Do it yourself Dividend ideas

I mentioned in my April recap that I recently bought a house.  The first thing that happens when you buy a house is that you will need to get things that you never needed in an apartment.  Captain Obvious right?   Things like lawnmowers, sprinklers, faucets, maybe paint and curtains.  I began to look at the various products and who made them.  It turns out there are large number of dividend payers who sell all manner of home care products.

My Grampa was a do it yourself kind of guy (At 75 he repainted the interior of his big house).  He told me that if you plan on owning a house that you need to be able to fix as much as possible.  Service calls are expensive and most non-critical issues (i.e. plumbing disaster), are not difficult to fix.

First of all, you need to buy from somewhere:

Home Depot (HD)

An obvious place to start.  HD sells pretty much anything you will need to fix/update your house. They have a friendly and knowledgeable staff. You can hire contractors and rent various pieces of equipment.
Dividend Streak: 5 years
Current Yield: 2.42
10 Year DGR: 19.2

Lowe’s (LOW)

Another DIY mega store.  They sell pretty much the same things as HD.  To be honest, I am not sure what exactly the benefit of going to one over the other is.  I am looking for the lowest price and will go to wherever that may be.

Dividend Streak: 51
Current Yield: 1.58
10 Year DGR: 29.2

Walmart (WMT)

WMT has a surprising amount of home care/ renovation items.  They have more painting equipment than I thought they would and it was cheaper that HD or LOW.  If you are looking for cheap throw away painting equipment, then take a look here.
Dividend Streak: 41
Current Yield: 2.42
10 Year DGR: 18

Target (TGT)

I am not exactly the best person at putting things together in a way the matches.  I had some more knowledgeable friends take me to TGT to pick out some curtains.  TGT has the least selection of DIY items, but you can get any cleaning supplies and some basic furniture at a good price.  They have a lot of nice (i.e. cheap) fabrics for various purposes.
Dividend Streak: 46
Current Yield: 2.91
10 Year DGR: 19.8

Stanley Black and Decker (SWK)

They make of tools of all kinds.  I decided early that I didn’t want to deal with gas for any lawn equipment.  So, I picked up a Edger/Trimmer/Blower 20v battery combo pack from Amazon (lowest price, not anymore though).  I was a little worried about battery life/power, but these tools have plenty of power and the battery lasts longer than I need it.  They also sell drills and other tools that use the 20v battery, which is convenient.
Dividend Streak: 46
Current Yield: 2.32
10 Year DGR: 6.8

General Electric (GE)

One of the first steps towards reducing my energy bill will be to replace the most used bulbs with high efficiency ones.  GE makes a large variety of energy efficient bulbs.  Light bulbs are by no means there only products, but for the time being this is what I buy from them.
Dividend Streak: 4
Current Yield: 3.33
10 Year DGR: NA

Honeywell (HON)

Honeywell is not a dividend champion, but they have been paying dividends for a long time.  Another step in my energy efficient plans is to keep lights on only when I need them on.  That seems pretty obvious, but the porch light is one I forget to turn on and off.  I purchased a controller that replaces the porch light switch. It will turn my lights on automatically based on the longitude/latitude of where I live at dawn/dusk.  I haven’t put this in yet, wish me luck! Old houses have crappy wiring.
Dividend Streak: 3
Current Yield: 1.94
10 Year DGR: NA

Sherwin Williams (SHW)

Painting!  I had originally decided that painting the house wasn’t going to happen.  Once I got there and started to think about things and with the encouragement of others, I decided to paint.  SHW is a paint store and you are able to get anything color you want, wallpaper and other supplies.  Painting is not that hard and is an ideal DIY task.  I have heard but not confirmed) that painters can charge anywhere from 50-100 dollars per hour for labor.
Dividend Streak: 36
Current Yield: 1.1
10 Year DGR: 12.4

A good start

There you have it, a good place to start for DIY companies.  There are plenty of others and as I continue my home ownership adventure, I am sure will find many more!  Well, I hope I find more, considering how many projects I have rolling around my head…

Disclaimer: Long TGT, WMT

April Portfolio Highlights

April was another month of backwards and forwards.  I am pleased to say that my portfolio went down less on down days and seemed to actually go up in some cases.  This is good to see, I think this has to do with a “flight to quality” and I feel like all of my companies match this criteria.

I haven’t been writing or commenting as much, I recently purchased a house and have spent the last 20 days being a domestic worker bee.  Turns out my project ideas are rather time consuming.  I want to get my energy bill down and I believe I can make it into a game!  So that will probably take up some of my time.

I spent the time I could looking over my portfolio and decided that any cash I used this month was going to be invested in my portfolio companies.  I have already done the research and there are several positions I wanted to build out a little more.

I annouced my purchases of DPS,TGT and PG.  In the closing days of April, I made another purchase of ARCP .  I doubled my position and feel that my REITs are well represented in my portfolio.  ARCP is the kind of REIT I like.  A triple, long term leasing structure with plenty of physical assets and a variety of high quality tenants.   I would like to add more to O, but not at the moment.

Dividends

Last year I received $200.02 in dividends.  This year I increased that by almost 25% and ended with $247.27.  The first month of the quarter is usually my lowest, only higher numbers per month for the rest of the quarter!

You can see my Progress page for additional information.

Dividend Increases

It was a pretty good month for dividend increases:

  • CVX : 7%
  • JNJ : 6.1%
  • KMI : 2% (another quarterly raise for 1 cent. About 4% so far this year)
  • OHI: 2% (quarterly raise. 2 cents so far).
  • PG : 6.7%
  • XOM: 9.5%

Strong raises all around.  KMI and OHI have raised for the second time this year.  I am pretty happy with all of these raises.  Ideally I would like to have my average weight adjusted raise around 8%.  With 21 of 43 companies raising dividends so far this year, I feel like I will be able to meet that goal because several (KMI, OHI, WEC) will raise their dividends at least once more.

New Positions

No new positions this month.

Added Positions

I did not add much cash:

  • New Cash: ARCP, DPS, PG, TGT
  • Drip: O, PM, KO, SYY

I have changed most of my positions in my Roth account to no longer drip.  There are a couple choice positions that I feel are undervalued, but large enough in my portfolio that I do not want to add cash, so I will drip them still.

There will be a few positions that were dripped next month due to the timing of my change and lag before it takes effect.

Dividend Decreases

None.

Sales

None.

Conclusion

A busy month playing around with my house!  I am very pleased with my stocks performance and will hopefully find some bargains over the next month!

Over the next twelve months I expect to receive at least $3972.28.  This is an increase of $157 from last month.  Almost to 4k!

Disclaimer: Long all stocks mentioned.

Purchase: Proctor and Gamble (PG)

Well, to be honest it has been a discouraging month.  I had hoped to make 2-3 purchases in addition to DPS, TGT earlier this month.  However, Mr. Market has had other plans.  I would be lying if I said the overall valuation of the market didn’t affect my desire to make a purchase.  Given the current high valuations of most stocks in my portfolio (about 25 are large positions or exceeding some criteria), instead of looking for the absolute best value, I decide to add to a position that is smaller than I would like.

My exposure to makers of consumer goods is limited to PG.  I have wanted to add KMB and Clorox, but I haven’t done as much research on either and they do not meet my entry criteria (dividends, PE, cash flow) at the moment.  Which is double edged sword for me.  They don’t meet my criteria, so then I don’t research and a vicious cycle begins.

I made my first purchase of PG in June 2013 at 79.33 per share.  It is currently trading at 80.36.  Not much of a return, but at the moment given the market I feel like it would be a good candidate for additional funds.  Yesterday, I bought  15 shares at a cost basis of 81.80 (including commission) even though this probably wasn’t the best value in the market.  PG recently raised the dividend by 6.7% and reported a raise in profit for the most recent quarter.   This dividend raise increases their dividend streak to 58 years.

Do I believe this is the best value in the market right now?  I don’t know.  However, PG is one of those companies that I can own and be comfortable with regardless of the market.

Disclaimer: Long DPS, PG, TGT

Tagged

My Savings System

After a long busy weekend of moving to my house, I am back on the internet!  I previously told my story so far. I am going to elaborate on my system for saving money.

My system for savings

I have been reading a lot about Systems vs Goals lately.  I first read about systems in How to Fail at Almost Everything and Still Win Big, written by Scott Adams. This book is about his many failures and what he did that eventually lead to his successes.  Basically, it boils down to setting up a series of steps that will eventually lead you to a better state. I try not to use the word “goal” because once a goal is reached you are done.  A good system will enable you to keep on advancing.  A system can be used to achieve goals, but the goal is almost incidental.  If that makes sense.

Spend less than you earn

The first thing that you will read in pretty much any financial independence book is to spend less than you earn.  This is what I have done since I left school.  In college I lived on what I had, which was just enough to pay bills and pay for necessities.  I had a little extra, but not much.  I don’t know how I did it, but the day I graduated college my bank account hit zero.

When I began working, I started to spend more.  I was able to do more and it happened, but I still spent less than what I earned.

Pay yourself first

My salary was larger than any amount of money I had earned before.  I started contributing to my 401k as soon as I began working.  This money never hit my bank account, so I never got used to having it.  I was saving money and it took me about 5 minutes to set up.  Effortless savings.  If your employer matches, that is free money.

My direct deposit hits multiple accounts.  I send money to my spending and various savings accounts.  When I get a bonus or work some overtime, I have designated my investment account for those deposits.  This account basically takes the remainder of the paycheck after each of the other accounts are funded.

Avoid lifestyle inflation

Lifestyle inflation is where you spend more as your income rises.  This is pretty easy to do without even thinking about it.  My system doesn’t allow this to happen, because when I get a raise my investment (overflow) account gets a larger deposit.  The amount going into my spending account is fixed.

Tracking what you spend

I don’t exactly track what I spend because I have an account that is for spending.  I am allowed to spend every dollar in that account.  This includes all my bills (car maintenance, cell, etc), food and anything else I want spend money on.  The money I don’t spend will go into a “to be spent” fund.  At the end of the year, it is easy to see how much I spent (i.e. total deposits – “to be spent” balance).

My goal is to keep this account to exactly what I spend.  I do not want the “to be spent” account to be overly full (usually just for plane tickets or if I want something and have to save up over a few checks).  Periodically, I will reduce the amount of money going into the spending account if I do not spend it all.  My spending has gone down over the last few years because I have everything that I want.

I have tried more complicated ways to track spending, but I usually only analyze how I have spent if I spend more than I was expecting.

Reduce fixed costs

What?  You just said you don’t track your spending!  I don’t, but I absolutely hate paying for things that I do not like.  I have an IPhone 3GS from 2009, I like the phone but hated the contract.  For years I looked for a service that met my needs, would let me use my current phone and was cheap.   I finally found a post on Mr. Money Mustache that talked about a company called Airvoice Wireless.  If you only text/call then check out that link.

I view the phone as a necessity.  I rarely do anything but make calls on it (I play games/listen to music on planes only).   Cable TV was another thing I could do without and cut the cord more than two years ago.  These changes saved me over $100 dollars a month, which enabled me to reduce my spending money (which automatically increased savings).

Forced withdrawals from savings

I love saving money, so how could I spend more money if I wanted to?  Well, I would be forced to remove money from my investment account.   This is an act I would have to do deliberately and feel the pain of seeing my available cash drop.

The other option is to change how much is going into that account.  This can be easily done in a minute, but then I would have to sit and wait longer to make my next investment.

Conclusion

This system works for me.  After setup, it requires very little to continue.  I feel good when I save and not as good when I spend.  It took a little tweaking but overtime I was able to simplify it.

 

What is your money saving system?

Loyal3 Purchase: DPS and TGT

After doing the most research per dollar invested ever (Round 1 and Round 2) the results are in!  Today I executed a trade in Loyal3 for both DPS and TGT.

I have been paid 55.31 in dividends for the first quarter and part of April.  The bulk of the dividends in this account will come in March, June, September and December.  With a few (KO,DPS) coming at the beginning of the following month.  Unless I add additional funds to the account, I will probably post only a few times per year after the dividends have been paid.

Making the trade

Loyal3 makes it very easy to purchase additional shares of a company (including fractional). On Sunday I logged into my account and placed the trades:

  • TGT : $27
  • DPS : $28

You are unable to use any cents when making a purchase with available funds.  However, if I had made a purchase with a credit card, then all available funds would be used prior to charging the card. That means that if I placed a single trade for $60, then $55.31 would be used from the Loyal3 account and $4.69 would be charged to my credit card.

Recently, Loyal3 made a change that would allow same day trades if using available funds and the trade was placed before 2pm eastern time.  When using a bank account or credit card, it takes about 2-3 business days before execution.  This is not really a problem, the market doesn’t usually change that much over a few days.

The lag time between placing a trade and execution can be frustrating.  I like my trades to happen instantly!  Half the time you will get it for a better price than your limit order with a specific price, but what’s a few pennies in the long run anyway?

The Purchase

After the trade executed, I purchased the following:

  • TGT : 0.4546 shares @ 59.39 (+$0.78)
  • DPS : 0.5451 shares @ 51.37 (+$0.89)

Raising my income by a total of $1.67 per year.

Conclusion

This has been a valuable exercise for my investing career.  I filtered a watch list, analyzed each security and chose the two that I felt provide the best value at the time.  I currently have 12 positions in the account and probably will not look outside these twelve in the future.  There are a few positions I added to the watch list, but none of those are that close to getting a spot in my portfolio.

Thank you for reading!

Disclaimer: Long DPS, KO, TGT.  My holdings are visible in the Portfolio tab.

Battle Loyal3: Round2 Elimination

In the first part, I examined all of the dividend paying stocks in the Loyal3 brokerage service.  After eliminating based on PE, Yield and Dividend Streak, I was left with a third of the original list.  Today, I dive a little deeper and attempt to reduce the remaining positions to three or so.

The remaining companies are:

AAPL, BBY, BUD, DPS, K, INTC, KSS, MAT, MCD, MSFT, TGT, WMT

AAPL : Eliminated

I am dropping AAPL out of the running for the simple reason that their current yield is below 2.5 (it was close during the initial screening).  AAPL is a good company with a brightish future ahead of them.  The main concern I have is whether or not they will still keep innovating.  They basically refurb their main product, the IPhone, each year.  Android phones are catching up in quality and I don’t know if they will be able to maintain market share.  Their market share will not erode overnight, but will be long drawn out affair.

BBY : Eliminated

They are struggling against their online competitors.  This can be seen in the steady deterioration of the following:

  • Operating Margin: 5.6 (2007) to 2.7 (2013)
  • Net/Operating Income have been declining since 2008
  • Free cash flow has been erratic.
  • Long term debt has grown.

BBY doesn’t provide the steady growth that I like and I do not like their future prospects.  This feels a lot like Circuit City to me. Remember them?

BUD : Watch list addition

I am eliminating BUD due to their lack of a dividend buyback and being a net issuer of shares. I do not want my ownership diluted.  Additionally, BUD has a FCF payout ratio of ~63%.  This is higher than I would like to see (60%).  However, I will keep an eye on BUD.

DPS : Maybe

DPS meets all of my criteria for a buy, including FCF Payout ratio <60, Payout Ratio <60, Interest Coverage Ratio > 9.  I currently have a small position in DPS, the only thing that concerns me is the current valuation.  DPS has less market penetration than KO or PEP and I feel like they could have steady growth.  I may be biased because my favorite soda is  Dr. Pepper.

K : Eliminated

The Kellogg Company has a tendency to buyback just a little bit more than they issue.  In fact, total shares outstanding went up from 2012 to 2013.   With my addition of GIS, I do not feel that adding more K at this time would be the best use of the available funds.  From a valuation standpoint, K is trading at a premium to most of it’s metrics.

INTC : Eliminated

I currently have a reasonable amount of Intel.  However, that is not the reason I will be eliminating INTC from contention.  INTC has not raised their dividend since mid 2012.  I may sell INTC if they do not raise the dividend or show demonstrable progress in revenue stabilization/growth.  INTC is at best a hold.

KSS: Eliminated

I think Kohl’s has some promise.  The main concern I have is that they are largely a clothing retailer (some home goods).  I know nothing about fashion and only go to Kohl’s when I can’t find it at WMT or TGT.  Relying as much on clothing/household goods may be hard when the consumer is more constrained.  During 2008, KSS FCF dipped into a negative value and has been inconsistent since.  Even though I do not necessarily require a 5 year or longer dividend history, I would like to see what happens when they hit a rough patch since they began their dividend policy in 2012.

MAT : Eliminated

Who doesn’t love toys?  MAT overall looks pretty good.  However, their cash flow has been pretty erratic over the last few years.  The FCF payout ratio was over 100% at the end of the most recent year, which is higher than I would like it to be.

MCD : Elmininated

I like MCD and would love to own more, but I am trying to avoid adding to my larger positions (over 4%).  MCD is in my Roth (which I am dripping right now), so I do not want to add additional funds at this time.  If MCD was trading significantly below my cost basis, then I would have considered it anyway.

MSFT : Eliminated

Microsoft has promise.  I like the moves the new CEO made with regards to Office on the IPad and releasing some of the software for free.  If you haven’t tried OneNote, you may like it.  It is a very useful product.  On the fundamental side, MSFT has a strong balance sheet and strong cash flow.  I would like to add to MSFT, however after the current run up, MSFT is over 4% of my portfolio.

TGT : Maybe

TGT has been beaten down this year.  They have suffered from a credit card breach that doesn’t seem to end.  Target is the kind of retailer I like. They sell a variety of necessities and other higher margin products.

WMT : Eliminated

For reasons discussed in my analysis of WMT, I will not be adding to this position at this time.

Two remain

TGT and DPS remain.  As of today, I have about 53 dollars in the Loyal3 account.  I will split the investment between these two positions.  Once this has completed, I will provide a post update!

Conclusion

It takes time to deploy capital in the most cost efficient strategy.  I spent a fair amount of time analyzing all of the possible candidates for my next investment.  This was a lengthy and instructive process for me.  The watch list of Loyal3 is somewhat of a random list (which isn’t how my actual watch list came to be), but it was good to familiarize myself with all of the dividend payers that are available in Loyal3.

Disclaimer: Long DPS, GIS, INTC, K MAT MCD, MSFT, TGT, WMT

 

My Financial Journey

Looking back on the years, the following is how I managed to save money/invest.  I originally meant for this to be a list, but it turned into a story.

My journey was a combination of good/bad choices, good luck and good timing.  Some of which was out of my control, some not.

I was in debt after leaving college at the end of 2005.  This is probably not a surprise to many people, but I managed to miss the large tuition increases that began in the early 2000s.  Freshman starting when I was a senior paid significantly more than me.  The amount of debt was relatively low (25k) considering I earned both a masters (Computer Science) and bachelors (Applied Math) degree.

I began working as a Software Engineer in January 2006.  The job market during 2005-2006 was much stronger than it is today and that field was(is) growing rapidly.  Having a desirable degree made it easy for me to find a job that pays well.  This wasn’t the case at first, I actually had to continue with a Masters after getting my Bachelors because not many people in the software industry had heard of my degree (Applied Mathematical Sciences, what a mouthful).

Once I began working, my paycheck was larger than any I had received.  Since I had spent the previous 5 years as a poor college student, I was well equipped to not spend money.  Initially, I set 10% of my paycheck aside in my company sponsored 401k.  I didn’t max it, but I had some debt to pay off.  Two months into my career disaster struck.

Well more of a mini disaster.  The car that served me well throughout college was wrecked beyond repair in an ice storm in February 2006.  Fortunately, while I was waiting for a tow truck, a city truck drove by and sanded where I crashed.  The damage to the car was substantial and the cost to repair it was much higher than it was worth.  At the time, I was still building my emergency fund (from 0) and did not have any cash set aside for this type of emergency.

I ended up buying a car that was cheapish.  I spent about 14k after all costs associated with the purchase.  For the most part, I was pretty content to making the payments on both my car and student debt, while saving any extra money I had.  That was until I met one of my friends.

It was at the end of 2006 that I met a good friend who was very knowledgeable about personal finance.  He was a follower of Dave Ramsey, a financial guru, I had never heard off.  I was pretty oblivious to all of the financial ideas.  My goal was to spend less than I earned, but I didn’t really have any negative feelings about having debt.  That changed after meeting him.  After building my emergency fund, I began to aggressively pay off both my student and car loans.  From the end of 2006, it took me about 2 years to pay off both loans.

All the while, my paycheck grew and I got a promotion.  Each time my paycheck increased, I raised my 401k contribution.  It was more money I never had, so I never missed it.  My spending stays pretty level from year to year, so this approach worked well for me.

Here I was, three years into my career debt free and with a high savings rate.  Stepping back a bit, my investing career started at the top of the market in 2007.  I didn’t invest a lot, but I got caught up in the market euphoria at the time. Housing is never going down! Hindsight is always 20/20 and if I had started two years earlier, the result might have ended the same, but I would have been able to pat myself on the back for picking a stock that went up.  Keep in mind I wasn’t investing.

Now I had several goals in mind:

  • Buy a house
  • Become a millionaire!

That was really about it.  I had never thought of financial freedom in the sense that I would stop working and live off investments.  I just figured I would work till I was old, which I am okay with because I enjoy Software Engineering, well more the puzzle aspect of it (which is why my other hobbies fitness/nutrition/investing seem to be puzzles).  As far as I was concerned, I was financially free.  I had a good job and more money than I needed.

This bring us to the end of 2008 and through 2009.  I was debt free, contributing to my 401k, saving for a house and starting to invest.  Having zero financial background, I surfed the internet for ways to pick stocks, talking to friends and even my Grampa!  I ended up getting into a news letter service where, for a fee, they would do the research and tell you when to buy/sell.  It took me a few years, but in the end I realized that the only people who make money with these services are the guys collecting the fees.  I took a beating throughout this time frame in the market, and gave up for the most part.  I had a portfolio and would buy based on the recommendations of the service, but I started to put less and less money into investments.

In 2009, I decided I wanted a new car.  I had gotten into bike riding and wanted a car that would make it easy for me to take my bike to the various places.  After searching for six months, I found it and ended up spending 27k on my second vehicle.  I’m a low mileage driver and my previous car was in great condition, so I was able to get about 6k for it and then I pitched in 3k. For a total loan value of about 19k.  After a few months of paying my loan, my aversion to debt and hatred of monthly payments caused me to raid my house fund and pay the car off.

At the start of 2010, I was back to square zero with the house fund, tired of “investing” and debt free (again).  I maxed my contributions to my 401k, where I was actually making money and decided to focus after tax money back into the house fund.   I still purchased stocks here and there, but put very little new money in.  After the beating I had taken in the market, my house fund would be in a “high” yield savings account.  I didn’t want to risk it, which is a good thing to do. I try to keep money I may need in the next 3-5 years as cash.

Jumping to the middle of 2012.  I can’t remember exactly what snapped, but I remember being tired of my poor performance in my own investing. By that time, I had made a few good “picks”, but still didn’t find consistent performance.   I had reached a point with my house fund where I could lower the contributions and have enough for the down payment by the time that I reached mid 2013.

At this point, I began to read several blogs, revisit my life goals and decided I didn’t want to work forever.  My Grampa was also dying at this time, needless to say, my conversations with him were foremost on my mind.  We spoke at length on how he invested and why.   He loved the safety of dividends from both stocks and municipal bonds.  He loved the tax free interest of munis.  He had never made much money, but his investment strategy(40k+ per year), a modest pension and social security/medicare enabled him to do everything he wanted.

At that point I changed my strategy to dividend growth investing.  I want to be able to have a secure retirement income stream.  Social Security won’t be what it is today and I have no pension.  I believe dividend growth investing will get me to that point.

Well, I have been somewhat vague on other aspects of my spending.  I had originally intended this to be a list instead of a story, but I will discuss more about what exactly I did to achieve the savings rate I do in the near future.

Thank you for reading.

 

Purchase: General Mills (GIS)

In late MarchI added General Mills (GIS) to my portfolio as I mentioned in my March Recap.  Here I provide the reasoning and metrics that enabled me to make my decision.

If something seems amiss, call me out.  I can’t learn without knowing I made a mistake!

Overview

General Mills (GIS) is a US based food company.  They sell a large variety of leading brands. Including Cheerios, Nature Valley and Yoplait.  You could easily eat all your meals from GIS!  Like this delicious looking Cheeseburger Crescent Casserole.  Many of their brands are 1 or 2 in their category.  GIS has seven product categories:

  • Small Planet Foods
  • Snacks
  • Big G Cereals
  • Baking Products
  • Frozen Foods
  • Yoplait
  • Meals

GIS has a moat that consists of the brands and the scale of its distribution.  For example, Cheerios has a 14% market share in the cold cereal market.  Brand recognition is key for GIS and they advertise accordingly.

GIS gets approximately 60% of its revenue from the US. The remaining 40% is collected internationally.

Story for ownership

With strong recognizable brands and a large variety of foods, people are going to eat.  GIS makes many foods that are convenient and inexpensive.  GIS gets about 40% of its revenues from outside the US. Increasing living standards in other countries will benefit GIS as people begin to spend money on a larger variety of foods.  GIS is focusing on growth in non-US markets.

Is debt under control*?

*Note: I am using data provided by Morningstar based on the TTM results and the FY14 Q3 report.

When I am analyzing a stock, I want to ensure that they can manage their debt.  I look at the following ratios:

Interest Coverage Ratio: 9
Current Ratio: .81
Quick Ratio: .52
Debt/Capital: ~54%
Is maturing debt spread out?: No

GIS can easily handle it’s interest expenses, with an Interest Coverage Ratio of 9.  Their interest expenses have slowly declined over the last decade from a high of 537 mil to 334 mil (FY13).  While their interest expense declined, the operating income has risen. Burning the candle from both ends!

Normally, I like to see a current ratio above 1, which is a measure of a companies ability to handle short term expenses.  GIS has a Current Ratio of .81 at the end of FY13, which is lower than than it has been over the last five years (greater than .9).  However, in Q314, the current ratio has returned to .97, which is in line more with historical standards.  GIS has a Quick Ratio of .52 (current ratio excluding inventories).  This could be a problem if they had to pay their debts quickly, but with a steady cash flow I don’t see this as an issue.

With a debt to capital ratio of 54%, I do not think that they hold a large amount of debt.  In fact, total debt has remained fairly steady over the last few years.  One note of concern, is that the bulk of GIS bonds mature before 2025, I believe they will be able to handle maturities with their cash flow and benefit from the current low interest rate environment (at least for a few more years).

How does GIS spend your(my) money?

  • Dividends:  GIS pays out approximately 52% of FCF as dividends (60% of EPS based on TTM EPS and new payout). GIS is currently yielding 3.2%.
  • Dividend Streak: 11 years
  • Share Buy Backs: GIS has 654M shares outstanding, which is down from 768M shares in 2004. 29M shares have been purchased F14 YTD.
  • Capex: GIS spends about 600M per year in capex.

Revenues have been increasing each year over the last decade.  EPS has dipped twice in 2006 and 2012, but rebounded the following year.  GIS fared well during the early part of the recession and managed CAGR of 4.4% from 2007 to 2010.

GIS oscillates between spending more on capex + dividends + buybacks than operating cash flow, this difference can only be made up by borrowing additional funds.

Valuation

I currently look at historical metrics to determine if a position has deviated significantly from the mean.  At this time, GIS is trading above it’s historical averages (PE, Price-to-sales).  GIS is trading above its historical dividend rate of 2.9%.

Concerns

GIS has to spend a lot on advertising in order to keep their products in the minds of consumers.  I don’t think this is foreign to the other competitors in the space.  GIS has begun to advertise more online each year, which is good and applicable for younger generations.

With a weakening consumer, the temptation to buy generic store versions of goods can cause an erosion of sales.  For the most part, I think that the product variety reduces the risk because store brands don’t offer the breadth of products that GIS offers.  I can’t even tell you what the generic version of Cheerios is.

A final concern is the potential for a lack of innovation and missing trends.  For example, GIS has done a good job creating Gluten free offerings and will hopefully monitor these trends as consumers tastes change.  I suppose this type of concern is generic and can really be applied to any business with a product or service.

Recent Developments

GIS recently raised their dividend 8% and which increases their dividend growth streak to 11 years.  They have shown a consistent desire to raise their dividend and have done so through a tough recession.

Fiscal Year 2013 is shaping up to be a good year.  Overall, US sales where flat, while the international segment has grown 8% YTD.  The driver for future growth will be the foreign markets that they are operating in.  GIS is partnering(or acquiring) with companies to reduce the risk of entering these markets.  I like this approach because it requires patience and is very deliberate.  This could of course get out of hand if they acquire poorly run businesses regardless of how familiar they are with the market.

Conclusion

GIS has shown a willingness and ability to increase shareholder returns each year.  They are making good moves to ensure that their market share increases in each product line.  Even though GIS is slightly overvalued based on historical measures, I feel like buying an initial position was a good move.  If the price falls somewhat and their aren’t more interesting options out there, then I will consider buying more shares.

Disclaimer:  Long GIS.  

March Portfolio Highlights

This month was rather tame.  There was a little bit of everything.  Lets see!

The market had its share of ups and downs, but for all the volatility it didn’t move very much by the end of the month.  This is good, but at the same time it would be nice for prices to come down a bit.  One of my weaknesses is trying to determine which is a better investment at the current time.  This is something I am working on and will need to get better at.

I didn’t look into to many stocks for investment purposes and made some very small additions.  I plan on looking at more in the future, but I am unsure what exactly to add.  I feel like I need a another utility, materials,  and healthcare.  These are rich fields, but I am having a hard time getting motivated to do some research.  I tend to get this way when the market goes up and then I get heavily motivated to research/buy as the market is going down.

Next month, my plan is to add an additional position or two from one of the sectors that is currently under represented.

News

There was some interesting portfolio news this month:

  • Microsoft finally released a version of Office for the Ipad.  They linked it to their Office 365 service.  I was hoping for a standalone product (there is an option), we will see how this works out.
  • Baxter has decided to split their business in two in 2015. One in biopharmaceuticals and another for everything else. This is interesting, I will have to wait and get more details.
  • Wisconsin Energy is rumored to be a potential purchase for Warren Buffer after some comments he made in his letter to shareholders.  Lets hope not!

Dividends

Last year I received $220.62 in dividends.  This year I increased that by almost 100% and ended with $440.56.  The third month of each quarter is my highest month.  The month this is over $400 will be a great milestone!  Its great to increase my monthly total by 100% year over year, but I was in a major transition last year and will not increase as much going forward.

I have also added a Progress page for my dividend income.  Fast progress from last year to this year, but it will slow down from here on out.

Dividend Increases

There were only two raises this month:

  • APD : 8.5%
  • O : .2 %

I am pleased with the raise from APD, I like to see raises above my desired amount of 8%.  I am not worried about O’s small raise, I don’t think they are done for the year.

New Positions

I purchased 20 shares of General Mills (GIS).  I will write a quick blurb about them in a few days.  It’s hard to be motivated to sit inside when the weather is nice!

Added Positions

I did not add much cash:

  • New Cash: GIS, CVX(1/3 of purchase)
  • Cash from sale: CVX (2/3), KMI
  • Drip:  COP, DLR, EMR, JNJ, LMT, LO, MSFT, MCD, O, PEP, SBSI, WAG, WEC,

All of my positions in my Roth are dripped because I can only add funds once per year and the dividends in the Roth accumulate too slowly.  Once they accumulate faster, then I will collect them and reinvest strategically.

Dividend Decreases

None.

Sales

I sold OKS this month.  I wasn’t planning on it, but after doing my taxes and the associated paperwork that this caused, I decided I didn’t want to mess with the K-1 over the long haul.  I replaced it with an addition to my CVX and KMI positions.  After making these purchases, I am still down about $30 from where I would have been otherwise.  Fortunately, the game is long and I can recover over time.

Conclusion

A rather uneventful month for the most part. I am happy for this, but would still like to have some openings into my positions and add a few additional ones for diversity.

Over the next twelve months I expect to receive at least $3814.94.  This is an increase of $47 from last month.

Disclaimer: Long all stocks mentioned (except OKS).

 

Battle Loyal3: Round I Screening

I have finally been paid enough dividends in my Loyal3 account to purchase some shares.  Loyal3 is a fee free brokerage that allows an individual investor to purchase partial shares with as little as $10.  This enables someone who can only save a few dollars at a time to invest in high quality companies.

Setup

How do they offer fee free trades?  Loyal3 keeps their costs low by batching as many trades as possible before execution.  How does this work?  Suppose you, our ten best friends and myself all place an order for Coca-Cola(KO) tomorrow.  Loyal3 will take all of our money, plus some other peoples and at some time over the next few days buy shares of KO.  Lack of execution speed is the cost of being free.  In addition to this restriction, you can only invest in about 53 companies at the moment and purchase a total of $2500 per stock each month.  You can fund the purchase with either a credit card or bank account.  If you use a credit card you get an instant discount depending on your rewards.

Purchase Criteria

The following criteria will be used to filter the less appealing payers from the list:

  • Dividend growth of three years minimum.
  • Dividend Yield greater than or equal to 2.5 (reasonable yield)
  • PE Less than 20 (protect against overvaluation)
  • Payout Ratio less than 60% (I want room for the dividend to grow).

The most important criteria that a position can have is the desire to create shareholder value through dividends.  This unfortunately cannot be describe in terms of metrics, but in terms of action.  A history of raising the dividend is one action that demonstrates this commitment.  However, this act in and of itself is a bit misleading.  It is great to own a company that has raised dividends for so long, but that is merely an example of what could be.  Still a company with a history of raising dividends will hopefully have a culture that continues regardless of who is running it.

Fortunately, those of us investing over the last decade have been through good and bad times.  The recession weeded out the weak and gave companies the opportunity to demonstrate their commitment to dividends.  This is a valuable demonstration of whether they were committed to dividends and creating shareholder value without extreme methods.

Candidates

I have provided a table of all the dividend payers in L3.  Included is some additional information that will enable us to eliminate those that do not meet our entry criteria.  The table is rather long and includes 38 different companies.  The data in this chart is provided by Google Finance, it may be a little old. It is sufficient for this exercise though.

TickerPriceDiv/shareYield (%)Growth StreakPEPayout Ratio
FOX30.970.250.81%113.7111%
ANF37.840.82.11%222.648%
AEO12.120.524.29%028.54122%
BUD104.253.022.90%412.5536%
AAPL537.4612.22.27%313.3330%
BBY25.730.682.64%313.0234%
ATVI20.250.190.94%421.4120%
BKW25.930.281.08%239.743%
KO38.821.223.14%5220.464%
DIS78.480.861.10%421.5224%
DPS53.721.643.05%517.5654%
DNKN48.910.921.88%236.0368%
FTR5.540.47.22%049.97361%
GPS39.880.882.21%914.5732%
HSY102.771.961.91%428.3854%
K61.761.842.98%912.4637%
HAS54.511.723.16%1125.2480%
INTC25.310.93.56%1013.4348%
KSS56.51.562.76%313.9639%
MAT39.431.523.85%515.2259%
MCD96.163.243.37%3817.3158%
MSFT39.361.122.85%1114.5441%
LB561.362.43%018.344%
M58.411.71%614.9826%
MDLZ34.210.561.64%126.6144%
NKE73.320.961.31%1224.7532%
PEP82.542.623.17%4219.161%
PVH123.080.160.13%070.69%
RL156.981.81.15%519.3422%
SBUX73.41.041.42%4567.98805%
TGT59.741.722.88%4619.4256%
UL41.61.43.37%518.2361%
TWX63.471.282.02%416.7934%
VFC60.861.041.71%4122.6839%
VIAB841.21.43%116.2523%
WWE27.350.481.76%0756.151327%
WMT76.141.922.52%4015.6940%
YUM73.21.482.02%1031.1563%

First thing to notice is that all of these companies are in the Consumer Goods category.  The exceptions being AAPL, INTC, MSFT and FTR.  I would have added diversification to the list above, but that is a relatively futile exercise here.  This is okay, as my accounts work together, so I will just buy other sectors to balance this out.

Let the filtering begin!

The following stocks will be removed because they fail to meet any of the criteria above.

DNKN, WWE, SBUX, YUM

A few takeaways from this bunch.  First, I didn’t realize that the World Wrestling Entertainment (WWE) paid a dividend, but it feels appropriate for them to have a gigantic PE! I am a little surprised at Starbucks (SBUX), I followed (and owned, sold last year) them for years.  After reading the 2013 annual report, SBUX had a $2.25 per share pretax charge relating to some litigation with Kraft.   After adjusting for this accounting change SBUX has a high PE, but a reasonable payout ratio.

Next, I will remove any stocks that do not have a history of raising dividends by at least three years.

AEO, ANF, FOX, FTR, LB, MDLZ, PVH, VIAB

These companies either recently initiated a dividend or have held the payout steady.  A steady dividend is better than no dividend IMO, but there are plenty of quality companies in each industry that have a habit of raising their dividends.

The following companies are being excluded due to their drastically low dividend yield.

 ATVI, BKW, DIS, GPS, HSY, M, NKE,  RL, TWX, VFC

I was surprised to learn that so many clothing companies pay dividends.  Some of them are relatively high (American Eagle Outfitters (AEO) and the GAP (GPS)), while others are low (Ralph Lauren(RL) and Nike (NKE)).  There is even one that has payed dividends for 40+ years in VFC Corp (VFC).

Having the capability of raising a dividend is one of the most important characteristics.  The following companies have a higher payout ratio which may limit the ability to raise dividends and make them less secure.

HAS, KO, PEP, UL

A couple of these positions have a higher payout ratio because they recently raised their dividends and we are using the prior years EPS and not the upcoming years.  With this in mind, I may not necessarily kick these positions out depending on what is discovered with the remaining stocks.

The remaining candidates

At this point in time, we have 12 remaining companies.  

AAPL, BBD, BUD, DPS, K, INTC, KSS, MAT, MCD, MSFT, TGT, WMT

In the next round, I will be looking a little bit deeper and attempt to whittle this number down to three companies or less.  This may seem like an excessive exercise for investing 50 to 60 dollars, but I feel like it is worth it.  I have additional funds to invest and I may uncover a hidden gem among these and at a minimum find some candidates for further research.

Watch list additions

Even though the following didn’t make the cut this time, I will be adding them to my watch list for future research:

GPS, VFC

Summary

This has been an interesting exercise.  I have uncovered some previously unknown dividend payers and then eliminated them based on some of the more basic criteria I am interested in.  In part 2, I will look a little deeper into each position and attempt to reduce the number further.

Disclaimer: Long KO, PEP, MCD, MSFT, INTC, K, HAS, MAT, TGT, WMT, DPS, UL