Monthly Archive: January 2014

One of the Dogs of Dow this year that caught my eye is the software giant, Microsoft (MSFT). Microsoft, has its hand in everything: mobile, search advertising, video games, operating systems, office products. I’m personally not a big fan of their individual products, but that’s mostly because I was raised in an Apple household. However, Microsoft has Apple beat in dividend history. It is soon to become a Dividend Achiever.

Microsoft has been raising its dividend since 2007, and has increased its payout by an average of over 14% each year, and with a payout ratio of 36%, it shouldn’t have any trouble continuing the trend.

The entry dividend yield is pretty attractive at 3.11%, and the P/E ratio is only 13.32. So it meets all of my usual criteria for valuation. From what I can gather, it’s EPS has also grown an average of 6% each year for the past 5 years.

If you invested $1000 in this stock 10 years ago and reinvested all dividends, you would now have about 68.60 shares worth $2485.03 paying out $66.54 dividends each year.

Now, despite this writer’s opinion of Microsoft’s products, the company does have a significant share in every industry it competes in. Google is obviously the #1 search advertiser at 65%, but Microsoft’s bing takes up 30 of the remaining 35%. The xbox one had a very successful launch as they shipped 3.9 million systems last year. As more games are released, that number is surely going to skyrocket. Windows phones are not nearly as widespread as the iPhone or Android, but their share is steadily growing as well.

I would argue that Microsoft’s strength is not in the individual products, but in the company’s willingness to take chances and expand. With a brand that has been around long enough to have customers’ loyalty and trust, Microsoft will always have buyers.

You may remember from my post about Target that I was waiting for the price to drop to the mid-50’s. It’s looking like I was right on that, so my next purchase will probably be either TGT or MSFT.

What do you think? would you buy TGT or MSFT?

I’ve had some time to think about how we evaluate dividend stocks. First we’ll make some assumptions.

A healthy dividend paying company should have a payout ratio that does not exceed 60%. Which means annual dividends should not be more than 0.6 times the company’s earnings per share. According to common belief, the lower the payout ratio, the greater the potential for dividend growth.

Traditionally, if a company’s PE ratio is greater than 20, it is considered to be overvalued. So a company priced at 20 times EPS is accurately valued.

This last assumption is not up for debate since it’s just straight math. Yield percentage is equal to the annual dividends per share divided by share price.

So an average healthy dividend stock will pay a dividend of 0.6 times EPS and be priced at 20 times EPS. This works out to an average dividend yield of 3% (0.6/20). Which means for a stock to have a better yield, it either needs to be undervalued so the PE ratio is lower than 20, or have a higher payout ratio, which is not considered healthy. This is why finding bargains is so essential to dividend investors.

If you own nothing but healthy dividend stocks, the yields are all going to be roughly the same if the company’s are healthy. So what sets apart the big winners? Growth

As dividend investors, we typically search for companies with a solid history of dividend growth dating back 10 years or more, such as Dividend Achiever. The trailing dividend growth rate shows that the company will reward shareholders. But if the dividends per share were a function of the EPS, the ability to grow that EPS would be a stronger indicator of future dividend growth.

A company can most effectively grow its earnings potential through either innovation or expansion. By this, I mean releasing newer better products, building new storefronts, or selling in different markets. If a company has a lower payout ratio, it’s safe to assume it has more revenue with which to reinvest in these areas, thus growing EPS.

This is why most naysayers of dividend investing believe the strategy to be foolish, since mathematically, everything comes back to EPS. However, there is must to be said for a company that is able to payout a solid dividend yield and still grow revenue each year.

In a market where everyone with a paycheck has the potential to be an active trader, stock prices tend to auto-correct themselves for minor mistakes in valuation. For instance, if a company is overvalued by 5%, it is likely that after a month, it will be corrected at some point to its average EPS multiple. So, the only way to take advantage of massive dips in price is when a company has fallen on hard times due to a lawsuit or a bad quarter, but has the branding and strength to recover as a business. If the company looks statistically bad in the short term, but has the capability to recover and come back stronger, there is some serious growth potential there.

The company that comes to mind for me right now is Target (TGT). They have faced difficulties with their expansion into Canada as well as the recent security issues. As a result, the price has dropped over 17% from the 52 week high in July, 2013. TGT currently has a payout ratio of 46% and a PE ratio of 16.30. This results in a dividend yield of 2.83%. This is all based on an EPS of $3.73, which is almost 20% lower than 1 year ago.

Considering the PE ratio of Target was about 13-14 a year ago, I believe Target still has a little a little further to fall (probably mid-50’s). After that, the company has the brand and leadership to recover rapidly and return some substantial rewards to investors. I currently have a small position in Target (16 shares), and am looking to possibly double that, but I think it can wait another month to get a really attractive entry price.

I should also mention that Target has been growing its dividend for 46 years, making it just 4 years away from being a Dividend King. It’s dividend growth rate has been outstanding over the past 10 years, averaging over 20% annual growth. If you invested $1000 in this stock 10 years ago and reinvested all dividends, you would now have about 35.00 shares worth $2126.60 paying out $55.30 dividends each year. This is a little less impressive than Clorox, so that makes my decision even tougher.

What are your thoughts on Target?

I will be able to make a new investment at the beginning of February, so over the next few days I will be analyzing a few stocks I have my eye on for this investment. It’s important to do proper research and analysis before you commit to buying a stock. All valuation metrics will be at the time of writing, so they may no longer be entirely accurate by the time you read this.

The first of the stocks I’ve wanted to take a position in is The Clorox Co. (CLX)

The Clorox Company (Clorox) is a manufacturer and marketer of consumer and professional products. It’s products are sold by merchandisers, grocery stores, other retail outlets, distributors and medical supply providers. The company owns brands that you will most likely see in every household such as Pine-Sol cleaners, Fresh Step cat litter, Glad bags, Kingsford charcoal, Hidden Valley and K C Masterpiece dressings and sauces, Brita water filters, and even Burt’s Bees Wax. I was personally surprised to see this much variety from the company, but that kind of diversification is great to see as an investor.

Clorox has raised its dividend every year for 36 years, making it a Dividend Aristocrat. Over the past 10 years, the company has increased its dividend payment by an average of 10.94%. So in terms of growth, it meets all of my criteria.

The dividend Yield for Clorox is fantastic at 3.16%. I typically aim for at least 2%, so Clorox definitely wins here. If you had invested $1000 in CLX 10 years ago and reinvested all dividends, you would now have about 37.16 shares worth $3336.22 paying out $100.33 dividends each year. So after 10 years, the dividend yield on cost is about 10%.

Clorox’s Earnings Per Share (EPS) is $4.34. So, with an annual dividend payout of $2.84, it’s Payout Ratio is 65.4%, which is just barely over my cut off criteria. Additionally, the Price to Earnings (P/E) Ratio is 20.69. For my investments, I like to make my entry when a stock’s P/E Ratio is below 20.

While I love the dividend yield and growth for this company, I think there may be better values to find in the market. Stay tuned for the other stocks I’m looking at.

How about you? Is Clorox on your radar? What other stocks are you watching?

It’s undeniable, zombies are everywhere. Well, luckily they’re not really, but zombies have certainly taken over all media; video games, movies, comic books, TV shows, etc.

Why are we suddenly so obsessed with zombies?

The best monsters are reflections of repressed themes in society. For instance, the werewolf represents losing control to your animal instincts. As for zombies, there are many meanings that have been drawn by fans of the genre.

Some people think zombies reflect the lack of humanity in office environments. Others look at zombies through the lens of technology, and how people will just hobble around plugged into their devices, devoid of emotion or thought.

To me zombies are the manifestation of consumerism.

Endless Hunger

zombie_hunger

Have you ever seen a zombie that was too full to eat flesh? I bet not. Every human they see, they must devour. In the same way, consumers eat up every new product. Ever wonder why some of the best zombie stories take place in malls?

Think about the last new product you bought, ideally one you were really excited about. I bet it didn’t take long before you were researching the next product you were going to buy. We hunger for these things like wild beasts, and once we have them, we’re just hungry again. I’m equally guilty of this when it comes to video games.

Have you ever seen the lines outside Apple stores when a new iPhone is released? How about the stories of life or death bouts over Black Friday deals? This disregard for the health and safety of others for the sake of consumerism is exactly how a zombie would think.

The Transformation

zombie_store

What makes zombies so especially terrifying is that anyone can become one. Minutes after your best friend dies, he can be up and moving. He’s not the same person anymore, in fact he has no individuality, only hunger. Get too close, and the virus will spread to you too.

Even the most frugal of us, and the most dedicated savers, can lose all of that progress and become a consumer zombie at any moment. It can take a lifetime to build up wealth, and only minutes to waste it. To become a zombie, is to lose that control.

The desire to waste money on new products can spread just as easily too. When your friend gets a 50 inch flat screen, suddenly the 46 inch TV you got earlier this year doesn’t look as sharp. Then you start looking at the prices of 52 inch TVs.

The Fight

walkingdead

However, every good zombie story has a human resistance. These folks have been around the block, and they get by on the bare minimum. They don’t care what kind of car they drive, or what brand of clothes they wear. This is where I see the analogy the strongest.

Frugal savers are the resistance to consumerism. The media tells us we need a new watch, a new iPhone, and a new car. The resistance ignores all of this and focuses on what they need to survive: food and shelter.

The unfortunate truth of the zombie apocalypse is that there is no winning, only surviving. In the same way, consumers are always going to be here trying to spread their virus to us, and all we can do is keep on living and saving.

You don’t need to be extreme to be part of the resistance. Just ask yourself, what do you need to survive? What do you need to be happy? What can you cut out of your budget?

Time is both a blessing and a curse to the value investor.

As investors, the end goal of investing is almost always to have our investments pay out more than we need to spend. We achieve this by saving large portions of our income and investing it into dividend paying stocks (or at least that’s how I do it). Time is the most powerful force we rely on for growing our capital. Today, a $1000 position is probably only going to pay back $35 each year. However, after 10 years, given average dividend growth and reinvestment, that initial investment will be paying out something more like $80 each year.

We invest as a way to buy time in our future, time that does not need to be spent working for someone else. In a way, it’s a trade of time now, for time later.

The problem here is where many new investors lose focus. When you’re working toward delayed gratification, time can feel like it’s moving very slowly. This is a big problem I face personally.

It can easily feel like every day just drags as we try to make it to tomorrow. It’s what the naysayers of early retirement usually refer to in their arguments. That you’re not enjoying your life to the fullest while you’re young.

The difficult balance of life is that you should try to live like there’s no tomorrow while still planning for many tomorrows.

Even though I’m trying to live frugally, there’s no reason I can’t enjoy each day. Basically I’m saying You don’t need to spend money to enjoy your time, you need a hobby.

So, every 30 days, I’m going to pick an activity that I will try to do for 30 days to try and spice up my day to day life. 30 days is enough time to determine if an activity is a chore (like giving up sugar) or a hobby (like taking a picture every day). I’m calling this my 30 day challenge.

For my first 30 day challenge, I’m going to compete in an official rated competitive Pokemon match every day for 30 days.

Yeah, I realize that’s probably not what you expected from a 28 year old man that has a blog about investing. But I spent an ungodly amount of time training probably over 20 Pokemon for competitive battles, and have barely used them at all. So it’s time to reap those rewards.

I’ll probably get stomped pretty hard getting started, but I bet by the end, I’ll be a Pokemon badass.

If there is such a thing.

How about you? What do you want to do for the next 30 days to spice up your day to day life?

Let me know in the comments, and show some love by giving a like, +1, or share.

2013 is behind us, and I have my goals going forward. However, it’s also important to look back at the past year. There have been some great games that came out this year, and I’ve easily dropped a lot of money on games. One of the founding principles of this blog is to allow dividend income to cover my gaming hobby. So I thought it would be fun to evaluate how I did this year on that goal.

First, The Games

I easily bought at least one game every month this year, as there were so many titles I was excited for.

Starting in January, we kicked off the year with DMC, Devil May Cry ($60).

In February, I made my first dive into Fire Emblem with Fire Emblem: Awakening on 3DS ($40).

March was huge, with God of War Ascension and Monster Hunter 3 Ultimate on both Wii U and 3DS ($60 + $60 + $40).

April was pretty much just dedicated to playing Monster Hunter

In May, I grabbed Luigi’s Mansion 2 ($40)

June: Animal Crossing New Leaf ($40)

In July I picked up a couple 3DS titles I had missed before Mario Kart 7 and Donkey Kong Country Returns, as well as the delightfully awesome Steam World Dig ($40 + $40 + $10)

August was a great month for Wii U, because Pikmin 3 was amazing ($60)

In September, I lost huge chunks of my life to Grand Theft Auto 5 ($60)

October reminded me how much I love competitive Pokemon battling ($40)

In November, I took to the high seas in Assassin’s Creed 4 ($60) and got a nice black friday deal on Starcraft 2 Heart of the Swarm ($20)

Finally, I finished off the year with Super Mario 3D World ($60)

So, adding all of this up, I spent well over $750 when you add tax to the games I bought physical copies of. That’s a lot of money on video games. I think it’s safe to say this is an expensive obsession I have. So the real question is, was I covered by dividends?

I’ll save you the headache of going through the months and individual positions. The grand total for dividends in 2013 was…

$895 !!!!

Which means I successfully spent less on video games than I earned in dividends. For those of you following the progress on the joint account my wife and I are starting for 2014, these dividends are from my personal individual account. Near the beginning of the year, I was chasing high yields, which ended up hurting my overall returns, luckily these mistakes were offset by winners like JNJ and MMM. Next year, my individual account is lined up to earn over $900 in dividends, so that should keep my addiction pretty well covered.