Seeking Alpha
Long only, value, dividend growth investing
Profile| Send Message|
( followers)

Introduction

I recently sold my Digital Realty (NYSE:DLR) holding. What did I do with the remaining capital from selling DLR? I mixed it in with some of my new capital and bought 2 high growth companies: Starbucks (NASDAQ:SBUX) and Visa (NYSE:V).

For someone with 30+ years before retirement, some readers have pointed out that I could add more growth to my Whistler Income and Growth Portfolio. Reviewing my portfolio, I agree with that. So, I decided to own companies at a spectrum of different growth rates. Particularly, some for high yield and little growth, good yield and moderate growth, and low yield and high growth.

These stocks will be in my taxable account because it's more tax advantageous to go for higher growth (capital gain) versus current income (higher dividends), even though I don't intend to sell them unless they become excessively overvalued. (I'm speaking in terms of Canadians owning U.S. dividend stocks in the taxable account.)

Why I Chose Starbucks

Starbucks is a roaster, marketer and retailer of coffee. There are 19,000 Starbucks stores located across 62 countries. As it enters its 43rd year, the growth story continues. Its China and Asia Pacific segment, comprising 13 countries, such as India and Vietnam delivered 27% revenue growth in 2013. Domestically, the Americas, its largest segment, still produced revenue growth of 11%.

1) Financially Strong with a S&P rating of A-

2) High Dividend Growth

Although SBUX has a low yield of 1.4%, since initiating a dividend in 2010, its dividend has grown at an annual rate of 27% (from $0.1 to $0.26 in 4 years).

For companies with lower yields, to pass the Chowder Rule, the sum of their yield and dividend growth rate [DGR] must be 15% or higher. 1.4 + 24.6% = 26%:

  • Yield: 1.4% (at $74.35 per share)

  • 3-year DGR: 24.56%

I do not expect Starbucks to continue having dividend growth rates in such high double digits. However, I do expect it to continue growing its dividends at least 18%. This is supported by analysts' estimation of earnings growth between 18 - 19%.

3) Valuation

Its earnings per share [EPS] for fiscal 2013 decreased to $0.01 due to a litigation charge of $2.8 billion which reduced EPS by $2.25 per share in fiscal 2013.

I initiated my position in Starbucks in the market dip last week. Considering Starbucks' price to follow more closely to its operating cash flow, as shown in the graph above, I consider Starbucks to be in the fair value range.

In 2014, Starbucks expects the operating margin to improve, and strong EPS growth, driven primarily by leverage on revenue growth. Capital expenditures are expected to be about $1.2 billion, primarily for store renovations and new stores, as well as for other investments to support ongoing growth initiatives.

Why I Chose Visa

Visa is a global payments technology company, which makes it easier to pay and be paid. It is accepted in more than 200 countries and territories around the world. Its global networks, VisaNet, connects 2.2 billion cards, 36 million merchants, and 14,600 financial institutions.

Visa is in the Industrials sector, which currently makes up 8% of my portfolio value and 3.5% of portfolio income. The main reason to add Visa is to add growth to my portfolio. Some other reasons to support this decision are:

1) Financially Strong with a S&P rating of A+

2) High Dividend Growth

Visa has a low yield of 0.72%. For companies with lower yields, to pass the Chowder Rule, the sum of their yield and DGR must be 15% or higher. 0.72 + 49.7 = 50.4%:

  • Yield: 0.72% (at $222.45 per share)

  • 3-year DGR: 36.6%

  • 5-year DGR: 49.7%

I do not expect Visa to continue having dividend growth rates in such high double digits. However, I do expect it to continue growing its dividends at least 18%. This is supported by analysts' estimation of earnings growth between 17 - 19%, and its current payout ratio of 18%. For the purpose of comparison, its highest payout ratio was 28% in 2012.

3) Valuation

I initiated my position in Visa in the market dip last week. From the graph above, I consider Visa to still be in the fair value range.

Conclusion

My intention is to hold these 2 high quality growth companies for a long time. I expect to get most of my return from Visa and Starbucks in capital appreciation.

References

Note: This article is not a recommendation to buy or sell. Do your due diligence before making a decision.

Disclosure: I am long SBUX, V. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Source: Adding High Growth Core Holdings To Strengthen My Dividend Growth Portfolio