Showing posts with label T. Show all posts
Showing posts with label T. Show all posts

Wednesday, October 10, 2018

Invest $200 K in a down market - for income M*

I don't know where the market is going any better than you or the experts on CNBC.  However, I know how to use fundamentals to build a portfolio.   I am busy working my holdings but here is a good start for a $200,000 portfolio using closing prices on 10/10/2018.  Be ready when opportunities come up.




Let's look at their P/E's (price to equity ratio) and D/E's (debt to equity ratio.)



Remember my focus, my specialty is income.  I don't have a pension.  My family lives off of the money our savings create.   Think about it.  You have to be ready when opportunities come up.

M*  MoneyMadam

Disclosure:  Long all positions
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Thursday, May 17, 2018

Update to 2018 Income Portfolio

Updated 2018 Portfolio

Some don't add to losers but I do when the fundamentals are still good.  Remember this blog concentrates on income and income that grows.  





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Wednesday, May 2, 2018

Starter Portfolio of 5 percenters

I write for the individual, ordinary investor who wants to manage or monitor their own income stocks.  In this post I am looking at stocks that I call my "5 percenters."   These stocks are intended for retirement accounts.  Therefore, the universe of stocks does not include master limited partnerships due to their complicated tax implications.

  • Three percent is not enough
  • A pristine balance sheet is critical
  • Value is important
  • Dividend increases are desirable

Three Percent is not enough


When you can buy a totally safe instrument such as U.S. Treasury bonds that pay you 3%, why would you risk exposure to a stock?   Reasons are: (1) you either don't really need more than 3 % to live or (2) you think there is stock appreciation potential which you will tap for income by selling some shares. 

I have never been comfortable with the idea that I have to sell some shares to meet my income needs. Perhaps I have been in this business too long and know what can happen to stock prices in what seems like an instant.   1987, 1992, 1994, 2001 and of course the 2007 - 2009 debacle are fresh in my mind.

Another reason is my very low risk tolerance, especially in retirement account investments.   Once you retire, you cannot re-fill the coffers should you suffer a loss.  Moreover, so many people end up selling during a rout instead of waiting it out.   

You can wait it out better if you know your income will continue during times of turmoil.  If you don't look at the stock prices and only look at deposits from dividends and interest, you can make it through these difficult times.

I am not suggesting the stocks in my "5 percenters" portfolio will not suffer price declines.  I am suggesting, they will pay you an average of five percent and may even increase your income over time.

Selection criteria


I found five stocks that would make a good starter portfolio for retirees like me who need five percent.  I did not include any MLP's (master limited partnerships) that can deliver really high yields but also have complicated tax implications.

The average yield of these five stocks is 5.22%.  The range is 4.26% - 6.1%.  

Several stocks did not make the cut due to balance sheet issues.  I want a really solid balance sheet as measured by D/E ratio (debt to equity.)   General guidelines suggest a D/E of one or less or within industry standard is a desirable hurdle.  

The average D/E ratio of these five stocks is .59.  The range is .11 - .89.  All are within industry standard.

Earnings always have to exceed dividend paid out and some dividend growth is desirable.  

Value


Let's assume, the investor reading this post has just received their corporate retirement payment.  Now they have to invest it.  You don't want to start by buying high.  Nothing can make a new retiree more uncomfortable than seeing the value of their holdings go down and that can happen in the best managed portfolios.

I am using P/E ratio (price earnings ratio) to measure value.   Current common wisdom suggests many good stocks are over valued.   Stocks are considered cheap when their P/E ratio is under 15 and expensive when their P/E ratio is over 20.   

Growth stocks almost always carry a high P/E ratio.  If you are going to live a full and long retirement, you will need some growth but this post highlights five stocks to consider not for growth but for five percent income.  

The average P/E ratio of these five stocks is 12.20.  The range is 6.61 - 17.64.

My Five 5 Percenters


Years ago when I would advise a client on a starter portfolio it almost always included names like Johnson and Johnson (JNJ).   Today stocks like JNJ pay too small a dividend.  JNJ's yield is not even 3%.   And, JNJ has had some earnings issues making their current P/E quite high although, JNJ will improve that metric in 2018.  

The five stocks I have selected are quite diversified and I am pleased to see that result.  I did not go into this study trying to find diversification, but I did hope to end up with a diversified portfolio.

All data is on the five percenters is presented below.

DIVIDENDS


In the table below, I bought $40,000 worth of each of the five stocks.  You can see the dividend income and yield.




Investors who want to live off of their dividends and interest payments, need to look carefully at this chart.  This chart presents very realistic expectations of income from dividend stocks.

BALANCE SHEET, DIVIDEND INCREASES & VALUE


In the table below, you can see the EPS (earnings per share) as compared with dividends paid out.  Also note  D/E ratios of these five stocks.  Finally P/E ratios are displayed.  P/E ratios are based on previous earnings rather than future earnings.  However, when I look at projected earnings the P/E ratios change only a bit.  T's P/E is projected to increase from 6.61 to 9.60 and NHI's P/E is projected to decrease from 17.64 to 12.41. 

Also presented are the dividend increases over the past four quarters.  To calculate dividend increase %, I summed the most recent four quarter dividends, and compared them with the prior four quarters to create the dividend increase %.



Everyone of these stocks has some trouble.  That is why they are considered cheap.  Yet I believe their fundamentals are strong enough that I am using them in my personal portfolio to create 5% income.




M* MoneyMadam
Disclosure:  Long all stocks discussed




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Sunday, January 28, 2018

2018 A Value Play for my next Income Stock

AT&T commonly known as Telephone, is a stock that has not participated in this lovely bull run. I like value and find that when I stick to my guns and invest using my disciplined income stock selection criteria, I am eventually rewarded.  Just look at Caterpillar (CAT) or Darden (DRI.)

  • AT&T gains from tax law change should provide long term benefit to its shareholders. 
  • VZ benefits from tax law change will provide price improvements.
  • Income stock fundamentals make Telephone the better stock for income investors looking for value.
Just last week monthly call options expired and a number of my options were called away leaving me with the daunting task of investing the proceeds.  Where to put this money is a challenge as everything seems expensive.

I look back and think about the ridicule of picking Kohl's stock in January, 2017  @ $41.88.  Several dividend payments and call premiums later, I personally no longer own KSS.  I made a nice tidy sum on Kohl's which I considered a value and income stock at the time.  Notice the 2017 portfolio has benefited greatly.   

Symbol Price Basis Date Acquired Forward Annual Dividend Dividend Yield % Gain 
KSS $63.40 $41.88 1/17/2017 $2.20 3.47% 51.38%



Management for the Long Term



Some complain that AT&T is not looking out for its shareholders.   They should take tax benefits and provide a special dividend or at least announce a major hike in the quarterly dividend.   As an income investor, I would like an income surprise.

However, Telephone has not declared a special dividend and that is okay with me because I am investing for the ongoing dividend and the hope for future increases.

I like that Telephone is using much of it's tax benefit to invest in the future.  Notwithstanding the Direct TV and Time Warner acquisitions, AT&T has a long term vision I hope. Some portion of their windfall goes to current employees, some portion goes to investing in the future but none goes to us the share holders and that is ok.

Management for a price increase.


A recent Seeking Alpha article noted that the tax benefits will not help T.   You see Verizon will receive a similar benefit and they will use the windfall to add to earnings.  Price and earnings are related so I would expect Verizon, symbol VZ, to have a price increase.  

The case is well laid out in the article noted here and I agree with it. https://seekingalpha.com/article/4140776-t-big-tax-reform-benefits-help   Telephone will not be using the tax benefits to add to earnings; at least not yet; and I do think that we will have to wait for earnings growth before we get stock price growth.  VZ on the other hand may do better in the short term.

Telephone Fundamentals


Let's take a look at AT&T's income stock fundamentals.  Telephone closed at $37.82 on Friday 1/26/2018 midway between it's 52 week high and low.  Earnings per share do exceed dividend paid out but not by a lot and that is why T needs to invest in growth.   Debt to equity ratio is a bit higher than my maximum of 1 but the industry standard is also above 1.  Notice Verizon's D/E ratio is much greater than 2.

         
  AT&T  
  T 1/26/2018 $37.82  
         
  D/E Ratio 1.31    
  E.P.S   $2.07  
  Dividend   $2.00  
         
  Dividend 3yr Growth 2.13%  
         

Verizon and Telephone Comparison


Look at these comparisons in the table below and perhaps you will agree with me that Telephone is a good pick for 2018.  Let's see how the year unfolds.  Hopefully we income investors will not only continue to collect the over 5% dividend, the modest dividend increases, and future potential.

Price 52 wk Hi 52 wk Low
T 37.82 42.7 32.55
VZ 54.72 54.77 42.8
Div Yld Last Div ^ 3 yr Av Div ^
T 5.16% 2.04% 2.13%
VZ 4.24% 2.25% 1.64%
3 yr Rev Growth D/E ratio
T 7.51% 1.31
VZ -0.02%
Use of Tax Savings
T Capital investing and 200,000 employees getting $1,000 bonus
VZ Tax savings added to Earnings per Shares (EPS)


On Monday I will execute my trade and record it in my portfolio to track.  I will also invest the same amount of money in the ETF that tracks the S&P 500 called SPY.  Over time, we can determine which was the better investment, SPY or the same amount invested in T.

M* MoneyMadam

Disclosure: Long AT&T
Bought on 1/29/2018 @ $37.27


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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

















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