Understand-investments

Dividend Stock Quality – Making Sense of Credit Ratings

I’ve been reading more about Chowder’s Rule recently as I wanted to learn more about one of the columns in the US Dividend Champion list (it’s tucked away on the right hand side of the sheet in column BZ).

One of Chowder’s first rules in his stock screener is to find companies of “good quality”. But what does that mean?

What is Quality?

Back when I was at University studying Electronic Engineering, a friend of mine was studying Manufacturing. He used to talk about going to “Quality lectures” and I thought he simply meant any lecture where the professor did a good job presenting the course material. It took me some time until I finally realized that “Quality” was actually a subject all on its own! Yes, I can be pretty slow sometimes.

As it relates to Companies, the trouble with “Quality” is that it means many different things to many different people. In many ways Quality is in the eye of the beholder, and while its effects can be seen, it’s hard to measure.

Does the fact that a company increases dividends for 25 years mean that it’s a high quality company, and if so, what’s the magic number when the quality threshold is reached – 5, 10, 25 years? Is it cash flow, earnings growth, financial strength, profit margins, all of the above? Quality isn’t a simple value you can just plug into a stock screener in the search for quality.

Measuring dividend stock quality

For a quick initial yes/no litmus test on whether to investigate a stock further; Chowder’s approach and definition is simple:

“High Quality is defined as having superior financial strength. A company must have a 1 or 2 rating for Safety with Value Line, or a BBB+ rating or better with S&P. Both of these Financial Strength ratings indicate investment grade quality. … Anything that doesn’t meet the High Quality definition is considered speculation and managed differently within the portfolio.”

Companies have credit / investment ratings assigned to them, much as we have our own personal Credit Scores. Companies with low investment grades must pay higher expenses when borrowing money because they’re considered to have a higher risk of not paying their debt (aka defaulting) than highly graded companies. And you can imagine that there’s an army of people involved in researching and determining each company’s grade because of how much money is involved in that industry.

The S&P rating mentioned by Chowder is one agency; here’s a quick comparison of some credit ratings available on the web as well as the things I learned along the way.

400-05702795 ? lucadp Model Release: No Property Release: No lot of numbers in a spreadsheet and charts over it (3d render)

S&P Investor Rating

You can obtain credit ratings for individual companies over at standardandpoors.com. You’ll be asked to create an account and supply email, password and name but it’s otherwise free and there are no charges. Their website is quite a pain to use because you have to pull each symbol individually however, and none of the screeners in my brokerage accounts allow this rating as a search criteria.

The S&P rating methodology grades companies from AAA (the highest), through AA, A, BBB, BB, B, CCC, CC and to R (in default). The symbols ‘+’ and ‘-‘ are used to denote positions with a rating e.g. AAA+ > AAA > AAA- > AA+.

Using Chowder’s definition, grades AAA+ through to BBB+ are investment grade companies and grades BBB through to CC- are speculative. Note that officially per the S&P rating, all BBB grades are investment quality not just BBB+.

Value Line

I didn’t try to get the Value Line ratings. The sign up process looked more complicated than at S&P and they seem very interested in promoting their newsletters and stock selection methodology so I stayed away…

Moodys

And went to Moodys instead which is a competitor to S&P. Their signup process is very similar to S&P’s (email, password and name) but I found their website better organized and it contained more information. It’s free to sign up and get basic ratings but there are charges for premium reports that detail the ratings and research on each individual company. I was still not able to find a list of stocks with a given credit rating, although their search tools are better than the S&P site.

Moodys’ rating methodology is more complicated than S&P’s with 25 different classifications. There’s the basic classification of Aaa (highest), then Aa, A, Baa, Ba, B, Caa, Ca and finally C (the lowest). Then within each rating (except for Aaa), there is an additional rating of 1, 2 or 3 showing the relative position within the rank. So Aaa > Aa1 > Aa2 > Aa3 > A1 > A2 > A3 > Baa1.

The grades of Aaa through to Baa3 are considered investment grade. Grades from Ba1 to Ca3 are speculative and C is in imminent danger of default.

Morningstar Credit Rating

Morningstar has their own credit rating score too. You can find it hidden on the “Bonds” tab of any individual stock quote page. Or you can view the entire list. This is a much easier system to work with than either S&P or Moodys, and is likewise freely available. One disadvantage here is that the coverage is not as high as with the previous two systems; I could not find scores for 6 companies that S&P and Moodys rated.

Morningstar’s scale is simpler though: AAA, AA, A, BBB, BB, B, CCC, CC and C. Any rating of BBB or higher is “Investment Grade” and ratings of BB through CC are considered more speculative grades. C is the rating that denotes imminent default on loan payments.

S&P Capital IQ Quality Rating

Finally I looked at S&P Capital IQ’s Quality Ranking score. S&P Capital IQ is related to the S&P Ratings service as they’re both owned by the same parent company – McGraw Hill. However Capital IQ is a more general investment data and analytics company competing with Bloomberg and Reuters.

The Capital IQ Quality Rating isn’t a standalone credit score; it rates growth and stability of earnings and dividends. This rating is not the same as the Capital IQ ‘star’ rating which is an aggregate of additional criteria. The Quality Ranking score is defined in a range from A+ (highest), A, A-, B+, B, B-, C+, C (lowest). Since it’s not a credit score, there’s not really a concept of Investment-Grade but the B+ score is considered “average”. So you could take either B+ or A- as a minimum threshold.

You can find the Quality Rating (and definition) on any S&P Capital IQ analysis report which are freely available via the Sharebuilder brokerage research tools and other brokerages. The Sharebuilder stock screener also includes this rating as a search criteria.

How do my stocks score?

I’ve normalized all the scores from the stocks in my portfolio to a common standard; using the Capital IQ scale as a baseline.

For Moodys, the conversion ignores the 1,2,3 classifier so I mapped Aaa=>A+, Aa*=>A, A*=>A-, Baa*=>B+, Ba*=>B, B*=>B-, etc.

For S&P, the conversion ignores the +/- classifier, e.g. AAA*=>A+, AA*=>A, A*=>A-, BBB*=>B+, BB*=>B and B*=>B- etc.

Finally for Morningstar, I used a similar scheme as the S&P conversion: AAA=>A+, AA=>A, A=>A-, BBB=>B+, BB=>B and B=>B- etc.

This yielded the following results for the stocks in my portfolio

Symbol Moodys S&P MorningStar Capital IQ
MSFT A+ A+ A+ A-
PFE A- A B+
T A- A- A- B+
ROC B B+ B
XOM A+ A+ A+ A
HD A- A- A- A
JNJ A+ A+ A+ A+
AXP A- B+ A- B+
PG A A A A+
UPS A A- A- B
CVX A A A A
MCD A- A- A A
JPM A- A- B+
KO A A A A+
INTC A- A- A B+
DOW B+ B+ B+ B-
AWR A- A- B
ADP A A A
UNP A- A- A- A+
KMB A- A- A- A
GXP B+ B+ B+ B
APD A- A- A- A
LNT A- A- B+
GIS A- B+ A- A
MAR B+ B+ B+ B+
RTN A- A- A- A+
TROW A-
LB B B+ B+
CB A A A- A
BMS B+ B+ B+
EMR A- A- A- A+
LMT B+ A- A- A+

Missing results

The Moodys and S&P Ratings are not always available for a given stock symbol. Here’s a quick run through the stocks in the list above where I couldn’t initially find a rating. Another place to find the rating can be the company’s Annual Report.

Rockwood Holdings (ROC)

ROC’s debt is issued by one of its fully owned Subsidiaries, Rockwood Specialties Group. Using the conversions above, this rates a normalized B for Moodys, or B+ from S&P.

American States Water (AWR)

AWR’s debt is mostly dependent on its subsidiary, Golden State Water Company (GSWC). This rates a normalized A- for Moodys and an A- from S&P.

T. Rowe Price (TROW)

TROW aren’t rated by S&P or Moodys simply because they have no debt!

Summary

While the Capital IQ ratings are by far the easiest to query and are readily available for every stock I’ve searched for; I think I’ll pay more attention to Moodys credit rating going forward. I think it’s more focused than the Capital IQ rating and since it can directly affect the cost of borrowing of a company, it’s a meaningful rating. I’m pleased to see that most of the stocks in my portfolio have a good credit rating though!

Based on Moodys scores, my two lowest quality stocks are ROC and LB although the news is not all bad. ROC is currently under watch for a possible upgrade after the announcement of the pending sale to Abermarle. LB was upgraded one step in 2011 due to strong performance and debt repayment, putting it in the top tier of its grade and the company currently has a stable outlook.

I’ve been reading more about Chowder’s Rule recently as I wanted to learn more about one of the columns in the US Dividend Champion list (it’s tucked away on the right hand side of the sheet in column BZ).

One of Chowder’s first rules in his stock screener is to find companies of “good quality”. But what does that mean?

What is Quality?

Back when I was at University studying Electronic Engineering, a friend of mine was studying Manufacturing. He used to talk about going to “Quality lectures” and I thought he simply meant any lecture where the professor did a good job presenting the course material. It took me some time until I finally realized that “Quality” was actually a subject all on its own! Yes, I can be pretty slow sometimes.

As it relates to Companies, the trouble with “Quality” is that it means many different things to many different people. In many ways Quality is in the eye of the beholder, and while its effects can be seen, it’s hard to measure.

Does the fact that a company increases dividends for 25 years mean that it’s a high quality company, and if so, what’s the magic number when the quality threshold is reached – 5, 10, 25 years? Is it cash flow, earnings growth, financial strength, profit margins, all of the above? Quality isn’t a simple value you can just plug into a stock screener in the search for quality.

Measuring dividend stock quality

For a quick initial yes/no litmus test on whether to investigate a stock further; Chowder’s approach and definition is simple:

“High Quality is defined as having superior financial strength. A company must have a 1 or 2 rating for Safety with Value Line, or a BBB+ rating or better with S&P. Both of these Financial Strength ratings indicate investment grade quality. … Anything that doesn’t meet the High Quality definition is considered speculation and managed differently within the portfolio.”

Companies have credit / investment ratings assigned to them, much as we have our own personal Credit Scores. Companies with low investment grades must pay higher expenses when borrowing money because they’re considered to have a higher risk of not paying their debt (aka defaulting) than highly graded companies. And you can imagine that there’s an army of people involved in researching and determining each company’s grade because of how much money is involved in that industry.

The S&P rating mentioned by Chowder is one agency; here’s a quick comparison of some credit ratings available on the web as well as the things I learned along the way.

S&P Investor Rating

You can obtain credit ratings for individual companies over at standardandpoors.com. You’ll be asked to create an account and supply email, password and name but it’s otherwise free and there are no charges. Their website is quite a pain to use because you have to pull each symbol individually however, and none of the screeners in my brokerage accounts allow this rating as a search criteria.

The S&P rating methodology grades companies from AAA (the highest), through AA, A, BBB, BB, B, CCC, CC and to R (in default). The symbols ‘+’ and ‘-‘ are used to denote positions with a rating e.g. AAA+ > AAA > AAA- > AA+.

Using Chowder’s definition, grades AAA+ through to BBB+ are investment grade companies and grades BBB through to CC- are speculative. Note that officially per the S&P rating, all BBB grades are investment quality not just BBB+.

Value Line

I didn’t try to get the Value Line ratings. The sign up process looked more complicated than at S&P and they seem very interested in promoting their newsletters and stock selection methodology so I stayed away…

Moodys

And went to Moodys instead which is a competitor to S&P. Their signup process is very similar to S&P’s (email, password and name) but I found their website better organized and it contained more information. It’s free to sign up and get basic ratings but there are charges for premium reports that detail the ratings and research on each individual company. I was still not able to find a list of stocks with a given credit rating, although their search tools are better than the S&P site.

Moodys’ rating methodology is more complicated than S&P’s with 25 different classifications. There’s the basic classification of Aaa (highest), then Aa, A, Baa, Ba, B, Caa, Ca and finally C (the lowest). Then within each rating (except for Aaa), there is an additional rating of 1, 2 or 3 showing the relative position within the rank. So Aaa > Aa1 > Aa2 > Aa3 > A1 > A2 > A3 > Baa1.

The grades of Aaa through to Baa3 are considered investment grade. Grades from Ba1 to Ca3 are speculative and C is in imminent danger of default.

Morningstar Credit Rating

Morningstar has their own credit rating score too. You can find it hidden on the “Bonds” tab of any individual stock quote page. Or you can view the entire list. This is a much easier system to work with than either S&P or Moodys, and is likewise freely available. One disadvantage here is that the coverage is not as high as with the previous two systems; I could not find scores for 6 companies that S&P and Moodys rated.

Morningstar’s scale is simpler though: AAA, AA, A, BBB, BB, B, CCC, CC and C. Any rating of BBB or higher is “Investment Grade” and ratings of BB through CC are considered more speculative grades. C is the rating that denotes imminent default on loan payments.

S&P Capital IQ Quality Rating

Finally I looked at S&P Capital IQ’s Quality Ranking score. S&P Capital IQ is related to the S&P Ratings service as they’re both owned by the same parent company – McGraw Hill. However Capital IQ is a more general investment data and analytics company competing with Bloomberg and Reuters.

The Capital IQ Quality Rating isn’t a standalone credit score; it rates growth and stability of earnings and dividends. This rating is not the same as the Capital IQ ‘star’ rating which is an aggregate of additional criteria. The Quality Ranking score is defined in a range from A+ (highest), A, A-, B+, B, B-, C+, C (lowest). Since it’s not a credit score, there’s not really a concept of Investment-Grade but the B+ score is considered “average”. So you could take either B+ or A- as a minimum threshold.

You can find the Quality Rating (and definition) on any S&P Capital IQ analysis report which are freely available via the Sharebuilder brokerage research tools and other brokerages. The Sharebuilder stock screener also includes this rating as a search criteria.

How do my stocks score?

I’ve normalized all the scores from the stocks in my portfolio to a common standard; using the Capital IQ scale as a baseline.

For Moodys, the conversion ignores the 1,2,3 classifier so I mapped Aaa=>A+, Aa*=>A, A*=>A-, Baa*=>B+, Ba*=>B, B*=>B-, etc.

For S&P, the conversion ignores the +/- classifier, e.g. AAA*=>A+, AA*=>A, A*=>A-, BBB*=>B+, BB*=>B and B*=>B- etc.

Finally for Morningstar, I used a similar scheme as the S&P conversion: AAA=>A+, AA=>A, A=>A-, BBB=>B+, BB=>B and B=>B- etc.

This yielded the following results for the stocks in my portfolio

Symbol Moodys S&P MorningStar Capital IQ
MSFT A+ A+ A+ A-
PFE A- A B+
T A- A- A- B+
ROC B B+ B
XOM A+ A+ A+ A
HD A- A- A- A
JNJ A+ A+ A+ A+
AXP A- B+ A- B+
PG A A A A+
UPS A A- A- B
CVX A A A A
MCD A- A- A A
JPM A- A- B+
KO A A A A+
INTC A- A- A B+
DOW B+ B+ B+ B-
AWR A- A- B
ADP A A A
UNP A- A- A- A+
KMB A- A- A- A
GXP B+ B+ B+ B
APD A- A- A- A
LNT A- A- B+
GIS A- B+ A- A
MAR B+ B+ B+ B+
RTN A- A- A- A+
TROW A-
LB B B+ B+
CB A A A- A
BMS B+ B+ B+
EMR A- A- A- A+
LMT B+ A- A- A+

Missing results

The Moodys and S&P Ratings are not always available for a given stock symbol. Here’s a quick run through the stocks in the list above where I couldn’t initially find a rating. Another place to find the rating can be the company’s Annual Report.

Rockwood Holdings (ROC)

ROC’s debt is issued by one of its fully owned Subsidiaries, Rockwood Specialties Group. Using the conversions above, this rates a normalized B for Moodys, or B+ from S&P.

American States Water (AWR)

AWR’s debt is mostly dependent on its subsidiary, Golden State Water Company (GSWC). This rates a normalized A- for Moodys and an A- from S&P.

T. Rowe Price (TROW)

TROW aren’t rated by S&P or Moodys simply because they have no debt!

Summary

While the Capital IQ ratings are by far the easiest to query and are readily available for every stock I’ve searched for; I think I’ll pay more attention to Moodys credit rating going forward. I think it’s more focused than the Capital IQ rating and since it can directly affect the cost of borrowing of a company, it’s a meaningful rating. I’m pleased to see that most of the stocks in my portfolio have a good credit rating though!

Based on Moodys scores, my two lowest quality stocks are ROC and LB although the news is not all bad. ROC is currently under watch for a possible upgrade after the announcement of the pending sale to Abermarle. LB was upgraded one step in 2011 due to strong performance and debt repayment, putting it in the top tier of its grade and the company currently has a stable outlook.

money-ideas

The Best Dividend Stock Screens

My Favourite Dividend Screens

Finding great businesses isn’t easy. With over a thousand businesses alone listed on the Australian Stock Exchange (and multiples more internationally), finding the diamonds in the rough can be difficult, time-consuming and overwhelming. Today, I’ll show you two quick methods to find companies that in my opinion provide a great starting point to finding dividend stocks that will deliver you attractive long term returns.

Stock Screening – the diamonds in the rough

Stock screening is the process of sorting a list of companies by some financial criteria. By using any number of online tools, we can take a universe of stocks and rank them on this criteria from best to worst. Two of the most commonly used company screens are Price to book value and Price to earnings; these are the two gold standards for screening for “value” stocks. Other common stock screening methods include sorting by market capitalisation (in order to separate smaller companies from larger companies) and growth-focused screens such as screening for return on equity and earnings per share growth rates. An excellent book that describes various stock screens and the subsequent investment results of these screens is “What Works on Wall Street” by James O’Shaughnessy – a true classic in using screening methods to build market beating portfolios.

My favourite Stock Screens.

I have two stock screens that I use to find excellent businesses. The first is filtering by volatility and looking for low volatility stocks. Low volatility stocks have a long history of outperforming market averages – this is known as the low volatility anomaly and has been discussed in a number of academic journals. Low volatility stocks have performed exceptionally well over the last three or so years, and as a result, the amount of investment dollars (particularly in the USA) that has flowed into low volatility products has been extremely high. The demand has been so strong in fact that investment firms have rolled out over 20 different “low-vol” stock funds and exchanged traded funds since the end of 2015! The largest such ETF is  the iShares MSCI USA Minimum Volatility ETF (USMV), which has a whopping US$14.1b invested in it! Unfortunately, there is some evidence that enthusiasm for these products has driven prices for low volatility assets to historical highs, which anecdotally is certainly the case in Australia as well. Nonetheless, this screen can be great for finding business to place on your watchlist, so you are ready to pounce should the price of the company fall to more reasonable levels!

dollar_bills

Currently, the lowest volatility quintile of the ASX300 are as follows:

CMWCromwell PropNVTNavitas Limited
TCLTransurban GroupSYDSYD Airport
DUEDuet GroupTAHTABCORP Holdings Ltd
CQRCharter Hall RetailDXSDexus Property Group
BKWBrickworks LimitedBXBBrambles Limited
SCGScentre GrpCBACommonwealth Bank.
GOZGrowthpoint PropertySGRThe Star Ent Grp
AGLAGL Energy Limited.FPHFisher & Paykel H.
TLSTelstra Corporation.RHCRamsay Health Care
SGPStocklandARBARB Corporation.
GPTGPT GroupSKISpark Infrastructure
DLXDuluxgroup LimitedIVCInvoCare Limited
IOFInvesta Office FundAOGAveo Group
ASXASX LimitedABCAdelaide Brighton
CSLCSL LimitedAMPAMP Limited
ASTAusNet Services LtdCCLCoca-Cola Amatil
APAAPA GroupSUNSuncorp Group Ltd
WFDWestfield CorpREAREA Group
WESWesfarmers LimitedIAGInsurance Australia
RMDResMed Inc.SKCSkycity Ent Grp Ltd
BWPBWP TrustBLDBoral Limited
CHCCharter Hall GroupGNCGrainCorp Limited
SCPSCA Property GroupNABNational Aust. Bank
GMGGoodman GroupAMCAmcor Limited
MGRMirvac GroupAHGAutomotive Holdings.
VCXVicinity CentresWBCWestpac Banking Corp
TTSTatts Group LtdTPMTPG Telecom Limited
ABPAbacus Property Grp.SAISAI Global Limited
FBUFletcher BuildingPPTPerpetual Limited
CARCarsales.Com Ltd.HSOHealthscope Limited

Obviously there are a number property trusts in the list, and these require special analysis which I will discuss in the future. Of particular interest in my opinion are industrial stocks; that is, everything other than resources and property trusts. The above list can be a great starting point for further research.

The other screen I love to use is very similar, and often there is a large percentage of overlap between the two. The next screen I use is a low-beta screen. Beta is a finance term which is reasonably technical, but a basic explanation is that a company with a beta less than 1 is less volatile than the broader market. Therefore, we again look for low betas as potential interesting opportunities. The top 60 of this screen are below as well.

RMDResMed Inc.SGPStockland
SKCSkycity Ent Grp LtdFBUFletcher Building
FPHFisher & Paykel H.SCGScentre Grp
ACXAconex LimitedTPMTPG Telecom Limited
DUEDuet GroupWFDWestfield Corp
IPHIPH LimitedAZJAurizon Holdings Ltd
SPKSpark New ZealandJBHJB Hi-Fi Limited
TMETrade Me GroupASTAusNet Services Ltd
PRGProgrammedAHYAsaleo Care Limited
GOZGrowthpoint PropertySYDSYD Airport
GNCGrainCorp LimitedTLSTelstra Corporation.
TCLTransurban GroupCCLCoca-Cola Amatil
APOApn Outdoor GrpSGRThe Star Ent Grp
SKISpark InfrastructurePGHPact Group Hldgs Ltd
BKWBrickworks LimitedGTYGateway Lifestyle
CMWCromwell PropDLXDuluxgroup Limited
CCPCredit Corp GroupMGRMirvac Group
ANNAnsell LimitedVOCVocus Comms Ltd
APIAustralian Pharm.PRYPrimary Health Care
ECXEclipx Group LtdCOHCochlear Limited
SAISAI Global LimitedCVOCover-More Grp Ltd
IOFInvesta Office FundBWPBWP Trust
HSOHealthscope LimitedCPUComputershare Ltd
TAHTABCORP Holdings LtdSCPSCA Property Group
ALUAltium LimitedGPTGPT Group
AGLAGL Energy Limited.SHLSonic Healthcare
CARCarsales.Com Ltd.MQAMacq Atlas Roads Grp
QANQantas AirwaysSKTSky Network
CQRCharter Hall RetailEHEEstia Health Ltd
CSLCSL LimitedNSRNational Storage

As you can see, there is some overlap between the two. Again, these can be great places to find quality companies with the potential to pay strong and growing dividend streams.

Why not just use Dividend Screens?

The reason I start with other screens is that I am far more interested in owning businesses with strong financial characteristics and strong prospects than companies with the largest yields. As I have written about before, stocks with lower than average volatility and low betas have historically performed well. My concern with screening by yield is that it can result in a list of companies with extremely high yields but impaired business outlooks. While I am primarily looking for dividend growth companies, I would prefer companies with slightly lower yields but with the ability to grow those yields over time.

Stock Screening Warnings.

Stock screens are great for coming up with a list of companies deserving of further investigation. I implore you not to just use the top 10% or top 20% as a portfolio. Blind buying of companies rarely works out for individual investors. Again, I would suggest you use these screens as a starting point for further research.

In addition, stock screens only screen for quantitative factors. Other factors, such as the quality of the management team and the outlook for the broader industry cannot be screened for (at least, as far as I am aware). These qualitative factors are an important part of the investment research process.

Lastly, when using stock screeners you should make the effort to understand where the data is coming from and how relevant it is. Fortunately, I have access to some institutional level tools which enables me to be confident in both the quality and timeliness of my data. Make sure the tools you use are up to date and accurate!

Conclusion:

Stock screens can enable an investor to quickly and efficiently find quality companies deserving of further investigation. I would encourage everyone to explore stock screening as a valuable way to find new investment ideas. For those of you who are concerned about data issues, I update my screens quarterly, and you can find them here. As I said, these are the primary way that I find new and interesting companies for further research.

Do you use stock screening? What are you favourite stock screens? Let me know in the comments!

distributing

Taking Advantage of Stocks Distributing Dividends

“Your Choice Determines Your Destiny!”

Few days ago, I got a request from one of the reader of this site. Here’s the screen shot of his request:

Before going into the details on How to Play the Dividends, here are the definitions that you need to know. More explanation can be read in my previous blog.

  • Declaration Date – Board of Directors announces the payment of Dividend
  • Ex-Dividend Date – The Stock starts to trade without the dividend
  • Record Date – Current shareholders on the record book will receive the dividend
  • Payment Date – Company issue the dividend payments

The dividend timeline below illustrates the four dates investors(traders) must understand and monitor in order to effectively implement their dividend play strategies.

Figure 1. Dividend Timeline

Maybe, you are already aware that dividends are one of the many factors that influence the stock price, though not really a big impact compared to other variables such as company earnings, arbitration’s issue like what happened recently with MWC and MPI.

In this article, I’m going to take a look on the common ways to trade around the dividends.

 

PHILIPPINE STOCK DIVIDEND HISTORY

As a Dividend Investor, Most of the time I am looking into stocks known as blue chips since these stocks are considered stable. I reviewed my database and filter the stocks that distributes dividends for the last five years, below is the top 5 blue chips dividend stocks ranked base on the dividend yield.

RANKSTOCKLAST PRICE YR2009TOTAL DIVIDEND YR2010 – 2014DIVIDEND YIELDLAST PRICE YR2014PRICE %CH YR2009-2014TOTAL RETURN
1DMC          1.94      8.5000438.14%        15.70709.28%1147.42%
2SCC        18.33    52.0000283.64%     142.00674.55%958.18%
3AEV          9.00      7.480083.11%        52.70485.56%568.67%
4AP          8.60      4.940057.44%        42.90398.84%456.28%
5URC        16.25      8.280050.95%     196.001106.15%1157.11%

The following screen shots shows the stock prices movement around the dividend dates:

AEV

AP

DMC

SCC

URC

Dividends coin

ACCUMULATE BEFORE THE DECLARATION DATE

It seems the idea of accumulating before the declaration date is good. If you notice, almost all of the five stocks shown above, the stock price started increasing prior to the declaration date. For Dividend Investor this may not really matter. I will elaborate this further in my future post. For Short term trader taking advantage of the upcoming dividend, this strategy might be good to implement. However, two important things is a MUST to be known. First, The expected Dividend distribution month MUST be known so you can schedule the timing when you will start accumulating. I have a compilation of this anyway to help you shorten your time of your research, just check the DIVIDEND CALENDAR page of this site. Secondly, You MUST be aware of the previous quarter earnings of the stocks of your interest. You have to ensure that the company has a positive earnings otherwise the probability of distributing dividends is very less.

 

BUY ON DECLARATION DAY

Most of the time, the stock price rises from the declaration day up to the day prior to Ex-dividend date. For short term trader taking advantage of the upcoming dividend, this day may be the BEST time to enter. However, not all stocks rises as shown in the screen shots above.

 

SELL ON OR BEFORE THE EX-DATE

For short term trader, selling before the Ex-Date is always preferred as long as the profit is almost equal or more than the dividend yield since on the Ex-Date, stock price will most likely drops to almost same amount of the dividend. Let’s take a look on DMC. On May 16, 2014, DMC declares a dividend with a 4.11% yield. Let’s assume you bought a shares of DMC during closing on May 16, 2014. On May 20, 2014 (two trading days after dividend was declared), the stock price raises as high as 7.68% from May 16 closing. During this time, you may consider to SELL your position reaping a 7.68% return better than the 4.11% return from the dividend. However, If you really wanted to collect the dividend income but not planning to hold the stock for a long time, you may SELL on the Ex-Date (most likely with a loss but dividend income may compensate this loss anyway). If you could wait a little longer, I recommend to SELL your stocks few days (or weeks) after the Ex-date since the stock price will recover from a loss due to the dividends (you may check again the screen shots above and observe how the stock price recovers after the Ex-date).

CONCLUSION

Not all stocks have the same behavior/reaction to dividends. Nonetheless better to know how the particular stock perform on the dividends and respond accordingly. I recommend that you MUST have always a trading (or investing) plan before you execute in any of your future trading(or investing) decision and stick to the plan all the time. In this way, it is easy to modify and trace what went wrong or which one needs to be improved. Remember, it is your hard earned money. So, be responsible on all your actions.

Thank you for reading. May you have a consistent and profitable trades ahead!

Gold Coins

Gold Coins and Gold Bullion Remain a Safe Place For Your Money

The Bull and The Bear are continuing to bang heads. Wall Street and even Main Street USA, and I am sure even your street is in shambles. The banking system is melting before our eyes and is in total chaos. The bankers, all the smart players are demanding a bailout. They have ripped us off, lined their pockets and are smoking a big cigar bought with their fat wallets and they want help! The only bailout plan should be the bankers getting bailed out of jail for this mess, the mess that has almost crippled our economy and the mess that they have put us into. So as we sit around wondering what’s next, now we need to ask ourselves… Are there any safe places to put your money in this time of the weak Dollar, while all of the financial lenders go belly up, with the oil market a ticking time bomb, with wild fluctuations in the stock market? There is hope for that safe haven. You need to follow this advise, you need to act now, this is not a doom and gloom scare tactic, it is simple real life mathematics. We say park your cash in: gold. Yes Gold! Whether it is coins, bullions, or Kruggerands, gold has historically been a safe haven for your hard earned cash. That is not about to change any time soon, if ever.

The California Gold rush is a well documented example of how far back gold has been popular. In fact, we can go back thousands of years to trace the investment lineage of gold. Gold has historically and will continue to be a solid investment! Think about this, gold is an item you can hold in your hand, that alone is a main reason why it is so valuable. It is an item you can hold, wear around your neck or store in a safe. It’s not an abstract number in a computer bank that rises or lowers by market movers who have no clue. It’s not spat out by a magic money tree in the basement the Federal Reserve. It is produced by mother earth and all her wonderful resources. Gold, to this day has to be mined by gold miners and separated from the earth. Gold is virtually impossible to become worthless, along with silver it is what all paper and minted money is supposed to be backed by in all countries around the globe. Everywhere you can think of, world economies depend on the price of gold, and more importantly the economies need the value of it to be maintained in a positive manner.

gold-coins

The history of our economy has always been whenever derivative money such as the Dollar have shown times of volatility, causing stocks and bonds to go on a wild ride, that is when most seasoned and wise investors have turned to gold and precious metals as a place to not only invest but to protect their hard earned precious wealth. Way back when gold was first discovered, gold has always been the rock upon which all currency and wealth is built upon. Stocks, bonds, oil, pork bellies, orange juice futures and other commodities, can collapse any day, gold will never collapse. The original money known to mankind is, that’s right gold. You can wake up one morning, or return from work one day and in an instant The Dollar can become worthless on the FOREX, but gold will never lose any of its value. If the Dollar were to become worthless, then investors would be pushing up the value of gold, driving the price to historic levels, and investing much more of their money in it! That will be an all time Gold Rush, and your pockets will be lined with golden dollar signs.

Now, I do not want to get your hopes up, in fact the Dollar going to zero is not a realistic scenario. But now that we have your attention we are just exaggerating to make a point–a very realistic point that gold as an investment really has some true merit. Gold coins and gold bullion have been magnificent investments for a long period of time. We do not see this changing and the more troubled times that occur in the speculative stocks and bond markets, thanks to a few greedy people, the better gold coins and bullion become as investment vessels. Gold will always remain a smart investment choice, perhaps one of the few, safe outstanding plays for a college fund. If college is still greater than 15 years out, then a play on gold, may in fact be a safe haven for a few of those “golden” eggs. In other words get into gold when your child is born and just tuck it away for the first college day.

Now, let’s look at what may not be fun to review, but is probably a good time to discuss the facts, and that is a few hard economic realities. First things first, the value of gold and the other precious metals, always reflects global inflation. Inflation is caused by the increased circulation of derivative or fiat monies. Inflation, even if it were to slow down now (very, very unlikely), is a hard reality of modern economics; thus, the value of gold will continue to rise. All the precious metals will continue to see an increase over the next decade and beyond.

For another thing, does it seem to you that geopolitical uncertainties are going do just vanish anytime soon? Yea, OK! There are way too many world leaders that have an agenda that is self centered and dangerous. Turmoil amongst world leaders is only going to worsen over the next few years. The world, especially some of its world leaders is crazy with greed. There are more than enough of crazy “leaders” in the world, plenty of people who will kill you for their fanatical cause, will keep the price of gold at all time highs. As the planet generally grows wealthier, while on the one hand that gives more opportunities for more people to do well, it also provides more opportunities for people to do wicked things. World financial markets, regardless of the country do not like the risk with this political chaos. These are threats to world economies and to the wealth of these world leaders. And yet, the smart and wise investors continue, year after year to profit from this kind of risk. And they know that perhaps the very best way to profit from risk is investing in gold and other precious metals. When markets grow more destabilized, which seems to be happening most of the time, the price of gold and precious metals goes up, because people around the world value it more.

There is always risk to the stocks and bond market anyway. No different than betting on some sports action in Vegas or a long shot at the races, the larger the risk or odds, the greater the return Smart investors and wise gamblers know that greater risk taking, if done right, leads to greater profits and earnings. But, those bigger profits are also less certain profits. Yet with gold, the riskiness has a very strong and historically proven tendency to drive up the value of the precious metal. So it can be said that with gold investments, greater risk basically GUARANTEES greater profits!

Remember, whenever the markets experience some turmoil, people start placing their money into more solid things. People want to be able to sleep comfortably at night; they need the comfort that their nest eggs are protected. They want less speculation, less derivation, and more concrete stuff. When stocks and mutual funds are reeling, gold coins and gold bullion are rising. For they are the stuff and the foundation that economies are made of and provide the true value that investors seek. Beginning today you should start building your core foundation of gold coins and gold bullion investments.

dollar

Why Invest in Dividend Stocks?

I realized that it is necessary to write about the reasons behind why I choose to invest in dividend stocks as my strategy in building wealth. Though, Dividend Investing is more popular in the United States, I am optimistic that this strategy will equally work-profitably in the Philippine Stock Market. Does anyone of you doing dividend investing strategy? I hope we can discuss our experiences here as we go along our journey towards financial freedom.

As an Overseas Filipino Worker (OFW), one of my goal is to build up my wealth as soon as possible. When I say wealth, it’s not simply about having a lot of assets, it’s about generating a significant amount of passive income that grows over time.

Putting Up a Business

I believe putting up a business is one way, if not, the best way to build our wealth. Indeed, I had put up three small businesses so far. Two of these are giving me an ample amount of passive income while the other one I decided to stop its operation due to the incompetence of the manager I hired.

With the closure of my third business and a timely introduction to me of the stock market, I realize that stock market could be a good business as well. Buying a share of stock in a company has no difference from what I have been doing in my businesses since I hire other people to manage the business that I put up for I am still working outside the Philippines (so I can be well capitalized).

 Stock Market as my new Business venture

I got motivated with the idea that once you bought a share of stock in a certain company, you are then a part OWNER of that company. Wow! I can own many businesses while I’m still an OFW. The challenge now is to define what strategy to implement before investing in the stock market?

EXPENSIVE-MONEY

Investment Strategy

Investing strategy depends on the type of the investor. In the Philippines, I often heard of the following strategies:

  • Buy and Hold. Buy and hold strategy involves buying company shares and hold them for a long time.
  • Peso Cost Averaging. The peso cost averaging strategy is designed to reduce the risk of suffering substantial losses resulted when the stock was bought just before the market falls.
  • Value Investing. The value investing strategy looks at the intrinsic value of a company and value investors seek stocks of companies that they believed are undervalued.
  • Market Timing. Market timing is usually used by the day traders (active traders) attempting to maximize their return.
  • Dividend Investing. Buying a Dividend Stock and holding while continually getting a dividend income.

So, Why Dividend Investing?

I am not against with any of the strategies mentioned above. In fact, I want to use them all. Yes, TO USE THEM ALL. I will incorporate the first four listed strategies above into the Dividend Investing. Why? Simply to ultra-maximize my return (wishful thinking).

Though, I’m still in the process of building up my Dividend Portfolio nevertheless I sense comfort with Dividend Investing, in a way that I don’t really need to put most of my time monitoring the ups and downs of the stock market price. In fact, I can’t monitor all the time during trading hours due to my 12-hours daily job (pardon, not really everyday – my work cycle is 4 Days work/4 Days Off). Monitoring the market action after the trading hours is not an issue in dividend investing.

My previous blogpost, a comparison of return between Dividend Stocks versus non-dividend stocks, shows how the dividend stocks leads in reaping the returns. Even, one stock reaps an overwhelming 1,600% return, wonderful, right? But then again just a reminder that this will not guarantee for the future performance. A detailed study is a MUST before you invest your hard earned money.

Another thing that I like in Dividend Investing is that, aside from price appreciation, the dividend income that you’re collecting can be re-invested hence, that will give you a passive income that grows exponentially each year and at the same time builds your net worth over the long term.

Security during Market Lows

As we all aware, stock market price is moving like a roller coaster. Everybody is happy when the price move upwards but many would panic whenever the price declines. The movement in price doesn’t affect much the dividend investor knowing we still get dividends and even have the opportunity to buy more shares when the price is low, Peso cost averaging and Market Timing strategies applies here. However, we MUST dutifully check the value of the stocks we’re holding to ensure that the stock value still holds to be favorable – here you will apply the Value Investing Strategy.

CONCLUSION

Apparently, the dividend investing strategy takes time and discipline. I would say, patience and perseverance is the key to success in dividend investing. Further, we need to develop a robust investing plan. We need to identify companies that will provide good earnings over time.

Some time ago, I read from one of the blogger (unfortunately, I forgot to take note of his blogsite 🙁 ) sharing his views in finding a good dividend growth stock for your portfolio. The following is what his general principles that are worth looking for when investing in dividends:

  • A good dividend growth company has a product or service that you can foresee existing and being relevant for many decades to come. Time is very important to allow passive income to increase, so it’s wise to find a company that is built to last forever.
  • The company should have unique aspects that separate it from competitors.
  • A strong balance sheet is the hallmark of a good dividend investment, because it increases the chances of your company being able to survive and grow.
  • Keep in mind the general estimation that the total rate of return will be equal to the dividend yield plus the sustained dividend growth rate. Some investors like high-yielding stocks with lower dividend growth while others like lower-yielding stocks with higher dividend growth, and some prefer a mix of both, but keep this basic guideline in mind.
  • The company’s stock should be reasonably priced. A good company can make a bad stock if it is over-priced relative to its fundamental value. If you buy stock in an overvalued company, your returns are likely to be less than the sum of dividend yield and dividend growth. If, instead, you buy quality undervalued companies, your returns may be greater than the sum of dividend yield and dividend growth.
  • You should be able to understand the company. My view of investing is about individuals taking control of their finances, so if they don’t really understand their stocks, they aren’t really taking control of their finances.

How is the idea of investing in dividends to you? Does it sounds more profitable, easy, and hassle-free strategy?

Thank you for reading and looking forward for our success in all our endeavor!

dargs-ediens

The Rise and Fall of Dividend Champions

How many companies have tried and failed to become a Dividend Champion with 25+ years of annual dividend growth? How many of the former Champions are back in the running for another try at Dividend Championship?

Read on for some stats on the rise and fall of Dividend Champions since 2007.

The excellent US Dividend Champions list has been maintained by David Fish since 2007. The list contains a detailed “Summary” tab showing the evolution of companies in the list from year to year; however it’s not entirely accurate because the earlier lists from 2007 do not contain all of the companies showing as Champions today.

I compiled all of the lists from the Dividend Champion list archives together so I could see the complete evolution of all companies from December 2007 through to December 2015. To compile the list I started with the 2015 list and subtracted one year in each company’s history until 2007, then I added the companies that were eliminated in each year and back-tracked their history as necessary.

You can download the Excel File here.

I’ve shown the first three lines from the report as an example; it contains the symbol / company name and then the dividend growth length (in years) as a number for each year from 2007 to 2015. The 2015 column matches the December 2015 list; earlier years might not match up exactly with earlier lists because I’ve extended the data backwards.

So-Expensive

Empty cells indicates either no dividend was paid or that the dividend growth was less than 5 years. You can infer when companies started paying dividends e.g. Agilent started paying a dividend in 2010 and grew it each year until 2015 when it reached a 5-year history and is first shown on the list.

SymbolNameIndustry200720082009201020112012201320142015
AAgilent Technologies Inc.Medical Equipment        5
AANAaron’s Inc.Retail-Rental5678910111213
AATAmerican Assets Trust Inc.REIT-Retail        5

The Fall of Dividend Champions

There are many reasons why dividend champions are removed from the Dividend Champions list. Poor performance is just one; it could be because the company was taken private or merged with another company. It could also be that the company decided to expand or grow the company instead of paying out the dividend. And a pause in an annual increase will remove a company from the list. I’ve not researched the reasons why; I was mostly interested in the rate of decline of existing dividend champions.

Here’s a table showing how the companies in 2007 with 5+ years of dividend growth have fared in the subsequent 8 years until 2015.

# Years200720082009201020112012201320142015
50+888888877
45181817151515151414
40343330272727272626
35716657545351515050
3011110281787573727169
2514212799949189878583
20165150120114111108106104102
15194179149143138133130128125
10252237207201189185182179174
5379364334328311298286279266

The data is cumulative; that is there were 379 companies with 5+ years of dividend growth in 2007 and 252 companies with 10+ years. In 2008 there were 364 companies remaining from the original 379. This means that between 2008 and 2007, fifteen companies failed to increase dividends and were removed (379-364 = 15), and that in 2007 there were 127 companies with a 5-9 year history (379 – 252 = 127).

I’ve plotted this table out in the chart below.

This chart shows both the effect of the 2007-2008 financial crisis with a large drop in dividend increases in that period. In general, companies with a long history show a much lower failure rate than companies with a shorter history.

Past performance won’t apply going forward, but this kind of information might help determine the allocation of stocks between companies with long and short histories. A stock portfolio containing twenty companies with a 5-year history might expect to lose about 6 companies (28%) in an 8-year period with a corresponding reduction (or freeze) in dividend increases.

Using the numbers above that’s (266-174) / (379-252) = 92/127 = 72% remaining. The table below shows all ranges.

Start Length20072015Survival %
5-91279272%
10-14584984%
15-19292379%
20-24231983%
25-29311445%
30-34401948%
35-39372465%
40-44161275%
45-4910770%
50+8788%

The law of small numbers increasingly distorts the results since a single company dropping out has a much more significant effect when there’s only 8 to start with compared to 127.

Rising from the ashes

The following former Dividend Champions from 2007 are back in the 2015 list with a 5 or 6 year Dividend History. Their former status might mean they’re above average compared to other 5-year growth companies.

SymbolCompany Name20072015Sector
AVYAvery Dennison Corp.315Business Equipment
BBTBB&T Corp. 36 5Banking
BUDAnheuser-Busch InBev SA/NV 31 6Beverages-Alcoholic
FITBFifth Third Bancorp 33 5Banking
GEGeneral Electric Co. 31 5Conglomerate
HSYHershey Company 32 6Confectioners
JCIJohnson Controls Inc. 32 6Auto Parts
KEYKeyCorp 43 5Banking
LMLegg Mason Inc. 26 5Financial Services
LNCLincoln National Corp. 25 6Insurance
PFEPfizer Inc. 41 6Drugs
STTState Street Corp. 26 5Banking
UDRUDR Inc. 30 5REIT-Residential
USBU.S. Bancorp 355Banking

Survivorship Bias

The Dividend Champions List is a no-nonsense list; if a company cuts its dividend it’s out; there’s no special treatment for 50-year Champions despite their pedigree. For the most part, this is a good thing since only the strongest companies survive which is a desirable trait for companies in a dividend growth portfolio. But Survivorship bias can creep into comparisons so keep that in mind when comparing numbers.

As a case in point, in the 2015 Dividend Champions list there are 13 Financial companies, 14 Utilities and 5 Health care companies which have a 33+ year dividend growth length. So you might look at those numbers and think that Financial companies and Utilities are both great sectors for dividend champions and Health Care is quite weak.

However if you wind the clock back to 2007 and look at companies back then that had a 25-year Dividend Growth history (which is 33 years now), your conclusion might be quite different.

Industry2007 (25-Year History)2015 (33-Year History) Survival %
Health Care191473.4%
Utilities8562.5%
Financial441329.5%

Less than one-third of the 25-year Dividend Champions from the Financial sector in 2007 managed to continue to increase dividends over the next eight years, compared to nearly three-quarters of the Health-care companies. This time period includes the Financial crisis where Financial companies were heavily impacted, but the high numbers of Financial companies in the 2015 list are simply because there were more financial companies to start with. And another financial crisis is perhaps more likely than a crisis in the Utilities sector in the future.

Even this conclusion has its bias since it only counts companies with 25+ years and not the total number of dividend paying companies.

Summary

I don’t think too much weight should be put on the percentages in this summary; the set of numbers are too small. But it was an interesting exercise to see the kind of failure rates that might be expected over a long investing cycle, especially for investors who have a 40-year investing period ahead of them.

Re-visiting former champions that have recovered from their prior cut or freeze is an interesting topic too. Of course they cut their dividend in the first place but further research might indicate if they deserve a second chance or not.

And in case you’re wondering, the solitary Dividend Champion with 60-years of dividend growth which was removed from the Dividend Champions list in the 2007-2015 period was Diebold Inc (DBD) due to a dividend freeze in 2014. It’s still paying dividends with a 4.3% yield but the Champion’s List has no mercy.

Quote of the day

Choose a job you love, and you will never have to work a day in your life.

dollar-banknote

Top 10 Reasons I Like Dividend Growth Stocks

I believe dividend growth investing is one of the best investment strategies available. There are many reasons I like dividend growth companies and today I wanted to highlight some of what I feel to be the biggest draws towards dividend growth stocks compared to other investment options. Here you’ll find my top 10 reasons that dividend growth stocks are my favorite type of investment.

Dividend growth companies tend to be great businesses.   Companies who have demonstrated the ability to increase dividends year after year for quite a few years (minimum of 5) are doing something right.  Look at many lists of dividend growth stocks and you’ll find many blue chip, solid industry leading companies who have been not only increasing dividend payments but earnings for many years in a row.
Income from dividend growth stocks can outpace inflation.  When looking for stocks to invest in I look for stocks that have a reputation for annually increasing their dividend payment at a rate higher than inflation.  This means that when I am living off of my dividend income, that income will at least keep pace with inflation.  As my expenses rise due to inflation, so will my income causing me no concern about being able to cover my bills.
Dividends can have a compounding effect on your wealth.  During the accumulation phase of investing I am using my dividend income to buy more shares of dividend growth companies.  As time passes I will be receiving dividend payments on shares that I purchased with previously earned dividends.  In effect I will be earning dividends on my dividends.  This is compounding and nothing can boost your wealth over time like the effect of compounding income.
Dividend income can pay my bills.  Eventually I will reach my goal of earning enough dividend income to cover my daily living expenses.  At this point I can choose to collect my dividend payments in cash rather than reinvesting them.  I can then use that cash to pay all of my bills and I will no longer have to go to a job in order to earn money.  When you don’t need to rely on a job to earn money to pay your bills, but instead can afford to cover those expenses with dividend income, this is what I call financial freedom.  Dividend growth can help me reach financial freedom.

Growth Stocks


Dividend income keeps me from making stupid mistakes.  There is a lot of volatility in the stock market.  Prices will go up sometimes and prices will go down.  As an owner of stocks you must be willing to sometimes experience large price declines.  When stock prices are dropping it is easy to think that you need to sell your stocks before you have nothing left.  However, if your main focus is on dividend income then this can give you a pause.  Dividend income can help you get through the hard times when you might be tempted to sell.  As long as the underlying business of the stock you own is still good and strong there is no reason to sell just because it may fall slightly out of favor with the market.
Don’t have to sell off assets (shares of stock) in order to generate cash.  If you own investments that don’t pay out an income then in order to pull out cash to pay your expenses you will need to sell some of those investments.  Dividend income allows me to continue to own my stocks while still paying me an income to meet my expense requirements.  I will never have to sell my stocks if I don’t want to.
Dividend growth is a positive sign from a companies management.  Typically if management is raising a dividend rate it is because they feel good about the future prospects of the company.  They believe they will have the profits to support a higher dividend payout.  The last thing management wants to do is have to decrease the dividend because this will negatively affect the stock price.  I believe most managements are conservative with their dividend increases so they will not be forced to have a cut in the future.  However, this is not always the case.  Make sure you do your due diligence as to the safety of the dividend before investing.
Dividends continue to grow even during recession or stock price declines.  There are companies out there that have increased their dividend for 20, 30 and even 50 years or more.  They continued to grow their dividends right through the bear markets of the 80′s, right through the bursting of the dot com bubble and right on through the recent financial crisis caused by the housing bubble.  Owning shares of companies who are able to continue to do well through recessions, despite what stock prices may be, makes me very pleased.  You can feel good that your companies are doing their jobs and the stock price will recover once the economy gets back on track.
Dividends are taxed at low rate for most taxpayers.  In the United States, qualified dividends are taxed at a lower tax rate than the regular income tax rates.  This means I get to keep more of each dollar of my dividend income compared to earned wages and interest.  I can then use these dividends to buy more investments to make more money in the future.
Dividend income is passive income.  Possibly my favorite reason to own dividend growth stocks is because dividend income is passive.  My goal is to eventually accumulate enough shares of dividend growth companies that I will be able to cover all of my living expenses with the dividend income I am paid.  I no longer will have to work to be able to meet my obligations.  I will be able to do whatever I want whether that is travel, golf, watching sporting events or sitting at home playing video games and watching movies.  Monday morning will come and rather than having to go into the office, I will be able to wake up and decide to do whatever I want.  That will be because no matter what I decide to do, my dividend stocks will be doing their job and paying me a passive income.

There you have it.  These are my top 10 reasons for owning dividend growth stocks.  What is your favorite reason for liking dividend growth investing?  Please share your thoughts in the comments below!

medical-conditions

What is Dividend Investing?

In your reading this article then congratulations are properly in order.  You’ve worked really hard, saved your money and reached the point where you want to invest your money.  You might even know a little about dividend investing but you still have questions.

What exactly is dividend investing?

How is a dividend growth investing different from every other investment strategy?

Well this article is great introduction to dividend investing and shows you the power dividend through patient long term investing.

You’ve probably all heard the expression “buy low and sell high”. Well if you ask me that puts a lot of pressure on most everyday investors.  How do I know the know the difference between a cheap stock and bad stock?  If I’m lucky enough to buy a stock that rises when should I sell my position?  Not only does investing take a lot of knowledge and luck but it also takes a huge amount of time and effort.  On the other hand, a dividend investing strategy can be explained as “buy and wait for the checks to roll in”.  That’s right, once I buy a stock I’m expecting to hold it for at least 5 years and most of my stocks I NEVER plan on selling.

Wait a minute how can you make any money if you never sell the stock?  I’m more interested in the constant and hopefully growing stream of money that I will receive from the dividend stream of the stock.

As most people who have ever invested in the stock market know stock prices fluctuate.  Sometimes they will even fluctuate wildly.  In a exceptional year even a blue chip stock that is an industry leader can easily swing 50 or more percent.  This volatility has the potential to generate massive wealth to the stockholders provided they are able to time the ebb and flow of the market.  However the trouble with this approach is that it puts all of the burden of generate wealth onto the investor.

dividend-cut-decrease

Unlike most investing strategies, dividend growth investing is looking at stocks over the VERY  long term. Let’s take Fortis Inc. as an example.  I’m using Fortis as an example not because it is an incredible stock.  In fact in most ways Fortis is a very boring stock.  The company is primarily a utility holding company.  There is nothing very interesting about paying your electrical bill every month.  You won’t get rich over night owning this stock but don’t be too quick to ignore the company either.  Fortis operates  electrical utilities in five different Canadian provinces along three different Caribbean countries.   The reason Fortis is such an interesting company is that they have a long history of paying their shareholders cash dividends as well as increasing that dividend year after year.  Let’s take a look at the dividend history:

As you can see from the chart above in Fortis has raised their dividend every year since 1973.  In 1987 the price on Fortis stock closed at $4.75 but the company also paid out a cash dividend of $0.313 or 6.5%.  This constant and long term growing income stream is what dividend growth investors are looking in a company.

Over the long term history has shown that stocks can counted on for about an 8% annual return.  That being said on any given stock there will be year’s the stock performance will be much higher then average 8% return and there will be years that the stock’s performance will be much worse.  The beautiful thing about the dividend stream is that unless the company cuts its dividend (a clear sign that the company is not healthy) the stock holder can count on the dividend income regardless of the stock performance.

Let’s take a look at the 5 year stock chart for Fortis compared to the S&P 500.

As you can see from the above graph that the Fortis stock price did very well over the last 5 years.  However, more importantly you can see that there were fairly significant fluctuation in the Fortis stock price over the last 5 years.  The beautiful thing about thing about dividend growth investing, and the difference between all other forms of investing in that the dividend investor isn’t too concerned about the stock price because over a long enough time frame it is expected that most stocks will return close to the expected 8% annual return.  However in addition to the stock gains the investors gets to sit bad and collect dividends while he waits. For  our Fortis example that means an additional $5.14 that he collected since 2007 which works out to approximately 18% of the price that he paid for that stock in 2007.

Hopefully, this article helped demonstrate why dividend investing can be such a powerful tool.  I’d love to hear your comments; Why do you invest in dividend producing stocks?

Tim-Robberts

When To Sell Dividend Stocks

Dividend investing is no different than investing in regular stocks when it comes down to the moment of selling your stocks. Once you know when to buy a dividend stock , you should also know when it is the right time to sell it. Your decision of selling your dividend stocks should never be based on fear or economic concerns but on solid and rational arguments. Here are quick indicators telling you when to sell your dividend stocks:

Sell Your Dividend Stock Upon A Dividend Cut

We already discuss the effect on a stock of a dividend cut. When it occurs, the stock value drops as it is an alarm signal. Dividend cuts indicate that the company has looked at all the possible options and they finally resign to cut their dividend payout in order to face their internal financial needs. It can be a result of bad management, a catastrophe (think of the BP case in 2010) or a sales slowdown.

In any case, you don’t want to be part of this boat. Your goal while holding dividend stocks is to earn dividend income. If this income becomes at risk, you should sell your dividend stock and move forward. You will definitely incur a capital loss (or at least selling at lower price) but you are better off selling right away and start hunting another solid dividend payer. For example, if you would have kept your financial stocks after the 2008, you would only start to earn dividend payout again in 2011 (small payouts for some banks). On the other side, there were astonish dividend investing opportunities back in 2009 – 2010 and you could be making 4-5% dividend yield with very solid companies.

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So, bottom line; dividend cut = sell your dividend stock!

Sell Your Dividend Stock Before It’s Too Late

Sometimes, you don’t have to wait until there is a dividend cut to sell your stock. If you quarterly at your holding, you will be able to follow the key dividend ratios and sell upon weaker performance. Consider the present quarter result as long as what is coming up next for the company. If they show weaker dividend and financial ratios and there are no short term reasons to explain this, you are better off selling your dividend stock and go back to your investing model.

Sell  Your Dividend Stock To Cash Your Profit

In some case, you will be quite lucky in your stock picking. If you happen to buy one a rock star, you might want to sell when you are making an important investment return. When stocks are going up too quickly, it is usually because of speculation or because it has become the “flavour of the month”. A dividend investor should not be looking for the homerun and should prefer a more stable portfolio. Selling your winners to buy other dividend payers is always a good move. A good indicator to sell your dividend stock in this situation would be to look at the P/E ratio. When it goes up higher than usual, there are some speculation involve. Sell you dividend stock and enjoy your investment return.

Sell Your Dividend Stock if You Love it Too Much

We often see investors falling in love with one of their stocks. They love the company, the way it’s managed or the product they are offering. However, lovers don’t make good match when it comes down to make money. If you love one of your dividend stock too much, you might want to consider selling it before your emotional attachment becomes too important. When it happens, dividend investors keep their stocks forever and choose to ignore selling alarms such as dividend cut or weaker financial ratios.

Final Advice: Sell Your Stock Right Away but don’t be in a Hurry to Buy Another Dividend Stock

If you have a good reason to sell your dividend stock, don’t hesitate and press the “sell” button as fast as possible. However, don’t be too trigger happy when it comes down to buy another stocks. It’s not a big deal if you are sitting on a few thousand for a couple of weeks or months in your investing account. You are better off moving the proceed of your sale in a money market fund and wait carefully for the next dividend buying opportunity.

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When To Buy Dividend Stocks

We have been receiving several requests from readers to help them determine when it is the right time to buy a dividend stock. First off, there are no easy ways to know when to buy dividend stocks or not. However, there are some key points to look at. Those key ratios and indicators will guide you to find the perfect moment when to buy dividend stocks.

When to Buy Dividend Stocks According To Dividend Ratios

Personally, I think that it is always the right time to buy dividend stocks… as long as the fundamentals are there. There are some key dividend ratios you must observe before buying a dividend stock.

A) Dividend yield and dividend payout

When I use a dividend stock screener, I always look for dividend yields over 3%. While I may be doing exceptions and buy lower paying dividend stocks, my main goal is to cover more than the inflation (for more info, read dividend vs inflation). Therefore, I consider a right timing to buy a dividend stock when the dividend raise to 3% or the stock value temporarily drops enough to show the dividend yield I am looking for.

B) Dividend Growth

Dividend raises are very important in a dividend portfolio. Since the purpose of dividend investing is to hold your stocks during several years; you want to make sure that your holdings will generate more money in the future. The 2 important ratios for dividend growth is the 1 year dividend growth and the 5 years dividend growth. The first one will tell you about the current situation of the company (if they are able to raise their dividend currently). The latter will tell you if they can maintain a steady dividend growth over time. I like dividend stocks showing a dividend growth over 5% (yearly and over 5 years). This tells me that there are solid dividend payers and that it is the time to buy this dividend stock.

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C) Dividend Payout Ratio

The dividend payout ratio must be lower than 75%. If you are looking at dividend stocks with a higher dividend payout ratio, you are looking at a stock that might encounter problem increasing their dividend payout over the long run. When you are looking at the right timing to buy a dividend stock, look at their recent dividend raise announcement and how was the dividend payout ratio. If they recently raise their dividend payout without impacting too much their payout ratio, this is the right time to buy this dividend stock.

When to Buy Dividend Stocks According To Other Financial Ratios

A) Price / Earning Ratio (P/E)

The P/E ratio is one of the most common financial ratios. It should be a must to be included in any stock analysis. The historical S&P 500 P/E ratio is around 15. Therefore, if you find a solid dividend payer showing a P/E ratio below 15, you may have found the right time to buy this dividend stock.

B) Revenue Growth

Dividend payouts are all about how much money is left in the company after taxes. Therefore, if you want another indicator of long term dividend growth, you should look at revenue growth. If the total sales are climbing on a steady basis, chances are that the dividend payout will increase accordingly. Steady revenue growth (1yr vs 5 years) is a good indicator as to when to buy a dividend stock.

C) Return on Equity (ROE)

The return equity gives you how much the money invested in this company is creating wealth. Having sales growth is good, but growing its profit and increasing the company value is much better. A ROE over 5% is suitable (and over 10% is even better!).

Is there a perfect timing to buy a dividend stock?

I just gave you a few indicators as to when buying a dividend stock. Those numbers are relatively easy to find using free investing websites. However, if your dividend stock meets those requirements, does this mean it’s the right time to buy it?

Since the goal of dividend investing is to select solid dividend payers which will increase their dividend payouts in the future; I’d say yes. However, it is important to look at what is the recent news around the company you are looking for and what are the potential opportunities and dangers.

For example, if you look at a pharmaceutical stock, it is important to look at their patent expiring dates (which equals to a decline in sales for a specific medicine) and what their pipeline look like (how many medicine are currently being researched). This is will also tell you a lot about when to buy this dividend stock.

Where to start looking at for any dividend stocks