It's Not Just the Dividend, It's the Dividend GROWTH (Part 2)

I've been thinking about the dividend growth rate, and have some more data to consider.  First, I broke the Chump portfolio into two groups, sorted by dividend yield.  Everything over and under 3% (Chowder rule) are separated.

As a refresher, the Chowder Rule from a frequent contributor on Seeking Alpha, Chowder, states that you strive to find a balance between yield and dividend growth, a sweet spot, that can be monitored by adding yield + dividend growth.  Yield should always be above 3%, and dividend growth should always be above 8%.  The sum of these should always be above 12%.  This is a decent rule of thumb to find balanced stocks that can continue to grow dividends.  This also assumes that higher yield stocks tend to increase their dividends at a reduced rate versus lower yielding stocks.

Looking at my portfolio, the weighted average (based on size of holding) increase for my higher yielders was 21.56%, and 37.75% for my lower yielders.  Technically, all of my holdings below 3% violate the Chowder rule, but if you look at five year averages....most are okay.  Nevertheless, it's good to note which holdings might be slowing down their dividend increases.  

I've also plotted a 5 year forecast for earnings growth next to each holding (courtesy of FAST Graphs).  Holdings with a small dividend, small growth, and low growth in earnings forecast should be highlighted as worrisome:

- Medtronic

- AFLAC

Both have enjoyed good price appreciation over the past year, so show low current yields.  But slowing growth coupled with a very modest dividend increase is cause for concern.

I'll keep a close eye on these two names - especially on valuation.  Below is a FASTGraph for each:

Regarding Medtronic, the yellow line above shows my average purchase cost.  I'm up 52% since purchase, and stock is still not overvalued, so I plan to hold a while longer.  I trimmed the position a bit last year, so it's still "right sized" in the portfolio.

Regarding AFLAC, I'm up 48% since purchase, and stock is still well below fair value.  I plan to hold my AFL position until the stock moves closer to fair value based on earnings.  Still a ways to go.  

This is the nice thing about have a few years left before retirement;  since I'm not living on the income, I can hold a stock for capital appreciation even if it pays a subpar dividend - at least for awhile.  But after another year, if the dividend isn't increased more meaningfully, I'll likely sell the position if I can trade up for better looking opportunity.

Thinking a bit more about AFLAC, I noticed their dividend increase was about equal to their projected growth in earnings, 6% to 7%.  Are they matching the dividend raise with eps growth? This would make some sense to me, so I checked for a correlation in my portfolio.  Here are the results:

This power curve was the best fit to the data, but still has an R squared value of only 0.154, which is pretty crappy.  Really can't draw a correlation between 5 year projected eps growth, and most recent dividend increase, which to me, is a bit surprising.  

This got me thinking, well what metric, if any, does correlate the dividend growth rate?  I played around a bit with this, and I found one....the 3 year and 5 year dividend growth rates!?  Here is data from David Fish' excellent CCC list - nice big population of over 500 stocks:

This is mildly interesting.  If you take last year's increase on the x-axis, then slide up to the best fit line, there is your prediction for the increase out three years.  The higher the initial value, the more the future value will decline, which implies that a lower dividend growth rate tends to stay at that level consistently vs. a higher DGR.

Not all that earth shattering, but if want a predictor of how much you expect your dividend to rise this year, look at last year's increase, and subtract a little.  This appears to be the best predictor available.

That's all for now.

Chump

It's Not the Dividend, It's the Dividend GROWTH (Stupid)

After finding Seeking Alpha a few years ago, I began reorganizing my IRA to reflect my changing investment philosophy. In 2012, I set about building a dividend growth portfolio for retirement, and have been recording the journey on a blog site here:

http://chumpmenudo.blogspot.com

2013 was my first full year with an established dividend growth portfolio, and the results were good. The portfolio's total return in 2013 was 32.95%, slightly beating the S&P 500 index over the same one year period.

When I started my blog and the redesigned portfolio in 2012, my intent was a hybrid portfolio of stellar dividend payers and less stellar, but faster growing stocks that would eventually morph into an income producing juggernaut at retirement. Over time, I found it difficult, and somewhat counter productive, to try and group my holdings into two categories. Thus, I simplified my approach, and began buying good stocks at attractive valuations. My definitions for "good" have been evolving, and for valuation have been deteriorating, with fewer bargains evident versus 2012.

And while I've continued to change my investing "rules," one tenant of my investing principles that hasn't changed is dividend growth. While I've bought several companies that pay small dividends, these same companies have a dividend growth track record of raising the dividend for at least several years. I've found that a great dividend growth track record is a useful screen to identify excellent companies.

First, why do I care about the dividend before I retire? In one of my earliest articles, I explored the effect of dividend growth on total return. Article here:

http://seekingalpha.com/article/898301-dgi-and-total-return-a-few-scenarios

As my simple analysis showed, and as my favorite author at Seeking Alpha, Chuck Carnevale has stated:

"Although the focus is often mostly on the dividend income, for many dividend paying stocks it is merely the icing on the cake. Whereas the cake is the capital appreciation component that is often overlooked in favor of yield."

Nevertheless, I have come to believe that the discipline required by a company to pay a dividend back to shareholders every single quarter, and grow that payout to shareholders every year, is a great indicator of earnings stability and future share price appreciation.

Throughout my career I've followed Peter Lynch's precept of "pay yourself first." Applied to companies in which I own stock, the dividend paid to shareholders is the perfect application of this principle. Management pays the dividend first, then decides how to reinvest what remains of retained earnings. As with individuals, this prevents management from "wasting" the money. This may come across as a bit cynical, but I firmly believe this to be true.

Taking this logic one step further, I believe that a stable, growing dividend is an indication of great corporate management, discipline, and deference to shareholders. And ascending a final mental step, I believe any enterprise that pays a consistent, growing dividend over long periods can very likely be considered a great company. Therefore, via the transitive property (the engineer within is always fighting to come out), long track record of dividend growth = great company!

So a growing dividend has become a consistent theme of my investing over the past 1.5 years, and my results have been pretty good so far. Looking at dividend growth in my IRA since 2010, you can see the effect of transitioning to dividend payers/growers:

                                

Back in 2010, I was invested mostly in index funds and ETFs. By late 2012, I had transitioned the portfolio to approximately 32 dividend growth stocks. Dividend payments, which are reinvested, have been growing at a compound annual growth rate of over 21%. The increase in income from 2012 to 2013 was only 7.35% due to timing of increases, and some heavy positions in lower yielding stocks. Here was the Chumpmenudo portfolio at year end, sorted by position size:

                          

Looking carefully at my dividend growth has given me a real appreciation for the "Chowder Rule" re-stated here from a recent Chowder article at Seeking Alpha.

"When you take the current yield and add it to the 5 year compounded annual growth, I want to see a number of 12% or better when the yield is 3% or higher, or a number of 15% or better when the yield is under 3% but above 2%."

While I don't stick to Chowder's rule perfectly, I do keep it in mind, and agree that its very important to consider the combination of current yield and dividend growth rate.

Looking at my holdings, I was surprised by the dividend growth rate. The weighted average (by position size) one year increase in dividends for this portfolio was a remarkable 31.32%!  Looking ahead to 2014, I've set myself up for a nice annual raise, I control the size of the raise, and irrespective of movements in share price, my yearly increase is virtually guaranteed.

I admit that an income of $12,704 is nothing to get excited about, and I certainly can't live on the income this portfolio threw off in 2013, but I still have around 15 years until retirement, and to some degree, I can control how that income grows. I'll continue to hold and select stocks that keep growing the dividend. If I assume retirement in 15 years, It's fun to project some different income scenarios, again, independent of stock price fluctuations. Here are those dividend income projections, with dividends reinvested:

                             

In the chart above, every scenario starts with my actual $12k in dividends from 2013. But going out 15 years to retirement, you can see that the rate of dividend increases is a major factor in determining my income at retirement.

Reinvesting dividends, that are growing rapidly every year, has an amazing compounding effect; what Lowell Miller refers to as your "compounding machine." The chart below shows that effect, comparing income growth without reinvested dividends versus with reinvested dividends. Dividend growth rate coupled with reinvestment is very powerful.

                                   

Can the Chump portfolio sustain a 20% dividend growth rate? Probably not, but if I'm focused on this metric, I can sure try to keep it above 10%. Looking back up at my holdings, and the one year dividend growth column, I count 9 of my 32 holdings that raised the dividend by at least 20% last year, and another 7 of 32 that raised the dividend by more than 10%. And depending on weighting of each stock, I can tilt the scales toward the higher dividend growth stocks by rebalancing. Even if I can't maintain 20% compound annual growth rate over time, I'd be quite happy with 15%, which gets to me to an income of $126k per year at retirement, and importantly, I don't have to sell any shares to get it.

This is where I think we folks that focus on dividend growth are on to something. If I keep my portfolio focused on two highly controllable metrics, current yield and dividend growth, the so called icing on the cake of capital appreciation, I can virtually guarantee a projected income stream in retirement. Conversely, I think its much harder (and stressful) to focus on capital appreciation! Yes, capital appreciation and total return are of paramount importance to me, but the best method I've found to insure price appreciation is to buy really good companies, which I define as those with the discipline and strength to pay and grow a dividend.

In summary, I want it all! Great total return and plenty of dividend income for a great lifestyle in retirement. The strategy I've adopted thus far is to focus on keeping the dividend stream growing at a healthy clip, and using a track record of dividend growth coupled with valuation to choose which stocks belong in the portfolio.

Valmont Industries - Acquisition

VMI announced an acquisition on March 3rd.  Here is the press release:

Valmont Announces Acquisition Of A Leading Northern European Manufacturer Of Engineered Steel Products >VMI

BY Dow Jones & Company, Inc.
— 6:30 PM ET 03/03/2014

Valmont Announces Acquisition of a Leading Northern European Manufacturer of Engineered Steel Products

PR Newswire

OMAHA, Neb., March 3, 2014

OMAHA, Neb., March 3, 2014 /PRNewswire/ -- Valmont Industries, Inc. (VMI) , a leading global provider of engineered products and services for infrastructure and mechanized irrigation equipment for agriculture, announced today that it has acquired privately-held DS SM A/S, a market leader in Northern Europe for the manufacture of heavy complex steel structures for a diverse range of industries including wind energy, offshore oil and gas, and electricity transmission. The Company, which will be renamed Valmont SM A/S, and will be reported in Valmont's Engineered Infrastructures Products Segment, has annual sales of approximately $190 million and operates two manufacturing locations in Denmark. The enterprise was valued at DKK 800 million (approximately $148 million) and DS SM's operating characteristics are similar to Valmont's other businesses within the Engineered Infrastructure Products Segment. Valmont expects the acquisition to be accretive to 2014 earnings.

DS SM (www.ds-sm.dk) part of DS Gruppen operates in three primary product segments.

   -- For wind energy, the company manufactures support structures for both the
      onshore and rapidly growing offshore wind market segments, as well as
      rotor housings for direct drive turbines.

   -- For the oil and gas industry, the company manufactures specialty
      equipment for offshore drilling rig stability. For offshore production
      platforms they also manufacture lifting and handling equipment such as
      cranes and winches.

   -- For the utility industry, DS SM manufactures engineered transmission
      support structures.

"DS SM is a premier engineered structures firm focused on energy infrastructure," said Vik Bansal, Group President of Valmont's Global Engineered Infrastructure Products Segment. "Support structures for the onshore/offshore wind and utility industries fit well with Valmont's existing competencies. This acquisition enables Valmont to participate in growing markets for wind energy, oil and gas exploration, power transmission and other related infrastructure projects, while giving us an attractive platform to expand our engineered infrastructure product lines across a broader geographic footprint."

"My management team and I are very pleased to be joining Valmont. We will maintain our 10% ownership interest in DS SM and we believe that Valmont provides the best strategic fit for DS SM and enables the next growth phase for our company," added Claus Bo Jorgensen, CEO of DS SM.

Valmont is a global leader in designing and manufacturing poles, towers and structures for lighting and traffic, wireless communication and utility markets, industrial access systems, highway safety barriers and a provider of protective coating services. Valmont also leads the world in mechanized irrigation equipment for agriculture, enhancing food production while conserving and protecting natural water resources. In addition, Valmont produces a wide variety of tubing for commercial and industrial applications.

The Chump IRA has maintained a 2.2% (of portfolio) position in VMI since January 2014.  I initiated the position on October 1st, and built it up throughout October, 2013.  My average cost per share is $137.37, is up 9.66% since purchase.

I like when companies buy competitors, or companies in the same industry.  This seems like a decent fit for VMI, so I'll hold the position as long it doesn't get too over valued.  Here is a FAST Graph of VMI today:

Today's blended PE of 13.5 is still a good value, and well below historical levels.  I'll trim the position if the PE reaches 20, but until then, I'll hold barring any new information.

Best,

Chump

Walmart (WMT) - Adding Some

Adding some Walmart today on price weakness, taking me to a full 3% position in the IRA.  Here is a recent FAST Graph:

WMT is a dividend superstar, increasing the dividend every year for the last 1,000 years or so.  It's trading at an historically low PE of around 14, and just keeps going.  WMT is a very nice defensive stock, with a beta of 0.31, it rarely moves in sync with the broader market.  This is a nice entry point for WMT.

The price is down today due to disappointing earnings in the fourth quarter.  Soft consumer spending and crappy weather are the main culprits.  A common theme among retailers.  Here are some highlights:

Wal-Mart earnings per share (EPS) were $1.34, down from $1.67 the same quarter a year ago; it had been projected to report EPS of $1.37.

For the full fiscal year 2014, Wal-Mart delivered EPS of $4.85 - a 2% increase over fiscal 2013's EPS of $5.01, but missing Wall Street expectations of an EPS between $5.11 and $5.21 per share.

The brightest news for Wal-Mart this morning was the company's global online sales and acquisitions, which topped $10 billion (a 30% increase compared to last year).

"We will continue to grow our global business by focusing on customers and serving them how they want to be served," Walmart Chief Executive Officer Doug McMillion said with earnings release this morning. "Improving store sales figures will be a priority, and we'll focus on being even stronger item and category merchants, delivering value and improving our service levels. We'll remain focused on our expense structure, and innovate to improve productivity and aid our ability to deliver everyday low prices."

I'm taking the long view.  Great company at a good price today, happy to hold for a very long time.

Chump

Judges, Hubris, and Same-Sex Marriage

Very good article regarding same sex marriage legislation from Dennis Prager.

Judges, Hubris, and Same-Sex Marriage

Tuesday, Feb 18, 2014

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In 2006, 57 percent of Virginia’s voters voted to amend their state’s constitution to define marriage as the union of a man and a woman. Last week, U.S. District Judge Arenda Wright Allen ruled the amendment unconstitutional.

In 2004, 76 percent of Oklahoma’s voters voted to amend their state’s constitution to define marriage as the union of a man and a woman. On Jan. 14, 2014, U.S. District Judge Terence Kern ruled the amendment unconstitutional.

In 2004, 66 percent of Utah’s electorate voted to amend their state’s constitution to define marriage as between a man and a woman. On Dec. 20, 2013, U.S. District Judge Robert J. Shelby ruled the amendment unconstitutional.

In 2004, 75 percent of Kentucky’s voters amended their state’s constitution to define marriage as between a man and a woman. On Feb. 12, 2014, U.S. District Judge John G. Heyburn II “struck down part of the state ban that he wrote treated ‘gay and lesbian persons differently in a way that demeans them’” (Washington Post).

In 2008, 52 percent of California’s voters amended their state’s constitution to define marriage as between a man and woman. On August 4, 2010, U.S. District Judge Vaughn Walker ruled that vote unconstitutional.

There is no doubt that federal judges will continue to do this throughout the country. Even the vote of 81 percent of Alabama voters will count for nothing to some federal judge.

Society may no longer define marriage in the only way marriage has ever been defined in the annals of recorded history. Many societies allowed polygamy, many allowed child marriages, some allowed marriage within families; but none in thousands of years defined marriage as the union of people of the same sex.

None of this matters to these judges or to all those who seek to re-define marriage and can’t convince a majority of their fellow citizens to agree.

For them, it is identical to ruling that laws that banned interracial marriages were unconstitutional. But that argument is utterly flawed. First, the analogy is false because there is no difference between black people and white people, while there are enormous differences between males and females. Second, no great moral tradition or thinking ever forbade interracial marriages (inter-religious marriages were sometimes forbidden). Moses, for example, married a black woman, and neither the Bible nor God hinted that it was wrong.

Some conclusions:

Proponents of same-sex marriage regularly label opponents “radical” and “extremist.” However, given that no society in thousands of years has allowed same-sex marriage, it is, by definition, the proponents of same-sex marriage whose position is radical and extreme. You cannot re-define marriage in a more radical way than allowing members of the same sex to marry. You can argue that is the moral thing to do. But you cannot argue that is it not radical.

All these judges have a hubris that is simply breathtaking. They not only know that they read the Constitution more accurately than the vast majority of the residents of many of America’s states, but they are also entirely comfortable with forcing great majorities of Americans to accept this new definition of marriage.

That it is conceit rather than legal reasoning is easily shown when one peruses the opinions of these judges.

I will cite only Judge Vaughn Walker as an example:

Walker: “Proposition 8 fails to advance any rational basis in singling out gay men and lesbians for denial of a marriage license.”

“No rational basis”? This is hubris. What he is stating is that for all of Western history — and contemporaneous non-Western history — there has not been a rational basis for defining marriage as the union of a man a woman. Vaughn Walker is convinced that he thinks more rationally than every moral leader and thinker in history, not one of whom advocated same-sex marriage. Judaism, Christianity, Islam, Buddhism, Hinduism, the Enlightenment — all were irrational regarding same-sex marriage, according to Judge Walker.

In Judge Walker’s mind, it is irrational, just to cite one example, to prefer that men and women form families in order to provide children with a mother and a father.

Walker: “Indeed, the evidence shows Proposition 8 does nothing more than enshrine in the California Constitution the notion that opposite sex couples are superior to same-sex couples.”

Yes, without in any way reducing the worth or the decency of any gay human being or dismissing the depth of same-sex love, California, like the rest of the world, has indeed believed in the superiority of man-woman unions. Not in the superiority of straight men and women as people: The gay human being is created in God’s image every bit as much as the straight human being, and there are gays who have led vastly more moral lives than many straights. But regarding how the family — the building block of society — should be constituted, the civilized world has always believed that it should be based on a married mother and father.

Society has also believed in the superiority of mother-father families to single-parent families. And that, too, never meant that every married person is inherently superior to every single person.

Walker: “Proposition 8 prevents California from fulfilling its constitutional obligation to provide marriages on an equal basis.”

This is another example of the lack of serious thought — as opposed to serious passion — that underlies the movement to redefine marriage. If American society has a “constitutional obligation to provide marriages on an equal basis,” then there is no plausible argument for denying polygamous relationships, or brothers and sisters, or parents and adult children, the right to marry.

On the matter of same-sex marriage, mass passions and coercive judges are winning. Above all, hubris is winning. That is why proponents always assert that they are “on the right side of history.”

But history is very long. Our grandchildren, or their grandchildren, will judge whether this is true. The Left since Marx has asserted that every one of their radical positions — such as the demise of capitalism — is on the right side of history. Virtually none turned out to be.

Coke

Added a little Coke (KO) to the portfolio today on price weakness.  Earnings and revenue hit expectations, but the price got hammered.  Added shares at $37.43.   This takes KO to about 2.9% of the portfolio, roughly a full position.

FAST Graph for your enjoyment:

As you can see from the charts above, the PE for KO never gets much lower than 20.  KO is not undervalued today, but it rarely is.  I'd say its trading at a "normal" multiple, and should give steady growth in share price and dividends dang near forever ;-)  Buy it, then forget about it.

Chump

** See the nice write up below from Paul Price on Coke (one day after my post above).  Great minds think alike I suppose.....

The Pause that Refreshes – Market Shadows Drank Coke by Dr. Paul Price Buying a Coke for the Value Portfolio Market Shadows’ Virtual Value Portfolio pulled the trigger and purchased 107 shares of beverage giant Coca-Cola (KO) this morning at $37.27 per share. The $3,988 investment amount came out of our cash reserve fund.   KO is a conservative position with a greater than 3% dividend yield. We expect to see an increased payout announcement in the near future. Risk appears low as the absoulte and relative Price to earnings ratios  are both near the low points of the past 15 – 20 years. While the company’s rate of growth has slowed, its fundamentals have never been stronger.  Dr. Paul Price | February 19, 2014 at 7:22 am | URL: http://wp.me/p2soa2-iRnZ

Emerson Electric (EMR)

Emerson announced quarterly earnings today, here is a summary:

Nothing negative here, but the stock is down today.  Here is a snapshot via FastGRAPHs:

A bit overpriced today, but has dropped from $70 recently, and I trimmed the holding back last full, so the IRA has a full position in EMR at present.  If the stock starts rising again in the coming months, I will likely sell additional shares and redeploy into holdings with a better valuation.  Here is a look at PE over time, a good indicator of over/under valuation:

As this graphic shows, a PE at or above 20 tends to be dangerous and likely to correct.