Archive for January 2016

The Ultimate Dividend Playbook

A while back I got Josh Peters’ The Ultimate Dividend Playbook: Income, Insight and Independence for Today’s Investor. It came out in 2008, and I read it just a few years ago. Here are some notes that I took on it. I am going to post them mostly verbatim.

He says to focus on cash flow more than price. Cash flow is the ultimate indicator. If a private equity firm want to take a company private, their offer price will be based on the company’s cash flow (page 31). Also: During the Great Recession, many dividend paying stocks went down in price 30% but still had cash flow and still increased their dividends.

Look into his dividend drill return model.

This book was written in 2007 or 2008. His dividend builder portfolio has a lot of bank stocks, no oil companies, and few utilities. Granted, now in 2016, oil companies do not look like such a great bet either.

He says dividends can be a signal. An article in the Motley Fool [URL not saved] points out that US firms pay consistent amounts. It may leave less to invest. True. One commenter asked why would anyone buy GM if it had a payout of 8%? Yes, a high dividend like that is a warning, and I think dividends are more likely to send a warning signal if a company pays out a consistent amount.

Intersting to note: I think all DJIA stocks pay dividends. For a long time MSFT did not.

Peters says chemical firms do not have a moat. The book has a section on the tax complexities of MLPs, and appendices on different industries.

Personally, I plan on avoiding MLPs. Kinder Morgan bought two MLPs for which it was the general partner: Kinder Morgan Energy Partners and El Paso Pipeline Partners. I think Richard Kinder helped invent MLPs. If he thinks they are no longer a good idea, who am I to argue?

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Ted Cruz likes to think of himself as some sort of outsider.

When did he become the insurgent taking on the establishment?

Was it when he went to Princeton?

Was it when he went to Harvard Law School?

Was it when he clerked for the Chief Justice of the US Supreme Court?

Was it when he worked for the George W. Bush campaign?

Or maybe it was actually working for the Bush Administration that made him an outsider.

Or perhaps when he married a woman who works for the firm that has supplied more elected and appointed officials in more countries than any other in history.

Or perhaps it was when he was the Solicitor General for the State of Texas.

Or perhaps it was when he worked for high-end corporate clients at a high-end Houston law firm.

Or perhaps it was when he became a United States Senator.

When has this guy been on the outside looking in?

So maybe nobody in the Senate likes him. But there are only 100 US Senators in a nation of 300 million.

The liberals in Texas, the atheists, the LGBT, the poor, the people who are not white, the people that Ted Cruz chooses to ignore as Senator and that he has promised he would ignore as President: They are the outsiders.

If Ted Cruz was really as smart as he thinks he is, he would realize that you will never ever ever be an outsider, you will never be standing up to the man, you will never be speaking truth to power when you have spent your whole life either working for the man or being the man, or serving those in power, or being someone with power.

If you can go around and say that atheists and gay people will one day have no place in America and have a chance of making that happen, if you can promise people that millions of other people will have fewer rights and you have a good chance of being able to one day carry out that promise, then you are not an outsider. You are the very thing you claim to be running against.

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Bad Advice And Dividend Growth Investing Criteria

I saw an article on Yahoo Finance that I thought had some good advice, and some really bad advice.

The title of the article is “Top 3 Dividend Stocks Offering Stability to your Portfolio in 2016”.

The things the article said that I agree with are:

  • to look at dividend stocks,
  • a reminder that the advantage of dividends is that you can get income even while the price is flat (or even declining),
  • a reminder that dividends are not guaranteed,
  • and to do some research on a stock before buying.

The bad advice is to buy Frontier Communications Corporation (FTR) because its yield is 9.6%. A yield that high is usually a red flag, and in this case I think it is. The author looked at price-to-book and price-to-sales. But the PE ratio and payout ratio are basically 0, because they have been losing money for about a year. FTR’s long-term debt and interest expenses went up a lot in 2015. The long-term debt seemed to double, and their interest expenses went up by about a third.

As far as FTR’s dividend, they started paying a dividend in 2004, and kept it constant 25 cents a share until 2010. Then they cut it to 18.8 cents a share. Then in 2010 they cut it again to 10 cents a share. Then in 2015 they raised it to 10.5 cents a share. So they are raising their dividend while they are losing money. How sustainable is that?

At some point, I will write a post on my dividend investment criteria. I admit, I think I am still working it out. But I think my criteria are similar to a lot of dividend growth investors (or DGI). Under these criteria, FTR would not be looked at by many DGIs.

The details are different for different investors, but the basic pattern is as follows:

  1. A history of dividend increases. Some people want at least 5 years of increases. Other people want at least 10, 15, or more. The longer your time horizon, the stronger the company, but then you have fewer companies to invest in.
  2. P/E Ratio (or just “P/E”). The historical P/E ratio of the US market is about 16.5. From what I have read, periods of low interest rates have higher P/E ratios, so I am willing to buy a stock with a P/E under 20. It seems like some stocks with lower P/E ratios (like Deere, Caterpillar, the big oil companies) are not looking too good these days. If a company is losing money, Yahoo Finance will list its P/E as “N/A.”
  3. Dividend yield. Many investors want a company to have a yield of at least 2%. Some want at least 3%. The upper limit depends on the industry. Financial firms, utilities and telecoms have higher yields than other industries, but anything above 6% is a red flag. 9.6% is a blinking red flag that just caught fire.
  4. Payout ratio. The payout ratio is the percentage of their post-expense cash a company is paying out as dividends. This threshold is also different for different people. I am willing to go as high as 75%, others want it to be under 50%. If a company is losing money, Yahoo Finance will list its payout ratio as “N/A.”

The only criteria for selling that the DGI community agrees on is to sell if a company cuts or eliminates its dividend. Dividend freezes is a point of disagreement. Also, some DGIs sell if a stock’s P/E gets too high.

So maybe FTR has a high dividend. But how long can it last if the company is losing money and is taking on debt? I plan on holding my stocks for the rest of my life and eventually living off the dividends and not selling any shares. That will probably not happen with all of the stocks I own, but there is no way I see it happening with FTR any time in the near future.

The author does recommend Bank of Montreal, which looks a lot more solid. He used a proprietary screening tool to pick these stocks. FTR is such a bad pick I did not bother to look at the third.

Not to brag, but when I started, all I did was spend a little time looking at the financial stocks for all of the then-Dividend Arisocrats on Yahoo Finance. I passed on a couple of stocks that wound up cutting their dividends (Diebold, and Integrys, which is now being bought by Wisconsin Energy).

I think people would be better off learning how to value companies themselves and sticking to dividend growth stocks.

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Unused Comment and a Quote

Aert_de_Gelder_-_Esther_and_MordecaiGoing through some files, I found a small piece that I think I intended to post as a comment on The Immoral Minority. I did some searching, and I don’t think I ever posted it.

I think I wrote it during the 2012 campaign for president, since I quote something that Rick Santorum said.

To 7:47:
“And overthrow these folks who think they know how to orchestrate every aspect of your lives.”

Did Santorum really say that? The guy who probably has wet dreams about forcing people to church at gunpoint said that?

In all seriousness, how do some of these conservatives function? They go on about “freedom”, yet they seem to have very definite ideas about how other people are supposed to live their lives. Given that many of them are religious nutcases, they also seem to want to control the thoughts inside your head. If I have fewer rights because of my beliefs (or lack of belief), then what sort of “freedom” is that? Conformity is not freedom. Obedience is not freedom. I don’t know if I could define freedom, but I do not want the “freedom for some” that these people are pushing.

Plus if you took what Santorum was saying, and told his supporters that a Muslim cleric was saying it, then they would be horrified. Why is Christian Sharia Law any better than Muslim Sharia Law?

To 8:24
I thought “GOP” meant “God’s Oil Pedophiles”.

Also, here is a quote from a comment that someone else left on The Immoral Minority in 2015 that I liked:

You righties mock the Islamists, yet you do the same things: glorify weapons of death, glorify those who use them, teach the usage of weapons of death to children, and by your ideology teach your people to hate the ‘other’ – thus ensuring that eventually, the ‘other’ is obliterated by your weapons of death. All because you, just like the Islamists, are totally lacking in any positive, socially transformative, ideas that are uplifting to your fellow man, including those with whom you disagree. ‘Love your neighbor as yourself’ is anathema to you, just as it is anathema to the Islamists. Your ideology is ‘obliterate your neighbor’, the same ideology that they have.


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2015-12 Dividend Income Report

Here is the dividend income report for December, 2015.

The monthly dividend income came out to $954.52. The yearly income total for 2015 through the end of the month was $5472.07. Right now I am a few months ahead of where I was in 2014.

The income for December, 2014 was $909.86, and the yearly income for 2014 through the end of December was $4438.02.

December income is always higher that the other months because RLI pays a special dividend every December, in addition to their regular dividend. The regular RLI dividend this year was $0.19/share, while the special dividend was $2.00/share.

I started using GnuCash to track my money in 2003, back when I was working for a TBTF bank. I saved some of my money in the 401K, and put most of it into index funds. My best year for dividend income was 2007, when I got $6575.54. In 2008, I got $5420.86. So I have finally beat what was my second best year. I do have to admit that I thought dividend growth investing would give better results than I have gotten. I guess compound growth just takes a while to take off.

The income was up this year for a few reasons. One is that many of these companies have increased their dividends. Another is that I bought more shares in companies that I already have shares in: JNJ, ADM and ETN. I also bought HON, but after their December payout. I also started a taxable account and bought shares in CTWS and SJW. I had planned on buying individual stocks in that account, but I have changed my mind and instead I will buy ETFs in that account. A few of the companies I did have in that accound were companies that were in my IRA. For KO and VZ, I got dividends from both the IRA and the taxable accounts.

I did sell COP due to what is going on in the oil industry. I sometimes wonder if I should have sold CVX instead. COP has raised its dividend but lost money, while CVX has broken its 28 year streak but still made a profit.

I have not decided if I should keep shares in a company that holds its dividend steady. Just about all dividend growth investors agree that a company should be sold if it cuts its dividend. There is still no real consensus about what to do with a company that holds it steady for a few years. I sold INTC when it stopped raising its dividend. Now that it is rasing the dividend again, I might get back in, even though INTC has not gotten back to a 5-year streak.

There is a saying on Wall Street: Bulls make money, bears make money, pigs and sheep get slaughtered. I guess this means you have to follow the advice of George Foreman: Plan your work, and work your plan. I have to admit I am still working out what my rules are. Is my minimum time for dividend raises 5 years? 10 years? Do I keep a company if its PE gets too high? If so, how high?

The PE one might be kind of tricky. Based on comments from people like Warren Buffett and Bill Gross, I think that higher PEs in a time of low interest rates is not necessarily a bad sign.

Here is a table with the year-to-date amounts, the monthly amounts, and the three- and twelve-month moving averages for each December from 2011 through 2015:

Month YTD Amount 3MMA 12MMA
2015-12 $5472.07 $954.52 $575.86 $456.01
2014-12 $4438.02 $909.86 $481.67 $369.80
2013-12 $3406.20 $594.59 $344.05 $283.85
2012-12 $3585.01 $686.10 $386.41 $298.75
2011-12 $3091.99 $514.94 $323.40 $253.92

Here are the stocks and the income amounts for December, 2015:

  • AFLAC Inc: $43.88
  • American States Water Co: $25.20
  • Black Hills Corp: $14.71
  • Bemis Co Inc: $29.00
  • SJW Corp.: $31.20
  • Vectren Corp: $23.64
  • Johnson & Johnson: $75.66
  • Archer-Daniels-Midland Co: $32.65
  • Chevron: $25.54
  • Emerson Electric Co: $26.51
  • Sonoco Products Co: $45.50
  • Exxon Mobil Corp: $83.24
  • Walgreen Co: $20.87
  • 3M Co: $13.92
  • Questar Corp: $12.01
  • Connecticut Water Service Inc.: $37.74
  • Dover Corp: $9.76
  • Consolidated Edison Inc: $20.29
  • Kellogg Company: $52.30
  • Coca-Cola Co: $43.26
  • Valspar Corp: $19.49
  • RLI Corp: $23.26
  • RLI Corp: $244.89

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Post From A Few Years Ago

A new year, when we sometimes think about old things, especially when going through stuff after moving. Here is something I posted on a forum a few years ago, when I was still in Chicago.

I have mentioned my European non-girlfriend in a few posts.

She will be leaving in a few weeks for her home country. She will be gone for three weeks and back in January.

A couple of other guys in our social circle have gotten more friendly with her, and I admit that makes me upset.

But I still think she plans on eventually going back to her home country. In one conversation she said that eventually she would go back. Another person said, “You don’t have to go back”, and she said that does.

Her parents are getting older. Her mother has trouble walking. Her father has said that he might only have ten years left. One of her brothers is severely autistic. He lives in an institution, and I do not think he recognizes her.

I don’t think she really wants to go back to her home country. I do not think she is truly choosing it. I think she is acquiescing to a trajectory for her life that she does not really want. Granted, when your family is in bad shape, it can be hard to walk away from all of that.

Plus she is not too happy at her job. And even though she has been here ten years she is no closer to becoming eligible for citizenship due to the type of visa she has.

If/when she goes back, she will take care of her parents. Eventually her parents will die. After that, who will be around for her?

I have the urge to tell her that I wish she would change her mind, even though I know she won’t. I get the feeling that she did not say no to me because of something that she wants, but because of something she does not want. I know this sounds selfish, but that bothers me.

Looking back, there were times I thought we were on the same wavelength, and there were times when I felt I did not know her well at all.

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