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Value, long-term horizon, dividend investing
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Well, it's been two months since we started on our journey with grandma's money. I want to thank all who commented, both here on SA and in private messages. We've looked into all the suggestions about account set up and legalities and taken actions as necessary. I also looked at the investment suggestions. Where appropriate, I added those to our list to review as we look for further diversification. There were some changes along the way and I wanted to follow up so anyone interested can see what our decisions were.

As we left it in the previous episode, we planned on taking $5,500 of grandma's cash and investing it in the following companies: Conoco Phillips (NYSE:COP), General Mills (NYSE:GIS), Lockheed Martin (NYSE:LMT), Meredith Corp. (NYSE:MDP) and Altria (NYSE:MO). Our primary goal was to bump up her current income to boost her savings for the day when her money would be needed for more intensive care. Right now, the vast majority of it is in low-yielding savings accounts.

When we set up the brokerage account, we found out grandma could trade without commission for the first 2 months. That eliminated the $50 in transaction costs we were expecting for the establishment of her portfolio. That satisfied the miser in me. Of course, dividend reinvestment is also free. As I only expect to make 2-3 trades per year, transaction costs will be minimal in the future.

I should digress here and mention that if you go through this process, have a checklist of things that need to be done. In my haste to ensure I wasn't putting grandma's money in too much risk, making sure we had the proper paperwork completed, et cetera, I forgot to turn on dividend reinvestment for all purchases in the account. I realized my mistake when the first two dividends were received on August 1st and deposited to her cash sweep account. I've since corrected that.

Once I got the money in the account, I placed limit orders slightly below where each was trading. Within two days, four of the orders were filled leaving MDP as the only outstanding trade. Of course, that was the time Mr. Market decided MDP should jump from the $41 trading range to above $44 and never look back. Many others on my short list did the same thing. I did not think it prudent to chase MDP so went back to my short list of candidates to see if any others would be a good substitute.

As in the first article, I'm not planning on giving a full analysis of my selection here. That's available here on SA and also many other places on the web. Instead, I'll just highlight the salient points that went into making my decision.

At the time, Darden Restaurants (NYSE:DRI) had taken a drop from the $53 trading range to $49. DRI had already announced a 10% increase in their dividend. The 4Q earnings report was flat -- sales up but earnings down. Management was discussing increased franchising activity in Latin America, the segmentation of their markets and re-emphasizing affordability in their renewed marketing campaign for the Olive Garden, Red Lobster and Longhorn Steakhouse brands. To me, it sounded like upper management had a good understanding of what their opportunities and challenges were going to be in the 2013-2014 time frame.

Yahoo Finance projects an average EPS growth of 6% over the next 5 years and Mr. Fish's CCC list is projecting a forward earnings growth of 4.4%. If earnings come within the expected range and the dividend grows about the same rate as earnings, we'll meet our goal of beating my 4% assumption of long-term inflation. DRI has raised their dividend consecutively for 9 years and has a dividend record of double digit increases over the last decade.

The payout ratio is about 65% of reported earnings. A little higher than my sweet spot and on the high end compared to similar companies in the industry but I don't feel the dividend is threatened. With a current yield of around 4.5%, the added risk seems acceptable since our goal is current income.

Anecdotally, I have seen more advertising for both Olive Garden and Red Lobster with limited time promotions. Adding to my interest was the recent local news that a Longhorn Steakhouse was finally coming to our area within the year. We've eaten at a Bahama Breeze in Tampa and absolutely loved it despite waiting over an hour for a table. Their other properties, Seasons 52, The Capital Grille, Eddie V's and Yard House, we've never seen although this now gives us an excuse to do more searching (and dining out) when we get a chance to travel. None are located in our area.

The downside to researching restaurant companies is that by the time I finished reviewing all their various brand's information, I was hungry again. Where was I going to get coconut shrimp with mango confit at 1:00 o'clock in the morning? You can call me whatever you want, just don't call me late for dinner … especially if dining out.

Reader Smallstep commented in my last article that I should consider Cracker Barrel (NASDAQ:CBRL). I agree it may have been a better choice since grandma often took the grandkids to CBRL when they went there to visit. However, CBRL has been going gangbusters as both a business and a stock. With a P/E of around 19 at the time and yield only slightly above 3%, CBRL just got away from me. With our shorter time frame and emphasis on current income, I felt DRI was a little better valued and with a yield closer to 4.5%, I felt it was a better choice. One of our criteria is that grandma had to be familiar with what we were investing in. Although the nearest DRI restaurant was about ½ hour ride from her when she was living in her own home, I don't believe she ever made it there. However, we have both an Olive Garden and Red Lobster (and soon a Longhorn Steakhouse) near us should she become curious about it. By happenstance, my daughter and several friend's children love Olive Garden so there must be some appeal there in the younger generation.

We put in the limit order, again a few cents less than what DRI was trading at, and it filled within a day. We now had our starting portfolio completed and even had change leftover.

Company

Purchase Price

Dividend

Yld on Cost

#Shrs

Amt Inv

Income

Conoco Phillips

$62.25

$2.76

4.43%

18

$1,120.50

$49.68

Darden Restaurants

$48.90

$2.20

4.45%

23

$1,124.70

$50.60

General Mills

$47.95

$1.52

3.17%

23

$1,102.85

$34.96

Lockheed Martin

$106.90

$4.60

4.30%

10

$1,073.60

$46.00

Altria Group

$35.905

$1.92

5.35%

30

$1,077.15

$57.60

Totals

$5,498.80

$238.84

In the interim, Conoco Phillips finally increased their dividend by 4.5% to $2.76 annually after a longer than expected wait. Although it's a lower increase than in the past, it still was above my assumed inflation rate and I still expect better days to come as COP's management continues reorganizing the business.

Also, as I was writing this, Altria announced a 9% increase in the dividend to $0.48 per share quarterly bringing the yield up to 5.35% based on our purchase price. Nice news before we've even received our first dividend.

Dropping Meredith Corp., adding Darden Restaurants and the COP & MO dividend increases also increased our projected annual income from $225.29 to $238.84, a 6% increase. Our first dividend payments, from DRI and GIS, totaled $21.39 which has already surpassed the annual income from her entire local savings account even if we included the cash we transferred to the brokerage. Not bad in two month's time frame.

Going forward, we are still making monthly additions to the account and should be ready to start looking for our next investment come October. By then I'm hoping the direction and magnitude of the change in interest rates may be more clear. Also, the debt ceiling limit and upcoming budget battle will hopefully be close to settled. Who knows what Mr. Market will be offering us then. When prudent, we may de-emphasize our requirement that she be familiar with the business as she's become more comfortable with us trying to boost her cash by investing in dividend stocks. This should give us more freedom in the choices we make.

I encourage everyone to not follow our choices blindly. Do your own research. Our goal was to increase current income with little expectation of long-term compounding to cover our mistakes.

In addition to the above, companies already held in one or more of our accounts include: ABBV, AFL, APD, BAX, BDX, BMO, BNS, COP, CVX, GIS, HAS, HRS, INTC, KRFT, LO, MCD, MSFT, NSC, PEP, RCI, ROST, RTN, T, TU, UTX, VOD, WAG.

Source: Taking Care Of Grandma's Money: A Redux