Seeking Alpha
Long-term horizon, dividend investing, dividend growth investing
Profile| Send Message|
( followers)  

Every year or two, when I have my vision checked by an optometrist, I am reminded of Einstein's Theory of Relativity - everything is relative to the perspective of the observer. The optometrist has me looking at the same image on the wall, but what I see depends on which lenses he puts in front of my eyes.

How does this relate to investing?

I made a trade recently, and whether it was "good" for me or "bad" for me depends on your perspective.

The History

On 8/2/11, I spent $24,564.71 to buy 380 shares of Kimberly-Clark (NYSE:KMB) at $64.64 per share. (That amount includes a $2 transaction fee, and might be slightly off, due to rounding in the least significant digits.) KMB was undervalued (according to FAST Graphs) at that time.

I received the following dividends:

On 10/4/11, I received $266.00.

On 1/4/12, I received $266.00.

On 4/3/12, I received $281.20.

On 7/3/12, I received $281.20.

On 10/2/12, I received $281.20.

On 1/3/13, I received $281.20.

On 4/2/13, I received $307.80.

On 4/22/13, I sold 380 shares of KMB at $105.00 per share. I collected $39,897.10. (That amount includes a $2 transaction fee, and might be slightly off, due to rounding in the least significant digits.) KMB was overvalued (according to FAST Graphs) at that time.

On 4/22/13, I spend $40,209.96 to buy 214 shares of IBM (NYSE:IBM) at $187.89 per share. (That amount includes a $2 transaction fee, and might be slightly off, due to rounding in the least significant digits.) IBM was undervalued (according to FAST Graphs) at that time.

A Total Return Perspective

I received $15,332.39 in realized capital gain, plus $1964.60 in dividends, for a total return of $17,296.99. This represents a total return of 70.4% on the original investment, in less than two years.

A total return teacher might give this trade a grade of A+.

A Capital Gain Perspective

I received $15,332.39 in realized capital gain. This represents a capital gain return of 62.4% on the original investment, in less than two years.

A capital gain teacher might give this trade a grade of A.

A (Short-Term) Income Perspective

KMB pays an annual dividend of $3.24 per share, for a current yield of 3.1%. Before the trade, 380 shares of KMB would yield $1231.20 worth of dividends in one year.

IBM pays an annual dividend of $3.40 per share, for a current yield of $1.8%. After the trade, 214 shares of IBM would yield $727.60 worth of dividends in one year.

My current income dropped by $503.60.

An income teacher might give this trade a grade of F.

A (Long-Term) Income Perspective

Let's take a look into the future. How much income would KMB have paid me, had I kept it? How much income will IBM pay me? When will IBM have paid me more income than KMB would have?

That depends on the future growth rate of the dividend for each company.

No one can predict the future, so let's look at the past.

The compound annual growth rate (OTCPK:CAGR) of KMB's dividend looks like this:

10 year - 9.484%

5 year - 7.020%

3 year - 7.054%

1 year - 5.797%

This downward trend is disturbing. To be conservative, let's pick the 1 year rate.

The bumpiness is 4 or less, which is very smooth.

The CAGR of IBM's dividend looks like this:

10 year - 18.786%

5 year - 17.080%

3 year - 15.352%

1 year - 13.793%

This downward trend is disturbing. To be conservative, let's pick the 1 year rate.

The bumpiness is 11 or less, which is very smooth.

Here's a spreadsheet showing the current and cumulative income from each company:

Current and cumulative income from KMB and IBM
YearKMB currentIBM currentKMB cumulativeIBM cumulative
1$1,231.20$727.60$1,231.20$727.60
2$1,302.57$827.96$2,533.77$1,555.56
3$1,378.08$942.16$3,911.86$2,497.72
4$1,457.97$1,072.11$5,369.83$3,569.83
5$1,542.49$1,219.99$6,912.31$4,789.81
6$1,631.91$1,388.26$8,544.22$6,178.07
7$1,726.51$1,579.74$10,270.70$7,757.81
8$1,826.59$1,797.64$12,097.30$9,555.45
9$1,932.48$2,045.58$14,029.80$11,601.00
10$2,044.51$2,327.73$16,074.30$13,928.80
11$2,163.03$2,648.79$18,237.30$16,577.60
12$2,288.42$3,014.14$20,525.80$19,591.70
13$2,421.08$3,429.88$22,946.80$23,021.60
14$2,561.43$3,902.97$25,508.30$26,924.50
15$2,709.91$4,441.30$28,218.20$31,365.80
16$2,867.01$5,053.89$31,085.20$36,419.70
17$3,033.21$5,750.97$34,118.40$42,170.70
18$3,209.04$6,544.21$37,327.40$48,714.90
19$3,395.07$7,446.85$40,722.50$56,161.80
20$3,591.88$8,473.99$44,314.40$64,635.80
21$3,800.11$9,642.81$48,114.50$74,278.60
22$4,020.40$10,972.80$52,134.90$85,251.40
23$4,253.46$12,486.30$56,388.40$97,737.70
24$4,500.03$14,208.60$60,888.40$111,946.00
25$4,760.90$16,168.40$65,649.30$128,115.00
26$5,036.89$18,398.50$70,686.20$146,513.00
27$5,328.88$20,936.20$76,015.10$167,449.00
28$5,637.79$23,823.90$81,652.90$191,273.00
29$5,964.62$27,109.90$87,617.50$218,383.00
30$6,310.38$30,849.20$93,927.90$249,232.00

IBM would not pay me more current income than KMB until year 9.

IBM would not pay me more cumulative income than KMB until year 13.

Of course this analysis depends on each company maintaining its dividend CAGR for at least 13 years. How likely is that?

36 companies have maintained dividend increases of 5% or more each year for 13 consecutive years (according to this chart), so it seems likely that KMB can keep this up.

0 companies have maintained dividend increases of 13% or more each year for 13 consecutive years, so it seems unlikely that IBM can keep this up.

An income teacher might give this trade a grade of F.

Conclusion

I have long thought of myself as an income investor, specifically a dividend growth investor. And yet, after reviewing this trade, it seems to me that I made a decision that was "bad" for me from an income perspective.

The only good news it that (1) the decision was "good" for me from both a capital gain perspective and a total return perspective, and (2) I look forward to buying back my KMB shares when they become undervalued (I hope this doesn't take too long to happen), so I can have both KMB and IBM.

My thanks to SA members (in alphabetical order) chowder, Chuck Carnevale, contraria2, David Van Knapp, fludolph, Paul Leibowitz, raykrv6a, richjoy403, and rnsmth for their very helpful comments and feedback.

Source: How Can One Trade Be Both Good For Me And Bad For Me?