Category: Stocks

In 2010, Verizon started a new advertising campaign that inspired my Starcraft 2 strategy, “Rule The Air.” I decided that if you had enough air units, and anti-air units to destroy the other team’s air units, you had a distinct advantage. By “ruling the air,” I was able to grab a good number of victories. Well, my Starcraft 2 days are over (it’s all about Diablo 3 now), but Verizon still has my interest as dividend stock. With a 31% market share, Verizon (VZ) is the current leader for wireless service (thus ruling the air) with AT&T in close second with 27%. Frugal phone owners will flock to which ever service is the best deal with little care for loyalty, so this could change very quickly, but I still like investing in winners.

Let’s look at the numbers. Verizon has a pretty solid dividend yield at 4.4% and has been paying a dividend for 30 years. In terms of growth, the company has been raising it’s dividend each year for at least 10 years. However, the average dividend growth per year has only been about 4.8%, with the most recent raise being only 2.9%. Based on my family’s current goals, low growth, high yield dividend payers are a decent target. Verizon’s P/E Ratio is currently about 12, but the PEG Ratio looks to be about 2.37, so it may still be slightly overvalued. Again I only take PEG Ratios with a grain of salt since it’s based on speculation.

Their payout ratio is nice and low at 39%, which means there is little threat of a dividend cut, so dividend growth should continue. If you invested $1000 in Verizon 10 years ago and reinvested all dividends, you would now have about 86.93 shares worth $4173.94 paying out $136.91 dividends each year. That’s a solid 13.6% yield on cost.

Verizon is on my list of potential stock to buy in the beginning of April.

There are 2 things you can count on, death and taxes. If we had to expand it to a third thing, it would be that Americans and the rest of the world are going to keep using Oil for the foreseeable future. Today, we’ll be looking at ConocoPhillips (COP). When it comes to natural gas and crude oil, ConocoPhillips does it all from searching to production and marketing.

One thing that drew me to COP is the low current P/E Ratio of 10.8, well below the 20 I usually aim for. Before we get too excited though, their PEG Ratio (which is based on projected growth) sits somewhere between 1.72 and 2.23 (depending on your source), which may still point to the stock being overvalued at the current price. I usually won’t raise an eyebrow for the PEG Ratio unless it’s over 2 since it’s being based on speculation.

What’s most important to me is the dividend. The current yield is about 3.9%, which is pretty nice. They have increased dividend distributions for the past 12 years, and dividend growth over the past 10 years has averaged over 17% per year. Last year’s dividend raise was significantly lower at 4.5%. The payout ratio is 48% based on last year’s EPS of 5.7 and the current quarterly dividend of $0.69. With this conservative calculation, there is still plenty of room to increase the dividend payment each year.

If you invested $1000 in this stock 10 years ago and reinvested all dividends, you would now have about 72.82 shares worth $5072.28 paying out $198.80 in dividends each year.

I’ll continue to analyze stocks on my watch list before making my first purchase in April.

In other news, my wife and I are looking to potentially buy a house later this year, which means the stock purchases I report in this blog will probably only be held for a short time. I intend to rebuild the portfolio after the down payment, but this will affect my strategy for this year. As such, a high yield stock like COP may be a good fit for this time frame. I have my individual account as well, so when the time comes, I will probably only sell the companies that are overvalued at the time of selling.

I’ve put off analyzing this stock for a while because the price movement over the last 5 years is choppier than I like to see. However, I’m no longer a “speculator,” I am an investor, and it’s time to do my homework. AT&T (T) is an communications company offering services and products that cover long distance, wireless communication, broadband and internet services. Their original partnership with Apple for the iPhone helped a lot in establishing brand loyalty, which will pay off as smartphones are becoming more commonplace. AT&T’s marketshare is currently second only to Verizon (VZ) for mobile carriers. This could all change very quickly because it’s in a very competitive industry.

AT&T looks fantastic on paper for a dividend investor that is just getting started. The P/E Ratio is currently at right about 10 which is well below my threshold of 20. This low ratio means that the yield can be quite high without sacrificing payout ratio, which is the case in the 5.4% yield and 53% payout ratio. This leaves room for the dividend to grow, which it has been doing for the past 30 years. Unfortunately, like many other high yield dividend stocks, their dividend growth for the past 10 years has not been impressive, averaging a little over 4% per year.

Luckily, a high current yield can mean this investment can provide you with quick cash to invest in dividend payers with a higher growth rate. High yields can also still out perform high growth low yield stocks. If you invested $1000 in this stock 10 years ago and reinvested all dividends, you would now have about 138.29 shares worth $4714.31 paying out $250.30 dividends each year, this is significantly higher than some of the higher growth stocks I am currently invested in.

I think today’s price on AT&T is a pretty decent value. I still have to do my taxes, so I’m not sure if I’m going to have the free cash to invest any time soon. But if I do, AT&T seems like a decent choice.

What are your thoughts on AT&T?

Also, if you’re looking for some good dividend stock ideas, Check out Dividend Growth Stock Investing. Dan has compiled the favorite dividend stocks of many dividend bloggers including myself.

I can’t see the future. It’s a bummer, I know. If I could see the future, I would have bought Tesla stock back when it was valued around $35. Believe me, I considered it too, but I had no true way to value the company so I decided to avoid the risk. That may sounds stupid now since it took off like a rocket ship and is now up over 500%. However, would you buy Tesla stock now? probably not, because it seems like it’s at the top and all the growing is done, but if it goes up to $1000 per share next year, we’ll all feel dumb again.

The fear of investing in a company like Tesla at a time like now is what I call “Pinnacle Mentality.” This is the belief that prices are too high to grow any more based on past performance. In the case of Tesla, there are other risks that should also be taken into account, but it serves best as an example here. This belief is what propagates all of the market doomsayers that are always telling you that market is just about to crash.

In 2011, I watched a popular documentary-style film called Zeitgeist. After seeing that, when the country was about to hit the Fiscal Cliff (for the millionth time), I was positive that the market was going to plummet and I should sell off my stocks. The Dow did fall that year, but the Dow has also risen ~30% from it’s highest valuation in 2011, does that sound like the “End of the World?”

My point is that even though you may think prices are at their highest, it’s only ever true relative to the past. In World of Warcraft, a long time ago, when I got my Lightning Bolt to deal over 6000 damage in PVP by using a clever combination of talents and buffs, I thought that was going to be the highest damage I would manage to do. Now, after a couple expansions, a shaman’s Lightning Bolt easily can hit for over 12,000. I thought I had peaked when in reality, numbers were just going to go up in the future.

Another reason this mindset is so common is that we’ve been trained to look for “bubbles.” After hearing all of the horror stories of the “tech bubble” or the “real estate bubble,” any time it looks like a price is rising exponentially, fear kicks in. A fun way to realize that it’s all an illusion is to look at chart (preferably on Google Finance) of the S&P 500. First look at the last 10 years, notice the dip for 2008 (which had real underlying infrastructure causes), but otherwise prices look like they’re rising pretty rapidly. Then push it back to going from 1994 to 2004, you’ll see another dip, and more prices rising at a similar rate. Finally push it back to 1984 through 1994, and you’ll notice that prices always look like they’re rising really fast and there’s a minor dip in one year. Unless, you’re at the bottom of a dip, the prices are ALWAYS going to look like they’re at the top or in a bubble. Also note that the best way to protect yourself from those dips is to just not sell and Tough it Out.

Warren Buffet has said that one thing he really believes in is the ability for businesses in the United States to continue growing. Even though when we look at stock charts we see the present date as a cliff, in a couple years, it will just be a bump on the way to new heights. So, don’t let yourself be fooled by a Pinnacle Mentality, buy smart, never sell.

One of the most confusing concepts of dividend investing is understanding how and when you get paid a dividend. If you’re new to dividend investing, you may have no idea of even where to look. You might think you just get paid a dividend for owning the stock right away, like a gunshot in Call of Duty. In reality, it’s more like Angry Birds, there’s a delay before you get your payout.

So first, let’s start with the vocab lesson.

The 4 terms you will see on these sites are the “Declared Date,” “Exdividend Date” (or Ex Date), “Record Date,” and “Pay Date.” The most important ones to know are the Ex dividend Date and the Pay Date. It’s very simple: if you own a stock when the opening bell rings on it’s Exdividend Date, you will be paid the dividends for each share you own on the dividend Pay Date. So if MCD has an Exdividend Date of 2/27/2014, for you to “Capture the dividend,” you must buy shares on 2/26/2014 or earlier. Then, on their Pay Date, 3/17/2014, you will receive dividends for each share you owned on 2/27/2014.

It should be noted, that for a dividend to be “qualified,” and thus taxed at a lower rate, you must own that stock for 60 days before and after the Exdividend Date.

The “Record Date” is usually a day or so after the Exdividend Date, and this is when the company looks at their records from the Exdividend Date and determines who is eligible to receive a dividend payment. The “Declared Date” is the day the company announces its next dividend. For the most part, these dates are not really relevant to the standard dividend investor, and can thus be ignored.

When I need to find out when a specific stock pays a dividend, I look on either dividend.com or dividata.com. These sites also have features that will let you search for stocks that have upcoming Exdividend Dates.

There is an investing strategy called “Capture the Dividend.” Where an investor purchases the stock the day before the Exdividend Date and then sells afterwards. This allows them to receive the dividend payment and potentially reallocate their cash elsewhere, maybe to capture another dividend. The problem is that on the Exdividend Date, the stock price usually “gaps down” by the amount of the dividend payment. For our example of McDonalds, if their dividend payment is $0.81 per share, and the closing price on the night before the Exdividend Date is $95.00, the opening price will be $94.19 the next morning.

This is not considered a safe or reliable strategy because there’s no guarantee that the price will move back up to or above the price you bought it at before receiving the dividend. Additionally, since this dividend is not “qualified,” you will pay taxes on it as capital gains (which is a higher rate). The most tried and true strategy for quality dividend stocks is “Buy and Hold.”

Well, hopefully you have a much better understanding of what you’re looking at when analyzing a stock.

The red and yellow titan of fast food, McDonalds is a brand that no American is unaware of. McDonalds (MCD) is also a dividend growth stock that has been increasing its dividend payout every year for over 35 years, making it a Dividend Aristocrat. The reason they are so successful is not the quality of food, but the systems they have in place to run like a well oiled machine. You can get a better hamburger at several places I personally enjoy, but when a manager quits at those establishments, the efficiency of recovery is nowhere near what McDonalds is prepared for. Additionally, their marketing has established not only a loyal customer base, but a brand that is known the world over.

I just bought 10 shares of MCD at $95.90 per share.

Let’s talk numbers. First of all, the dividend yield is great right now at 3.38% yield on cost. Over the past 10 years, the dividend has grown about 4.4% per year. Which isn’t all that impressive, but the price has also grown by an average of 18% per year over the same time frame. This means, that despite the solid yield, they are still making use of the rest of their capital to grow the business. The payout ratio is sitting at 56%, which is under the level I consider to be too high, and given their growth, I would say there is little risk in this regard. According to Google, their PE Ratio is 17.25, which is safely below 20. If you invested $1000 in this stock 10 years ago and reinvested all dividends, you would now have about 62.67 shares worth $6013.81 paying out $195.53 dividends each year.

When you look at these numbers, it begs the question “Why wouldn’t every dividend investor want to own this company?” Well, in my opinion, they should. However, given the unhealthy nature of the majority of their menu, McDonalds can get a lot of bad press. On the moral scale, MCD comes in a little heavy, but honestly not as much as a tobacco stock or oil stock in terms of damage to people and the planet.

So the next time you see a news story float around about how unhealthy McDonalds is, check the stock price. Because you might be able to pick up an outstanding stock at a discount due to some short term price noise.

When you first start researching the investing strategy for you, you’ll see hundreds of advertisements about “penny stocks.” As such, it can seem that penny stocks are the most popular investment strategy. While it’s true that they are the most advertised, that does not mean that they are the best and most successful long term strategy. As I love to do, I’ll compare penny stocks to dividend growth investing by using video game analogies.

Investing in penny stocks is the practice of purchasing stocks that have such low prices, that tiny price movements can mean massive changes in your balance. Dividend investing is all about finding high quality companies that distribute some of their profits to shareholders in the form of dividends. You try to find companies with a good history of dividend distribution increases as well. For more information check out my article on dividend valuation.

The dividend growth investor is patient, and willing to research every move they make to maximize success and minimize risk. I like to think of the dividend investor like Solid Snake. As you work your way through a compound of enemies, you slowly pick your targets and neutralize them without being compromised. Even if you make a mistake and trigger an Alert, you can rely on your past success to provide a safe haven and hide out until it’s safe to make your next move. Dividend investing follows a similar strategy, you pick a target, observe its strengths and weaknesses, and then make a move to buy it at the opportune time.

The penny stock investor is looking for a big payout within a short time with no regard for risk. Trying to win with penny stocks is like playing Ikaruga, it feels great when you’re doing well and working on that high score, but then it can all end in an instant. One thing goes wrong and you have to start all over again, and many times, it’s something you don’t even have control over. Penny stocks are the same, except there’s little skill, mostly speculation and gambling, and you can face immense losses when something doesn’t go right.

Your life isn’t a quick game of Ikaruga, it’s a long long game. On that long of a timeline, taking too many investment risks will not pay off. There’s a reason the smartest and richest investors in the world buy and hold high quality companies, because it works.

I found a fun article the other day about Warren Buffett. Apparently, he made a bet with Protege, a hedge fund management firm in New York, back in 2008 that over 10 years he could outperform their best funds by just investing in a low-cost index fund that follows the S&P 500, the Vanguard 500 Index Fund Admiral Shares (VFIAX). Buffett is wagering $320,000 in Treasury Bonds that they hedge funds are not worth the fees. After 6 years, the VFIAX is up 43.8% and the hedge funds are only up about 12.5% after fees. (Source)

I thought it might be fun to track something similar. I am invested in 2 dividend growth funds with Vanguard. I decided to look at the top holdings for each and noticed that I owned positions in my taxable account for about half of them. So I thought it might be fun to track how the funds perform compared to the underlying securities I am invested in elsewhere.

The first of the funds is the Vanguard Dividend Growth Fund (VDIGX). At the time of writing this, the stocks I own in the top 10 holdings are as follows:
MCD, MSFT, MRK, WMT, JNJ, LMT
Henceforth these will be tracked as KFund1

The second fund is the Vanguard Dividend Appreciation Index Fund (VDAIX). At the time of writing this, the stocks I own in the top 10 holdings are as follows:
PEP, PG, WMT, KO, XOM, CVX, MCD, MMM
Henceforth these will be tracked as KFund2

It got a little complicated since I own KO in both my joint account, which I track on this blog, and my individual account. I decided to just use the position in my Joint Account for tracking. Since the totals for the individual investments and the investments in the funds are completely different, I’m just going to be reporting the percentage changes each month. There’s no point in sharing the actual balances publicly since what matters is the growth, I’ll be tracking the cost basis offline.

I will have an update on the value changes next month. In all cases, dividends will be automatically reinvested.

February has just started, but I already have some news. This morning, I bought 25 shares of KO and 14 shares of MSFT. For the reasons why, see here and here.

This adds $43.68 to our annual dividends. Which doesn’t sound like much, but after compounding over the next 10 years, this small investment will be paying out over $100 a year if the trends of the past 10 years continue.

I’m also starting a new 30 day challenge. I’m going to try to draw something every day. It’s been a long time since I did any sketching, so I’m way out of practice. My wife has also decided to join me with a 30 day challenge of her own. She’s going to try to learn to knit.

As for my last 30 day challenge, I kept up with my competitive pokemon battles pretty well. Unfortunately, by the end of the challenge it really started to lose its luster. Everyone above the average rating was using the same handful of overpowered pokemon, which made fighting them very frustrating and rather uninteresting. It’s really a shame that the developers would allow such unfair advantages in a game that is supposed to provide a competitive experience. It made me appreciate a community known as Smogon, much more. They have rules in place that ban certain overpowered threats from certain tiers of play. This allows more variety and strategy in the gameplay.

There is a lot of hate over Smogon in the community, but from a game design aspect, they’re really just fixing a broken system.

The final stock I’ll be analyzing before making my next stock investment in early February is The Coca-Cola Company (KO). I currently already have a position of KO in my personal portfolio, and it has made little headway outside of dividends since I made my entry. When I consider the history of this stock, I won’t just be talking about the past 2 years I’ve owned it.

The Coca-Cola Company has had an amazing history, with 51 years of dividend increases, it is a Dividend King.

Their dividend distributions have risen over 9% in the past year, and about 9.3% per year for the past 10 years on average. Right now, entry yield is 3.01% and they’re just about due for another dividend raise in the middle of February.

The current EPS is $1.93 putting the PE ratio at 19.26 which is just below my threshold of 20. I think this stock is set to take off over the next year, making now the ideal time to buy.

KO’s payout ratio is currently 53.6% which gives them space to increase distributions and is below my threshold of 65%.

If you invested $1000 in The Coca-Cola Company 10 years ago and reinvested all dividends, you would now have about 71.36 shares worth $2654.59 paying out $79.92 dividends each year.

The Coca-Cola Company also has a significant economic moat as the provider of both the #1 and #2 top soft drinks. Source

This concludes my analysis of stocks for this next purchase. Today Target fell into the $55 range, and it did so a little sooner than I thought it would, so I intend to stand by until after whatever damages result from their quarterly earnings report. Right now, KO is my favorite, so I’ll probably be purchasing 25 shares of KO. MSFT is my second favorite right now, so if I can swing it, I’d like to buy 13 shares of MSFT as well.