Archive for the ‘Commentary’ Category.

Why Investing For Dividends Is Better Than Capital Gains

There are many ways to invest in the stock market.

There are a few I will not discuss here, such as options and other derivatives. I don’t have time to try to understand them, and I honestly think that a lot of the people that deal with these instruments on a daily basis do not understand them too well themselves.

I will discuss two ways in this piece. The first is investing for capital gains. This is done by trying to buy at a relatively low price and hoping to sell later at a higher price. The other is investing for cash flow. This is what I do by investing in stocks that increase their dividends every year.

Even when I was growing up, I would hear people say that the way to make money in the stock market is to buy low and sell high. The capital gains model is drilled into people, and most people never become aware of any alternative. I did not until stocks started going down in 2008. It was not until later that I learned that reinvesting dividends are responsible for at least half of the gains in the stock market in the 20th century. Until about the 1980s, investing for dividends was more common. It is a self-reinforcing cycle. Almost every financial site has charts for stock prices. Technical analysis is mostly about looking at charts of the stock price. But there are far fewer charts for dividends.

During the dot-com boom, prices were rising at an accelerating rate. Why invest for a 3% yield when your stock doubles every year? Because eventually it will stop doubling every year. We saw this again in 2008: Many stocks went down in price by a lot, even stocks that paid dividends. But many of those dividend paying stocks still increased their payouts.

I think that capital gains investing is no different than the Greater Fool Theory.

Granted, these are not entirely mutually exclusive. I have said on this site that “price doesn’t matter”. Actually, it does not matter as much to a dividend investor as it does to a capital gains investor. If one of my stocks goes to $0, then I will get no income out of it. (But it would probably have cut its dividend before that happens.) “Price doesn’t matter as much as you think it does” is more accurate, but has a bit less punch as a catchphrase.

You can only sell once. Dividend investing is like having an animal for its milk or eggs or wool. You can milk a cow, harvest a chicken’s eggs and shear a sheep multiple times throughout its life. But you can only get meat from them once. And you can only sell a share of stock once. If you are only owning something in order to sell it later, you only really get the benefit of owning it when you stop owning it. I think that is pretty strange.

I don’t think pigs produce any goods while they are alive, so perhaps pigs are a better analogy to stocks that do not pay dividends.

You can sell a stock that pays dividends for capital gains. That makes investing for dividends better than just investing for price appreciation. But relying solely on price can be more risky. You can only make money one way, and only at one time: when you sell.

And you are assuming that you will get the price you need. Liquidity dries up when people need it the most.

Captial gains investing is more like the fixed mindset, and dividend growth investing is more like the growth mindset.

Selling means you are dipping into principal. Eating your seed corn. Someone once compared selling shares for profit like sawing off a tree branch while you are sitting on the wrong side of the branch.

“Bahram Chubina Kills the Lion-Shaped Ape Monster”, Folio from a Shahnama (Book of Kings) by Abu’l Qasim Firdausi (935–1020), available at The Metropolitan Museum of Art, assumed allowed under Fair Use.

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Thoughts On Dividend Income

This is a post about dividend income

There has been some drama in the dividend growth investing (DGI) blogosphere. The guy who ran Dividend Mantra sold it to an outside company, and for months there was little original content. The sellers said the original author (henceforth DM) would still provide content, but there was nothing.

There were a lot of comments expressing discontent, and those posts were later deleted.

This led to some discussion on other sites. One was Mr Money Mustache.

Most people there are indexers and said DGI is not as good. Obviously, I disagree.

One person said DM was stupid for only using taxable accounts and putting no money into tax-advantaged accounts. That I agree with.

A few disputed the notion in DGI that selling shares is like sawiing off a tree branch while you are sitting on it. I agree with that metaphor. You can only sell shares once. But many companies pay dividends for years. It’s sort of like a cow or a chicken. You can get milk or eggs from them multiple times, but you can only eat them one time. You can only sell a share once. My goal is to never sell and to live off the dividend income.

Some on the forum that the DGI investors might not reach the goal of living off dividends. That is true, but that is not a valid objection to DGI. ANY plan could fail. If that invalidates DGI, it invalidates everything.

One person pointed out that while index investing can be judged by total return, DGI should be judged by the growth of the dividend income. Many on the forum disagreed, and insisted total return is the ONLY way to judge a portfolio. I disagree. While it is bad if a stock goes to 0, the point of DGI is to not rely on price alone. We saw a lot of people get hosed relying only on price in the dot com bust with stocks, and for just about every asset class in the Great Recession. Meanwhile, many DGI stocks kept paying. The funny thing about relying on price is that when you really need money, usually the price goes down. Dividends are not guaranteed, but neither are capital gains. And you might not get them when you REALLY need them.

Maybe things will change in the future, but if the same thing happens for two cycles in living memory, you should pay attention.

Plus, I invest in some pretty big companies. If my stocks go to 0, then whatever you are investing in is probably hosed too.

I don’t think a lot of indexers understand DGI. Some of them accused DGI investors of chasing yield. As I have mentioned in the past, for many DGI investors, a high yield is actually interpreted as a sign to get out. Most prudent DGI investors also look at P/E ratio, payout ratio, and dividend history.

To me, “chasing yield” is holding a stock that pays 10% for a year and then selling. Most of the stocks that DGI investors are interested in have yields from 2% to 4%, and we intend to hold for a long time. Ideally, for life.

I am considering going more towards DGI ETFs. That is sort of like indexing. It’s like “indexing without the bad stuff”. But I really have no desire to buy the whole domestic market if I can avoid it. My 401K through work offers regular index funds, but no DGI funds; in this blog I mostly talk about accounts that I have full control over. As I said, I do not want to rely on capital gains. I want cash flow. Not potential cash flow. Not theoretical cash flow. Not cash flow dependent on getting a higher price. But actual cash flow. As Josh Peters wrote in The Ultimate Dividend Playbook, when a private equity firm want to take a company private, their offer price will be based on the company’s cash flow. Why not get that money now? Why wait until I sell? If the only time you benefit from owning a stock is when you sell (in other words, when you stop owning it), then it is pretty dumb to own that stock in the first place. Why should my money go into firms that are not paying dividends? As far as I am concerned, US stocks that do not pay dividends are dead weight.

Granted, with foreign firms, it is a different story. There are not as many DGI ETFs for foreign stocks. Directly buying a stock listed on a foreign exchange would cause more tax headaches than it is worth. But for stocks on domestic exchanges, and as for my house, we stick with DGI.

One person said indexing is better, and asked if us DGI investors thought we were smarter than the market, and advised us to listen to what the market is telling us. Well, it has shown that companies that have grown their dividends do better than the total market. S & P has a page on the Dividend Aristocrats, and it has a chart applet that you can use to compare the Dividend Aristocrats against the S & P 500. Guess what? The Dividend Aristocrats do better than the overall market. So, no, I don’t think I am smarter than the market. Unlike you, pompous indexer, I am listening to what the market is telling me.

The High Yield Dividend Aristocrats also did better than the S & P 500, but not quite as much.

Also, if you look at the fact sheets for those indexes, the “High Yield” Dividend Aristocrats index yields about 3%, while the regular Dividend Aristocrats index yields about 2.52%. The High Yield Dividend Aristocrats index has stocks that have increased dividends for 20 years, while the Dividend Aristocrats index has stocks that have increased dividends for 25 years. So I guess “High Yield” is relative.

There was a lot of discussion about the returns of DM. Some said the only reason his portfolio gained was because he added capital to his accounts. Below is a very large table with information about some of my dividend holdings. This shows stocks for periods in which I did not buy any additional shares. I did re-invest the dividends.

For each stock, there are two rows. The first is the first dividend payment I got. The second is a more recent. This chart was made earlier in the year, so it does not have the latest. For some, it might have a transaction from a couple of years ago. For each stock, I looked at the earliest and latest for a time period in which I only got new shares through dividend reinvesting. For the second row of each stock, the “Income Increase” is calculated by dividing the second income amount by the first. The “Div Percent Increase” is calculated by dividing the second dividend payout amount by the first. Some stocks split, so that may affect the amounts. I think the “Income Increase” is more consistently useful.

So for ABM, the income from the dividends increased 34%, while the payout amount per share increased 19%. I would say that is a pretty good return.

Constituent Name Symbol Bought Shares Price Num Shares Div Income Div/Share Total Shares IncomeIncrease Div Percent Increase Yearly Div
ABM Industries Inc ABM 2010-05-03 21.91 0.3080 6.75 0.1350 50.3080 0.00 0.00 0.54
ABM Industries Inc ABM 2015-11-02 29.01 0.3110 9.03 0.1600 56.7490 1.34 1.19 0.64
Archer-Daniels-Midland Co ADM 2010-09-09 31.95 0.2850 9.03 0.1500 60.4960 0.00 0.00 0.60
Archer-Daniels-Midland Co ADM 2015-03-10 47.00 0.3860 18.16 0.2800 65.2310 2.01 1.87 1.12
Automatic Data Processing ADP 2010-10-01 42.03 0.4290 18.08 0.3400 53.6200 0.00 0.00 1.36
Automatic Data Processing ADP 2016-01-04 86.98 0.3620 31.49 0.5300 59.7790 1.74 1.56 2.12
AFLAC Inc AFL 2010-12-01 51.50 0.2880 15.07 0.3000 50.5370 0.00 0.00 1.20
AFLAC Inc AFL 2014-03-03 63.86 0.3110 19.52 0.3700 53.0720 1.30 1.23 1.48
Air Products & Chemicals Inc APD 2010-05-10 74.57 0.0920 6.86 0.4900 14.0920 0.00 0.00 1.96
Air Products & Chemicals Inc APD 2015-11-09 138.81 0.0930 12.91 0.8100 16.0290 1.88 1.65 3.24
American States Water Co AWR 2010-09-01 33.33 0.3890 13.00 0.2600 50.3890 0.00 0.00 1.04
American States Water Co AWR 2015-12-01 40.64 0.6200 25.20 0.2240 113.1150 1.94 0.86 0.90
Black Hills Corp BKH 2010-06-01 28.69 0.3810 10.80 0.3600 30.3810 0.00 0.00 1.44
Black Hills Corp BKH 2015-12-01 42.63 0.3450 14.71 0.4050 36.6550 1.36 1.13 1.62
Constituent Name Symbol Bought Shares Price Num Shares Div Income Div/Share Total Shares IncomeIncrease Div Percent Increase Yearly Div
Chubb Corp CB 2010-04-06 51.90 0.1430 7.40 0.3700 20.1430 0.00 0.00 1.48
Chubb Corp CB 2014-07-15 94.03 0.1170 10.91 0.5000 21.9390 1.47 1.35 2.00
Colgate-Palmolive CL 2010-11-15 78.58 0.3460 26.57 0.5300 50.4830 0.00 0.00 2.12
Colgate-Palmolive CL 2015-11-16 66.86 0.6250 41.79 0.3800 110.6070 1.57 0.72 1.52
Clorox Co CLX 2011-02-14 71.26 0.4210 27.78 0.5500 50.9250 0.00 0.00 2.20
Clorox Co CLX 2015-11-13 122.20 0.3580 43.75 0.7700 57.1720 1.57 1.40 3.08
Chevron CVX 2010-06-10 70.79 0.2000 14.40 0.7200 20.2000 0.00 0.00 2.88
Chevron CVX 2015-12-10 86.87 0.2940 25.54 1.0700 24.1670 1.77 1.49 4.28
Dover Corp DOV 2010-06-15 45.41 0.1240 5.46 0.2600 21.1240 0.00 0.00 1.04
Dover Corp DOV 2015-12-20 63.78 0.1530 9.76 0.4200 23.3960 1.79 1.62 1.68
Consolidated Edison Inc ED 2010-06-15 43.35 0.3480 14.88 0.5950 25.3480 0.00 0.00 2.38
Consolidated Edison Inc ED 2015-12-15 61.85 0.3280 20.29 0.6500 31.5390 1.36 1.09 2.60
Emerson Electric Co EMR 2012-03-09 49.67 0.0000 20.27 0.4000 50.6650 0.00 0.00 1.60
Emerson Electric Co EMR 2015-12-10 48.64 0.5450 26.51 0.4750 56.3560 1.31 1.19 1.90
Eaton Corporation ETN 2011-05-27 50.67 0.3410 17.00 0.3400 50.3410 0.00 0.00 1.36
Eaton Corporation ETN 2015-08-25 55.06 0.5470 30.12 0.5500 55.3170 1.77 1.62 2.20
Constituent Name Symbol Bought Shares Price Num Shares Div Income Div/Share Total Shares IncomeIncrease Div Percent Increase Yearly Div
Hormel Foods Corp HRL 2010-05-15 41.25 0.1120 4.62 0.2100 22.1120 0.00 0.00 0.84
Hormel Foods Corp HRL 2015-11-16 67.64 0.1780 12.04 0.2500 48.3550 2.61 1.19 1.00
Illinois Tool Works ITW 2011-01-11 54.37 0.3140 17.00 0.3400 50.3140 0.00 0.00 1.36
Illinois Tool Works ITW 2016-01-07 87.52 0.3350 30.31 0.5500 55.4520 1.78 1.62 2.20
Johnson & Johnson JNJ 2010-06-15 58.42 0.2750 16.20 0.5400 30.2750 0.00 0.00 2.16
Johnson & Johnson JNJ 2014-12-09 108.05 0.2220 23.94 0.7000 34.4250 1.48 1.30 2.80
Kellogg Company K 2014-06-16 67.21 0.6800 46.00 0.4600 100.6800 0.00 0.00 1.84
Kellogg Company K 2015-12-15 70.96 0.7370 52.30 0.5000 105.3460 1.14 1.09 2.00
Kimberly-Clark KMB 2011-04-04 65.38 0.5380 35.44 0.7000 51.1730 0.00 0.00 2.80
Kimberly-Clark KMB 2016-01-05 126.48 0.3930 50.99 0.8800 58.3340 1.44 1.26 3.52
Lowe's Cos Inc LOW 2010-11-03 21.92 0.2580 5.50 0.1100 50.2580 0.00 0.00 0.44
Lowe's Cos Inc LOW 2015-11-04 74.21 0.2040 15.14 0.2800 54.2890 2.75 2.55 1.12
MDU Resources Group Inc. MDU 2010-07-01 18.03 0.4200 7.88 0.1580 50.4200 0.00 0.00 0.63
MDU Resources Group Inc. MDU 2016-01-04 18.56 0.5860 10.88 0.1900 58.5910 1.38 1.20 0.76
3M Co MMM 2010-06-12 78.30 0.0840 6.30 0.5250 12.0840 0.00 0.00 2.10
3M Co MMM 2015-12-14 156.51 0.0890 13.92 1.0250 13.6650 2.21 1.95 4.10
Constituent Name Symbol Bought Shares Price Num Shares Div Income Div/Share Total Shares IncomeIncrease Div Percent Increase Yearly Div
Northwest Natural Gas Co NWN 2010-08-13 45.93 0.4400 20.85 0.4150 50.6990 0.00 0.00 1.66
Northwest Natural Gas Co NWN 2015-11-13 46.77 0.5950 27.83 0.4675 60.1230 1.33 1.13 1.87
Procter & Gamble PG 2010-11-15 64.33 0.3830 24.69 0.4820 51.6340 0.00 0.00 1.93
Procter & Gamble PG 2015-11-16 76.09 0.5100 38.81 0.6629 59.0910 1.57 1.38 2.65
Piedmont Natural Gas Inc PNY 2010-10-15 28.10 0.4980 14.74 0.2800 50.4980 0.00 0.00 1.12
Piedmont Natural Gas Inc PNY 2015-10-27 39.33 0.4940 20.47 0.3300 59.4300 1.39 1.18 1.32
RLI Corp RLI 2011-03-18 54.72 0.2560 13.93 0.2900 48.2830 0.00 0.00 1.16
RLI Corp RLI 2015-12-22 59.71 0.3890 23.26 0.1900 122.8370 1.67 0.66 0.76
RPM International Inc. RPM 2010-07-30 18.56 0.5340 10.25 0.2050 50.5340 0.00 0.00 0.82
RPM International Inc. RPM 2015-10-30 45.65 0.3510 15.68 0.2750 57.3680 1.53 1.34 1.10
Questar Corp STR 2011-06-13 17.60 0.4420 7.63 0.1530 50.4420 0.00 0.00 0.61
Questar Corp STR 2015-12-14 18.71 0.6420 12.01 0.2100 57.8280 1.57 1.37 0.84
Sysco Corp SYY 2010-10-22 29.48 0.4320 12.50 0.2500 50.4320 0.00 0.00 1.00
Sysco Corp SYY 2016-01-22 39.55 0.4510 17.98 0.3000 58.4600 1.44 1.20 1.20
Texas Instruments TXN 2010-08-16 24.28 0.2400 6.00 0.1200 50.2400 0.00 0.00 0.48
Texas Instruments TXN 2015-11-16 57.86 0.3660 21.18 0.3800 56.1120 3.53 3.17 1.52
Valspar Corp VAL 2011-01-14 35.30 0.2890 9.96 0.1800 55.6470 0.00 0.00 0.72
Valspar Corp VAL 2015-12-16 82.83 0.2350 19.49 0.3300 59.3040 1.96 1.83 1.32
Vectren Corp VVC 2010-12-01 25.90 0.6540 17.25 0.3450 50.6540 0.00 0.00 1.38
Vectren Corp VVC 2015-12-01 42.13 0.5610 23.64 0.4000 59.6720 1.37 1.16 1.60
Constituent Name Symbol Bought Shares Price Num Shares Div Income Div/Share Total Shares IncomeIncrease Div Percent Increase Yearly Div
Walgreen Co WAG 2010-12-11 36.43 0.2570 9.33 0.1750 53.5580 0.00 0.00 0.70
Walgreen Co WBA 2015-12-11 83.96 0.2490 20.87 0.3600 58.2140 2.24 2.06 1.44
WGL Holdings Inc WGL 2010-05-01 35.83 0.2950 10.57 0.3775 28.2950 0.00 0.00 1.51
WGL Holdings Inc WGL 2015-11-02 61.36 0.2560 15.71 0.4625 34.2320 1.49 1.23 1.85
Exxon Mobil Corp XOM 2011-03-10 84.38 0.2860 24.39 0.4400 55.7210 0.00 0.00 1.76
Exxon Mobil Corp XOM 2013-12-10 95.84 0.3870 36.51 0.6300 58.3360 1.50 1.43 2.52
Intel INTC 2010-06-01 21.42 0.3330 7.09 0.1580 45.3330 0.00 0.00 0.63
Intel INTC 2013-12-02 23.63 0.4730 11.17 0.2250 50.1180 1.58 1.42 0.90
AT&T T 2010-08-02 25.94 0.8030 21.00 0.4200 50.8030 0.00 0.00 1.68
AT&T T 2014-11-03 34.84 0.8050 27.75 0.4600 61.1270 1.32 1.10 1.84
Coca-Cola Co KO 2011-04-01 66.34 0.3620 23.70 0.4700 50.7780 0.00 0.00 1.88
Coca-Cola Co KO 2015-10-01 39.51 0.9380 37.08 0.3300 113.3050 1.56 0.70 1.32
Sonoco Products Co SON 2010-12-10 33.04 0.5150 16.95 0.2800 61.0530 0.00 0.00 1.12
Sonoco Products Co SON 2015-09-10 38.68 0.6200 23.98 0.3500 69.1240 1.41 1.25 1.40
Constituent Name Symbol Bought Shares Price Num Shares Div Income Div/Share Total Shares IncomeIncrease Div Percent Increase Yearly Div

Image generated from an applet on S & P site, assumed allowed under Fair Use. This shows that the Dividend Aristocrats (the blue line) outperformed the S & P 500 (the green line) over the past ten years.

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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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Bad Advice And Dividend Growth Investing Criteria

I saw an article on Yahoo Finance that I thought had a little bit of 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 is 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. This 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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I Might Move To ETFs In Some Accounts

I am thinking about shifting the investments in my taxable account from individual stocks to dividend ETFs.

The original plan for this account was to buy enough shares in individual stocks such that each dividend payout would be enough to buy an entire share. I needed to have enough to get a better commission rate, and I wanted to have some diversification. That meant I could only get about a dozen stocks, and spend $5,000 or so on each. There are not many stocks that fit the criteria.

There are some disadvantages to using dividend ETFs. There might be some overlap in my holdings. They only rebalance a few times a year, so they might hold a stock after it cuts its dividend. They are passive, so they will not sell a stock even though there are signs the dividend might be cut. They might also invest in stocks that I would not touch with a ten-foot pole. One of the ETFs I am looking at has shares in IBM. It’s only about 2% of the stock, but as far as I am concerned, anything more than no IBM is too much. Whenever I read an article stating that buybacks are bad (which they are) and profiling companies that make all or most of their money from financial engineering versus their nominal function, IBM is usually mentioned. It used to mean “International Business Machines”. Now it seems to mean “Incompetent Banking Manipulation”.

There are disadvantages for me for making this change. It would result in a lot of churning, which is bad. The point of dividend growth investing is to buy and hold for as long as possible, preferably forever. I would have to sell the stocks I bought in my taxable account, and in some cases buy the same stocks that I sold in my IRA.

There are some advantages to dividend ETFs. They can give people diversification that otherwise would be out of reach. It takes a hundred (or several hundred) shares of a stock to get a payout that will buy an entire share.

But the advantage might be to reduce long-term churn. There have been a few events that have caused me to reconsider the goal of this account. Duke is buying Piedmont Natural Gas. Norfolk Southern is fending off a merger offer from Canadian Pacific, and Berkshire Hathaway’s BNSF might look into buying another rail company. Baxter split. Verizon said it’s open to the possibility of buying Yahoo (that was a real WTHBTU? announcement). And the big deal is that Dow Chemical will merge with DuPont, and then they will split into three companies.

I want this account to be simpler. I will have to pay taxes on holdings in this account every year. If companies are buying and selling to each other, that will make my life more complicated. I am not a lawyer or an accountant, but I think that an ETF will shield me from some of that complexity.

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What To Do With My New Stock Account

As I had mentioned previously, I opened a taxable brokerage account to buy more stocks.

The plan is to put in some money, and buy enough shares of each such that each dividend payment will be enough to buy an entire share. At first I thought I would buy shares of additional companies. Now I am thinking of replacing shares of companies in my tax-advantaged account as well.

Granted, if I did that, I would lose the tax advantages for those shares. But it would free up money in my retirement accounts to buy additional shares of the companies I would still own in those accounts. It has taken three years to buy an additional share of 3M. Perhaps I could finally buy more and reduce that time.

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I Am Looking At Deere Again

I am thinking about re-buying shares in Deere.

They increased their dividend a few weeks ago by about 17%. It was one quarter late, but I think it still counts towards their streak.

I know I keep saying I should stick to my rules, but I am still trying to work out what my rules are. How strict should I be? I held on to Intel after they had gone 8 quarters without a dividend raise. Deere raised theirs after five quarters. They have a nice P/E ratio, and they are still making money.

Plus they are in the agriculture business. Sort of. I think along with energy that food and water will be huge issues (and huge money makers) in the next decades. I think Deere is a good way to play that. Plus they are based in Illinois.

I bought Kellogg recently. I read an article that pointed out that most things we buy at the grocery store come from a handful of companies. Kellogg is on the list. I will start looking at some other companies listed in the article: Kraft, General Mills, JM Smucker, even Pepsico (even though we are a Coke family).

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Looking For A New Broker

Lately I have been thinking about going with a different broker.

One reason is security. So far there have been no problems, but you can never be too careful. There have been a lot of articles about security after the discovery of the Heartbleed bug. I read a article/comment/post from someone who said the passwords for one of his financial providers was case-insensitive. Some do not allow non-alphanumeric characters for passwords. Some have low character limits.

I also found out that Scottrade has what they call FRIP, Flexible Reinvestment Program. It is sort of like a DRIP. With a DRIP, dividends from a stock are re-invested in that stock. With a FRIP, you can re-invest dividends commission-free in upto five stocks. It does not have to be the same stock that paid the dividend.

When I was looking at brokers, I did not go with Scottrade because they did not allow you to buy fractional shares. If they had the FRIP back then, I probably would have gone with Scottrade.

I am currently reinvesting all the dividends from the stocks I own back into themselves. I think with a FRIP, I could reach my goal of getting some of my stocks up to 100 shares a bit more quickly; have all the stocks feed into one, then when it gets to 100 shares, pick another. I might be buying high if the market keeps rising, but if I keep doing what I am doing I will be buying high anyway. Plus now that I am looking at the FRIP, the idea of fractional shares seems unnecessarily complicated.

The downside is that I would pay a lot in commissions to sell at my current broker, and buy at Scottrade. Another broker offered 50 free trades for new accounts, but I did not see that at Scottrade. I have read comments on other dividend sites that they might offer it if you ask. Plus I would be giving up some dividend income for a couple of weeks. We shall see.

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Thoughts On MLPs

A few of the dividend sites that I visit (like Dividend Growth Investor  and Dividend Growth Stocks) will frequently post lists of stocks: stocks they have recently bought, stocks they are looking at, and stocks that have recently increased their dividends.

Sometimes these stocks will include companies that are master limited partnerships. An MLP is a different legal structure for a company. Unlike a corporation, its members share some liability.

My issue is that many of these sites (and lots of articles around the web) will mention MLPs without really explaining some of the differences from regular stocks. One example is here.

One of their main features is they do not pay income taxes at the company level. For this reason, they are sometimes called “pass-through entities“. They must send a certain amount of their profits to their investors. Investors buy and hold “units” instead of shares, and they get “distributions” instead of dividends. (I think some REITs are also pass-through entities.)

They tend to be in the energy industry, and have “LP” at the end of their name. A couple of the bigger, more famous ones are Kinder Morgan Energy Partners, L.P. (KMP) and Enterprise Products Partners L.P. (EPD).

Because they are taxed differently, you get a different tax form called a K-1. I have heard it is a beast to deal with.

My impression is since they are pass-through entities they should only be held in taxable accounts. You could pay tax on the MLP income even if you hold it in a Roth IRA. I think there are a lot of people in the USA for whom the $5500 they put in their Roth IRA is the entirety of their retirement savings. Right now, I am one of those people. If you want to go with an MLP, I think an ETF would be the best bet.

Dividend investors need to be aware of the different tax treatment. And some of us who have been doing this for a while need to let beginners know that there are a few gotchas with MLPs. I think most people should avoid investing in them directly and just go with an MPL ETF.

Another point about MLPs is that they tend to have higher percentage yields than most stocks. Many of them have yields above 6%. Many dividend investors would consider anything above 6% yield for a corporation to be a serious red flag if not a reason for elimination. But for MLPs it is not necessarily a cause for concern. When I was first looking into dividend investing I found this a bit confusing until I learned a bit more about MLPs. One week a writer would say I should avoid a stock with a yield of 7% since yields that high are considered a sign a company is having trouble. But then the next week the same writer would say that some other stock (an MLP in this case) was a good investment because it had a 7% yield. If you do not know the distinction between a corporation and an MLP, those mixed signals can be a bit confusing.

They also may have higher payout ratios than stocks. I have neither a degree nor any experience in accounting, but from what I have gathered MLPs track things differently. So a higher payout ratio is not a cause for concern.

Once again, I think for most people an ETF is the best way to invest in MLPs.

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A Few Thoughts On Dividend Kings

I have been thinking a lot about my stock portfolio. As I stated before, I started out buying $1000 worth of shares of stocks. I quickly dropped that, and went for 50 shares of each stock, although I still have less than 50 of some of them. I am now starting to go for 100 shares of each stock, as well as getting a few more stocks. The market has been going up a lot lately, so I might wait a few more months. For a long time the best time to buy stocks for the long term was between May and October. That pattern was disrupted during the Great Recession, but I think we are getting back to it again.

I found this site called Buy Upside with some great tables on it. One is the Dividend Map: Dividend Aristocrats Annualized Dividend Growth Rates and Dividend Yields  You can find Dividend Aristocrats that have decent yields and fairly high yield growth. A few that look good to me are KMB, PG, BMS, ADP, APD, CLX, COP

There is also a concept called the Dividend Kings. It is the group of stocks that have been increasing their dividend for at least 50 years. This list seems more colloquial than the Achievers, Aristocrats or Champions. There does not seem to be one person or group that keeps track of this list. Granted, that might be unnecessary, since there are not that many stocks that meet the criteria.

There is a site called Dividend Kings, but it seems like a general investing blog. I have only glanced at it, but some of the posts mention companies that I do not see on other dividend sites. Plus it is not updated too often.

One site that has listed the Kings is Dividend Growth Investor.
Here are the stocks on the list that I have: AWR, DOV, NWN, EMR, PG, MMM, VVC, KO, JNJ, LOW
Here are the stocks on the list that I do not have: GPC, PH (low yield)
In a couple of years, there will be a couple of more socks added, both of which I own: CL, ITW

Dividend Aristocrats is a probably a trademark of S&P. Dividend Achievers is probably a trademark of Indxis. This site has a disclaimer.

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