I'll explain remixing for greater dividends in a minute. First, I need to provide some background so we've got a meaningful starting point.
This is in the Berkshire Hathaway portfolio. Based on the size of the holding, I'm guessing that either Todd Combs or Ted Weschler made the purchase. I paid $68.75 and I thought it was a real bargain. In any event, they are an old company (founded in 1862) and they are in the business of helping oil companies get gas and oil out of the ground. This is another energy play. I also like that this is a dull and boring business. It's just not sexy and that keeps a lot of people away. Management is great based on everything I've read. I think the spinoff of the distribution business will generate a lot of value. it reminds me a little of the (NYSE:COP) spin-off of (NYSE:PSX). I'm excited about it and I'll be holding NOV for a while, maybe forever. By the way, NOV is also a Dividend Challenger; growing dividends for 5 years now.
It's a rock solid company and back then it was trading for about $70 so it was easy to buy and hold. It was just a bit above my average buy price at that time with no meaningful capital gain. Steady as she goes with no need to rock the boat.
Fast forward to today, where NOV trades for just over $82 for a gain of roughly 20% and flirting with the 52-week high of about $85.
Although I really like NOV, and I will continue to hold a lot of shares, I started to feel like I ought to diversify a little bit more and I wanted to capture some gains. Also, I wanted to increase my yearly dividend cash flow. The 2.3% yield is reasonable, especially considering it was pumping out $1.04 annualized in January but now it's $1.84 per year.
The bottom line here is this: I really liked NOV and I still really like NOV, but it's near a 52-week high, my conviction has dropped a little, I want to diversify a bit, and most importantly, I want to increase my cash yield.
Remixing to Higher Dividend Cash Flow
To stay focused on my goals and end game, I've been tracking dividends on a yearly, monthly, weekly and daily basis. I track the yearly amount to see the big picture of dividends in relation my other income and income replacement. I track the monthly cash because bills must be paid monthly, like utilities. I track weekly cash because of weekly expenses like groceries. And I track daily cash from dividends (averaged out, of course) because it's awesome to think about waking up with that much more money passively generated (after years of saving and investing). In other words, I think about dividend cash flow in terms of what our family needs, but also short- and long-term goals.
I also look at dividend cash flow for purely psychological reasons. I'm looking for as much of a dopamine rush from my dividends as possible to constantly keep me focused on what matters. I believe it's these things that help overcome both fear when things collapse and greed when the market or my individual stocks are richly valued.
In any event, although NOV isn't exactly overpriced right now with a P/E just under 15, and it's actually still a good buy in my opinion, I wanted to do the following:
- Capture and reinvest some gains
- Buy similar or lower P/E stock(s)
- Increase my dividend overall yield
I saw an opportunity to remix my portfolio by selling NOV and buying two stocks with higher yields while maintaining long-term dividend stability and perhaps even increasing dividend growth, while also buying stocks at fair prices or even undervaluation. The two stocks I bought after selling NOV were Wal-Mart (NYSE:WMT) and Verizon (NYSE:VZ).
Without going into all of the fundamental reasons for the adjustment, I'm going to explain the remixing and the impact. I will say that NOV has a P/E of just under 15, whereas WMT is just over 15 and VZ is about 11 right now. So, just based on P/E, we're in good shape.
Also, as many of my readers know, I'm a fan of long-term dividend-paying companies. NOV has been paying growing dividends for 6 years, WMT for 41 years, and VZ for 9 years. Here's how the yields look:
NOV = 2.3% yield
WMT = 2.5% yield
VZ = 4.3% yield
The whole story is that NOV's payout ratio is low (below 20%), whereas WMT's is about 37% and VZ's is over 70% right now and it was around 90% 2010 through 2012. There's more to the story here, but I do watch yields, payout ratio and dividend growth rates. Speaking of dividend growth rates, NOV's is excellent right now, whereas WMT and VZ are slower. So, I am definitely making a sacrifice in dividend growth.
Depending on your goals, you might stop right here, check out NOV and invest given the very fair dividend combined with the excellent recent dividend growth rate. Remixing to a higher yield might be complete nonsense to you, and I understand that thinking.
Let's pretend that I sold 115 shares of NOV for about $10K in cash. Then, let's assume I bought about $5K of WMT (80 shares) and $5K of VZ (70 shares). Here's what happens.
That would be $211.60 in cash from NOV per year eliminated, but a gain of $148.40 from VZ and $153.60 from WMT. So, the one sale and two buys provides an increase of $90.40 per year.
Was this exchange crazy? It provides me with $7.53 per month, $1.74 per week or $0.25 per day, depending on how you slice it.
Here's how that looks:
You can see that for about $10,000, I was getting about $212 per year, and then by remixing by selling NOV and reallocating about $5K to WMT and $5K to VZ, I am getting $302 per year. So, the remix increase is about $90 per year. Do this intelligently on a regular basis and you'll compound your wealth more quickly.
For what it's worth, "remixing to higher value" is exactly what IBM (NYSE:IBM) does, as described clearly in their 2013 annual report. In the case of IBM, remixing is about moving into higher-value, more profitable markets:
Ultimately, this is the essence of capital allocation and the cash flow that follows. It doesn't matter if we're talking about changing corporate assets or personal assets. You're still shifting investments to obtain the highest and safest returns over a time horizon.
But this is exactly how remixing works. If you're trying to increase the amount of cash flow you're passively generating, it takes this kind of adjustment. Or you can invest more money, or you can let dividend growth take care of your increasing cash flow. My remixing allowed me to achieve some goals, lock in some gains, diversify and so forth. But I can imagine that other investors with different goals would simply ride NOV. That's perfectly reasonable depending on the situation. However, I opted to lock in what I see as a permanent yearly, monthly, weekly, daily cash flow gain. I now have permanently higher dividends where I get an extra $0.25 every single day that I'm alive and that feels good.
I also have done the research on WMT and VZ, and they are already in my portfolio, so I'm not blindly remixing by chasing yield. It's not just about increasing yield and cash flow, it's about capital allocation in light of intrinsic value, which I feel I've done rationally here. The move was low risk for a simple, moderate gain.
Disclosure: The author is long NOV, WMT, VZ, IBM.
The author wrote this article themselves, and it expresses their own opinions. The author is not receiving compensation for it (other than from Seeking Alpha). The author has no business relationship with any company whose stock is mentioned in this article.