Using some year-end bonus money, Dividend FIREman has opened up positions in five new dividend stocks:
- Edison International (EIX) – paid $63.63, PE 14.4, yield 3.85%
- Blackstone BX – paid $32.98, PE 14.7, yield 6.79%
- Duke Energy (DUK) – paid $80.38, PE 21.0, yield 4.44%
- Archer Daniels Midland (ADM) – paid $40.12, PE 18.7, yield 3.21%
- Proctor & Gamble (PG) – paid $90.14, PE 24.2, yield 3.05%
I made these purchases after extensive research, and I can confirm the rumors that finding stocks at a fair valuation in this market is growing increasingly difficult. I actually pondered the possibility of resting my new little green soldiers until better opportunities (i.e. lower and more reasonable valuations) present themselves. But after careful consideration I think that deploying my cash to these particular stocks will pay off in the long run. My reasoning follows – I have evaluated each of these stocks below.
Seeking Higher Yield and Diversification
First a bit of context for these purchases. All of these purchases were made in my dividend stock brokerage account (one of my five Cash FIREhoses). In 2017, this account yielded roughly 2.44% in dividends. This is a bit above the dividend/interest yield on my mutual fund portfolio (another one of my Cash FIREhoses), which was .211 percent in 2017. It is also almost 3/4 of a point higher than the S&P 500 dividend yield as of today (January 11, 2018), which is 1.74 percent, and also higher than the current Vanguard Total Stock Market Admiral (VTSAX) yield of 1.75 percent.
Many mutual fund companies offer high yield dividend funds or ETFs. For example, Vanguard’s high yield dividend fund (VHDYX) currently pays 2.71 percent, but it costs .15 percent per year (every year), with possible capital gains taxes paid as the fund gets in and out of positions. Also, their yield may be lower than it should be, because they must keep investing new cash, which may require the fund managers to purchase at less-than-optimum valuations.
While I am doing ok with my current dividend yield, my 2018 goal is increasing to a 3% yield in my dividend account. Otherwise I am going to be working well into the 22nd Century to pile up enough money on which to retire! 3 percent is below almost all of the safe withdrawal rates discussed in various blogs and publications, and I should not need to assume crazy risks to get this yield in my account. If I am successful increasing the yield to 3 percent, and if the stocks continue to gain in value over the next 20 to 30 years, I will be able to use the dividends without ever touching the principal (the stocks). My hope is to leave this portfolio as a legacy to my wife and children (once I sort out the related tax issues, of course).
I usually purchase my dividend stocks in tranches of roughly $3000 per purchase. My broker charges roughly $7 per trade, which means my cost to acquire new shares is roughly .23 percent. This may seem high compared to index funds, but remember I only incur this cost once, and I hope to own these stocks for many years.
One more background fact which may explain my lower-than-expected yield so far in this account. Dividend FIREman’s investment knowledge and experience have come a very long way since I started investing in 2012. I didn’t even start my dividend stock account as a dividend account. As explained in my first post here, and later in my post describing my Cash FIREhoses, I started investing in 2012 while going through a painful (and very expensive) divorce. I opened the brokerage individual stock account as an investing neophyte, and as I have learned about investing (and absorbed some painful losses), I have determined that this account will be a dividend growth stock account, to serve as one source of passive income when I reach FI (i.e. one of my Cash FIREhoses).
In the early years of my investing, I made some pretty poor decisions (buying a couple of penny stocks for example, and jumping on the 3D printing bandwagon at its highest point). I am still recovering from those mistakes, which even now drag on my portfolio because I haven’t yet sold the losers (I am still developing my exit/sell strategy for these stocks, which will be the subject of a future post). As a result of not selling, this capital is currently deployed in stocks that pay zero yield. I also have a couple of other stocks (GOOGLE for example) that have performed very well, but which pay no dividends.
The relatively low yield last year (2.44 percent) is somewhat offset by the larger capital gains in the account (up 16.44 percent in 2017), and I have been (and will likely continue to be) adding positions in high quality, higher-yielding dividend growth stocks as time goes on. But the purpose of adding these latest positions is to increase my yield without adding too much additional risk. The additional risk on an individual stock basis should be ameliorated by the diversification benefits these holdings bring to my overall portfolio.
As always, my goal with each purchase is to obtain stocks that I can hold forever.
First, let’s look at Edison International (EIX). Edison is an electric utility supplying central, coastal, and southern California. It also invests in renewable energy. Its stock price has been hit hard as a result of the recent fires and associated lawsuits alleging that its electric lines may have caused the fires. The stock is currently trading at roughly $62.74, or $20.64 below its 52-week high of $83.38 in November 2017. This is a drop of almost 25 percent in two months.
The dividend has not been cut or frozen, currently standing at $.60 per share, or 3.88 percent (raised 12 percent in December 2017). Its PE is near the industry long-time average of 14, and is currently below its peers. I paid $63.63, and Morningstar gives it a $66 fair value. Dividends are paid quarterly, if that is important to you (not as important to me during my accumulation phase). It has a five year dividend growth rate of 8.36 percent, and a dividend payout ratio of roughly 49 percent.
EIX is currently trading at a large discount compared to its peers, and seems to be a good company with solid fundamentals that is trading at below-market value due to temporary externalities. In other words, a good buy!
Blackstone (BX) represents my riskiest purchase to date, because I confess to not really understanding how the “unit shares” (these are technically not stocks) I am purchasing are valued. BX is a global investment firm with investments in private equity, real estate, hedge funds, and credit, among other things. This means that the returns, while often much higher than traditional dividend payments, are volatile, and the future is a bit uncertain. Moreover, BX is classified as “alternative asset management,” and they are structured as a “master limited partnership” (MLP), which means I will need to do some additional work at tax time, because payments are often more than just dividends – they may include interest income, capital gains, and a return of capital. This also means that many of the traditional valuation metrics available for publicly-traded companies are harder to tease out for BX due to its different accounting methodologies.
So why did I purchase this beast? Yield, my friends. Yield. Based on historical performance and the opinions of lots of people much smarter than me, it appears that the potential returns – both now and in the future – for this company are strong. I will keep BX to a low percentage of my total portfolio, but I am hoping that the high yields increase my overall yields over time. While the yearly dividends will no doubt vary widely, the long-term performance should be strong as long as current management continues it success in finding and executing new deals. Yes, this is very much of a “trust in management” purchase! BX is a component of a few high-yield dividend mutual funds (FEQTX, for example), so I am not alone in trusting their management.
The published PE ratio (really a blend of ratios from the different business units) is 14.7, with a “dividend” yield of 6.79%. It is trading at near its 52-week highs, but Morningstar gives a price target of $37 (I paid $32.98 a few days ago, although it is currently trading at roughly $35.12), deeming BX the “largest and most diverse alternative asset manager.” Barron’s ran an article in 2017 giving a $40 fair value to the unit shares. Dividends are paid quarterly.
Duke Energy (DUK) is a stock I have been watching for awhile. My portfolio is light on utility stocks, and thus for diversification purposes, I had several on my watch list, including recent purchase EIX discussed above. DUK is another utility, providing electricity to several states including parts of North Carolina, Kentucky, Ohio, Indiana, South Carolina, and Florida. DUK also invests in renewable energy. DUK is one of the largest electrical utilities in the nation, and continues to slowly grow its customer base.
I paid $80.38 a few days ago, for a PE of 21.0 and a 4.44% dividend yield. The dividend (paid quarterly) has been growing at 4 percent over the last few years, and DUK has not missed a dividend payment in 91 years. Dividends have been growing for 11 years, since the 2007 crisis. Morningstar values the stock at $87, and gives it an undervalued rating. DUK has a higher yield than its competitors (4.44 compared to 3.81 for all utilities), and a lower “price to book” value (1.33 for DUK versus 1.67 for the industry).
All is not wine and roses for DUK, however. Zack’s rates DUK in the bottom 15 percent of its industry (226 out of 265), and assigns a “sell” rating. EPS have been a bit up and down over the last five years, and the growth, while extant, has been very slow. I think that many pundits believe there are better utility sector options out there. Recent dividend payout ratios have been high (between 71 and 93 percent over the last few years), which concerns me a bit. However, utilities in general tend to have higher payout ratios (they pay higher percentages of their earnings to shareholders), because most do not undertake significant expansions or huge new investment such that it is unnecessary to retain large percentages of their free cash.
I am overall bullish on this stock, because of their size, long history of steady dividend performance, and commitment to renewable technologies. DUK management forecasts continued growth in the customer base and revenues, and I think they are a good long-term hold stock that will pay steady dividends even if the price appreciation is not great.
Archer Daniels Midland (ADM) is an agricultural conglomerate that has been increasing its dividend for 42 years. ADM processes oil and other products from corn, wheat, cocoa, and soybeans. They also make flour, protein meal, vegetable oil, animal feed, and biodiesel/ethanol products. Their business includes a strong storage and transportation component, which gives them some involvement in most all aspects of the supply chain.
ADM yields 3.21 percent (quarterly) at my purchase cost of $40.12. The PE is 18.7, and its dividend payout ratio of 54 percent. The current price is near the lowest point over the last year, and most analysts have a valuation of around $40 to $41 per share (roughly what I paid), with an overall “hold” rating. Morningstar gives the stock a fair value of $43. No one is particularly excited about this stock, but no one is terribly bearish either. The biggest criticism seems to be that they are subject to competitive forces beyond their control, which could reduce sales, revenues, and profitability.
I don’t see great price appreciation for this stock, but there are no storm clouds on the horizon for this stock, and there is plenty of room for years of dividend payment increases.
Proctor & Gamble (PG) is a multinational consumer goods company, which has paid an increasing dividend every year for the last 61 years. The company is well known, established, and respected as a leading consumer goods company that sells to the masses both in the US and abroad.
Dividend FIREman paid $90.14 last month, with a PE of 24.2, and a dividend yield of 3.05%. However, there are some concerning metrics. The payout ratio is 66 percent, which is much higher than its peers in the industry. EPS has been growing more slowly than its competitors, and its PE ratio has priced in a forward earnings forecast that appears rosy when weighed against performance over the last few years. Growth has slowed over the last couple of years, and the company has concomitantly lost market share. However, the company has been actively downsizing and shedding brands (they recently sold their Duracell division to Warren Buffett, for example). They are retrenching and trying to retain only the most profitable and efficient brands, and so far the transition seems to be going cleanly. Stock repurchases are ongoing, which will increase or maintain share prices in the short term. Longer term, the company will need to invest in the company and grow its revenues and market share before shareholder value significantly increases.
This is a bit of a contrarian play for me. The metrics say the stock may be overvalued (although Morningstar’s fair value is $96), and recent history (including a distracting fight with an activist investor at the end of 2017) suggests a possibly rocky road ahead. Revenues and profits will not increase overnight. But I like the stock because I believe in the plan of current management. I think they will be able to take back market share based on the brands they are retaining. I also think that the overseas profit numbers (a significant chunk of their revenues) have taken a beating because of the higher dollar, and not because of systemic weakness in the underlying business.
One of my selection criteria is to avoid “flavor of the month” stocks. I generally prefer a long history of performance, even at the expense of higher yields. Sometimes this preference leads me to buy stocks (like GE, which is currently in my portfolio and was the subject of a separate post here) that may seem overvalued. Time will tell whether my faith in companies like GE, PG, and ADM is rewarded.
Values are high across the board in early 2018. The S&P dividend yield was roughly 2.3 percent at the end of 2016, and that it fell to 1.74% over the following year. What happened is a prime example of a common lament in dividend investing – yields tend to go down as prices go up, especially when they rise beyond historical norms. This is happening all around us right now. Dividends are typically announced and paid as dollar amounts rather than percentages. The percentage yield is calculated by dividing the dividends paid by the share price, and thus as share prices rise, the dividend paid becomes a smaller percentage of the share value, at least until the next dividend is announced/paid if earnings have increased. The S&P yield reduction over the past year is primarily attributable to these rising equity values.
It was against this backdrop that I made these purchases. Have I paid too much for ADM and PG? Again, time will tell.
I am not an investment professional, nor am I making recommendations on stocks to buy. Having said that, I do believe these are all quality acquisitions, and that these stocks could be good baseline stocks for anyone’s dividend growth portfolio, provided you are a long-term, “buy and hold” investor. You should not take my comments as investment advice! However, I hope you find this information useful in making your own investment decisions.
In a future post, I will detail my investing methodology, which has evolved since I first started investing in 2012.
What dividend stocks have you purchased recently? Let me know your thoughts about these stocks in the comments. Happy investing!