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chowder
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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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  • The Chowder Rule 126 comments
    Oct 30, 2013 6:42 AM

    I notice that a lot of people are now referring to The Chowder Rule. I thought that as long as people are going to use it as a criteria in their stock selection, I would explain how and where it came from.

    In order to understand the importance of The Chowder Rule, and how it relates to the stock selection process, one needs to understand the concept of dividend growth investing as I see it. One needs to understand what I was trying to accomplish and why. Once you understand this, you may be able to adjust the numbers to suite your needs, or accept it and apply it as it is.

    When I discovered dividend growth investing I was surprised that there wasn't a blue print to describe exactly what it was. I saw where people had various views or ideas of what dividend growth investing meant to them.

    One concept I came across stated that any company whose expected long-term dividend growth rate exceeded its current yield, was a dividend growth stock. I can see that as workable, but it appears to have limitations. One would have to abandon owning high quality companies with high yields, yet low dividend growth rates. One might get caught up with owning mostly low yielding companies with high dividend growth rates that are unsustainable.

    Keep in mind that there is usually a trade off between yield and dividend growth. My objective was to find a balance between the two.

    I do prefer a long history of dividend growth over a short one. I do prefer more dividend growth over less. With the threat of higher interest rates affecting high yield companies, it is also plausible that high dividend growth will slow, and low dividend growth will freeze or decline. So again, I'm looking for balance between the two.

    One of the problems with high dividend growth is that it eventually has to slow. So in my opinion, I am better off trying to balance a high yield vs high dividend growth.

    Another consideration about double digit dividend growth is the base from which it began. If a company started with a dividend of 2 cents, it wouldn't be difficult to grow at double digits and it wouldn't have much of an impact on the income stream either. Also, keep an eye on the payout ratio. Just make sure it isn't astronomically high in order to provide dividend growth. A company can't continue raising the payout ratio, so something has to give.

    One thought that had an impact in applying The Chowder Rule was a stock that yields 1% has to raise its dividend 20% to generate the same dollar increase in annual income that another stock yielding 4% can achieve with a mere 5% hike.

    Which growth rate is more realistically expected to be maintained over long time frames?

    Most of the principles and concepts I apply have been taken from the book, "The Single Best Investment" by Lowell Miller.

    According to Miller, the hidden key to the single best investment is dividend growth. The reason dividend growth is so important for long-term investors is because dividend growth is what drives the compounding machine in a way that is certain and inevitable. Dividend growth is an authoritative force that compels higher returns regardless of other factors affecting the stock market.

    An important point is that an instrument that produces income is valued based on the amount of income it produces. The more income it produces, the more valuable the asset.

    Keep in mind, you not only receive greater income as the years go by, you also get a rising stock price because the asset producing the income is worth more as the income it produces increases.

    Stop and think about it for a minute. When you look at the long dividend growth history of companies like KO, PG and JNJ, if share price didn't keep up with dividend growth, they would have yields of 10%, 15% or more -- and the market isn't going to allow that to happen.

    (The following paragraph is the essence of The Chowder Rule!)

    So in effect, you get a "double dip" when you invest in high yield stocks that have high rising dividends. You get the income that increases to meet or surpass inflation, and you get the effect of that rising income on the stock price, which is to force price higher.

    Dividend growth investing to me means that I am creating a compounding machine, not playing the market. Dividend growth is the energy that drives that machine.

    In the book, "What Works on Wall Street" by James O'Shaughnessey, he states ... "It's impossible to monkey with a dividend yield." The author found that high yield was a much more effective factor in stock price performance when what he calls "large" stocks are studied. Among large stocks, he found that the highest-yielding stocks out-performed the overall universe 91% of the time over all rolling ten year periods.

    Miller/Howard Investments revisited the issue of high yield and dividend growth with the help of Ford Investor Services, an institutional database and research organization based in San Diego. Using their data base going back to 1970, they found that high-yield stocks outperform the market over long periods on both an absolute and a risk-adjusted basis. The key is to own quality! ... (I hope you got that.)

    Once you understand the concept, the next step is to come up with a plan of action.

    This leads to a formula I adopted. I call it "The Success Formula That Never Fails."

    High Quality + High Current Yield + High Growth of Yield = High Total Return.

    High Quality is defined as having superior financial strength. A company must have a 1 or 2 rating for Safety with Value Line, or a BBB+ rating or better with S&P. Both of these Financial Strength ratings indicate investment grade quality. ... Anything that doesn't meet the High Quality definition is considered speculation and managed differently within the portfolio.

    High Current Yield is defined as a yield that is at least 50% above the yield offered by the S&P 500. Therefore, if the S&P 500 has a 2% yield, then 3% is the minimum number for purchase under the formula stated above.

    High Growth of Yield is defined as companies that raise their dividend at a rate of 5% or more.

    With the "Success Formula" in hand, I needed to come up with a way for it to support my long-term objectives.

    My long-term objective is to grow the portfolio at an 8% compounded annual growth rate (OTCPK:CAGR). I decided I would try to take advantage of total dividend return, current yield plus a 5 year CAGR to help support my long-term 8% CAGR objective. This total dividend return concept was dubbed The Chowder Rule by a Contributor on Seeking Alpha by the name of J.D. Welch.

    Since High Current Yield called for a 3% minimum yield, based on the 50% above the S&P 500 yield concept, Howard Miller's 5% annual dividend growth minimum, when added to the yield came out to 8%. That was exactly what my long-term goals were and I established those goals before I read Miller's book.

    I then decided I would place a "moat" around that 8% number as a margin of safety because I knew as price rises, yields come down and the original Chowder Rule number will as well.

    I thought I would go 50% higher and came up with a Chowder Rule number of 12% as a total return objective. ... If others want to adjust the number to meet their objectives, that's fine. As long as it supports what it is you are trying to do, you'll get no argument from me. ... Ha!

    Anyway, that 12% total dividend return number is now referred to as The Chowder Rule by many. So basically, if a stock has a 3% yield, I need a 5 year dividend growth rate of 9% to get my 12% number. If a stock has a 4% yield, I only need an 8% dividend growth rate.

    For example:

    CVX has a yield of 3.1% and a 5 year CAGR of 9.13%. When added together, I get a Chowder Rule number of 12.23%. ... It qualifies for purchase as long as the fundamentals and valuations meet your standards.

    As I delved deeper into the concept of dividend growth investing, I realized I needed to focus on the safety of the dividend first. As I researched, I found that a lot of companies with solid dividends weren't able to grow their business like a lot of other companies, so their dividend growth may not be as robust. Utility companies are a good example of this.

    Since my long-term goal is to achieve an 8% CAGR, I thought I would use that number for utility companies since it still supported my objective. I include telecom and MLP's under the utility umbrella. So for example, D has a yield of 3.4% and a 5 year CAGR of 6.99%, giving me a Chowder Rule number of 10.39%. It qualifies for purchase as long as the fundamentals and valuations meet your standards.

    I know there are those who wish to own companies with yields below 3%, yet have higher dividend growth. I'm not opposed to this, but keep in mind, the lower the yield, the more you must rely on capital appreciation to achieve High Total Return.

    I decided that if I'm willing to accept a yield below 3%, I must require a higher dividend growth rate. I needed a higher Chowder Rule number to serve as a margin of safety. I decided to use 15% for companies yielding less than 3%.

    So for example:

    DE has a yield of 2.4% and a 5 year CAGR of 13.84% for a Chowder Rule number of 16.24%. It qualifies for purchase as long as the fundamentals and valuations meet your standards.

    Again, these numbers were designed around my long-term objectives. If your goals are different, you can adjust the numbers any way you wish as long as they support your goal. Just keep in mind that the lower the yield, the more you must rely on price appreciation.

    I applied The Chowder Rule as a way to take the pressure off of price appreciation. I was looking for the "double dip" balance.

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Comments (126)
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  • Bob Wells
    , contributor
    Comments (5620) | Send Message
     
    And now we have the rest of the story! The chowder rule a/k/a Total Dividend Return (TDR) rocks!

     

    As always, many thanks my friend.

     

    Bob
    30 Oct 2013, 06:58 AM Reply Like
  • PendragonY
    , contributor
    Comments (6644) | Send Message
     
    Excellent article Chowder. I have used this for more than a year now and it has lead me to some great companies. I track this as one factor in both the companies I own and on my watch list.
    30 Oct 2013, 07:02 AM Reply Like
  • poundofbutter
    , contributor
    Comments (87) | Send Message
     
    Chowder-
    You mentioned DE in your post. Would you accumulate shares at their current levels???
    Thanks for singling out D. I hadn't been looking at that one.
    30 Oct 2013, 07:50 AM Reply Like
  • chowder
    , contributor
    Comments (8015) | Send Message
     
    Author’s reply » Yes, I would accumulate shares of DE at their current level. It's on the watch list for Project $3 Million and a top 2 pick.
    30 Oct 2013, 07:55 AM Reply Like
  • mbn
    , contributor
    Comments (501) | Send Message
     
    Top 2 pick?

     

    TGT the other? I know you added to SO and O recently, so they are off the list.
    30 Oct 2013, 08:26 AM Reply Like
  • chowder
    , contributor
    Comments (8015) | Send Message
     
    Author’s reply » I'm considering a speculation play in DNKN.

     

    Project $3 Million has a solid enough foundation now that it can afford a spec play.

     

    I would like to see a little correction in DNKN, but if it doesn't come, I'll delay DNKN and purchase DE.

     

    TGT is one I'd like to pick up in 2014.
    30 Oct 2013, 08:44 AM Reply Like
  • kolpin
    , contributor
    Comments (1074) | Send Message
     
    chowder--as i'm close to your son's age, I'm also interested in devoting a small portion of my portfolio to more growth oriented stocks. I also have already laid a good foundation of core dividend growth stocks that I will continue to add to. going forward, how will you approach the "speculative" portion of project $3 million? will it remain a certain percentage of the portfolio? will you add new growth positions once the 1st one becomes a full position? I'm trying to determine how to manage this portion of my portfolio without adding too much risk. thanks!
    2 Nov 2013, 07:05 PM Reply Like
  • chowder
    , contributor
    Comments (8015) | Send Message
     
    Author’s reply » I'm looking at DNKN as his spec, would take SBUX if I had to, but I'm going to keep the position at 1% of the portfolio value. I'm not going to get greedy or go crazy.

     

    There are still some sectors of dividend growth I want to add. A railroad for example. I'd like to own TGT.

     

    I would like to add a health care company since JNJ is the only one in this portfolio. I have BDX and CAH on the watchlist.

     

    I'd like to add an industrial, and another utility or two. Perhaps even a water utility.

     

    Since there is only so much money to invest, patience is the name of the game.

     

    I am going to add a spec company in 2014 and I might add a growth company in 2015.

     

    Who knows, I might even purchase Baby BRK one day in this portfolio.

     

    I'll keep the positions small, around 1% to minimize portfolio risk, and allow them the opportunity to grow.

     

    My attitude will be ... "Show Me!"
    2 Nov 2013, 07:47 PM Reply Like
  • kolpin
    , contributor
    Comments (1074) | Send Message
     
    thanks for sharing your Project $3 million plan...perhaps it'll warrant a future instablog post someday! and nothing wrong with BRK-B--it is already one of my largest positions, but instead of chopping it down to size, I'm simply adding to others.
    3 Nov 2013, 02:28 PM Reply Like
  • chowder
    , contributor
    Comments (8015) | Send Message
     
    Author’s reply » I think that's a wise decision. At your age you don't need to chop anything down to size.

     

    Build up, not down. ... Heh, heh.
    3 Nov 2013, 02:31 PM Reply Like
  • Smallstep
    , contributor
    Comments (941) | Send Message
     
    Chowder,

     

    SBUX is testing their new thing about tea shop. It will be separate store with coffee one. I think it has already started in CA someplace. This will be huge for future because everyone is watching the health issue. I think it is not only for young people, may be we should also watch it closely. Just sayin. ---Small
    3 Nov 2013, 11:00 PM Reply Like
  • chowder
    , contributor
    Comments (8015) | Send Message
     
    Author’s reply » Thanks Small. I wonder why they want to keep the coffee and tea separate.

     

    I'm looking to purchase either DNKN or SBUX. I don't care which one. I keep looking for a decent entry point and they aren't cooperating.
    4 Nov 2013, 02:56 AM Reply Like
  • Smallstep
    , contributor
    Comments (941) | Send Message
     
    Chowder,

     

    I am not very patient. I learned from you and let money work hard. haha. So, today, I bought small amount as 20 of SBUX for my daughter. I will watch it closely because I am waiting to understand VFC splits for 4:1 announced on Oct. 20th. The price keeps going up. I could not add on it. I did add some JNJ today when it was down and started GIS for myself. Thanks for your advice. ----Small
    4 Nov 2013, 07:17 PM Reply Like
  • chowder
    , contributor
    Comments (8015) | Send Message
     
    Author’s reply » I like JNJ and GIS. I think they should be part of the foundation of one's portfolio.

     

    I know a lot of people over in the SA comment streams hate hearing about the same companies over and over again. They want something different.

     

    I used to be that way and something different didn't work out as much.

     

    I keep adding to the same old boring companies because the same old boring companies continue to perform for me.

     

    When I look at a 40 equity plus portfolio and see nothing but green, why would I want to risk changing what's working?

     

    I have just added to KRFT, CL, CVX, D, GIS, JNJ, KMB, KO, O, PG and WEC.

     

    I'm sticking with what's working! ... Ha!

     

    I still want to buy DNKN or SBUX for the Project $3 Million Portfolio though. I'm waiting on funds to build in order to take a position.

     

    I'd like to see SBUX at lower prices, but over the long term, I don't think you'll regret your decision unless you panic and sell when you shouldn't. ... No panic! ... Ha! Ha!
    4 Nov 2013, 07:40 PM Reply Like
  • rnsmth
    , contributor
    Comments (2080) | Send Message
     
    I own 8 of those, and have two of the others on a watch list :)
    4 Nov 2013, 07:56 PM Reply Like
  • Smallstep
    , contributor
    Comments (941) | Send Message
     
    Agreed, no panic at all. On your added list, I do not have KRFT, D, and WEC. Watching KRFT, but did not do any research on D and WEC. I will do homework and let you know.

     

    So far watching several biotech and tech for youngsters. So far, l am happy with QCOR. Thanks Chowder. I keep forgetting to congrats on Red Sox winning. You should be jumping up to ceiling---I guess. haha. I would, but I do not understand that ball game. Just love my basketball. ---Small
    4 Nov 2013, 08:13 PM Reply Like
  • chowder
    , contributor
    Comments (8015) | Send Message
     
    Author’s reply » Ron, I look at things a little different than most people. Most people want to make all of their purchases when a company is undervalued.

     

    I happen to think that keeps people from building quality positions. I see it all the time where people say I wish I owned more of it, but they won't buy because it's fairly valued or even fully valued.

     

    I will average up on a position in a heart beat, if I want to own more of it. I will raise my cost basis and not even give it a second thought.

     

    Take D for example. I don't think there's any question that most people are going to deny D is overvalued here, and I would agree with them. However, if you could purchase D at a 20% discount to today's price, would you buy it? I know I would!

     

    After adding D today, my cost basis has risen, but here's the best part. My cost basis is still 24.4% below today's closing price.

     

    My situation with the other companies I just purchased are in similar situations.

     

    I know others would say I could get more shares if I wait and that would be true, but I see people who have been waiting for over a year and prices keep going higher and higher.

     

    Now here's what I learned from my trading days.

     

    Dow Theorists divide bull markets into three phases. In the first, confidence in the future of business revives and stocks rebound from discounted levels. In the second, stocks respond to rising earnings and dividends. In the third, rampant optimism and speculation push stocks higher on hopes and expectations. Historically, some of the market's best gains are seen in the third phase.

     

    Have we reached this speculative third phase? Answering that question with precision is impossible. Sentiment surveys, option prices, and mutual-fund inflows suggest bullishness is close to the highs of recent years. But stocks are not outrageously valued, and the recommended equity allocations of Wall Street strategists are still below long-term norms.

     

    The market, although has come a long way, has not reached the end of that third phase in my opinion, and it's the third phase where big money is earned. Most people miss that phase because they subscribe to the concept of you never go broke taking a profit and they sit on the sidelines with cash in hand.

     

    That third phase is what index funds get to participate in and is the reason most people can't beat the index. They miss the third stage, the index doesn't.

     

    If we make mistakes in valuations, as long as we stick with quality, quality will bail us out if we simply show some patience.
    4 Nov 2013, 08:21 PM Reply Like
  • Miz Magic DiviDogs
    , contributor
    Comments (4514) | Send Message
     
    "I wonder why they want to keep the coffee and tea separate."

     

    Starbucks CEO Howard Schultz was on CBS This Morning this week (or last), and was asked that very question. He replied that the culture of tea-drinkers is much more relaxed and "zen-like" than coffee-drinkers, who tend to be in a hurry.

     

    His new stores are named Teavana, and the first one opens in Manhattan.

     

    Miz
    4 Nov 2013, 08:26 PM Reply Like
  • chowder
    , contributor
    Comments (8015) | Send Message
     
    Author’s reply » Thanks Miz, makes sense.

     

    I thought they were trying to keep the Missus and me apart. She's the tea drinker, I'm the coffee and beer drinker.
    4 Nov 2013, 08:28 PM Reply Like
  • Miz Magic DiviDogs
    , contributor
    Comments (4514) | Send Message
     
    Hard to say, Chowder. Your name didn't come up, but you never know, it may be some nefarious plot! :)

     

    Miz
    4 Nov 2013, 08:33 PM Reply Like
  • Smallstep
    , contributor
    Comments (941) | Send Message
     
    Thanks Miz. I somehow listened that the first store was opened in CA (when Jim Creamer interview the CEO Mr. Schultz last week.) Now I know. I will try to visit that store if I go again to NY City. Just went there last Saturday to avoid the traffic on Sunday event. We were stocked in 95, thanks god we use GPS and turned to 278--smoooooothly to Manhattan. Well, yesterday bought that SBUX and today it went up $1.62???(cannot remember, but nicely up already.) Nice!!

     

    I am a chocolate drinker---I think it is for happy camper, haha.
    ----Small
    5 Nov 2013, 09:18 PM Reply Like
  • Miz Magic DiviDogs
    , contributor
    Comments (4514) | Send Message
     
    Small, congrats on your purchase of SBUX! :)

     

    I'm an equal opportunity sampler. I love-love-love my mocha almond joy (coffee + cocoa + almond + coconut) in the morning. That's one of my greatest joys in being retired -- being able to enjoy my coffee at my leisure in the mornings. I've tried a lot of ground coffees, and my favorite is Starbucks Columbian.

     

    Then I drink tea the rest of the day!

     

    Miz
    5 Nov 2013, 11:16 PM Reply Like
  • maybenot
    , contributor
    Comments (3845) | Send Message
     
    Wait, wait, wait a second Miz.

     

    If we are going completely off-topic, fine. You say Starbucks Columbian is your fav.

     

    Have you ever tried the Starbucks French Roast? That is my fav. I've had the Columbian, but I like the stronger/"bolder" flavor of the French.

     

    Do you add the cocoa, almond, coconut to your Columbian?
    Hmmm...sounds pretty good, might try it, if it's not too much of a "thing" to do each morning.

     

    And mind you, I work for a living, vice being retired. :)
    5 Nov 2013, 11:38 PM Reply Like
  • Miz Magic DiviDogs
    , contributor
    Comments (4514) | Send Message
     
    Shoot, Maybenot, how can it be off-topic when Chowder brought it up? ("It" being drinking coffee.) :)

     

    I've tried French Roast, I just like the mellower Columbian. My Mocha Almond Joy is very easy to concoct. Just brew your coffee as usual, and when it's ready, put your favorite instant cocoa mix in the cup, pour in the coffee, add some French Vanilla creamer, almond extract and coconut extract. Might want to start small (1/8 tsp) with the extracts and work up to taste, it's awfully easy to get too much!

     

    In the summer, pour over crushed ice, and it's every bit as good as a Starbucks Iced Coffee with whipped cream! In the winter, it's so smooth and yummy. :)

     

    Miz
    6 Nov 2013, 12:13 AM Reply Like
  • maybenot
    , contributor
    Comments (3845) | Send Message
     
    Thanks Miz -- I'll give it a try. I've tried making other similar ones at home, but they always seem to come out too sweet, at least for me.

     

    Now, I do put in the ol' half & half and stevia in my regular French roast, so I do like some sweetness, not the ol' "black and bitter."
    6 Nov 2013, 12:25 AM Reply Like
  • mbn
    , contributor
    Comments (501) | Send Message
     
    French Vanilla guy here. Got hooked on it a few years ago - now I can't do without my French Vanilla cup in the A.M.
    27 Nov 2013, 08:26 AM Reply Like
  • Big Thunder
    , contributor
    Comments (567) | Send Message
     
    chowder, your Rule and guidelines for quality quickly became foundation concepts for my portfolio when I first read of them. They just make sense.
    30 Oct 2013, 07:56 AM Reply Like
  • Lovethosedividends
    , contributor
    Comments (52) | Send Message
     
    Chowder, you have made such a difference. Thank you very, very much for all your excellent posts and comments. Also you are a terrific writer!
    30 Oct 2013, 08:50 AM Reply Like
  • robandcindy2
    , contributor
    Comments (132) | Send Message
     
    Nice article "Gunner". Thank you for the explanation!! Very helpful.
    30 Oct 2013, 08:54 AM Reply Like
  • chowder
    , contributor
    Comments (8015) | Send Message
     
    Author’s reply » I'd be remiss if I didn't sneak in a comment about the Gunners. ... Top of the Table babee. ... Whoooo!!!
    30 Oct 2013, 09:13 AM Reply Like
  • maybenot
    , contributor
    Comments (3845) | Send Message
     
    Thanks chowder. Ok, can of worms time, sorry, but why or how did you pick the 15% number? Just curious. Thanks.
    30 Oct 2013, 09:35 AM Reply Like
  • chowder
    , contributor
    Comments (8015) | Send Message
     
    Author’s reply » If I'm going to accept a lower yield, I need a higher dividend growth rate to achieve high total return, unless most of that return is going to be capital gain, and I'm trying to take pressure off of share price. I had to be realistic in what that dividend growth was going to be. It had nothing to do with any formula's per say, it had to do with what can be realistically expected.

     

    I wasn't going to violate the "Success Formula That Never Fails" by lowering the High Current Yield criteria without raising the High Growth of Yield criteria.

     

    If someone wants to adjust that number higher or lower, that's fine. I have no problem with that. I simply wanted to keep the number reasonable and attainable, and have something that could reasonably perform well enough to keep my portfolio CAGR above 8%.
    30 Oct 2013, 09:55 AM Reply Like
  • maybenot
    , contributor
    Comments (3845) | Send Message
     
    Thanks so much chowder -- I thought my math wasn't even at the 3rd grade level! I just wanted/needed to understand where you were coming from.

     

    So, being realistic, reasonable, and shooting for something attainable certainly makes sense for me in regards to 15%. Percentages higher than that, well, it sure does make one need to stretch something.

     

    Thanks again -- I appreciate it, and all you have provided for me as an investor.
    30 Oct 2013, 02:09 PM Reply Like
  • Eric Landis
    , contributor
    Comments (917) | Send Message
     
    Thanks for the great explanation Chowder. You were one of the first members I followed when I joined SA and I've learned so much from your comments and insta-blogs. You've made a huge difference in my investing philosophy and so far it has yielded great results in my portfolios.

     

    Thanks again!
    30 Oct 2013, 09:39 AM Reply Like
  • robandcindy2
    , contributor
    Comments (132) | Send Message
     
    With regards to CAGR, we are specifically discussing/using 5 year compound "dividend" growth rate, correct?

     

    If yes, then it seems these are the best places to grab the 5 year CAGR:

     

    http://bit.ly/1bCk3sa

     

    http://bit.ly/PnjpTT

     

    http://bit.ly/MbI9z6

     

    And subscribers to FastGraphs can set the screen for "6 years" which will result in a 5 Year Dividend Growth Rate displayed under "Performance Results".
    30 Oct 2013, 09:39 AM Reply Like
  • David Van Knapp
    , contributor
    Comments (10492) | Send Message
     
    Yes. Keep in mind that some sites update the DGR data annually. So, for example, the 5-year DGR might represent 2008-2012 even this late in 2013. The 2013 increase is not included. When the sites are updated at the end of the year or early next year, the 5-year period advances by one year.
    Dave
    30 Oct 2013, 09:28 PM Reply Like
  • cgrehm
    , contributor
    Comments (13) | Send Message
     
    Does the basic version of FastGraphs offer this ability?
    31 Oct 2013, 01:02 PM Reply Like
  • SDS (Seductive Dividend Sto...
    , contributor
    Comments (3359) | Send Message
     
    Chowder,
    Thank you for good blogpost, now you can refer to it in all cases when CR is mentioned 8-).
    If you "do prefer a long history of dividend growth over a short one" why not include DG history in the rule? For example, each 15 years of DG can be qualify as -1% in safety margin - so it company has 30 years of DG your target for Y+DG can be 12%-2%=10%.
    I do not use CR but in my metric DG history is included.
    SDS
    30 Oct 2013, 10:07 AM Reply Like
  • chowder
    , contributor
    Comments (8015) | Send Message
     
    Author’s reply » SDS, although I prefer a long history of dividend growth over a short one, I don't discount a short one.

     

    I purchased KMI without a long history of dividend growth because I have confidence in Kinder Morgan. I purchased KRFT right after the split with MDLZ, before they even declared the first dividend because I was confident they would pay a dividend and raise it. Management confirmed they wanted to reward share-owners.

     

    So, I try to keep things simple and use common sense. I'm not smart enough to be too smart. ... Ha!
    30 Oct 2013, 10:13 AM Reply Like
  • PendragonY
    , contributor
    Comments (6644) | Send Message
     
    "I purchased KMI without a long history of dividend growth because I have confidence in Kinder Morgan. I purchased KRFT right after the split with MDLZ, before they even declared the first dividend because I was confident they would pay a dividend and raise it. Management confirmed they wanted to reward share-owners."

     

    I might say great minds think alike, but really its more like I think like a great mind in the case of these two stocks!
    30 Oct 2013, 10:24 AM Reply Like
  • drcarl
    , contributor
    Comments (276) | Send Message
     
    I want to add my thanks along with everyone else. You provide one of a couple of quick screens I find useful.

     

    I am glad of the "Project $3 Million" because it allows a younger person to opt for lower yielding issues with strong growth (and dividend growth rate) potential.

     

    I recommend this strategy to my children.
    30 Oct 2013, 11:08 AM Reply Like
  • VeloMaster
    , contributor
    Comments (8) | Send Message
     
    Thanks, Chowder, for filling in some of the blanks surrounding the Rule. Would you say a few words about if/how you apply these criteria after purchase. Are they factors in any future decision to sell? Or do you wait for a dividend freeze or cut?

     

    Many tks for all you share.
    30 Oct 2013, 11:59 AM Reply Like
  • chowder
    , contributor
    Comments (8015) | Send Message
     
    Author’s reply » @Velo ... Once I am in the position, I monitor the yield and the dividend growth. I had purchased VFC and MKC when they had yields around 3.5%. When both of them saw their yield drop below 2%, I locked in my profits.

     

    If one is willing to hold, and allow capital gains to lift the company higher, I wouldn't argue with that. I simply replaced them with companies that had higher yields and were still investment grade.

     

    When a company has their dividend growth drop below 5%, I place them on probation for a year. Last year PEP raised the dividend 4.4%. They went on probation. This year they raised the dividend 5.6%. They came off probation.

     

    When SYY saw their yield drop below 5% and stay down, I sold them.

     

    With utilities, I consider selling once the dividend growth rate drops below 3%.

     

    People can show me successes that they have had that didn't conform to the "Success Formula Than Never Fails." What they can't show me are examples of companies who failed that met the formula. When we look at the failures we've had in our investing life time, I'd bet odds one or more of the ingredients to the formula were missing.
    30 Oct 2013, 02:27 PM Reply Like
  • Stephen J Melnykevich
    , contributor
    Comments (1247) | Send Message
     
    AFL approached that just yesterday when they announced a 5.7 increase. I was slightly disappointed that it wasn't higher as there are many a patient investors and fundementals that support a greater increase.

     

    Would love your thoughts.
    30 Oct 2013, 02:39 PM Reply Like
  • chowder
    , contributor
    Comments (8015) | Send Message
     
    Author’s reply » If you are in AFL, I'm sure the dividend increase is as disappointing to you as MCD was to me this year. However, in both instances, the yield remains above 5% and that's a keeper as far as I'm concerned.
    30 Oct 2013, 02:58 PM Reply Like
  • Stephen J Melnykevich
    , contributor
    Comments (1247) | Send Message
     
    Excellent response. Disappointment but not warrent for probation. It's funny you mention MCD as that is on a very short list of stocks I am eyeing for my next purchase. I want it to be one of my cores but it has seen some headwinds. I am stuck on whether to wait for the price to come back down as a result of the disapointment and buy in lower or whether or not it is even deserving of a purchase.
    30 Oct 2013, 03:10 PM Reply Like
  • chowder
    , contributor
    Comments (8015) | Send Message
     
    Author’s reply » MCD has faced headwinds before and has actually had lower dividend growth than we're currently experiencing.

     

    If looking to purchase, you could consider waiting for their earnings report and see if they are improving over the previous report or if the downside is still in play.
    30 Oct 2013, 03:27 PM Reply Like
  • VeloMaster
    , contributor
    Comments (8) | Send Message
     
    Tks, Chowder. In fact, I was thinking of AFL, currently one of my core DG holdings.
    30 Oct 2013, 04:24 PM Reply Like
  • mostserene1
    , contributor
    Comments (3343) | Send Message
     
    I most appreciate your expressed flexibility on your rule, unlike some who generate rules and demand no deviation from their "number".

     

    Thanks.
    8 Nov 2013, 04:26 PM Reply Like
  • SkipK
    , contributor
    Comments (1017) | Send Message
     
    Thanks for the article, and for sharing your experience. Much appreciated.

     

    Bought DE recently.
    30 Oct 2013, 12:33 PM Reply Like
  • rnsmth
    , contributor
    Comments (2080) | Send Message
     
    Thanks :)
    30 Oct 2013, 01:27 PM Reply Like
  • Garthilk
    , contributor
    Comments (590) | Send Message
     
    I wish there was a way to run this as a predefined screen. haha.
    30 Oct 2013, 01:58 PM Reply Like
  • BenH
    , contributor
    Comments (142) | Send Message
     
    Garthilk, you can run a similar screen at M*.

     

    Ben
    3 Nov 2013, 04:25 PM Reply Like
  • fiveoh
    , contributor
    Comments (123) | Send Message
     
    Great article and rule, I'm going to start using it. thanks!
    30 Oct 2013, 02:08 PM Reply Like
  • Penny Lane
    , contributor
    Comments (66) | Send Message
     
    Chowder, all I can say, I very much hope that this is not your last article. Keep on writing and sharing. Thank you!
    30 Oct 2013, 06:13 PM Reply Like
  • Alex_P
    , contributor
    Comments (185) | Send Message
     
    Brilliant thoughts from brilliant man! Thanks again Chowder for this great article. Keep up the great work by helping us who are relatively new to this. You are my Number 1 author on SA!
    30 Oct 2013, 09:56 PM Reply Like
  • sneaker1404
    , contributor
    Comments (388) | Send Message
     
    Thanks for another great instablog Chowder.

     

    I found an interesting way to get a partial list of the companies that Value Line rates 1 or 2 for safety.

     

    Look at the holdings of the First Trust Value Line® Dividend Index Fund (FVD) which :

     

    - The index begins with the universe of stocks that Value Line® gives a SafetyTM Ranking of #1 or #2 using the Value Line® SafetyTM Ranking System. All registered investment companies, limited partnerships and foreign securities not listed in the U.S. are removed from this universe.

     

    - From those stocks, Value Line® selects those companies with a higher than average dividend yield, as compared to the indicated dividend yield of the Standard & Poor's 500 Composite Stock Price Index.

     

    - Value Line® then eliminates those companies with an equity market capitalization of less than $1 billion.

     

    - The index seeks to be equally weighted in each of the securities in the index. The index is rebalanced on the application of the above model on a monthly basis

     

    Details :
    http://bit.ly/18xTggm

     

    FVD Holdings - 166 companies (which includes many companies I own):
    http://bit.ly/18xTi7Z

     

    It's been in existence since 2004 so there is history as to how it did during the great recession. The 2009 low still looks scary to me for higher quality companies :( ... but I'll need to ponder on this a little more. Although rated 1 or 2 for safety, they are not all dividend growth stocks (nor do they all meet the Chowder Rule of course :)

     

    Anyone else know how to find Value Line 1 & 2 rated companies without a trip to the library (or of course a membership)?
    30 Oct 2013, 10:23 PM Reply Like
  • chowder
    , contributor
    Comments (8015) | Send Message
     
    Author’s reply » Did you note the top sector in that first link to the FVD Fund? ... Utilities.

     

    How long have I been harping about high quality utilities?

     

    Value Line will eliminate utilities from a lot of screens they do for dividends and dividend safety because they say utilities will dominate the list. And people want to avoid that? ... Ha!

     

    There are a lot of companies with a 1 or 2 rating for safety I'll pass on. I need all of the criteria. I stick with the formula.
    30 Oct 2013, 10:56 PM Reply Like
  • Big Thunder
    , contributor
    Comments (567) | Send Message
     
    "Anyone else know how to find Value Line 1 & 2 rated companies without a trip to the library (or of course a membership)?"

     

    My local library gives me online access to Value Line. I just had to establish an online account with the library and click through the link on their site.
    31 Oct 2013, 07:35 AM Reply Like
  • fiveoh
    , contributor
    Comments (123) | Send Message
     
    Great tip, I didnt know this and just checked and my library offers it as well! Thank you.
    31 Oct 2013, 01:46 PM Reply Like
  • CCCB
    , contributor
    Comments (55) | Send Message
     
    Chowder you speak of Value line often. Which one of the products you use?
    Thanks.
    cccb
    31 Oct 2013, 02:38 PM Reply Like
  • chowder
    , contributor
    Comments (8015) | Send Message
     
    Author’s reply » I use the Value Line Survey. It is expensive though. I'm going to see if I can get it online from the library.

     

    Value Line has a Dividend Select edition and I contacted them asking if they could provide just one sample of what it looked like and they told me it wasn't available. They used the money back sales pitch if I was dissatisfied. ... I'm not buying that. ... Ha!

     

    If you're not willing to allow a subscriber to one of your other services an opportunity to see a sample copy of an old report, I'm not willing to subscribe to it.

     

    Thus, I'm going to try and get around subscribing to VL at all. I'm hoping I can get it online from the library.
    31 Oct 2013, 03:04 PM Reply Like
  • David Van Knapp
    , contributor
    Comments (10492) | Send Message
     
    chowder, They clearly mistook the short term gain of a "trial" subscription for the long-term value of a dedicated subscriber. I guess their marketing/sales people don't really understand what the company is selling. In its own little way, that story is sad and incredible at the same time.
    Dave
    31 Oct 2013, 03:59 PM Reply Like
  • Big Thunder
    , contributor
    Comments (567) | Send Message
     
    fiveoh, my pleasure! My library offers Value Line, Morningstar, and S&P Capital IQ NetAdvantage. I was pretty pleased when I discovered that. :-)

     

    There may be differences between what you get for free through the library and what a paying customer gets; I'm not sure. But I've been very happy with the wealth of info available.
    31 Oct 2013, 05:08 PM Reply Like
  • chowder
    , contributor
    Comments (8015) | Send Message
     
    Author’s reply » DVK, I've spent most of my adult life in sales. I understand sales concepts and sales pitches. When we had to resort to a money back, if dissatisfied approach, you now entered the realm of high pressure sales.

     

    Salesmanship is the art of friendly persuasion.

     

    When training a news salesperson, and they saw me make a sale, you should have seen their eyes get wide open when I handed the check back to the person and asked them to make sure they felt comfortable enough with their purchase to hand the check back to me.

     

    A customer that did that, was a customer for life. I taught my people that the quality of the business they acquired was more important than the quantity. A lot of that quantity wouldn't stick with you and you ended up spinning your wheels trying to build a client base.
    31 Oct 2013, 06:08 PM Reply Like
  • MonkeyDo
    , contributor
    Comments (21) | Send Message
     
    Not only do you dispel a wealth of knowledge about investing, but about salesmanship and life as well!! Talk about a value!

     

    Love the blog Chowder, def one of the highlights of my day to see a new posting from you pop up in "feed"
    4 Nov 2013, 10:59 PM Reply Like
  • HiloBeMagical
    , contributor
    Comments (358) | Send Message
     
    Hi Chowder,

     

    In reviewing your Project 3 Million portfolio recently I noticed DEO. I hadn't caught that before, and hope you can offer some insights as to why it merits its place there.

     

    Its dividends don't seem, to me, to meet the reliable and predictable qualifications of your mission, but I suspect there's something I'm not seeing? Perhaps your purchase at under $30 offered a yield sufficient to get in? If so, does its current yield + DGR being so far below 12 give reason to deploy some of the profits to other opportunities? (NICE price appreciation though! Woo Wee!)

     

    What don't I know about Diageo?

     

    Thanks,
    Hilo
    31 Oct 2013, 12:39 PM Reply Like
  • chowder
    , contributor
    Comments (8015) | Send Message
     
    Author’s reply » Hilo, DEO met the Chowder Rule at the time of purchase. The 5 year performance record sort of smoothed out the return and didn't appear as though it was going to aggravate me as much as it did. ... Ha!

     

    So, I purchased DEO in my portfolio, but then locked my profits in when I saw the yield dropping, and realized I didn't like the inconsistent dividends. Although the annual number was showing growth, I didn't like the inconsistency.

     

    I kept DEO in the Project $3 Million portfolio because it was the leader in its field, was showing decent capital appreciation, and the owner of that portfolio is just 28 years old and in a better position to continue holding for the long term, than I am.

     

    DEO is the second best performing company in that portfolio, so I thought I'd let it play out as a capital gain holding. If DEO wants to provide capital gains, then this portfolio can handle it.

     

    I also expect to pick up a speculation play for Project $3 Million in the coming weeks or months, something I wouldn't consider for my own portfolio. Since the owner of Project $3 Million has decades until retirement age, and has a solid foundation of dividend growth stocks, I thought it could weather a speculation company and maybe even a pure growth company at some point.

     

    The major focus will remain to be dividend growth companies though.
    31 Oct 2013, 01:45 PM Reply Like
  • HiloBeMagical
    , contributor
    Comments (358) | Send Message
     
    "Since the owner of Project $3 Million has decades until retirement age, and has a solid foundation of dividend growth stocks, I thought it could weather a speculation company and maybe even a pure growth company at some point."

     

    Makes perfect sense. Thanks.
    H-
    31 Oct 2013, 02:29 PM Reply Like
  • Robert Allan Schwartz
    , contributor
    Comments (13898) | Send Message
     
    "I didn't like the inconsistent dividends. Although the annual number was showing growth, I didn't like the inconsistency."

     

    Chowder, was the inconsistency due to currency fluctuations, or was it going up and down in its native currency?
    31 Oct 2013, 03:22 PM Reply Like
  • chowder
    , contributor
    Comments (8015) | Send Message
     
    Author’s reply » Robert, it was a combination of currency rates and the fact that UK companies provide a small dividend for the first 6 months and then a larger dividend for the next 6 months, provided the business could support it.

     

    I prefer the same dividend for 4 quarters like US companies do. That's more reliable. That's more predictable. That provides me with more peace of mind.

     

    I simply don't like semi-annual dividends.

     

    I'm not concerned with hedging currencies. I get paid and spend US dollars. That's all I care about.

     

    How bout them Red Sox !!!!! ... Whoooo!
    31 Oct 2013, 06:14 PM Reply Like
  • Robert Allan Schwartz
    , contributor
    Comments (13898) | Send Message
     
    Chowder, thanks, I understand. You're right about the differing amounts, and the semiannual dividends. I agree that I prefer predictable dividends every quarter, with a raise every year.

     

    Yes, Boston is alive with excitement about the Red Sox!
    1 Nov 2013, 09:25 AM Reply Like
  • Miguel Arnot
    , contributor
    Comments (897) | Send Message
     
    "I prefer the same dividend for 4 quarters like US companies do. That's more reliable. That's more predictable. That provides me with more peace of mind."

     

    I understand what you and Robert are saying about the dividends paid every qtr versus every 6 months, however, that's not a good reason to stay away from international companies or to think the quarter system is more reliable or predictable. There are some superb int'l companies out there and the majority of them pay twice a year. It doesn't make them inconsistent though. You have to add the 2 divs together and compare the dividend increase to the year before.

     

    Perhaps a better way of looking at it is that the qtr system allows the divs to compound at a quicker rate than the 2 x year system.

     

    DEO is a phenomenal company, wish I owned it.

     

    A couple of int'l beverage companies that might be worth taking a look at (and on big pull backs at the moment) are ABV (Ambev, Brazlilian) and FMX (Mexican).
    5 Nov 2013, 03:39 PM Reply Like
  • chowder
    , contributor
    Comments (8015) | Send Message
     
    Author’s reply » >>> that's not a good reason to stay away from international companies <<<

     

    It is for me. I have enough quality companies right here in this country that I own. I can't own everything. In retirement, I want that consistency of seeing a dividend paid every 3 months.

     

    I see nothing wrong with others looking International, but I've sold my International companies and wish to focus on Domestic.

     

    I do have DEO in the Project $3 Million Portfolio though. That portfolio belongs to a younger person, who won't be relying on the dividend income for decades, and the position is up 82% at this time. I have no intention of selling it, regardless of valuations.

     

    I sneak a peek at ABV every now and then. I used to have a company sponsored DRIP with BUD. I sold that to get rich quick during the tech days, another mistake of many. ... Ha!
    5 Nov 2013, 04:34 PM Reply Like
  • Miguel Arnot
    , contributor
    Comments (897) | Send Message
     
    Nothing wrong focusing on the familiar; but, perhaps at least some US companies that have a lot of exposure overseas. They also pay quarterly. (And here I was trying to give you a case of ABV and FMX....:)

     

    By the way, if you are still looking for the pure cap play for the $3M portfolio, take a look at MYGN. Molecular diagnostic company. Their patent was invalidated (can't patent natural molecules) but they just blew away earnings in after hours. This company has the feel of a future QCOR, AMGN, ALXN, etc. (sorry, terrible lumping of companies as a comparison) in terms of possible price action. Risky? Yep! The short percent right now is around 30%.
    5 Nov 2013, 04:46 PM Reply Like
  • chowder
    , contributor
    Comments (8015) | Send Message
     
    Author’s reply » I appreciate the beer, but neither of those companies remotely look like companies that meet my initial stock selection process, based on the Chowder Rule.

     

    I'll look into the other selections for Project $3 Million. Thanks for sharing them.
    5 Nov 2013, 05:40 PM Reply Like
  • Miguel Arnot
    , contributor
    Comments (897) | Send Message
     
    Both ABV and FMX have out-performed KO, PEP, and DEO over the last 10 yrs and by a huge margin. And DEO has out done both KO and PEP. Just sayin - but I get your point about not fitting your formula at this point.
    5 Nov 2013, 09:10 PM Reply Like
  • scubastevo80
    , contributor
    Comments (221) | Send Message
     
    BUD has outperformed every holding of mine since I purchased it in September of 2011. It was up 45% a year until I just sold it in July and September at ~100. FastGraphs overvaluation coupled with the low yield was a no brainer for me. That and what Chowder pointed out (not a consistent dividend every three months) made it much easier to sell.

     

    Now I just need to determine where to redeploy the proceeds - the market is getting a bit pricey and I'm having problems finding bargains in stocks I don't already own.
    6 Nov 2013, 07:47 AM Reply Like
  • mostserene1
    , contributor
    Comments (3343) | Send Message
     
    In dividends? I doubt it. Most of us want a solid stream of dividends, not high flying speculative growth stocks.
    8 Nov 2013, 04:32 PM Reply Like
  • Stephen Mayo
    , contributor
    Comments (422) | Send Message
     
    My very favorite are U.S. companies paying dividends quarterly, but who also have forward looking international growth. That's the best compromise I can think of.
    10 Jun, 03:36 PM Reply Like
  • Smallstep
    , contributor
    Comments (941) | Send Message
     
    Chowder,

     

    I do not know how to thank you enough for leading me/us into the right path. If I did not find you in SA(and other great teachers..) I would never feel so confidence in managing my own and family accounts today.

     

    I notice I am totally changed to another person. Never in my life feel so eager to learn and patiently listen to authors (and community) of SA. Thank you for kindly teaching me/us. I wish there is another English word heavier than "Thank you" or "Appreciate" to explain my feeling.

     

    One simple question, please. When a stock no long meets with Chowder rule, after you sell it, do you plan to watch it and re-enter when it goes to the right tract again? Or you would rather give the stock a test for several quarters? Or do you recommend to move on and never would re-purchase the same stock?

     

    Thank you very much for all your advice. I have to re-think many things you said. I will re-read this and think deeper. For 0 experience investor as I am, your article is easy to understand, but a lot to plan and research. I thank you again for pushing my old brain running fast. haha.
    -----Small
    1 Nov 2013, 10:25 PM Reply Like
  • chowder
    , contributor
    Comments (8015) | Send Message
     
    Author’s reply » Thanks for the kind words Small.

     

    Brains are capable of running fast. Well, for most people. We just need to make sure they are running in the right direction. ... Ha!

     

    Yes, I keep the companies I sell on my watchlist and look forward to purchasing them again if they meet the stock selection criteria.

     

    I took profits on VFC and MKC when the yields dropped below 2%. Both are high quality companies. If I can catch them having a decent correction, I would purchase them back in a heartbeat.

     

    If a company meets the criteria, it meets the criteria. Having owned it in the past should not make a difference and prevent you from purchasing it again.
    2 Nov 2013, 06:40 PM Reply Like
  • Stephen J Melnykevich
    , contributor
    Comments (1247) | Send Message
     
    Chowder,

     

    Can you elaborate on what you mean when you sell stocks that drop below the 2% yield. I imagine that you purchase stocks that having a starting yield of 2 or higher so wouldn't the yield only grow based on your cost basis, albeit slower with smaller increases.

     

    Take AAPL for example right now with a yield of 2.34. What would need to happen for you to sell the stock?

     

    P.S.- Despite being a Yankee fan. Congrats on the World Series win, it was a tough year for you guys both with the marathon and the season. Well deserved.
    2 Nov 2013, 07:48 PM Reply Like
  • Smallstep
    , contributor
    Comments (941) | Send Message
     
    Chowder,

     

    Thanks for reply. VFC announced 4 to 1 on Oct 20th. Is that going to affect the value of VFC or it is a good thing for shareholders?
    Sorry to ask so many questions to you. ----Small
    3 Nov 2013, 11:03 PM Reply Like
  • chowder
    , contributor
    Comments (8015) | Send Message
     
    Author’s reply » Small, the only thing it really changes is that the share price will drop low enough where smaller retail buyers will be more inclined to buy them.

     

    All of the other numbers will adjust to reflect the same value so whatever market value people have in their portfolio will be unchanged.
    4 Nov 2013, 03:00 AM Reply Like
  • chowder
    , contributor
    Comments (8015) | Send Message
     
    Author’s reply » Stephen, I purchased VFC and MKC when the yields were about 3.5%. I expect the yields to come down as share price rises, but when the yields dropped below 2%, I had some decent capital gains.

     

    I don't know that I would do that again, but at the time I was worried about valuations and I'm not sure if selling them was the right thing to do. So of course, if they meet my criteria again, I'm in.

     

    I don't look at yield on cost because I keep adding to positions. Yield on cost might be beneficial if you bought something and never added to it again.

     

    That's 3 World Series Championships in 10 years. That qualifies as a dynasty. The impressive thing to me was that they gave up the big money players, Beckett, Gonzalez and Crawford and filled their roles with lost cost players, Uehara, Gomes and Victorino.

     

    The Power of the Beard babee! During their victory parade, vehicles they rode on had beards too! ... Ha!
    2 Nov 2013, 08:05 PM Reply Like
  • Miguel Arnot
    , contributor
    Comments (897) | Send Message
     
    Chowder,

     

    You didn't invite me to the party! Oh well, here I am anyways. :) Very solid article. In particular, I liked your comments about branching out into other stocks/sectors.

     

    I have DNKN, TGT, BDX, MDT, EMR, UTX, ITW and all of them are solid and probably fit within your rule. I worked for EMR & UTX for years and would recommend them to any investor. DE on the buy list.
    2 Nov 2013, 11:02 PM Reply Like
  • chowder
    , contributor
    Comments (8015) | Send Message
     
    Author’s reply » Miguel, if you didn't get an invite, how did you get in? ... Ha! Ha!

     

    I've owned EMR before in my portfolio but not the Project $3 Million portfolio. I would purchase it again, and maybe keep it this time, if I can get a decent initial yield.

     

    I don't know about DNKN at this time. I'd call it a spec play for me, although I am looking to own it.

     

    I agree with you about the others, all solid companies and I can envision owning any of them if they can meet the Chowder Rule.
    3 Nov 2013, 07:22 AM Reply Like
  • Miguel Arnot
    , contributor
    Comments (897) | Send Message
     
    I bribed the doorman with a case of beer.

     

    I was able to pick up DNKN last year and since the yield isn't really that high at this point I would be careful about getting in right now.
    3 Nov 2013, 10:37 AM Reply Like
  • jpparker30
    , contributor
    Comments (9) | Send Message
     
    is anyone concerned about the huge payout ratio? my fidelity account shows 303% payout ratio last quarter. how can this be sustained?
    24 Nov 2013, 04:50 AM Reply Like
  • chowder
    , contributor
    Comments (8015) | Send Message
     
    Author’s reply » Hello jp,

     

    Which company are you referring to regarding the 303% payout ratio?
    24 Nov 2013, 08:42 AM Reply Like
  • larch99
    , contributor
    Comments (44) | Send Message
     
    Assume DEO, as I see a 315% ratio on the Dividend Investor site. On a side about DE, do you see the growth slowing (In USA) due to the ethanol reduction news?
    24 Nov 2013, 09:48 AM Reply Like
  • chowder
    , contributor
    Comments (8015) | Send Message
     
    Author’s reply » That's got to be a mistake with DEO. They might have had a one time charge which inflated the number, I don't know.

     

    They earned $6.34 per share and paid out $2.99.

     

    You've got to be careful with foreign companies because they pay irregular dividends. A lot of sites pick up the second payment, which is usually the largest payment and they extrapolate that. Sometimes currency issues muddy the waters as well.

     

    DE may see slower growth from ethanol reduction and most analysts are expecting that. DE's strength in 2014 is going to come from the construction side of their business, at least that is what DE management is saying.
    24 Nov 2013, 10:26 AM Reply Like
  • jpparker30
    , contributor
    Comments (9) | Send Message
     
    sorry, I was referring to O
    24 Nov 2013, 10:21 PM Reply Like
  • chowder
    , contributor
    Comments (8015) | Send Message
     
    Author’s reply » You can't use payout ratios based on earnings when you are dealing with REIT's or MLP's. Due to the way they are structured, between the amount of depreciation they take, and the large amounts of distributions and dividends they pay put in order to maintain their corporate tax advantages, their payout ratios look inflated.

     

    You are supposed to judge them based on what they pay using Funds From Operation (FFO).

     

    Over the last 15 years, the normal Price per FFO ratio has been 13.7. It is currently 16.3 which would make O slightly overvalued.

     

    They have made a huge acquisition which has caused the number to inflate and is the reason I expect the dividend increases to remain small during 2014. I believe O wants to get that P/FFO number down to normal levels and once there, I believe we will see O then start raising that dividend at higher rates in 2015.
    25 Nov 2013, 06:46 AM Reply Like
  • tak111
    , contributor
    Comments (57) | Send Message
     
    hi Chowder, where did you get the number 13.7 for average P/FFO?
    29 Dec 2013, 01:48 AM Reply Like
  • chowder
    , contributor
    Comments (8015) | Send Message
     
    Author’s reply » F.A.S.T. Graphs which uses S&P Capital IQ data.
    29 Dec 2013, 08:24 AM Reply Like
  • tak111
    , contributor
    Comments (57) | Send Message
     
    thanks Chowder. all the best!
    29 Dec 2013, 10:11 AM Reply Like
  • YCantIRetire
    , contributor
    Comments (437) | Send Message
     
    Thank you for the explanations.
    I have been having difficulty with investing in stocks that pay low dividends (under 3%). I appreciated reading that you have a revised guide for those and another for utility/mlp/reit.
    14 Jan, 12:46 PM Reply Like
  • drftr
    , contributor
    Comments (120) | Send Message
     
    Chowder,

     

    Could you please explain why you use a 50% safety margin for 'normal' stocks and no safety margin for MLPs, REITs and utilities?

     

    Tnx!

     

    drftr
    8 Mar, 04:07 AM Reply Like
  • chowder
    , contributor
    Comments (8015) | Send Message
     
    Author’s reply » MLP's, REIT's and utilities are capital intensive businesses. As such, I don't anticipate as much dividend growth out of them as I do other companies. I also expect more capital gains out of MLP's and REIT's than most sectors, over time.
    8 Mar, 08:51 AM Reply Like
  • drftr
    , contributor
    Comments (120) | Send Message
     
    And therefor less volatile, right? I get it. Thanks!

     

    drftr
    8 Mar, 09:38 AM Reply Like
  • drftr
    , contributor
    Comments (120) | Send Message
     
    Hello Chowder,

     

    After a full year of studying asset allocation, dividend growth investing, bonds, commodities, hedging, et cetera, I'm at the point where I have to put things together, set goals and design my portfolio. You may have mentioned that I'm posting some stupid questions out there just to make sure that I understand things right as I hate making expensive mistakes. I've had enough of those in my "trading carreer" already. This leads to the following question about the "Chowder Rule".

     

    If you follow the rule of 12 for "normal" stocks ending up with let's say exactly 12 there are 2 extremes. I think you say you need 15 when the yield is 2% or lower so let's consider 2,5% the minimum yield for the 12-rule and 9,5% for dividend growth. If my calculation model is set up in the right way this means that after 10 years without reinvestments your yield is 5,66%, right?
    On the other end of the spectrum and changing the yield into 9,5% and dividend growth into 2,5% again we end up with 12. But in this case your yield after 10 years wouldn't be 5,66% but a whopping 11,86%. Same rule but more than double the yield.

     

    I'm not sure what this all means to me and if it makes enough sense for me to adopt. I know you only use the rule as a screen but still the difference is enormous. Do you use info like what the 10 year yield could/would/should be in order to spread risks, centering on the hot spot mid way? That would be the 6% by 6% that leads to 10,14% after 10 years. And that is exactly DVK's reference point with his 10x10 rule, which probably is no coincidence. That 10% line in my calculation of course looks completely different as it is a results line while yours is an entry line for buying (or better: starting research).

     

    My questions: Am I interpreting things in the right way? And do you use calculations to come to a minimum yield after a certain number of years in addition to the Chowder Rule?

     

    Long story - but hopefully not too stupid as I don't want to waste anyone's time.

     

    drftr
    3 Apr, 03:24 AM Reply Like
  • chowder
    , contributor
    Comments (8015) | Send Message
     
    Author’s reply » Hello drftr,

     

    I don't take the info and extend it out ten years. I'm assuming the yield and the dividend growth are going to make adjustments and vary as price fluctuates in one direction or the other.

     

    In fact, if everything works the way I wish it too, the yield is going to come down as will the Chowder Rule number, because I expect price to rise.

     

    I'm basically looking to get a fast start with the total dividend return, yield plus dividend growth, and using those two components to help compound my returns via reinvestment.

     

    I have had companies I sold that had a 3.5% to 4% yield initially and sold them once the yield dropped below 2%.

     

    I did this with VFC and MKC. I was able to increase the income component immediately as I replaced VFC with PG and GIS, and I replaced MKC with PM.

     

    However, in hindsight, a couple of years out, I would have had better total return if I kept the positions in play as opposed to swapping them out.

     

    VFC, not counting dividends, up 90.77% since I sold it.

     

    PG up 23.86% and GIS up 31.48%. So, it looks like a huge mistake on my part.

     

    MKC is up 16.45% since I sold it and PM is down 6.33%.

     

    My overall PM position is profitable, but this particular block of business is down.

     

    I suppose this makes sense that the replacements have lagged as I replaced a momentum company with one that was undervalued which generally means under-performing.

     

    I'm going to monitor them and see what happens 5 years out.
    3 Apr, 08:50 AM Reply Like
  • HiloBeMagical
    , contributor
    Comments (358) | Send Message
     
    "However, in hindsight, a couple of years out, I would have had better total return if I kept the positions in play as opposed to swapping them out.

     

    VFC, not counting dividends, up 90.77% since I sold it.

     

    PG up 23.86% and GIS up 31.48%. So, it looks like a huge mistake on my part."

     

    How many examples do you have where you sold a stock and months later it was significantly _lower_? (See where I'm going with this?)

     

    Chowder, it's only a mistake if you should have seen some indication that VFC was going to continue rising.

     

    I don't see anything in your mission about "amassing the most federal reserve notes", your mission is all about increasing income. Mission accomplished.

     

    You'll remember that I'm reminding you of this because of our previous conversations about you holding onto MKC. You finally sold and increased the income to your port. Given your mission, it was the right move, no matter what's happened to the price of MKC & VFC since.

     

    Imo, of course...

     

    Rip the rear-view mirror right out of the car, babee. What's behind us is none of our concern. ;)

     

    Hilo
    4 Apr, 07:38 AM Reply Like
  • maybenot
    , contributor
    Comments (3845) | Send Message
     
    Hilo -- I have to say I love your line:

     

    "Rip the rear-view mirror right out of the car..."

     

    Nice. Thanks Hilo.

     

    (sure, we need to compare, blah, blah. but remember one's mission, goal)
    4 Apr, 09:32 AM Reply Like
  • Smallstep
    , contributor
    Comments (941) | Send Message
     
    Chowder,

     

    Thanks for showing us about the fact. Everyone made mistakes. The different is either ignore it or learn lesson from it. I appreciate you showed us the lesson in details. It helps me to understand what was going on.

     

    I also have VFC which I exercise the rule---whatever I shop, I use..., I should consider to have the shares. Lucky me, I went through that split time(12/18, 2013??). Never in my life time would have any experience of 100 shares turned to 400 shares just overnight. Beside excitement, I then quickly turn to worry mood. What shall I do?

     

    Silly me, did not see the value still remain the same, just worry I have too many shares. Of course, mistake was made, I sold 200 of VFC. It is just repeated the same mistake I made in 2013, sold MMM for the same reason.

     

    Recently, I have a new question that I could not get the right answer. I understand we should try hard to manage our risk. I have 40-50(sometime a little over 50 stocks) stocks in my account. I tried to pick and balance in different sectors. At first I equally hold them as 2% or 2.5%, then moved to some heavily have 4-5% and some have only 1%.

     

    I am not patient enough just stay there and see equally hold stocks either not growing, or slowly grow. Based on their reliable dividend history, they are still great stocks to have. I just wonder my emphasis on faster growth stock and put more % on it(e.g. LMT, ) is a right thing to do?
    Thanks for help. ---Small
    3 Apr, 09:53 PM Reply Like
  • jonathanliu
    , contributor
    Comment (1) | Send Message
     
    thanks for the explanation. I've made a customized "ETF" so to say on motif.
    not sure if im allowed to post a hyperlink but its here: http://bit.ly/1mVju6g
    29 Apr, 04:06 PM Reply Like
  • chowder
    , contributor
    Comments (8015) | Send Message
     
    Author’s reply » Hmmm, it was difficult to read because most of it got covered up by a dark screen.
    2 May, 06:54 PM Reply Like
  • Bob Wells
    , contributor
    Comments (5620) | Send Message
     
    jonathan...

     

    What you did is great! Moving forward it will be fun to watch.

     

    Thanks again

     

    Bob
    31 May, 01:34 PM Reply Like
  • drftr
    , contributor
    Comments (120) | Send Message
     
    Thanks Jonathan for your portfolio ideas AND the Motif concept. I'll definitely look into that and see how useful it is. Prices are that's for sure so I'll have a look what else there is DGIs could benefit from.

     

    drftr
    1 Jun, 05:04 AM Reply Like
  • YellowJoe
    , contributor
    Comments (134) | Send Message
     
    Hi Chowder,
    I been reading (and learning) your Project-3-Million blog as of recent.

     

    I did some research on about 10 of your stock picks for your son's portfolio and its great to see that these high quality dividend growth stocks are beating the S&P 500 YTD :)
    3 May, 08:10 AM Reply Like
  • ghaukness0929
    , contributor
    Comments (174) | Send Message
     
    Thanks again for this gem. reviewed it and implemented your logic into some trading workflows as part of an automated system. Excited to be able to have this implemented alongside other strategies.
    27 May, 12:34 PM Reply Like
  • mikhailo23
    , contributor
    Comments (27) | Send Message
     
    I am confused by your "Chowder Rule".

     

    "You first take the current yield of a stock and its 5-year dividend compounded annual growth rate (OTCPK:CAGR). Add these two numbers together and that gives you its "score"."

     

    If stock XYZ has a dividend yield of 5%, and the CAGR of the dividend yield is 10%, the following year the stock would yield 5.5%. How does this get you to a chowder score of 15?
    14 Jun, 03:05 AM Reply Like
  • scubastevo80
    , contributor
    Comments (221) | Send Message
     
    Chowder's number is not based on future yield, but rather a min requirement to make a purchase. 5% yield plus 10% dividend growth give you a Chowder number of 15%. Chowder's min requirement is 12% I believe, so the stock in question, barring other minimum purchase requirements, would make it eligible to buy. The number is not a predictor of next year's forward dividend rate, although the expectation can be made that 5.5% will be the new "yield on cost".
    14 Jun, 07:38 AM Reply Like
  • chowder
    , contributor
    Comments (8015) | Send Message
     
    Author’s reply » Thanks stevo. I also followed up with a PM to mikhailo.

     

    BTW, next purchase in my personal Ira will be an addition to KMR and a possible addition to XEL. Just thought I'd pass it along. I expect the purchase to be made the latter part of the upcoming week.
    14 Jun, 08:30 AM Reply Like
  • scubastevo80
    , contributor
    Comments (221) | Send Message
     
    Thanks Chowder - I have full positions now in KMI and XEL, but am looking for something to purchase in the coming week as I now have the cash to invest. I still feel the other utilities are a bit above fair value, so I may look to KMP or another MLP. Regardless, I'm coming up on my semi-annual review. At the end of June I'll take the time to reassess and see if anything changes from what I have now.
    14 Jun, 01:36 PM Reply Like
  • Stephen Mayo
    , contributor
    Comments (422) | Send Message
     
    Isn't XEL well below the Chowder Rule?

     

    I see a 3.9 div and a 3.72 five year growth rate.

     

    Help!
    14 Jun, 08:04 PM Reply Like
  • chowder
    , contributor
    Comments (8015) | Send Message
     
    Author’s reply » Vern, that turns out to be 7.62 and the Chowder Rule number for utilities is 8.0. That is close enough for me given the yield, low payout ratio for a utility, and forward looking earnings that are expected to grow.

     

    I'd provide more information but I'm watching World Cup and I'm distracted. ... Ha!
    14 Jun, 08:36 PM Reply Like
  • Stephen Mayo
    , contributor
    Comments (422) | Send Message
     
    Ah! Are the Bruins playing in the World Cup?

     

    Hmmm.

     

    I didn't realize the Utes had a different Chowder number!

     

    Thanks!
    14 Jun, 11:22 PM Reply Like
  • chowder
    , contributor
    Comments (8015) | Send Message
     
    Author’s reply » Vern, utes aren't growth companies, their earnings are capped by regulators thus it would be very difficult for them to maintain high dividend growth rates for a long period of time, at least enough to qualify for a 12 number. So, 8 it is and 8 works for me when dealing with higher yields and a safe dividend.

     

    The Bruins didn't qualify for Cup but the team I picked to win it all starts with a B ... Belgium.
    15 Jun, 08:25 AM Reply Like
  • maybenot
    , contributor
    Comments (3845) | Send Message
     
    Vern -- plus, XEL's latest dividend increase is above the 5yr DGR.

     

    XEL is a good buy. WR & NU aren't too bad either currently.
    14 Jun, 09:15 PM Reply Like
  • JaxJaguar
    , contributor
    Comments (95) | Send Message
     
    Chowder,

     

    Just discovered this page. Thanks for the excellent explanation of the Chowder Rule. Very thorough; easy to understand; it will be easy to follow. A couple of questions for you. I don't see any mention in this article regarding taking into consideration a company's p/e ratio. Do you take this into consideration at all? Also, do you pay any attention to the "Confidence Factor" column on Dividend Champions (Column CA)? Thanks very much for your time.
    23 Jun, 09:29 PM Reply Like
  • chowder
    , contributor
    Comments (8015) | Send Message
     
    Author’s reply » The Chowder Rule is applied at the end of the due diligence. I apply it to companies that are ready for purchase fundamentally and then valued properly. So PE is important as it comes under the valuation criteria.

     

    I've never used the Confidence Factor as I have no idea what it is or does. I've never seen it.
    24 Jun, 03:35 PM Reply Like
  • JaxJaguar
    , contributor
    Comments (95) | Send Message
     
    It is the column next to the Chowder Rule on Dividend Champions, Contenders and Challengers. Chowder Rule is in column BZ and Confidence Factor is in column CA. It is a formula to "gauge confidence in continuation of dividend-increase streaks......"
    25 Jun, 07:38 PM Reply Like
  • chowder
    , contributor
    Comments (8015) | Send Message
     
    Author’s reply » Thanks for sharing, I appreciate it.
    25 Jun, 08:44 PM Reply Like
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