Showing posts with label 2017 Dividend Machine. Show all posts
Showing posts with label 2017 Dividend Machine. Show all posts

Friday, December 22, 2017

Foot Locker FL my last 2017 stock

I completed my 2017 portfolio of stocks I call Dividend Machines today by adding Foot Locker, symbol FL.

  • Foot Locker has virtually no debt
  • Revenue Growth is robust
  • Dividend Growth is solid
  • Covered Calls show potential

I went a touch over my budget of investing $100,000 in 2017.  With the addition of Foot Locker, my basis is  $101,248.20.   Foot Locker stock fundamentals are good as you can see in the table below.




I like their revenue growth and I like the dividend growth.  This area of retail has been challenging but athletic/leisure footwear is making a come back.   In spite of retail challenges, FL has demonstrated steady revenue growth.




Moreover, a few calls are encouraging. Although I am not selling calls against my position today, I find the trend encouraging.   See the February $52.50 and January $50 calls below.

 February $52.50 note there are a low volume of contracts trading today.




January $50 contract volume is much higher.




FL has virtually no debt which is comforting as we enter 2018 and the specter of increasing interest rates. 

Adding Foot Locker makes this very small portfolio a bit heavy in retail but when you are investing with rules, these irregularities are sometimes inevitable. 

This will complete my posting for 2017.  I will be on vacation until mid January.  During this time, I work on analyzing what has gone on in 2017 and determine how I will invest in 2018.

I thank you for reading and encourage you to stay invested using a disciplined strategy.

M* MoneyMadam


Disclosure:  Long FL


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Sunday, December 10, 2017

Justifying BBT for the 2017 Dividend Machine Portfolio

  • Interest rate increases should benefit banks

  • Inflation remains tame.

  • BB&T has the fundamentals needed to be a stock in the 2017 Portfolio


One of the old rules investors follow is that a progressive interest rate curve where longer rates are higher than shorter rates favors banks.  The reason is because a bank can lend money and receive higher income on that loan than they pay to the saver who deposited the money.   The spread is the bank's profit.



Image result for 2017 yield curve



















Inflation conundrum 


While we are told that the Federal Reserve will continue to gradually raise rates, we are also told there is basically no inflation.  

Most ordinary investors find this counter intuitive.  When interest rates go up we expect inflation.   But inflation has a lot of moving parts.  Going back to old adages, simply stated, inflation is defined as too much money chasing too few goods. 

United States Inflation Rate
 
The answer to the question of why inflation is technically hard to find is because of globalization. We do not have too few goods.  We have lots of goods and lots of money. Yet, interest rates are still going to be raised by the Fed.  and the upcoming raises should benefit banks.

BBT Dividend Machine Fundamentals



Therefore, I move onto the fundamentals of BB&T bank (symbol BBT) to support why I am adding this stock to my 2017 Dividend Machine Portfolio.

To review, I require a stock to deliver more income than I can get from a 2 year U.S. Treasury.  After all, stock investing is riskier than U.S. Treasuries, so you must demand more income.  BBT meets that goal, not by a lot but it does.  Currently the 2 year U.S. Treasury is paying about 2.3%.

Earnings per share (EPS) must be greater than dividend paid out.  Some investors like to use free cash flow and I encourage all investors to gather as much information as possible when they pick a stock investment.  I use EPS because I write for the ordinary investor and EPS is an easy value to find and understand.

Dividend and revenue growth are very important.  With or without formal measures of inflation, readers of this blog know that I concentrate on my future cash flow needs and I know my expenses will go up.  Therefore, a solid history of dividend growth is critical.

Like dividend growth, revenue growth is very important.  I looked at a lot of bank stocks and one of the main reasons I picked BBT is their revenue growth.

Finally, a good balance sheet lets me sleep at night.  It is not fail safe (just ask the owners of G.E.) but it is helpful.  I like a D/E ratio of 1 or less or within industry standard. MSN pegs industry standard D/E at .87.


 


Notice that BBT meets all the criteria.  It is not a growth or momentum stock and therefore I would not expect covered call options.  However, I have owned BBT for a while and I have sold a few calls over time.

I am long BBT and I added on Friday.  I still need to invest about $14,000 to complete my goal of investing $100,000 in Dividend Machines in 2017 and time is running short.  As with all my portfolios, I will track this performance and report on it periodically.   You can follow this portfolio by clicking on the Portfolio pages for 2017.

M* Money Madam

Disclosure:  Long BBT
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Sunday, November 26, 2017

Watsco wins Dividend Machine over 5 others

I need to finish investing the funds dedicated to my 2017 portfolio.  I have another $35,000 to invest and I really don't like buying in this market when everything seems expensive. Since the market seems expensive maybe oversold stocks are where I should look.

I screened about 400 stocks that were considered oversold using R.S.I. (relative strength indicator) of 28 - 30 and who deliver a dividend yield of 2.5% or more.   It was a waste of time. I found out there was a reason why every one of those stocks was in an oversold situation.  Most often they failed on balance sheet issues such as D/E ratio or revenue growth.

What I am looking for to finish my 2017 portfolio

  • More than 5% annual dividend growth over past 3 years
  • Home building materials, services or derivatives
  • Well managed balance sheet as measured by D/E ratio (debt to equity ratio)
  • Revenue growth that supports future dividend increases.

Since that screen didn't expose a great pick, I went back to the same screens I have used since I started writing this blog.   Beginning with yield, and making sure earnings are greater than yield.  I want revenue growth, dividend growth and a decent D/E ratio.

DIVIDEND GROWTH



Dividend growth is very important to me and that is because my expenses go up all the time.  I measure these things and I know it is the case no matter what the official measure of inflation suggests.

So I started my new screen with dividend growth in mind.   I don't want anymore retail, or health care.  We have a chip maker in the portfolio and a fast dining option.  (See the portfolio holdings below.)  Energy seems so overpriced and few banks pay enough in dividends to warrant inclusion.



Right off the bat I found WSO as an example of a stock in the industry I like with great dividend growth.  WSO is where I started.




SIX STOCKS FOR COMPARISON


While, dividend growth is the goal, I also know diversification is important.  Just look at my 2014 portfolio and you will see too much emphasis on energy.  Link to 2014 PortfolioSince 2017 is a small portfolio, I looked for stocks selling goods and services for the home.

I looked at Leggett and Platt (symbol LEG) because they make stuff for the home like faucets.  Watsco symbol WSO is in a similar space but they make HVAC equipment and supplies.   Home Depot (symbol HD)  and Lowes (symbol LOW) are another couple of stocks with products for the home.   Then I added in UPS (symbol UPS) and FedEx (symbol FDX)  because the ecommerce growth at both HD and LOW is significant and someone has to shipped that stuff.  These are the six stocks I analyzed for my next Dividend Machine pick.


I am always surprised when I do these comparative analyses.   I have been really excited about Home Depot but when I saw that their debt has exploded to a D/E ratio of over 10, I have to really consider unloading my position and moving into something else.

It won't be hard to beat HD's 2.07% yield but finding a stock with annual dividend growth of 30% will be hard to find.  Certainly Lowe's comes close.  Lowe's balance sheet is better than home depot but still at 2.89 it is a bit high.   I looked at one other big box stock, Big Lots and their D/E ratio is under .40.   Costco's D/E is .62.  Clearly both HD and LOW have more debt then their industry standard.  LOW's dividend growth rate of 26% is very enticing but their meager yield of 1.87% in view of the other criteria leaves me wanting

The UPS and FDX comparisons are interesting.  UPS has the better yield at 2.89% and acceptable dividend growth of 8%.  But, and it is a big but, their debt to equity ratio is more than 12.  This balance sheet is unacceptable to a conservative income investor.   FDX has much better control of its balance sheet with a D/E ratio of .91 and dividend growth of a mighty 50%.  The hair on this stock is the low yield of .78%.



When I see stocks with low yields, but good balance sheets and good yield growth, and good revenue growth I reserve them for my covered call category of income investing even though I cannot include them in a Dividend Machine Portfolio.  Since FDX meets these criteria, I looked for call options but found none to my liking.

This leaves me with Leggett and Platt (LEG) and Watsco (WSO.)  Purely on dividend growth, the first choice is WSO  with annual dividend increases averaging 36%.  Only HD in this list beats that kind of dividend growth. 

LEG as a contender


LEG has the highest yield but the lowest dividend growth of 5%.   With a 5% annual average increase, I can meet the expenses increases I am living through right now so it is respectable.

LEG has a D/E ratio just above 1.  This is not horrible like UPS or HD but it is higher than WSO's very low D/E ratio of .27.  Let's look more carefully at WSO. 

WSO Dividend Machine Fundamentals


Watsco has been of interest to me, the MoneyMadam, for quite a while; WSO is in each of these portfolios 2011, 2012, and 2016.   In 2012 when tax changes were on the horizon and dividends might be taxed at a higher rate, WSO pay five years of dividends early.   As an income investor, they have your back.

I always like to see revenue growth in a dividend growth stock.  For instance CSCO is very intriguing but their revenues are stagnant.  WSO has decent revenue growth.  It is no Nvidia (NVDA); WSO is not that kind of growth stock.  But income investors need to know the top of the funnel is being fed as well cash the end result - dividends.



Watsco is quite a cash machine and they continue to reward their investors by starting up the dividend increases again.  Take a peek at the table below to view the data I use to evaluate WSO.



What stands out to me is the P/E ratio which at 30.2 is a bit high.  Indeed Watsco is close to it's 52 week high.  Not exactly a bargain.  However, I need to invest some money for income and waiting has not been good to me.

WSO is going into the 2017 portfolio.  When the trade executes, I will post the data on the 2017 Portfolio Page.  WSO is a touch short on yield at 2.68% and touch high in price but I am not going to hope for a price pull back so I can say I bought WSO with a 2.75% yield.  The 2.68% yield is good enough when I look at the other fundamentals.

I may have paper losses if WSO corrects but I can live with that as long as my income continues.  Moreover, I can always buy more.

M* MoneyMadam

Disclosure:  Long WSO, LEG, HD

UPDATE:  Trade executed on Monday, 11/27/2017 @ $164.40.



 http://www.themoneymadam.com/2011/01/dividend-machine-wso-7-of-52.html

http://www.themoneymadam.com/2011/06/wso-covered-call-for-more-income.html

http://www.themoneymadam.com/2012/09/dividend-machine-for-week-of-9242012.html

http://www.themoneymadam.com/2016/01/watsco-wso-first-2016-money-madam-stock.html

http://www.themoneymadam.com/2016/02/watsco-wso-justifies-2016-portfolio.html
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