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My primary objective is income replacement! ... The objective is to start earning an income stream now, to replace the income that will be earned throughout the working years. I want that income to be reliable, predictable and increasing. The income stream will need to continue to grow to stay... More
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Market Strategies
  • 2014 Watch-List

    At the beginning of each year, I update the companies I would like to own and then track their share price throughout the year to see if any of them pull back into a buy zone.

    The reason they are on the watch-list as opposed to being in my portfolio is because they were/are overvalued.

    I won't purchase every company on the watch-list, for example I have several railroads listed but I only wish to purchase one. So when the time comes that one qualifies and gets purchased, the other railroads will come off the list.

    Those of you who have been reading my comments over the last few years know that I'm a very big proponent of strength. I believe that the strong often stronger, and because I know that is often the case, I don't allow companies selling at 52 week highs to prevent me from buying them if they pass my stock selection process. Not all companies at 52 weeks highs pass, and for those that don't, I will wait them out.

    I think most of us would agree that valuations are very important for long-term success, but I find it interesting to see that overvalued companies usually beat the S&P 500 Index easily in shorter time frames. At least the ones that make my list do. ... Ha!

    I'm not going to chase overvalued companies and this instablog is certainly not suggesting that others do either, I simply wanted to show how in the short term, momentum companies continue to show upside momentum.

    I may use this concept in the future when selecting growth oriented companies.

    Anyway, the following list shows price appreciation only for 2014, and they are not equally weighted. They were all based on the same number of shares, the number doesn't matter since all I was tracking was share price appreciation.

    I wouldn't apply the same concept in the portfolio because there I would be looking for total return and it's relation to the other positions, but for a watch-list, all I'm measuring is price action since I'm waiting on my price to open a position.

    Again, this wasn't or isn't a study or an attempt to prove anything. It is simply an exercise on value in the short-term and I couldn't think of a better example than my own watch-list.

    Here are the numbers: (Jan 1 through Dec 15)

    AMP ..... up 11.56%

    BAX ..... up 4.42%

    BDX ..... up 23.10%

    CAT ..... dn <1.17%>

    CB ...... up 5.28%

    CNI ..... up 12.12%

    COST ... up 16.76%

    CSX ..... up 20.02%

    CVS .... up 25.57%

    DNKN .. dn <3.69%>

    DNP .... up 8.81%

    EMR .... dn <16.72%>

    FL ...... up 40.46%

    GE ..... dn <10.03%>

    GPC ... up 22.19%

    HD ..... up 23.55%

    ITW .... up 10.37%

    LOW ... up 31.83%

    MA ..... up 1.41%

    MKC ... up 4.25%

    MMM ... up 11.84%

    NSC .... up 9.52%

    SBUX .. up 3.18%

    SWK ... up 16.13%

    TGT .... up 15.36%

    TJX ..... up 4.05%

    TPZ .... dn <0.70%>

    ULTA .. up 32.97%

    UNP ... up 33.74%

    UTX ... dn <1.66%>

    V ...... up 15.28%

    VFC ... up 16.39%

    WAG .. up 27.86%

    WMT ... up 6.88%

    This portfolio was up 12.80% on share price alone. It would be much higher if dividends were added and some of the positions showing negative above would actually be slightly positive if dividends were included.

    S&P 500 (NYSEARCA:SPY) ... up 8.40%

    Dec 16 6:14 AM | Link | 32 Comments
  • Project $3 Million - KMI

    This month's cash contribution should be posted in the account on Monday or Tuesday. There will be enough cash to make an add-on purchase. That purchase is going to be KMI.

    Kinder Morgan Inc. - KMI has recently completed a deal to consolidate the other Kinder companies, KMP, KMR and EPB. KMI is now one of the largest energy companies on the continent. With their size and scale, their diversification and track record of growth throughout market cycles, it becomes one of the best offensive and defensive plays in the midstream space.

    KMI now has the scale where there isn't a project on the continent they can't bid on. KMI now has the economy of scale where they can go on an acquisition spree and continue to grow the business.

    Institutional Investors have shown they approve of this deal. In an environment where oil prices are dropping and other midstream companies are seeing significant price corrections, KMI is only down 7% from it's all-time high. That's a sign of strength and I buy strength!

    Richard Kinder has said they expect to grow the dividend at a rate of 10% per year for the next 5 years. When you add the current 4.4% yield, that makes KMI an ideal dividend growth prospect at this time. The Chowder Rule number is 14.4 and that certainly confirms a good dividend growth prospect.

    I am purchasing KMI as a Core position and I am willing to pay up to 3 to 5 percent above fair value for a Core. Morningstar says KMI is selling at a 2.0% discount to fair value and S&P says it is selling at a 2.2% premium. So, it qualifies as fair value.

    Jefferson Research says KMI has an Earnings Quality rating of STRONG. They have a Cash Flow Quality rating of STRONGEST. They have an Operating Efficiency rating of STRONGEST.

    Bulls Say
    With the consolidation in the rear-view mirror, Kinder Morgan is starting a new chapter as the largest midstream firm in North America.
    We agree with management's expectations of 10% dividend growth through 2020, providing a solid outlook for both income and growth.
    Kinder Morgan is poised to be a consolidator, and Chairman Rich Kinder has already signaled his intent to hunt for accretive acquisitions. Over time this will help propel Kinder's growth.

    Bears Say
    With lower oil prices, there's a new headwind facing project development. It may become harder to keep project backlogs full, threatening longer-term organic growth.
    The TransMountain expansion is meeting with increasing opposition. Pipeline politics are playing out, moving the project from a sure thing to a maybe, pushing out likely in-service dates, and driving up project costs.
    It's unclear how the consolidated Kinder Morgan will fund new growth--will it raise equity capital like KMP did, and will markets tolerate that from a c-corp?

    The risk level is rising with weak oil prices, and share price could start falling, following the other midstream companies, but I'm willing to accept this risk given the strong earnings and cash flow ratings. KMI has the financial strength to survive an oil bust cycle.

    So there it is! As soon as the cash shows up in the brokerage account, KMI will be the next purchase.

    Dec 14 10:25 PM | Link | 33 Comments
  • Equity Investing Or Index Investing

    In this instablog I am going to show that investing in a portfolio of 30 to 40 high quality companies is far superior to investing in an Index Fund, especially if one is seeking income.

    I am also going to show how one can own a group of companies that underperform an index in total return, yet can still outperform that index by a great margin when it comes to income.

    I have read comment after comment over the years stating that anyone holding 30 or more equities would be better off just holding the Index. That couldn't be further from the truth for those who have a focus on income.

    The dividend growth investing strategy works best when one is looking at longer time frames, and the time frames that are of the most concern for me, are the time frames that include at least two recessions with considerable downside to share prices.

    It is my belief that sometimes a company can survive one major recession, but to survive two of them places a company in the higher probability of success category.

    I want to see not only how far price can draw down, I want to see what happens to the income these assets generate.

    I am going to use a 20 year time frame and the reason this time frame is important to me is because not only was I invested during this time frame, it includes the recessions of 2001-2002, The Tech Crash years and 2008-2009, The Great Recession years, the worst market crash since the Great Depression. Not only this, but it includes the five years leading into the The Tech crash and the five years following the Great Recession. So we have a balance leading up to and out of both recessions, a five year time frame. I believe it is this time frame that best shows the power of the dividend growth investing strategy over good times and bad.

    Again, this isn't an attempt to show what will happen going forward, but merely to show how companies performed relative to the S&P 500, which is considered the benchmark for The Market, with regard to income. I will show both the good and the bad.

    I will use a $10K investment as an example for each equity and I will use data supplied by S&P Capital IQ.

    Over the last 20 years, the S&P 500 has an annualized rate of return of 8.6%. That's your market performance! This was the number everyone was so keen to beat. ... 8.6%.

    A $10K investment in the S&P 500 would have generated $8,532.60 in dividends. That's your income benchmark. Funny how nobody uses income as a benchmark.

    The next step is going to show a group of 10 companies that underperformed the market in total return, or kept pace, and how they compared income wise.

    Why am I showing the following 7 companies? Because those are the 7 companies that I happen to hold or did hold, and since it's my goals I'm trying to achieve, it is all about me. ... Ha!

    It's also an explanation to others as to why I am willing to hold these companies, even if they can't outperform the market going forward when it comes to cap appreciation. To me, it's about the income and the safety of that income stream.

    How they fared, annual rate of return and dividends received, not reinvested.

    GIS ...... 8.1% ... $10,428.21

    KO ....... 7.4% ... $8,933.22

    DEO ..... 7.2% ... $9,343.74

    BP ....... 8.1% ... $17,155.16 (no longer own)

    SO ...... 6.8% ... $22,577.16

    VZ ...... 5.9% ... $12,283.42

    T ........ 5.4% ... $12,102.25


    Total Income ... $92,823.15

    This 7 company portfolio, with a $70K investment, $10K each, would have under-performed the S&P 500 in total return, but it would have crushed the S&P in income generated.

    S&P 500, with $8,532.60 for each 10K, for a $70K investment x 7 = $59,728.20.

    The equity portfolio, while underperforming the S&P 500 in total return generated 55.4% more in income. That's a considerable amount of money that the S&P 500 can't make up for in total return and by selling some shares to make up the difference.

    I'm sorry that I didn't provide any worse examples than those above, but I didn't own any. Here are a couple of other companies one can use to substitute the above companies if they wish.

    BAC ..... 5.9% ... $16,281.40

    GE ....... 8.1% ... $15,810.21

    I did own WFC and sold for a profit after they cut the dividend.

    WFC ... 12.9% ... 22,179.15.

    Here is how the other companies I own, that have a 20 year history, fared with total return and income generated.

    ROST ... 27.6% ... $50,686.10 (an investor's dream)

    MMP .... 21.7% ... $26,388.78

    KMP .... 17.5% ... $93,329.96 (you read that right, see note below)

    EPD ..... 15.0% ... $27,919.00

    IBM ..... 12.5% ... $14,820.03

    CL ....... 12.4% ... $15,923.51

    JNJ ...... 11.8% ... $17,728.93

    DE ....... 11.6% ... $14,231.21

    O ......... 11.3% ... $30,978.59

    LMT ..... 11.3% ... $12,682.78

    XOM .... 10.9% ... $16,619.20

    SYY ..... 10.5% ... $17,009.99

    MCD .... 10.5% ... $13,791.73

    CVX ..... 10.4% ... $18,052.44

    PG ....... 10.2% ... $14,215.82

    ADP ..... 10.1% ... $10,603.82

    PEP ...... 9.9% .... $12,344.39

    S&P 500 ... 8.6% annual return ... $8,532.60 (Pffft! ... and this makes sense to people?)

    ROST has been, and still is, considered a growth company. It has always had a low yield, but it has also shown double digit dividend growth, every single year for the past 20 years.

    I don't know that ROST will show the same high performance of the past 20 years, but ROST is still being projected as having double digit earnings growth going forward, and that means the "growth" aspect of the business is still intact.

    The incredible amount of income generated by KMP over the past 20 years started back in 1995 when KMP had a yield of 10%. It was in the third year of this time frame when they started raising the distribution rate. Compounding did the rest.

    The amount of distributions paid by KMP over the past 20 years ... $93,329.96 ... almost covers the entire $100K investment in the S&P 500 in this example.

    The new KMI, after the merger with KMP and KMR, is expected to grow the distribution rate in double digits over the next few years. The new KMI will be my largest position by far and I intend to keep every share. A double digit dividend growth rate should have an incredible positive effect on my portfolio.

    Now this is important, future performance probably won't be repeated, but the principles applied to my holdings will, regardless of the numbers.

    The S&P 500 has a yield of 2.0% and a 5 year compounded annual growth rate of 5.6% on the dividend income generated by the Index. It has a Chowder Rule number of 7.6%.

    Part of my stock selection process is to own companies that have a yield that is 50% more than the S&P 500 pays. My minimum dividend growth rate is 5%, but I look for a higher total dividend return between the yield and the dividend growth. The Chowder Rule number must be higher than that provided by the S&P 500.

    The Chowder Rule number for most equities is 12. This is why nearly all of my companies outperformed the Index in total return, not just income.

    I use a Chowder Rule number of 8 for utilities and telecom companies because they aren't considered great growth companies. However, they are considered great income producing companies and as such, I want to own the ones with a higher Chowder Rule number than the S&P provides.

    I use a higher Chowder Rule number for growth companies who don't have a yield 50% higher than the S&P 500. I use a Chowder Rule number of 15 in those cases.

    The Chowder Rule number is explained here:

    I won't invest in an index because it can't produce the income I seek to generate, and it's cap appreciation isn't going to make up for the difference as long as I stick with high quality companies, where the dividend is considered safer, and the companies I select meet the Chowder Rule number.

    Indexing over equity investing? Not for those willing to do a little work. We can make investing as simple or as complicated as we wish. I'm going to stick with simple and simple means owning high quality blue chip companies. They may be boring but over longer time frames, they will outperform the market. Your job, if you are willing to accept it, is to insure the companies you own have a quality rating of BBB+ or higher and meet or exceed the Chowder Rule number. It's as easy as that. All you have to do is allow them time to marinate. Leave them alone.

    Nov 11 4:42 AM | Link | 50 Comments
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