Purchase: SBSI, Banking in Texas

It has been a busy few weeks for me.  I haven’t been able to do as much investing as I wanted.  A combination of being busy with the house, enjoying the nice weather and making up hours from a vacation that lasted too long (from works perspective).    However, I have had time to keep up with all the M&A action that has been going on.   One that struck me as particularly interesting was SBSI purchase of OMNI American.

OMNI American Bank is a small bank that is located in Fort Worth, Texas.  They have fourteen branches located throughout Fort Worth and its suburbs.  They have no presence within about 30 miles of Dallas.  They have about 1.4 billion in assets and had an EPS of .57 cents over the last few months.  SBSI agreed to buy them for ~.45 shares and 13 dollars per share of Omni.    Being that this is already a done deal,  I am not worried about whether or not they overpaid for the bank.  I personally don’t believe they did.

I look at SBSI and one aspect that I do not like about the bank is were most of its branches are located.  They are located in smaller towns with a token presence in Fort Worth and Austin, with two SBSI branches in town or in a suburb.  Cities like Dallas and Houston do not have any.  I have wanted SBSI to increase it’s footprint in at least one of the fast growing metro areas in Texas.  According the the census, four of the top 10 metro areas with the largest population growth were in TX.   These cities were Houston, Austin, Dallas and Fort Worth in that order.   It makes sense to expand in these areas from a banking perspective.

Texas has done very well in recent years.  Some large companies have been moving activity from other states to TX.  Chevron (moving personnel), Occidental Petroleum (LA to Houston) and Toyota come to mind.  The housing market did not collapse like it did in AZ or CA.  There was a rather modest fall from the peak of the housing bubble to the trough.   As we speak, the housing market is going gang busters in the Dallas Area and construction is booming.  As I walk around the area there are help signs practically everywhere I go.  Anecdotal evidence for sure, but sometimes that is good information.

In light of this move by SBSI, I re-evaluted my thesis and asked the question.  Does the purchase of SBSI add to the growth potential of this bank?  After reading, looking at macro factors and considering SBSI management track record, I chose to purchase additional shares of this company.   I placed a limit order yesterday, but did not have my order filled even though the price of SBSI hit my price! Frustrating for sure and it lead to me missing out on the ex-dividend date of today.

No worries though.  Today I purchased 42 shares of SBSI for a cost basis of 25.99 (including commission).  This will round out my position of SBSI to a little over 100 shares and add 35.28 to my yearly income.  After the 5% increase for SBSI recently and this new purchase my forward dividend income has now…

Broke 4k in forward dividends!

This is a great accomplishment and at this point I feel like my snowball with move forward without adding any additional outside funds.  However, I have no planes to not continue saving as much as I can.

Disclaimer: Long SBSI

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.


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





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.

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 : 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!


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


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.


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!


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

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



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.


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.


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.


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

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.


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.


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.


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.


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.  


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:



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 

Interesting Metrics: Which payout ratio?

There are three payout ratios that are used most often with dividend investing: payout ratio, forward payout ratio, and free cash flow payout ratio.  What are they and which ones should I use?

A payout ratio is a way to attempt to show the safety and possible growth of a dividend.  The lower the payout ratio, the better potential dividend growth.  During times of economic stress, a low payout ratio can be used as one piece in the puzzle to help determine the safety of a dividend.  The other pieces being expenses, free cash flow and other fun metrics.

What are they?

There are several types of payout ratios I use.  They are:

  1. Payout Ratio: This payout ratio takes the current 12 month dividend and divides it by the trailing twelve months (TTM) of earnings per share (EPS).
  2. Forward Payout Ratio:  This payout ratio takes into account the current 12 month dividend and divides it by the projected EPS over the next twelve months.
  3. Free Cash Flow Payout Ratio:  Takes the amount paid in dividends over the previous twelve months and divides it by the Free Cash Flow (FCF) generated during the TTM.

The payout ratio that should be used depends on the industry.  Generally, I try to stay below a 60% payout ratio (this number is a matter of individual choice).  However, some sectors will have a higher payout ratio because there is only so much they can reinvest in the business.  Two sectors that come into mind are utilities and tobacco companies.

Issues with each

Payout Ratio

The main issue with the payout ratio is the fact that it uses earnings per share (EPS).  EPS can be affected by charges that are not necessarily accrued at one time or by charges that are merely an accounting requirement.  Take Starbucks (SBUX) for example.  According to SBUX 2013 annual report they earned $.01 per share. Or did they?  It turns out in Q4 2013 they finished arbitration with Kraft, which resulted in a $2.25 charge to earnings.  The claim was not paid in Q4 2013, but will be funded with cash and debt at a later date.

SBUX is currently paying .26 per quarter ($1.04 per year). So which do you use? .01 or 2.26? Or in terms of Payout Ratio 1.04 / .01 = 10400%? or 1.04/2.26 = 46%? This case is a drastic example, but suppose SBUX only had a charge of $1.  Then the payout ratio would be 1.04/1.26 = 82%, still high but not necessarily high enough to make you want look deeper.   For this kind of investment, one falls below my 60% rule and the others are well above.  It takes some due diligence to make sure that a charge off doesn’t skew your results, or you could miss out on a good investment opportunity.

After reading enough reports, you will see that charge offs are fairly common.  Generally, the bulk of what I have seen are a couple pennies. It is only in the rare case that one is much larger.  The SBUX write off is the largest I have personally seen.

Forward Payout Ratio

The Forward Payout Ratio has only one main issue that concerns me, that is the nature of telling the future.  This ratio uses earnings projections for the next year to determine what the payout ratio is today.  In order to use this number and be confident in it, you must understand the business and what is possible in terms of earnings growth.  Earnings growth can be affected by a large number of things.  The economy, share buybacks (almost artificial earnings growth), issuing shares, etc.

Free Cash Flow Payout Ratio

The Free Cash Flow payout ratio is my preferred ratio.  This divides the previous TTM dividend with the actual cash the was generated after paying expenses and capital expenditures.  I like this ratio the most because it uses money the company actually made as part of the ratio.  Like the payout ratio, I would like this to be below 60%.  If this ratio is above 100%, then that will require some additional digging to figure out why.

On the plus side, the free cash flow of a business is less affected by many of the same problems that arise when calculating EPS (charge offs, accounting gimmicks, etc).  It is the cold hard case that the company generated.  The main issue with this ratio is that it is a historical number.  It’s a measurement of what was done and as we all know in investing “past performance does not guarantee future results.”


Using a combination of the Payout Ratio, Forward Payout Ratio and Free Cash Flow ratios can be part of the process for helping to determine the safety, sustainability and growth potential of a dividend.  Each has their flaws, but provide insight into the overall picture.

 Disclaimer: None

Mortgage Recovery Portfolio

After living in an apartment for the last eight years, I have decided to buy a house.  When I first began looking, I was adamant about putting 20% down.  I was mostly interested in avoiding Private Mortgage Insurance (PMI) fee.  PMI is required when a borrower doesn’t have a 20% equity in the house. After the previous housing collapse, I assumed that lenders would require 20% at minimum.  It turns out that the lenders I have spoken with require 5% minimum down with PMI.  Once I discovered that 20% wasn’t required, I decided to look into building a portfolio with the remaining amount in my house fund.

The purpose of the portfolio will be to recover the difference in interest between putting down 10% and 20%.  I do not want to take an enormous amount of risk with the dividend payers I choose.  With an interest rate of 4.5%, it would be doable to invest in MLPs, REITs and Preferred shares to beat this number.  If I did that, than there wouldn’t be much to write about or numbers to crunch!  While 4.5% is a high dividend rate, historically this is very low for an individual to borrow funds.  From that perspective, I will be effectively borrowing at a low (relative) rate and investing in securities, that over time, will each yield more than 4.5%.

Using Leverage to make money

My largest position, Phillip Morris (PM), has been very active with this trick.  They are buying back their higher yielding stock and selling bonds that have lower yields.   The vast majority of their debt that matures after 2019 is under 4.5%. To show how this benefits a company, suppose PM sells 1 million in bonds at 3.5% and uses that to purchase 1 million worth of stock which currently yields 4.65%.  PM pockets the payout difference, pays a little extra interest and reduces outstanding share count.  This maneuver saves them a little more money every year (as long as they keep raising their dividend), while the bond interest is fixed for its duration.

Step 1: Avoiding PMI

I initially believed I was going to have to pay PMI.  I went to several lenders and got quotes which ranged from $50 to 85 per month.   After a little more digging, I found that some Credit Unions don’t require PMI.  I attempted to use my search skills to find out why this is the case, but I failed.  After investigating several Credit Unions and banks, I chose to go with a Credit Union due to the favorable tradeoff between closing costs, interest rates and lack of PMI.

If you are interesting in learning more about PMI, read on.

Step 2: How much interest will I pay

The first step to identifying a portfolio is to determine what the difference in payments will be when putting down 10% vs 20%.  The interest rate I will use is 4.625% for a 30 year mortgage, which is the rate I will be borrowing at. The following table is based on a house that costs $225,000.

Loan AmountDown PaymentInterest Initial Interest Payment

When I first did this calculation, I was surprised to see that the difference between 10 and 20% down was $19145. For some reason, I had thought that the difference would be much greater. This is a blessing due to the low interest rate environment that has persisted over the last 5 years.  Sadly, I think that will make this exercise less challenging.

Onward! The situation as presented is to attempt to recover 19k with dividends over a 30 year window. This amounts to approximately $638 dollars a year in dividends (19k/30). With a portfolio of size $27,000 (this is what will be left over after down payment plus closing costs), this will require a yield on cost of approximately 2.3%. Not very challenging at all, but inflation must be kept in mind. In 30 years time, 19k will not have the same buying power as it does today. In order to make the challenge a little more interesting, I will attempt to recover 19k in 2044 dollars assuming an inflation rate of 3%. This leads to a value of $46470. In order to collect this in 30 years, we will need to collect an average of 1549 dollars per year. This would require a yield on cost of 6.8%.   This number could be low or high; I can’t tell the future of inflation, but I think 3% is a good target.

A target has been set. Collect $46470 in 2014 money over the next 30 years with 27000 cash to invest.

Step 3: Estimating dividend return

The goal of the portfolio is to start with an initial value of 27000 and produce enough income over the next 30 years to earn the interest difference back.  As described above, this would require a current yield on cost of 6.8%.  There are plenty of investments (Reits, MLPs and Preferreds, Junk Bonds) that make this possible and I want to diversify the portfolio.  I will make up the difference over time with dividend increases.  The dividend increases will eventually raise my yield on cost above 6.8%.  After this crossover point, the portfolio would make up any lost ground over the first few years.   The purpose of this section is to determine what yield and dividend growth is required to realistically solve this problem.  If you read my previous post, a higher dividend growth will be more important over the course of the next 30 years.  I will attempt to achieve an initial yield of 3.5% and dividend growth rate of 8%.

The following table provides an abbreviated dividend return with an initial yield of 3.5%


 DividendsTotal DivsReinvested DivsReinvested Total

The table contains several important pieces of information.  First, it will take 21+ years without reinvesting dividends to pass the value of $46470, while 17+ years if we reinvest dividends.  This is an important point and can be examined with a much greater difference at year 30.  The “Reinvested Total” is more than twice as large as no-reinvestment total.  This is amazing and demonstrates the value of reinvesting your dividends as soon as possible.  This exercise was done compounding both the dividend growth and reinvestment being done annually at the end of each year.

My methodology for calculating reinvested dividends is as follows.

  1. Take the previous received dividends and multiply by .035. These are the dividends you will be paid from the income received.  Take year 20 as an example. 7840.61 * .035 = 274.42
  2. Add value calculated in 1 to the previous years total. (7840.61 + 274.42 = 8115)
  3. Assume dividend growth at end of year. (8115 * 1.08 = 8764.23).

Mathematically, this makes sense to me.  I have seen vastly different returns (higher) from the various calculators and was unable to determine what equations are being used.  Maybe my calculations are somewhat conservative, but I would rather be surprised, then left wanting.

Step 3.5 Wait! What about total return

I don’t want to make the claim that I am not interested in total return.  I like to see my portfolio higher than where I bought it.  The problem here is that I can’t tell the future.  The market could trade sideways for the next 30 years, but what I can do is invest in companies that have a history of raising dividends through good and hard times.  The first fourteen years of this century have tested many of the historically good dividend payers.  Some fell (GE and most banks), while some dividends flourished (MCD, KO).  As long as I select the proper companies, when their earnings go up, so will their price eventually!  Mr. Market is a fickle man.

Step 4: Building the portfolio and the future

There are many companies that can be selected for this portfolio.  In the coming months, I will begin to research and invest in these securities.  These companies will by and large be blue chips, but I will add some higher yielding securities to help with the overall return of the portfolio.  In a few days I will describe my process of stock company selection.  Since I have been on a Walmart kick lately, I will begin there.

See you in a few days!

Disclaimer: Long PM, WMT, PEP, KO, MCD

Interesting Metrics: Dividend Yield and Growth

This article is the first in the series of articles I will use to describe my investing method.  These are meant to be informational and contain information that will help me as I invest.  I have tendency to forget what a metric means.  The research in this series will provide the basic information and examples that will help me.  Many of these articles will be basic, but I have friends/family reading this that are new to investing. Hopefully it helps them and you too!

Now for Dividend Yield and Growth!


What is a dividend? A dividend is a payment that a company pays to its shareholders from profits. This is a way for the owners to share in the spoils of the business.  

What is a dividend yield?  The dividend yield is the market price of the stock divided by the total amount of dividends paid in a year.  For example, if ACME’s current market value is 100$ per share and they pay 2.5$ per year in dividends,  their yield is 2.5/100 = 2.5%.

What is a dividend growth rate? Percentage at which the dividend changes over a period of time. Commonly, you will see 5-year, 10 year and most recent growth rates.  These rates are calculated using the Compound Annual Growth Rate (CAGR).

How I use them:

When I look for dividend investments, I attempt to look for stocks with an entry yield higher than 2.5%.   When I use a stock screener, I usually set the lowest yield to 2.0.  While I may not purchase a stock below 2.5, I like to keep track of which stocks are near it and keep them on a watch list.  As the price of a stock fluctuates, individual securities move up or down around my dividend entry criteria.  Walmart, for example, has a tendency to stay in the 2.3 to 2.6 range.

Next, I attempt to find stocks with a minimum dividend growth.  It must be positive with no dividend cuts and three or more years of growth.   Three years isn’t enough to demonstrate to a potential shareholder the commitment to pay a dividend, but it can yield hidden gems that will potentially raise their dividends quicker. Most of my large positions will have dividend growth streaks over 10 years.  A fantastic resource for finding these types of dividend stocks  is the U.S. Dividend Champion spreadsheets created and maintained by Dave Fish.

Given a combination of growth and yield, I generally like to start with yields closer to 3 and 5 year growth of 8-10.  I do not mind having some strong dividend growers in the portfolio with lower yields.  There are plenty of high quality companies yielding more than 2.5 (KO, PEP and PM for example), this higher yield criteria is not hard to find.  On the flip side of the coin, I will have some stocks with larger yields and slower growth like AT&T(T) and Realty Income (O).  It’s a matter of balance.  A few higher yielding investments enable me to accumulate funds faster to buy securities that grow faster.

Illustration of dividend growth:

I will examine three scenarios, each with a different yield and growth rate. What do you think will perform the best? Higher growth/lower yield or higher yield/lower growth? Let’s see.

ScenarioRate (%)Dividend Growth (%)Years to reach $1549
High Growth3109
Realistic Growth3.589.1
Minimal Growth4610.5

Interesting!  The 3 and 3.5% scenarios are neck in neck to reach 1549 dividends per year, while the larger yield of 4%, but lower growth, is years behind.  This demonstrates the importance of dividend growth, even with portfolios that start at a higher yield.

Dividend Growth Investing
Comparison between different yields and growth.

The graph demonstrates how a low yield with high growth can overcome the initial gap between yields.  The scenarios I chose seem somewhat arbitrary, but I wanted to illustrate that getting the highest starting yield possible can be defeated by a strong consistent growth rate.  Dividend growth rates do not stay this constant and will vary over the years as companies go through peaks and troughs.

The next question that you may be asking yourself is, what is the difference in dividends earned per year and what are the overall dividends?

ScenarioDivs @ 30Total Divs @ 30Divs @ 30 reinvestTot. Divs reinvest
High Growth10,708111,03311,029114,344
Realistic Growth7,33789,2107,59492,305
Minimal Growth4,87671,1525,07173,962

As the years go on, the High Growth scenario destroys the other two.  At year 30, you would receive 10,708 in dividends per year (which is calculated by initial-divs * (1+ growth rate) ^ number of years).  Hopefully my math is right!  This value is more than double the highest yielding yet slowest growth.

The final two columns demonstrate the effects of reinvesting your interest.  As your investments pay you, you can either save the money or reinvest.  These columns demonstrate what happens if you reinvest those dividends at the start of the next year (compounded annually).  Basically, you get two raises.  The dividend growth that happens during the year and the reinvestment of the dividends.  The reinvestment numbers may be low because once you have accrued enough, you will reinvest the dividends instead of waiting until the end of the year (compound quarterly or monthly vs. annually).  This was merely for demonstration purposes and simplicity.

What if I just started with a higher yield? You definitely could have and there are yields with enough growth that would beat all the scenarios demonstrated above.  However, with great reward comes greater risks.  The goal is to keep risk as low as realistically possible, given the nature of these investments.  A high yielding dividend isn’t necessarily unsafe, but maintaining the dividend may be hard when a rough patch is hit.  Due diligence is key!

There is no fixed yield/growth rate that will work for everyone.  Depending on your circumstances, you may need more yield or growth.  I have a long time till I want to live off of the income, so I can make due with a lower starting yield and higher growth.  Over the years, my research has lead me to believe that the “realistic” scenario of 3.5% with 8 percent dividend growth is an achievable long term goal.  Only time will tell!


The provided examples make a strong case for dividend growth investing.  There is more to investing than pretty charts and stock prices.   These examples are illustrative of the potential of dividend growth investing, but unlike numbers the market doesn’t behave in a consistent fashion. Good investments go down and bad go up.  I feel this strategy will give me the best opportunity to reach my financial goals.

Thanks for reading!

Disclaimer: Long KO, O, PEP, PM,T,WMT

February Portfolio Highlights

February was a busy month!  Many companies issued earnings that were slightly below analysts estimates.  Personally, I like to see the overboard selling reactions to these reports for companies that are on my watch list and in my portfolio.  Taking a long term view and investing for the future.  In ten years will it matter if one of the companies missed a quarterly earnings release by a few pennies?

I took advantage of some of the craziness and added to several positions (WMT,KO,PEP).  I feel like all three of these companies are poised for growth going forward.  KO and PEP are continuing productivity initiatives and Walmart is going to increase it’s US capex.  I feel like these companies are being good stewards of the money they create and making choices to enhance shareholder value.

I initiated a position in TGT in late January.  The company continued to decline throughout most of February, so I took advantage and slowly added a small amount of cash at several points throughout the month.  This position is in my loyal3 account, this enabled me to trade commission free and add smaller portions at a time.   I feel like TGT got beaten down enough for the data breach and sales suffered after that was disclosed.  The unfortunate thing is that data breaches are going to continue to happen.  One must monitor their credit report diligently.

I received $229.32, which was an amazing improvement over last years total of $80.28. At this point last year I was in the process of transforming my portfolio from growth to dividend stocks. It took me over a year, but the results are starting to speak for themselves!

Dividend Increases
Seven companies raised their dividends for me:

  • CSCO : 11.7%
  • DPS    : 7.9
  • HAS    : 8
  • KO      : 8.9
  • LO      : 11.8
  • PEP    : 15.4
  • WMT  : 2.0

Strong raises across the board, with the exception of Walmart. They have been having a tough few quarters and I am not concerned with a small increase as long as they set themselves up for future growth (which they indicated they are by increasing capex this year).

New Positions
While I did not open any new positions, Vodaphone(VOD) paid me a dividend in the form of Verizon (VZ). VOD executed a 6:11 share split at the same time. Thus, my 65ish VOD shares turned into 35 VOD and 17 VZ. VOD pays the same dividend and VZ becomes a new income stream for me, adding $36 per year to my income. I look forward to the special cash dividend on March 4th, where it will be dripped back into VOD.

Added Positions
This month proved to be a relatively good month for adding to investments, the following positions were increased:

  • New Cash: COP, KO, MO, PEP, PM, TGT
  • Drip: ARCP, APD KMI, O, OHI, OKS, PG, T, VOD

All of my positions in my Roth are dripped and prior to the middle of February my taxable account was as well. In general, the taxable account will not be dripped going forward, but specific securities may be.

Dividend Decreases

None.  This is great and a stark contrast to the way it used to be.  One average, I probably sold one position per month, this resulted in a lot of portfolio churn and lost money in both commissions and invested capital.  I hope this continues to last a long time, although INTC is on the potential chopping block if they don’t start to turn around by the end of the year.

A great month, I hope these continue. The third month of each quarter is generally my largest, so I am hoping to break some more records next month!

Over the next twelve months I expect to receive at least $3767.10.

Disclaimer: Long all stocks mentioned.