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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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  • It's All About The Fundamentals 107 comments
    Jan 11, 2014 5:39 AM

    In the next few days, I will be making another purchase in the Project $3 Million Portfolio. I thought I'd share some insight into how I go about the process.

    I've had quite a few requests about my stock selection process, and although I don't mind sharing it, it is time consuming to take people through the process. So, I thought I would write it down here and simply link to it when asked again.

    The very first thing I look at is a company's financial strength ratings, their credit rating if you will. I look for companies that rate a 1 or 2 for Safety by Value Line, or a BBB+ rating by Morningstar if you don't have access to Value Line, and I look at S&P Capital IQ for Quality ratings of B+ or better.

    If a company doesn't meet the quality rating, or I can't confirm one, I go no further, unless I'm specifically looking for a speculation company.

    These companies I purchase are supposed to provide us with a lifetime of income and the best way to insure that is to own quality. Quality is job #1.

    I have a watch-list of 48 companies that pass the quality stage. These are the companies I monitor for opportunity.

    As I look over the watch-list, I have to see what I own and decide which sectors I want to go with. Here is the current portfolio weightings:

    Consumers ... 43.2%

    MLP's ... 14.5%

    Utilities ... 13.5%

    Industrials ... 8.1%

    REIT's ... 5.6%

    Healthcare ... 4.2%

    Business Services ... 4.1%

    Energy ... 3.8%

    Technology ... 3.1%

    Financials ... ZERO

    Since the portfolio is so heavily weighted in consumers, anything consumer related is out this time around. That would include WMT or TGT for example.

    I decided to focus on the sectors with weightings under 10%, to help build some balance as we go forward this year.

    In looking over my watch-list, it isn't valuations I look to first. I look for companies rated to beat the market over the next 6 to 12 months. Fidelity has a rating system called StarMine and the research firms in the system provide ratings from zero to ten to determine where the collective firms rate a company currently. Anything from 7.0 and up is a Bullish rating.

    The reason I want some momentum here is because I want the position to have a good chance of getting off to a good start. We're in a good economic and market environment right now where the tide is supposed to raise all boats. By getting off to a fast start, it provides peace of mind during market corrections.

    Out of 48 companies on the watch-list, and considering the sectors I was looking to invest in, only 3 companies passed the StarMine ratings test. They were MSFT... 9.0, IBM ... 9.5 and CSX ... 9.1 If I was willing to add consumer related, WMT rated out at 7.4.

    Once I have the list narrowed down, I then look to see who provides the best discounts to fair value. I use S&P Capital IQ for these ratings. According to S&P, MSFT is selling at an 18.8% discount. IBM is selling at a 30.7% discount to fair value, and CSX is overvalued by 4%. I like to see discounts of 15% or more, but will settle for less when I have to. I eliminated CSX from consideration until better valuations present themselves.

    The next step, since this is a dividend growth portfolio, is to determine the total dividend return when you combine yield to the dividend growth number, what is known as the Chowder Rule.

    I won't delve into the fundamentals until the quality ratings, discounts and dividend growth numbers are acceptable. I don't wish to dig deep and then find out the dividend growth is unacceptable.

    When you take the current yield and add it to the 5 year compounded annual growth, I want to see a number of 12% or better when the yield is 3% or higher, or a number of 15% or better when the yield is under 3% but above 2%.

    MSFT has a Chowder Rule number of 18.98%. IBM has a Chowder Rule number of 16.27%, so both companies qualify.

    I want to see where the company has a consecutive string of raising the dividend. I'll accept 5 years, but I prefer 10 or more. The more the better.

    IBM has a 17 year string and MSFT has a 7 year string. Both qualify.

    At this point I look at earnings. I look at the last 10 years and I want to see where earnings have increased at least in 7 of those 10 years.

    IBM has seen their earnings rise in 10 of the last 10 years. I really like this! MSFT has seen their earnings rise in 7 of the last 10 years. Both qualify.

    At this point, it isn't a matter of who has the better numbers, both companies qualify for the next step, where the final decision will be made.

    This is important! I don't go with the best yield and dividend growth. I go with the company with the better underlying fundamentals, and that's the next step.

    I look at current PE's vs historical PE's to help determine valuation.

    IBM's current PE is 11.1% and normal PE is 16.6%. MSFT's current PE is 13.3% and normal PE is 18.1%. Both are still looking good. But when I look at return on equity and return on invested capital, I see that IBM's numbers are on the rise and MSFT's numbers are on the decline.

    Estimated earnings growth, and I realize they are just estimates, show IBM at 10.2% and MSFT at 9.1%.

    When I look at all the firms that cover these companies, StarMine tracks their buy, sell or hold ratings for accuracy. I always look at the reports by the top two firms for accuracy on a company and these companies aren't tops with every company they cover.

    The top two firms for accuracy calls on IBM are Jefferson Research with an 84% accuracy rating and then comes Ford Equity Research with a 73% accuracy rating. Both companies have a Buy rating on IBM.

    The top two firms for accuracy calls on MSFT are the same two companies, so this makes this easier to decipher. Jefferson Research has an accuracy rating of 84% and has a Hold rating on MSFT. Ford Equity has a 73% accuracy rating and has a Strong Buy on MSFT.

    Since Jefferson Research is more accurate than any other firm with their calls on these two companies, I delved a little deeper into their research.

    IBM:

    Earnings Quality ... Strongest

    Cash Flow Quality ... Strongest

    Operations Efficiency ... Strongest

    Balance Sheet ... Strongest

    Valuation ... Least Risk

    MSFT:

    Earnings Quality ... Strongest

    Cash Flow Quality ... Strong

    Operation Efficiency ... Strong

    Balance Sheet ... Weakest

    Valuation ... Least Risk

    ....

    Both companies are still worthy of purchase, and some people may choose MSFT because of the higher yield and slightly better Chowder Rule number, but IBM presents the stronger fundamentals at this time, and it's those fundamentals that are going to drive the dividend growth.

    So, when the cash hits the account, I will be taking out a position in IBM the middle of next week.

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Comments (107)
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  • jjnagoings
    , contributor
    Comments (153) | Send Message
     
    Chowder,
    Love your articles and the blog they are great resources to us that are just starting out. When do you consider a position to be full, if at all? If it is a dollar amount(assuming some people go by shares) is it the current value of the position or is it the amount of invested capital?
    11 Jan, 07:35 AM Reply Like
  • chowder
    , contributor
    Comments (7523) | Send Message
     
    Author’s reply » I go by dollar amount. For example, for somebody young and just starting out, they may want to build up to 5 positions and diversify them among different sectors. Say, a VZ, PG, CVX, O and D. You have 5 different sectors and then start with $1,000 in each of them. Then you can raise a full position to $2,000 and add to each one of them $1,000 at a time.

     

    At that point $2,000 is a full position. You may want to start adding additional positions at $1,000 each, representing half-positions. When they become full positions, you can raise a full position to $3,000 each and start adding to them once again.

     

    As the portfolio grows, some positions will become larger than others. They may become overweight. You can raise the criteria again, or simply keep everything in balance and sell part of it. It's all a matter of personal choice.

     

    I started with invested capital for weighting positions, but as time goes on, I changed to portfolio value because some positions grew more than others.
    11 Jan, 08:34 AM Reply Like
  • thomas.t
    , contributor
    Comment (1) | Send Message
     
    Chowder,
    I'm 32yrs old and just starting out. I put aside $500 a month into my Tax Free Trading Account. My question is that since I have an employee share plan at my work (RCI) and as you know it's also on David Fish Challenger's List. Should I be selling some of the shares and use it towards building my positions?
    Thanks,
    T.T
    12 Jan, 11:59 PM Reply Like
  • chowder
    , contributor
    Comments (7523) | Send Message
     
    Author’s reply » thomas, I think you would need to talk with a tax person first. I don't know what the cost of doing that would be, assuming there is a cost.

     

    I don't know what to advise here other than tell you what I do. The Missus has a 401K at her work that only allows the money to be invested in mutual funds. Due to her age, she can take withdrawals and move the cash to her Traditional IRA with Fidelity and there are no penalties or taxes incurred.

     

    Every time she accumulates $5,000, we move the funds to invest in dividend growth companies.

     

    If she was taxed on the money she transferred, or had to pay taxes on the gains, I wouldn't be moving the money. I'd let it stay put until she could move it without penalty.

     

    Give it some thought, check with a tax person, and then you'll be in position to make the right decision.
    13 Jan, 12:08 AM Reply Like
  • keu4bike
    , contributor
    Comments (223) | Send Message
     
    Thomas,

     

    I'm not advising. I'm simply stating how I think.

     

    I feel like I have a lot of exposure to my employer simply from my job, since that is where most of my income comes from. If something bad happened to my employer, that would affect my cash flow as well as the value of stock held in the employer. Therefore, I AVOID holding employer stock in a 401(k). The last thing I want is the value of my stock holdings getting cut by 60% the day I get laid off! Some employers will push you to own stock in a 401(k). Others actually forbid owning company stock in a 401(k).

     

    If your employer also offers an ESPP or ESOP plan -- usually taxable -- that allows you to purchase stock at a discount to market, it's often a good deal to participate because you can often get a 5-15% (almost) guaranteed gain. However, because I recognize this as additional exposure to my employer, I tend to trade out of the stock fairly quickly after I achieve that short term gain. I like to buy and hold dividend growth, but I'll take my gains and trade my employer stock.
    13 Jan, 12:58 PM Reply Like
  • yahoo.com
    , contributor
    Comments (25) | Send Message
     
    do not sell your RCI from employee share plan unless you do not like the company
    18 Apr, 08:37 AM Reply Like
  • Tradevestor
    , contributor
    Comments (4071) | Send Message
     
    Good pick there Chowder. And Microsoft's recent musical chairs CEO selection process is not all that encouraging either.

     

    Intel was supposed to be the next DG tech stock but has not been very consistent. So why not go with the one major tech name that has been paying consistently over so many years ? Good one.
    11 Jan, 08:58 AM Reply Like
  • tuliptown
    , contributor
    Comments (814) | Send Message
     
    Chowder, I appreciate your taking the time to provide this. I really enjoy seeing how others choose stocks.

     

    where do you find the accuracy call outs for analysts? I have never seen this and always wondered why they (and weather people) are not measured in this way.

     

    thanks
    t
    11 Jan, 09:01 AM Reply Like
  • chowder
    , contributor
    Comments (7523) | Send Message
     
    Author’s reply » tulip, the accuracy ratings are provided by Fidelity. It's part of their research availability to account holders.

     

    I was looking at a company the other day that was being analyzed by S&P Capital IQ. I checked their accuracy rating for that company and saw it was just 30%. So, you discount their recommendations and simply dig for the numbers they provide. The numbers are the numbers. People may interpret them differently, so I look to those who are more accurate.
    11 Jan, 11:40 AM Reply Like
  • SDS (Seductive Dividend Sto...
    , contributor
    Comments (3268) | Send Message
     
    Chowder,
    Thank you for good post.

     

    "I use S&P Capital IQ for <discounts>".
    HOW?

     

    "IBM's current yield is 11.% and normal PE is 16.6%."
    Typo?

     

    SDS
    11 Jan, 09:47 AM Reply Like
  • chowder
    , contributor
    Comments (7523) | Send Message
     
    Author’s reply » S&P Capital IQ provides fair value numbers as part of their research reports. It's right there on the report.

     

    The yield numbers are not a typo. I was looking at a 15 year time frame. The numbers were provided by F.A.S.T. Graphs which uses data from S&P.

     

    Since F.A.S.T. graphs shows valuations, I want to be consistent with sources being used for those valuations, so that's why I place a premium on the S&P research reports when judging valuations.
    11 Jan, 11:45 AM Reply Like
  • KiloBravo
    , contributor
    Comments (47) | Send Message
     
    -IBM's current yield is 11.% and normal PE is 16.6%. MSFT's current PE is 13.3% and normal PE is 18.1%.-

     

    I thought it was meant to read "current 'P/E'" .... Unless you are stating earnings yield for IBM and P/E for Microsoft....

     

    Thanks for putting forth the time to contribute on SA, I always get something from your post and comments
    11 Jan, 01:05 PM Reply Like
  • chowder
    , contributor
    Comments (7523) | Send Message
     
    Author’s reply » Kilo ... I had to read it several times to see it said yield when I meant PE.

     

    It's supposed to read current PE is 11.1%.

     

    I can't believe I proof read it three times and still didn't see it. ... Ha!
    11 Jan, 02:07 PM Reply Like
  • chowder
    , contributor
    Comments (7523) | Send Message
     
    Author’s reply » Okay SDS, I made the correction. Thanks for pointing the typo out, although I wasn't smart enough to see it even after you said it.
    11 Jan, 02:12 PM Reply Like
  • SDS (Seductive Dividend Sto...
    , contributor
    Comments (3268) | Send Message
     
    I do not use F.A.S.T. Graphs, so I'm probably wrong but anyway again: ""IBM's current yield is 11.% and normal PE is 16.6%."
    I define current yield as dividend/stock price and it is now ~ 2% (http://yhoo.it/wqBUh7). PE is price per earnings and Trailing P/E (ttm, intraday) =12.97 (http://yhoo.it/wqBUh7), so E/P is ~ 7.7%.
    SDS
    12 Jan, 07:00 AM Reply Like
  • drcarl
    , contributor
    Comments (274) | Send Message
     
    This is excellent, thank you. The difficulty I have in buying IBM is that many of their growth metrics are affected by stock re-purchases. I am surprised no commentator has mentioned this yet. I have no dispute with stock buy-backs per se, but their revenue numbers are not nearly as attractive as MSFT.

     

    Still, you have solid thinking behind your choice and I hope IBM proves a good buy for you.
    11 Jan, 10:03 AM Reply Like
  • chowder
    , contributor
    Comments (7523) | Send Message
     
    Author’s reply » drcarl, you make a good point about revenues, but I don't allow one metric to determine a buy or sell. Since no selection is perfect, I take fundamental points as a whole and determine who has the most consistency among the criteria.

     

    MSFT may outperform IBM, I don't know. What I do know is the more criteria that is satisfied, the more confident I am to stick with the company during market corrections.

     

    I did forget to mention another metric I use. I look at a company's Stewardship ratings by Morningstar.

     

    Here is what the Stewardship ratings signify ...

     

    >>> Our corporate Stewardship Rating represents our assessment of management's stewardship of shareholder capital, with particular emphasis on capital allocation decisions. Analysts consider companies' investment strategy, history of investment timing and valuation, financial leverage, dividend and share buyback policies, execution, management compensation, related party transactions, and accounting practices. <<<

     

    In other words, Morningstar rates a company's share-owner friendliness of lack thereof. Most companies get a Standard rating.

     

    MSFT gets a Standard rating and IBM gets an Exemplary rating. I will use Stewardship ratings to help separate companies who are close with the fundamentals.

     

    IBM has proven to be more share-owner friendly than MSFT.
    11 Jan, 11:56 AM Reply Like
  • chowder
    , contributor
    Comments (7523) | Send Message
     
    Author’s reply » One of the things that has proved successful for me over the years, was to purchase a high quality company, at a time when the price was down, as they tried to overcome adversity.

     

    JNJ with all of their recalls, PG when they stopped innovating and simply tried to raise prices at a time when the economy turned sour.

     

    There are many examples. All companies face adversity at some point. The strong often find a way to survive and then start moving forward again. They have a record of overcoming adversity. It's how they became the large companies that they are.

     

    IBM is a financially strong company who is facing revenue problems due to weakness in International markets mostly. This is why the company is selling at such a discount, otherwise I wouldn't be getting this discount, and I wouldn't be buying IBM.

     

    If I wait until clearer weather, the discount will be gone.

     

    Anyway, Value Line discusses the headwinds that IBM faces and state that IBM is a timely buy here and have above-average 3 to 5 year potential. They say this recent pull back provides a good entry point.

     

    I'm not trying to make a sale here, I'm simply explaining what I'm doing and why.

     

    If anyone is interested, you don't have to subscribe to Value Line to see the IBM report. You can read it here if you wish.

     

    http://bit.ly/eMzHyX
    12 Jan, 11:50 AM Reply Like
  • Contraria2
    , contributor
    Comments (376) | Send Message
     
    Thanks for this play-by-play article. Nicely done.

     

    I've owned IBM for over a decade, added monthly for a long time, now just sitting and letting in DRIP. If it were to go lower, $150 range, I'll probably nibble some more. I want IBM to be (among others) the stock they gush about me during my eulogy :)

     

    PS, Chowder, I'm planning to use some (FRIP) money to add to T and PM tomorrow. Thoughts? Thanks
    12 Jan, 12:16 PM Reply Like
  • maybenot
    , contributor
    Comments (3542) | Send Message
     
    chowder -- wonderful article cause it lays it out how you do it. Thanks!

     

    Of course there is confirmation bias cause so much agreed with how I do it. But I have added so much from how you do it. So it is all a mixed-maxed mess! But a good mess.

     

    And wow -- I had IBM on my short-short list too. Gawd I love SA and the community we have here.

     

    Thanks so much chowder for all of your advice, comments, articles, thoughts, sharing, help, and etc.

     

    Looking forward to your next one.
    11 Jan, 12:31 PM Reply Like
  • DAG1996
    , contributor
    Comments (3092) | Send Message
     
    Excellent. Thanks for sharing your process. There are some important similarities to parts of my own process, though there are also some stark differences (which I don't consider to mean that one is wrong and one is right).
    11 Jan, 04:32 PM Reply Like
  • maybenot
    , contributor
    Comments (3542) | Send Message
     
    chowder -- just reread your article. Question -- what process lead you to your "48 companies" on your watch-list?

     

    Or is that a whole 'nother article? :)
    11 Jan, 05:51 PM Reply Like
  • chowder
    , contributor
    Comments (7523) | Send Message
     
    Author’s reply » It was a very scientific, highly sophisticated company selection process.

     

    I looked at a Value Line report and simply chose some companies that rated a 1 or 2 for safety.
    11 Jan, 06:48 PM Reply Like
  • maybenot
    , contributor
    Comments (3542) | Send Message
     
    oh my...in that regard, we are too much alike. Thanks so much.
    11 Jan, 07:03 PM Reply Like
  • sheldond
    , contributor
    Comments (1109) | Send Message
     
    IBM is a nice choice. I like how you talk about building positions. Seems to be a reasonable method to keep growing the portfolio.

     

    If you were not overweighted in consumers would you consider TGT over IBM based on fundamentals.

     

    I have been thinking of opening a TGT position in my set and forget portfolio.

     

    D
    11 Jan, 07:45 PM Reply Like
  • chowder
    , contributor
    Comments (7523) | Send Message
     
    Author’s reply » I would like to see TGT in this portfolio but I wouldn't purchase it at this time. There is too much uncertainty surrounding TGT. I would wait until after the next earnings date before I would consider buying it. I would want to see what the forward guidance looks like first.
    11 Jan, 07:55 PM Reply Like
  • Garthilk
    , contributor
    Comments (590) | Send Message
     
    That's interesting, I think the bad news with credit cards and the difficult expansion into Canada would make this a buy given their dividend history and relative short term weakness.
    12 Jan, 12:04 AM Reply Like
  • Garthilk
    , contributor
    Comments (590) | Send Message
     
    Nevermind, just saw the reviewed 2014 news after posting this. Ouch.
    12 Jan, 01:31 AM Reply Like
  • maybenot
    , contributor
    Comments (3542) | Send Message
     
    @Garthilk -- seems TGT is facing many headwinds of late.

     

    I had thought I would buy TGT a while back and almost did. It was undervalued and was a good pickup at the time.

     

    Now? Too many questions and I (purely my guess) think it will go down some more. But who knows.

     

    Plus, I remember it is a "store" -- so it's moat is different than those with a product. Not bad, just different. And it's a difference which seems not as secure.

     

    We shall see.
    12 Jan, 12:26 PM Reply Like
  • StepUp
    , contributor
    Comments (426) | Send Message
     
    Also - the hacking news has not really affected the stock price much at all.
    12 Jan, 07:47 PM Reply Like
  • yahoo.com
    , contributor
    Comments (25) | Send Message
     
    I am in Canada. TGT opened numbers of store in Canada in the last a couple of years. It is very hard for the store to attract customer. There are a few reasons, e.g. people are not familiar with TGT, the price is not attractive, and also a lot of people turn to online shopping. Wait till TGT has a clear direction for new store. Today's retail model is different from 10 years. Similar issue for WMT
    18 Apr, 09:47 AM Reply Like
  • billinsd
    , contributor
    Comments (1471) | Send Message
     
    Like yourself CSX is on my radar,awaiting the right price point.
    MSFT and IBM are both GREAT choices,but since I am tech phobic,I would probably choose AAPL.

     

    Happy New Year,Hope we see more fine article from you this year.

     

    Bill in San Diego
    12 Jan, 07:10 AM Reply Like
  • chowder
    , contributor
    Comments (7523) | Send Message
     
    Author’s reply » I never thought of AAPL. I don't think AAPL was paying a dividend when I put my wish list to together a few years ago, maybe that's why.

     

    Anyway, this isn't my portfolio. Someone else has entrusted me to invest their money and I take that responsibility very seriously.

     

    IBM has a long history of paying dividends, and increasing them, and I'm willing to sacrifice some capital gains for the safety of the dividend.

     

    I'd need to see some history on how AAPL operates as a dividend paying company first.

     

    I'll take on risks in my portfolio that I'm afraid to take for others. I own SDRL. I think it is more speculative in nature than most of my holdings. I don't have SDRL in any of the portfolios that I manage for others.

     

    I'll have to think about AAPL for my own portfolio though. Thanks.

     

    I hope San Diego wins today. If they do, they go to New England next week. If they lose, we go to Denver. We don't lose at home. So, I need for SD to win today.
    12 Jan, 10:07 AM Reply Like
  • yahoo.com
    , contributor
    Comments (25) | Send Message
     
    AAPL probably is not a good pick due to the competition it faces. Also the smart phone products are so easy being replicate or copy. AAPl growth potential will not be great.
    18 Apr, 09:49 AM Reply Like
  • wizjinx
    , contributor
    Comments (395) | Send Message
     
    I love everything about you Chowder, other than the horrible fact that you are a Patriots fan lol (I'm a lifelong Dolphins sufferer, er, fan). Thank you not only for your authorship, but also for your willingness to respond to your readers with courteous and always helpful strategies and insights.
    12 Jan, 11:56 AM Reply Like
  • Yield Hunter
    , contributor
    Comments (294) | Send Message
     
    Thanks again, Chowder!

     

    Please clarify something for me, though. I have always thought PE is a multiple, meaning, it will be greater than 1 (for example, IBM's current PE is approximately 12, as in 12 times greater than earnings). You, along with a few of the commentors, have written it as a percentage, i.e. less than 1 (for example, IBM's current PE is approximately 1/8 of earnings). Am I missing something, or is this an alternate way of stating it?

     

    Thanks in advance!
    12 Jan, 12:14 PM Reply Like
  • chowder
    , contributor
    Comments (7523) | Send Message
     
    Author’s reply » I'm so used to writing % I'm in the habit of writing %. It's supposed to be just a number.

     

    %chowder%
    12 Jan, 12:17 PM Reply Like
  • Yield Hunter
    , contributor
    Comments (294) | Send Message
     
    Thanks for clarifying. That's what I was hoping you'd say.
    20 Jan, 11:25 PM Reply Like
  • SDS (Seductive Dividend Sto...
    , contributor
    Comments (3268) | Send Message
     
    OK.
    Possibility to fix/update is a big advantage of SA blog to compare with SA article. I just did it with My 2 Cents On "Buy And Hold" blog ( http://seekingalpha.co...) which might explain why I don't use FASTGraphs
    SDS
    12 Jan, 12:55 PM Reply Like
  • Eric Landis
    , contributor
    Comments (809) | Send Message
     
    Great write-up Chowder and completely agree with your selection as I just added to my IBM position last week!

     

    I haven't gotten around to the hard and fast rule for financial strength in my selection criteria but I think its probably something I need to start doing more of. I have a few positions that probably won't fare as well should the markets tank again. Should things get lumpy this year I may have to take a closer look.
    12 Jan, 12:58 PM Reply Like
  • chowder
    , contributor
    Comments (7523) | Send Message
     
    Author’s reply » @Eric ... >>> I have a few positions that probably won't fare as well should the markets tank again. <<<

     

    I've been through three serious recessions in my investing career. 1987, 2000-2001 and 2008-2009. It's times like that when one wishes they paid attention to the quality of their holdings.

     

    It's easy to throw caution to the wind when we're in a bull market, but being battle hardened from previous market corrections, where I lost large sums of portfolio value, I now measure what I might gain by what I might lose. Quality usually pulls through, that's not so much the case with others. This is what helped me through the last recession. After all, if quality doesn't pull through, nothing will.
    12 Jan, 01:21 PM Reply Like
  • OntheRock
    , contributor
    Comments (189) | Send Message
     
    Hi Chowder,
    I couldn't help but notice that you are somewhat underweight in Energy stocks. CVX and XOM didn't make your screen, and I wondered if there is a reason.

     

    Great article, I've printed it and put it in my investing "manual" by my desk! Looking forward to more blogs this year, thanks..

     

    Marilyn
    12 Jan, 05:53 PM Reply Like
  • chowder
    , contributor
    Comments (7523) | Send Message
     
    Author’s reply » I own XOM in my portfolio, along with CVX. Project $3 Million, where the next purchase is going to be, has CVX already in the portfolio. Since I was looking to start a new position, CVX wasn't considered.

     

    XOM yields just 2.4% and since it is yielding less than 3%, it must meet the Modified Chowder Rule of 15% when you add the current yield to the 5 year compounded annual growth rate of the dividend.

     

    The current yield is 2.4% and the 5 year CAGR is 9.78% for a Modified Chowder Rule number of 12.18%. It falls short of the 15% number.

     

    Additionally, XOM is fairly valued at this time and I was looking for something that was undervalued.

     

    I don't mind paying fair value, and do from time to time, but IBM is offering a nice discount to fair value and if I wanted to own it, the time to buy it is now, before the discount has a chance to disappear.

     

    I expect to add XOM at some point. I just don't know when.
    12 Jan, 06:10 PM Reply Like
  • StepUp
    , contributor
    Comments (426) | Send Message
     
    Hi Chowder -

     

    Thanks for another great "article". Can you recommend a source for free financial strength/credit ratings?

     

    Thank you.

     

    Step
    12 Jan, 07:51 PM Reply Like
  • chowder
    , contributor
    Comments (7523) | Send Message
     
    Author’s reply » StepUp, a free source is Morningstar. They use what they call, Credit Rating. It's actually a Bond Rating, but serves well for a company's financial strength.

     

    http://bit.ly/1gyEdGI

     

    If your brokerage firm supplies research reports for free, I use S&P Capital IQ.

     

    I have accounts with both Fidelity and TD Ameritrade and they provide those S&P research reports for free.
    12 Jan, 10:29 PM Reply Like
  • StepUp
    , contributor
    Comments (426) | Send Message
     
    Thanks Chowder -

     

    What if Morningstar says "This firm has no bond data available." ?
    15 Jan, 11:05 AM Reply Like
  • chowder
    , contributor
    Comments (7523) | Send Message
     
    Author’s reply » Then I'll try to get a rating from Value Line or S&P. If I can't come up with a quality rating from any of them, I pass. I will not consider the company for purchase unless I'm looking to speculate on a capital gains play, and I do that from time to time.
    15 Jan, 11:39 AM Reply Like
  • chowder
    , contributor
    Comments (7523) | Send Message
     
    Author’s reply » I might as well show what's on my watch-list. This will be a good place to have a record of it in case I need it for some reason.

     

    There are a couple of speculative positions on the list, as I hope to place a spec or two in the Project $3 Million Portfolio.

     

    I don't plan on owning all of these companies, but any on the list are eligible for purchase once they meet the stock selection criteria. For example, there are four railroads on the list, but I only want to own one. When one is purchased, I will scratch the others.

     

    If anyone has a suggestion, of a high quality company, that they think is worthy of being added to the list, please feel free to speak up.

     

    I don't wish to add foreign companies unless there is no foreign tax withholdings.

     

    The current list:

     

    ADM, AXP, APD, BAX, BDX, CAH, CAT, CB, CBRL, CHD, CNI, CSX, CVS, DNKN, DOV, DRI, EMR, FDO, GPC, HRL, ITW, LEG, LOW, MA, MKC, MMM, NKE, NSC, OMI, PNY, PSA, ROST, SBUX, SJM, SYK, T, TGT, TJX, UNO, V, VFC, WAG, WMT, XOM and YUM.

     

    DE and IBM are still on the list, but DE was purchased in November and IBM will be purchased this week.
    12 Jan, 10:40 PM Reply Like
  • kolpin
    , contributor
    Comments (1052) | Send Message
     
    chowder--have you considered UNH, MDT, AMGN or GSK? I'm long the first two stocks and have the latter two on my watchlist. the first 3 aren't exactly high yielding, but could round out your healthcare holdings nicely. AMGN may not have the dividend history you want and I'd like it to come down a bit price before I buy, and GSK recently popped up on my radar as a possible pharma comeback story.

     

    what is your ticker symbol UNO?
    13 Jan, 12:01 AM Reply Like
  • chowder
    , contributor
    Comments (7523) | Send Message
     
    Author’s reply » Sorry! UNO is supposed to be UNP.

     

    I had MDT on the list at one time. I took it off the list due to the serious decline of its dividend growth over various time frames.

     

    10 year CAGR ... 14.9%
    5 year CAGR ... 11.6%
    3 year CAGR ... 7.9%
    1 year CAGR ... 6.9%

     

    I don't mind variances, I would like to see more consistency between the numbers though. It can earn its way back on the list if the trend reverses.

     

    I don't like health insurance companies. There are too many changes within the industry on an ongoing basis. If I'm going to have access to insurance coverage's, I'd prefer life or property and casualty companies.

     

    AMGN and GSK don't have the dividend history I'm looking for, therefore they can't meet the Chowder Rule numbers. Since I don't have a lot of confidence in biotech or pharmacy, I need to see a dividend growth string of at least 5 years. They can earn their way on the list, otherwise they could be purchased as speculative positions, and I might consider that later in the year. Thanks.
    13 Jan, 12:32 AM Reply Like
  • kolpin
    , contributor
    Comments (1052) | Send Message
     
    that's why I like UNH…they've taken a very conservative approach with the healthcare exchanges so far, plus great divvy growth, steadily increasing revenues every year, and they beat on almost every earnings report. I just wish I'd bought more on one of the rare pullbacks last year--which was incidentally b/c they didn't beat earnings by as much as they usually do.
    13 Jan, 05:52 PM Reply Like
  • poundofbutter
    , contributor
    Comments (86) | Send Message
     
    Chowder -

     

    Your thoughts on SWK?
    13 Jan, 04:59 AM Reply Like
  • chowder
    , contributor
    Comments (7523) | Send Message
     
    Author’s reply » SWK is selling at fair value. I don't mind purchasing something at fair value if I can't find anything else selling at a discount to fair value.

     

    Since SWK didn't get past the valuation screen, I didn't finish my analysis of of it. I kept it on the list for later.
    13 Jan, 08:23 AM Reply Like
  • tomterp
    , contributor
    Comments (23) | Send Message
     
    Chowder:

     

    I appreciate the time and effort you put into this article that will help me and other readers learn to make informed investment decisions.

     

    Thank you..........Tom
    13 Jan, 12:03 PM Reply Like
  • gfmn2000
    , contributor
    Comments (779) | Send Message
     
    I like your selection process and the IBM pick. I added IBM to my portfolio back in August of last year. I also have held MSFT since 2012.
    13 Jan, 10:09 PM Reply Like
  • Babylove23
    , contributor
    Comments (64) | Send Message
     
    Thanks for all your work and for sharing…..I've learned a lot reading your articles and your blog.
    14 Jan, 01:54 AM Reply Like
  • maybenot
    , contributor
    Comments (3542) | Send Message
     
    chowder -- what is your go to source for confirming what the inflation rate is?

     

    I was updating my Plan (i.e. where I cut & pasted much from you!) and was looking at the "Selling" guidelines. You know -- the "double inflation" part for what the annual dividend increase must be.

     

    Anyway -- thanks -- it is appreciated.
    14 Jan, 11:54 PM Reply Like
  • chowder
    , contributor
    Comments (7523) | Send Message
     
    Author’s reply » maybenot, I don't get all wrapped up in the inflation rate. I go by whatever I hear in the media. I figure if I can grow the income in the high single digit numbers or better, then I'll be ahead of inflation whatever it may be.
    15 Jan, 11:42 AM Reply Like
  • maybenot
    , contributor
    Comments (3542) | Send Message
     
    thanks. Good to know I am not the only one who doesn't get all hyper over the inflation number.

     

    Social media -- works for me.
    15 Jan, 01:39 PM Reply Like
  • farstud
    , contributor
    Comments (128) | Send Message
     
    Hi Chowder! Great piece. Is CB fairly valued or slightly overvalued for you right now?
    15 Jan, 12:50 AM Reply Like
  • chowder
    , contributor
    Comments (7523) | Send Message
     
    Author’s reply » S&P Capital IQ says CB is fairly valued.

     

    Morningstar thinks it is slightly undervalued. They have fair value at $93.
    15 Jan, 11:46 AM Reply Like
  • sriniv
    , contributor
    Comments (3) | Send Message
     
    Hi Chowder

     

    I also have access to S&P Capital IQ reports through Fidelity. However, I am unable to find current discount to Fair Value ratio or absolute Fair Value number anywhere. Can you please tell me where you found these numbers in the IQ report? Morningstar fair value calculation seem to require Premium access.
    21 Jan, 08:06 PM Reply Like
  • chowder
    , contributor
    Comments (7523) | Send Message
     
    Author’s reply » Hello sriniv,

     

    When you log into the research section of Fidelity, type in IBM and then below that, click on Research Reports.

     

    Once that comes up, ignore the S&P Capital IQ Company Report that is linked above the firms that present their reports. Look down into the firm section and you will see another S&P report on IBM, the sixth one down. Combined Stock Report. Click on that.

     

    Once that report comes up, scroll down to page 3, top left, second one down, Fair Value Calculation.

     

    Budda-bing, Budda-boom.
    21 Jan, 09:10 PM Reply Like
  • CharReg
    , contributor
    Comments (90) | Send Message
     
    Thank you! I was looking at the Capital IQ report linked above the firms and couldn't figure out where you were finding fair value. I didn't notice the other report below. Now I know where to find that info.
    24 Jan, 02:21 PM Reply Like
  • sriniv
    , contributor
    Comments (3) | Send Message
     
    Hi Chowder

     

    Thank you for your generosity and for being such an excellent teacher. Learning a lot from you and other DGIers.

     

    I understand the reason behind checking S&P rating for quality. But confused by eliminating companies based on StarMine Rating, ,right at the top of your selection process. For a long time DG investor, isn't a lower rating (current depressed prices) works in favor? Why focus on what analysts think about near term and loose the opportunity to invest in a quality company? For example, I notice currently all quality REITS that are on CCC list have the lowest possible StarMine rating. I recall, in one of you talked about this criteria and said that you would like to see some initial momentum. But wondering why and how does it matter?

     

    21 Jan, 06:44 PM Reply Like
  • chowder
    , contributor
    Comments (7523) | Send Message
     
    Author’s reply » Good question sriniv. When I have companies selling at a discount, I will look first to the companies that StarMine thinks their share price will rise quicker than others over the intermediate term. I want to get that discount while I can.

     

    Companies with bearish ratings aren't expected to see their share price take off and leave me behind, therefore the odds suggest I can come back to them on the next purchase, provided I don't find something else selling at a hefty discount and expected to rise short-term.
    21 Jan, 09:14 PM Reply Like
  • Bingy77
    , contributor
    Comments (143) | Send Message
     
    Chowder,

     

    I know your a long term investor so I doubt the recent weakness in revenue doesn't have you too concerned, but do you have any thoughts on their quarter? It seems like they are cutting costs in every possible area and will have another $1 billion of restructuring costs in 1 qtr 2014. Earnings looked good which was helped by a low tax rate and lots of buy backs thanks to more debt. Is the revenue decline a concern at all for you or the fact that Asia sales were down double digits again? Thanks for all of your articles.
    21 Jan, 09:28 PM Reply Like
  • chowder
    , contributor
    Comments (7523) | Send Message
     
    Author’s reply » Bingy,

     

    If it were my portfolio, I might have concerns. However, the Project $3 Million Portfolio, where IBM was placed, belongs to a 28 year old person and they have many years for this position to work out.

     

    Additionally, a full position in that portfolio represents $4,000. I only have $1,000 invested in IBM, so I'm willing to take the risk that IBM is only facing near term headwinds and that over the longer term will turn out to be a very good investment from these low prices.

     

    I won't add to the IBM position until I see more positive numbers, but the time to buy high quality companies is when they are facing adversity.

     

    It's in hindsight that people look back and say well anyone could have good numbers if you bought back then. I'm buying back then.
    21 Jan, 09:42 PM Reply Like
  • Bingy77
    , contributor
    Comments (143) | Send Message
     
    Thanks for the reply. Always look forward to your updates since I also am a 28 year old investor.
    25 Jan, 08:50 PM Reply Like
  • chowder
    , contributor
    Comments (7523) | Send Message
     
    Author’s reply » Bingy, here's something to think about. The starter position in IBM, if the company went to zero, only represents 0.9% of the portfolio value.

     

    A loss of 0.9% value is nothing, and what are the odds of a company like IBM going to zero?

     

    It's easier to be patient when you look at the larger picture, what your position represents to the whole portfolio, as opposed to focusing on a single equity.

     

    In sports, you hope your team will carry you to victory while the rookie you started gains experience and confidence. That's how I look at my portfolio. I expect the longer-term positions to carry the load while the new position tries to establish itself. As time goes on, and it shows that the new position is gaining experience (starting to grow in value), then I can give it more playing time (start adding more to the position).
    25 Jan, 09:38 PM Reply Like
  • Bingy77
    , contributor
    Comments (143) | Send Message
     
    I like the analogy a lot! Can't wait to let the power of compounding work it's magic
    25 Jan, 10:09 PM Reply Like
  • Ordos
    , contributor
    Comments (32) | Send Message
     
    Late to the party, but great article as always. And please do keep updating your blog.
    22 Jan, 05:54 PM Reply Like
  • shodgi
    , contributor
    Comments (8) | Send Message
     
    Hi Chowder,

     

    I am a newbie and interested in dividend growth investing and came across this article. I am looking to move existing money gradually from ETFs and mutual funds into just individual stocks. I am 20+ years from retirement. I understand how to figure everything out in your methodology above, but when digging into the financials for MSFT and IBM, exactly what is the criteria to determine that.

     

    Exactly what numbers are you looking at on the financials and the criteria for those numbers?

     

    How did you determine the following for IBM?
    Earnings Quality ... Strongest

     

    Cash Flow Quality ... Strongest

     

    Operations Efficiency ... Strongest

     

    Balance Sheet ... Strongest

     

    Valuation ... Least Risk

     

    When I see the financial statements of a stock, I know what some of the numbers mean, but I can't tell if that is good or bad.

     

    Overall I see your approach to be being the simplest for determining if a stock is a buy for dividend growth investing.

     

    I really appreciate the time and consideration you put into writing this article. Even the blog is a great read.

     

    Thank you.
    23 Jan, 07:54 PM Reply Like
  • chowder
    , contributor
    Comments (7523) | Send Message
     
    Author’s reply » Welcome aboard shodgi.

     

    I count on analyst reports for their reporting of the income statements and balance sheets. It isn't the buy, sell, or hold calls I'm interested in, it's their analysis of a company's financials.

     

    Fidelity offers research from a firm called Jefferson Research, and I like the way they break those numbers down for me. Those ratings above are from Jefferson Research.
    25 Jan, 02:33 PM Reply Like
  • shodgi
    , contributor
    Comments (8) | Send Message
     
    Thank you for your reply. I will check out Fidelity's site.
    4 Feb, 12:30 PM Reply Like
  • rnsmth
    , contributor
    Comments (1979) | Send Message
     
    Great blog post chowder! You do so much for so many.
    26 Jan, 07:45 AM Reply Like
  • chowder
    , contributor
    Comments (7523) | Send Message
     
    Author’s reply » Thanks Ron.

     

    On another note, I was talking with a friend last night who asked me about the market falling off a cliff the last few days. I had no idea! I didn't know that it did. My internet service was down for two days and I don't watch TV other than for sports.

     

    She was surprised I don't watch CNBC. I told her I stopped watching them about 5 years ago. CNBC does everything within their power to undermine my strategy, to try and wear me down.

     

    I told her about a study I read prior to turning off CNBC. The study found that when things were bullish, CNBC lost ratings. When things were bearish, their ratings climbed.

     

    I started thinking about that and it took me back to my military days. When things are going good, you take things for granted, you get comfortable and you just try to cruise along.

     

    There is nothing that will get one's brain to really focus than to face danger. You zero in at that point!

     

    That's the mission of CNBC. To get you to zero in, so that have to provide enough bearish news to capture your attention.

     

    Being CNBC free has provided me with peace of mind and allowed me to simply apply common sense. That's all investing is. Common sense.
    26 Jan, 08:57 AM Reply Like
  • maybenot
    , contributor
    Comments (3542) | Send Message
     
    chowder -- indeed, it's nice to cruise.

     

    And if the internet is up, and the market tanks, then it's time to look for some blue chippers on sale.

     

    Bearish news can be good news.
    26 Jan, 12:37 PM Reply Like
  • CharReg
    , contributor
    Comments (90) | Send Message
     
    Hi Chowder,
    I was wondering if you make exceptions to the “Chowder Rule” based on particular circumstances. As background, I’m trying to build a core dividend portfolio by redistributing holdings in my IRA. I was reviewing my portfolio a couple of weeks ago decided to sell a couple of my underperforming funds at about the same time the S&P was near the top. I had initially intended to invest in cheaper index funds, but then I came upon DGI and your excellent blogs and decided “that’s it – that’s what I want to do!” So now, I’m sitting on some cash while watching the dip and thinking maybe it’s a buying opportunity.
    My question is: Does it make sense to buy some champions to establish some core holdings in top companies that you wouldn’t otherwise select because they don’t quite meet the Chowder Rule?
    As an example, KO is currently at $37.82 with a yield of 2.93 and CAGR of 8.06, so the “Chowder number” is essentially 11. But, based on its pedigree of dividend growth, perhaps the safety margin is a bit less important and it could be considered more like a utility? A similar situation exists for some other companies with good pedigrees such as ADP, JNJ, CL, and MMM - most are in the 11 to 12 range under the Chowder rule, but they’re all rated A+ and have increased dividends for 40-50 years.
    I’d love to hear your perspective. Thanks!
    1 Feb, 02:59 PM Reply Like
  • chowder
    , contributor
    Comments (7523) | Send Message
     
    Author’s reply » CarReg, the companies you mention are close enough to qualify for purchase given the quality of the companies and if you are considering holding them for many years.
    1 Feb, 07:19 PM Reply Like
  • jrepasch
    , contributor
    Comments (846) | Send Message
     
    Chowder,

     

    As always, this article was very helpful.

     

    I have a question: Re: Sectors -- I use S&P Capital IQ to determine sectors and subsectors, so your listing is somewhat different from mine.

     

    Yours read:
    Consumers ... 43.2%
    MLP's ... 14.5%
    Utilities ... 13.5%
    Industrials ... 8.1%
    REIT's ... 5.6%
    Healthcare ... 4.2%
    Business Services ... 4.1%
    Energy ... 3.8%
    Technology ... 3.1%
    Financials ... ZERO

     

    Without too much difficulty on your part do you know under which sector of the S&P "Business Services" would fall?

     

    Not sure this really matters but I place MLPs under Energy and eREITS under Financials. Of the latter I only own one: O.

     

    joni
    1 Feb, 06:24 PM Reply Like
  • chowder
    , contributor
    Comments (7523) | Send Message
     
    Author’s reply » The only Business Services company I own is ADP and it's listed under Technology.

     

    I didn't include it under Technology because it isn't like a MSFT, CSCO or IBM for example.
    1 Feb, 07:23 PM Reply Like
  • jrepasch
    , contributor
    Comments (846) | Send Message
     
    Chowder,

     

    Thanks for your response.

     

    joni
    3 Feb, 11:12 PM Reply Like
  • jrepasch
    , contributor
    Comments (846) | Send Message
     
    ADP and Paycheck both under IT via S&P sectors and sub-sectors
    I scratched my head when I saw how S&P placed both of these under Tech.......to me it doesn't make a lot of sense.

     

    joni
    3 Feb, 11:15 PM Reply Like
  • finest kind 126
    , contributor
    Comments (5) | Send Message
     
    Hi,
    Wonderful information and thought guidance. A definite asset to assisting a 'newbie' (me) or established self guided portfolio decision maker.
    A few questions though. I am a Canadian. The site Fidelity.ca does not allow non-account holders access to their research. Fidelity.com will allow non-account holders to signup (free for 30 days), but not without a U.S. address.
    I also tried to access S&P Capital IQ. They appear to only allow paid access to various types of financial services companies,
    I can request Morningstar and Value line from my broker (free), but MS & VL do not seem to provide the data you use to establish investment suitability.
    One of the shortfalls with my smaller independent broker is they can only cover so many equities. They do a good job on the U.S. and international markets, but the limited scope results in shortcomings like not following IBM.
    Any suggestions as to how to access some of the info you use to determine investment suitability? I am sure all your readers north of the border will be grateful.
    peter
    9 Feb, 12:38 PM Reply Like
  • chowder
    , contributor
    Comments (7523) | Send Message
     
    Author’s reply » If you have free access to Value Line, that's all you need in my opinion. I had to Pay $600 USD to receive that information.

     

    Combining Value Line with Morningstar is more than enough to help in the quality stock selection process.

     

    If you haven't read "The Single Best Investment" by Lowell Miller, I recommend that you do. It was from that book that I learned how to use Value Line effectively.

     

    If you don't mind investing a couple of hundred dollars per year into your investing trade, I would recommend a subscription to Morningstar's Dividend Investor.

     

    Between the two, you're Golden!
    9 Feb, 01:46 PM Reply Like
  • jrepasch
    , contributor
    Comments (846) | Send Message
     
    Value Line & M*

     

    I live in Arlington County, VA and am able to access VL if I trudge to the library. However, unlike some public libraries across the US, it is not available online. Sigh.

     

    M*'s Dividend Investor: Best investment decision I've made so far in 2014. Well worth the $$.

     

    joni
    14 Feb, 12:37 PM Reply Like
  • Big Thunder
    , contributor
    Comments (544) | Send Message
     
    joni -- I live in Fairfax County and not too long ago was looking into the library resources available in Arlington and Loudoun; it seemed to me that I found cardholder access to VL in both Arlington's and Loudoun's library sites. Just looking at Arlington library's site again, under the Research tab there appears to be access to VL (http://bit.ly/1eWDv8Q). Hope it is what it appears to be -- crossing my fingers!
    14 Feb, 01:19 PM Reply Like
  • jrepasch
    , contributor
    Comments (846) | Send Message
     
    Big Thunder,

     

    Sorry I missed your reply. Just getting around to reviewing older emails.

     

    Many thanks for this info. I'll check it out shortly.

     

    joni
    1 Mar, 10:49 PM Reply Like
  • almanack
    , contributor
    Comments (89) | Send Message
     
    Hi Chowder
    Great information (as always) – thanks! Thank you very much for taking us through the steps that you take in order to select a stock. I have a few questions about your process:

     

    (1) Current PE and Historical PE -- Where are you getting your data from? I am looking at FAST Graphs. It indicates that IBM’s current and historic PE’s are 15.3 and 19.9, respectively. Your article states that the PE’s are 11.1 and 16.6. Granted, you wrote this a few weeks ago, but the data wouldn’t have changed that much…

     

    (2) Best discounts to fair value – You said that you are using S&P Capital IQ for these ratings. May I presume that you are gathering this data from FAST Graphs? If so, can you tell me where (specifically) you are finding this. I can’t seem to locate this info.

     

    (3) B+ or better by S&P Capital IQ – You mentioned that you are looking for stocks with a B+ or better by S&P Capital IQ. Again, I am presuming that you are getting the S&P Capital IQ ratings from FAST Graphs. Can you point me as to where on FAST Graphs this data resides?

     

    (4) VL – You seemed to indicate recently that you’ve moved away from Value Line (due to pricing issues). May I presume then, that you are using Morningstar’s ratings instead of relying on VL for their 1 & 2 ratings?

     

    Thanks in advance for your reply and assistance. And again, thanks much for all the great info that you share.

     

    David
    18 Feb, 09:04 PM Reply Like
  • chowder
    , contributor
    Comments (7523) | Send Message
     
    Author’s reply » almanack, since I was looking at a 10 year chart on earnings, I was using a 10 year chart for PE to stay consistent.

     

    I get my Capital IQ ratings from their research reports which are part of Fidelity's free research service to account owners.

     

    Although I haven't renewed my VL subscription, I still have their reports from last year and I still get the Dow 30 reports for free. Other than that, I'll use M*'s ratings and Capital IQ's which are provided by my broker.
    18 Feb, 09:16 PM Reply Like
  • almanack
    , contributor
    Comments (89) | Send Message
     
    Thanks - I too have a Fidelity account, so I'll look there for the Capital IQ data...
    18 Feb, 09:32 PM Reply Like
  • marg.mast
    , contributor
    Comments (4) | Send Message
     
    Hi Chowder,

     

    I am just beginning to learn about investing. I found Dividend Mantra and so admire him. I am 53 y/o, have a 401k, but now need to put savings to work. (I was a single mom, to-but my daughter is now 26). In the current market, what stocks would you be considering? Also, are there any "easy" books to read to fully understand concepts, etc.? Thank you, Margaret
    12 Apr, 11:08 AM Reply Like
  • chowder
    , contributor
    Comments (7523) | Send Message
     
    Author’s reply » Hello Margaret,

     

    If you want to see how I manage a portfolio in real time, you can check out the Project $3 Million blog. It's a real portfolio using real money. I manage the portfolio for a 29 year old person.

     

    If you click on as a follower, you should receive a notice any time a new entry is made.

     

    http://bit.ly/rBJkXG

     

    I highly recommend the book, "The Single Best Investment" by Lowell Miller. Pay extra attention to the introduction and the first four chapters. Be sure to read this again as part of an annual or semi-annual review. The philosophy, concepts and principles will go a long way to helping insure you build a successful portfolio.

     

    Any company in the Project $3 Million is a prospect if you can purchase it below fair value.

     

    I want to keep this as simple as possible since you are starting out. I know others may want to help and offer advice, but let's take it one step at a time until you gain experience and confidence.

     

    Lets' use Morningstar to help you with your valuations. Go with high quality companies that have a 4 or 5 star rating. This means that the company is selling at a discount.

     

    It is permissible to purchase a 3 star company if it is selling under fair value.

     

    Let's use PG as an example.

     

    M* has a 4 star rating on PG. If you scroll down below the price chart, you will see an $89.00 Fair Value Estimate. Then a Consider Buying of $71.20 and Consider Selling at $111.25.

     

    If you can get the Consider Buying Price, that's fine but often times the market won't cooperate. So in my opinion, buying below $89.00 (Fair Value) is okay if one is willing to hold long-term. Price is at $80.76.

     

    http://bit.ly/1huPECf

     

    Apply this concept to all of your prospects and you should be able to build from this as you go along.

     

    chowder
    12 Apr, 02:23 PM Reply Like
  • marg.mast
    , contributor
    Comments (4) | Send Message
     
    Chowder,

     

    Thank you SO much. I will buy the book and also register onto Morningstar as it seems that you have to pay for the service. I am so grateful to have found the Seeking Alpha community! Thank you again!

     

    Margaret

     

    PS I am now following you on your blog :)
    13 Apr, 09:13 AM Reply Like
  • BigIslandBum
    , contributor
    Comments (415) | Send Message
     
    marg.mast,

     

    Many public libraries provide free access to the pay services of Morningstar and ValueLine. I recommend checking your local library before spending money.
    13 Apr, 05:04 PM Reply Like
  • jrepasch
    , contributor
    Comments (846) | Send Message
     
    Margaret,

     

    I believe you can get the book "The Single Best Investment" online for free. Google the title and see what you can find.

     

    It's a great book. Chowder said so! :-)

     

    Best to you in your investing.

     

    joni
    15 Apr, 10:53 PM Reply Like
  • Big Thunder
    , contributor
    Comments (544) | Send Message
     
    "The Single Best Investment" may be found at:

     

    http://bit.ly/XzYRKQ
    15 Apr, 11:04 PM Reply Like
  • Dennis Anderson
    , contributor
    Comments (349) | Send Message
     
    These days you don't even need to go into the library. At least through our library I can now get these resources through the "e library."
    13 Apr, 06:17 PM Reply Like
  • ZokMaster
    , contributor
    Comments (127) | Send Message
     
    Chowder - Add another groupie to your fan club. I was recently put in the unique position of being able to self-direct my 401k through TD Ameritrade and am attempting to adopt your principles (my grandfather bought and held dividend stocks and did very well).

     

    I studied your comments and posts, but missed an important point concerning entry points. As you know, much of today's market seems to be inflated; however, I really don't want to stay in cash. Using the advice you gave to Margaret above, today I perused the purchases I recently made and discovered I overpaid on a number of stocks per Morningstar.

     

    For instance, I bought T at $35, over Morningstar's Fair Value of $32. (Plus, it's currently listed at 2 stars...)

     

    So my question... Is there a % above the Fair Value where you might consider entering a stock? Perhaps staying on the sidelines until that major pullback the Noise Machine is crowing about occurs is a good idea?

     

    Thank you for all you do. A bona fide service to the investing community.
    13 Apr, 09:03 PM Reply Like
  • chowder
    , contributor
    Comments (7523) | Send Message
     
    Author’s reply » Zok, I'm willing to pay fair value for a high quality company, but I'm not sure I would go higher than 3%.

     

    I recently purchased T (a month ago at $32.64). I announce all moves "BEFORE" I make them in the Project $3 Million Portfolio.

     

    Here was the analysis I provided back on March 10.

     

    Monday, March 10, 2014

     

    New Purchase

     

    A check will be sent to TD Ameritrade tomorrow and should show up in the account this coming Friday afternoon. There will be enough cash in the portfolio, at that time, to purchase another position in the Roth Ira. ... That new position will be T.

     

    The portfolio currently has a position in VZ and I want to add another high quality telecom.

     

    The first thing I look at in the stock selection process is the company's financial strength. If a company doesn't pass this test, I go no further in my research.

     

    I look for companies that rate a 1 or 2 for safety by Value Line, or a BBB+ rating or higher with Morningstar, or a B+ rating or higher with S&P Capital IQ.

     

    Value Line shows a safety rating of 1, a Financial Strength rating of A++ and Morningstar shows a Credit Rating of A-. This is the type of company I prefer to own over the long term.

     

    In looking at the company earnings, S&P Capital IQ shows operating earnings at 5.0%. I place telecom companies under the utility umbrella and a 5.0% earnings growth is a number I look for. So, T qualifies there as well.

     

    Looking forward regarding total return results, S&P Capital IQ thinks that over the next 5 years T will show total annualized returns of 12.0%. Value Line thinks 12.0% is the low number and thinks T now has the potential to show a total annualized return of 14.0% on the high side.

     

    When looking at valuations, T has a PE of 10.1 and the historical PE over the last 10 years has been 16.2. That would indicated that T is undervalued based on historical performance. However, Morningstar thinks T is fairly valued at $32.00 and Capital IQ thinks fair value is $29.10.

     

    I am willing to buy "high quality" companies at fair value, and companies don't get higher grades for quality than what Value Line assigns to T.

     

    According to Jefferson Research, a company who rates as one of the top companies for accuracy when assigning buy, sell or hold ratings for T, has a Buy rating at this time.

     

    They list Earnings Quality as Strongest. ... Cash Flow Quality as Strong. ... Operating Efficiency as Strongest. ... Balance Sheet as Weak, but up from Weakest. ... Valuation as Least Risk.

     

    In looking at their Balance Sheet rating, they say T shows the ability to pay its bills and fund future growth. Their cash position has increased from $1,480M to $3,445M and with more cash on hand, T is better able to meet its financial obligations including its dividend. T has increased the amount of current assets relative to current liabilities.

     

    Fidelity has an analysts rating system called StarMine who shows an Equity Summary Score (ESS) for each company. The ESS system rates various investment firms for their accuracy in making buy, sell or hold calls for the following 6 to 12 months after they make their call.

     

    The ESS system then takes the views from the various investment houses and comes up with a score from 1 to 10.

     

    9.1 to 10 = Very Bullish
    7.0 to 9.0 = Bullish
    3.0 to 6.9 = Neutral
    1.1 to 2.9 = Bearish
    Below 1.1 = Very Bearish

     

    I have been tracking T for a couple of months and back on 12/23 the rating was 5.5. The rating rose in January and on 1/30 the rating was 6.8. Following the most recent earnings report, the rating has risen to 8.5 ... Bullish.

     

    Value Line has a Timeliness Rating from 1 to 5 with 1 being best. Anything rated 1 or 2 for Timeliness means they expect the company to outperform the other companies they cover over the next 6 to 12 months. They assign T a rating of 2.

     

    So, ESS and VL say now is the time to purchase T. Since T meets most of the metrics required, the only thing left is the yield and dividend growth.

     

    T has raised the dividend for 8 consecutive years. It has a current yield of 5.60% which is well above the minimum requirement. It's 5 year compounded annual growth rate of the dividend is 2.37%.

     

    When I'm looking at utilities, and I place telecom under the utility umbrella, I look for a total dividend return (yield plus 5 year dividend growth) of 8.0%. ... T currently has a rating of 7.97%. It's close enough for me given the high quality of this company.

     

    With this in mind, as soon as the funds hit the account, T is the next purchase!

     

    http://bit.ly/rBJkXG
    13 Apr, 09:22 PM Reply Like
  • ZokMaster
    , contributor
    Comments (127) | Send Message
     
    Excellent. Thanks so much for the response - I'll be sure to follow Project $3 million hereafter.

     

    A final question, if I may: If you were in my position, how much would you keep on the sidelines, just in case desired stocks were to fall into your "buy zone"?

     

    (After paring the overpriced purchases I recently made, I'm at about 80% invested...)
    14 Apr, 05:28 PM Reply Like
  • chowder
    , contributor
    Comments (7523) | Send Message
     
    Author’s reply » Zok, I don't keep money on the sidelines for buying opportunities. I stay 100% invested and when I accumulate enough money to add to an existing position, or buy a new one, I always find something worth investing in.

     

    I do have an emergency fund outside of our brokerage accounts for household emergencies, but money set aside for investment stays invested.

     

    As of today, Project $3 Million has $500 and change in cash. As soon as it reaches $1,000 a purchase will be made somewhere.

     

    I understand some people aren't comfortable being 100% invested, so they must find their comfort level and not worry about it. Do whatever it takes to stay in your comfort zone.
    14 Apr, 05:35 PM Reply Like
  • ZokMaster
    , contributor
    Comments (127) | Send Message
     
    Thank you once again. Tough to find much at "fair value" nowadays, but I'm now 95% in. At 45, I'm still in the accumulation phase - will be sure to follow Project $3 Million for ideas on new money.

     

    Your consideration is truly appreciated, Sir.
    16 Apr, 10:40 PM Reply Like
  • INCOGNITO 2
    , contributor
    Comments (4) | Send Message
     
    chowder...how do I become a follower on the Project 3 Million blog?
    ...I am very interested in getting the notifications before you purchase....and any other info you are sharing. I have studied your work on SA and it has helped me learn so much.

     

    I am about to retire...Ha!
    Maureen
    13 Apr, 10:31 PM Reply Like
  • chowder
    , contributor
    Comments (7523) | Send Message
     
    Author’s reply » I'm not sure. There is a blue tab, top right, that says Join This Site. Maybe that's how you get to follow.

     

    http://bit.ly/rBJkXG
    13 Apr, 10:38 PM Reply Like
  • D-inv
    , contributor
    Comments (4038) | Send Message
     
    Thanks for asking that question, Maureen. As a result, I just looked around the page and found a link at the bottom reading, "Subscribe to: Posts (Atom)" Click on the link and it will take you to http://bit.ly/1eEGCO7 presenting a button icon at the top of the page.
    14 Apr, 10:19 AM Reply Like
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