Seeking Alpha

Dividend Duchess: February 2020 Undervalued Stalwart Stock Picks

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Includes: HD, MMM, TXN, UPS
by: Blue Chip DRiP
Summary

My 5th grade daughter is the self-proclaimed Dividend Duchess. Each month, we have an investing lesson which culminates in a stock purchase for her portfolio.

We have been funding this account solely with my Seeking Alpha Contributor earnings.  This month, Lucy starts investing a portion of her allowance as well.

We use some basic screens, easy for an 11 year-old to implement - starting with Dividend Champions and Contenders that she recognizes and understands.

Keep It Fun and Engaging for the Groms

For a kid, nothing's quite as fun as sitting down for a good old game of "Stock Investing with Dad"- hopefully. For me, it's all about muscle memory. Instilling sound financial principles at an early age, and then building the literacy slowly over time. The goal is for the repetition to form positive monetary habits to last a lifetime. It's up to us as parents to handle this teaching. Don't rely on schools! Keep it fun!

With that said, each month, I sit down for an investing lesson with my 11-year-old Lucy. It's super cool how residual math, analytics, reading comprehension and writing slide into the tutorials as well. When it's time for this daddy-daughter time, Lucy now eagerly grabs her chair and joins at my computer. The thought of buying a new stock is more enticing than going to Justice at the mall. Ok, maybe that's a stretch. Our sessions have been spilling over to her little sister, Molly (age 6) and I'll be starting her on a financial journey soon. Good times!

Dividend Duchess Goals

Lucy coined her account the Dividend Duchess Portfolio. Pretty snazzy. If you're new to this series, this is our 4th installment of documenting her investing journey from scratch. The previous articles provide some context and are available here. Our goals will morph over time, but for now, we're keeping it super simple:

  • Purchase one new business every month for the first year, and eventually build a portfolio of 20-30 stocks. *Note - many have asked why not an index fund or ETF, set it and forget it, etc. - Yes those would be great, but it's simply more fun for Lucy to buy individual equities.
  • Focus on high-quality, resilient businesses that are fair to undervalued and have a solid track record of dividend growth and a better-than-market-average dividend yield.
  • Fund the portfolio with my earnings as a Seeking Alpha contributor and reinvest all dividends received. *Note - starting this month, Lucy is contributing allowance money. More on that below.
  • Motivate readers - that means you - to create and implement your own plans with your kids.

Seeking Alpha Income Update

As mentioned, we have been funding Lucy's portfolio solely with my earnings generated from writing articles for Seeking Alpha. This way, she gets a small amount of money to invest each month, and I can simultaneously report my slowly growing author earnings. I wrote my first article for SA on 10/16/19. Here are my total earnings as of February 10th, 2020:

# of Articles Written Income Received to Date Avg. Income per Article
18 $946.97 $52.61 (up from $46.42)

With the SA income received in January + cash rolled over previously, Lucy has an impressive $317.62 available to invest. But wait, there's more! Lucy is contributing $46 of her own money for a total of $363.62 to invest in February. Where did the $46 come from?

Pay Yourself First

A major lesson for our girls every week also happens to be one of the most important life lessons for any individual that hopes to build wealth and attain financial freedom. Pay yourself first. Can't start early enough. Can't reiterate it enough. For my kids, that means each week, when we pay them their allowance (based on how effectively they complete their chore charts), they take 20% off the top and put it directly into savings before they even take ownership or giving it a chance to burn a hole in their pockets. They also save 20% of cash from holiday and birthday gifts, the tooth fairy, etc. So after some time of "paying herself first" Lucy has accumulated $46 and will be investing it this month. Now that's real skin in the game!

Stock Selection Criteria

To keep it simple and build repetition, we're sticking with the criteria developed over the last couple of months. Our basic stock screener has a few must:

  • Company must be either a Dividend Champion or Contender (raising dividends consistently for at least 10 years) - this generates a list of around 400 companies.
  • Lucy must recognize the company name and have a general understanding of the business - this narrows the list down to 48 companies.
  • Company must have a current yield higher than their 5-year average yield. With current all-time market highs, this slimmed the field down a fairly narrow 14 companies this month. See below:

Then we widdle the list down a bit further, based on the following criteria:

  • Current dividend yield must be 2.5% or higher - which narrowed the list to 12 companies.
  • 5-year dividend growth rate of 7% or higher - now we're down to 7 companies.
  • Payout ratio below 65% (we let Texas Instruments (TXN) slide at 68% because the rest of the metrics are solid). After this we were down to 5 businesses, as seen below:

These results are very similar to what we wound up with last month. I think next month we'll open the search up to Challengers (dividend raiser from 5-9 years) to get some fresh blood in the mix. The only difference was last month Home Depot (HD) made the cut and this month, Williams-Sonoma (WSM) snuck on the list. Also, last month we removed Cracker Barrel (CBRL) from the list because of a discrepancy in information I received. This month, we're keeping them in.

Five To Pick From

After this, our final choices were as follows:

  • 3M (MMM)
  • Cracker Barrel
  • Texas Instruments
  • United Parcel Service (UPS)
  • Williams-Sonoma

From here, it is 100% Lucy's decision without any more input from pops. Of course, she wanted to color-code with purple, green, and yellow to help the process:

I keep trying to drill in the concept of "margin of safety" with Lucy. For this reason, she seems to be placing extra emphasis on yield valuations and % below 52-week high. Lucy to pay specific attention to the difference between the current yield and 5-year average as well as % below 52-week high. Referring to the chart above, she quickly narrowed it down to MMM and UPS. Since she already purchased 3M last month, it was a no brainer: United Parcel Service it is!

Photo Credit: UPS website

UPS: In Lucy's Words

Why United Parcel Service? Instead of trying to delve into the thought process of an adolescent brain, why not let Lucy pen her own "mini-analysis"?

1. I see UPS trucks everyday - which means that they're always delivering packages. The reason for that is: Everyone's always ordering packages! Example: My mom orders something at least every week.

2. UPS is a Dividend Contender which means that they have been raising their dividend at least once every year for 10-24 years. UPS has been raising their dividend for 10 years.

3. UPS also has a current yield that's way higher than their 5-year average!"

- Lucy J. aka The Dividend Duchess

The Magic Green Button

Now for the fun! Log in to Schwab (NYSE:SCHW) with $364 bucks at the ready. With a pencil and paper, she figured she could buy three shares. Time to navigate through the trade screens and click the magic green button. Boom!

Portfolio Update

Here's the current standing of Lucy's Dividend Duchess Portfolio after the recent UPS purchase:

UPS now comprises 33.87% of the portfolio and added $11.52 of forward annual dividend income. Lucy will now make approximately $29.52 of dividend income annually. That's equivalent to almost 3 weeks worth of allowance without lifting a finger. As Lucy pointed out, she doesn't even have to empty the dishwasher, feed the dog, or brush her teeth to earn it. I think the lessons are sinking in!

Conclusion

Teaching kids about money early gives them tools for growing lifelong wealth. As a child, I learned from a disciplined, middle-class father who was frugal in his day-to-day life. Yet, through a high savings rate and compounding dividends, he easily became a millionaire before retirement. And that's when a million went a lot further than now. We lived below our means. I was never spoiled, yet never lacked anything. We took amazing vacations, saw tons of movies, and ate out every weekend. The Cheesecake Factory (NASDAQ:CAKE) was like a second home.

As I get older, I realize these core financial values, embedded from my youth, have stuck with me. I'm eager to pass it on, and I'm not sure who's enjoying "money school" more... Lucy or myself. She takes pride in her Dividend Duchess Portfolio. Her investing acumen is slowly increasing. Learn a little, earn a little. Life is good!

I hope you'll stick around for this journey by clicking the orange "Follow" button up above.

Have any tips for teaching kids about saving/investing? What else would you like me to include in these updates? Do tell!

As always, best of luck on your personal quest for financial emancipation.

PS - Lucy reads and enjoys all your comments and encouragement!

Disclosure: I am/we are long UPS. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Additional disclosure: This is not stock advice. These are purely my opinions. I'm not a professional. Do your own research. Best of luck in your investing journey!