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Cummins
$CMI, is the newest member of my Dividend Machine portfolio for 2015.
Over
the past 10 plus months I have profiled 16 stocks which, at the time, complied
with my four stock picking criteria.
My
Dividend Machine work is relevant because ordinary investors need to learn how
to find and use basic criteria to pick stocks that have a history of providing
solid, ever increasing income. My
criteria are based on these ideas:
- A company should earn more money than it pays out in dividends.
- The dividend should have increased on average 4% per year over the past five years.
- The stock should deliver at least 3.5% yield on your investment.
- You should avoid a stock with a high debt to equity ratio.
Investors
can determine if a stock they are considering for the income producing portion
of their portfolio meets the above stated criteria through easy to find
sources. Yahoo, MSN, Google, plus your
brokerage all have this data available.
Earnings
per Share (EPS)
I
use earnings per share to measure if I think a company is earning more money
than it pays out in dividends. Others
use difference measures. For instance
free cash flow is more relevant for stocks that have a REIT (real estate
investment trust) structure.
Dividend
yield and increases
Yield
is determined by both the cash dividend and the stock price. Stocks can move in and out of the Dividend
Machine universe on a weekly maybe even daily basis. Stock price goes up and yield goes down. Or sometimes the stock price goes up and so does the dividend so the yield is stable.
In
order to maintain control over the Dividend Machine data, I must stick with my
criteria when I add a stock. The stock must yield 3.5% or more. Moreover, by rule,
the portfolio is long only and no trading occurs. The model portfolio holds every stock picked forever. Look at 2011, not bad.
Whereas,
on a personal level I may buy a stock that falls short of the yield criteria of
3.5%. Frankly, in view of the Federal
Reserve’s reticence to raise interest rates, I probably should have stuck with
3% as my yield criteria for the 2015 model portfolio but I did not and I must
live with it and pick stocks on the stated criteria. In the previous 4 years of finding Dividend
Machines, 3% was my minimum yield.
Perhaps like all investors, I became greedy.
The
result of being greedy in yield is you tend to buy within an industry that is
suffering, i.e. energy. The stocks in
the 2015 portfolio are energy heavy and therefore prone to price deterioration
in today’s market. Yet for the income
investor, yields are good as are some dividend increases. See the table below.
Dividend increases
Dividend
increases are paramount to investors who want to develop a nest egg of stocks that
pay some or all of their monthly expenses.
Over time expenses go up and so should your income.
The
stock I am profiling today fits all four Dividend Machine criteria and boy am I
surprised because I have looked at this stock before and it has not made the
grade due to yield. The answer is that CMI is well
off its 52 week high of $150. Trading at
$106.48 on last Friday’s (11/6/2015) close, the yield is now attractive and the dividend increases are compelling.
Is
CMI a falling knife?
Cummins
Inc. CMI
Let’s
look at the Dividend Machine Fundamentals for CMI. I see a stock that I want to
own. EPS $9.34, Dividend $3.90, yield
3.63%, dividend increases far greater than the required 4% and a D/E ratio well
below 1 or industry standard. See the
table below.
Now
for the icing on this Cummins Cake; on Friday you could have bought CMI around
$106, and sold January $115 covered calls for about $1.04. If they take your CMI you will have received
the quarterly dividend and the call premium plus a nice gain. See the table below.
Should
Monday’s trading action provide for selling a call like this at $1.15 I will
sell calls on one half of my position.
I am willing to lose some CMI for the current income, but I like it
enough that I want to hold it for the prodigious dividend increases and the
solid balance sheet.
By
dictate, when I add CMI to the 2015 Dividend Machine portfolio on Monday, the
recorded price will be the close on Monday, 11/9/2015.
TheMoneyMadam
Disclosure: Adding
CMI at $107 or less on Monday and may sell calls
