Dividend Growth Investor

Six Companies Rewarding Their Thankful Shareholders With a Raise

Fri, 27 Nov 2020 09:00:00 GMT

There were several companies over the past week which announced their intent to raise dividends to shareholders. It is always great to see companies that are able to extend their long streaks of annual dividend increases. I find dividend increases to be a good indicator of how company executives feel about the near-term business environment. It also shows their confidence in the company’s growth prospects.

Factors that boards of directors consider when setting the dividend include future earnings expectations, payout ratio and dividend yield relative to those at peer companies, as well as returns available on other income-oriented investments.

This is why I find it very helpful to review dividend increases every week for established dividend growth companies. To be included in this list, a company should have managed to reward shareholders with a dividend hike for at least ten years in a row.

I review these press releases as part of my monitoring process. For the purposes of this article, I narrowed the list of dividend increases down to a more manageable level.

I focused on companies that can afford to grow dividends for at least a decade. I figured that a company which has managed to boost dividends during a recession and an expansion, or even longer, is better suited for further research by a long-term dividend growth investor like me.

In my previews, I look at the most recent dividend increase, and compare it to the ten year average. While there are some year-over-year fluctuations in dividend growth, it is helpful to see if dividend growth is decelerating.

In addition, it is helpful to review trends in earnings and dividends, alongside dividend payout ratios. This is another indicator of dividend safety.

Last, but not least, I also try to review the valuation behind every company. I prefer to buy future dividend income at attractive valuations; overpaying for future dividend income is not a good business decision.

Over the shortened Thanksgiving week, we had six companies hiking distributions to their thankful shareholders. I have had the first five of these companies consistently raising dividends during Thanksgiving week for the past several years that I have been writing these review. The companies include:

Hormel Foods Corporation (HRL) produces and markets various meat and food products in the United States and internationally. The company operates through five segments: Grocery Products, Refrigerated Foods, Jennie-O Turkey Store, and International & Other.

Hormel Foods increased its quarterly dividend by 5.40% to 24.50 cents/share, marking the 55th consecutive annual dividend increase for this dividend king. Hormel Foods has managed to increase distributions at an annualized rate of 16% over the past decade.

Between 2010 and 2020, Hormel managed to triple its earnings from 73 cents/share to $1.69/share.
Analysts expect Hormel to earn $1.80/share in 2021. It looks like earnings per share have plateaued for three years in a row if analyst projections are correct.

I believe that the stock price is overvalued at 26 times forward earnings. The stock yields 2.10%. I may consider it if it dips below $36/share. Check my analysis of Hormel for more information about the company.

Becton, Dickinson and Company (BDX) develops, manufactures, and sells medical supplies, devices, laboratory equipment, and diagnostic products worldwide.

The company’s dividend eked out a small 5.10% increase to 83 cents/share. Becton Dickinson has raised its dividend for the 49th consecutive year. If BD hikes dividends in 2021, this dividend champion will be upgraded to the elite dividend king status. Over the past decade, Becton Dickinson has managed to boost dividends at an annualized rate of 8.90%.

The company earned $5.49/share in 2010 and analysts expect Becton Dickinson to earn $12.53/share in 2021.

The stock seems fairly valued at 18.15 times forward earnings and a dividend yield of 1.45%. The rate of dividend growth has slowed down, and if you want to review earnings per share, you would have to dig a little deeper into things such as purchase accounting adjustments and other items that the company deems as one-time events.

McCormick & Company, Incorporated (MKC) manufactures, markets, and distributes spices, seasoning mixes, condiments, and other flavorful products to the food industry. The company operates in two segments, Consumer and Flavor Solutions.

McCormick managed to hike its quarterly dividend by 9.70% to 68 cents/share. This marks the 35th consecutive year that this dividend champion has increased its quarterly dividend. McCormick has managed to boost dividends at annualized rate of 9% over the past decade.

The company earned $2.75/share in 2010, and managed to grow this to $5.24/share in 2019.
Analysts expect that McCormick will earn $5.71/share in 2019.

Unfortunately, this great company is overvalued at 32.50 times forward earnings and yields 1.45%. Check my analysis of McCormick for more information about the company.

Hingham Institution for Savings (HIFS) provides various financial products and services to individuals and small businesses in the United States.

The company increased its quarterly dividend to 47 cents/share, which is a 4.40% increase over the dividend paid during the same time last year. This dividend champion has consistently increased regular quarterly cash dividends over the last twenty-five years. The bank also announced a special dividend in the amount of 70 cents/share. During the past decade, it has managed to increase dividends at an annualized rate of 6.10%.

The company managed to grow earnings from $4.81/share in 2010 to $17.83/share in 2019.
The stock is fairly valued at 10.80 times earnings and offers a dividend yield of 0.85%.

The York Water Company (YORW) impounds, purifies, and distributes drinking water. It also owns and operates three wastewater collection systems and two wastewater treatment systems.

The company raised its quarterly dividend by 4% to 18.74 cents/share. This is the twenty-third consecutive year that this dividend achiever has increased its dividend. During the past decade, York Water has managed to grow its distribution at an annualized rate of 3.20%.

York Water has stated that it has managed to pay dividends every year since 1816, but I have been unable to find any history on distribution payments that goes beyond 1912. If anyone from the company’s IR department is reading, I would love to see the data behind this claim.

The company earned $0.71/share in 2010 and managed to grow earnings to $1.11/share in 2019.

Analysts expect the company to earn $1.25/share in 2020.

The stock is overvalued at 37.22 times forward earnings and sells at a dividend yield of 1.60%.

South Jersey Industries, Inc. (SJI) provides energy-related products and services. The company engages in the purchase, transmission, and sale of natural gas.

The company hiked its quarterly dividend by 2.50% to 30.25 cents/share. With this announcement, SJI has increased its dividend for 22 consecutive years. During the past decade, this dividend achiever has managed to boost distributions at an annualized rate of 6.90%.

Analysts expect that South Jersey Industries will generate $1.56/share in 2019.

The stock is fairly valued at 15.80 times forward earnings and offers a dividend yield of 4.90%. Sadly, the dividend payout ratio is at 78%, which means that the pace of future dividend growth will be slow at best.

Relevant Articles:

- Dividend Achievers Offer Income Growth and Capital Appreciation Potential
- Ten Companies Rewarding Investors With Dividend Hikes Last Week
- Nine Dividend Growth Stocks With Growing Yields on Cost
- Eleven Dividend Growth Stocks For Further Research

Dividend Growth Investor Black Friday and Cyber Monday Sale

Thu, 26 Nov 2020 15:45:54 GMT

Dear Readers,

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- Dividend Stock Ideas I am investing in for the month
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The goal of this dividend newsletter is to provide a real-world and real-time educational tool, to help achieve dividend investing goals. I provide a listing of ten companies that I will purchase with my own money, and show you how I build and manage a portfolio from scratch. The newsletter includes detailed analysis of each company, and includes bonus materials on dividend growth investing.

In my investing, I believe in the following principles:

- Buy and hold investing
- Dividend Growth Investing
- Dividend Safety
- Value Investing
- Diversification
- Equal weighting
- Keeping investment costs low

I put all of these concepts together in building and managing the portfolio in the Dividend Growth Investor newsletter.

I believe that this newsletter will provide educational insights to investors in the accumulation phase, as well as those who are at or near retirement. The concepts discussed in the newsletter are the same ones I have used for over a decade to build my dividend growth stock portfolio.

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On Tuesday, December 1st, the price of the newsletter increases to $76/year. I have a limited number of open spots remaining, which is why I may have to turn people away if there is too much interest. This is a one person operation, and will remain that way to preserve quality.

Nine Cash Machines Hiking Dividends Last Week

Mon, 23 Nov 2020 13:06:22 GMT

I review the list of dividend increases every week, as part of my review process. I focus my attention on companies that raised dividends in the current week, and have at least a ten-year track record of annual dividend increases.

Only a company with a strong cash flow generating business can afford to grow dividends for a long period of time. Therefore, a business growing dividends for at least a decade is worth looking at for further research.

There were nine companies that fit the criteria. You can view the five companies in the table below:

Aflac Incorporated (AFL) provides supplemental health and life insurance products. It operates through two segments, Aflac Japan and Aflac U.S. The company raised its quarterly dividend by 17.86% to 33 cents/share. This marked the 38th consecutive annual dividend increase for this dividend aristocrat. During the past decade Aflac has managed to grow dividends at an annualized rate of 6.80%. Between 2009 and 2019, Aflac managed to boost earnings from $1.59/share to $4.43/share. Aflac is expected to generate $4.93/share in 2020. Right now the stock is attractively valued at 8.90 times forward earnings. Aflac yields 3%.

McCormick & Company Incorporated (MKC) manufactures, markets, and distributes spices, seasoning mixes, condiments, and other flavorful products to the food industry. The company operates in two segments, Consumer and Flavor Solutions. The company hiked quarterly dividends by 9.68% to 68 cents/share, marking the 34th year of consecutive annual dividend increases for this dividend aristocrat. McCormick has managed to increase dividends at an annualized rate of 9.04% during the past decade. Between 2009 and 2019, McCormick has managed to grow earnings from $2.27/share to $5.24/share. The company is expected to earn $5.71/share in 2020. The stock is not cheap at 32.20 times forward earnings. McCormick yields 1.50%.

Brown-Forman Corporation (BF.B) manufactures, bottles, imports, exports, markets, and sells various alcoholic beverages. The company raised its quarterly dividend by 3% to 17.93 cents/share. This marked the 37th year of annual dividend increases for this dividend aristocrat. During the past decade, Brown-Forman has managed to boost dividends at an annualized rate of 8%. Brown-Forman managed to grow earnings from 81 cents/share in 2010 to $1.72/share in 2020. The company expects to earn $1.92/share in 2021. The stock is overvalued at 41.50 times forward earnings and yields 0.90%.

NIKE, Inc. (NKE), designs, develops, markets, and sells athletic footwear, apparel, equipment, and accessories worldwide. The company hiked its quarterly dividend by 12.24% to 27.50 cents/share, marking the 19th year of consecutive annual dividend increases. Nike has hiked dividends at an annualized rate of 13.195 over the past decade. Between 2009 and 2019, Nike managed to grow earnings from 76 cents/share to $1.60/share. Nike is expected to earn $2.86/share in 2020. The stock is overvalued at 46.50 times forward earnings and yields 0.80%.

First Financial Corporation (THFF) provides various financial services. It offers non-interest-bearing demand, interest-bearing demand, savings, time, and other time deposits. The company hiked its quarterly dividend by 1.90% to 53 cents/share. This marked the 32nd year of consecutive annual dividend increases for this dividend champion. Over the past decade, it has managed to grow distributions at an annualized rate of 1.36%. First Financial Indiana managed to increase earnings from $1.73/share in 2009 to $3.80/share in 2019. The company is expected to generate $3.65/share in 2020. The stock is cheap at 10.22 times forward earnings. The stock yields 5.70%.

Matthews International Corporation (MATW) provides brand solutions, memorialization products, and industrial technologies worldwide. The company hiked its quarterly dividend by 2.40% to 21.50 cents/share. This marked the 26th annual dividend increase for this dividend champion. Over the past decade, it has managed to hike distributions at an annualized rate of 11.80%. The company earned $1.90/share in 2009 and is expected to earn $2.90/share in 2019. The stock is fairly valued at 9.50 times forward earnings and offers a dividend yield of 3.10%.

American Equity Investment Life Holding Company (AEL) provides life insurance products and services in the United States. The company raised its annual dividend by 6.67% to 32 cents/share. This marked the 18th year of annual dividend increases for this dividend achiever. During the past decade, American Equity has managed to grow dividends at an annualized rate of 14.10%. The company grew earnings from $1.18/share in 2009 to $2.68/share in 2019. Analysts expect earnings to hit $2.86/share in 2020. The stock looks cheap at 9.50 times earnings. It yields a little over 1.15%.

Royal Gold, Inc. (RGLD), acquires and manages precious metal streams, royalties, and related interests. The company hiked its quarterly dividend by 7.14% to 30 cents/share, marking the 20th consecutive increase in its dividend. Royal Gold has a ten year annualized dividend growth rate of 12.72%. The company has managed to grow earnings from $1.07/share in 2009 to $3.03/share by 2019. Royal Gold is expected to earn $3.65/share in 2020. The stock is not cheap at 30.10 times forward earnings. It yields 1.10%.

Spire Inc. (SR) engages in the purchase, retail distribution, and sale of natural gas to residential, commercial, industrial, and other end-users of natural gas in the United States. The company operates in two segments, Gas Utility and Gas Marketing. Spire hiked its quarterly dividend by 4.42% to 65 cents/share. This marked the 18th consecutive year of annual dividend increases for this dividend achiever. During the past decade, the company has managed to grow dividends at an annualized rate of 4.41!. The ten year rate is equivalent to the rate of the latest dividend increase, which is somethign you seldom see.

Relevant Articles:

- Nine Dividend Growth Stocks Rewarding Owners With A Raise

- Busiest Week for Dividend Increases Since February

- Eleven Companies Rewarding Shareholders With Regular Dividend Increases

- Four Dividend Increases From Last Week

My General Philosophy on Dividend Growth Stocks

Thu, 19 Nov 2020 09:00:00 GMT

In my previous article, I discussed in brief how I come up with investment ideas. I also wanted to share with you my general philosophy on understanding dividend growth stocks.

In general, I look for a history of annual dividend increases. This is indicative of a business that generates a lot of free cash flow, which is a sign of a successful business model.

I then dig into that business, in order to understand if it has some competitive advantages, which would allow it to continue succeeding. I also dig further into the business fundamentals, in order to determine if the rise in dividends per share was supported by a growth of earnings per share, and not because the dividend payout ratio was increasing.

I look to understand how cyclical the business model is, which is a fancy way of saying that I want earnings that do not decline by a lot during recessions, but still participate on the upside during economic growth. Sustainable earnings can pay sustainable dividends through the ups and downs of the economic cycle. I want to buy companies at an attractive valuation, which can continue growing earnings, raising dividends and hopefully grow in value as well.

I focus on valuation, although valuation is more art than science these days. A company with a low P/E is not necessarily cheap, because it is probably not growing earnings and dividends by much. If it pays a high portion of earnings as dividends, it may have a place in my portfolio, but I would not expect high returns.

For a company with a high P/E ratio, I expect high earnings and dividends growth over time. That company could find its place in my portfolio too.

I also evaluate how defensible or sustainable those earnings are too. I take a higher preference for defensible earnings streams, the types that consumer staples companies or healthcare and some utilities generate. It seems like the whole world has awaken to these valuable earnings streams however, and has bid them up. I am patient, and on the lookout to add to these companies that millions of consumers worldwide use on a daily basis, and have them ingrained into their recurring purchasing decisions.

Speaking of analyzing companies, I have shared with you my screening process over the past 12 – 13 years on my regular website. My screening process goes hand in hand with stock analysis, at least the quantitative side of it. It goes something like this:

1)A long track record of annual dividend increases. I use 25 years, but could go as low as 10 years

2)A minimum dividend growth of 6%/year over the past decade. I can fiddle around with this

percentage too, and can go as low as 3%, or the annual inflation rate over the past decade. I want the past 1, 3, 5, and 10 years to have that minimum percentage of annualized dividend growth.

3)A dividend payout ratio below 60%. I want a lower payout ratio in general, in order to minimize the risk of a dividend cut during temporary earnings hit during the next recession. This ratio also needs to be adjusted for certain industries such as Utilities and Tobacco, which tend to distribute most of their earnings as dividends. You also need to use FFO for REITs, and be more comfortable with higher payouts. In my dividend analyses, I review trends in payout ratios, but for screening purposes, that would be a little tough to do.

4)A history of earnings growth. I find it helpful to observe trends in earnings per share over the past decade, and identify whether I like a company or not. In general, I want a consistent growth in earnings, and want to avoid companies that are no longer growing the bottom line. Sometimes you need to do additional research to gain comfort behind the trends however.

5)A P/E ratio that is below a certain number. This number varies, depending on the underlying conditions we are in. That means interest rates, the P/E of the stock market etc. When rates were 8% - 10%, a P/E of 10 would have been a good yardstick. When rates on 30 year Treasury Bonds are lower than 2%, even a P/E of 25 or 30 could signify a relatively cheap stock.

6)I used to have a minimum yield requirement, but I have dropped those when I realized that some of the best dividend growth stocks in the past were low yielding but high growth ones. I do follow the principle of building a portfolio of companies in the three types of dividend yield/growth.

Of course, I do not look at each one of these parameters in isolation. I try to combine all of these parameters into one full understanding of a company.

Armed with this knowledge, you can take a stab at the list of dividend aristocrats for example, and start digging further.

Relevant Articles:

- How to find companies for my dividend portfolio

- Price, Value and Sources of Returns

- Time in the market beats timing the market

- Dividend Growth Investing Principles

Terry Smith on Investing in Tobacco Stocks

Tue, 17 Nov 2020 12:41:10 GMT

Terry Smith is a British fund manager, who has an impressive track record over the past decade at the fund he founded, Fundsmith. Some call him the British Warren Buffett.

I recently identified an interesting video of him discussing the tobacco industry. I wanted to share it with you, and include a transcript of his comments too:

Check the video here. https://twitter.com/DividendGrowth/status/1325799553065349121

You can read the full transcript from here:

"I mean they obviously own the number one brand in the world - Marlboro. One of our theories. I think it's a fact actually on the tobacco industry is that the tobacco industry is an illustration of the of the reverse of that great Reaganism. He said the nine most dangerous words in the English language are "I'm from the government and I'm here to help".

The tobacco industry is an illustration that the best business you can be in is one that the government attempts to stop, because if you do a chart of the tobacco industry over many decades you'll find it wasn't a particularly strong performer until the government tried to stop it. And then the government got involved by pack warnings and then the surgeon general's pack warnings. Then litigation by the states, then litigation that was on a federal level ,then bans on advertising and marketing and now bans on packaging and so on. This has led to two things which have been hugely beneficial to their financial status (their operations, their returns, their profits, their cash flows and to us as shareholders.

And those are one: These are industries which have got fabulous returns on capital. In the end they're basically selling an addictive product. They will never face a new competitor.

If you go into your boardroom and say I got a really good idea to the economics of tobacco. I think we should get in the industry it will be a very short conversation. Nobody's ever going to enter the industry.

And normally the way in which super returns are competed away is by people entering the business. It can't happen.

So they've got this wonderful business with these fabulous returns and there's no one brand and they can't spend any money on advertising marketing or now packaging. What's not to like?

And then the final frontier. I mean, of course if you think you've got this brilliant brand down there and you're going to compete with Marlboro How do you do it? You can't advertise. No.

And also with plain packaging, apart from the fact that all the statistics show it hasn't caused an iota of downturn in actual smoking; If you go into a shop, and there's no display of anything other green packs with horrible photographs on them, and you want something to smoke, you say something like: Do you have any Marlboro? Because you can't see what it is. It's all right. So I mean the Government's intervention is, I mean ,we are very very inclined to invest in things that the government thinks is a bad idea and they'll try and stop. "

It is interesting that he has had a position in Philip Morris International (PM) for the past decade. It is one of the largest positions in his mutual fund.

Tobacco companies in general are undervalued today, with the likes of Altria (MO), British American Tobacco (BTI) and Philip Morris International (PM) selling at very cheap valuations. You may also like this video of Warren Buffett and Charlie Munger discussing tobacco companies, which I discussed before.

Another interesting fact is that Michael Burry, who is famous for his bets against housing right before the 2007 - 2009 Financial Crisis, just initiated a position in Altria Group (MO). It is fascinating to watch a lot of value investors seeing the opportunity in tobacco companies today.

Relevant Articles:

- Warren Buffett and Charlie Munger on Investing in Tobacco Stocks

- What if Altria went to zero?

- Analysis of Altria's Recent Deal Activity

- Altria (MO) - a recession proof high yield dividend stock

- Philip Morris International versus Altria

Eleven Dividend Growth Stocks That Grew Dividends Last Week

Mon, 16 Nov 2020 09:00:03 GMT

My monitoring process involves reviewing notable information for companies on my watchlist and companies on my portfolio. A fairly significant chunk is spent reviewing the dividend growth universe for value. I also review the list of dividend increases every week, but focus on the ones that have at least a ten year track record of annual dividend increases.

It is a helpful tool to help me see the pace of dividend growth for companies I may be interested. It is also a helpful exercise to familiarize myself with companies that I may have not looked at before, and potentially place them on my list for further research. I like to review a lot of companies, and watch them operate in real time. This trains me to hopefully identify certain patterns that may be helpful in my stock research and selection process.

That process is also a nice summary of what I look for in a company. I view a long streak of dividend increases as an indication of quality. Only a limited number of companies end up being able to grow dividends for ten years in a row. This is my investable universe. I review the most recent dividend increase, and compare it to the past five and ten years. It is helpful to see a company whose growth is fairly consistent over time. It is also helpful to compare this growth along with the growth in earnings per share, and observing the payout ratio as well. In general, dividend growth investing is about selecting a company that grows earnings and dividends in lockstep, and grows intrinsic value as a result. Last but not least, we are looking to acquire such a company without overpaying for it. Valuation is part art, part science, because the right multiple depends on variable such as growth, dependability of the earnings stream, industry and interest rates.

In general, I look for companies that can continue to thrive, no matter what the underlying economic conditions are. It is amazing that no matter what we went through in 2020, there are so many companies that are resilient enough, so that they can continue growing their dividends. Find a company so good that it can increase its dividend and share buyback during a pandemic.

During the past week, the following companies managed to increase dividends to shareholders:

ManpowerGroup Inc. (MAN) provides workforce solutions and services in the Americas, Southern Europe, Northern Europe, and the Asia Pacific Middle East region.

The company increased its semi-annual dividend by 7.35% to $1.17/share. This marked the tenth consecutive annual dividend increase for this dividend achiever. Over the past decade, it has managed to grow distributions at an annualized rate of 11.40%.

Earnings are cyclical and rise and fall with the economy. Earnings peaked at $5.73/share in 2007, fell to a loss of $3.26/share in 2010, before rebounding to $8.56/share in 2018. Manpower Group is expected to earn $3.32/share in 2020.

Right now the stock is selling for 26.20 times forward earnings and yields 2.70%.

Aaron’s, Inc. (AAN) operates as a specialty retailer of consumer electronics, computers, residential and office furniture, household appliances, and accessories in the United States and Canada.

The company increased its quarterly dividend by 12.50% to 4.50 cents/share. This marked the seventeenth consecutive annual dividend increase for this dividend achiever. Over the past decade, it has managed to grow distributions at an annualized rate of 11.90%.

The company earned $1.37/share in 2009. Aaron's is expected to earn 5.13/share in 2020.

Right now the stock is selling for 11.70 times forward earnings and yields 0.30%.

Microchip Technology Incorporated (MCHP) develops, manufactures, and sells semiconductor products for various embedded control applications in the Americas, Europe, and Asia.

The company increased its quarterly dividend by 0.14% to 36.85cents/share. This marked the 19th consecutive annual dividend increase for this dividend achiever. Over the past decade, it has managed to grow distributions at an annualized rate of 0.75%.

Between 2009 and 2019, the company grew earnings from $1.31/share to $2.23/share. Microchip Technology is expected to earn $6.26/share in 2020.

Right now the stock is selling for 20.15 times forward earnings and yields 1.20%.

Snap-on Incorporated (SNA) manufactures and markets tools, equipment, diagnostics, and repair information and systems solutions for professional users worldwide. It operates through Commercial & Industrial Group, Snap-on Tools Group, Repair Systems & Information Group, and Financial Services segments.

Snap-On raised its quarterly dividend by 13.895 to$1.23/share. This marked the 11th consecutive annual dividend increase for this dividend achiever. During the past decade, the company has managed to grow dividends at an annualized rate of 12.60%.

The company earned $4.07/share in 2009 and managed to grow that earnings stream to $12.41/share in 2019. Snap-On is expected to earn $10.74/share in 2020.

Right now the stock is selling for 15.95 times forward earnings and offers a dividend yield of 2.87%.

Assurant, Inc. (AIZ) provides lifestyle and housing solutions that support, protect, and connect consumer purchases in North America, Latin America, Europe, and the Asia Pacific. The company operates through three segments: Global Lifestyle, Global Housing, and Global Preneed.

The company raised its quarterly dividend by 476% to 66 cents/share. This marked the 17th year of annual dividend increases for this dividend achiever. During the past decade, it has managed to grow dividends at an annulized rate of 15.20%.

Between 2009 and 2019, Assurant managed to grow earnings from $3.63/share to $5.84/share. The company is expected to earn $8.97/share in 2020.

Right now the stock is selling for 14.90 times forward earnings and yields 2%.

Automatic Data Processing, Inc. (ADP) provides cloud-based human capital management solutions worldwide. It operates through two segments, Employer Services and Professional Employer Organization (PEO).

The company raised quarterly dividends by 2.20% to 93 cents/share. This marked the 45th consecutive annual dividend increase for this dividend champion. Over the past decade ADP has managed to grow dividends at an annualized rate of 10.60%.

Between 2009 and 2019, the company managed to increase earnings from $2.63/share to $5.70/share. The company is expected to generate $5.63/share in 2020.

Right now, the stock is selling for 30.50 times forward earnings and yields 2.20%.

Service Corporation International (SCI) provides deathcare products and services in the United States and Canada. The company operates through Funeral and Cemetery segments.

The company raised quarterly dividends by 10.53%to 21 cents/share. This marked the 11th consecutive annual dividend increase for this dividend achiever. Over the past decade SCI has managed to grow dividends at an annualized rate of 16.23%.

The company managed to grow earnings from $0.49/share in 2009 to $1.99/share by 2019. Service Corporation International is expected to earn $2.60/share in 2020.

Right now the stock is selling for 19.20 times forward earnings and yields 1.70%.

Southside Bancshares, Inc. (SBSI) operates as the bank holding company for Southside Bank that provides a range of financial services to individuals, businesses, municipal entities, and nonprofit organizations.

The company raised its quarterly dividend by 3.23% to 32 cents/share. This marked the 26th consecutive year of annual dividend increases for this dividend champion. During the past decade, it has managed to grow dividends at an annulized rate of 12.50%.

Between 2009 and 2019, Southside Bancshares managed to grow earnings from $2.05/share to $2.20/share. The company is expected to earn $2.23/share in 2020.

Right now the stock is selling for 13.30 times forward earnings and yields 4.30%.

Atmos Energy Corporation (ATO) engages in the regulated natural gas distribution, and pipeline and storage businesses in the United States. It operates through Distribution, and Pipeline and Storage segments.

Atmos increased its quarterly dividend by 8.70% to 62.50 cents/share. This was a higher rate of increase than the ten year average of 4.95%/year over the past decade. This was the 37th year of annual dividend increases for this dividend champion.

Between 2009 and 2019, Atmos managed to grow earnings from $2.07/share to $4.35/share. The company is expected to earn $5.02/share in 2020.

Right now the stock is selling for 20.35 times forward earnings and yields 2.45%.

Lancaster Colony Corporation (LANC) manufactures and markets specialty food products for the retail and foodservice markets in the United States. The company operates in two segments, Retail and Foodservice.

The company raised its quarterly dividends by 7.15% to 75 cents/share. This marked the 58th consecutive annual dividend increase for this dividend king. Over the past decade, the company has managed to grow distributions at an annualized rate of 8.65%.

Lancaster Colony managed to boost earnings from $3.17/share in 2009 to $4.97/share in 2019. The company is expected to generate $5.61/share in 2020. The stock is selling at 31.20 times forward earnings and yields 1.70%.

MDU Resources Group, Inc. (MDU) engages in regulated energy delivery, and construction materials and services businesses in the United States. The company's Electric segment generates, transmits, and distributes electricity for residential, commercial, industrial, and municipal customers in Montana, North Dakota, South Dakota, and Wyoming

MDU Resources hiked its quarterly dividend by 2.40% to 21.25 cents/share. This marked the 29th consecutive year of annual dividend increases for this dividend champion. During the past decade, the company has managed to boost distributions at an annuazlied rate of 2.7%.

MDU resources has failed to grow earnings per share since 2007, when EPS was at $2.36. The company is expected to earn $1.83/share in 2020.

Right now the stock is selling at 13.60 times forward earnings and yields 3.40%.

As usual this is just a list of companies that raised dividends last week. It is not a recommendation to buy or sell companies. I use this exercise of monitoring dividend increases as part of my monitoring process. It helps me decide which companies to put on my list for further research and which ones to discard for the time being.

Relevant Articles:

- Nine Dividend Growth Stocks Rewarding Owners With A Raise

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Warren Buffett and Charlie Munger on Investing in Tobacco Stocks

Wed, 11 Nov 2020 09:00:04 GMT

As a dividend growth investor, I have owned shares in major tobacco companies such as Altria (MO), Phillip Morris International (PM) and British American Tobacco (BTI). I like the nature of the product being sold, the pricing power, the inelastic demand for an addictive product and the fact that these companies have managed to defy expectations. Tobacco companies have managed to grow earnings, dividends and intrinsic values over time, showering their shareholders with torrents of cash in the process.

In fact, Altria was the best performing stock in the S&P 500 between 1957 and 2003, compounding investor capital at 19.75%/year.

Tobacco companies are under fire today for some reason, perhaps ethical investing being a chief one. Another being increased regulation that could make tobacco illegal, or somehow infringe upon their strong brands. It is possible that legalization of cannabis or the introduction of alternative tobacco products could impair the model of tobacco companies. That may explain why Altria lit several billion on fire in late 2018 by acquiring a stake in JUUL. Either way, PMI seems to be well positioned of the three companies with its iQOS product.

Perhaps investors believe that management teams have not done a good job in enhancing shareholder value. I do not know why these companies are so cheap, despite the fact that they have done a good job growing earnings ( well, sans PMI but it still has at least maintained earnings). Either way, companies like Altria, PMI and British American Tobacco are sold at very low valuations today. Even if they never grew, if these companies can at least maintain cashflows to pay their dividends, an investor can easily recoup their investment within 12 - 15 years from dividends alone.

If valuations are so low, I ask myself the question as to why wouldn't someone from the private equity industry or another consumer staple company simply go ahead and acquire the types of Altria for example at less than 10 times earnings. They could easily offer $60/share, which is perhaps 13 - 14 times forward earnings, and finance the investment with cheap long-term debt. I believe that this is due to ethical concerns. I saw an interesting video from the 1997 Berkshire Hathaway Shareholder meeting, where Buffett and Munger discuss their attitude towards investing in tobacco companies. I believe this attitude is shared by many other investors. It is possibly the reason why tobacco offers such a good valuation today. I believe it is an opportunity, but my risk averse side warns me that a high yield in this environment is also indicative of a high risk. The risk is that I am buying a value trap, which cuts dividends along the way, impairing my projections.

You can watch the video from the 1997 meeting here: https://www.youtube.com/watch?v=c2OR0nrIClo

I am attaching a transcript too:

"WARREN BUFFETT: Zone 6.

AUDIENCE MEMBER: My name is Michael Hooper. I’m from Grand Island, Nebraska. I applaud Berkshire for starting the Class B shares.

My question deals with tobacco stocks, which have been beaten down lately. Does Berkshire own any tobacco stocks, and are some of these stocks attractive now that prices are down on some of them? And in particular, a company called UST. Thank you.

WARREN BUFFETT: Yeah. We have owned — we won’t comment on what we own now — but we have owned tobacco stocks in the past. We’ve never owned a lot of them, although we may have made a mistake by not owning a lot of them. But we’ve owned tobacco stocks in the past, and I’ve had people write me about whether we should do it or not.

We own a newspaper in Buffalo. It carries tobacco advertising. We don’t — well, actually, Charlie’s a director of a sensational warehouse chain called Costco, which used to be called PriceCostco. You know, they sell cigarettes.

So we are part of the distribution chain in — with a hundred percent-owned subsidiary in the Buffalo News. And so we have felt that if we felt they were attractive as an investment, we would invest in tobacco stocks.

We made a decision some years ago that we didn’t want to be in the manufacture of chewing tobacco. We were offered the chance to buy a company that has done sensationally well subsequently, and we sat in a hotel in Memphis in the lobby and talked about it, and finally decided we didn’t want to do it.

Can I give you some —?

CHARLIE MUNGER: But it wasn’t because we thought it wouldn’t do well. We knew it was going to do well.

WARREN BUFFETT: We knew it was going to do well.

But now, why would we take the ads for those companies, or why would we own a supermarket, for example, that sells them, or a 7-Eleven, you know, or a convenience store that sells them or something of the sort, and not want to manufacture them? I really can’t give you the answer to that precisely.

But I just know that one bothers me and the other doesn’t bother me. And I’m sure other people would draw the line in a different way.

So the fact that we’ve not been significant holders of tobacco stocks has not been because they’ve been on a boycotted list with us. It just means that overall we were uncomfortable enough about their prospects over time that we did not feel like making a big commitment in them.

Charlie?

CHARLIE MUNGER: Yeah. I think each company, each individual, has to draw its own ethical and moral lines, and personally, I like the messy complexity of having to do that. It makes life interesting.

WARREN BUFFETT: I hadn’t heard that before. (Laughter)

We’ll make him in charge of this decision.

CHARLIE MUNGER: Yeah, no, no. But I don’t think we can justify our call, particularly. We just — we have to draw the line somewhere between what we’re willing to do and what we’re not, and we draw it by our own lights.

WARREN BUFFETT: We owned a lot of bonds at one time of RJR Nabisco, for example, some years back. And should we own the bonds and not own the stocks?

Should we own, you know — should be willing to own the stock but not be willing to own the business? Those are tough calls.

Probably the biggest distributor of — the biggest seller — of cigarettes in the United States is probably Walmart, but — just because they’re the biggest seller of everything. They’re the biggest seller of Gillette products, and they’re huge.

And you know, do I find that morally reprehensible? I don’t. If I owned — we owned all of Walmart, we’d be selling cigarettes at Walmart. But other people might call it differently, and I wouldn’t disagree with them."

I believe it is fascinating to see Warren and Charlie's attitude towards investing in tobacco companies. This is as relevant today as it were relevant in 1997. That was around the time of the Master Settlement Agreement, which basically removed a lot of uncertainty from tobacco. That was a time when tobacco companies were a bargain, but were about to become a better bargain. But long-term patient shareholders ultimately made out like bandits.

I have also learned another mention of tobacco companies from Buffett, from the book "Barbarians at the Gate".

"When Buffett came on the line, Gutfreund put him on a speaker phone and laid out the situation in detail. What should they do?

Go for it, Buffett advised. Once one of RJR’s largest shareholders, he knew tobacco and liked it. “I’ll tell you why I like the cigarette business,” he said. “It costs a penny to make. Sell it for a dollar. It’s addictive. And there’s fantastic brand loyalty.”

Would Buffett himself like to join forces with Salomon? No, the investor said, not this time. Cigarettes were a fine investment, but owning a tobacco company, with its social baggage and all that Death Merchant business, wasn’t a burden Buffett felt he was ready to bear. “I’m wealthy enough where I don’t need to own a tobacco company and deal with the consequences of public ownership,” he said."

It looks like Buffett and Munger understand that tobacco companies are a great investment that could be immensely profitable. However, they are concerned about their public image at this time. Ethics are personal, and beliefs vary from individual to individual of course.

Either way, I continue seeing tobacco companies doing what has made them successful for investors.

They raise prices, cut costs, and enjoy a sort of regulatory advantage, since it is impossible to penetrate the market without advertising. While volume growth has been negative in the developed world, rising prices have more than compensated for it each year and over time.

Relevant Articles:

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- Philip Morris International versus Altria

Nine Dividend Growth Stocks Rewarding Owners With A Raise

Mon, 09 Nov 2020 09:00:08 GMT

I review the list of dividend increases every week, as part of my portfolio monitoring process. I leverage several of my dividend investing resources for this effort.

I started by reviewing the list of all dividend increases for the week. I then narrowed the list down to the companies that have managed to boost dividends for at least ten years in a row. I also focused on companies that had a meaningful combination of yield and dividend growth.

The companies for this week’s review include:

AmerisourceBergen Corporation (ABC) sources and distributes pharmaceutical products in the United States and internationally.

The company raised its quarterly dividend by 4.76% to 44 cents/share. This marked the 17th year of consecutive annual dividend increases for this dividend achiever. During the past decade, the company has managed to increase dividends at an annualized rate of 20.89%.

Between 2009 and 2019, the company grew earnings from $1.66/share to $4.04/share. The company is expected to earn $8.42/share in 2021.

The stock is selling for 12.30 times forward earnings and offers a dividend yield of 1.70%.

BOK Financial Corporation (BOKF) operates as the financial holding company for BOKF, NA that provides various financial products and services in Oklahoma, Texas, New Mexico, Northwest Arkansas, Colorado, Arizona, and Kansas/Missouri. It operates through three segments: Commercial Banking, Consumer Banking, and Wealth Management.

The company raised its quarterly dividend by 2% to 52 cents/share. This marked the 16th year of consecutive annual dividend increases for this dividend achiever. During the past decade, the company has managed to increase dividends at an annualized rate of 7.80%.

Between 2009 and 2019, BOK Financial managed to grow earnings from $2.96/share to $7.03/share. The company is expected to earn $5.88/share in 2020. The stock is selling for 10.20 times forward earnings and yields 3.50%

Evergy, Inc. (EVGY), through its subsidiaries, engages in the generation, transmission, distribution, and sale of electricity in Kansas and Missouri.

Evergy raised its quarterly dividend by 5.90% to 53.50 cents/share. This marked the 16th consecutive annual dividend increase for this dividend achiever. Over the past decade, Evergy has managed to increase distributions at an annualized rate of 4.95%.

Between 2009 and 2019 Evergy managed to grow earnings from $1.58/share to $2.79/share. The company is expected to earn $3/share in 2020.

The stock sells for 18.35 times forward earnings and yields 3.90%.

Lincoln National Corporation (LNC) through its subsidiaries, operates multiple insurance and retirement businesses in the United States. It operates through four segments: Annuities, Retirement Plan Services, Life Insurance, and Group Protection.

The company increased its quarterly dividends by 5% to 42 cents/share. This marked the elevents consecutve annual dividend increase for this dividend achiever. During the past decade, the company has managed to raise dividends at an annualized rate of 19.95%.

Lincoln Financial has cyclical earnings per share. At the cyclical peak in 2007 it earned $5.13/share. By 2019, it earned $4.38/share. The company is expected to earn $6.80/share in 2020.

The stock sells for 5 times forward earnings and yields 4.90%.

Rockwell Automation, Inc. (ROK) provides industrial automation and digital transformation solutions. It operates in two segments, Architecture & Software, and Control Products & Solutions.

The company raised its quarterly dividend by 4.90% to $1.07/share. This marked the 11th consecutive annual dividend increase for this dividend achiever. During the past decade, it managed to increase distributions at an annualized rate of 13%.

Between 2009 and 2019, the company managed to grow earnings from $1.18/share to $6.22/share. The company is expected to earn $5.44/share in 2020.

The stock sells for 8.90 times forward earnings and yields 3.80%.

Mercury General Corporation (MCY), engages in writing personal automobile insurance in the United States.

Mercury General hiked its quarterly dividend by 0.40% to 63.25 cents/share, marking the 34th consecutive annual dividend increase for this dividend champion. The company's rate of dividend growth was 0.76%/year over the past decade.

Between 2009 and 2019, Mercury General earnings went from $7.32/share to $5.78/share. The company is expected to earn $4.50/share in 2020. The stock sells for 9.30 times forward earnings and yields 6.10%

Commerce Bancshares, Inc. (CBSH) operates as the bank holding company for Commerce Bank that provides retail, mortgage banking, corporate, investment, trust, and asset management products and services to individuals and businesses. It operates through three segments: Consumer, Commercial, and Wealth.

The company declared a dividend of 27 cents/share, coupled with a 5% stock dividend. When you increase number of shares by 5%, but you keep the dividend unchanged, you are in effect increasing the dividend by 5%.Over the past decade, Commerce Bank has managed to grow distributions at an annualized rate of 6.36%

This is the 53rd year of annual dividend increases for Commerce Bancshares, which is a dividend king.

Between 2009 and 2019, earnings per share increased from $1.28 to $3.58. The company is expected to earn $2.83/share in 2020.

The stock sells for 22 times forward earnings and yields 1.70%.

Emerson Electric Co. (EMR), a technology and engineering company, provides solutions to industrial, commercial, and consumer markets worldwide. It operates through Automation Solutions and Commercial & Residential Solutions segments.

Emerson Electric increased its quarterly dividend by 1% to 50.50 cents/share. This marked the 64th consecutive annual dividend increase for this dividend king. During the past decade, Emerson Electric has managed to grow dividends at an annualized rate of 4.05%.

The company is expected to earn $3.46/share in 2020. Earnings per share have been largely flat between 2008 and 2019, rising from $3.06/share to $3.24/share. The stock is overvalued at 22.90 times forward earnings and yields 2.90%.

Utah Medical Products, Inc. (UTMD) manufactures and distributes medical devices for the healthcare industry in the United States, Europe, and internationally.

The company raised its quarterly dividend by 1.80% to 28.50 cents/share. This marked the 18th year of consecutive annual dividend increases. During the past decade, the company has been able to grow dividends at an annualized rate of 1.75%.

Between 2009 and 2019 the company raised its earnings from $1.72/share to $3.94/share.

The stock is selling for 25.60 times earnings and yields 1.40%.

This is a list of companies for further review. Most seem attractive as businesses, but that doesn’t mean that they should be invested in at any price, regardless of valuation.

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If you had to own one company for a generation..

Thu, 05 Nov 2020 09:00:00 GMT

I have often been asked to name my best idea by people who have not heard much about me apparently. Regular readers know that I am a very big fan of diversification. I like owning a lot of quality companies, purchased at attractive valuations, which I can then hold on for decades. I rarely sell. The only factors these days that would cause me to sell are a dividend cut or an acquisition in cash. I invest money to work every month, and I do not have an upper limit on the number of companies to hold.

That being said, I always strive to improve upon my process and expand my circle of competence about different companies. It is great to expand my toolkit, and checklist to incorporate different criteria to include when evaluating companies, their moats and qualitative as well as quantitative characteristics. I review different companeis from different industries, and follow different investors with different investment styles. One such investor that I have been studying is Terry Smith from British fund company Fundsmith. I will have to do a more detailed review of Terry’s investment style in the future, but I will just let you know that he is a great investor with a fantastic track record.

His head of investment research is Julian Robins. The company holds annual meetings with shareholders, which are recorded and uploaded for everyone to see on the internet. I really enjoyed the 2018 meeting. In it, Julian Robins discussed the factors he would look for if he were to select a company that he would put all of his net worth in, and a company that should provide for several generations of his offspring. Naturally, this discussion is very helpful.That’s because it approaches investing as a way to buy into a business to hold in a family for generations, rather than a speculation that treats stocks as lottery tickets.

You can view it starting in minute 59 of the video. But here is a rough transcript I put down for easier viewing:

“If you had to own just one company for 50 years

You have to start looking for certain characteristics

First of all you want a big market

You want something which doesn’t have a lot of regulatory or reputational risk

You wanta company which is number one in that big market

But which at the same time has not got tremendously big market share

It’s no good if it’s a big market but it’s got a 90% market share

If you had to buy a business for your family that would sustain you for the next five generations what would it be

My company is L’Oreal

So if you think of the cosmetics market I mean

We all want to look good

Your market is basically seven and a half billion people

It’s a two hundred and twenty billion dollar per year market

L’Oreal is the number one player, but it does 26 billion euros of sales per year, it’s got a 12% market share

It’s got a family control, which is good because it means it is not gonna do dumb things

The numbers look great, the market always grows even during the financial crisis the cosmetic market generally goes well

It’s got eight brands of over a billion in sales

It’s got 30 great brands

It’s got positions in all parts of the market

Luxury and cheap

positions in all parts of the sort of geographies in terms of developed markets and emerging markets

It’s extremely well run although that could change over the years”

I think that this is a fantastic mental model to have in mind. I also like the example being used. This model could be replicated and used when evaluating future investments.

That being said I wanted to mention that I disagree about concentration. I believe individual investors should be diversified, and not limit number of holdings they own. I am biased, because my best ideas were after what I believed to be my 20 best ideas. I also know enough to state that out of 100 companies I may own, I could not tell you which would be the best and which would be the worst ideas as seen from the year 2050. While it is an interesting idea to ponder about the type of business you would hold if you could own just one business, in reality we can own as many businesses as we can find. So please do not view this as an article telling you to own just one business. It is mostly a mental model for the types of factors to look for in evaluating quality businesses for a diversified portfolio.

It does seem to be part of their Fund Smith Portfolio:

While great investors can concentrate in their 20 or 30 best ideas, I believe this to be riskier for ordinary investors who may not have the skillset to pull it off. After all, life is easier with a margin of safety. You only need to get rich once. There is no reason to take too much risk with money that is important for you, to make more money than you may need. You do not want to go back to go.

To add to the model, Terry Smith is known for his three factor approach to investing:

-Only invest in good companies

-Don’t overpay

-Do nothing

It basically means to acquire quality companies at good valuations, and then sit tight, while waiting for the power of compounding to do the heavy lifting for you.

L’Oreal was an international dividend aristocrat, but sadly it lost the noble title in 2020 after it kept dividends unchanged due to Covid-19. I think that it can easily keep raising dividends in the future, based on the growth vectors listed in the transcript above.

Source: L'Oreal Presentation

It does have a lot of tailwinds going in its direction however, so it would likely be more valuable 20 – 30 years from now. Hopefully it won’t be mismanaged badly by then. But even so, a great business can usually recover easily from a period of mismanagement.

Now, L’Oreal is a great quality company. The problem is that it is often overvalued. The problem with quality companies is that they are often seen as overvalued. However, the market usually misprices these companies. I believe that a company with durable brands and sustinabale earnings, coming from repetitive purchases that would grow over time will most probably grow earnings over time.

Particularly when it reinvests back into the business in projects that have high expected rates of return.

This would result in higher earnings over time, and higher dividends for shareholders out of that excess cashflow being generated over time. All of this would make the business even more valuable over time.

When you have branded products that the consumer wants, and which have inelastic demand, you can afford to increase prices and your business is somewhat immune from the economic cycles. Therefore, a company with a P/E of 30 that grows earnings at 6%/year for 30 years would be cheaper than a cyclical company with a P/E of 10 that may or may not grow profits over time by more than the rate of inflaiton.

I read some research recently that the market is very poor at recognizing the longevity of cash flows from successful consumer staples companies. If properly handled, consumer brands should be able to last for generations and thus sustain their competitive advantage and the superior returns that bring over time.

Investors often underestimate the durability of supernormal returns, thus structurally undervaluing these companies.

A researcher went back to 1973, and asked themselves what would have been the highest P/E they could have paid for a quality consumer staple that year, and still earn 7% annualized return ( before dividends). They found out that they could have paid 281 times earnings for L’Oreal in 1973 or 241 times earnings for Altria, and still generated 7% annualized return (before dividends).

These companies were not selling at such high valuations of course, and adding dividends would have further turbocharged returns. This just goes to show you that the future growth expectations may be lower than actual growth.

That doesn’t mean to go out and buy a stock at any valuation of course, since the future is uncertain. What worked in the past may not work in the future, so a margin of safety should be required in terms of valuation and diversification. However you should never forget that valuation and growth are attached at the hip in a solid value investing framework. You should always look at P/E in conjunction with earnings stability and growth.

Relevant Articles:

- Buying Quality Companies at a Reasonable Price is Very Important

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Busiest Week for Dividend Increases Since February

Mon, 02 Nov 2020 09:00:00 GMT

There were 62 dividend increases last week. Last week was the busiest week for dividend increases since February 2020. This was right before we went into a lockdown - perhaps two or three weeks prior to it.

Perhaps Corporate America believes that the worst is over in terms of economic activity. The pace of dividend increases shows me that management teams have a relatively optimistic view on near term business activity. I view dividend increases as an instant check on management near-term expectations.

I noticed this fact, as part of my monitoring process of reviewing dividend increases. I check the list of dividend increases to evaluate the performance of companies I already own and to identify companies for further research.

I focus my attention on companies with an established streak of annual dividend increases, in order to identify strong businesses that generate excess cash flows that grow over time. I usually look for companies that have managed to grow dividends for at least a decade.

Next, I review the most recent dividend increase to its historical trends, in order to determine if things are improving, decelerating or keeping pace. I also like to review the pace of dividend increases relative to earnings growth, in order to determine if distributions are growing on a solid ground. I also like to review the payout ratio, in order to determine dividend safety.

Last but not least, I review valuation. Valuation is not a formula - it is a combination of P/E, earnings growth, safety of the earnings stream on a relative basis for all other available investments.

I compiled the list of dividend growth stocks, which managed to increase dividends last month and also have at least a ten year history of annualized dividend increases:

One note for me is that Black Hills Corp (BKH) has managed to boost dividends for 50 years in a row, making it one of the newest additions to the list of dividend kings.

Just wanted to mention that this list is not a recommendation for you to buy or sell. It is just a list of companies that raised dividends last month. Each company has managed to grow dividends for at least a decade.

I discussed what I look at when evaluating companies at the beginning of the article

Relevant Articles:

- Eleven Companies Rewarding Shareholders With Regular Dividend Increases

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How to find companies for my dividend portfolio

Thu, 29 Oct 2020 08:00:09 GMT

I am a buy and hold dividend growth investor. This means that I build my portfolio patiently. It also means that I rarely sell. I buy stocks to hold for decades, and would do so for as long as the dividend is not cut or for as long as a company is not acquired. This inactivity keeps investment fees and costs low.

It also reduces the impact of behavioral errors. I believe that time in the market beats timing the market. I try to buy companies that I would be comfortable owning even if the stock market closed for a decade.

To paraphrase Warren Buffett “If you aren't willing to own a stock for ten years, don't even think about owning it for ten minutes.”

I have discussed how I evaluate each company in detail. But I have not discussed how I find companies to research and potentially invest in a more comprehensive way.

Today I will share with you the general process I use to find companies for investment.

One of the goals of my newsletter is to try and share how I operate as an investor. My goal is to help you become a more rounded investor, so as you can create your own investing process that would help you to achieve your investment goals and objectives. While I would hope that you would stay and follow my journey over the years, I would be happier if you end up as an investor who can follow their own system, and be an independent thinker that would take their financial future in their own hands.

I wanted to share with you the process I follow to identify companies for further research, and potential acquisition.

My process has evolved over time of course, but there are a few places where I look for investment ideas.

The first place is the good old list of dividend aristocrats. It is a well-known and widely distributed list of S&P 500 companies which have managed to increase dividends for at least 25 years in a row.

Membership is restrictive, but I like the quality and the fact that this list includes great businesses and it is not too exhaustive either. The list has ranged from 40 to 65 members over the past 10 – 15 years. If you managed to learn about each company, you will likely have a list of companies that make sense to you from a business perspective. The next step is either to consider acquiring the ones that are attractively valued, or to wait for the right price for the companies that seem expensive.

I generally screen the list by focusing on growth in earnings per share, dividends per share growth versus valuation, payout ratios etc.

The second place is the list of dividend champions, contenders and challengers. It is updated monthly, and includes over 800 companies. The number of companies raising dividends for over 25 years is double the Dividend Aristocrats list, because it includes companies that are not part of the S&P 500. It doesn’t have liquidity or market capitalization requirement either.

This list also includes a list of companies that have increased dividends for over 10 years or over 5 years. It has a lot of useful data as well.

The third place I look is the monitoring process, where I review dividend increases every week. I like reviewing the press release for nuance, and try to gauge the management optimism. Sometimes, they read that we are in a situation where it is business as usual. Other times they seem too optimistic. After reading it for a few years, you may get a hang of it too.

A fourth place is through checkups of activity, including press releases, large sudden drops or increases in share price etc. While I review the list of dividend champions, dividend aristocrats and my portfolio holdings, I still learn about major moves in other businesses that I may want to study.

A fifth place is by scuttlebutt. Basically, in my daily life, I look at products, services, ideas, trends etc. You can identify investable opportunities this way. This is also an interesting way to admit that a lot of the missed opportunities I have had have been underneath my nose all those years.

If you like a certain product or service, you should always check and see if there is a company behind it. If that company is publicly traded, you may want to put it on your list for research. This idea is inspired by Peter Lynch.

Sometimes we overcomplicate life. Some of the best investment opportunities are right under our noses. I am reminded about Wal-Mart, Target, Lowe’s, Home Depot, Microsoft, Apple, Starbucks, Hormel, Altria, etc.

I recently saw a video, about a very simple investing process. The eat them, drink them, smoke them and go to the doctor portfolio. You may check it out from here - https://www.youtube.com/watch?v=U23fhx06SUQ&feature=youtu.be

Sometimes, I like a company, and decide to review some of its peers. I may end up owning stakes in all of them.

The sixth place is primary the most dangerous one. I follow a lot of dividend investors and other investors. Sometimes I see a lot of them buying a stock, perhaps because they are blindly following each other. Or perhaps because they are all seeing a good value, possibly because the stock had a catalyst that makes it a value. It is dangerous to be a lemming and blindly follow others, because you may be following them into their bad ideas, lose conviction, and ignore their best ideas. Also, you are not learning much by following others. Groupthink may influence you, which could be bad for your investment returns.

I believe it is best to have your own process to follow, because you are not at the mercy of others for ideas. Plus, no single investors out there, even Warren Buffett is right 100% of the time. If you follow someone, make sure to follow all of their investment ideas. However, also make sure you have your own process to decide for yourself if a stock is a buy or an avoid.

For example, Buffett received a lot of negative publicity recently, after he sold his airline stocks. In my opinion, that was a bad decision in the first place. After he sold at a loss, everyone out there started saying that he has lost his touch. After Apple went up to $135/share however, everyone started signing poraises for him again. Right now, he is sitting on an unrealized gain of $76 billion, and few are saying that he has lost his touch. And overall, his gains on Apple are higher than his losses on airlines and IBM.

Eleven Companies Rewarding Shareholders With Regular Dividend Increases

Mon, 26 Oct 2020 08:00:07 GMT

As part of my monitoring process, I review the list of dividend increases every week. This exercise helps me monitor the progress of existing holdings. It also helps me identify companies for further research. I use this process in conjunction with my screening process.

As part of this process, I look at the companies that raised dividends over the past week. I narrow my focus on companies with an established track record of annual dividend increases. I look for companies that have managed to increase for at least a decade.

I then review the company’s most recent dividend increase, and compare it to the ten year average for perspective.

I also look at the growth in earnings, along with estimated earnings for this year. It is helpful to gain an understanding if the company has been able to grow dividends due to growth in the business. If growth is achieved through expanding the payout ratio, I am generally not interested in such a company.

Last but not least, I review valuation. This includes P/E ratios, dividend yields, but also compare that with historical dividend growth and trends in earnings per share. As you can see, I have come to the conclusion that valuation is more art than science.

During the past week, there were several companeis that raised dividends. Each company has at least a ten year track record of annual dividend increases: The companies include:

Home Bancshares, Inc. (HOMB) operates as the bank holding company for Centennial Bank that provides commercial and retail banking, and related financial services to businesses, real estate developers and investors, individuals, and municipalities.

The company increased its quarterly dividend by 7.70% to 14 cents/share. This marked the tenth consecutive annual dividend increase for this newly minted dividend achiever. During the past decade, it has managed to grow distributions at an annualized rate of 25%.

The company raised earnings from $/share in 2009 to $/share in 2019. Home Bancshares is expected to earn $1.18/share in 2020.

The company sells for 15 times forward earnings and yields 3.16%.

Middlesex Water Company (MSEX) owns and operates regulated water utility and wastewater systems. It operates in two segments, Regulated and Non-Regulated.

The company increased its quarterly dividend by 6.30% to 27.30 cents/share. This marked the 47th consecutive annual dividend increase for this dividend champion. Over the past decade, the company has managed to grow distributions at an annualized rate of 3.20%.

Between 2009 and 2019, the company was able to grow earnings from 72 cents/share to $2.01/share.Middlesex Water is expected to earn $2.12/share in 2020.

The company sells for 32.90 times forward earnings and yieods 1.56%.

Standex International Corporation (SXI), together with subsidiaries, manufactures and sells various products and services for commercial and industrial markets in the United States and internationally. The company operates through five segments: Electronics, Engraving, Scientific, Engineering Technologies, and Specialty Solutions.The company hiked its quarterly dividend by 9.10% to 24 cents/share, marking its tenth consecutive annual dividend increase. During the past decade, it has managed to grow distributions at an annualized rate of 8.60%.

Standex is expected to earn $3.65/share in 2020.

The company sells for 17.80 times forward earnings and yields 1.50%

American Electric Power Company, Inc. (AEP) is an electric public utility holding company that engages in the generation, transmission, and distribution of electricity for sale to retail and wholesale customers in the United States. It operates through Vertically Integrated Utilities, Transmission and Distribution Utilities, AEP Transmission Holdco, and Generation & Marketing segments.

American Electric Power raised its quarterly dividend by 5.70% to 74 cents/share. This marked the 11th consecutive annual dividend increase for this dividend achiever. During the past decade, the company has managed to grow its dividends at an annualized rate of 5.15%.

Between 2009 to 2019, the company’s earnings went from $2.96/share to $3.88/share.

American Electric Power is expected to earn $4.32/share in 2020.

The company sells for 21.30 times forward earnings and yields 3.20%

Hubbell Incorporated (HUBB) designs, manufactures, and sells electrical and electronic products in the United States and internationally. The company operates through two segments, Electrical and Power.

The company increased its quarterly dividend by 7.70% to 98 cents/share. This marked the 13th consecutive annual dividend icnrease for this dividend achiever. Over the past decade Hubbell has managed to grow dividends at an annualized rate of 9.40%/year.

Between 2009 and 2019 the company managed to grow earnings from $3.15/share to $7.31/share. Hubbell is expected to earn $7.22/share in 2020.

The company sells for 21.25 times forward earnings and yields 2.56%

The Gorman-Rupp Company (GRC) designs, manufactures, and sells pumps and pump systems worldwide.

The company increased its quarterly dividend by 10.70% to 15.50 cents/share. This marked the 48th consecutive annual dividend icnrease for this dividend champion. Over the past decade Gorman-Rupp has managed to grow dividends at an annualized rate of 7.80%/year.

The company grew earnings from 70 cents/share in 2009 to $1.37/share in 2019. Gorman-Rupp is expected to earn $1.10/share in 2020.

The company sells for 31 times forward earnings and yields 1.80%

Avery Dennison Corporation (AVY) produces and sells pressure-sensitive materials worldwide. The company raised its quarterly dividend by 6.90% to 62 cents/share. This marked the 10th consecutive annual dividend increase for this dividend achiever. Over the past decade, the company has been able to raise dividends by 6.35%/year.

In 2008, the company earned $2.70/share. It managed to grow earnings to $3.57/share by 2019. Avery Dennison is expected to earn $6.06/share in 2020.

The company sells for 23.40 times forward earnings and yields 1.75%

Stepan Company (SCL) produces and sells specialty and intermediate chemicals to other manufacturers for use in various end products in North America, Europe, Latin America, and Asia. The company operates through three segments: Surfactants, Polymers, and Specialty Products.

Stepan raised its quarterly dividend by 10.90% to 30.50 cents/share. This marked the 53rd consecutive year of annual dividend increases for this dividend king. During the past decade, the company has managed to boost dividends at an annualized dividend growth of 8.60%.

Between 2009 and 2019, Stepan managed to grow earnings from $2.92/share to $4.42/share. Stepan is expected to earn $5.21/share in 2020.

The company sells for 22.70 times forward earnings and yields 1.03%

Lincoln Electric Holdings, Inc. (LECO), designs, develops, manufactures, and sells welding, cutting, and brazing products worldwide. It operates through three segments: Americas Welding, International Welding, and The Harris Products Group.

The company increased its quarterly dividend by 4.10% to 51 cents/share. This marked the 26th consecutive annual dividend icnrease for this dividend champion. Over the past decade Lincoln Electric has managed to grow dividends at an annualized rate of 13.30%/year.

The company earned $2.46/share in 2008, right before the Global Financial Crisis. While it has had some dips in earnings per share in 2009 and in 2014 – 2016, its earnings per share grew to $4.68/share in 2019. Lincoln Electric is expected to earn $3.58/share in 2020.

The company sells for 29.50 times forward earnings and yields 1.93%

Whirlpool Corporation (WHR) manufactures and markets home appliances and related products. It operates through four segments: North America; Europe, Middle East and Africa; Latin America; and Asia.

The company raised its quarterly dividend by 4.20% to $1.25/share. This marked the 10th consecutive annual dividend increase for this newly minted dividend achiever. Over the past decade, the company has been able to raise dividends by 10.70%/year.

Between 2009 and 2019, the company managed to increase earnings from $4.34/share to $18.45/share.

Whirlpool is expected to earn $13.02/share in 2020. The company sells for 15.20 times forward earnings and yields 2.50%

Tompkins Financial Corporation (TMP), a community-based financial services company, provides commercial and consumer banking, leasing, trust and investment management, financial planning and wealth management, and insurance services. The company operates in three segments: Banking, Insurance, and Wealth Management.

The company increased its quarterly dividend by 3.85% to 54 cents/share. This marked the 34th consecutive annual dividend icnrease for this dividend champion. Over the past decade Tompkins Financial has managed to grow dividends at an annualized rate of 5%/year.

Between 2009 and 2019, Tompkins Financial grew earnings from $2.96/share to $5.37/share. Tompkins Financial is expected to earn $4.49/share in 2020.

The company sells for 13 times forward earnings and yields 3.70%

Relevant Articles:

- How to value dividend stocks

- Four Dividend Increases From Last Week

- Price, Value and Sources of Returns

- Dividend Growth Investing Principles

Price, Value and Sources of Returns

Fri, 23 Oct 2020 12:03:42 GMT

As an investor, I follow a very simple model.

I look for companies that have a track record of annual dividend increases, supported by earnings growth. I try to buy enough of these companies in order to build a diversified portfolio.

Naturally, everyone discusses the fact that they do not want to overpay for companies. Obviously you want to buy at a discount.

The problem with this statement is that it assumes a static environment.

We live in a dynamic environment.

If I see a company that sells at a P/E of 20, it may look optically more expensive than a company that sells at a P/E of 10.

However, we cannot just look at P/E in isolation. Not all P/E ratios are created equal.

We need to look at the stability of the earnings and cash flows for each company. A cyclical company should in general have a lower P/E ratio, because its earnings streams are not defensible and they follow the rise and fall in the economy. A more defensive company such as a tobacco or spirits manufacturer whose earnings are more immune to the short-term ups and downs of the economic cycle would be more resiliant, and therefore pricier. The market participants are willing to pay a premium (usually) for things that are easier to forecast due to the repetitive nature and stability and intanglibles such as brands.

We also need to look into the growth prospects for the company. A company with a P/E of 10, that doesn’t grow earnings is more expensive for a long-term investor than a company with a P/E of 25 that manages to double earnings every decade.

To paraphrase Warren Buffett: Price is what you pay, value is what you get

I also follow a simple model for when it comes to estimating future returns.

Future returns are a function of:

1) Initial dividend yield

2) Growth in earnings per share

3) Dividend Reinvestment

4) Changes in valuation

The first three items are part of the fundamentals return. The fundamental return – earnings, dividends, reinvested earnings and dividends, basically remind me that by buying a stock I am not just buying a lottery ticket, but a piece of an actual business.

That business sells products and services to customers, and hopefully it grows. Management hopefully works carefully at capital allocation too, in order to benefit shareholders. As I discussed earlier, management should invest earnings back into the business, but only if they expect those to generate a certain return on investment. If they cannot put that money back into the business and generate a high rate of return on it, they need to send it back to shareholders in the form of dividends. There is a natural limit to how much money a business can reinvest at a high rate of return and how quickly it can deploy that money as well in an intelligent manner. Just stocking up the balance sheet with cash may not be the most optimal decision. Excess cash can goad chief executives into making impulsive acquisitions at high prices, splurging on palatial headquarters or overfunding underwhelming projects. In fact, academic research shows that companies with the highest levels of cash go on to become less profitable in the long term; one recent study found that high-cash firms earn future profit margins 1.5 percentage points lower than those that carry the least cash. Source

Charlie Munger has stated that “Over the long term, it's hard for a stock to earn a much better return than the business which underlies it earns. If the business earns 6% on capital over 40 years and you hold it for that 40 years, you're not going to make much different than a 6% return even if you originally buy it at a huge discount. Conversely, if a business earns 18% on capital over 20 or 30 years, even if you pay an expensive looking price, you'll end up with a fine result.”

Terry Smith from Fundsmith states that Munger’s idea is a mathematical certainty.

It is difficult to forecast returns or management ability to reinvest capital at high rates of return. Hence, it is important to look at predictable businesses that can deploy earnings back at a high rate of return. Not every company can do that, as there are limits to everything due to competition, nature of the industry, time etc.

But perhaps this is what Buffett was refering to with this quote “ It's far better to buy a wonderful company at a fair price, than a fair company at a wonderful price.’

It is good to buy a company that can grow earnings over time, since that grows dividends and intrinsic value. This is a good type of company to be in if you are a long-term investor. Otherwise, you would be stuck buying cheap stocks at a low P/E, that you have to sell when they get to a fair price. Only to repeat this process again and again.

Sadly, in this day and age, a lot of investors tend to view shares in terms of speculative returns.

Let’s illustrate everything with an example. I will use the company Church & Dwight (CHD)

Back in 2009, the company sold at $15.11/share. It earned 85 cents/share, and had a forward annual dividend of 14 cents/share. Church & Dwight yielded 0.93% and sold for a P/E of 17.78.

Fast forward a decade, and the stock sold at $70.35/share, and earned $2.44/share. The annualized dividend rose to $0.91/share, and the dividend yield was 1.29%. The P/E ratio had expanded to 28.83.

If you had bought 1 share of Church & Dwight at the end of 2009, you would have paid $15.11 for it. If you had reinvested those dividends along the way, you ended up with 1.165038 shares by the end of 2019. At a share price of $70.35/share, the total investment value went to $81.96. Not a bad return for a decade.

You can see the breakdown of sourced of return.

Intrinsic value resulted in a $28.26 increase in value, while changes in valuation resulted in a $26.98 increase in value. The rest is attributed to dividend reinvestment. I believe that changes in valuation are part of the speculative return, so I would not expect that to be a key source of investor returns going forward. As an investor I would focus more on the fundamental returns, mostly growth in earnings per share and dividends. Over time, I would expect that valuations revert to the mean.

Between 2010 and 2019, the company earned $17.04/share in earnings in total. It distributed $6.03/share in dividends. This means that the company retained $11.01/share to reinvest in the business.

According to Morningstar, the company has been able to achieve a return on invested capital of roughly 13% - 14%, which is pretty impressive. I do not want to venture any further into calculating more numbers however. At first look, it may seem that retaining $11.01/share resulted in increase in earnings from 85 cents to $2.44 and intrinsic value by $28.26. However, it may be hard to break down what percentage of growth was derived from past capital investments versus the investments from 2009 - 2019. Some long-term investments may not bear fruit for many years; others may have been misallocated.

Right now, Church & Dwight is expected to earn $2.82/share in 2020. The stock sells at $90.99/share for a forward P/E of 32.21. At the annual dividend rate of 96 cents/share, the dividend yield is at 1.05%. If earnings and dividends grow by 7%/year over the next decade, then they will double by 2030. The basic return would be at least 8%/year ( 1% from dividend yields and 7% from earnings and dividend growth). There are various scenarios going on of course, one where P/E ratios remain elevated and another where they shrink. The speculative return is hard to estimate, which is why I doubt it matters too much, unless you plan to invest for less than 5 years. If Church & Dwight doubles earnings in a decade, but the P/E ratio shrinks, the share price may not deliver much in terms of returns. This has happened before and won't surprise me from happening again in the future.

Under this scenario, the stock would still sell around $90/share, but would be earning $5.60/share and have a P/E of 16. The stock would be paying a dividend of $1.92/share and yield 2.10%. If you hold for several decades, and the business is durable enough to continue compounding wealth and income, that valuation shrinkage won't matter. This is why Buffett states that you want to invest in quality businesses, and let the power of compounding do the heavy lifting for you.

I do want to emphasize focus on quality companies that have a strong brand, strong moat, repetitive purchases, strong competitive positions, which can also grow profits over time. We want a durable and predictable business model, with a slower pace of industry change.

Today, we learned a few important lessons.

We learned that when valuing companies, we need not look at P/E ratio in isolation. We need to take into consideration growth and stability of the earnings

We learned the factors that drive future investment returns, notably initial dividend yield, earnings growth and changes in valuations. We need to focus on fundamental return, because the speculative return based on changes in valuations cannot be relied upon, as it reverts to the mean.

If management is able to reinvest earnings at a high rate of return in the business, they should do so. But for excess cashflows, they should distribute it to shareholders. For most of the dividend growth stocks we have covered extensively over the past decade and a half, managements have managed to balance the long-term needs of the business and its earnings growth with the ability to distribute a growing stream of dividends. But those rising earnings and rising dividends, reinvested over time, really turbocharge returns for investors.

The really important lesson is to focus on quality, even if it looks optically more expensive. If you are a long-term investor, a quality company is more likely to deliver solid returns over time than a statistically cheap, but poor one.

Relevant Articles:

- What drives future investment returns?

- Not all P/E ratios are created equal

- Evaluating Dividend Growth Stocks – The Missing Ingredient

Four Dividend Increases From Last Week

Mon, 19 Oct 2020 08:00:09 GMT

I review the list of dividend increases as part of my monitoring process. I find it helpful to observe the companies I own execute on their business plans, and watch them allocate money, and gauge their business sentiment through watching their dividend actions.

The mental model I focus on looks for established companies that grow earnings, and generate more cashflows than they know what to do with. While some companies in the initial growth phases need all capital to grow the business, for most corporations in the US, there is excess cashflow left at the end of the year. There is also a limit as to how long you can profitably reinvest all cashflows too.

As a general rule, I prefer excess cashflows to be distributed to shareholders, in order to reduce the amount of wasteful acquisitions, spending on projects with low returns on investment, or just stocking up cash for no reason, which executives could waste on new headquarters, corporate jets etc.

I look for companies that grow earnings over time, which also manage to grow that excess cashflows and thus manage grow dividends for a certain number of years. Growing earnings, growing dividends and growing intrinsic values over time go hand in hand.

During the past week, there were four companies that raised dividends to shareholders. Every single one of those companies have managed to increase dividends for at least ten consecutive years. The companies include:

V.F. Corporation (VFC) engages in the design, production, procurement, marketing, and distribution of branded lifestyle apparel, footwear, and related products for men, women, and children in the Americas, Europe, and the Asia-Pacific. It operates through four segments: Outdoor, Active, and Work.

The company raised its quarterly dividend by 2.10% to 49 cents/share. This marked the 48th consecutive year of dividend increases for this dividend aristocrat. V.F. Corp has managed to grow distributions at an annualized rate of 13% over the past decade.

Earnings per share went from $1.29/share in 2010 to $1.70/share in 2019. This is down from 2018’s earnings per share of $3.15.

The company is expected to generate $1.12/share in 2021 and $2.58/share in 2022.

Due to weakness in earnings this year, the company is selling at 67.70 times forward earnings. Even if earnigns were to normalize in 2022 however, V.F. Corp still seems expensive at close to 30 times forward earnings. The stock yields 2.60%, which does not seem well covered this year. It is a little better covered based on FY 2022 earnings. At this time I view the stock as a hold, but I would not be interested to add more.

Cummins Inc. (CMI) designs, manufactures, distributes, and services diesel and natural gas engines, products worldwide. It operates through five segments: Engine, Distribution, Components, Power Systems, and New Power.

The company raised its quarterly dividend by 3% to $1.35/share. This marked the 15th consecutive annual dividend increase for this dividend achiever. Over the past decade, it has managed to grow distributions at an annualized rate of 21.50%.

Earnings per share increased from $5.28/share in 2010 to $14.48/share in 2019.

The company is expected to earn $9.72/share in 2020 and $11.99/share in 2021.

The stock is selling at 22.90 times forward earnings and yields 2.40%. I think it is a little pricey, and believe it may be a better value on dips.

A. O. Smith Corporation (AOS) manufactures and markets residential and commercial gas and electric water heaters, boilers, tanks, and water treatment products in North America, China, Europe, and India. It operates through two segments, North America and Rest of World.

The company raised its quarterly dividend by 8.30% to 26 cents/share.

This is the 27th consecutive annual dividend increase for this dividend aristocrat. During the past decade, A.O. Smith has managed to grow distributions at an annualized rate of 21.50%/year.

Earnings per share increased from 60 cents/share in 2010 to $2.22/share in 2019.

The company is expected to generate $1.87/share in 2020 and $2.29/share in 2021.

A.O. Smith is a little pricey at 29.60 times forward earnings. The stock yields 1.90%. It may be a better value on dips, provided that its short-term issues are finally resolved. The company is unlikely to exceed 2018’s earnings per share of $2.58 soon. That may be an opportunity if it does return to the path of profitable growth. It may be too expensive if earnings per share flatline.

Williams-Sonoma, Inc. (WSM) operates as an omni-channel specialty retailer of various products for home.

The company raised its quarterly dividend by 10.40% to 53 cents/share. This marked the 15th year of consecutive annual dividend increases for this dividend achiever. During the past decade, this company has managed to grow distributions at an annualized rate of 14.60%.

Earnings per share increased from $1.83/share in 2011 to $4.49/share in 2020.

The company is expected to generate $6.25/share in 2021 and $6.04/share in 2022.

Williams-Sonoma is priced fairly at 16.80 times forward earnings and yields 2%.

Relevant Articles:

- Dividend Growth Investing Principles

- What is Dividend Growth Investing?

- Rising Earnings – The Source of Future Dividend Growth

Cboe (CBOE) Dividend Stock Analysis

Fri, 16 Oct 2020 08:00:11 GMT

Cboe Global Markets, Inc. (CBOE) operates as an options exchange in the United States. It operates in five segments: Options, U.S. Equities, Futures, European Equities, and Global FX.

The company has managed to increase dividends for ten years in a row, which makes it a newly minted dividend contender.

The last dividend increase was in August 2020, when it hiked the quarterly dividend by 16.70% to 42 cents/share.

“This year marked the 10th anniversary of our IPO and each year since, we’ve raised our dividend, demonstrating Cboe Global Markets’ ongoing commitment to returning capital to our shareholders,” said Ed Tilly, Chairman, President and Chief Executive Officer, Cboe Global Markets. “The increase in our dividend reflects Cboe’s financial strength and cash flow generating capabilities, while we execute on our growth initiatives and deliver sustainable returns to our shareholders.”

Since initiating a quarterly dividend in 2010 at 10 cents/share, the company has managed to quadruple its quarterly distribution to 42 cents/share.

Between 2010 and 2019, CBOE grew earnings from $1.03/share to $3.34/share. The company is expected to generate $5.16/share in 2020.

CBOEs key growth initiatives are the following:

-Expand product lines across asset classes

-Broaden geographic reach

-Diversify business mix with non transactional revenues

-Leverage leading proprietary trading technology

-Build upon core proprietary products

The company operates the largest options exchange in the US, where we have equity and index options being traded. A large portion of revenues is derived by trading fees. With the proliferation of online trading, exchanges such as CBOE should benefit form all this speculation. The company has a dominant position in options. It is the second largest exchange for equities trading in the US after Nasdaq, but ahead of NYSE.

Some popular products include its options products on S&P 500 options, which are under license from S&P until 2030. Other products include VIX options and VIX Futures, which are widely followed as well. The implosion of several VIX funds in early 2018 was a negative for CBOE however. Both S&P 500 options and VIX futures can be a positive for CBOE when there is increased market volatility and when investors want to hedge their market exposure.

Focusing on costs, and driving efficiencies across its business can results in higher profits over time and a better customer experience. Investing in the trading platforms through technological advances will definitely be a plus.

New products and bolt on acquisitions can further be accretive to its offerings to clients, and further strengthen the moat. Acquisitions could be accretive due to synergies realized. CBOE realized synergies from its acquisition of BATS from a couple of years ago for example, which boosted revenues and increased profits.

The acquisition of BATS also diversified the revenue mix from 81%/19% in options/futures to options (51%), futures (11%), US Equities (27%), European Equities (7%) and Global FX ( 5%). This merger also reduced the transactional fees as a percentage of revenues from 68% to 57%.

The dividend payout ratio increased from 19% in 2010 to 40% in 2019. A large part of the increase in the payout ratio was the initiation of the dividend later in the year in 2010.

It is possible for this phenomenon to continue in the 2020s as well, but sooner or later dividend growth and earnings growth would converge. If management takes the payout ratio too far, it is very likely that the next step would be dividend growth going slower than earnings. But I am getting ahead of myself here.

The number of shares outstanding have increased over the past decade. Between 2010 and 2016, the number of shares went down from 96 million to 81 million. After the acquisition of BATS however, the number of shares outstanding increased to 111 – 112 million.

Currently, the stock is attractively valued at 16.30 times forward earnings. It offers a dividend yield of 2%.

Relevant Articles:

- Selling Options is no free lunch

- Eight Companies Raising Dividends to Shareholders

- Dividend Achievers versus Dividend Contenders & Champions

Peter Lynch Portfolio Holdings at the Fidelity Magellan Fund

Thu, 15 Oct 2020 08:00:09 GMT

Peter Lynch is a super-investor, who managed to compound money at 29.30% at Fidelity Magellan Fund between 1977 and 1990. He is a very smart investor, who has managed to mentor other fund managers at Fidelity. He has mentored a generation of investors through his books. I have learned a ton from his books "One Up on Wall Street" and "Beating the Street".

Peter Lynch seemed to have a fascination with the list of Dividend Achievers, which I discussed previously.

I have studied Peter Lynch, and tried to find out as much as possible about his investing style, in order to improve my own investing. In the process, I was able to uncover his long-lost articles from Worth magazine in the 1990s.

I have tried looking for historical reports from the Fidelity Magellan Fund, which would include his current commentary.

I have been unsuccessful in this endeavor. However, I did uncover a list of his stock portfolio at Fidelity Magellan between 1984 and 1989 by going through my Mergen's Database ( it was Moody's at the time).

You can see the portfolio holdings for Fidelity Magellan Fund by clicking on each year. The quality of the copy is not very good in the early years, but it is still legible.

Clicking on each resource opens a PDF. You may have to adjust and zoom to the maximum settings in order to view.

Fidelity Magellan Fund Portfolio Holdings for 1989

Fidelity Magellan Fund Portfolio Holdings for 1988

Fidelity Magellan Fund Portfolio Holdings for 1987

Fidelity Magellan Fund Portfolio Holdings for 1986

Fidelity Magellan Fund Portfolio Holdings for 1985

Fidelity Magellan Fund Portfolio Holdings for 1984

Thank you for reading!

Relevant Articles:

- Peter Lynch on Dividend Growth Investing
- Peter Lynch Articles For Worth Magazine
- Buffett Partnership Letters
- These Books Shaped My Investing Strategy
- Dividend Achievers Offer Income Growth and Capital Appreciation

Time in the market beats timing the market

Tue, 13 Oct 2020 08:00:04 GMT

"The idea that a bell rings to signal when investors should get into or out of the market is simply not credible. After nearly 50 years in this business, I do not know of anybody who has done it successfully and consistently." Jack Bogle

We all know that timing the market is so difficult to make it worthwhile, that it is essentially not worth doing. A lot of brainpower goes into market timing, but it always comes back with worse results over a long period of time.

I wanted to illustrate the futility of timing the markets by a simple calculation I made.

I assumed that there were three separate investors, each of them starting in January 1980. Every investor has $100 to invest every month. They keep investing $100 per month from January 1980 to September 2020.

The first investor is great at timing, and always buys at the bottom of the month. This means that this investor is able to correctly predict the lows for the month for 40 years.

The second investor is unlucky at timing, and always ends up buying at the highest price for the month. This investor is so unlucky, that he always buys at the worst time of the month.

The third investor simply puts $100 to work at the end of each month, like clockwork.

So how do they do in the end?

The first investor ends up with 648,103.85

The unlucky investor ends up with 611,372.16

The investor who just buys regularly every month, ends up with 628,047.32. I think that this is the most realistic scenario.

The chart below shows no visible difference between the three investors.

I have crunched the numbers before for Johnson & Johnson, and I have come up with a similar conclusion. While you may be able to get an edge in a perfect situation, it is not large enough to warrant trying to time the markets, especially given the high failure rates. Therefore, it is best to identify a process, and stick to it on a repeatable basis. If you manage to buy regularly, on a predictable schedule, you will do better than most investors due to discipline and good behavior.

Three Dividend Growth Stocks In the News

Mon, 12 Oct 2020 08:00:00 GMT

I review the list of dividend increases as part of my monitoring process. This helps me review the story behind companies I already own. It also helps me review companies for potential inclusion into my watchlist.

A long track record of annual dividend increases is an indication of a quality company with a strong business model. Its strength could be due to a favorable environment, competitive position, unique product, patent or trademark, a strong brand, a loyal group of customers or a combination of the above.

I find it helpful to identify these businesses and place them on my list for further research.

During the past week, there were three companies with long histories of annual dividend increases, which also hiked distributions to shareholders.

The companies include:

Northwest Natural Holding Company (NWN) provides regulated natural gas distribution services to residential, commercial, industrial, and transportation customers in Oregon and Southwest Washington.

The utility raised its quarterly dividend by 0.50% to 48 cents/share. This marked the 65th consecutive annual dividend increase for this dividend king. Over the past decade, it has managed to increase the dividend at an annualized rate of 1.75%.

Earnings peaked at $2.83/share in 2009, and gradually declined to $2.07/share in 2019. The company is expected to generate $2.27/share in 2020.

Currently, the stock is fairly valued at 20.70 times forward earnings and yields 4.10%. Given the lack of earnings growth, and the high payout ratio,

RPM International Inc. (RPM) manufactures and sells specialty chemicals for the industrial, specialty, and consumer markets worldwide.

The company raised its quarterly dividend by 5.60% to 38 cents/share. This marked the 47th consecutive annual dividend increase for this dividend aristocrat.

“One of the primary ways we continuously reward our shareholders is by annually increasing our cash dividend,” stated Frank C. Sullivan, RPM chairman and CEO. “Increasing the dividend, combined with an appreciating stock price, is key to our ability to consistently deliver long-term value and outperform the cumulative total return of the broader market.”

Over the past decade, RPM International has managed to grow dividends at an annualized rate of 5.80%.

Between 2009 and 2019, RPM International grew earnings from $1.39/share to $2.34/share.

RPM International is expected to generate $3.93/share.

Currently, the stock is selling for 22.20 times forward earnings and yields 1.75%. RPM International is close to being fairly valued today.

McDonald's Corporation (MCD) operates and franchises McDonald's restaurants in the United States and internationally.

The company increased its quarterly dividend by 3.20% to $1.29/share. This marked the 44th year of consecutive annual dividend increases for this dividend aristocrat.

"Today's dividend increase reflects our strong financial position and represents continued confidence in our ability to drive profitable growth and long-term shareholder value while still investing in our people and the business."

During the past decade, McDonald's has managed to increase dividends at an annualized rate of 8.70%.

Between 2009 and 2019, McDonald’s was able to grow earnings from $4.11/share to $7.88/share,

McDonald’s is expected to generate $5.88/share in 2020.

Right now the stock is selling for 38.24 times forward earnings and yields 2.30%. I find the stock to be pricey at the moment. I would love to be able to buy McDonald's at a lower price from here.

Relevant Articles:

- Dividend Growth Investing Principles

- Three Companies Raising Dividends to Shareholders

- Four Dividend Growth Stocks Rewarding Shareholders With Higher Payouts

Morgan Stanley (MS) to acquire Eaton Vance (EV)

Fri, 09 Oct 2020 08:00:03 GMT

Morgan Stanley (MS) announced that they are planning to acquire Eaton Vance (EV) at a premium to the closing price on Wednesday. Eaton Vance shares went up over 48% on Thursday. I am pretty sure this is close to the all-time-highs for Eaton Vance that were reached in early 2018.

Shareholders of Eaton Vance will receive $28.25/share in cash and 0.5833 shares of Morgan Stanely for every share of Eaton Vance that they own. The deal is expected to close by the second quarter of 2021. Before the deal closes, Eaton Vance shareholders are expected to receive a one-time special dividend payment in the amount of $4.25/share.

Eaton Vance closed at $60.65/share. Morgan Stanley closed at $49/share. This means that at current prices, Eaton Vance shareholders will receive a special dividend of $4.25/share, cash in the amount of $28.25/share and 0.5833 shares of Morgan Stanley worth $/28.58/share. This comes out to a total of $61.08/share. There may be a few regular dividends in between today and the closing of the deal. At the current rate of 37.50 cents/share, that could be 75 cents if you get two payments.

I have a position in Eaton Vance, both for my personal account and for the premium newsletter I write.

While many folks focus on dividend cuts as risks, acquisitions are another risk to be aware of in a long-term portfolio. They may be as likely as cuts over the long term for a diversified portfolio consisting of quality companies. The risk with acquisitions is that while you get a big premium to get the shares taken from you, you may also be robbed of any future potential that the business would have generated on its own.

Each Eaton Vance share generates $1.50 in annual dividends. Eaton Vance is a dividend champion with a 39 year history of annual dividend increases. Check my last analysis of Eaton Vance (EV) for more information about the company.

As part of my approach, I have learned to be as passive as possible when it comes to investments. This means that when I buy a stock, I will hold it for as long as the dividend is at least maintained. I sell after a dividend cut or suspension. If a stock is acquired for cash, I have to sell.

In the case of Eaton Vance, I will not make any elections of whether I want stock or cash, I will go with the default election.

Let's walk through a situation where I do nothing.

This means that I would likely shares of Morgan Stanley (MS) and some caash when the acquisition closes around the end of first half of 2021. I am not sure if I would receive fractional shares in Morgan Stanley as a result of the acquisition - It is possible that they would be paid in cash instead. I am going to wait and see if Eaton Vance continues paying the regular dividends until the deal closes.

I would continue reinvesting Eaton Vance dividends received in the meantime however. This includes the regular dividend and the special dividend. Many brokers would not reinvest the cash amount received, so that would likely be invested in the best investments in 2021. Let's hope we are all well, and able to participate. It is also likely that at that time, my broker TD Ameritrade may have migrated my brokerage account to Schwab.

Morgan Stanley (MS) is a financial holding company which provides various financial products and services to corporations, governments, financial institutions, and individuals in the Americas, Europe, the Middle East, Africa, and Asia. It has been on an acquisition spree recently, acquiring ETrade, and now wanting to acquire Eaton Vance. Morgan Stanley is trying to get into more fee based assets, in order to better compete in todays financial markets. It pays an annual dividend of $1.40/share. It has increased dividends for 7 years in a row - it cut dividends in 2009 during the Global Financial Crisis.

Morgan Stanley yields 2.85%, while Eaton Vance yields 2.50%. This deal may actually increase the dividend income from the remaining shares of Eaton Vance.

The problem with doing nothing however is that this action would increase my fees, when the deal closes some time in 2021. That's because TD Ameritrade has a $38 reorganization fee. Other brokers like Etrade have the same fee, while others like Sogotrade may have a $50 fee. I am pretty confident that this fee would be charged when the deal is completed, and the shares of Eaton Vance are cancelled, and replaced with cash and shares of Morgan Stanley in my account. That's a pretty steep fee for a position. If I was using another broker that didn't charge this fee, I would have likely done nothing. Hence, it is good to check for any hideen fees from your brokerage house. I have been charged this fee by Etrade, when Shire was acquired by Takeda a few years ago. Since commissions are zero today, the best course of action would be to sell. When you keep investment costs low, this leaves more money working for you as an investor.

I just have to decide how I am going to replace the dollars/shares of Eaton Vance. I do have over half an year to decide of course. In the meantime, it is possible that a bidding war could emerge for Eaton Vance, which may increase the price even higher. It is also possible that we get increased volatility in the stock market, and Morgan Stanely is unable to complete this acquisition for one reason or another. If I sell today, I would have a long-term capital gain.

This is perhaps why it is best to invest through a retirement account such as a Roth IRA account for example, in order to minimize the tax drag on dividends and capital gains. Since I may not be eligible to contribute in a Roth IRA every single year until I reach this portfolio objectives, I am using a tax account. If I keep my personal income low through legal means, I may not have to pay taxes on the proceeds and dividends however. Personal tax situations are personal, hence I seldom discuss them here.

So today, I am not going to do anything. I would have personally done nothing, until the deal closes.

Sadly, my broker would charge me $38 when the deal closes, which is too much in my opinion. If this position was in the hundreds or thousands of shares, it would have made sense. If there was no reorganization fee, I would have not done anything. As it is not, I would very likely sell the stock at some point between tomorrow and June 2021. I would keep reinvesting Eaton Vance dividends however in the meantime. If they stop paying the regular dividend, I would sell the stock pretty much right away.

Historically, Eaton Vance raises dividends every October, so I was expecting an action by early next week. Let's sit back and see what happens.

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Dividend Growth Investing Principles

Thu, 08 Oct 2020 08:00:02 GMT

We have had some new readers join the Dividend Growth Investor website. As a result, I wanted to discuss briefly what Dividend Growth Investing is all about.

The basic premise of dividend growth investing is that companies that grow earnings can grow dividends over time, and can see increases in intrinsic values over time. Add in the power of reinvested dividends, and you have a decent picture of what to expect.

When you are paid a rising dividend to hold onto a stock, you can afford to be patient. You can sit out any temporary weakness, or situations where the valuation is stretched out for a while.

This is quite obvious when you review long-term charts of dividend kings such as Johnson & Johnson (JNJ) and Procter & Gamble (PG).

You can see that in the case of Procter & Gamble, the company has generally managed to grow earnings per share for decades, since 1970.

Procter & Gamble has been able to grow its dividend for 64 years in a row. The last 50 of those years are visible in the chart above. That dividend growth was possible only because the company has a solid line-up from products, which face demand that is somewhat immune from recessions. In addition, the company has a durable moat, stable cash flows and had a lot of factors going for it. It had a long runway ahead of it, and a line-up of products that were not going to be made obsolete by technology. They were going to be aided by technology.

You can see however, that there were times when the share price went nowhere for extended periods of time. That was despite the fact that earnings per share and dividends per share grew during those times. A few notable examples to focus on include 1972 - 1985 and 2000 - 2012. The reason for these periods is that the share price got ahead of itself for a while, so it took a few years to correct the imbalance. Share prices oscilate above and below intrinsic value. By the time of maximum pessimism, the pendulum swings to undervalued. At the time of maximum optimism, the pendulum swings to overvalued. Some great investors like Warren Buffett may be able to sell above intrinsic value and buy below intrinsic value. For the mere mortals like you and me, the best course of action is to buy and hold, and sit patiently, while collecting a rising stream of dividend payments. This is your fair share of the company earnings. This is your incentive to hold on to your shares as a long-term shareholder. Trading in and out of a stock is usually going to cost you, lead to frustrations, and lead you worse off than simply doing nothing.

While the intrinsic value of the business grew steadily, the share price did not grow steadily in lockstep each year. This is where new investors need to learn that equities do not just generate 10%/year every single year. There may be long periods of time with no or low returns, which test everyone's patience. During these periods of time, everyone starts questioning if buy and hold investing even works.

By the time the weakest hands have sold, because they became discouraged from hearing bad news about the company they owned, the price starts reverting back to intrinsic value, turbocharging returns for the patient shareholders. This reminder should help you avoid the temptation to sell, because the amount and timing of capital gains is very uncertain and sporadic. As you can see from the chart above however, dividend income is more stable and dependable than share prices.

In general, a Dividend Growth Stock is a company that has managed to grow dividends for a certain number of consecutive years. I look for ten consecutive years of annual dividend increases , but sometimes I look for 25 years, while other times I can live with a 5 year streak of annual dividend increases. It depends on the company.

The basic model is that a company can afford to grow dividends because it generates more free cash flows that it knows what to do with. Such a company usually has a strong business model, a moat or is riding some long-term trend. Either way, that streak of consecutive annual dividend increases is an indication of a quality business with growing earnings, which should be researched further.

I view dividends as a signal from management, which shows me their confidence in the near term and long-term prospects of the business. A company that can afford to grow dividends, shows me confidence in the near term business prospects. This is valuable information that things are going according to plan, particularly for a company with a long track record of annual dividend increases.

However, if management is just growing dividends, while earnings are flat or not rising, this is a warning sign. That’s because without earnings growth, future dividends have a natural limit. Ultimately, flat earnings and rising payout ratios increase the risk of a dividend cut.

A company that cannot grow dividends usually serves as a warning sign that not everything is going according to plan. A lot of companies go through changes in the business model, economic environment or competition, which is why a dividend freeze is something that can be expected at some point. If this comes from a company with a long history of annual dividend increases, this shows that something is not working as expected. As an investor, I want the company that delivers rising earnings, rising dividends and rising intrinsic value over time. If I do not see that any more, I would likely keep the investment for the time being, but allocate new money and dividends elsewhere.

A company that ends up cutting or eliminating its dividend shows me that things have changed for the worse, and that it cannot afford a dividend any more. Usually this happens when the business is at risk, and it needs all financial resources available for survival. While the odds of reinstating the dividend and the business going under are perhaps equal, I see this as a change in fundamentals. I invest to see one outcome, following my thesis that things go up gradually over time. If they do not, and I am proven wrong, this shows me that my thesis was incorrect. If my thesis no longer holds, I sell a stock. Usually, I sell after a dividend cut or suspension. Most other reasons to sell have been a mistake. When things change and I receive information about this material change, I change my mind. Selling after a dividend cut is helpful, because quite often investors may fall in love with a stock, and fail to see objectively that the company is no longer the cash flow generating machine it once was. A dividend cut is a wake up call that the thesis has changed, so a course revision may be necessary.

When discussing dividends, investors often tend to view them either as great or terrible. In reality, things are much more nuanced.

There are two or three major types of companies. The first type includes companies that can reinvest all of their earnings at a high rate of return in the business, which can translate into high earnings growth over time. A lot of these companies do not pay dividends, because they reinvest everything back into the business. The problem with this approach is that a lot of these companies may hit a ceiling point, at which it would be difficult to find projects to reinvest all earnings at a high rate of return. As a result, once the company hits that ceiling, they start distributing dividends. No company in the history of the world has ever been able to reinvest all earnings back into the business at a high rate of return for extended periods of time. The ones that may have done it, have been more of an outlier than a trend.

The second type includes companies that generate a lot of excess cash flows, and they may not need all of that money to be reinvested into the business, in order for it to grow. Usually, these are companies in mature, slow growth industries. They can grow slowly over time, but only need a small fraction of earnings to reinvest back into the business. There is a natural limit to how much more capital can be productive put back into the business at a high rate of return. You may recall Warren Buffett’s discussion of his investment in See’s Candies, which generated over $2 billion in profits between 1972 and 2007, and needed an increase in working capital from $8 to $40 million during the same time period. They managed to grow slowly over time by raising prices, increasing productivity, eliminating waste from the system. While growth was slow, the company still managed to generate a lot of income over time.

There are various stages for dividend growth companies. The companies that are in the initial phase of paying and growing a dividend may have a lower payout ratio, but manage to grow the distribution faster than earnings per share, up until they hit a certain target payout ratio. Other companies are in a more mature phase, hence their dividend growth and earnings growth are fairly similar. A third group is in the decline phase, and they have been unable to grow earnings, which means dividends are at risk.

There are also various types of companies depending on their payout ratios and dividend growth trajectories.

Some companies have high yields, pay a large portion of earnings, but grow distributions at a low rate. Some utilities, telecom companies, REITs and tobacco companies are in this group.

Other companies are in the sweet spot, with average yields and average dividend growth. Companies like Johnson & Johnson, Procter & Gamble and PepsiCo fit this bill.

A third group of companies has a lower dividend payout ratio, but they have higher growth expectations. A few examples include Visa, United Technologies and Cintas.

There may be a third type of companies, which cannot afford to pay a dividend. That could be because they cannot earn a profit or they need to reinvest all profits to stay competitive, without a corresponding impact on their profitability and intrinsic value.

Now that you have a general idea of dividend growth investing, I wanted to mention briefly that a long streak of dividend increases is usually an indication of a quality business with a business model that needs to be researched further by the enterprising dividend investor.

This analysis should include a qualitative, and a quantitative evaluation of the business. A qualitative evaluation would look at brands, moats, the competitive environment and likelihood for future growth/strategy. A quantitative evaluation should look at trends in earnings, dividends, payout ratios, revenues, return on capital, and capital allocation. It is imperative that the investor understand the business. Otherwise, they would be unable to get the conviction to buy and to hold on to it if things get tough.

It is very important to acquire a quality business at a very good valuation. If you overpay for a business, you may end up sitting at an unrealized loss or a small gain for years, even if the business grows revenues, earnings and dividends. If you overpay for a business, your dividend income would be smaller than a situation where you buy that business at a more adequate valuation. As you saw in the chart above, overpaying for Procter & Gamble in 1972 led to seeing the capital value of your investment go down substantially, before recovering and breaking even by 1985. The only return you received was from dividends. I doubt that many investors would be willing to sit for 13 years with little to show for it. Only a patient investor would have enjoyed receiving more in dividends, despite gloom and doom. When you overpay for a stock, you should be willing to sit out any overvaluation and not earn returns for a few years, before breaking even. It may or may not be worth for you to overpay for future growth that could take up to a decade to resolve itself. If you are patient enough, and plan to hold for 40 years, it won't matter at the end. If you are impatient, and want instant gratification, you may end up selling low and destroying capital and future compounding potential.

Today we discussed a simple mental model called Dividend Growth Investing. With this strategy, you have a quality company that grows earnings, and raises dividends regularly for a long period of time. This growth in earnings and dividends typically leads to growth in intrinsic value. Reinvestment of dividends also increases net worth for the investor. This long streak of dividend increases is the quality factor that piques the interest of the enterprising investor, who places the company on their list for research, before deciding if the business, the fundamentals and the valuation are right for their portfolio.

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