Thursday, August 17, 2017

4 Dividend Stocks of interest after a down day.

I don't have a lot of time to write about these stocks.  In this post I summarize four stocks I am nibbling at with very optimistic limit orders.  Orders that will get me a good income stock at a recent discount.

All four pay a dividend and have dividend growth.  I am long all stocks and want to add.  In the table below I note reasons I like each stock:  either high dividend yield or high dividend growth.   I just did an analysis of this subject and concluded you need a lot of both.






Good Income Investing

M* MoneyMadam



Sunday, August 6, 2017

High Dividend Yield or High Dividend Growth: Income Investor Dilemma

Recently I have had discussions with some friends and family members and people who email me about retiring with income that grows.   I cannot stress enough that you will need more money to live on in 20 years than you do today.   Therefore, your dividend income investing should be designed and implemented to fulfill this goal.

  • High Dividend Yield is available from quality stocks rather than bonds
  • Dividend Growth must be a consideration for a 20 year investment plan
  • A combination of high yield and dividend growth delivers the goods for income investors who expect to live at least 20 years

In this post I am revisiting the dilemma all income investors face when picking a stock.  Should I go for a stock with a high current yield or the stock with a higher dividend growth history.  We can only use history and our wits to decide if the future will mimic the past. None of us has a crystal ball.  You have the luxury of being able to find the dividend growth history of every stock under consideration.

I approach this analysis of high dividend yield or high dividend growth as an income investor who uses my stock dividends and other investment income to replace the salary I used to bring home.   There is no chance I could go back to work.  I don't particularly want to invade my principle for living expenses although there are plenty of articles out there telling me that it is ok to spend some principle provided I only take out 4%.    No, I want my investments to create enough income to live on today and in 20 years.

Mine are not the only blog posts that emphasize the need to double your income every 20 years.  I don't care what the inflation guru's report.  I now have two twenty year cycles where I can measure my fixed expenses and they have doubled twice.  I strongly encourage every retiree and every pre-retiree to write down your current fixed expenses multiply by 2 and figure out how to invest so you can create the income needed in 20 years.

Let's get to the analysis.   I have created a spreadsheet with a theoretical analysis and then I applied that technique to four commonly held dividend stocks.  I set up my spreadsheet so I can fill in the investment amount, the dividend yield, and the dividend growth rate and evaluate every stock I own and those I may want to buy.

I do not reinvest dividends in this analysis.  The theoretical analysis uses a comparison of a stock with a 2.5% dividend yield and 7% dividend growth and a stock with a 5% dividend yield but 2% dividend growth.   Take a careful look at the table below.




Notice your current income with the 5% yielder is of course much higher and stays higher than the dividend grower for about 15 years, then the dividend grower provides more income.    If you expect to hold your stock for longer than 15 years, the dividend grower is probably the better choice.

Of course you take a risk on either stock.  Some externality could make the high yielder reduce the payout.  Other factors could make the dividend grower slow the dividend growth.   This is where further study is important.  Know the industry, use your wits, look at revenue trends before you jump into either investment.

Now let's apply the analysis to two very well known stocks; stocks that have been the subject of many of my posts lately:  AT&T, symbol T is a high yield at just over 5%.  Telephone's stock price has been stuck a bit lately.  They can cover their dividend through free cash flow even though their debt has expanded.  

Telephone's 10 year dividend history shows an average 1.3% annual dividend increase.  I am using their most recent dividend increase of 2% for this 20 year analysis.   Telephone is trying to build growth in a very competitive and changing industry.   Only you can decide to buy T or not.  But if you do buy T and you expect to keep it for a while, take a look at your projected income in the table below.

Also included in this table is CVS Health, symbol CVS.  This is another stock in a changing and competitive industry.  CVS delivers only one half of Telephone's yield at just over 2.5%.  However, their long term dividend growth is huge (see the chart below.)  I used their most recent dividend increase of 17% as what I expect for the next 20 years.   Again, only you can decide if CVS is the right stock for your portfolio but if you do buy CVS, the table below is helpful at seeing how much income to expect from this dividend grower.


Comparative Table of Dividend Income:  Telephone a high yielder versus CVS a dividend grower.






Notice it only takes about five years for the big dividend increases from CVS to overtake the big yield delivered by T.   Project out 20 years and the difference is quite remarkable: $1,900 per year from CVS versus $280 from T.    I cannot predict with confidence that CVS is going to continue this dividend growth performance but they have done it for 10 years and that says a lot.

Comparative Table of Dividend Income:  NHI a high yielder versus LMT a dividend grower.


CVS is pretty extreme at 17% dividend growth rate so I selected two additional stocks for analysis.  National Health Investors has been a Dividend Machine a few times and I own it.  It is a high yielder at just about 5% but dividend growth is also decent at 5%.

I look for 4% dividend growth in my personal portfolio.  Four percent will deliver a solid double of my income in less than 20 years and is well above current estimated levels of inflation at about 2%.

Lockheed Martin is a very expensive stock and it too has been a Dividend Machine whose stock price has soared.   Ordinary investors who are not planning to use covered call options should not be embarrassed to buy fewer than 100 shares of a stock.   In this case I use 15 shares of LMT  or $4,427.85 for the analysis to keep the comparisons fairly even.   Lockheed Martin has a current yield of only 2.47% but has delivered an average of 33.33% per year in dividend increases.  What have they done for us lately?  LMT's most recent dividend increase was 10.30% and that is what I am using for this analysis.


 



Notice in this comparison it takes 13 years for the dividend grower LMT to catch up with the high yielding NHI.   The difference at the end of 20 years is not as powerful as the CVS, T comparison but it is a difference of $175 per year.  That just might cover a cost of specialty coffee in 2037.

Conclusion


Income investors have few choices today for creating the income we need to replace our salaries.  We need enough today to pay our bills but we also need income growth to cover the inevitable increases in our fixed expenses.  You are not going to get income growth using bonds.   Real estate is not an asset I cover here.  Dividend stocks are a very good way to secure current income and to get income growth.

The analysis uses similar investments in each of the four stocks and the theoretical projections. When projecting out 20 years, dividend growers out perform high dividend yield.  I personally will not just invest in growers.  I use a spreadsheet to look at a combination of stocks.

Lets say you invested in each of these four stocks for a total of about $16,000.  You have two high yielders and 2 high growers.   Your first year income would be $591.46 for a yield of  3.69%.   In 20 years your income would be $3,473.32 per year.  That is an increase in income of 48.64% and a yield on your original investment of 21.7%. 



I think we could live on that income and can rest better if you put pencil to paper or keyboard to spreadsheet and know what to expect.

M* MoneyMadam

Long NHI, T, CVS, LMT

















Thursday, August 3, 2017

Four Dividend Value Stocks in an up market

I have four nice dividend stocks I want to buy again.   I lost each one of these stocks to a call buyer during the past 6 months.   Although the Dow Jones Industrial average is hitting highs every day, these four stocks are not participating.   They are getting close to or already have dropped below the strike price at which they were taken.



  •  Stocks on call that were assigned and whose stock price retreated to break the previous strike price are ripe for reinvestment.
  • When picking a dividend stock, breaking some of my Dividend Machine rules can help an income portfolio.
  • Although the over all market is at all times highs, you can find bargains in these Dividend growth stocks.


Not one of the four stocks I am writing about today is a true Dividend Machine.   To be a dividend machine, they need a yield of about 2.75%, earnings per share (EPS) greater than the dividend paid out, a history of dividend growth near 4% and a D/E ratio of less than 1 or within industry standard.   While using a disciplined strategy takes a lot of anxiety out of investing for income, I do vary from these rules on occasion.  In my explanatory notes, I tell you why I am adding each stock to my short term watch list.

Microsoft (MSFT)


I am long Microsoft but I lost some of my position in July.  I sold calls with a $70 strike price and MSFT was called away in July.   MSFT has not sunk below the strike price of $70, today it is trading in the $72.00 range but yesterday MSFT intraday prices were as low as $71.45.   It is getting close to breaking through the previous strike price.

I am motivated to keep my MSFT and to add to it because I think MSFT has figured out their business.  They are not just a PC company.  Cloud revenue has grown.  However, Microsoft is no longer a Dividend Machine.  With a yield of about  2.3% MSFT's dividend yield is well below my target of 2.75%.  Earnings are greater than dividends paid out.  Their most recent dividend increase was 8.3% and this is one of the metrics that makes me want to own MSFT for my income portfolio.  D/E (debt to equity) ratio is a bit sticky.  MSFT has a D/E of 1.191.   This metric is why I am not willing to chase MSFT and buy high.

Source:  https://www.statista.com/statistics/273482/segment-revenue-of-microsoft/

Microsoft's revenue from 2012 to 2017 financial years, by segment (in billion U.S. dollars)

Created with Highcharts 3.0.10Revenue in billions of U.S. dollars0026.9826.4326.4930.440021.7423.7225.0427.440038.4643.1640.4338.77-0.490.4-0.340.27-6.64-6.7137.1339.69000019.519.0200006.746.4600004.645.6600006.26.620000000000Productivity and business processesIntelligent cloudMore personal computingCorporate and OtherCommercial LicensingDevice and Consumer LicensingComputing and Gaming HardwareCommercial OtherDevices and Consumer OtherPhone Hardware
201220132014201520162017
0100


When to buy MSFT.   I have Microsoft on my watch list and my target is $69.00.   I use call option premiums to guide my target price on this stock.   Over the past few days, October options are interesting.   A $75 strike price fetches about $1.00.   I like at least a 1% yield from the call premium to make up for the low dividend yield.  If you go up to a $77.50 strike price or above, you will not get that 1% yield on premium.   I also like a minimal 8% gain on my basis should my shares get called away (also known as assigned.)  That makes my target $75 minus 8% or $69.

If I buy at $69 I and sell calls on the position, it is highly likely I will receive at least a 1% call premium.  If I  buy before the August  15 ex-dividend date, I will get the $.39 quarterly dividend.  Should my shares be called away again, and I think it is highly likely they would be called away, I would get my 8% gain in under 80 days.

Eli Lilly (LLY)


Lilly is another stock that I buy, sell calls, have it called away and buy again.   Most recently my LLY was called away on a weekly call on July 28 at $82.50.  I was quite surprise because the call buyer paid me $1.40 for that call and when it was called away LLY closed at $83.10 which means the call buyer was up only  $.80.

Today LLY is trading at $82.10.  This is below my strike price but at this basis I cannot get 1% on a call premium.   Therefore, using the same math as I did on MSFT, I see an $85 October call fetches about $.95 and that meets my 1% call premium yield.  To get my 8% gain, I would need to buy at $85 - 8% or about $78.

Again on LLY there are negatives.  First the yield on my target is o.k. at 2.67% not quite 2.75% but pretty good is I can sell calls on my shares.  Dividend growth is weak at 1.96%.  Earnings per share showed a big loss the first quarter of 2017.  However, the most recent quarter showed significant improvement.   My history of buying LLY and selling calls and the fact that this stock has been a solid company for a very long time puts LLY on my watch list.

Source:  https://www.chaffeybreeze.com/2017/07/29/eli-lilly-and-company-lly-forecasted-to-earn-q3-2017-earnings-of-1-03-per-share.html


Earnings History and Estimates for Eli Lilly and (NYSE:LLY)


 Conoco Phillips (COP)


Conoco Phillips is a troubled stock in a troubled industry.   It has the worst fundamentals when doing Dividend Machine analysis.  Earnings per share have tumbled due to low oil prices to the point where COP reduced the dividend in 2015.  The reason I am including COP in this watch list is their most recent performance.  Earnings have improved and so have dividends.  Their most recent dividend increase was 6%.   D/E ratio is quite acceptable at .7477 source ycharts.

I hold some COP and have suffered but I am a patient investor.  Sometimes I dump a stock right away and other times I find it too late to sell.   I sold calls on COP to make up for the dividend reduction.  I had calls with a strike price of $50 and $49 and all those calls were assigned.   Now COP is down to $45.40.  This is a 15% retracement from the high of $53.   52 week low on COP is $39.

COP does not have an October call.  You would have to go out to November and that is too far for me.   Therefore, I am going to keep COP on my watch list and monitor the calls.  I would like to buy later in August so the November call expiration is less than 90 days out.  Right now a November $49 gets a $1.10 in call premium plus the October dividend of $.265.   My target is $45.


Source:  Zacks






Earnings: Earnings per share excluding special items came in at 14 cents against the Zacks Consensus Estimate of 2 cents loss per share.
Revenue: Revenues of $8,882 million surpassed the Zacks Consensus Estimate of $6,735 million.
Key Stats: Total production during the second-quarter 2017 came at 1,437 thousand barrels of oil equivalent per day (MBOE/D), down from 1,546 MBOE/D in the year ago quarter period.The total realized price of hydrocarbon was $36.08 per barrel of oil equivalent (BOE), against $27.79 per BOE in the April to June quarter of 2016, implying higher average realized prices across all commodities.    


Gentex (GNTX)


My last stock on this watch list is not well known.  They make rear view mirrors and other window products.  Unfortunately we have to look forward but it is an interesting small cap stock.  I sold a $17.50 call that was exercised (assigned, called away) and now GNTX is trading at $16.90.  

 

Gentex misses on only one Dividend Machine metric and that is yield.  At $16.90 their dividend yield is 2.13%.  Dividend growth is 11.11%, earnings exceed dividends with dividends paid out only 31.4 % of earnings.  They have virtually no debt with a D/E ratio of .0184.

Take a look at  GNTX's most recent Earnings and Revenue Growth:  Source Nasdaq.com


 Fiscal Quarter2017
(Fiscal Year)
2016
(Fiscal Year)
2015
(Fiscal Year)





March
   Revenue$453,535(t)$405,567(t)$368,937(t)
   EPS0.33 (3/31/2017)0.28 (3/31/2016)0.26 (3/31/2015)
   Dividends0.090.0850.08
June
   Revenue$423,800(t)$379,258(t)
   EPS0.29 (6/30/2016)0.25 (6/30/2015)
   Dividends0.090.085
September
   Revenue$429,643(t)$389,829(t)
   EPS0.32 (9/30/2016)0.26 (9/30/2015)
   Dividends0.090.085
December  (FYE)
   Revenue$419,912(t)$405,592(t)
   EPS0.3 (12/31/2016)0.31 (12/31/2015)
   Dividends0.090.085
Totals
   Revenue$453,535(t)$1,678(m)$1,543(m)
   EPS0.331.191.08
   Dividends0.090.3550.335
   Previous 3 Years
 
 


Calls are not robust but I have written (sold) calls several times on this little gem.   A September $17.50 fetches $.35.   Thirty five cents doesn't seem like much but it is a 2% premium.   The $17.50 strike is only a 3.5% gain so I have to wait for a proper call to jump in again.  At this moment I see no calls in October and none of the November calls are trading.   I will try to get in at $16.  When the $17.50 call trades, that would get me the 8% minimal gain I need should my shares be called away.

Conclusion:


The final Table below compares these four very different stocks.  All are dividend stocks, all have decent recent fundamentals.  All provide the opportunity to find a little value in this very robust stock market.




I do not chase stocks.  I use the fundamentals that have worked for me for many years.   Consider this strategy for the stocks in your portfolio.   Buy, cash the dividend, sell calls, cash the premium, if called away and a new opportunity to buy emerges and the fundamentals are tolerable, get in again and repeat.

M* MoneyMadam