Dividend Growth Investor

How I Would Invest A Lump Sum Today

Thu, 25 Feb 2021 09:00:02 GMT

One of the most common questions I receive relates about the idea of how to invest a lump-sum amount. I believe that the answer is not a one sized fit all approach. I also believe that the answer for the same person may vary from time to time.

In general, there are pros and cons to each approach. If you look at the historical data, it makes sense to invest money as soon as possible. The stock market usually goes up most of the time, and when you invest, you get to enjoy receiving dividends and the opportunity for capital gains. Of course, this approach assumes that past performance is an indication of future results – this is the warning below each investment that is discussed. The future cannot be forecasted, so in theory, any historical data is not going to be a bulletproof way for future riches.

Either way, the lump sum investing approach also uses the common-sense theory that since no one can predict the future, it makes sense to invest right away. If you do not invest right away, then you are engaging in timing the market.

To put more support behind lump-sum investing, if you have the money to buy 100 shares of Johnson & Johnson today, you get to enjoy the right to $404 in future annual dividends from the start. That’s much better than waiting in cash, and earning a lower level of interest income. (taxed at worse rates as well).

The longer you sit in cash, putting off investing in a stock, the more future dividend income you are missing out on. So perhaps, as long as the valuation is not ridiculous, it may make sense to invest as soon as one has the cash. That assumes that this investor will continue buying even during the next bear market or two, and even after securities fall by 20% - 50% or more. It assumes that the investor will not sell in panic, merely because the stock price is lower.

If you are more risk averse, it may make sense to wait before you invest. Some readers spread the money over a certain period of time. They do so in order to avoid the risk of putting everything at the highest point, only to see a 40% - 50% loss, dividend cuts etc. I believe that if that approach works for the risk tolerance of these investors, it is preferable to them trying to wait for a bear market for several years, while they are waiting in cash for a crash. At least with the dollar cost averaging approach, they have a plan in action to conquer their fears. An imperfect plan you can stick to is much better than not having a plan in place. The downside to that plan however is that you may be missing out on dividend income, and the potential for future appreciations, because you are sitting in cash for a decent chunk of time. To put it in other words, if you plan to own 100 shares of Johnson & Johnson that pay $4.04 in dividends, and have the money to do it, you miss out on $404 in annual dividends by sitting in cash.

Both of those examples are looking at money that is earmarked for long-term investment. If you need money within the next 1 – 3 years for a major expense such as a down payment on a house, a health issue, a car or college, it makes sense to keep the money in cash/fixed income. If you have a large credit card debt, you are better off paying it off in full, before starting to invest in equities.

Depending on your risk tolerance, it may make sense to de-risk by paying off your mortgage. The downside of course is that you may miss out on future dividends and appreciation by doing so – just ask anyone who paid off their mortgage between 2010 and 2014. The upside is that you will get a totally different perspective for someone who paid off their mortgage in 1999 - 2000, and missed out on the bear market from 2000 - 2003.

I have thought a lot about the topic, and my opinion has shifted over the years. I went from being risk-averse to slightly less so. But If get a large enough lump-sum amount, I would most likely invest it right away. If I were a reader of my newsletter, I would likely put the money in an equally weighted portfolio of all companies in the portfolio. I would of course keep costs to the bone, and invest preferably in a tax-advantaged account. Either way, I would continue investing in the companies I identify every month afterwards. The weights may be different, if we for example put $50,000 in the 50 or so companies in the portfolio today, and then put $1,000/month in ten companies for several months. Over the course of the next 5 – 10 years however, things will work themselves out of this initial lopsided situation.

While some companies appear to have stopped growing dividends, others seem to have reduced the rate of dividend growth, while a third group may appear overvalued, I believe that after a long period of time, (e.g. ten years), the investor may be better off investing right away and holding, than sitting in cash waiting for the right pitch. This opinion may have been influenced by the relentless rise of equity prices over the past decade however too. My earlier experiences in 2007 – 2009 showed me that it pays to wait before you invest, despite the data showing me that under most scenarios it has historically paid to invest right away. The issue of course has always been that past performance is not an indication for future results. The other issue is that your personal situation may vary from the averages due to skill or luck. Speaking of personal experiences being different than averages, at the beginning of the decade, I had a colleague who went into a surgery that supposedly had a 98% success rate. Unfortunately, he turned out to be of the unlucky 2% and perishing at the tender age of 27. He was one day older than me. Fate can be a tricky thing.

Alternatively, one could also put the money on an equally weighted scale in the 30 members of the Dow Jones Industrials Average or Dividend Aristocrats or Dividend Champions if they had a lump sum.

If I invest right away, I get to enjoy dividends right away. If share prices decline after my investment, I will just use the dividend cash to acquire more shares that pay more dividends. I have come to believe that timing the markets is a fruitless endeavor. Certain decisions such as waiting to invest are a way of market timing. I invest my money regularly whenever I have cash to invest, so I do not see a reason not to do that with lump sum amounts too.

Thank you for reading!

Relevant Articles:

- Should I buy dividend stocks now, or accumulate cash waiting for lower prices?

- Dividend Investors: Stay The Course

- How to invest a lump sum

- Dollar Cost Averaging Versus Lump Sum Investing

Fifteen Companies Rewarding Shareholders With a Raise

Mon, 22 Feb 2021 12:59:08 GMT

I review the list of dividend increases as part of my monitoring process. This process helps me review how the companies I own are doing. It also helps me identify companies for further research.

For this weekly review, I tend to focus my attention on companies with at least a ten year history of annual dividend increases, which also raised dividends last week. I provide a quick overview of each company that includes the amount of the most recent dividend increase, and compares it to its recent historical record. I also review the streak of annual dividend increases, and review earnings and valuation information.

Over the past week there were fifteen companies that raised dividends, and have a ten year history of annual dividend increases. The companies include:

The Coca-Cola Company (KO) is a beverage company that manufactures, markets, and sells various nonalcoholic beverages worldwide.

Coca-Cola hiked its quarterly dividend by 2.43% to 42 cents/share. This marked the 59th year of consecutive annual dividend increases for this dividend king. Over the past decade, the company has managed to grow dividends at an annualized rate of 6.40%.

The company is expected to earn $2.14/share in 2021.

The stock is not cheap at 23.69 times forward earnings, given the lack of earnings growth and the slowing dividend growth. It does offer a dividend yield of 3.31%, but the payout ratio is high at 78.50%.

Walmart Inc. (WMT) engages in the retail and wholesale operations in various formats worldwide. The company operates in three segments: Walmart U.S., Walmart International, and Sam's Club.

Wal-Mart hiked its quarterly dividend by 1.85% to 55 cents/share. This marked the 48th consecutive year of dividend increases for this dividend aristocrat. It also marked the 8th consecutive year of 2% dividend increases for Wal-Mart Stores. Over the past decade, the company has managed to grow dividends at an annualized rate of 6.20%.

The company is expected to earn $5.60/share in 2021

The stock is selling for 24.59 times forward earnings and yields 1.60%. I don’t think it offers a good value, given the high valuation, and low growth and yield.

The Sherwin-Williams Company (SHW) develops, manufactures, distributes, and sells paints, coatings, and related products to professional, industrial, commercial, and retail customers. It operates in three segments: The Americas Group, Consumer Brands Group, and Performance Coatings Group.

The company raised its quarterly dividend by 23.13% to $1.65/share. This increase follows 42 consecutive years of dividend increases for this dividend aristocrat. The company has managed to grow dividends at an annualized rate of 14% over the past decade.

The company is expected to earn 27.07/share in 2021.

The stock sells for 26.85 times forward earnings and yields 0.91%. It would be nice if there was a dip below $600/share for this boring paint company.

Nestle S.A. (NSRGY) operates as a food and beverage company. The company operates through Zone Europe, Middle East and North Africa; Zone Americas; Zone Asia, Oceania and sub-Saharan Africa; and Nestle Waters segments.

The company raised its annual dividend to 2.75 Swiss Francs per share, which is a 1.85% increase over the previous annual payment. This marked the 26th consecutive annual dividend increase for this international dividend aristocrat. The company has managed to hike dividends at an annualized rate of 3.70%/year over the past decade.

The stock is selling for 22.31 times forward earnings and yields 2.80%.

British American Tobacco p.l.c. (BTI) provides cigarettes and other tobacco products worldwide.

The company raised its quarterly dividend by 2.50% to 53.90 British Pence/share. This comes out to an annualized payment of 2.156 British Pounds. For reference, in 2011 the company paid an annual dividend of 1.191 British Pounds/share.

Genuine Parts Company (GPC) distributes automotive replacement parts, industrial parts and materials, and business products in the United States, Canada, Mexico, Australasia, France, the United Kingdom, Germany, Poland, the Netherlands, and Belgium.

The company raised its quarterly dividend by 3.16% to 81.50 cents/share. This marked the 65th year of consecutive annual dividend increases for this dividend king. During the past decade, GPC has managed to grow dividends at an annualized rate of 6.80%.

The company is expected to earn $5.72/share in 2021.

The stock is selling for 17.66 times forward earnings and yields 3.23%.

Omnicom Group Inc. (OMC) provides advertising, marketing, and corporate communications services.

The company raised its quarterly dividend by 7.69% to 70 cents/share. This would mark the 12th year of consecutive annual dividend increases for this dividend achiever.

During the past decade, the company has managed to increase distributions at an annualized rate of 13.20%/year. The rate of dividend growth has been dropping in recent years, as the company skipped a dividend increase in 2020. If Omnicom had not raised dividends in 2021, it would have lost its track record of annual dividend growth.

The company is expected to earn $5.59/share in 2021.

The stock sells for 11.94 times forward earnings and yields 4.19%. It is cheap, but traditional advertising industry is facing some headwinds.

Telephone and Data Systems, Inc. (TDS) is a telecommunications company, provides communications services in the United States. It operates through three segments: U.S. Cellular, Wireline, and Cable.

The company raised its quarterly dividend by 2.94% to 17.50 cents/share. This is the 47th year of consecutive annual dividend increases for this dividend champion.

The company has a 10 year growth rate of 4.18% annualized.

The stock is selling for 15 times forward earnings and yields 3.45%.

Extra Space Storage Inc. (EXR) headquartered in Salt Lake City, Utah, is a self-administered and self-managed REIT and a member of the S&P 500.

The REIT hiked its quarterly dividend by 11% to $1/share. This marked the 11th consecutive annual dividend increase for this dividend achiever. Extra Space Storage has a ten year dividend growth rate of 24.60% annualized.

The stock is selling for 23.11 times FFO and yields 3.38%

Humana Inc. (HUM) operates as a health and well-being company in the United States. It operates through Retail, Group and Specialty, and Healthcare Services segments.

The health insurer hiked its quarterly dividend by 12% to 70 cents/share. This marked the 10th year of consecutive annual dividend increases for this newly minted dividend achiever. Humana has managed to grow annual dividends at an annualized rate of 16.30% over the past 5 years.

The stock is selling for 17.55 times forward earnings and yields 0.74%.

Essex Property Trust, Inc. (ESS) is a fully integrated real estate investment trust (REIT) that acquires, develops, redevelops, and manages multifamily residential properties in selected West Coast markets.

This REIT hiked its quarterly dividends by 0.60% to $2.09/share. This marked the 27th consecytive annual dividend increase for this dividend champion. Over the past decade, this REIT has managed to raise dividends at an annualized rate of 7.10%.

The stock sells for 21.09 times FFO and yields 3.16%.

Xcel Energy Inc. (XEL) generates, purchases, transmits, distributes, and sells electricity. It operates through Regulated Electric Utility, Regulated Natural Gas Utility, and All Other segments.

Xcel Energy raised its quarterly dividend by 6.40% to 45.75 cents/share. This marked the 18th consecutive annual dividend increase for this dividend achiever. During the past decade, the company has managed to increase distributions at an annualized rate of 5.50%.

The company is expected to earn $2.98/share in 2021.

The stock is selling for 20.92 times forward earnings and yields 2.94%.

Analog Devices, Inc. (ADI) designs, manufactures, tests, and markets integrated circuits (ICs), software, and subsystems that leverage analog, mixed-signal, and digital signal processing technologies.

The company managed to increase dividends by 11.29% to 69 cents/share. This marked the 19th year of consecutive annual dividend increases for this dividend achiever. Over the past decade, the company has managed to grow dividends at an annualized rate of 11.20%.

Analog Devices is expected to earn $6.02/share in 2021.

The stock is selling at 26.25 times forward earnings and yields 1.75%.

Public Service Enterprise Group Incorporated (PEG) operates as an energy company primarily in the Northeastern and Mid-Atlantic United States. It operates through two segments, PSE&G and PSEG Power.

The company raised its quarterly dividend by 4.08% to 51 cents/share, marking the tenth year of consecutive annual dividend increases. Over the past decade, this company has managed to grow dividends at an annualized rate of 3.75%.

The company is expected to earn $3.42/share in 2021.

The stock sells for 17.08 times forward earnings and yields 3.49%.

Jack Henry & Associates, Inc. (JKHY) provides technology solutions and payment processing services primarily for financial services organizations in the United States.

The company hiked its quarterly dividend by 6.98% to 46 cents/share. This marked the 31st year of consecutive annual dividend increases for this dividend champion. Over the past decade, it has managed to increase quarterly dividends at an annualized rate of 16.20%.

The company is expected to earn $3.85/share in 2021.

The stock sells for 39.72 times forward earnings and yields 1.20%.

Relevant Articles:

- Fourteen Dividend Growth Stocks Raising Dividends For Shareholders

- Eight Dividend Paying Companies Growing Dividends Like Clockwork

- Busiest Week For Dividend Increases Ever

- Seven Companies Rewarding Shareholders With a Raise

Warren Buffett's Latest Three New Investments

Wed, 17 Feb 2021 03:24:28 GMT

Warren Buffett does not need any introduction. He is a very successful investor who is in charge of Berkshire Hathaway. He has an impressive track record investing in the stock market and in businesses.

Because of his success, his every move is followed very closely. For example, his holding company Berkshire Hathaway is required to file a report with the SEC once per quarter that shows a listing of its portfolio holdings. You can find the most recent report by clicking on this link to the SEC filing.

It looks like Buffett initiated a position in three dividend growth companies. These are Chevron (CVX), Verizon (VZ) and Marsh & McLennan (MMC). I wanted to provide a brief overview of each company, from the perspective of a dividend growth investor below:

Chevron Corporation (CVX) engages in integrated energy, chemicals, and petroleum operations worldwide. The company operates in two segments, Upstream and Downstream.

Chevron is a dividend aristocrat with a 33 year track record of annual dividend increases. Over the past decade, it has managed to grow dividends at an annualized rate of 6.20%.

The stock is selling for 26.63 times forward earnings and yields 5.58%. I do not believe that the annual dividend of $5.16/share is safe, based on forward earnings of $3.48/share. If oil prices rebound however, it is likely that earnings would grow as well, making Buffett's investment in Chevron smart in hindsight.

Marsh & McLennan Companies, Inc. (MMC) is a professional services company that provides advice and solutions to clients in the areas of risk, strategy, and people worldwide. It operates in two segments, Risk and Insurance Services, and Consulting.

This dividend achiever has managed to increase dividends for 11 years in a row. Marsh & McLennan has managed to grow dividends at an annualized rate of 8.60%/year over the past decade.

The stock is selling for 21.24 times forward earnings and yields 1.65%. The annual dividend of $1.86/share seems adequately covered from forward earnings of $5.31/share.

Verizon Communications Inc. (VZ) offers communications, information, and entertainment products and services to consumers, businesses, and governmental entities worldwide. This dividend achiever has managed to increase dividends for 16 years in a row. Over the past decade, Verizon has managed to grow dividends at an annualized rate of 2.60%.

The stock is selling for 10.69 times forward earnings and yields 4.63%.

Buffett's company also made other moves, including the complete exit from the following positions (meaning he sold all the shares that his holding company owned)

- Pfizer (PFE)

- M&T Bank Corp (MTB)

- PNC Financial Services (PNC)

- JPMorgan Chase & Co (JPM)

- Barrick Gold Corp (GOLD)

You can view a complete listing of the changes below:

Source: Dataroma

I am interested in the fact that he is adding to Abbvie (ABBV), Bristol Myers Squibb (BMY) and Merck (MRK), which are attractive values in today's market.

Abbvie (ABBV) is a dividend aristocrat with a 48 year track record of annual dividend increases. It has managed to grow dividends at an annualized rate of 18.50% during the past five years. Abbvie sells for 12.38 times forward earnings and yields 4.98%.

Bristol-Myers Squibb (BMY) is a dividend achiever with a 12 year track record of annual dividend increases. Over the past decade, it has managed to grow dividends at an annualized rate of 3.50%, but this rate has been accelerating in recent years. The stock sells for 8.04 times forward earnings and a dividend yield of 3.27%.

Merck (MRK) has a ten year history of raising dividends and a ten year dividend growth rate of 4.80%. The stock sells for 11.63 times forward earnings and a dividend yield of 3.47%.

I also like the fact that he is buying more Kroger (KR), which in my opinion is a company that is working on transitioning itself to better compete in this new environment. I believe that it has what it takes to survive and thrive in the future. I also believe it offers a good value today as well. Kroger sells for 10.21 times forward earnings and yields 2.12%. The company is a dividend aristocrat with a 15 year track record of annual dividend increases, and a 13.30% rate of annualized dividend growth over the past decade. Check my analysis of Kroger for more information about the company.

I have not analyzed RH in detail before, so I do not have much to say about it. I do understand T-Mobile (TMUS), and think that it is a very competitive telecom company in the US telecom sector. While it has not paid a dividend since going public earlier last decade, it has outmaneuvered its competitors, acquired Sprint, and is positioned very well to benefit from an increasingly concentrated oligopoly.

Twelve Dividend Growth Stocks Raising Dividends For Shareholders

Mon, 15 Feb 2021 09:00:04 GMT

In my monitoring process, I tend to analyze companies I own once every 12 to 18 months. However, I also receive push notifications such as annual reports, quarterly press releases, dividend increase notifications. Since most companies I focus on are major multi-national corporations, if they do something significant, it makes the business news.

I review the list of dividend increases every week, as part of my monitoring process. I focus on the companies with at least a ten year history of annual dividend increases, in order to reduce noise.

This process is helpful in monitoring how existing holdings are doing. It is also helpful in uncovering companies for future research.

Auburn National Bancorporation, Inc. (AUBN) operates as the bank holding company for AuburnBank that provides various banking products and services in East Alabama.

The company raised its quarterly dividend by 2% to 26 cents/share. This marked the 20th year of annual dividend increases for this dividend achiever. Over the past decade, the company has managed to increase dividends at an annualized rate of 2.70%.

Between 2010 and 2020, the company managed to grow earnings from $1.47/share to $2.09/share

The company sells for 18.80 times earnings and yields 2.65%

Brookfield Asset Management (BAM) is a leading global alternative asset manager and one of the largest investors in real assets.

The company raised its quarterly dividend by 8.33% tp 13 cents/share.

This is the tenth year of consecutive annual dividend increases for this international dividend achiever. Over the past decade, the company has managed to increase dividends at an annualized rate of 9.20%.

The stock yields 1.21%.

CSX Corporation (CSX) provides rail-based freight transportation services.

The railroad hiked its quarterly dividend by 7.69% to 28 cents/share.

This is the 17th consecutive annual dividend increase for this dividend achiever. Over the past decade, the company has managed to increase dividends at an annualized rate of 12.30%.

CSX Corp earned $1.35/share in 2010, and managed to grow profits to $3.60/share by 2020.

The stock is selling for 20.63 times forward earnings and yields 1.24%.

Eversource Energy (ES) a public utility holding company, engages in the energy delivery business. The company operates in four segments: Electric Distribution, Electric Transmission, Natural Gas Distribution, and Water Distribution.

This utility company raised its quarterly dividends by 6.17% to 60.25 cents/share.

This was the 23rd consecutive annual dividend increase for this dividend achiever. Over the past decade, the company has managed to increase dividends at an annualized rate of 8.30%.

Between 2009 and 2019, the company managed to grow earnings from $1.91/share to $2.81/share.

The company is expected to earn $3.64/share in 2020.

The stock is selling for 23.41 times forward earnings and yields 2.83%.

NextEra Energy, Inc. (NEE) generates, transmits, and distributes electric power in North America.

NextEra increased its quarterly dividend by 10% to 38.50 cents/share.

This marked the 26th year of annual dividend increases for this dividend aristocrat. Over the past decade, the company has managed to increase dividends at an annualized rate of 10.80%.

The company earned $1.15/share in 2011 and is expected to earn $2.52/share in 2021.

The stock is selling for 33 times forward earnings and yields 1.85%.

Nu Skin Enterprises, Inc. (NUS) develops and distributes personal care and wellness products worldwide. NuSkin raised its quarterly dividend by 1.33% to 38 cents/share.

That was the 21st year of consecutive annual dividend increases for this dividend achiever. Over the past decade, the company has managed to increase dividends at an annualized rate of 11.60%.

Between 2009 and 2019, the company managed to grow earnings from $1.40/share to $3.10/share. Nu Skin Enterprises is expected to earn $3.99/share in 2020.

The stock is selling for 12.24 times forward earnings and yields 3.11%.

NorthWestern Corporation (NWE) provides electricity and natural gas to residential, commercial, and industrial customers. The company operates through Electric Operations and Natural Gas Operations segments.

NorthWestern raised its quarterly dividend by 3.33% to 62 cents/share.

This was the 17th year of annual dividends increases for this dividend achiever. Over the past decade, the company has managed to increase dividends at an annualized rate of 5.80%.

Between 2009 and 2019, the company managed to increase earnings from $2.02/share to $3.98/share.

NorthWestern is expected to earn $3.51/share in 2021.

The stock is selling for 12.24 times forward earnings and yields 3.11%

Primerica, Inc. (PRI) provides financial products to middle income households in the United States and Canada. The company operates in three segments: Term Life Insurance; Investment and Savings Products; and Corporate and Other Distributed Products.

The company raised its quarterly dividend by 17.50% to 47 cents/share.

This marked the 12th year of annual dividend increases for this dividend achiever. Over the past decade, the company has managed to increase dividends at an annualized rate of 55%.

The company is expected to earn $11.05/share in 2021.

The stock is selling for 12.83 times forward earnings and yields 1.33%.

Robert Half International Inc. (RHI) provides staffing and risk consulting services in North America, South America, Europe, Asia, and Australia. The company operates through three segments: Temporary and Consultant Staffing, Permanent Placement Staffing, and Risk Consulting and Internal Audit Services.

The company raised its quarterly dividends by 11.76% to 38 cents/share.

This was the 18th year of consecutive annual dividend increases for this dividend achiever. Over the past decade, the company has managed to increase dividends at an annualized rate of 10.10%.

Between 2010 and 2020, the company managed to increase earnings from 44 cents/share to $2.70/share. The company is expecting to earn $3.35/share in 2021.

The stock is selling for 22 times forward earnings and yields 2.06%.

Sonoco Products Company (SON) manufactures and sells industrial and consumer packaging products in North and South America, Europe, Australia, and Asia. The company operates through four segments: Consumer Packaging, Display and Packaging, Paper and Industrial Converted Products, and Protective Solutions.

The company raised its quarterly dividend by 4.65% to 45 cents/share.

That was the 39th year of annual dividend increases for this dividend champion. Over the past decade, the company has managed to increase dividends at an annualized rate of 4.50%.

The company earned $2.13/share in 2011 and is expecting to earn $3.54/share in 2021.

The stock is selling for 16.90 times forward earnings and yields 3%.

T. Rowe Price Group, Inc. (TROW) is a publicly owned investment manager.

The company raised its quarterly dividend by 20% to $1.08/share.

This marked the 35th consecutive annual dividend increase for this dividend aristocrat. Over the past decade, the company has managed to increase dividends at an annualized rate of 12.80%.

Between 2010 and 2020, the company has managed to grow earnings from $2.53/share to $9.98/share.

The company is expected to earn $11.98/share in 2021.

The stock is selling for 13.70 times forward earnings and yields 2.65%.

United Parcel Service, Inc. (UPS) provides letter and package delivery, specialized transportation, logistics, and financial services. It operates through three segments: U.S. Domestic Package, International Package, and Supply Chain & Freight.

UPS raised its quarterly dividend by 1% to $1.02/share.

That’s the 12th consecutive annual dividend increase for this dividend achiever. Over the past decade, the company has managed to increase dividends at an annualized rate of 7.90%.

The company earned $3.84/share in 2011, and is projected to earn $8.92/share in 2021.

The stock is selling for 18.32 times forward earnings and yields 2.50%.

Relevant Articles:

- Busiest Week For Dividend Increases Ever

- Seven Companies Rewarding Shareholders With a Raise

- How to read my weekly dividend increase reports

- Dividends Offer an Instant Rebate on Your Purchase Price

My Bet with Buffett - Year Three Results

Thu, 11 Feb 2021 09:00:01 GMT

Back in 2017, I made a bet with Warren Buffett and my friends Carl over at 1500Days and Ben at Suredividend. Buffett does not know that I made a bet with him however.

This bet was inspired by Buffett's now famous bet with a Hedge Fund manager. The bet was that no hedge fund manager can do better than investing in S&P 500, because of their high fees. Needless to say, Buffett won the bet, and donated the proceeds to charity.

Inspired by Buffett's bet, I did my own bet with Carl. I am afraid that Buffett is unaware of this high stakes bet, but I wanted to proceed with it for educational purposes.

A lot of people do not understand the reason why Buffett won the bet with the hedge fund manager.

The reason the hedge funds failed the bet is because of their huge fees. A typical hedge fund charges a 2% annual fee on assets under management plus 20% of profits earned on the investment. These fees serve as a huge drag on performance.

Historically, a diversified stock portfolio has earned a total return of 10%/year. This figure includes dividends and capital gains. If you paid a hedge fund manager to earn than return for you however, you would have to subtract 2% for their recurring fee and 2% for their performance fee. The performance fee is calculated by taking the the 10% return, and multiplying it by 20%. This means that you would lose abut 40% of your returns to hedge fund fees, each year, and that's before taxes. In order for the hedge fund manager to generate a return of 10%/year after fees, they would have to outperform S&P 500 by over 4%/year and earn over 14%/year.

This is incredibly difficult to achieve in the long run, as few investors have been able to do that.

Check chart below on the performance of the best investors and the length of their great performance:

In a previous article (Keeping Investment Fees Low Matters), I discussed how these excessive hedge fund fees rob investors of their returns, even if the hedge were to do very well. The problem is that most of these excess returns would go to the hedge fund, rather than the investors who are taking all the risk and coming up with all the capital. Investor Terry Smith had calculated that If you had invested $1,000 in Berkshire Hathaway in 1965, your investment would be worth $4.3 million by 2009. Buffett’s company compounded your capital at 20.46%/year.

If Warren Buffett had set up Berkshire Hathaway as a hedge fund however, he would have charged you 2% per year and gathered 20% of any annual gains. If you had the same performance numbers, your $1,000 would have only grown to $396,000 by 2009. Only $396,000 would belong to you, the investor. This means that of the $4.3 million that you would have earned without fees, $3.9 million would belong to the hedge fund manager. This of course is the result if your hedge fund manager had a performance that is as great as Warren Buffett’s. Most hedge funds do not generate good returns for investors. They only generate good returns for the hedge fund managers, because of their outrageously high fees.

That brings me back to my bet with Buffett and Carl.

I believe that noone knows in advance what the best performing investment over the next decade would be. You can control what you invest in however, your costs, your behavior.

I am doing this bet to educate investors, who may have a lot of misconceptions about things.

If you choose an investment that is different than another investment, their results will vary over time. If you chose a portfolio of international companies, I would do better or worse than a portfolio of US companies. So if I choose a portfolio of 30 companies, I may end up doing better or worse than a portfolio of 500 companies. We do not know which portfolio would do better in advance. All we can do is keep costs low, keep turnover low and stay invested.

At the end of the day, you have to pick investments that you will be able to stick to through thick or thin. Whether it is a collection of stocks picked by an index, or a collection of stocks picked by you, you have to be a picker and make a choice. When index investors pick US index fund over International index funds, they refer to it as asset allocation. If I chose to own more US stocks over international stocks, they call it stock picking. You can see that index investors are indeed stocks pickers, whether they admit it or not.

Many index investors view the selection of your own stocks as active, while their selection of an index fund as passive investing. Yet by engaging in an active decision to own US or International stocks, or go the route of slicing and dicing funds by market capitalization and value/growth criteria, they are engaging in stock picking as well.

The nice thing about owning stocks directly is that you can afford to do nothing, and have a very low turnover and a very low cost. With index funds, you have forced turnover for various reasons, including an indexing committee actively deciding whether to add or remove a security. This may increase direct costs, and opportunity costs as well.

Back at the end of 2017 I decided to test my assumptions and knowledge, and select a group of companies that would do better than S&P 500 during the next decade. I essentially made a bet that the passive list of companies in the Dow Jones Industrials average as of December 2017 would do better than the active list of the companies in the S&P 500. At the end of the day, this portfolio is more passive than the passive index S&P 500.

Before we go any further I just wanted to tell you that Carl is winning this bet so far. He's one of the best investors I know, and he invests in a very different way than I do. His portfolio is up by 73%, while mine is up by 37.98%, vs 48.24% for S&P 500.

Carl is a great stock investor. The problem is that he has allowed to be convinced by others that he is going to be mediocre in the future. As a result, he has been selling stock in companies, and buying index funds with the proceeds. But the stock he has been selling has done much better than the index funds he has been buying. If Carl wins this contest, he may realize that he has squandered millions of dollars in potential returns by selling the best companies in the world, and buying investments that didn't do as well.

My friends at SureDividend had selected The Dividend Aristocrats ETF (NOBL), but it was up by 33.02% since the end of 2017 through the end of 2020.

I calculated these results using the total returns calculator at dividendchannel.com.

For my strategy, I decided to focus on solid blue chips, from a strategy that has been around since 1896.

Basically, I selected the 30 companies from Dow Jones Industrials Average.

I decided to equally weight the companies at start, and to "never sell them". I keep all spin-offs, reinvest all dividends, and keep costs low ( you can achieve that using a commission free brokerage and investing through a retirement account such as a Roth IRA)

This portfolio has been inspired by a few pieces of research I have shared before. You may check the research by clicking on the links below:

The main inspiration behind the idea for this passive portfolio of blue chip companies stems from the concept of the coffee can portfolio.

Stocks that leave the Dow tend to outperform after their exit from the average

My analysis of the Corporate Leaders Trust - A passive portfolio of 35 blue-chip stocks selected in 1935

How investing in the original 500 securities of the S&P 500 index in 1957 actually did better than S&P 500

Wow, that's a lot of words to discuss this idea.

So how did we do in 2020?

The portfolio has generated 37.98% in returns since inception on December 29, 2017. This is lower than the return on S&P 500 for the same period, which was 48.24%. Dow Jones 30 has returned 31.90%.

This is a fun portfolio to calculate, because of the spin-offs.

This year we had United Technologies (UTX) spin--off Otis Elevator and Carrier Global, before acquiring Raytheon (RTN), and changing its name to Raytheon Technologies (RTX).

We also had Pfizer do a spin-off as well.

All of this activity has increased the number of companies in the portfolio to 35, up from 30.

It looks like the best performing company is Apple, while the worst performing company is Exxon.

The companies that had a P/E above 20 in late 2017 have returned 40.31% on average

The companies that had a P/E below 20 in late 2017 have returned 35.66% on average.

It would be interesting to see how this portfolio performs through the end of 2027, which is when this bet is off.

Relevant Articles:

- My Bet With Warren Buffett

- My Bet With Warren Buffett – Year One Results

- My Bet With Warren Buffett - Year Two Results

Eight Dividend Paying Companies Growing Dividends Like Clockwork

Mon, 08 Feb 2021 09:00:06 GMT

As part of my review process, I look at the dividend increases every week. I use the following resources to compile this list, if you are interested to learn more about it.

I tend to narrow my attention down to the companies that have managed to increase dividends for at least ten years in a row. This helps me monitor how my existing investments are doing and also identify some emerging dividend growth success stories early on.

During the past week, there were several companies that managed to raise dividends to shareholders. The companies are listed below:

3M Company (MMM) develops, manufactures, and markets various products worldwide. It operates through four business segments: Safety and Industrial, Transportation and Electronics, Health Care, and Consumer.

The company raised its quarterly dividend by 0.68% to $1.48/share

This marks the 63rd consecutive year 3M has increased its dividend. 3M is a dividend king that has paid dividends to its shareholders without interruption for more than 100 years.

The pace of dividend increases has definitely slowed down in recent years, and is a far cry from the ten year dividend growth rate of 10.84%.

Between 2010 and 2020, 3M managed to boost earnings from $5.63/share to $9.25share. The company is expected to earn $9.61/share in 2021.

The stock seems fairly valued at 18.62 times forward earnings and a dividend yield of 3.30%.

Avista Corporation (AVA) operates as an electric and natural gas utility company. It operates through two segments, Avista Utilities and AEL&P.

The company raised its quarterly dividend by 4.30% to 42.25 cents/share. The dividend increase marks the nineteenth consecutive year of dividend increases for this dividend achiever.

Avista has managed to increase dividends at an annualized rate of 4.94% during the past decade.

Between 2009 and 2019, Avista managed to grow earnings from $1.58/share to $2.97/share. Avista is expected to earn $1.84/share in 2020.

The stock is selling for 20.75 times forward earnings and yields 4.40%.

Activision Blizzard, Inc. (ATVI) develops and distributes content and services on video game consoles, personal computers (PC), and mobile devices in the Americas, Europe, the Middle East, Africa, and the Asia Pacific. The company operates through three segments: Activision Publishing, Inc.; Blizzard Entertainment, Inc.; and King Digital Entertainment.

The Board of Directors declared an annual dividend of $0.47 per common share, which represents a 14.63% increase from 2020. This marked the 11th year of consecutive annual dividend increases for this dividend achiever.

Over the past decade, Activision Blizzard has managed to increase dividends at an annualized rate of 10.58%.

The company managed to grow earnings from 33 cents/share in 2010 to $$2.22/share in 2020. The company is expected to earn $3.51/share in 2021.

The stock is valued at 28.95 times forward earnings and yields 0.46%.

CME Group Inc. (CME) operates contract markets for the trading of futures and options on futures contracts worldwide.

The company raised its quarterly dividend by 5.88% to 90 cents/share. This marked the 11th year of consecutive annual dividend increases for this dividend achiever. Over the past decade, CME Group has managed to grow distributions at an annualized rate of 13.96%.

CME Group managed to boost earnings from $2.48/share in 2009 to $5.91/share in 2019. The company is expected to earn $6.76/share in 2020.

The company’s stock is selling for 28.31 times forward earnings. CME Group yields 1.88%. This figure does not include the special dividend that is has paid regularly over the past few years – the last payment was for $2.50, which is an extra 1.30% yield.

Quest Diagnostics Incorporated (DGX) provides diagnostic testing, information, and services in the United States and internationally.

Quest Diagnostics raised its quarterly dividend by 10.70% to 62 cents/share. This marked the 10th consecutive annual dividend increase for this newly minted dividend achiever. Over the past decade, the company has managed to raise dividends at an annualized rate of 18.64%.

Between 2010 and 2020, Quest Diagnostics managed to increase earnings from $4.05/share to $8.94/share. The company is expected to earn $10.95/share in 2021.

The stock is selling for 11.12 times forward earnings and yields 2.03%. This looks like an interesting company that is selling at a cheap price, that also grows earnings and dividends. I would put it on my list for further research.

Corning Incorporated (GLW) engages in display technologies, optical communications, environmental technologies, specialty materials, and life sciences businesses worldwide.

The company raised its quarterly dividend by 9.09% to 24 cents/share. This marked the 11th consecutive annual dividend increase for this dividend achiever. Over the past decade it has managed to boost dividends at an annualized rate of 15.97%.

Corning is expecting to earn $1.96/share in 2021, which is only slightly higher than 2011's earnings of $1.78/share.

The stock is selling for 19.09 times forward earnings and yields 2.56%.

Prudential Financial, Inc. (PRU) provides insurance, investment management, and other financial products and services. It operates through eight segments: PGIM, Retirement, Group Insurance, Individual Annuities, Individual Life, Assurance IQ, International Businesses, and Closed Block.

The company hiked quarterly dividends by 4.50% to $1.15/share. This marked the 13rd consecutive annual dividend increase for this dividend achiever. Over the past decade, the company has actually managed to grow dividends at an annualized rate of 14.36%.

Prudential Financial is expected to earn $11.71/share in 2021. For comparison, Prudential Financial earned $7.12/share in 2010. The company’s earnings per share are all over the place due the cyclical nature of the insurance industry.

The stock is selling for 6.85 times forward earnings and yields 5.73%.

RenaissanceRe Holdings Ltd. (RNR) provides reinsurance and insurance products in the United States and internationally. The company operates through Property, and Casualty and Specialty segments.

The company raised its quarterly dividend by 2.86% yo 36 cents/share. This marked the 26th consecutive annual dividend increase for this dividend champion. During the past decade, RenaissanceRe Holdings has managed to increase distributions at an annualized rate of 3.42%/year.

RenaissanceRe is expected to earn $14.69/share in 2021.

The stock is selling for 10.84 times forward earnings and yields 0.90%.

Relevant Articles:

- Busiest Week For Dividend Increases Ever

- Seven Companies Rewarding Shareholders With a Raise

- How to read my weekly dividend increase reports

- Dividends Offer an Instant Rebate on Your Purchase Price

Dividend Investing Resources I Use

Thu, 04 Feb 2021 03:04:07 GMT

I am frequently asked by readers about resources I use. While I have discussed before the resources I use to monitor my holdings, and I have compiled before information on resources before, those lists are forever changing. As I have done this for over a decade, I continuously add, test and remove tools from my list. However, I also have to keep in mind the fact that this site is read by investors with varying levels of experience. Therefore, I have decided to list a few free resources that may be helpful for any dividend investor out there.

The first resource that I have been using for several years is the list of Dividend Champions, Contenders and Challengers, that used to be maintained by Dave Fish. Dave had painstakingly updated and improved on that monster spreadsheet every month for a decade! Unfortunately, Dave passed away last month. The list is now published by someone else.

The site also includes links to some international dividend growth stock lists focusing on UK, Canada, Swedish securities.

The second resource I have leveraged is Morningstar. I have found Morningstar to be helpful in providing a quick ten year snapshot of a company’s financials. Under the following link, you can view the ten year financials for Johnson & Johnson.

Morningstar also has some good articles on general investing. They also have some newsletters targeting various strategies, which could be helpful to some readers. They had a guy named Josh Peters, who frequently had interviews on dividend investing, but he has since left to manage a dividend mutual fund.

Another helpful resource that shows historical financial information for US and Canadian companies that goes further than the past ten years is from The Globe and Mail. Here you can find a summary of the historical financials for Johnson & Johnson going as far back as 1978

Of course, this is just the beginning for you. I would go back and review quarterly press releases on the company’s website for more information on large changes in earnings per share from year to year.
Alternatively, you can use the SEC website to find old annual and quarterly financial information going as far back as 1994. In my research, I have leveraged SEC’s website extensively to obtain information on companies that are no longer publicly traded. Those filings have a lot of detail, management comments and footnotes for the really serious full-time investor out there. I doubt most readers would benefit from reading historical footnotes, but if that is your passion, who am I to be the obstacle to your true happiness. In the case of Johnson & Johnson, you can find annual, quarterly and other SEC filings going as far back as 1994.

I have recently started using the following resources more:

Gurufocus - It shows historical data for companies I am researching, going as far back as decades. For example, I can chart earnings per share data for Johnson & Johnson going as far back as 1991. Just select a metric from the drop down menu, and you can find things like historical revenue, number of shares outstanding etc. The site also shows a good collection of articles on investing.

I have found the following resources invaluable in identifying dividend increases:

Wall Street Journal – The Wall Street Journal offers a breadth of information on a variety of topics. I find their dividend section to be very helpful in monitoring dividend increases. However, this section sometimes is late by a few days in reporting dividend increases. In addition, when companies like PepsiCo announce their intention to do a dividend increases a few months in advance, WSJ reports it when declared many weeks later.

Seeking Alpha– Seeking Alpha is quickly becoming a one stop shop for the needs of dividend investors. You have articles, comment sections and news on important topics occurring in real-time. They also have a feed of dividend news as they happen. You can learn pretty much all notable dividend news such as dividend declarations and dividend increases by scrolling through that feed. The problem is that they just decided to charge $200/year to access the site.

The Morning Dividend - The Morning Dividend offers news updates on prominent dividend paying companies, including earnings and dividend information. You can see a sample issue here. You can sign up here for it.

Street Insider - This is another source that is paid. However it offers a real-time view of dividend announcements such as dividend increases and dividend cuts.

I used to frequent Yahoo Finance religiously over the past twenty years. The site is helpful to me, because I can create portfolios that include various metrics such as P/E ratio, dividend yields, prices etc. This makes it super easy to navigate the list of dividend champions, and screen for quality companies using my entry criteria.

In addition, I use Yahoo Finance to obtain historical quotes and dividends. I always check the data however, in case there are issues with the data.

Unfortunately, Yahoo! Finance has been unveiling new features which in my opinion have made the site less usable.

If you like to socialize and interact with other dividend investors, there are several online communities that would get the job done.

Dividend Growth Forum
Seeking Alpha comments under articles on dividend investing
Drip Investing
Motley Fool
Morningstar Income & Dividend Investing

I also want to warn you that this is not an all inclusive list of resources for dividend growth investors. I read blogs and follow people on Twitter, who frequently mention items in real-time that may not be available in other resources above. In addition, I also use the services of my broker, which shows me expected dividend increases for companies I own.

Going through all of these resources takes time and effort. This is where the value proposition of this site comes up - I read that all for you, and then synthesize the information by adding some actionable steps.

Relevant Articles:

- How to monitor your dividend investments

- Dividend Investing Resources

- How I Manage to Monitor So Many Companies

- Dividend Aristocrats List for 2018

Long Term Investing Is a Marathon, Not a Sprint

Tue, 02 Feb 2021 09:00:08 GMT

A little over two years ago I launched a project, where I am trying to show readers how I would go about building a dividend portfolio from scratch. I invest about $1,000/month in ten dividend growth stocks, which I believe to be attractively valued. I reinvest dividends, and stick to the plan, in order to reach a stated goal and objective. This is the type of investing I have been working on for the past 10 - 15 years, and which I have discussed on this blog.

The goal of this dividend portfolio is to generate $1,000 in monthly dividend income. I want a stable dividend income, from a diversified portfolio of blue chip companies, which grows at or above the rate of inflation without any new capital added in.

The portfolio following this strategy is on track to earn $1,100 in annual dividend income or $91.64 in monthly dividend income.

Most of us invest or have invested with the stated goal of reaching the coveted dividend crossover point. Given the limits I outlined above, I believe that reaching $1,000/month was a decent goal.

Based on my calculations, which are dependent on factors outside my control, I can expect to reach those objectives within ten to fifteen years from the launch date. Based on my experience and observations, the journey to the coveted dividend crossover point for many investors could easily take at least 10 - 15 years. This is all dependent on people's savings rates, ability to keep investment costs and taxes low, and the availability of quality companies at affordable valuations.

I keep reminding myself that every investing journey is more of a Marathon than a Sprint. I tell this to myself as a reminder, after feeling good about some company I bought. This reminder is helpful from becoming too overconfident in my abilities, when the shares have appreciated or the dividend keeps growing and humming along.

I also remind myself that whenever I end up kicking myself for investing earlier in the month, when prices were lower later or vice versa ( not investing early in the month when prices are higher later). My research has uncovered that it doesn’t matter if you are buying at the high of the month, the low of the month or the close of the month, as long as you are investing every month. I believe that Time in the market beats timing the market.

Sometimes I get the urge to do some short-term move like buying a higher yielding security, which would increase current income, but would result in lower dividend growth going forward. The immediate gratification is great, and would immediately flow through my results. The problem is that the long-term dividend growth of the portfolio will suffer. I do not want to be in a position where I have reached my goal, but the dividend income is not growing organically.

Going for the quick short-term wins may feel good, but would lead to a performance that suffers in the long run. Just like everything else in life, the good things in life take time to achieve. Delayed gratification works wonders in the end, but at the heat of the moment it is always challenging to go through the motions, constantly improving and grinding through in the initial stages. In the initial stages, it sounds like there is not progress to be made. In reality, the initial grind sows the seeds of future success.

For my portfolio, this means not overpaying for securities, focusing on defensive earnings streams, and well covered dividends. I want earnings that grow over time, in order to generate higher dividends over time. It means having adequate diversification, but focusing more of a bottoms up approach on defensiveness, rather than focusing on diversification for the sake of diversification. It also means focusing on quality, and using a streak of annual dividend increases as a factor in initial determination of quality. It also means having adequate risk controls in place, in order to focus on prudent allocation of new capital, strategic reinvestment of dividend income and knowing when to continue building a position versus letting a position go. It means focusing on a process, investing regularly and consistently, keeping costs low, and avoiding turnover like the plague.

At the end of the day the true results from this strategy won’t be felt until several years down the road. If the foundation is built right however, it would withstand anything thrown at it. It might even become stronger and more resilient as a result of any adversity.

That's really the important part, because we want income to keep growing, even when all dividends are spent and no new capital is added to the portfolio.

Relevant Articles:

- Time in the market is more important than timing the market

- Should I buy more high yielding stocks in order to retire early?
- Should you sell after yield drops below minimum yield requirement?

Busiest Week For Dividend Increases Ever

Sat, 30 Jan 2021 03:19:00 GMT

I have tracked dividend increases on this site for over a decade, almost every single week. I use a process to compile dividend increases for the week from multiple sources, and then narrow it down to the group of companies that have managed to increase dividends for at least ten years in a row.

I do this exercise as part of my monitoring process. It is helpful to see how companies I own or am interested in are performing. It is also a helpful process

Last week was the busiest week for dividend increases since I started doing this in 2008 - 2009. There were 70 dividend increases last week. This means that there were 70 companies announcing a dividend increase, which shows that these companies are optimistic about near-term business prospects and the economy.

This is also just a notch higher than the record number of dividend increases I saw just before Covid-19 hit the world and its economy.

I narrowed the list down to the companies that have managed to increase dividends for at least 10 years in a row. There were 25 companies that fit this characteristic. You can view the table with some information about each company, including track record of dividend increases, old and new dividend.

Ticker

Name

Years Annual Dividend Increases

10 year Dividend Growth

New

Old

Raise

Price

Yield

Forward P/E

ADM

Archer Daniels Midland

9.15%

0.37

0.36

2.78%

50.01

2.96%

12.76

AJG

Arthur J. Gallagher & Co.

3.47%

0.48

0.45

6.67%

115.41

1.66%

23.32

APD

Air Products & Chem.

10.43%

1.5

1.34

11.94%

266.76

2.25%

25.19

Celanese Corp.

29.99%

0.68

0.62

9.68%

122.15

2.23%

11.50

CHD

Church & Dwight

20.00%

0.2525

0.24

5.21%

84.43

1.20%

27.68

CINF

Cincinnati Financial

4.06%

0.63

0.6

5.00%

84.09

3.00%

21.96

CMCSA

Comcast Corp.

16.83%

0.25

0.23

8.70%

49.57

2.02%

13.73

CNI

Canadian National Railway

12.61%

0.615

0.575

6.96%

101.17

2.43%

19.53

CWT

California Water Service

3.63%

0.23

0.2125

8.24%

54.64

1.68%

31.77

FELE

Franklin Electric Co.

9.18%

0.175

0.155

12.90%

69.42

1.01%

28.33

GATX

GATX Corp.

5.54%

0.5

the epic short squeeze of companies like Gamestop (GME). The stock, which sold as low as $4/share last summer is currently selling above $347/share.

If you look at the business, it does not seem inspiring. It is very likely that this business may not survive in the future, as more folks buy their games online, and not need a store for it. It has suspended its dividend, amidst the fact that business conditions have been slowly deteriorating.

This business is not worth $347/share.

This is a perfect example of what Ben Graham was referring to, when he stated that in the short-term, the market is a weighting machine. Short-term events can temporarily distort prices above and below intrinsic value.

As an investor, the goal is to survive long droughts, before prospering. In my case, this means diversifying heavily into a broad number of companies with established track records. Some of them will do very well, while others would not do that well. However, the worst that I can get is a loss of 100%. This is mitigated by any dividends I receive of course, and offset by any tax benefits on capital losses.

This means that I can theoretically hold on to my investments for as long as possible. No one can really shake me out of a position, unless my conviction changes based on new information I uncover.

This is not the case when you invest on margin however, because a temporary but severe enough decline may force you to sell, in order to cover your margin loan. Using margin turns your long-term advantage of a patient long-term investor into a disadvantage. You could theoretically lose more than your original capital as well, if a stock declines faster that anticipated. However, the downside is still clear, because a stock cannot go below zero.

Selling a stock short is a whole different ballgame however. When you sell a stock short, you borrow the security at a given price from someone that owns it. You hope that the price goes down, so that you can purchase the shares back at a lower price, and return them back to their owner.

In other words, if you think that a stock like Johnson & Johnson (JNJ) is overvalued at $165/share, you can find someone that owns it to borrow their shares. You will pay them a small fee in the process. If you are correct and the share price declines to say $150/share, you can buy the stock and return the shares to the original owner. However, if Johnson & Johnson stock rose to $180/share and you cover your short, you would have to buy it back at a higher price in order to return the shares to the owner.

The reason why I do not sell short is because the upside is limited. If you sold 1 share of Johnson & Johnson (JNJ) short at $165/share, and the business goes bankrupt in one year, the most you will gain is $165, minus any fees you paid to the original holder of the stock. As a short seller you also need to reimburse the original holder for the dividend they missed out a payment on.

However, your downside is virtually unlimited. If Johnson & Johnson tripled overnight to $495/share, you would have lost 200% on your original trade. In other words, you started with a net worth of $165 to short 1 share, but since that share is now $495/share, you have a negative net worth of $330. That’s because you need to buy 1 share to return to the original owner, but it costs $495 now and you only have $165. This is how you can easily bankrupt yourself with short selling stock.

Of course, shares of Johnson & Johnson do not fluctuate so widely. That’s because they are stable and predictable and boring.

As an investor in a stable, boring and predictable business, I can afford to hold on through the bad times. The scandals in 2010 were one such time. Even then, my downside was protected by the amount I put up to invest. Any dividends I have received since have acted as an instant rebate on my purchase price. Dividend income has increased since, as earnings have increased, and the stock price has risen too. My downside is limited with an investment in a company like Johnson & Johnson. But my upside is unlimited.

(click chart to expand)

This is the type of intelligent investment to make. It is no wonder I do not do short selling.

But shares in companies that face trouble are often easier to move by a large percentage gain or loss. They value is more difficult to determine, and they are more speculative in nature.

This is what happened with Gamestop in a nutshell. Hedge funds believed that the business can go to zero, which means they borrowed shares to short it. They were right for a while, until they weren’t. When share prices start moving up, these Hedge Funds need to cover their short positions at higher prices, because they are probably facing margin calls. If you have a portfolio worth $100, and you sold one share of Gamestop short at $5/share, you can easily withstand the stock doubling to $10/share.

However, when the stock goes to $20 and then $50/share, your losses are growing exponentially. If you do not sell by the time the stock exceeds $100/share, you are going to be wiped out.

With speculative companies, there may be some manipulation of the stock prices. If your competitors see you short a stock that is growing in price, they may start buying it, in order to drive the price up, and drive you out of business as you need to cover at a higher price. You cannot simply sit tight and wait for it to be over – you will be out of money if you are short a stock and the price rises above a certain point. You can easily get in trouble where you owe more than what you are worth.

Hedge funds usually try to manipulate short-term stock prices to their own advantage. For example, a short-seller would go out and sell short a company, and then issue a press release stating why the company is a bad one. They may do interviews on TV, and even attend conferences, trying to present their case for a short sale. Even if they are wrong, they can still shake out investors who lack conviction into selling, which pushes the price down.

Jim Cramer actually received some criticism a few years ago for discussing some techniques used by Hedge Funds to drive prices up or down. It is pretty interesting to see what happens on a day to day. You can read this article here at Reuters. I have highlighted the most interesting parts below:

The interview described methods including tactical buying, shorting or using options to create an impression in the market that could prompt other traders and investors to buy or sell a stock.

“A lot of times when I was short at my hedge fund ... meaning I needed (a stock) down, I would create a level of activity beforehand that could drive the futures,” said Cramer. “It’s a fun game and it’s a lucrative game.”

Cramer, host of the popular CNBC television show Mad Money, described tactics that could be used to drive down technology stocks such as Research in Motion RIM.TO or Apple Computer AAPL.O to make them cheaper to purchase later. CNBC is owned by General Electric Co. GE.N

In the interview, Cramer said a hedge fund manager’s favorite tactic is to get a rumor about a stock to an unwitting reporter -- at the Wall Street Journal or at his current employer, CNBC -- and hope that it moves the stock in the direction the manager wants.

Cramer said some tactics are “blatantly illegal,” but sometimes essential for poorly performing hedge funds. He did not say he ever used such tactics himself.

Cramer said if a market participant wanted to get shares of a company like RIM lower then he should first get investors “talking about it as if there is something wrong with RIM”.

"Then you call the (Wall Street) Journal and get the bozo reporter in Research in Motion and you would feed that (rival) Palm's PALM.O got a killer it's going to give away," he said. "These are all the things that you must do on a day like today and if you're not doing it, maybe you shouldn't be in the game."

“It might cost me $15 million or $20 million to knock RIM down but it would be fabulous because it would beleaguer all the moron longs who are also keying on Research in Motion,” said Cramer.

He also said the SEC does not understand some illegal activity.

I have personally witnessed this with a short attack on Realty Income in 2010, as well as a short attack on Digital Realty Trust in 2013. Both times were actually good times to acquire decent businesses at good prices. If you took those bears seriously however, you missed out on gains.

Not all short sellers are bad of course. They are needed in an effort to contain enthusiasm for equities, so the net effect is that they keep share prices more affordable in the short-run due to an increase in supply of shares to sell. Some notable short-sellers like Jim Chanos has uncovered major corporate fraud at Enron for example.

There was a famous short corner in 1901, which caused shares of Northern Pacific to increase from $165/share to $1000/share, wiping out short-sellers.

There was another famous short squeeze in 2008, which caused shares of Volkswagen to increase dramatically.

Warren Buffett has also discussed why he does not like short selling. Basically your upside is limited, but your downside is wide open. This does not strike as intelligent behavior.

You can also see the video by clicking on this link below.

You can read his thoughts on short-selling from this 2001 Berkshire Hathaway Meeting Transcript:

"Warren Buffett: Short selling, it’s an interesting item to study because it’s, I mean, it’s ruined a lot of people. It is the sort of thing that you can go broke doing.

Bob Wilson, there’re famous stories about him and Resorts International. He didn’t go broke doing it. In fact, he’s done very well subsequently.

But being short something where your loss is unlimited is quite different than being long something that you’ve already paid for.

And it’s tempting. You see way more stocks that are dramatically overvalued in your career than you will see stocks that are dramatically undervalued.

I mean there — it’s the nature of securities markets to occasionally promote various things to the sky, so that securities will frequently sell for five or 10 times what they’re worth, and they will very, very seldom sell for 20 percent or 10 percent of what they’re worth.

So, therefore, you see these much greater discrepancies between price and value on the overvaluation side. So you might think it’s easier to make money on short selling. And all I can say is, it hasn’t been for me. I don’t think it’s been for Charlie.

It is a very, very tough business because of the fact that you face unlimited losses, and because of the fact that people that have overvalued stocks — very overvalued stocks — are frequently on some scale between promoter and crook. And that’s why they get there. And once there —

And they also know how to use that very valuation to bootstrap value into the business, because if you have a stock that’s selling at 100 that’s worth 10, obviously it’s to your interest to go out and issue a whole lot of shares. And if you do that, when you get all through, the value can be 50.

In fact, there’s a lot of chain letter-type stock promotions that are sort of based on the implicit assumption that the management will keep doing that.

And if they do it once and build it to 50 by issuing a lot of shares at 100 when it’s worth 10, now the value is 50 and people say, “Well, these guys are so good at that. Let’s pay 200 for it or 300,” and then they could do it again and so on.

It’s not usually that — quite that clear in their minds. But that’s the basic principle underlying a lot of stock promotions. And if you get caught up in one of those that is successful, you know, you can run out of money before the promoter runs out of ideas.

In the end, they almost always work. I mean, I would say that, of the things that we have felt like shorting over the years, the batting average is very high in terms of eventual — that they would work out very well eventually if you held them through.

But it is very painful and it’s — in my experience, it was a whole lot easier to make money on the long side.

I had one situation, actually, an arbitrage situation when I was in — well, it was when I moved to New York in 1954, so it would’ve been about June or July of 1954 — that involved a surefire-type transaction, an arbitrage transaction that had to work.

But there was a technical wrinkle in it and I was short something. And I felt like a — for a short period of time — I felt like Finova was feeling last fall. I mean, it was very unpleasant.

It — you can’t make — in my view, you can’t make really big money doing it because you can’t expose yourself to the loss that would be there if you did do it on a big scale.

And Charlie, how about you?

CHARLIE MUNGER: Well, Ben Franklin said, “If you want to be miserable, you know, during Easter or something like that,” he says, “borrow a lot of money to be repaid at Lent,” or something to that effect.

And similarly, being short something, which keeps going up because somebody is promoting it in a half-crooked way, and you keep losing, and they call on you for more margin — it just isn’t worth it to have that much irritation in your life.

It isn’t that hard to make money somewhere else with less irritation.

WARREN BUFFETT: It would never work on a Berkshire scale anyway. I mean, you could never do it for the kind of money that would be necessary to do it with in order to have a real effect on Berkshire’s overall value. So it’s not something we think about.

It’s interesting though. I mean, I’ve got a copy of The New York Times from the day of the Northern Pacific Corner. And that was a case where two opposing business titans each owned over 50 percent of the Northern Pacific Company —the Northern Pacific Railroad.

And when two people each own over 50 percent of something, you know, it’s going to be interesting. And — (laughter) — Northern Pacific, on that day, went from 170 to a thousand. And it was selling for cash, because you had to actually have the certificates that day, rather than the normal settlement date.

And on the front page of The New York Times — which, incidentally, sold for a penny in those days. It’s had a little more inflation than Coca-Cola — front page of The New York Times, right next to the story about it, it told about a brewer in Newark, New Jersey who had gotten a margin call that day because of this.

And he jumped into a vat of hot beer and died. And that’s really never appealed to me as, you know, the ending — (laughter) — of a financial career.

And who knows? You know, when they had a corner in Piggly Wiggly, they had a corner in Auburn Motors in the 1920s. I mean, there were corners. That was part of the game back when it was played in kind of a footloose manner. And it did not pay to be short.

Actually, during that period — you might find it interesting — in the current issue of The New Yorker, maybe one issue ago, the one that has the interesting story about Ted Turner, there’s also a story about Hetty Green.

And Hetty Green was one of the original incorporators of Hathaway Manufacturing, half of our Berkshire Hathaway operation, back in the 1880s. And Hetty Green was just piling up money. She was the richest woman in the — maybe in the world. Certainly in the United States. Maybe some queen was richer abroad.

But Hetty Green just made it by the slow, old-fashioned way. I doubt if Hetty was ever short anything.

So as a spiritual descendent of Hetty Green, we’re going to stay away from shorts at Berkshire."

For reference, here is the cover of New York Times from the day of the Northern Pacific Corner. Check this article from Global Financial Data for more details too:

Warren Buffett discussed why he does not like short selling. That's because your upside is limited, but your downside is wide open. This does not strike as intelligent behavior. It has ruined a lot of people and it is the sort of thing that you can go broke doing.

The other thing to consider is that even if a company is worth zero, its stock may not go to zero for a long period of time. If you are a short seller and the price rises above a certain threshold, you may be ultimately right about the demise of the company, but you will be wiped out anyways because your received a margin call.

In addition, some companies may issue shares to the public when a short-squeeze increases the price of those shares. As a result, the value of that business may actually increase due to the cash infusion from selling stock through the capital markets.

This is why I do not play short-term games. As an investor, my edge is in buying companies, and holding them for the long-term. In order to avoid being shaken out of my position, I avoid leverage, and I avoid the noise. To succeed, think years and decades, not days or weeks.

Seven Companies Rewarding Shareholders With a Raise

Mon, 25 Jan 2021 09:00:00 GMT

I review the list of dividend increases as part of my monitoring process. This allows me to see how the companies I own are doing. It also lets me uncover companies for further research.

This process also allows me to share the quick review I make for each company I stumble upon. It provides me with an idea of whether I want to research any further, or move on to other ideas.

In general I look for:

1) A ten year track record of annual dividend increases

2) Growing earnings per share

3) Consistent dividend increases

4) Margin of safety to ensure dividend safety

5) Good valuation

During the past week, there were several companies that raised dividends, which also had a ten year track record of annual dividend increases. I will be reviewing them with the five step guidelines above, before deciding if I want to research them any further.

The companies raising dividends last week include:

Fastenal Company (FAST) engages in the wholesale distribution of industrial and construction supplies in the United States, Canada, Mexico, North America, and internationally. It offers fasteners, and related industrial and construction supplies under the Fastenal name.

The company raised its quarterly dividends by 12% to 28 cents/share. This marked the 22nd consecutive annual dividend increase for this dividend achiever. Over the past decade, the company has managed to increase dividends at an annualized rate of 16.90%.

Between 2010 and 2020 the company grew earnings from 45 cents/share to $1.49/share. The company is expected to earn $1.57/share in 2021.

The stock is selling at 30.40 times forward earnings and yields 2.35%.

Alliant Energy Corporation (LNT), headquartered in Madison, Wis., provides regulated electric and natural gas service to 970,000 electric and 420,000 natural gas customers across Iowa and Wisconsin.

The company increased quarterly dividends by 5.92% to 40.25 cents/share. This marked the 18th year of consecutive annual dividend increases for this dividend achiever.

During the past decade, the company has managed to grow dividends at an annualized rate of 6.80%.

Between 2008 and 2019, Alliant Energy managed to grow earnings from $1.30/share to $2.33/share. The company is expected to earn $2.43/share in 2020.

The stock is selling at 20.30 times forward earnings and yields 3.25%.

Cintas Corporation (CTAS) provides corporate identity uniforms and related business services primarily in North America, Latin America, Europe, and Asia. It operates through Uniform Rental and Facility Services and First Aid and Safety Services segments.

The company raised its quarterly dividend by 7.14% to 75 cents/share.

Cintas has paid cash dividends on its common stock for 37 consecutive years since it went public in 1983 and increased the annual regular dividend every year.

Over the past decade, Cintas has managed to increase dividends at an annualized rate of 19.30%.

This dividend champion managed to grow earnings from $1.40/share in 2010 to $8.11/share in 2020. The company is expected to earn $9.67/share in 2021.

The stock is selling for 33.55 times forward earnings and yields 0.92%.

CMS Energy (CMS) is a Michigan-based company that has an electric and natural gas utility, Consumers Energy, as its primary business. It also owns and operates independent power generation businesses.

The company increased its quarterly dividend by 6.74% to 43.50 cents/share. This marked the 15th consecutive annual dividend increase for this dividend achiever.

During the past decade, the company has managed to increase dividends at an annualized rate of 9.50%.

The company managed to grow earnings from 91 cents/share in 2009 to $2.39/share in 2019. The company is expected to earn $2.67/share in 2020.

The stock is selling for 21.87 times forward earnings and yields 2.97%.

BlackRock, Inc. (BLK) is a publicly owned investment manager.

Blackrock increased its quarterly dividend by 13.77% to $4.13/share.

This is the 12th straight year of dividend increases for BlackRock, which is the largest asset management firm in the United States with $8.6 trillion in assets under management (AUM).

Over the past decade, Blackrock has managed to increase dividends at an annualized rate of 13.80%.

Between 2010 and 2020 the company managed to grow earnings per share from $10.55 to $31.85. The company is expected to earn $36.80/share in 2021.

Currently, the stock is selling for 20 times forward earnings and yields 2.24%.

Consolidated Edison, Inc. (ED) engages in regulated electric, gas, and steam delivery businesses in the United States.

The company increased its quarterly dividend by 1.30% to 77.50 cents/share.

This is the 47th consecutive annual increase for this dividend aristocrat. During the past decade, Con Edison has managed to increase dividends at an annualized rate of 2.50%.

The company has managed to grow earnings from $3.14/share in 2009 to $4.08/share in 2019. The company is expected to earn $4.21/share in 2020.

The stock is selling for 16.34 times forward earnings and yields 4.50%.

Enterprise Bancorp, Inc. (EBTC) operates as the holding company for Enterprise Bank and Trust Company that provides banking products and services primarily in the Greater Merrimack Valley, Nashoba Valley, and North Central regions of Massachusetts and Southern New Hampshire.

The company hiked its quarterly dividend by 5.71% to 18.50 cents/share. This marked the 28th consecutive year of annual dividend increase for this dividend champion. During the past decade, this dividend champion has managed to increase distributions at an annualized rate of 5.80%.

The bank has managed to increase earnings from 89 cents/share in 2009 to $2.89/share in 2019.

The stock is selling for 9.78 times earnings and yields 2.61%.

Relevant Articles:

- What Dividend Investors Can Learn From Human Resource Departments?

- Seven Dividend Growth Stocks Rewarding Shareholders With a Raise

- Fourteen Companies Spreading Holiday Cheers To Shareholders

- Let Your Dividends Pay Your Phone Bills

Dividend Aristocrats List for 2021

Sat, 23 Jan 2021 22:19:16 GMT

The S&P Dividend Aristocrats index tracks companies in the S&P 500 that have increased dividends every year for at least 25 years in a row. The index is equally weighted, and rebalanced every quarter.

To qualify for membership in the S&P 500 Dividend Aristocrats index, a stock must satisfy the following criteria:

1. Be a member of the S&P 500
2. Have increased dividends every year for at least 25 consecutive years
3. Meet minimum float-adjusted market capitalization and liquidity requirements defined in the index inclusion and index exclusion rules below.

The group of companies in the Dividend Aristocrats index tend to generate reliable dividend income, and provide the potential for strong total returns. The list is well diversified across sectors.

There are 65 companies in the Dividend Aristocrats index for 2021.

For 2021, there were several changes. The index added:

- International Business Machines (IBM)

- NextEra Energy (NEE)

- West Pharmaceutical Services (WST)

The index removed:

- Raytheon Technologies (RTX)

- Otis (OTIS)

- Carrier (CARR)

- Ross Stores (ROST)

In 2020, United Technologies spun-off Carrier (CARR) and Otis Elevator (OTIS), before merging with Raytheon to form Raytheon Technologies (RTX). Because the overall amount of annual dividend income was lower after the transactions than before, the S&P committee eliminated the descendands of United Technologies from its list.

Since the inception of the index in 1989, the number of holdings has fluctuated from 26 to 65 holdings. It is still not even half the number of Dividend Champions however.

The 2021 Dividend Aristocrats are listed below:

Symbol	Name	Sector	Years of Annual Dividend Increases	10 year Dividend Growth	Dividend Yield
ABBV	AbbVie Inc.	Health Care	48	18.50%	4.85%
ABT	Abbott Laboratories**	Health Care	48	5.73%	1.64%
ADM	Archer-Daniels-Midland Co	Consumer Staples	45	9.15%	2.86%
ADP	Automatic Data Processing	Information Technology	46	11.85%	2.11%
AFL	AFLAC Inc	Financials	38	6.99%	2.97%
ALB	Albemarle Corp.	Materials	26	10.52%	1.04%
AMCR	Amcor	Materials	26	#N/A	0.90%
AOS	Smith A.O. Corp	Industrials	27	21.92%	1.90%
APD	Air Products & Chemicals Inc	Materials	39	10.43%	1.96%
ATO	Atmos Energy	Utilities	37	5.74%	2.62%
BDX	Becton Dickinson & Co	Health Care	49	8.02%	1.33%
BEN	Franklin Resources Inc	Financials	41	13.92%	4.48%
BF.B	Brown-Forman Corp B	Consumer Staples	37	8.10%	0.90%
CAH	Cardinal Health Inc	Health Care	25	10.08%	3.63%
CAT	Caterpillar Inc	Industrials	27	9.13%	2.26%
CB	Chubb Ltd	Financials	27	9.11%	2.03%
CINF	Cincinnati Financial Corp	Financials	60	4.06%	2.75%
CL	Colgate-Palmolive Co	Consumer Staples	57	5.60%	2.06%
CLX	Clorox Co	Consumer Staples	43	7.53%	2.20%
CTAS	Cintas Corp	Industrials	38	19.33%	0.79%
CVX	PBCT	Energy	34	6.21%	6.11%
DOV	Dover Corp	Industrials	65	8.22%	1.57%
ECL	Ecolab Inc	Materials	29	11.73%	0.89%
ED	his study of mental models. There are plenty of books, articles, podcasts and blogs about these mental models. There are lots of them, many of which I utilize in my own investing. There is one underappreciated mental model, which has never to my recollection been mentioned. The mental model I am referring to is that of Dividend Growth Investing. In a nutshell, Dividend Growth Investing is the investing strategy, where you purchase shares in a company which grows dividends annually for a minimum number of years. For this company to achieve this track record, it must have grown earnings, and it should also have a chance of continuing to grow the bottom line in the future. The dividend must be sustainable, and the company’s shares should be purchased at an attractive valuation. Dividend Growth Investors focus on the operating performance of a business first, and the fundamental traits that a successful business leaves in the form of growing dividends. Growing dividends are a byproduct of a successful business, which generates more cashflows than what it needs to deploy intelligently back into the business. By definition, most businesses cannot deploy all cashflows back into growing the business. There is a natural ceiling, after which more investment may actually be counter-productive. The focus on fundamentals means that dividend investors in general treat stocks as real businesses, and not some pieces of paper or blinking bits of information on a computer screen. The focus on annual dividend payments that rise over time results into a shareholder base that is longer-term focused. Smart managements should cultivate a smart long-term shareholder base, and reward them with consistent operating performance, and a continuing track record of annual dividend increases. These investors are not worried about short-term volatility, drops in the share price, or bear markets. Rather, they focus on the long-term trends in the business, and the relentless rise in dividend income over time, supported by fundamentals. The insistence of a minimum track record of annual dividend increases reduces the number of businesses for research to around 300 worldwide. After a study of dividend growth investing over the past decade, I have come to the conclusion that most of these enterprises have historically been successful due to having strong competitive advantages, stable business model, or an innovative management that focused on returns, rather than chasing growth for the sake of growth itself. Managements that execute and deliver long track records of annual dividend growth are good at capital allocation. These management teams allocate capital at the projects with the highest expected values, because the need to maintain the track record of annual dividend increases helps them focus in that direction. Past performance is not a guaranteed for future success however. Just because something worked in the past, it doesn’t meant that it would work in the future. This is why Dividend Growth investors also focus on diversification. It matters to hold shares in companies from different industries, without sacrificing quality and the need to obtain the shares at attractive valuations. Of course, that also means that certain sectors may not be perfect for long-term investors, because they are highly cyclical and produce unreliable earnings streams to establish even a minimum track record of annual dividend increases. Dividend Growth Investors also focus on keeping their investment costs low, by using commission free brokers, holding their investments directly, and investing through tax-deferred accounts such as Roth IRA’s. Using a commission free broker guarantees low investment costs, as does not using an expensive financial adviser that charges a fee for selecting a few mutual funds. Holding securities directly also means that you can control how long you can hold these securities for, and not be subject to the whims of investor inflows and outflows, which could impact you if invested in a mutual fund or a hedge fund. Many high-fee advisers and active fund managers do not like dividend investing, because there is no money in it for them. I view most investment strategies through the lens of the dividend growth investment mental model. Dividends are more stable and much less volatile than stock prices. Boards of directors set dividend rates based on current and prospective earnings, taking into account economic and business conditions. If you look at the dividends from companies in the dividend aristocrats or dividend champions lists, they have a steep upward looking slope from left to right. Dividends are more stable and predictable than stock prices, which makes them an ideal source of income in retirement. It is easy to predict how much income a diversified portfolio of dividend growth stocks will generate over the course of the next year. Stock prices are determined by the neurotic crowd that gets fearful or greedy, which explains the volatility. I would never base my retirement on selling off shares, because I cannot predict share prices. People who plan to sell stock to fund retirement, despite evidence that they cannot predict share prices, are speculators. For example, there are plenty of naysayers behind dividend growth investing. Most of the show elaborate backtested portfolios, which show amazing results for things like shareholder yield. However, when we are no longer in the safe setting of curve-fitting and optimizing historical data, these models always fail to deliver. Because Dividend Growth Investing works in reality, but won’t show you the best backtested model to riches. Promoters will continue ignoring it, since there is not a lot of money to be made off DIY investors. The other helpful factor is behind active investment management, viewed through the prism of dividend growth investing. Active managers do not like dividend investing, and dividend investors, because they are DIY type investors. These investors are not easily swayed, because they invest in solid companies they understand and can stick to through the ups and downs of the economic cycle. On aggregate, diversified portfolios of dividend growth stocks are cheaper than most mutual funds out there. That’s because most dividend growth stocks are well known blue chips, for which our dividend investors do not need to hire a Harvard MBA to select and manage for a 1% annual fee. Most dividend investors are buy and hold investors, which means that they will have small turnover and therefore pay less in commissions and capital gains taxes than the average active investors out there. Plenty of FIRE bloggers hate dividend growth investing for some strange reason. They usually cite the fact that you pay taxes on dividends in taxable accounts as a reason why they do not like dividends. The problem with this faulty thinking is that most investors nowadays invest through a tax-deferred account. Hence, taxation should not be an issue that it is made out to be. Even if everything is invested in taxable accounts, with dividend growth investing you generate your highest income in the future, due to the growth in distributions and the powerful force of dividend reinvestment. In addition, when someone is truly retired and only lives off investment income, they can generate up to $100,000 annually in qualified dividend income with their spouse, and not pay a dime in federal taxes. Of course, if you are a FIRE blogger who claims to be retired, but works tirelessly to generate tax-inefficient blog income that is taxed even worse than employment income, you are deceiving yourself. If you were truly retired, and not just pretending to be one in order to generate money online, you would be living off dividends and not generating any tax liabilities. Dividend investors looks at stocks they own as pieces of real businesses. The part of the profits that businesses cannot intelligently reinvest are distributed to shareholders in the form of a dividend. This is a fundamental return on investment. Speculators on the other hand look for investment appreciation, and eschew dividends as something old fashioned. In reality, share prices are unpredictable, as market conditions, investment sentiment and economic factors such as interest rates can result in rapid changes. For example, a dollar in earnings per share could be worth anywhere from 5 to 105 times, due to factors and changes in growth expectations alone, even if the business operating performance is stable and humming along nicely. Since dividends track fundamentals, they are more stable and easier to forecast and rely upon. Today, we discussed the mental model of Dividend Growth Investing. In a nutshell, Dividend Growth Investing is the investing strategy, where you purchase shares in a company which grows dividends annually for a minimum number of years. For this company to achieve this track record, it must have grown earnings, and it should also have a chance of continuing to grow the bottom line in the future. The dividend must be sustainable, and the company’s shares should be purchased at an attractive valuation. Relevant Articles: - Dividends Provide a Tax-Efficient Form of Income - Rising Earnings – The Source of Future Dividend Growth - Dividend Growth Investing Principles - Market Declines: An Opportunity to Acquire Quality Dividend Stocks - If you had to own one company for a generation.. The best investors in the world are dead Tue, 19 Jan 2021 09:00:04 GMT A few years ago, I read about a study conducted by Fidelity on its client brokerage accounts. The study tried to identify the best performing investors at the brokerage, by reviewing account returns. They came to a stark discovery – the best investors were either dead or had forgotten to log on to their accounts for a long period of time. Perhaps they forgot their passwords, and got locked out of their accounts, but didn’t bother resetting them. It makes intuitive sense that accounts where investors do little trading would do better than accounts that are more active. There are several reasons why that would make sense: 1) When you buy and sell stocks often, you incur costs. Back in the day, you had to pay a commission to buy and to sell a stock. If you do that enough times, you can be out of some serious cash. Even if you lose 1% of your portfolio value to commissions and fees each year, that could eat away a sizeable chunk of returns over time. Costs compound over time, but unfortunately not in your favor. Plus, when you buy and sell stock, you end up losing a little bit on the buying and selling, because you buy at the ask price and sell at the bid price. The difference varies from company to company, but it also adds up over time. We are not even going to discuss taxes, which can eat up a portion of returns, especially if you invest in a taxable account. 2) When you buy and sell stocks too, you often pay an opportunity cost as well. I have read some academic research that showed how companies that investors have sold tended to do much better than the companies the investor replaced them with. For example, if you sold Johnson & Johnson (JNJ) in the year 2000, you missed out on a stock that returned several times its original cost. If you replaced it with a tech flyer like Nokia for example, you ended up losing money, and missing out on Johnson & Johnson. If you had simply sat tight, you would have actually made money. That difference between what you could have achieved by patiently holding on to Johnson & Johnson and the actual result from buying Nokia in 2000 is your opportunity cost. Some may call this behavioral cost as well. Chasing what is hot, which is what following Nokia or other red hot tech darlings were in 1999 – 2000 was a big cost to investors. 3) Behavior costs are costly I have personally fallen for behavioral costs. I have seen companies that seem to suffer through some issues, and I would sell them. Then these companies would miraculously recover and returns would revert to the mean. The companies I replaced them with either turned out ok, or they didn’t do as well. I have also ended up selling companies because I thought they were too high, and replaced them with something else. You live and you learn. At the end of the day, a lot of investors fall for the idea that you won’t go broke taking a profit. The problem is that you won’t get rich either. That’s because if you look at the Paretto principle, 80% of results would be concentrated in the top 20% of companies. In other words, if you sell too early from these 20% of companies that generate most capital gains and dividends, you are shooting yourself in the foot. And if you replace these companies with bad ones, you are compounding your mistakes. Peter Lynch describes it as “cutting the flowers and watering the weeds”. Investors tend to trade a lot in general, chasing what is hot, and selling what is not. At the end of the day, they end up consistently buying high and selling low, which turns out to be costly for long-term returns. While the study does sound plausible, the reality is that it does not exist. It is just a popular piece of Wall Street Folklore. However, it does confirm my observations that your portfolio is a like a bar of soap – the more you handle it, the smaller it gets. You can read more about my observations in the four articles referenced below: -Corporate Leaders Trust - No new investments since its launch in 1935 -Coffee Can Portfolio -The performance of the original companies in S&P 500 from 1957 -Stocks that leave the Dow tend to outperform after their exit from the average Keeping up with the Joneses Wed, 13 Jan 2021 09:00:01 GMT At a party given by a billionaire on Shelter Island, the late Kurt Vonnegut informs his pal, the author Joseph Heller, that their host, a hedge fund manager, had made more money in a single day than Heller had earned from his wildly popular novel Catch 22 over its whole history. Heller responds,“Yes, but I have something he will never have . . . Enough.” As a dividend growth investor, my goal has always been to reach the dividend crossover point. This is the point where dividend income meets or exceeds expenses. To get there, I did some saving, some investing, and some holding. I basically came up with a strategy to follow, and I followed it thought thick or thin to get to my crossover point. I made mistakes along the way, learned some lessons, and have kept investing and following along my basic strategy. Since I invest with the end goal in mind, my strategy produces tangible results that I can see very clearly how I am doing relative to my needs ( expenses) and my goals for income. As a result, for as long as the companies I hold are doing well, growing earnings, and dividends, I am a happy camper. I am fine holding on to companies, even if they stop growing but keep at least maintaining their dividends. This attitude allows me to sit through any bear markets, temporary declines and have the patience to endure difficult periods of time. I do pull the plug when there is a dividend cut or a company is acquired however. My patience is very long, but not limitless. I know when to hold and when to fold. A lot of times people ask me about different investing strategies, investments, and usually show me a past investment that has done very well in the past. Now if they made actual money on it, I congratulate them. There are many strategies out there, so the important thing is finding the one that works for your goals and objectives and sticking to it. I disagree with the notion that one should abandon their strategy and go chase other strategies, because that could risk them selling low and buying high. But I do get a decent amount of pushback now and then that I should have done this or that. Which I frequently choose to ignore. I always end up thinking that I could not care less if my retirement portfolio value fluctuates between $500,000 and $2 million, for as long as it throws off enough income to live off. What I mean by that is that investors should ignore stock price fluctuations. They are meaningless to the investor, unless they have money to invest. So basically, they are to be ignored, unless you want to take advantage of them. It also does not matter to me if my portfolio is worth $1 million but someone else's portfolio is now worth $2 million, for as long as my portfolio meets my needs. The goal of my portfolio is to meet my investment goals and objectives. Whether my neighbor does better or worse than me doesn't really matter to the achievement of my investment goals and objectives. You may like the story from Warren Buffett about his investment in the farm and how his crazy neighbor shouts out random prices at him. In 1986, I purchased a 400-acre farm, located 50 miles north of Omaha, from the FDIC. It cost me $280,000, considerably less than what a failed bank had lent against the farm a few years earlier. I knew nothing about operating a farm. But I have a son who loves farming and I learned from him both how many bushels of corn and soybeans the farm would produce and what the operating expenses would be. From these estimates, I calculated the normalized return from the farm to then be about 10%. I also thought it was likely that productivity would improve over time and that crop prices would move higher as well. Both expectations proved out. I needed no unusual knowledge or intelligence to conclude that the investment had no downside and potentially had substantial upside. There would, of course, be the occasional bad crop and prices would sometimes disappoint. But so what? There would be some unusually good years as well, and I would never be under any pressure to sell the property. Now, 28 years later, the farm has tripled its earnings and is worth five times or more what I paid. I still know nothing about farming and recently made just my second visit to the farm. There is one major difference between my two small investments and an investment in stocks. Stocks provide you minute-to-minute valuations for your holdings whereas I have yet to see a quotation for either my farm or the New York real estate. It should be an enormous advantage for investors in stocks to have those wildly fluctuating valuations placed on their holdings – and for some investors, it is. After all, if a moody fellow with a farm bordering my property yelled out a price every day to me at which he would either buy my farm or sell me his – and those prices varied widely over short periods of time depending on his mental state – how in the world could I be other than benefited by his erratic behavior? If his daily shout-out was ridiculously low, and I had some spare cash, I would buy his farm. If the number he yelled was absurdly high, I could either sell to him or just go on farming. He can choose to ignore them, or take advantage of them if they are really out of whack. In my case, if I see Johnson & Johnson (JNJ) selling at $50/share tomorrow, and nothing material has changed about the business, I would be excited. I may even buy a share or two. But I see Johnson & Johnson selling at $500/share given todays state of the business, I would probably sell it. That's despite the fact that I never sell, I would view selling at close to 60 times forward earnings for a company like Johnson & Johnson to be ridiculous. Now in 10 - 20 years, I don't doubt that Johnson & Johnson share price would hit and/or exceed $500/share. I have always followed a strategy where I invest when I have money to invest. Otherwise I just stick to my investments and do nothing. Some investors get scared away from stocks going down, and they may end up selling low. Charlie Munger has said that if you are unwilling to see a 50% correction in net worth a few times per century, you should not be in common stocks. For historical reference, US Stock prices have fallen by more than 50% in 1929 – 1932, 1972 – 1974, 2000 – 2003 and 2007 – 2009. Pretty much nobody can predict when we are about to get a bear market. Even if someone managed to predict it, they have to predict when to sell and then also determine when to buy back. Since no one can do that market timing consistently, it is just best to not even try. As Terry Smith says, there are two types of investors out there: Those who can't time the markets And Those who don't know that they can't time the markets As an investor it pays to focus on identifying good businesses, buying them at an attractive price, and holding them forever. It pays to ignore short-term fluctuations when you hold stocks. You pay attention to stock fluctuations when you have money to invest. For example, if Lowe’s (LOW) went from $125/share in early 2020 to a low of $60 in March and now is at $170/share. The dividend was still getting paid every quarter, and even it was recently increased from 55 to 60 cents/share. A shareholder that focused on the business side of it, and stuck to it, did well. Ignoring the fluctuations worked out ok. Other times, ignoring may be a problem but you just never really know too. Many businesses experience temporary bumps on the road. Second, if I need say $30,000 in dividend income, and my portfolio generates it, why would I care that someone else makes $100,000/day trading tech stocks? I have my "enough" point I should not care.. The point at which I can tell everyone to leave me alone, and I can do my own thing ( within a few limits of course). This is the point of having "Enough", as discussed in the story with Kurt Vonnegut at the beginning of this article. The other thing is that I have a strategy that works for me in achieving my goals and objectives. Let's say that my goal is to have a portfolio of 100 companies paying me $30,000 in annual dividend income. Imagine that this portfolio is worth say $1 million on a given day. However that portfolio is worth say $2 million when I die If it turns out when I die that doing another strategy could have generated $5 million, it won't really matter at the end. That's because no-one would have known for sure which race horse would have run the fastest to the finish line. All that matters is achieving my own goals and objectives. Not keeping up with the Joneses. Someone will always do better than me in the future. The problem is that we do not have a time machine. So if I buy Johnson & Johnson, and can live off the dividend stream, and in 30 years it is at $600/share, paying $18/share in dividends, after never cutting them, I would be happy whether it went to $100 at some point or above $2000 in between. And if you buy Amazon (AMZN) and it 30 years it is at $80,000/share, that's fine too. Again, we do not know today which of the two companies will do best between 2021 and 2050. Only people in 2050 know for sure. We can tell with the benefit of hindsight, but there is not much we can do about it, right? Unless you have a time machine of course In that case, would you please send me a link to next years newspaper? Relevant Articles: - Dividend Investors Should Ignore Market Fluctuations - My General Philosophy on Dividend Growth Stocks - Are you patient enough to become a successful dividend investor? - How to have enough Your Savings Rate Matters Mon, 11 Jan 2021 09:00:11 GMT One of the biggest misconceptions is that you need a high income to achieve financial independence. Your savings rate is much more important than absolute dollars earned. Your savings rate is determined by dividing the amount you saved over the amount you earned. For example, if you earn $250,000/year as a doctor or lawyer, but spend $240,000, you can become financially independent after a long but productive 55 years on the job. Hope you enjoy your occupation, because you would be working well into your 70s or 80s. On the other hand, if you make $60,000, but live on half of it, you can retire in 15 years. While it may look "easier" to save a higher percentage with a higher income, you may also have to keep up with the expensive tastes of peers (expensive houses, cars, clothes, vacations etc). Hedonic adaptation, keeping up with the Joneses mentality, can lead to a gradual inflation of your lifestyle. Managing your savings rate effectively is an exercise in playing effective offense and effective defense. Effective offense is the ability to grow income over time, which can increase the savings rate over time. This could mean getting promotions, starting a side hustle or a second job. Growing dividend income is an effective side hustle, where you generate extra income. If you earn $50,000/year, and save $10,000, your savings rate is 20%. If you manage to grow earnings by 10% while keeping expenses constant, your savings increases by 50%. That’s a $5,000 salary increase. Your savings rate rises to 27%. Growing income is not easy of course. In my experience, I ended up working much harder for each raise beyond a typical inflation adjustment. Switching jobs can help too, but you also need to take into consideration if there are other costs to do that job in terms of work attire, longer commute, working longer hours etc. This difficult work environment does provide motivation to pursue financial independence however. Effective defense is the ability to contain expenses, stick to a budget and look for ways to eliminate waste from the system. Again, as we saw above, if you earn $50,000/year, and save $10,000, your savings rate is 20%. If you manage to decrease expenses by 12.50%, or $5,000, your savings rate increases by 50%. Your savings rate rises to 30%. As a result, it would take you less time to reach financial independence for each dollars of cost you take out. The nice thing about being frugal, is that it gives you a double benefit. For example, if you spend $30,000/year, you would need a $1,000,000 portfolio of dividend stocks yielding 3% to reach the dividend crossover point. If you earned $50,000/year, it would take you 19 years to get to the dividend crossover point. This example assumes investing $20,000/year in dividend growth stocks yielding 3% and growing dividends at a rate of 6%/year. The math behind early retirement is shockingly simple. Let’s look at an example where your salary increased by $3,000, to $53,000. Let’s assume that your spending remained at $30,000/year. You still need to accumulate $1 million in dividend growth stocks yielding 3% in order to retire. But now you can save $23,000/year. It would take you 18 years to reach the dividend crossover point at this rate. If you cut expenses by 10%, to $27,000/year, you would only need $900,000 invested in dividend growth stocks to reach retirement. You would be able to save $23,000/year., and reach the dividend crossover point in 17 years. In a way your needs are smaller, which means you need a smaller nest egg. But your savings rate also increases from 40% to 46%, which speeds up time to retirement significantly. Today we discussed the importance of the savings rate in achieving financial independence. Each dollar that you reduce your expenses by has a higher impact on your savings rate than each dollar that you increase income by. The issue of course is that you can only cut out so many expenses. That’s why you need a good offense (grow income) and a good defense (keep or lower expenses). Relevant Articles: - The Simple Math Behind Early Retirement - What are your dividend investing goals? - Use these tools within your control to get rich - Simple Investing Principles to Follow Value and Growth Are Attached at the Hip Wed, 06 Jan 2021 09:00:03 GMT There seem to be to schools of thought when it comes to investing. One is the so-called value investors community, where folks look at low P/E ratios, high dividend yields, low price to book or price to sales. In other words, value investors try to acquire assets at a portion of their worth. On the other hand, there are some growth investors, who believe that companies with growing sales, and growing earnings are more valuable. They do sophisticated discounted cashflow analyses to project future growth, and discount at a certain rate to come up with fair value. Then there is Warren Buffett, who believes that Growth and Value are part of the same equation. Growth and Value are attached at the hip, which means that you have to look at both the valuation metrics like P/E or dividend yield for example alongside with growth in earnings or dividends. Buffett stated the following in his 1992 letter to shareholders: "Most analysts feel they must choose between two approaches customarily thought to be in opposition: "value" and "growth." Indeed, many investment professionals see any mixing of the two terms as a form of intellectual cross-dressing. We view that as fuzzy thinking (in which, it must be confessed, I myself engaged some years ago). In our opinion, the two approaches are joined at the hip: Growth is always a component in the calculation of value, constituting a variable whose importance can range from negligible to enormous and whose impact can be negative as well as positive." As a Dividend Growth Investor, I have followed an approach that looked at value and growth as one thing. I looked at things like P/E ratios, but also looked at growth, along with sustainability and defensibility of the earnings stream throughout past economic cycles. Please check my article on how to value dividend stocks. I recently found the following video, which explains this neatly. (Youtube) I have also included the transcript from the 2001 Berkshire Hathaway Meering your reference: (Source: CNBC) 13. “There is no such thing as growth stocks or value stocks” WARREN BUFFETT: Zone 3. AUDIENCE MEMBER: Good morning. Mo Spence from Waterloo, Nebraska. You’ve often stated that value and growth are opposite sides of the same coin. Would you care to elaborate on that? And do you prefer a growth company that is selling cheap or a value company with moderate or better growth prospects? WARREN BUFFETT: Well, actually I think you’re — you may be misquoting me. But I really said that growth and value, they’re indistinguishable. They’re part of the same equation. Or really, growth is part of the value equation. So, our position is that there is no such thing as growth stocks or value stocks, the way Wall Street generally portrays them as being contrasting asset classes. Growth, usually, is a chance to — growth, usually, is a positive for value, but only when it means that by adding capital now, you add more cash availability later on, at a rate that’s considerably higher than the current rate of interest. So, there is no — we don’t — we calculate into any business we buy what we expect to have happen, in terms of the cash that’s going to come out of it, or the cash that’s going to go into it. As I mentioned at FlightSafety, we’re going to buy $200 million worth of simulators this year. Our depreciation will probably be in the area of $70 million or thereabouts. So we’re putting $130 million above depreciation into that business. Now that can be good or bad. I mean, it’s growth. There’s no question about it. We’ll have a lot more simulators at the end of the year. But whether that’s good or bad depends on what we earn on that incremental $130 million over time. So if you tell me that you own a business that’s going to grow to the sky, and isn’t that wonderful, I don’t know whether it’s wonderful or not until I know what the economics are of that growth. How much you have to put in today, and how much you will reap from putting that in today, later on. And the classic case, again, is the airline business. The airline business has been a growth business ever since, well, you know, Orville [Wright] took off. But the growth has been the worst thing that happened to it. It’s been great for the American public. But growth has been a curse in the airline business because more and more capital has been put into the business at inadequate returns. Now, growth is wonderful at See’s Candy, because it requires relatively little incremental investment to sell more pounds of candy. So, its — growth, and I’ve discussed this in some of the annual reports — growth is part of the equation, but anybody that tells you, “You ought to have your money in growth stocks or value stocks,” really does not understand investing. Other than that, they’re terrific people. (Laughter) Charlie? CHARLIE MUNGER: Well, I think it’s fair to say that Berkshire, with a very limited headquarters staff — and that staff pretty old — (laughter) — we are especially partial to laying out large sums of money under circumstances where we won’t have to be smart again. In other words, if we buy good businesses run by good people at reasonable prices, there’s a good chance that you people will prosper us for many decades without more intelligence at headquarters. And you can say, in a sense, that’s growth stock investing. WARREN BUFFETT: Yeah, if you had asked Wall Street to classify Berkshire since 1965, year-by-year, is this a growth business or a value business — a growth stock or value stock — you know, who knows what they would have said. But, you know, the real point is that we’re trying to put out capital now to get more capital — or money — we’re trying to put out cash now to get more cash back later on. And if you do that, the business grows, obviously. And you can call that value or you can call it growth. But they’re not two different categories. And I just cringe when I hear people talk about, “Now it’s time to move from growth stocks to value stocks,” or something like that, because it just doesn’t make any sense. Dividend Growth Investor here. That is a very insightful discussion from Warren Buffett and Charlie Munger. When evaluating investments, it is very helpful to think about the returns and sources of returns. I follow the idea that returns are a function of three factors: 1) Initial Yield and dividend reinvestment 2) Earnings/Dividend Growth 3) Changes in valuation multiples I will illustrate this principle by looking at Realty Income (O). Check my last analysis of Realty Income for more information behind the company. In 2010 the stock sold between $35.97/share and $25.28/share. At an FFO/share of $1.83, this meant that the stock sold between 19.66 and 13.81 times FFO. Someone looking at the range may have considered that 19 times FFO is “high” and 14 times FFO is a “low” price. The problem is that Realty Income never sold below 14 times FFO again. The closest it went to was 14.11 times FFO in 2011 and 14.34 times FFO in 2014. Obviously, buying Realty Income at $25/share in 2010 would have worked out better than buying it at $35/share. But in reality, buying and holding the stock for the next decade would have entitled the investor to $20.47 in dividends between 2011 – 2019 and a stock that is selling at $60 as of the start of 2021. The REIT grew FFO/share from $1.83 in 2010 to $3.29 in 2019. Even if you paid a notch too much, the growth in intrinsic value bailed you out. Even if you paid 19 times FFO in 2010, you turned out fine, because the company kept growing FFO/share. As a result the value of the business grew as well. It definitely helped that the dividend increased from $1.72/share in 2010 to $2.72/share in 2019. If FFO/share was flat however, dividends would have been flat as well. That would have likely depressed the Price/FFO ratio. Investors would have also most likely demanded a higher dividend yield. Another REIT selling at an FFO/share of 15 in 2010 that did not grow, would have been more expensive going forward through 2020. That’s because its dividends would have remained largely flat, and the share price would have remained flat too, as intrinsic value failed to grow. Of course, hindsight is always 20/20. But on the other hand, we only have past data when we are making decisions, which is why intelligent investors should look for ways to determine the likelihood that future results. Realty Income is a quality company with a management team that has a proven track record of growing Funds from Operations, managing the portfolio etc. I see Realty Income as the gold standard in triple net leases. The future is always uncertain, but I think the management has kept up with being transparent, and I have watched their collectibility slowly creep up. If you look at Price/FFO ranges in the past decade, the current high is within that range. The nice thing of course is that FFO/share grows over time, and the dividend is in my opinion secured by the cash flows from the leases. Value and growth are attached at the hip. Relevant Articles: - How Dividend Growth Investors can prosper even if interest rates increase - Evaluating Dividend Growth Stocks – The Missing Ingredient - How to value dividend stocks - Rising Earnings – The Source of Future Dividend Growth Health Savings Account (HSA) for Dividend Investors Mon, 04 Jan 2021 02:59:50 GMT I recently signed up for a Health Savings Account (HSA) with my employer. A Health Savings Account is a tax-advantaged medical account which is available to individuals in the US who have enrolled into a high-deductible health plan (HDHP). For 2021, individuals cannot contribute more than $3,600/year, while families cannot put more than $7,200. There is a catch-up contribution of $1,000 for those 55 or older. Individuals who are enrolled in Medicare are not eligible to open an HSA. I signed up for the HSA mainly as another way to defer money for future investment. As most of you know, I am already maxing out other tax-deferred accounts in an effort to cut one of my largest expenses. Benefits An HSA offers a triple tax advantage in most states. The contributions are before tax, which means that the account holder does not pay Federal, State and FICA taxes. If you were in the 24% marginal tax bracket, had a 5% state income tax rate, and you didn’t pay 7.65% for FICA, you will end up saving 36.65% merely by contributing to an HSA account. On $3,600, this comes out to $1,319.40 in tax savings right off the bat. The money can be used for qualified medical expenses at any age, without having to pay any taxes on such withdrawals. However, support documentation should be retained in case of an audit. Withdrawals not for qualified medical expenses are subject to a 20% penalty and income tax. After age of 65, withdrawals are not subject to a 20% penalty. While they continue to be tax-free for medical expenses, they are taxed at your ordinary income rate for any other type of distribution from the account. I was attracted to HSA’s because of the large up-front tax deduction. When I contribute money to a tax-deferred vehicle, I have more money under my control, since I reduce the largest expense in my household budget ( taxes). I have done a similar thing by maxing out 401 (k) and Sep IRA contributions since early 2013. I was also attracted by the fact that money put in an HSA account compounds tax-free. In addition, unlike a Flexible Spending Account (FSA), the money does not have to be used by a certain date. Hence with an HSA the money carries over from one year to the next, and thus stays in the account and could potentially compound over time. Drawbacks One of the major drawbacks to HSA accounts is the large monthly fees with many providers. When I reviewed different providers in 2014 - 2015, it looked like a minimum account balance that is anywhere between $3,000 - $5,000 has to be maintained in cash, in order to avoid a monthly charge in the range of $2 - $5/month. Many employers tend to cover this amount for their employees, so this is a benefit. However, there are additional fees on each withdrawal, ordering checks to pay for items, opening fees, account closing fees etc. Plus, there are monthly fees if you plan to invest that HSA money into something. This is in addition to the fees for failing to maintain a minimum balance in the account. In addition, most of the investment options are limited to mutual funds, some of which have really high expense ratios that come close to 1%/year. The one positive thing however is that a person is not stuck with an HSA provider, if their employer offers a crappy HSA provider. One can simply rollover the funds from their original HSA administrator, to the HSA administrator of their choice. This is one thing I did a few years ago. I moved my HSA money to LivelyMe, which is a no-cost HSA alternative. The other drawback is the low limits on how much one can potentially defer. If limits for individuals are increased to at least match those on IRA or Roth IRA accounts, this would be a good start. Best Providers I looked at different providers, and looked at their costs to have an account, and availability of investment options. In my research, I give extra points for companies that are not going to charge me $4- $5/month on a $3,000 - $6,000 balance that takes 1 – 2 years to build up, or at least will not charge me monthly fees after my total balances exceed a reasonable amount of dollars. I am talking about eliminating as much in monthly or annual fees are possible, since some administrators tend to charge you an HSA Bank fee if you have less than $3,000 - $5,000 in a bank, in addition to charging you a monthly brokerage fee. I also wanted to find the broker that would allow me as much flexibility as possible in choosing investments that do not cost me a lot. When I originally wrote this article in 2015, there were not a lot of good options out there. At the end of 2020 however, there are two great options. The first one is with Fidelity. Up until a few years ago, it was impossible to open an account with Fidelity. But now, it is relatively easy and anyone can open one to move money to a Fidelity HSA. It offers No-Fee-HSA's, which means that you have a maximum amount of money working for you. There are no account service charges, minimum fees, or fees to invest your money. You can pretty much invest the money in anything you want from individual stocks, to ETFs or mutual funds. Plus, this is with Fidelity, which is an investing brokerage powerhouse. The second one is with Lively. It also has no fees for HSA accounts, and also offers free investing options. There are no hidden charges. You can invest the money through TD Ameritrade. The downside for Lively is that it is a relatively new player, so it may not be around for a long time if it gets acquired or goes out of business. I have used both Fidelity and Lively, and really like the ease of opening and funding accounts. You can do pretty much everything electronically. You do need to fax information if moving assets, but that is similar to moving assets from one broker to the next. The thing to consider of course is that fees can change if minimum balances are changed as well. Plus, there might be fees assessed if you transfer money from one custodian to the next. I have contributed to a Health Savings Account since 2015, and have enjoyed the process of accumulating funds there and investing them. One thing to note is that all of my employers that have offered an HSA have also matched a certain portion of contributions. This is similar to a 401 (k) match, but only for HSA's. In a way, it is another account to use to accumulate a nest egg in a tax efficient way. Health Savings Accounts make perfect sense for those like me who are looking for another vehicle where they get a tax deduction upfront today, and receiving a tax-advantaged growth of their investments. The real nice part is that after age of 65 I can withdraw the money for whatever reasons I desire, and will not have to pay any penalties (if the money is spent on non-medical expenses, it is taxed at ordinary income tax rates). I have decided that even if I have to end up with an index fund in that Health Savings Account, I would be better off than picking individual dividend stocks in a taxable account. Let me walk you through a hypothetical (made-up) calculation. I calculated that if I choose to invest $1,000 in an HSA that generates a net annual total return of 7%/year, I would end up with $5,807 in 26 years. This return assumes that no taxes are taken and also assumes fees paid are subtracted from returns ( meaning the gross return is slightly higher). However, if I were to earn those $1,000 from my day job but decided not to put them in an HSA, I would be left with $623.50. This is because I would be paying 24% Federal Tax, 5% State Tax, 1% City Tax and 7.65% FICA. If I managed to earn an after-tax annual total return of 9%/year for 26 years in a row, my account balance will be $5860. The break-even point will be 26 years. Of course I am not comparing apples to apples here, because an after-tax return of 9% in a taxable account usually requires a return above 10% even at today’s low rates on dividends and capital gains. Conclusion To summarize, I believe that HSA accounts provide several benefits to investors who want to build retirement savings, and have exhausted common vehicles such as 401 (k) or IRA's. The first advantage of HSA's is triple tax advantage, because of the deduction for Federal, State and FICA taxes. This leaves more money working for the investor. The second advantage is tax-deferred growth of that capital for decades. The third advantage is that this money can be withdrawn at any time, penalty free if it is for qualified medical expenses. It can also be withdrawn penalty free after the age of 65. The money is taxed after the age of 65 if used for non-medical purposes at the ordinary income tax rates. The drawbacks behind HSA's include fees, low variety of investment options and the fact that annual contribution limits are low. Of course, for those of us who understand the power of compounding, we know that even a small contribution of $3,000/year over a period of a couple decades could turn into a few nice supplement to the retirement nest egg. Relevant Articles: - Why I Considered Tax-Advantaged Accounts for My Dividend Investments - Roth IRA’s for Dividend Investors - Six Dividend Paying Stocks I Purchased for my IRA - Twenty Dividend Stocks I Recently Purchased for my 401 (k) Rollover - Nine Quality Dividend Stocks Purchased for the Roth IRA 2020 Was a Record Year For Dividends Thu, 31 Dec 2020 09:00:04 GMT The year 2020 was definitely a turbulent one. It was marked by lockdowns worldwide due to the Covid-19 pandemic, high unemployment and economic turbulence. Yet, it also marks as another record year for US dividend payments, as measured by S&P 500. S&P 500 is a proxy for how US stocks do, since this index of 500 prominent US based companies accounts for 75% - 80% of total stock market capitalization. These are huge companies, with global operations, in 11 industries. Dividend payments to investors in the S&P 500 rose to a new record in 2020, up 0.7% to $58.28 per share from the previous record set in 2019, according to research from S&P Global. This marked the eleventh consecutive annual dividend increase for annual dividends on the S&P 500 index. This is due to strong performance in US companies, which expect business to improve over time. The growth in dividends was due to strong first quarter and a strong fourth quarter. While the dividend cuts received a lot of publicity, at the end of the day we ended up with record dividend incomes. This also means that the best dividend fund is probably still the S&P 500. In 2020, there were 423 companies on the S&P 500 that paid a dividend. It is fascinating to see that: -287 companies raised dividends -11 companies initiated dividends -27 companies cut dividends -42 companies suspended dividends You can see the performance by sector broken out in the chart below: It is fascinating to look at how the S&P Dividend Aristocrats did in 2020. There were 61 dividend increases, and only two dividend cuts and one dividend suspension. The dividend suspension was from Ross Stores (ROST), which had just joined the index at the beginning of 2020. The dividend cuts were from Amcor (AMCR) and Raytheon Technologies (RTX). Raytheon Technologies was formed when dividend aristocrat United Technologies (UTX) merged with Raytheon (RTN), and then spun off Otis Elevator (OTIS) and Carrier Global (CARR). The S&P committee also points out to two dividend initiations for the dividend aristocrats index, notably Otis (OTIS) and Carrier Global (CARR). There were five companies that failed to increase dividends in 2020. If they don't raise dividends anytime by 2021, they would be kicked out of the index. The companies include: AT&T (T) Caterpillar (CAT) Exxon Mobile (XOM) Leggett & Platt (LEG) Sysco (SYY) You can view all the dividend actions year to date below: You can also view it by sector below: As I discussed in a previous post, I disagree with the way they handled the transaction. That’s because, based on spin-off weights, it looks like Raytheon Technologies actually increased dividends. Based on pre-spin-offs weights, it looks like Carrier and Otis are not pulling in their weight. In other words, these two companies are paying less than what they would have paid if United Technologies had not done any breakups. Yet, the company that actually ended up raising dividends, and which actually created the long record of annual dividend increases ended up being booted off the S&P Dividend Aristocrats index. It makes no sense that the two spin-offs would be kept due to the record of the original company, but the original companies is booted off because the spin-off itself it is treated as a dividend cut. My head is spinning just thinking about it. Overall, United Technologies shareholders received less dividends with all the spin-offs than before. Now if you want to treat the whole thing as a dividend cut, that would be logical. But do not treat the original company with the track record as a cut, but the spin-offs that just initiated dividends as dividend aristocrats. Anyway, my issue is that the S&P committee is not treating spin-offs consistently. In 2007, Altria was kicked off the Dividend Aristocrats list after it spun-off Kraft foods. However, in 2013 they kept both Abbott and Abbvie after the original Abbott Labs split into two companies. I would stop my ramblings now. I will update the dividend aristocrats list in 2020 in a few weeks, but I have always stated that the Dividend Champions list is more extensive. It is best reviewed together with the list of dividend champions. I still like a lot of the companies on the aristocrats list, and find many of them to be of higher quality. It is also easier to learn about 65 dividend aristocrat companies than 138 dividend champions. Either way, it is fascinating to see that strong dividend payments continued in 2020, despite the global pandemic, economic turbulence and high unemployment. It makes me wonder how much higher we would have been if Covid-19 was contained. Relevant Articles: - Index Fund Investors are Closet Dividend Growth Investors - Dividend Aristocrats List for 2020 - Dividend Champions List for 2021 - Dividend Kings List for 2021 - Dividend Aristocrats Keep Performing Well in 2020 - What should I do about Raytheon and its spin-offs? Dividend Champions List for 2021 Tue, 29 Dec 2020 09:00:00 GMT A dividend champion is a company which has a 25 year record of annual dividend increases. There are only 134 such companies in the US today. I believe that becoming a dividend champion is no accident, and it is a result of a strong business that has generated earnings growth for a long period of time. These are the types of businesses I like to study, and potentially consider at the right time for my dividend portfolio. I believe that the dividend champions list offers a more complete picture than the dividend aristocrats. I first posted the annual list of dividend champions through December 31, 2018. I decided to update the list of dividend champions after the untimely passing of David Fish in May 2018. Last year, I shared with you the Dividend Champions list for 2020. You can download the 2020 Dividend Champions List from this link. This year, I decided to make an annual update as well. I decided to keep it simpler this time, and kept the data per each company to a minimum. You can download the 2021 Dividend Champions List from this location. As a starting point, there were 134 companies on the dividend champions list at the end of 2019. There were five companies that ended up leaving the Dividend Champions list in 2020. These companies all managed to cut or suspend dividends. The list includes: - Helmerich & Payne (HP) (47 years) - Meredith Corp (MDP) (26 years) - Tanger Factory Outlet (SKT) (26 years) - Urstadt Biddle Properties (UBA) (26 years) - Ross Stores (ROST) (25 years) The number in brackets is the number of year of consecutive annual dividend increases for each of these five companies. There were nine companies added to the list in 2020. These companies achieved dividend champion status by raising dividends to shareholders for 25 years in a row. The companies include: Artesian Resources (ARTNA) First of Long Island Corp.(FLIC) International Business Machines(IBM) Lincoln Electric Holdings(LECO) NextEra Energy Inc. (NEE) New Jersey Resources (NJR) Polaris Industries (PII) RenaissanceRe Holdings(RNR) Southside Bancshares (SBSI) One company changed its name and ticker from (WTR) to (WTRG) Essential Utilities Inc. (WTRG) Another company, United Technologies (UTX), had two spin-offs in 2020 - Carrier (CARR) and Otis (OTIS). Next, it merged with Raytheon to form Raytheon Technologies (RTX). Overall, shareholders in United Technologies experienced a dividend cut, but mostly due to the dividend policy in its spun-off subsidiaries. As a result, I am keeping Raytheon Technologies (RTX) as a dividend champion. All of this brings the list of dividend champions to 138 companies by the end of 2020. You can download the list from here. There are a few companies such as AT&T (T) or Exxon Mobil (XOM), which may lose their status in 2021 because they failed to raise dividends this year. If the dividend is kept unchanged, chances are the company will lose its dividend champion status. Thank you for reading! Relevant Articles: - Dividend Champions, Contenders & Challengers: The most complete list of US dividend growth stocks available - October 2018 Dividend Champions List - December 2018 Dividend Champions List - RIP David Fish

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