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Tim McAleenan Jr.  

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  • Putting Companies On 'Dividend Growth Probation' [View article]
    But what if....what underperform the S&P 500 by a full percentage point for a month? What are you going to do with those $750 dividend checks then?

    Don't you hate it when you're at a restaurant and you have your cash declined because it was generated by a strategy that hasn't beaten the S&P 500 on a three-week trailing basis? So embarrassing, happening in front of everyone and all.
    Jun 13, 2014. 10:40 PM | 8 Likes Like |Link to Comment
  • Realty Income Should Offer A 14% Yield-On-Cost Within 9 Years [View article]
    It depends on how quickly the rates rise. If it is slow, and only two or three percentage points, the effects will be negligible. You might see a lower valuation based on price to funds from operations for an extended period of time, but that would be the extent of the damage.

    If rates were to rise sharply, then the consequences become more significant as it may be troublesome to raise rents (if inflation accompanies the raised rates) and you might see lower growth/lower valuations.

    It's a very good company, and long-term holders will be well-rewarded. I wouldn't consider it a value investment here, but I do think the current price point has the opportunity to offer a good yield-on-cost nine years down the road for those that seek it.
    Jun 13, 2014. 10:29 PM | 2 Likes Like |Link to Comment
  • I Have No Fear Of A Market Crash Or A Significant Correction, Here's Why: Part 1 [View article]
    The timing of Chuck's article is spot on.

    In March 2009, the risk of, say, a 30% cut was minimal, because stocks were already deeply undervalued. It would have required stocks going from very cheap to stupid cheap.

    Now, we are in the interesting predicament of seeing many stocks trading at 10-15% excesses to fair value, and a 30% cut would mean things went from slightly overvalued to moderately undervalued. Something to that effect is always possible looking forward.

    Chuck's timing of sharing certain thoughts is masterful, per always.
    Jun 13, 2014. 09:16 PM | 23 Likes Like |Link to Comment
  • Dividends Are A Return Of Capital And A Return On Capital [View article]

    Great article. If you choose to think about everything strictly rationally, you can suck the fun out of just about anything in a hurry.

    On the other hand, I think of it like this: It is psychologically frustrating to see money earned from your labor turned into nothing. Yet dividends permit you to have an outlet to receive a payback without selling.

    For instance, in the past 19 years, without reinvesting dividends, you would have collected a total of $1.41 on every $1.00 invested into Chevron. If you had used those dividends to live, it guarantees that you received as much value from your investment as if you had never invested at all. Oh, and you're still sitting on this block of Chevron stock cranking out dividends.

    But even if Chevron goes bankrupt, you've at least equalized value. The hours you expended with your labor to make the investment have been paid back, and you've received the utility from that money.

    Dividends collected and spent are a form of derisking; ensuring that you actually receive value for the capital you set aside for delayed gratification.

    I find your approach turns investing into an art that brings great personal satisfaction, a soft factor whose value is often underestimated.
    Jun 11, 2014. 11:15 PM | 6 Likes Like |Link to Comment
  • How To Stay Motivated On Your Road To Financial Independence [View article]
    Jun 10, 2014. 11:39 PM | 1 Like Like |Link to Comment
  • What To Make Of That 5% McDonald's Dividend Hike [View article]
    Dodgerbob, I dig the independent thinking.

    With the notable exception of some banks that had a small place in the Berkshire portfolio in the world before 2008 happened, it's been very hard to go wrong holding the large-cap companies that entered the Berkshire portfolio that Buffett subsequently sold. McDonald's, Disney, and Conoco immediately come to mind.

    Why has continuing to hold after Buffett sold worked out so well? Probably because, at the time Buffett made the investment, he contemplated holding it for 20+ years. Even though that didn't actually happen, it suggests that you're dealing with the small universe of companies in which Buffett would think holding for a lifetime would be appropriate.

    I think the inadvisability of selling companies with extraoardinarily high quality is slowly catching on. Take someone like Benjamin Graham, the man associated with buying cheap and selling at fair value more than anyone else. Yet, it was Graham breaking all of his personal rules about cheapness and diversification and opting instead to bet heavily on GEICO that was responsible for over half the wealth he made in life.

    "In 1948, we made our GEICO investment and from then on, we seemed to be very brilliant people. Ironically enough, the aggregate of profits accruing from this single investment-decision far exceeded the sum of all the others realized through 20 years of wide-ranging operations in the partners’ specialized fields, involving much investigation, endless pondering, and countless individual decisions.

    Are there morals to this story of value to the intelligent investor? An obvious one is that there are several different ways to make and keep money on Wall Street. Another, not so obvious, is that one lucky break, or one supremely shrewd decision – can we tell them apart? – may count for more than a lifetime of journeyman efforts. But behind the luck, or the crucial decision, there must usually exist a background of preparation and disciplines capacity. One needs to be sufficiently established and recognized so that these opportunities will knock at his particular door. One must have the means, the judgment, and the courage to take advantage of them."

    It's right there, in The Intelligent Investor, yet it's the part about Graham's investing life that no one ever talks about.
    Jun 6, 2014. 02:08 PM | 5 Likes Like |Link to Comment
  • The Effect Of Dividends On Stock Prices: Is There A Connection? [View article]
    Really, when you think about the effects of dividends, it should be a two-step analysis.

    First, the short term.

    Sure, when you take cash out of a company's coffers, it should be worth less in the immediate sense. Conoco is worth more with $2.5 billion in the bank than $500 million in the bank, all else equal.

    But it's not like that cash was taken out back and set on fire. It was given to the people that own the company.

    Then, the real value of the dividend is based on what you do with it. Did you reinvest into undervalued Conoco shares? Then, it was probably a good idea. Did you reinvest into Coca-Cola at 50x profits, like 1999ish? Probably a suboptimal idea. Did you buy a car? Well, what kind?

    And then, there's the long-term effect of whether a dividend should have been paid out. That depends entirely upon what the company would have done in place of paying the dividend. I guarantee you every Bank of America shareholder would have rather received a $1,000,000,000+ dividend payout rather than have management buy up Countrywide. In the case of that particular situation, a dividend would have secured much, much more wealth for shareholders than what otherwise happened.

    On the other hand, if the money that Wells Fargo used to buy Wachovia had been paid out as a dividend instead, shareholders would likely be less well off (although the low prices at the time reinvestment would have hypothetically happened mitigates this factor somewhat).

    A lot of times, it's an unanswerable question because you don't know what management would have done with the cash that could go towards either a dividend or a growth initiative. But I will say this: Folks critical of a dividend's role in the wealth creation process tend to ignore facts like this: Every 100 shares of BP reinvested over the past two years would have produced 10 brand new, fresh shares of BP added to the account. If you're going to criticize the effects of dividends on enterprise value, then you should acknowledge the ameliorative effect of dividends on increasing the percentage of your ownership pie that sets into place a perpetual, automatic money machine that gives you larger payouts every three months as you tip your cap to the holy trinity of wealth creation: Your investable cash + growing business profits + reinvested business profits.
    May 4, 2014. 02:21 PM | 16 Likes Like |Link to Comment
  • Visa's Fall To $200 Is Classic Short-Term Thinking [View article]
    I'd have to think more about the Apple question, so I'll leave that to the side for now.

    As for Visa, there are two things you have to remember when valuing a stock. A lot of people simplistically say, "This company is at 20x, 25x, 30x earnings right now, therefore it's overvalued. It's not cheap."

    If that is all there is to the analysis, then it is bogus. Why?

    Because there are two components to your long-term returns. It's not just your current earnings yield that matters.

    Someone could have easily looked at the Starbucks IPO in 1992 and said, "It's trading at 50x earnings, therefore it's overvalued. Too expensive for my blood!" That kind of logic ignores the presently invisible component of total returns: the growth to come. Someone who bought at the IPO would have achieved 20% annual returns since then (turning a $50,000 investment into $2,500,000).

    It's not just current earnings yield that matters--future growth has a heck of an influence on your total returns as well.

    With Visa, the company has a tendency to improve earnings per share each quarter (at the very least, it's non-cyclical in that the EPS figure doesn't typically decline between quarters). That makes it fair to say that $2.20 per share gives Visa current earnings power of at least $8.80.

    When I buy Visa, I think of it like this: I get present earnings power of 4.4% plus 12-16% annual earnings per share growth. That is going to work out well.

    For people that buy today, it will be especially interesting to see the quickly rising dividend yield-on-cost that investors will be earning on their capital set aside today, as well as the likely substantial capital gains that accompany it. Companies raising payout ratios while growing north of 12% annually tend to be great fertile soil for the truly long-term income investor.

    If you find a non-cylical company with a high probability of growing at least 12% annually for the next 10+ years, and you can buy it with a present earnings yield between 4% and 5%, it's hard to imagine a world in which that doesn't work out if your growth projections prove correct.

    Visa is replicating across the world what it did in the US, and is still growing quite well (8% or so) here, while possessing enormous sums of free cash flow to destroy stock and further increase earnings per share of a business with an already high organic growth rate.

    Given that some companies build wealth more rapidly than others, Visa isn't a bad place to scratch the get-rich-quick itch.
    Apr 28, 2014. 10:44 AM | 5 Likes Like |Link to Comment
  • Visa: High Price Should Not Prevent Exceptional Returns [View article]
    Navy, I can't speak for others, but Visa is absolutely my best idea. I refer to it as my home-run swing stock, because its growth rate is different from the other companies I typically discuss.

    When I write about Exxon, Johnson & Johnson, and Coca-Cola, the general point of those articles (when it comes to total return) is that you might beat the S&P 500 by a point or two over the long haul.

    Visa is a different animal. It might beat the S&P 500 by five or six percentage points annually over the long term. It is currently growing around 8-9% in the U.S., and in pockets of the rest of the world, has growth rates of 20-30%. The company carries no debt, preferred stock, pensions, or any of those balance sheet burdens.

    During 2009, the company improved on every single financial metric by at least 5% compared to 2008; how's that for financial protection?

    There's a good chance that Visa could be the "one that got away" for people that don't buy and hold it for the next 15+ years. Its growth rate has shown no signs of moderating towards the S&P 500 level mean, and to the extent that anything is predictable in this world, seems like the highest probability place to go for those who want to build wealth quickly.

    If you're a young man in a hurry, my guess is that buying Visa every month on autopilot for the next few years could be the decision that alters your time here on this earth. Results get insane when you start combining a few ~$5,000 annual investments with 15-20% annual growth with 20+ year time horizons.
    Apr 17, 2014. 06:37 AM | 3 Likes Like |Link to Comment
  • Why Investors In Tesla, Netflix, And Amazon Have A Rough Five Years Ahead [View article]
    I did not see that $11.34 estimate.

    If you find those estimates likely, or even credible, then you should sub that into your analysis.

    The skeletal of the analysis remains the same, however: If Tesla is making profits of $11.34 five years from now, what would be a fair value multiple to apply?

    It seems to me that, in order to make long-term money with Tesla from here on out, you need best case scenarios to materialize: very robust growth without a hiccup, and a very generous future valuation to accompany it.

    You are giving yourself no margin of safety either in terms of (1) current price, (2) current business model, or (3) future growth prospects. Is that something you're comfortable doing? If so, I admire your courage, but in my case, I regard it as a recipe for stacking the odds against the favor of a new Tesla investor at current prices.
    Apr 15, 2014. 10:22 AM | 6 Likes Like |Link to Comment
  • First-Quarter Portfolio Review: There's Change On The Way [View article]
    If someone posed the question, "What is the strategy of a bad investor?", what would be your answer?

    My answer would be this: Someone who constantly compares himself to others (the S&P 500, Wilshire, or whatever it may be) and then abandons his strategy simply because something else is doing better over a particular period of time.

    Since 1970, the Sequoia Fund has returned 14.71% while the S&P 500 has returned 10.91% annually. When it started, it underperformed the S&P 500 Index in 1970. Then in 1971. Then in 1972. And then again in 1973. Heck, it underperformed the S&P 500 by 15 full percentage points in 1972.

    It only took a couple blowout years for the Sequoia Fund's long-term strategy to prove its worth (beating the S&P 500 Index by 25 percentage points in 1975, and 49 percentage points in 1976).

    In other words, underperforming the S&P 500 Index for lengthy periods of time can very well be a characteristic that leads to super long-term outperformance because you are holding onto ownership interests when it is unfashionable to do so, setting yourself up for "snapback" profits when the winds of change finally shift.

    By my count, there are at least 19 stocks in your portfolio that could continue raising dividends in the event of economic or military catastrophe. Bombs. Double-digit unemployment. Etc. That's what I call risk management!

    Trailing the S&P 500 by a little bit is ephemeral. It has no bearing on what those assets will be doing years and years from now. You have ownership interests in things that keep people's lights on in their homes, puts macaroni and cheese in their bellies, shaving cream on their faces, and drinks on their tables. That is financial security!

    Bob has built an excellent portfolio of companies that make stuff or do stuff, and will be pounding out profits for decades to come. That's something to applaud, not criticize. It's something to get excited about, not lament.

    A comparison between any given portfolio and the S&P 500 is amorphous, subject to change daily.

    Rob Goizueta, the former head of Coca-Cola, has created a trust that keeps 84% of its assets in Coca-Cola stock. Since June 2003, it has performed 7.6% while the S&P 500 has performed 7.9%. Do you think his beneficiaries and charitable selections locked themselves in their bedrooms this morning, entering a deep funk because they trailed the S&P 500 by 0.3% over the past eleven years?

    No. They know exactly what they own: an ownership stake in the world's best company with unparalleled distribution networks, billion-dollar brand names, and over 500 total offerings. The brilliance of this business model has resulted in dividend payments since the 1890s, which have increased annually for over five decades. A business model like that builds wealth in good times and preserves it in extraordinarily painful times.

    When you build collections of assets like that, things work out well in the end. But to get there, you have to tolerate periods when other people are getting richer, faster (of course, the tortoise eventually passes the hare because during bad times, the hare gets poorer, much faster).

    Sticking to a portfolio of high-grade assets during a measurable period of underperformance is a vindication of sound investing principles, rather than a repudiation of them because it exemplifies the wisdom of mature, adult thinking that recognizes patience as a virtue and the inevitable changes to come that will make some of today's losers turn into next year's winners.

    Success to a retired investor isn't measured by parsing a point or two against the S&P 500 here and there, but rather, it comes from seeing Coca-Cola's annual dividend go from $0.76 to $0.82 in 2009, hitting your checking account at just the right time. Multiply that logic across dozens of positions, and you'll see the wisdom of what Bob is doing.
    Apr 11, 2014. 03:09 PM | 50 Likes Like |Link to Comment
  • Dividend Growth Investing: Why I Don't Own Index Funds [View article]
    To answer your question: "What if half of your portfolio was in companies like Kodak or US banks going bust in 2008?"

    If you bought Eastman Kodak in 1985 and held through its bankruptcy, you would have achieved returns of 8.9% annually.

    How is this possible? You would have collected years and years of Eastman Kodak dividends, plus you would be sitting on shares of Eastman Chemical that got spunoff in 1994.

    Likewise, Wachovia owners that purchased the stock in 1982 would have achieved returns of 5.5% annually, on the date of the bankruptcy. That's because the dividends were fat, and grew fatter for three decades before the company went kaboom.

    Even Sears (which has been bank-like) for crying out loud has worked out. According to Frank Bifulco, the manager at Portfolio Channel, if you bought 100 shares of the old Sears in June 1993, here’s what you’d have today: 50 shares of Sears Holdings, 156 shares of Morgan Stanley, 21 shares of Sears Canada, 184 shares of Allstate, and 78 shares of Discover Financial Services.

    Your total returns over that time? 10.3% per year. Had you invested in the S&P 500 in June 1993, you would have had just shy of 9% per year. Even though the core Sears company has largely disintegrated, the collection of four spinoffs would have not only offset your losses from the collapse at Sears, but you would have actually created a bit more wealth over the past twenty years with a “buy-and-forget-it” attitude regarding Sears than a run-of-the-mill S&P 500 index fund.

    A lot of the data doesn't support the whining you frequently hear about survivorship bias.
    Apr 5, 2014. 05:45 PM | 5 Likes Like |Link to Comment
  • BP: You Could Realistically Double Your Money In Five Years [View article]
    The "worst, worst case scenario" would be this: (1) plummeting commodities prices for a few years, mixed with (2) adverse legal judgment. In other words, BP would have to sell assets in a down market (and they'd have to sell more than anticipated because our assumption is that the market is down) and so they'd have fewer assets generating lower profits.

    In a situation like that, who knows? A dividend cut would be on the table.

    Oil companies aren't really built for perfect linear growth. Heck, Royal Dutch Shell has cut their dividend at least four times since 1911, yet has returned 14% since then and the dividend is higher each decade, despite some freezes and declines along the way. Exxon and Chevron are extreme outliers in the oil industry; the business model isn't built for perfect, smooth linear dividend growth because that's not how operating results work in the oil industry.

    So if we had a viciously long bottoming cycle in which BP had to sell assets, I think you'd have to be patient for awhile. That's where diversification comes in--if BP is only 3% or 4% of your portfolio, you could wait it out.

    In other words, a repeat of 2008-2009 that lasted for, say, five years would hit BP harder than Exxon, especially if they got whacked with a large legal settlement. In extended terrible times, I'd much prefer Exxon. But in decent or good times, BP should be far more compelling. Hence, my answer is to own both.
    Mar 27, 2014. 03:11 PM | 2 Likes Like |Link to Comment
  • Why The Highest-Yielding Dividend Stocks Deliver The Best Capital Gains [View article]
    Mar 26, 2014. 07:48 PM | Likes Like |Link to Comment
  • Where Is Realty Income's Dividend Going Over The Next 5 Years? [View article]
    I'll have to create an option d: none of the above.

    Realty Income is making $2.35-$2.55 per share from its 3000+ properties, and it's putting $2.18 of that cash in the pockets of shareholders.

    REITs take their profits, and put about 90% of those profits in the pockets of shareholders.

    Specifically, Realty Income is making profits organically, doing what it's always done, and I don't share your worry because the concern you expressed isn't something that I see as existing.
    Mar 26, 2014. 07:31 PM | 7 Likes Like |Link to Comment