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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 Dividend Growth Investing Mindset

    Mindset is a simple idea discovered by world-renown Stanford University psychologist Carol Dweck in decades of research on achievement and success ... a simple idea that makes all the difference.

    In a fixed mindset, people believe their basic qualities, like their intelligence or talent, are simply fixed traits. They spend their time documenting their intelligence or talent instead of developing them. They also believe that talent alone creates success ... without effort. They're wrong.

    In a growth mindset, people believe that their most basic abilities can be developed through dedication and hard work ... brains and talent are just the starting point. This view creates a love for learning and a resilience that is essential for great accomplishment.

    When it comes to mindset, I'm reminded of my basic training in the Marine Corps decades ago.

    Where the Marines are different from the other branches of the military is that they are not trained to fight a war, or their role in it during their boot training.

    Marine Corps boot camp is spent on how to teach you to think like a Marine. You don't get the right to learn how to fight in a war, or learn your role in it, until you know how think and act like a Marine. Those who earn the right move on to Infantry Training in Camp LeJuene, NC.

    Just this weekend, my Navy son and friends were laughing and high fiving because they were off duty and celebrating over quite a few adult beverages, while the off duty Marines were involved in a pushup contest.

    I told my son, that's what Marines do. That is what is expected of them.

    Dividend growth investing takes a certain mindset too, if one wants to succeed at it. Dividend growth investing is different from most styles of investing because the application of the strategy is different from what most people are used to, or have experienced in the past.

    This instablog is going to attempt to explain the dividend growth investing strategy as I understand it to be applied, and it is certainly the mindset that I have and apply.

    There should be some way to have a simple investment program that makes sense, is easy to implement, and has a high chance of succeeding in meeting a set of long-term goals.

    Dividend growth investing is a plan for builders and savers who understand, or want to understand, that the forces of time, modest and reliable growth, and compounding are on their side.

    Investing is the methodical accumulation of capital through a disciplined and sensible plan that recognizes that shares are not little numbers that jump around in the paper everyday. They represent a partnership interest in a real and ongoing business, a business that earns a decent profit, shares that profit with you, and grows the amount of profit shared on an annual basis.

    A dividend growth investor knows that their portfolio value will go up and down, as this can never be avoided if you are to have reasonably good long-term gains. However, a dividend growth investor won't be bothered by the downs because they understand why price is down, they know that prices will rise over the long run. This confidence level is high because the strategy is based on common sense.

    Common sense dictates that the only hope for long-term success is having the ability to stick with the plan.

    Common sense in investing means employing a strategy that is actually linked to the companies in which you've invested. Investing is about being a partial owner of a real business.

    Common sense means spreading out your risks, but not so much that you lose control over your portfolio.

    Common sense investing is about establishing a comfort level that allows you to stay calm while others around you are in the state of panic or deep concern.

    When you lose your comfort level, you become fearful, greedy, superstitious, intuitive, prayerful and victimized. You enter into an emotional state that ultimately provokes investing mistakes.

    Dividend growth investors manage equity portfolios for dividend growth, because we happen to believe it is the best strategy for making money in the current economic and financial environment.

    I believe that a portfolio that provides a steady and growing stream of dividend income is the best way to finance a secure retirement without having to worry about the fluctuation of stock prices.

    Most investors ask, "What's my account's current value?" ... A dividend growth investor asks, "How much dividend income did my portfolio generate?"

    Most investors ask, "How much was my account up or down this year? ... A dividend growth investor asks, "How much did my account's income grow this year?"

    Most investor's ask, "Where is the stock market going this year?" ... Dividend growth investors don't try to predict short-term swings in the market.

    A dividend growth investor doesn't focus on capital appreciation because we never know when it will show up. A dividend growth investor is more concerned with the safety of the dividend and its potential for growth. A dividend growth investor understands that if a company is solid enough to continue paying and raising the dividend, capital appreciation will follow.

    Dividend growth investors understand the power of compounding. The very essence of the dividend growth strategy is to compound your money at an acceptable rate of return, for as long as you can. If you're able to do that, you'll end up rich.

    Dividend growth investors understand that focusing on capital appreciation is the most difficult way to try and achieve consistently positive returns from investing in stocks, much less consistently high returns.

    If investors truly understand the power of compounding, they would have the confidence to stay invested, and continue to invest regularly, regardless of how the market was doing.

    Dividend growth investors understand the power of regular cash flow to their portfolio.

    How do we generate cash flow to our portfolio? We do it by locking in yields in excess of 50% above the yield provided by the S&P 500. We look for companies that can grow their dividend at a rate above inflation. The combination of dividend yield and dividend growth is a powerful contributor to the compounding equation. A dividend growth investor will then reinvest all of those growing dividends to earn a "double compounding" effect on our money.

    During the mid-60's, Warren Buffett said, that he figured out that while having cheap stocks was nice, buying companies that could produce positive and growing cash flow that he could allocate to other profitable investment opportunities was a much better way to invest. Buffett said that if he was able to buy a good company with reliable cash flow at a cheap price, all the better, but what he was after was control of a steady and growing cash flow.

    It was the cash flow that allowed Buffett to do a number of things, including investing in other promising businesses, or buying the company outright.

    It's those monthly cash flows to the portfolio that the successful dividend growth investor focuses on, not capital appreciation.

    In summation, the dividend growth strategy is about purchasing a business partnership in an ongoing, high quality business that shares the profits with you and grows those profits annually. The dividend growth investing mindset is for builders and savers who understand that time in the market will perform better than trying to time the market. The dividend growth investing mindset is about understanding and utilizing the power of compounding and then reinvesting those dividends to get a double compounding effect.

    The dividend growth investing mindset is a common sense approach to investing.

    Sources: The Single Best Investment by Lowell Miller --- Views On investing by Mark Deschaine

    Sep 29 7:39 AM | Link | 56 Comments
  • Dow Theory Forecast

    This was posted by Dow Theory on May 28 and I thought I would pass it along.

    -------------------------------------------------

    You can find income everywhere

    Every sector of the S&P 1500 Index paid out more in dividends last year than it did three years earlier. And if profits grow as fast as expected, that trend should continue over the next three years.

    According to Standard & Poor's, in the March quarter U.S.-traded stocks declared 9,802 dividends, up nearly 7% from the same period in 2013 and the highest number in at least 11 years. That kind of expansion suggests a broader swath of stocks is playing the dividend game.

    Traditionally dividend-heavy sectors such as consumer staples, industrials, telecom, and utilities each account for a similar percentage of the S&P 1500's total dividends today as they did at the end of 2004. However, the financial sector has charted a different course.

    At the end of 2004, financial stocks accounted for 29.1% of the S&P 1500 Index's dividends, versus 14.6% today. In contrast, sectors not known for dividends - consumer discretionary (9.0% today, 6.2% in 2004), energy (11.6%, 7.9%), and technology (15.2%, 5.1%) - have seen their contributions rise.

    In general, more companies have started to pay dividends (66% of the S&P 1500 today versus 59% in 2004), and the average yield has increased to 1.5% from 1.1% in 2004.

    Over the last decade, the percentage of energy, health-care, industrial, and technology stocks paying dividends has risen. Increased participation drove up the average yield, but the average dividend-payer's yield has also risen. The payout power of the three upstart sectors suggests the financial sector won't get back to 29% of the index's dividends soon, if ever.

    In each of the last five calendar years, the S&P 500 Index delivered an income return of at least 2.1%. We haven't seen such a five-year stretch since 1993 through 1997, and last year's 2.8% income return is well above the 15-year average of 2.0%.

    Fortunately, it's never been easier to construct a diversified portfolio of dividend-paying stocks.

    Jun 02 7:57 PM | Link | 38 Comments
  • New Purchase - ROST

    A new purchase is going to be made in the Project $3 Million Portfolio which belongs to a 29 year old person, and I manage the fund for him.

    That portfolio, which is a real portfolio, can be seen here.

    project3million.blogspot.com/

    A check was placed in the mail today and should arrive at the brokerage firm for posting by Thursday. At that time, the new purchase is going to be ROST.

    Going into 2014 we established some company goals we wanted to achieve with the funds going into the Roth Ira. The portfolio is already established with a series of core positions and we wanted to expand on the core positions.

    It was our goal to add a technology and financial company, as well as a railroad and a couple of speculative positions where the yields would be below our normal acceptance criteria, but hopefully we wanted to offset that with high dividend growth and capital gain appreciation.

    We wanted to purchase these companies with a discount to fair value. We wanted a 10% discount, 15% would be even better. We decided that we would confirm the double digit discount with at least two firms.

    If we were unable to find a high quality company selling at a discount, we would simply add to one of the core positions at fair value.

    The first thing I look for in a company is its financial strength rating. If a company doesn't pass this criteria, I go no further with my due diligence, regardless of how sexy the story sounds.

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

    S&P gives ROST a credit rating of A- and an A+ rating for quality. ROST qualifies for purchase once the valuations and company fundamentals line up.

    When I look to purchase a company, I'm looking for a dividend and dividend growth. Normally I look for an initial yield that is 50% above the yield for the S&P 500. I use SPY to determine the yield for that Index.

    The current yield for SPY is 1.85% and when you multiply that by 50% I get a yield of 2.78%. That would be my minimum yield under current market conditions unless I was looking to speculate. I am considering ROST a speculation play due to it's low yield which means I must count more on capital appreciation over dividend income in the near term.

    Since I am looking to speculate, I expect higher earnings rates than I would with my blue chip core positions. My minimum earnings growth expectations for growth and spec companies is 10%.

    My minimum requirement for estimated earnings on a growth or spec company is 10% as well.

    During my research, of the 50 plus companies I have on my watch list, ROST was the only company that qualified with a 10% discount to fair value by both Morningstar and S&P Capital IQ, and had 10% estimated earnings growth rate.

    In looking at price discounts a few companies came close. It came down to four companies. ROST, MA, TGT and BAX.

    Here are the price discounts as of May 9.

    ROST ... S&P says ROST is undervalued by 13.6%. M* says ROST is undervalued by 15.7%.

    MA ... S&P says MA is undervalued by 10.3%. M* says MA is undervalued by 9.3%. ... This was close enough to a double-double to consider for purchase.

    TGT ... S&P says TGT is undervalued by 7.7%. M* says TGT is undervalued by 12.7%. ... TGT was close, but not close enough for consideration at this time in this portfolio.

    BAX ... S&P says BAX is undervalued by 8.8%. M* says BAX is undervalued by 10.6%. Again, this one was close enough to consider but I decided to pass as BAX is expected to spinoff a part of their business and I want to wait until the dust settles on that one.

    So it came down to ROST and MA for this portfolio.

    In looking at estimated earnings growth, ROST is expected to grow earnings at a rate of 12.2%. MA is expected to grow earnings at a rate of 17.7%. Both companies passed the double digit earnings growth criteria.

    One aspect that is important to me when investing other people's money, is that I want to get their position off to a fast start. If I can select companies that are expected to beat the market over the next six to twelve months, it provides them with the confidence to hold during market corrections. I try to provide them with a little peace of mind if I can.

    With this in mind, I look for undervalued companies that look to have upside price momentum. I look for companies that most analysts can agree on that the company in question is expected to outperform in the near term.

    In order to determine who qualifies under this criteria, I turn to Fidelity and a rating service they call Starmine. This system rates the accuracy of the firms participating in the system. Fidelity assigns each covered company with an Equity Summary Score.

    The Equity Summary Score is an accuracy-weighted sentiment derived from the ratings of independent research providers on Fidelity.com. It uses the past relative accuracy of the providers in determining the emphasis placed on any individual opinion.

    These scores range from 0 which is Very Bearish to 10 which is Very Bullish. Anything above a 7.0 is a Buy.

    ROST carries an ESS rating of 8.4 Buy. ... MA carries an ESS rating of 8.1 Buy. ... Both companies are expected to outperform the market over the next six to twelve months.

    In looking at earnings, I want a company to have increased earnings in at least 7 of the last 10 years. ROST has raised earnings in 9 of the last 10, which also includes the years of the Great Recession.

    MA hasn't been trading for 10 years but they have increased earnings in 7 of the 7 years they have been trading.

    In looking at revenues, ROST has an impressive record of revenue growth. Over the last 10 years they have a 15.11 CAGR of revenue.

    MA has a 7 year record of 9.77% CAGR for revenue growth.

    It's at this point that ROST is edging ahead and the rest of this analysis applies to ROST.

    I don't know how to accurately read a balance sheet or income statement so I have to outsource that task. I use Jefferson Research to help me with this.

    Here are their findings:

    Earnings Quality ... Strongest

    Cash Flow Quality ... Strongest

    Operating Efficiency ... Strong

    Balance Sheet ... Strong

    Valuation ... Least Risk

    I was impressed with the fundamentals here.

    Return on Equity has been rising each year for the last 5 years.

    2008 ... 27.8%

    2009 ... 31.1%

    2010 ... 41.1%

    2011 ... 44.6%

    2012 ... 46.5%

    2013 ... 48.3%

    ROST had a couple of years where cash flows were declining, but they are rising again. Over the last 10 years the cash flow per share has a 24.36% CAGR. This is what helps support the dividend growth.

    McLean Capital Research says that ROST is not only growing ROE, but it is also growing what they call economic profit. They say ROST is creating shareholder value.

    According to McLean, cash flows from operations are 1.2 times that of operating income. Cash Flows from Operations have grown another 4.3% year over year. This company is generating significant amounts of free cash flow and is clearly self-funding, which brings us to the yield and dividend growth.

    The current yield is just 1.2% which means I need significant dividend growth to offset the low current yield.

    ROST has grown the dividend for 20 consecutive years according to the CCC list put out by David Fish. What I find impressive is not only the high CAGR of the dividend, but the consistency of that high growth over all time frames.

    1 year ... 21.4%

    3 year ... 28.6%

    5 year ... 29.0%

    10 year ... 27.9%

    In summation, I was looking for a growth company whose estimated earnings were predicted at 10% or more, with a high quality company that was selling at a 10% or more discount to fair value. The company had to pay a dividend and had to have exceptional dividend growth, and a record of paying a high dividend growth rate over many years.

    Additionally, not only was valuation important, but the timing of the purchase was of importance as well.

    From November of 2013 to the current date, the price for ROST has been declining. While price has been declining, On Balance Volume has been rising. This is known in the technical world as a bullish divergence. Volume usually confirms price direction. It's not this time.

    This is an indication that Institutional Investors are accumulating shares of ROST on small price pull backs.

    When you look at the following chart, note how price has fallen since November, but the indicator below the volume chart has been rising.

    This is very good news from a timing standpoint. In my opinion, value and timing are on the same page together.

    On Thursday of this week, when the funds hit the account, I will be purchasing ROST.

    stockcharts.com/h-sc/ui?s=ROST&p=W&a...

    May 12 11:14 PM | Link | 31 Comments
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