within positive territory at any value below 17.4. +10
• Morningstar’s Market Valuation Graph. Morningstar’s proprietary market valuation graph is at 1.00, up from 0.96 last time and suggesting that the market is exactly at “fair value” right now. For our purposes, that means neutral. +5
• S&P 500 Short Term Technical Trend: This short-term technical indicator uses the two shorter simple moving averages (SMAs) of the S&P 500. The configuration (see the chart) is Index > 20-day > 50-day. That suggests rally mode, with the index “pulling up” the shorter SMA, which in turn is “pulling up” the longer SMA. Positive. +10
• S&P 500 Medium Term Technical Trend: The mid-term indicator remains ambiguous, as the 200-day SMA is still higher than the 50-day SMA. If (when) the 50-day crosses through and above the 200-day, that will be known as a “golden cross,’ which many consider to be one of the strongest technical indicators. Until then (if it happens), this indicator remains neutral. +5
• DJIA Short Term Technical Trend: This chart looks similar to the S&P 500 chart. Positive. +10
• DJIA Medium Term Technical Trend: On the Dow, the “golden cross” took place a few days ago. Positive. +10
• NASDAQ Short Term Technical Trend: The NASDAQ’s chart has the same configuration as the S&P’s for both trends. Positive. +10
• NASDAQ Medium Term Technical Trend: Neutral. +5
TOTAL POINTS: 80
NEW READING: 80 / 10 = 8.0 = POSITIVE
Monday, September 13, 2010
September Rally Pulls Timing Outlook Back To Positive, But Still Not Re-Entering Market
1. Summary
An early September rally has pulled the Timing Outlook back into positive territory, up to 6.0 this time from a negative 4.5 last time.
For over four months, the S&P 500 has been stuck in a trading range of 1040 to 1130. The Timing Outlook has not performed well during this period, as the market’s drifts up and down have been timed nearly perfectly to repeatedly reverse the Timing Outlook, which I re-compute about every other week. So the Timing Outlook has been out of phase with the market’s short-term “trends.” There has been no long-term trend up or down; it has been sideways.
While the short drifts up and down have been long enough to keep the Timing Outlook off balance, they have been too short to pass my other criteria for being invested in stocks, so my Capital Gains Portfolio has been 100% cash since early May. The additional criteria, again, are:
• 9% rise over two weeks, with at least 7/10 days positive
• 3% rise over 3 weeks, with at least 10/15 days positive
• 4% rise over 4 weeks, with at least 14/20 days positive
• 5% rise over 5 weeks, with at least 17/25 days positive
• Etc.
The criteria are close to being met. Check out the chart above (click on it to enlarge it). It shows that the S&P 500 has risen about 6% during the past 10 trading sessions, with 8 of the past 10 sessions being positive. If the market’s rally continues a few more days, the criteria go to the three-week line, requiring a 3% rise with 10 out of 15 days being positive. We’re almost there. But patience is the watch-word. Don’t plug in hope as a substitute for actual performance. Waiting for the right entry point can be tedious, but avoiding losses is as important to overall success in investing for capital appreciation as scoring gains.
My Dividend Portfolio remains 100% invested after the changes described last time. By the way, I have begun to work on the 2011 edition of The Top 40 Dividend Stocks. I will keep you up to date on its progress. I hope to release it in January.
2. Market Performance Since Last Outlook
(“now” figures are as mid-day, Monday, September 13, 2010)
Last Outlook (8/25/10): 4.5 (negative)
S&P 500 last time (8/25/10): 1048
S&P 500 now: 1122 Change: +7%
S&P 500 at beginning of 2010: 1115
S&P 500 now: 1122 Change in 2010: +1%
S&P 500 at close 3/9/09 (beginning of bull market): 677
S&P 500 now: 1122 Change since 3/9/09: +66%
3. Indicators in Detail
• Conference Board Index of Leading Economic Indicators: No new report since last time. This index has been gyrating the past few months, rendering it ambiguous for our purposes. I require three straight monthly increases or decreases to label this as positive or negative. Indicator remains neutral. +5
• Fed Funds Rate: No change. With the Federal Funds rate near zero, this indicator remains positive. +10
• S&P 500 Market Valuation (P/E): Morningstar pegs the current P/E of the S&P 500 at 13.7, down from 15.2 last time. This indicator is in positive territory at any value below 17.4. +10
• Morningstar’s Market Valuation Graph: Morningstar’s proprietary market valuation graph is at 0.96, up from 0.91 last time. It is still in the neutral range, which is any value between 0.90 and 1.10. +5
• S&P 500 Short Term Technical Trend: This short-term technical indicator uses the two shorter simple moving averages (SMAs) of the S&P 500. The configuration (see the blue and green lines on the chart) is Index > 50-day > 20-day. That is ambiguous, reflecting the back-and-forth nature of the market over the past several months. Neutral. +5
• S&P 500 Medium Term Technical Trend: The mid-term indicator uses the two longer SMAs (50-day and 200-day, the blue and red lines on the chart). The lineup is Index > 200-day > 50-day. The recent 2-week rally has flipped this from last time, moving the indicator from negative to neutral. +5
• DJIA Short Term Technical Trend: This chart looks similar to the S&P 500 chart. Neutral. +5
• DJIA Medium Term Technical Trend: Same as the S&P 500. Neutral. +5
• NASDAQ Short Term Technical Trend: The NASDAQ’s chart has the same configuration as the other two. Neutral. +5
• NASDAQ Medium Term Technical Trend: Same as the other two. Neutral. +5
TOTAL POINTS: 60
NEW READING: 60 / 10 = 6.0 = POSITIVE
An early September rally has pulled the Timing Outlook back into positive territory, up to 6.0 this time from a negative 4.5 last time.
For over four months, the S&P 500 has been stuck in a trading range of 1040 to 1130. The Timing Outlook has not performed well during this period, as the market’s drifts up and down have been timed nearly perfectly to repeatedly reverse the Timing Outlook, which I re-compute about every other week. So the Timing Outlook has been out of phase with the market’s short-term “trends.” There has been no long-term trend up or down; it has been sideways.
While the short drifts up and down have been long enough to keep the Timing Outlook off balance, they have been too short to pass my other criteria for being invested in stocks, so my Capital Gains Portfolio has been 100% cash since early May. The additional criteria, again, are:
• 9% rise over two weeks, with at least 7/10 days positive
• 3% rise over 3 weeks, with at least 10/15 days positive
• 4% rise over 4 weeks, with at least 14/20 days positive
• 5% rise over 5 weeks, with at least 17/25 days positive
• Etc.
The criteria are close to being met. Check out the chart above (click on it to enlarge it). It shows that the S&P 500 has risen about 6% during the past 10 trading sessions, with 8 of the past 10 sessions being positive. If the market’s rally continues a few more days, the criteria go to the three-week line, requiring a 3% rise with 10 out of 15 days being positive. We’re almost there. But patience is the watch-word. Don’t plug in hope as a substitute for actual performance. Waiting for the right entry point can be tedious, but avoiding losses is as important to overall success in investing for capital appreciation as scoring gains.
My Dividend Portfolio remains 100% invested after the changes described last time. By the way, I have begun to work on the 2011 edition of The Top 40 Dividend Stocks. I will keep you up to date on its progress. I hope to release it in January.
2. Market Performance Since Last Outlook
(“now” figures are as mid-day, Monday, September 13, 2010)
Last Outlook (8/25/10): 4.5 (negative)
S&P 500 last time (8/25/10): 1048
S&P 500 now: 1122 Change: +7%
S&P 500 at beginning of 2010: 1115
S&P 500 now: 1122 Change in 2010: +1%
S&P 500 at close 3/9/09 (beginning of bull market): 677
S&P 500 now: 1122 Change since 3/9/09: +66%
3. Indicators in Detail
• Conference Board Index of Leading Economic Indicators: No new report since last time. This index has been gyrating the past few months, rendering it ambiguous for our purposes. I require three straight monthly increases or decreases to label this as positive or negative. Indicator remains neutral. +5
• Fed Funds Rate: No change. With the Federal Funds rate near zero, this indicator remains positive. +10
• S&P 500 Market Valuation (P/E): Morningstar pegs the current P/E of the S&P 500 at 13.7, down from 15.2 last time. This indicator is in positive territory at any value below 17.4. +10
• Morningstar’s Market Valuation Graph: Morningstar’s proprietary market valuation graph is at 0.96, up from 0.91 last time. It is still in the neutral range, which is any value between 0.90 and 1.10. +5
• S&P 500 Short Term Technical Trend: This short-term technical indicator uses the two shorter simple moving averages (SMAs) of the S&P 500. The configuration (see the blue and green lines on the chart) is Index > 50-day > 20-day. That is ambiguous, reflecting the back-and-forth nature of the market over the past several months. Neutral. +5
• S&P 500 Medium Term Technical Trend: The mid-term indicator uses the two longer SMAs (50-day and 200-day, the blue and red lines on the chart). The lineup is Index > 200-day > 50-day. The recent 2-week rally has flipped this from last time, moving the indicator from negative to neutral. +5
• DJIA Short Term Technical Trend: This chart looks similar to the S&P 500 chart. Neutral. +5
• DJIA Medium Term Technical Trend: Same as the S&P 500. Neutral. +5
• NASDAQ Short Term Technical Trend: The NASDAQ’s chart has the same configuration as the other two. Neutral. +5
• NASDAQ Medium Term Technical Trend: Same as the other two. Neutral. +5
TOTAL POINTS: 60
NEW READING: 60 / 10 = 6.0 = POSITIVE
Thursday, September 2, 2010
Buffett May Not Pay Dividends, But He Sure Likes Them
Berkshire Hathaway (BRK), aka Warren Buffett, has paid only one dividend since Buffett gained control. In 1967, Berkshire paid a dividend of 10 cents on its shares. It’s never happened again. Buffett has said he "must have been in the bathroom when the dividend was declared.”
Berkshire Hathaway is famous for not paying dividends despite having billions of dollars in cash. The company has many critics who believe that the company should “reward” or “return money to” shareholders. I am not one of those critics. I believe that Bershire/Buffett has proved itself to be perhaps the best allocator of capital on the planet, and I do not question that they can allocate their capital as well as or better than I could if they gave me some of it. I love dividends, but I don’t think Berkshire should pay a dividend.
Berkshire, while known mainly as an insurance company, is actually a conglomerate. It has a dizzying array of wholly owned companies in businesses as diverse as railroads, carpeting, candy, furniture, and jewelry. It also owns huge stakes in several public companies. It is the latter that I want to focus on, because Berkshire/Buffett has shown a great liking for companies that pay dividends.
Berkshire’s stock holdings are published quarterly. For the most recent quarter (ending June 30), here are its largest holdings, the percent of Berkshire’s stock portfolio represented by that holding, and the stock’s projected yield based on current payout. All information is from Morningstar.
• Coca-Cola (KO), 22%, yield = 3.2%
• Wells Fargo (WFC), 18%, yield = 0.9%
• American Express (AXP), 13%, yield = 1.8%
• Procter & Gamble (PG), 10%, yield = 3.3%
• Kraft (KFT), 6%, yield = 3.9%
• Johnson & Johnson (JNJ), 5%, yield = 3.8%
• Wal-Mart (WMT), 4%, yield = 2.4%
• Wesco Financial (WSC), 4%, yield = 0.5%
• U. S. Bancorp (USB), 3%, yield = 1.0%
• ConocoPhillips (COP), 3%, yield = 4.2%
These top 10 holdings account for 88% of all of Berkshire’s stock holdings—a very concentrated portfolio, especially considering its size. Overall, the company owns more than $46 billion in stocks, spread out over 37 different positions. (These figures do not include foreign investments held abroad.)
In Q2, Berkshire purchased about 17 million shares of Johnson & Johnson, adding to the 24 million it already owned. The total spent was about $1 billion, or about $58 per share. This was the biggest increase in any holding in Berkshire’s portfolio, raising its stake by 70%. What’s that worth in dividends? In June, J&J raised its dividend from $0.49 per share per quarter to $0.54, or $2.16 per year. A year’s worth of dividends at that rate for 24 million shares is $51,840,000. Actually, Berkshire will get more than that in the next 12 months, because J&J will raise its dividend again next June, as it has for 48 straight years.
In fact, 5 of those 10 companies are Dividend Champions—companies that have increased their payouts for 25 years or more consecutively: Procter & Gamble (54 years), Coca-Cola (48), J&J (48), Wesco (38), and Wal-Mart (36). ConocoPhillips has a 10-year streak going. In Q2, the second-largest increase in shares held by Berkshire was in Becton Dickinson (BDX), in which Berkshire increased its position by 8%. Becton Dickinson is a Dividend Champion with a 37-year streak.
Charlie Munger, Buffett’s sidekick at Berkshire, has been quoted as saying, “Investing is where you find a few great companies and then sit on your ass." While dividend-raising companies require attention just as any stock holdings do, it is clear that Berkshire/Buffett have found several great companies with a common characteristic—they pay consistently rising dividends. They have helped make Buffett the richest investor in the world.
Berkshire Hathaway is famous for not paying dividends despite having billions of dollars in cash. The company has many critics who believe that the company should “reward” or “return money to” shareholders. I am not one of those critics. I believe that Bershire/Buffett has proved itself to be perhaps the best allocator of capital on the planet, and I do not question that they can allocate their capital as well as or better than I could if they gave me some of it. I love dividends, but I don’t think Berkshire should pay a dividend.
Berkshire, while known mainly as an insurance company, is actually a conglomerate. It has a dizzying array of wholly owned companies in businesses as diverse as railroads, carpeting, candy, furniture, and jewelry. It also owns huge stakes in several public companies. It is the latter that I want to focus on, because Berkshire/Buffett has shown a great liking for companies that pay dividends.
Berkshire’s stock holdings are published quarterly. For the most recent quarter (ending June 30), here are its largest holdings, the percent of Berkshire’s stock portfolio represented by that holding, and the stock’s projected yield based on current payout. All information is from Morningstar.
• Coca-Cola (KO), 22%, yield = 3.2%
• Wells Fargo (WFC), 18%, yield = 0.9%
• American Express (AXP), 13%, yield = 1.8%
• Procter & Gamble (PG), 10%, yield = 3.3%
• Kraft (KFT), 6%, yield = 3.9%
• Johnson & Johnson (JNJ), 5%, yield = 3.8%
• Wal-Mart (WMT), 4%, yield = 2.4%
• Wesco Financial (WSC), 4%, yield = 0.5%
• U. S. Bancorp (USB), 3%, yield = 1.0%
• ConocoPhillips (COP), 3%, yield = 4.2%
These top 10 holdings account for 88% of all of Berkshire’s stock holdings—a very concentrated portfolio, especially considering its size. Overall, the company owns more than $46 billion in stocks, spread out over 37 different positions. (These figures do not include foreign investments held abroad.)
In Q2, Berkshire purchased about 17 million shares of Johnson & Johnson, adding to the 24 million it already owned. The total spent was about $1 billion, or about $58 per share. This was the biggest increase in any holding in Berkshire’s portfolio, raising its stake by 70%. What’s that worth in dividends? In June, J&J raised its dividend from $0.49 per share per quarter to $0.54, or $2.16 per year. A year’s worth of dividends at that rate for 24 million shares is $51,840,000. Actually, Berkshire will get more than that in the next 12 months, because J&J will raise its dividend again next June, as it has for 48 straight years.
In fact, 5 of those 10 companies are Dividend Champions—companies that have increased their payouts for 25 years or more consecutively: Procter & Gamble (54 years), Coca-Cola (48), J&J (48), Wesco (38), and Wal-Mart (36). ConocoPhillips has a 10-year streak going. In Q2, the second-largest increase in shares held by Berkshire was in Becton Dickinson (BDX), in which Berkshire increased its position by 8%. Becton Dickinson is a Dividend Champion with a 37-year streak.
Charlie Munger, Buffett’s sidekick at Berkshire, has been quoted as saying, “Investing is where you find a few great companies and then sit on your ass." While dividend-raising companies require attention just as any stock holdings do, it is clear that Berkshire/Buffett have found several great companies with a common characteristic—they pay consistently rising dividends. They have helped make Buffett the richest investor in the world.
Wednesday, September 1, 2010
Portfolio Forensics
From time to time, one runs across pointless arguments about whether buy-and-hold is dead. Most long-term stock holders know that buy-and-hold really means buy-and-monitor, or buy-and-homework, or some similar phrase that indicates that reasons can arise to sell a long-term holding. The days of the dying grandfather telling his family “Never sell the AT&T” are long gone. While the ideal might be to hold each stock “forever,” life happens, and in doing so it can create reasons to sell any stock.
How do you decide? I advocate periodic Portfolio Reviews. In my Dividend Portfolio, which is devoted to dividend growth stocks and does not require real close attention, I aim to conduct a review twice per year. The point is to impose upon yourself the discipline to really examine your stock portfolio periodically, apply standards designed to reveal whether each stock still deserves a place in your portfolio, and take action on what you find out.
In my Dividend Portfolio, normally the presumption is that each dividend stock will not be sold. But that presumption can be overcome. During a Portfolio Review, the burden shifts to the company to prove why it should be kept. Here are some of the questions I ask:
• What is its yield on cost (YOC)? I don’t penalize a dividend growth stock solely because its current yield may have dropped below qualifying levels. That may be only because the stock’s price has jumped way up. If I purchased it years ago, and I am still satisfied with how it is growing its dividend, the reliability of the dividend, etc., I normally would keep it. It is doing its job. By the way, the formula for YOC is: Yield on Cost = (Current Yield x Current Price) / Acquisition Price. An equivalent formula is Last 12 Months’ Dividends / Acquisition Price.
• Should some profits be taken? If the company’s price has skyrocketed, that may present an opportunity to cash out some or all of it and purchase another stock selling at a better price and offering a higher yield. The goal would be to have the total dividend stream increase after the transactions are completed. Notice that if you have held a stock a long time, its current yield may be low but its YOC may be quite high, difficult to match with a new purchase.
• Is the safety of its dividend in question? As soon as BP’s oil rig blew up, the safety of its dividend became perilous for anyone who thought about it. In a Portfolio Review, update your information on each company and give serious thought to the ongoing reliability of its dividend.
• Is there a chance to improve your portfolio by making a stock swap? There are various ways to improve your portfolio, such as increasing its total yield, increasing the rate of dividend growth, diversifying it, and so on. As to increasing yield, note the discussion above (second bullet) about making sure that the initial yield on a new purchase would exceed the YOC of the stock you would sell. If it wouldn’t, it’s hard to justify the swap. A higher expected rate of increase may tip the scales.
• Did the company cut or freeze its dividend? If so, it is subject to immediate examination. You will probably decide to sell most stocks that cut or freeze their dividend. The main goal of my Dividend Portfolio is to deliver an ever-increasing dividend stream, so obviously a cut or freeze hurts that goal. Also, a cut or freeze often portends a price drop. Confident management teams adhere to established dividend-growth patterns. A company that cuts or freezes its dividend is conserving cash for some reason. Find out why. The company may be in difficulty, and its price may be in for a drop too. Selling early usually brings in the most money you will be able to get for that stock for a long time to come.
• Has the company’s current yield risen above 10 percent? If so, it is subject to immediate review, but this is not an automatic reason to sell. An extremely high yield is usually the result of an extremely low price. Find out why the market has devalued the stock. It may be a clue that the company is having major problems, and upon examination you may discover that the dividend itself is in peril. This may be dividends’ equivalent of a “dead-cat bounce” in price.
• Has the rate of growth of the dividend taken a turn for the worse? Can you figure out why? Many dividend investors regard dividend growth as a key indicator of future prospects, because it reflects management’s view of and confidence in the next few years, often based upon information available to them but not to you.
Let’s look at some examples. Here is how these principles played out for six stocks in a recent Portfolio Review of my Dividend Portfolio.
Abbott Labs (ABT): I own two slugs, purchased in 2008 and 2009. Their yields on cost are 3.2% and 3.7%, respectively. Abbott increased its dividend 10% this year. The stock is working fine. Decision: Hold
Alliant Energy (LNT): Initiated position early in 2010, and it has worked out well. The stock has a 9% price increase and a 4.9% YOC after a 5% dividend hike this year. Decision: Hold.
Diageo (DEO): I bought this in 2008. Diageo is a foreign stock (Britain), and like many foreign stocks, it does not adhere to a predictable dividend-raising schedule. It makes two payments per year, and the first payment is typically less than the second payment, making the total year’s dividend impossible to predict. In its native currency, Diageo has been a steady dividend raiser, but with varying exchange rates, that has sometimes translated into fewer $US, as if it had cut its dividend. Too many headaches to keep track of, despite the company’s strengths. My position was small, and I had a 14% long-term price gain on the stock. Decision: Sell and put the money to work elsewhere.
Emerson Electric (EMR): Also purchased in 2008, EMR has disappointed lately with small dividend increases, just 2% in 2010. Its 2.7% yield on cost (YOC) was pulling the portfolio’s YOC down. Last year, I put it on sort of probation, sticking a 10% trailing sell-stop under it. It survived by steadily moving up in price from what had been a significant capital loss. After nearly hitting the breakeven point, its price began to weaken again. The lousy dividend increase motivated me to put a tighter stop under it (5%), which it hit a couple of weeks later. Decision: Put tight stop under it; the stop was hit, so stock sold.
McDonalds (MCD): Purchased in 2008 and again in 2009. YOC is 3.7% and 4.1% respectively. Blended price increase is more than 20%. Raised its dividend 26% in 2009; awaiting 2010’s increase (which typically comes with the final payment of the year). What’s not to like? Decision: Hold.
Royal Bank of Canada (RY): Purchased in 2008, the stock survived the financial crisis and is a solid, stable bank. But it has not increased its dividend since 2008. I decided to put this small position’s money to work elsewhere. Decision: Sell.
The Dividend Portfolio contained 12 stocks when I did the Portfolio Review. The 3 sells mentioned above are a little misleading, because I wanted to show examples of reasons to sell. Those were the only 3 sales resulting from this review. The other 9 stocks were held. In dollar terms, there is typically less than 10% turnover per year in this portfolio. Sometimes there is none.
A good practice is to keep a Shopping List ready—stocks that will help improve your portfolio in some way and that meet all your criteria for buying a stock. For my Dividend Portfolio, I use my e-book, The Top 40 Dividend Stocks for 2010, as my Shopping List. I make sure to update the information, especially any target’s yield and valuation, before making any purchase. With the proceeds from the 2 immediate sales, I increased my stake in Alliant Energy. At a current yield of 4.5%, that gave a nice boost to the portfolio’s overall YOC (which was 4.1%). When Emerson Electric hit its sell-stop, I used those proceeds to initiate a position in Johnson & Johnson (JNJ), whose price seems depressed, at a 3.6% initial yield. I was pleased to see that Warrren Buffett—through Berkshire Hathaway (BRK)—had made JNJ his single largest stock purchase in Q2, adding 17 million shares to the 24 million he already owned, spending about $1 billion on the purchase. I picked up 50 shares myself. What the hell. Always glad to be in agreement with Mr. Buffett.
How do you decide? I advocate periodic Portfolio Reviews. In my Dividend Portfolio, which is devoted to dividend growth stocks and does not require real close attention, I aim to conduct a review twice per year. The point is to impose upon yourself the discipline to really examine your stock portfolio periodically, apply standards designed to reveal whether each stock still deserves a place in your portfolio, and take action on what you find out.
In my Dividend Portfolio, normally the presumption is that each dividend stock will not be sold. But that presumption can be overcome. During a Portfolio Review, the burden shifts to the company to prove why it should be kept. Here are some of the questions I ask:
• What is its yield on cost (YOC)? I don’t penalize a dividend growth stock solely because its current yield may have dropped below qualifying levels. That may be only because the stock’s price has jumped way up. If I purchased it years ago, and I am still satisfied with how it is growing its dividend, the reliability of the dividend, etc., I normally would keep it. It is doing its job. By the way, the formula for YOC is: Yield on Cost = (Current Yield x Current Price) / Acquisition Price. An equivalent formula is Last 12 Months’ Dividends / Acquisition Price.
• Should some profits be taken? If the company’s price has skyrocketed, that may present an opportunity to cash out some or all of it and purchase another stock selling at a better price and offering a higher yield. The goal would be to have the total dividend stream increase after the transactions are completed. Notice that if you have held a stock a long time, its current yield may be low but its YOC may be quite high, difficult to match with a new purchase.
• Is the safety of its dividend in question? As soon as BP’s oil rig blew up, the safety of its dividend became perilous for anyone who thought about it. In a Portfolio Review, update your information on each company and give serious thought to the ongoing reliability of its dividend.
• Is there a chance to improve your portfolio by making a stock swap? There are various ways to improve your portfolio, such as increasing its total yield, increasing the rate of dividend growth, diversifying it, and so on. As to increasing yield, note the discussion above (second bullet) about making sure that the initial yield on a new purchase would exceed the YOC of the stock you would sell. If it wouldn’t, it’s hard to justify the swap. A higher expected rate of increase may tip the scales.
• Did the company cut or freeze its dividend? If so, it is subject to immediate examination. You will probably decide to sell most stocks that cut or freeze their dividend. The main goal of my Dividend Portfolio is to deliver an ever-increasing dividend stream, so obviously a cut or freeze hurts that goal. Also, a cut or freeze often portends a price drop. Confident management teams adhere to established dividend-growth patterns. A company that cuts or freezes its dividend is conserving cash for some reason. Find out why. The company may be in difficulty, and its price may be in for a drop too. Selling early usually brings in the most money you will be able to get for that stock for a long time to come.
• Has the company’s current yield risen above 10 percent? If so, it is subject to immediate review, but this is not an automatic reason to sell. An extremely high yield is usually the result of an extremely low price. Find out why the market has devalued the stock. It may be a clue that the company is having major problems, and upon examination you may discover that the dividend itself is in peril. This may be dividends’ equivalent of a “dead-cat bounce” in price.
• Has the rate of growth of the dividend taken a turn for the worse? Can you figure out why? Many dividend investors regard dividend growth as a key indicator of future prospects, because it reflects management’s view of and confidence in the next few years, often based upon information available to them but not to you.
Let’s look at some examples. Here is how these principles played out for six stocks in a recent Portfolio Review of my Dividend Portfolio.
Abbott Labs (ABT): I own two slugs, purchased in 2008 and 2009. Their yields on cost are 3.2% and 3.7%, respectively. Abbott increased its dividend 10% this year. The stock is working fine. Decision: Hold
Alliant Energy (LNT): Initiated position early in 2010, and it has worked out well. The stock has a 9% price increase and a 4.9% YOC after a 5% dividend hike this year. Decision: Hold.
Diageo (DEO): I bought this in 2008. Diageo is a foreign stock (Britain), and like many foreign stocks, it does not adhere to a predictable dividend-raising schedule. It makes two payments per year, and the first payment is typically less than the second payment, making the total year’s dividend impossible to predict. In its native currency, Diageo has been a steady dividend raiser, but with varying exchange rates, that has sometimes translated into fewer $US, as if it had cut its dividend. Too many headaches to keep track of, despite the company’s strengths. My position was small, and I had a 14% long-term price gain on the stock. Decision: Sell and put the money to work elsewhere.
Emerson Electric (EMR): Also purchased in 2008, EMR has disappointed lately with small dividend increases, just 2% in 2010. Its 2.7% yield on cost (YOC) was pulling the portfolio’s YOC down. Last year, I put it on sort of probation, sticking a 10% trailing sell-stop under it. It survived by steadily moving up in price from what had been a significant capital loss. After nearly hitting the breakeven point, its price began to weaken again. The lousy dividend increase motivated me to put a tighter stop under it (5%), which it hit a couple of weeks later. Decision: Put tight stop under it; the stop was hit, so stock sold.
McDonalds (MCD): Purchased in 2008 and again in 2009. YOC is 3.7% and 4.1% respectively. Blended price increase is more than 20%. Raised its dividend 26% in 2009; awaiting 2010’s increase (which typically comes with the final payment of the year). What’s not to like? Decision: Hold.
Royal Bank of Canada (RY): Purchased in 2008, the stock survived the financial crisis and is a solid, stable bank. But it has not increased its dividend since 2008. I decided to put this small position’s money to work elsewhere. Decision: Sell.
The Dividend Portfolio contained 12 stocks when I did the Portfolio Review. The 3 sells mentioned above are a little misleading, because I wanted to show examples of reasons to sell. Those were the only 3 sales resulting from this review. The other 9 stocks were held. In dollar terms, there is typically less than 10% turnover per year in this portfolio. Sometimes there is none.
A good practice is to keep a Shopping List ready—stocks that will help improve your portfolio in some way and that meet all your criteria for buying a stock. For my Dividend Portfolio, I use my e-book, The Top 40 Dividend Stocks for 2010, as my Shopping List. I make sure to update the information, especially any target’s yield and valuation, before making any purchase. With the proceeds from the 2 immediate sales, I increased my stake in Alliant Energy. At a current yield of 4.5%, that gave a nice boost to the portfolio’s overall YOC (which was 4.1%). When Emerson Electric hit its sell-stop, I used those proceeds to initiate a position in Johnson & Johnson (JNJ), whose price seems depressed, at a 3.6% initial yield. I was pleased to see that Warrren Buffett—through Berkshire Hathaway (BRK)—had made JNJ his single largest stock purchase in Q2, adding 17 million shares to the 24 million he already owned, spending about $1 billion on the purchase. I picked up 50 shares myself. What the hell. Always glad to be in agreement with Mr. Buffett.
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