It's graduation time here in Bumpass, Virginia, and my granddaughter will be heading off to college next fall. In order to fill the unused room in her house, my daughter is now expecting. When I retired in 2000, I thought expenses would drop off and I could relax in my golden years - WRONG!
With a never-ending crop of education expenses, I need to increase my long-term investments in a growing global sector - technology. Last year at this time, I was anticipating the summer pullback and thought that Intel (INTC) would make a good buy at the 4% yield point. After all, it had raised the dividend in early 2011 and announced another increase before the summer was over. I put in my limit order at $21 and it was filled in June. I am back in the same boat again and have set my limit order at $24. Intel has just announced its first dividend increase for 2012 at 7.1% or $.225 per quarter. You might ask why I didn't set my limit order at $22.50? With Intel's track record last year, I feel that the 7.1% dividend increase is only half of what it will do this year, since the five-year average dividend growth rate is 14.4%. Intel is a Dividend Challenger with nine years of increasing dividends. I feel confident that a $.24 per quarter dividend is in the cards.
Why do I think Intel will come down from the current $27.19 share price? Intel is a cyclical stock in the semiconductor industry averaging around $20 since 2002. In my mind, the price per share is based on the yield, even though the P/E ratio is low (11.5), I think the stock price is similar to a utility, with a floor based on 4% yield-- a premium of 1% over the 30-year treasury bond at 3.04% yield. The earnings growth is projected to be 7.6% next year and 10.6% for the next five years. (Data from David Fish's CCC charts and Yahoo Finance) There is an alternative view to my utility model for Intel in the technology sector which speaks of competition by tablets -- Apple (AAPL), operating systems, Microsoft (MSFT) and smartphones with battery life ARM Holdings (ARMH). However, I look at the long-term chart for Intel and am satisfied with my model:
Now to get down to what the long-term purchase of Intel can do for my portfolio. I have created a spreadsheet for the last five years for Intel with dividends reinvested:
|Stock||Date of reinvest||Div Rate||# Shares||Dividend||Drip price||# Shares pur||Total Value||Current Yield|
Note that the total value of the investment grows from the $10,000 initial investment to $15,341.74 in five years for an annual growth of 8.9%. The yield varied between 1.68% and 4.03% during this period. This stock is held in a traditional IRA, so no taxes are included in the calculations. I have graphed the results on the chart below:
Although I have purchased this stock for the yield + dividend growth rate, there is the possibility of capital appreciation similar to the period 1995-2000. However, if it becomes a growth stock again, an exit point must be set, due to over valuation.
Conclusion: In the current secular bear market, one must remain flexible - try various sectors and see what works. Intel provides safety of principal with a good dividend + dividend growth rate. Purchased at the 4% yield point, it makes a good long-term investment. It is critical that a retiree does his or her own due diligence on any investment.
Additional disclosure: I have an open order for INTC.