Tuesday, September 19, 2017

An interesting look at share dilution and share buybacks

I did some homework yesterday to review what the number of outstanding shares looks like for each of the companies that I hold. As a background, companies usually buy back shares to reduce the number of outstanding shares on the open market. Companies are measured by earnings per share (EPS). This is done by dividing total earnings of the company by the total number of shares on the market. With a lower share count, the EPS goes higher. Also with a lower share count, the company does not have to dish out so much cash to pay for all those quarterly dividends.For example Coca Cola pays 37 cents per dividend every quarter. If they bought back 10,000,000 shares back for $460,000,000 then they would be able to save paying $14.8M a year in dividends.

Companies can also dilute shares. Sometimes a company needs to finance a large acquisition. Or maybe the company needs more money for various reasons to operate. Diluting shares is bad for investors unless the money spent is able to add more to the earnings relative to how much dilution occurs. Usually debt heavy industries such as real estate and utilties dilute shares to fund expansion. With each new share sold on the open market, the amount of dividend dollars a company needs to pay increases. Every new share needs to be paid the dividend making the dividend burden even bigger.

I get my share data from Morningstar. I look at a 5 year window up to 2016 and just divide the percentage decline or increase over that 5 year period to get a rough estimate of how much the company on average changes the number of shares.

The example above shows Illinois Tool Works (ITW). In my portfolio this company has been the best at reducing share count over a 5 year window and they are also a very well performing dividend aristocrat with rising earnings per share. The share count at the end of 2016 was 357M and it was only 495M 5 years earlier. This is a very impressive decrease of 5.5-6% a year.

I did this investigation for all of my holdings. I noticed that a lot of my best portfolio performers have very nice share count decreases. These include ITW, Home Depot (HD), Visa (V), MasterCard (MA), Ross Stores (ROST), and 3M (MMM). Most of my normal "C" Corps have made an attempt to reduce or at least keep the number of shares flat. Keep in mind companies do pay their execs and employees stock for bonuses and incentives. Companies have to keep buying these stock back in order to avoid diluting the share base.

Name Ticker Sector ShareCnt5yr
Illinois Tool Works Inc. ITW Industrial -6%
Home Depot Inc HD Discret -4%
McDonald's Corporation MCD Discret -4%
Visa Inc V Financial -3%
Mastercard Inc MA Financial -3%
Ross Stores Inc ROST Discret -3%
3M Co MMM Industrial -3%
TJX Companies Inc TJX Discret -3%
Bard (C.R.) Inc BCR Health -3%
Philip Morris International Inc PM Staples -2%
PepsiCo PEP Staples -2%
General Mills, Inc. GIS Staples -2%
Kimberly-Clark KMB Staples -2%
Automatic Data Proc, Inc ADP Tech -2%
Church & Dwight CHD Staples -2%
Colgate-Palmolive Co CL Staples -2%
Altria Group Inc MO Staples -1%
McCormick & Company MKC Staples -1%
Procter & Gamble Co PG Staples -1%
The Coca-Cola Co KO Staples -1%
Stryker Corporation SYK Health -1%
Abbott Laboratories ABT Health -1%
Johnson & Johnson JNJ Health 0%
Becton Dickinson and Co BDX Health 0%
Starbucks Corporation SBUX Discret 0%
Clorox Co CLX Staples 0%
Hormel Foods Corporation HRL Staples 0%
Air Products & Chemicals, Inc APD Materials 0%
AT&T Inc T Telecom 1%
Xcel Energy Inc XEL Utilities 1%
Dominion Resources, Inc D Utilities 1%
The J. M. Smucker Company SJM Staples 1%
Aqua America Inc WTR Utilities 1%
NextEra Energy Inc NEE Utilities 2%
Southern Co SO Utilities 2%
Federal Realty Investment Trust FRT REIT 3%
WEC Energy Group, Inc. WEC Utilities 7%
Realty Income Corp O REIT 40%
Kraft Heinz Co KHC Staples N/A
Medtronic plc MDT Health N/A

Some companies are the product of mergers and acquisitions so I was not able to really get a good idea of share count growth or decline. The Utilties and REIT space are the worst sectors in terms of minimizing share count. I don't own any MLPs but MLPs also operate similarly. Realty Income (O) has increased the number of shares drastically from 126M in 2011 to 256M in 2016. This is basically a doubling of the number of shares in just 5 years. REITs need to make public offerings to acquire cash for purchasing additional properties. REITs pay the large majority of their earnings back to the share holders, which means they cannot keep a lot of the money they earn. Diluting the share base is the way they can fund their expansion. If the expansion purchases add more to the bottom line compared to the dilution of shares, then the overall company performance will continue increasing. This can be seen in well managed REITs like FRT and O. However, the dilution of shares still concerns me which is why I do not have a super large position in REITs.

Although share buybacks are important. It is not the panacea for increasing company earnings per share. I would rather see executives invest in the company organically instead of financially engineering the company's earning statistics. Buying back stock can only work so much but one must innovate and keep up with the competition by having good products and services. That requires investment back into the company and buying back shares is only a way to "cheat" in the short term. Additionally, companies oftentimes buy shares back at market highs since that is when the company is doing their best and spare cash is abundant. That money might have been better used in dividends or company reinvestment or acquisitions.

Saturday, September 16, 2017

A look back at 4 years of dividend growth

I took some time to open up the charts from my previous years. I tabulated the dividend increases for each of my position every year. I write down how many percent they increase their dividend per share compared to the amount they paid previously. My portfolio's goal is to average around 2.5-3.0% in dividend yield and average 7.0-8.0% in dividend growth. With the dividends reinvested this is around 10-11% income growth in my portfolio per year which will allow me to meet my income goals.

I hold a variety of companies that all pay dividends in my portfolio. Some are slow growers like utilities or AT&T which pay a high yield but have slower dividend growth. Some are fast growers like ROST or Visa so their yields are lower but the dividend growth is much higher. I look at my portfolio's average dividend performance based on each position's dollar weighting and how much the raise was for that year.

To summarize these are the results I saw in 2014, 2015, 2016, and so far 2017. I saw a decrease in total income growth as the years went on because I saw many headwinds from the strong dollar. I also transitioned my portfolio over the years to emphasize more non-cyclical businesses that are higher quality (better credit rating and more conservative management). These type of companies grow slower and have a lower yield than riskier cyclical businesses that I used to hold when I started out. I hate to admit but when I started out I was victim of chasing yield and I got burned on each of those greedy positions.
Year Dividend Growth Dividend Yield Total Income Growth
2014 10.30% 2.81% 13.11%
2015 9.68% 2.94% 12.62%
2016 10.11% 2.76% 12.87%
2017 8.28% 2.70% 10.98%

I show more of the breakdown for each year below:

2014: My first year
In 2014 I had my first attempt at dividend growth investing. I held more cyclical companies than I do now and my preference over the years has been to shift away from technology, oil (energy), and industrial names and more into conservative non cyclical businesses. I also held a lot of Vanguard index funds in my 401k since that time I did not take the effort to open a brokerage account for my 401k. All my companies raised their dividend that year except the Vanguard bond fund which had a dip in income received.

Tuesday, September 12, 2017

August 2017 Portfolio Summary

This is the August portfolio summary report. I will be using data up to the September 11, 2017 period. I will first summarize what happened in the market in the last month. The dollar continues to weaken. This is great for my portfolio as most of my portfolio has companies that deal internationally. A weaker dollar means more US dollars recovered when they convert their foreign earnings to US dollars. A weaker dollar allows our US products to compete more competitively in price on foreign lands. 

The S&P500 has retreated in August. August, September, and October are usually more volatile months and corrections are common in the last few years. I always took advantage of the declines but it seems our market now has largely recovered. The S&P500 is hitting all time highs again but my portfolio has not since many of the gainer industries are not in my portfolio (I tend to hold very low volatility stocks so my portfolio does not usually follow so extremely with the S&P500). In the news, there were a lot of concern over the North Korea nuclear testing situation, Trump's inability to get any movement on tax reform or repatriation, the destruction of Hurricane Harvey and Irma, and the US debt ceiling. 

I used to monitor oil very closely in the past. My portfolio does not contain any companies that directly deal with oil. But I still track the oil market since this commodity is so crucial to our economy. Oil has stayed relatively flat. It is still very cheap, sub $50. This new environment of very cheap oil is likely to stay for a very long time. It is going to be very hard for any oil company in this environment. I tend to stick out of the oil business in general as countries aim to phase out gas powered cars for alternatives, and the world becomes less reliant on oil. I cannot see oil being a dominant source of energy in 70+ years. I cannot see all of our oil pipelines being usable in the future as oil reserves get all mined out, eventually they'll all be retired. I invest for the decades and the future. If a company's core product is no longer going to be here then I will not invest in it. I can see toilet paper and toothpaste and laundry detergent being here in 100 years time, but oil not so much.

Friday, September 8, 2017

Crossed the 5-figures in Annual Dividends Mark

As of today my portfolio's annual dividend has crossed 5 figures. On an annual basis, my portfolio is expected to generate $10,028 in dividends per year. This is before taxes of course, and barring any disasters that causes one of the companies I own shares in to go bankrupt.

Today I purchased the following companies. This allowed me to cross the 5 figure mark in dividends:

Medtronics - MDT - $657
Nextera Energy - NEE - $588
Philip Morris - PM - $934
Illinois Tool Works - ITW - $841

In total I invested around $3000 today.

Friday, September 1, 2017

August 2017 Dividends Received

Like clockwork, I received payments in the month of August from several of the businesses that I have shares in. The table below shows where the money was earned:

Ticker      Total    Taxable         401k
T $113.19 $113.19
GIS $88.66 $57.33 $31.33
PG $69.65 $59.31 $10.34
O $53.07 $53.07
SBUX $46.18 $37.90 $8.28
CLX $36.12 $36.12
APD $33.25 $33.25
HRL $27.71 $27.71
CL $24.00 $24.00
MA $16.78 $6.38 $10.40
ABT $15.90 $15.90
BCR $1.62 $1.62
Interest $0.36 $0.00 $0.36
$526.49 $412.71 $113.78

The high payer was AT&T followed by General Mills and Procter & Gamble.
August is a weak month, along with the months of 2, 5, and 11 in the year since not many of the companies I hold pay in those months.

For September I am expecting around $880 to be cashed into my brokerage account.
And for October I am expecting $1020.

If I take the quarterly moving average since month to month can be volatile, the trend is a nice upward increase in my monthly dividends. This is largely due to the contributions I put into my portfolio every month and the results are showing. I expect that my portfolio is able to grow the dividend by around 10% year over year by itself. This growth is from around 2-3% in dividend yield reinvested from my various portfolio positions (on average) plus the 7-8% of natural dividend growth from each of the holdings (on average) I have in my portfolio.

September and October tend to be very bad months for the year. I can already see my portfolio falling slightly despite my biweekly cash contributions trying to prop the portfolio up from market weakness. I am stocking up on cash for the coming weeks. I will post buy activities when they happen.


Wednesday, August 16, 2017

Recent buy: HD, ITW, MA ...

Today I shares in the following companies:

HD - Home Depot - $2436
ITW - Illinois Tool Works - $559
MA - Mastercard - $397
GIS - General Mills - $230
HRL - Hormel - $206
CL - Colgate Palmolive - $143

More shares in my portfolio equals more dividends! What I try to do is continue to add every month no matter if the amounts are small or big. At the least each contribution I do will increase the future passive income I will receive.

Tuesday, August 15, 2017

July 2017 Portfolio Summary

In this post, I will summarize how my portfolio has been doing in the last month. Today is August 15th and my portfolio sits at $383,000. The portfolio is generating $9713 in dividends every year. For me, 15% of this dividend will be taxed. My dividends are always immediately reinvested back into the company that paid them. This increases the level of compounding for each of my positions. All of my positions pay dividends, and all of them have increased them every year for many years which establishes a solid track record. I don't expect all of my holdings to continue increasing dividends forever. Some companies may fall and die but from the homework I have done, I believe that will be a rare occurrence. It is impossible to avoid any failures; however, I am confident the winners in my portfolio will more than cover for any losses from companies that go out of business.

Nearly all of my positions are defensive. This means that the companies offer products and services we use everyday no matter the economic situation. I want to be part of a business that receives money from the regular consumer that will use the product on every occasion. My favorite companies are in the consumer staples business offering food, beverage, personal care, cleaning, and daily household item goods. I also favor utilities and healthcare as they offer products people will use even if the economy is bad. Defensive companies are more predictable, they offer more consistency in the dividend. I hold less industrials, no energy, and little materials stocks because they are volatile due to the nature of the economy or commodity prices. I hold quite a few consumer discretionary companies to diversify. However they are not my core holdings.

Sunday, August 13, 2017

July 2017 Dividends Received

In July I collected a total of $967 in dividends. All of the cash received was reinvested back into the companies that paid them.

Ticker      Total    Taxable         401k
MO $414.79 $369.66 $45.13
PM $216.37 $170.56 $45.81
KMB $60.63 $38.80 $21.83
MKC $55.27 $35.72 $19.55
KO $52.91 $52.91
O $52.86 $52.86
ADP $39.90 $39.90
XEL $32.76 $32.76
ITW $15.60 $15.60
MDT $13.09 $13.09
SYK $12.33 $8.50 $3.83
Interest $1.25 $0.90 $0.35
$967.76 $765.31 $202.45

The 1, 4, 7, 10 months are high paying months for me since I hold a lot of MO and PM in my portfolio.

Below is the plot showing my the monthly dividends I receive. The 3 month average trend is a nice growth upward. Nearly all of this growth is due to my continuous contribution. By itself the portfolio is growing income around 10% annually.

I zoomed out the chart for this month going forward since some of my plots were approaching the maximum dollar amount I previously set ($1000). I can feel that the snowball is starting to roll. Nearly $1000 in dividends in a month is an appreciable sum for me. My goal now is to my monthly moving average to cross $1000/mo.

I hope in the future my dividends alone can pay for all of my rent or mortgage if I choose to purchase a property. That would make life much easier.

Friday, July 28, 2017

Recent buy: MO

I missed the large dip in PM today. It largely is now flat.
MO dropped a lot and I bought it after a 10% drop. It was lower intraday but I did not wake up early enough.

The announcement that the FDA will look at reducing nicotine concentrations in cigarettes caused all tobacco vendors to drop today. I took the opportunity to add.

I added $1663 in MO today. Will add more if the yield hits 4% territory. Any drop in PM below 5% I will start adding. PM is largely international so I don't think there's much effect on PM.

Happy investing

Tuesday, July 25, 2017

Recent buy: MMM

I purchased around $1000 in 3M (MMM) after they announced earnings. The stock fell 5% so I decided to add more to my position.


Friday, July 21, 2017

My annual dividend is now almost reaching 5 figures

My investing started back in October 2013. I have been diligently investing my income into dividend paying stocks so that one day I can live off the dividends. The companies I invest in are largely dividend aristocrats with large margins of payout safety and track record of dividend increases over many decades. My primary focus is dividend safety and the growth of that dividend on its own.

Back then I had $0 in passive income every year. The contributions initially felt like a complete waste of time. I had people tell me 3% yield (what I'm shooting for as my average portfolio yield) is nothing and that it would take forever to accumulate enough assets to live off of that. The income I was receiving from my dividends in 2014 every month would barely pay for a happy meal. But now the dividends are rolling in. I'm making more from my dividends now doing absolutely nothing than when I was a college student laboring away at minimum wage part time to pay my rent. The dividend payments are quite sizable now with my largest month January paying over $1000. I'm certainly glad that I kept with my original plan instead of spending the money as the dividend payment effects are starting to snowball. 

I estimate that by the end of August or September I will be able to cross the $10,000 a year mark in dividends. This means that every year I will be able to receive $10,000 for doing absolutely nothing. I can be sipping martinis and those dividend checks will still be mailed to my door. What a great feeling to not have to be tied to an employer. Eventually I hope this number grows even more so I can sustain my entire lifestyle with passive income.

I expect that with dividends reinvested, this $10,000 will be able to grow by 10% (3% yield reinvested with 7% dividend growth on its own), which means that $10,000 in one year will become $11,000 the next year and $12,100 the next. I find that this is a great way to snowball my passive income without having to work at all.

I invested heavily in the Q2 of 2017. A lot of my position was in cash starting in 2017 so I deployed a lot of that to work. I will post when I finally cross the 5 figure mark in a few weeks.

Happy investing -YD

Thursday, July 20, 2017

Recent buy: HD

Shares of HD dropped 4.1% today after Sears said it is now selling its Kenmore appliances on Amazon. I took this opportunity to add $2000 to my existing position in HD.

Tuesday, July 18, 2017

Recent buy: PEP, V, JNJ ...

I have deployed around $10k this week. Here are the buys I executed:

PEP:  $2301
V:       $3026
JNJ:    $1344
HRL:  $461
KMB: $625
TJX:   $844
T:       $433
GIS:   $539
SJM:  $587

I prefer to buy winners but I also added to companies that are having a tougher time now. Companies that are doing fantastic include PEP, V, JNJ. KMB is experiencing P/E contraction but overall is relatively flat. Hormel is still growing well but is experiencing P/E contraction. AT&T is getting competition from T-Mobile and has seen share price falling, but overall it's still very much flat in terms of growth. GIS and SJM are having a tough time in the super market, especially GIS due to their product portfolio positioning and the transition to Organic and natural. GIS has no growth at this moment.  TJX is expanding (same with ROST). However TJX traded at a high P/E and experienced P/E contraction due to the Amazon pressure on retail.

Friday, July 7, 2017

June 2017 Portfolio Summary

The report will be summarized using data up to July 7, 2017.

Not much excitement in June. The portfolio stayed relatively flat however my forecasted annual income from my investments climbed higher since I added to several positions.

I recently added a new position in Federal Realty (FRT). It's a dividend aristocrat REIT company. Together with Realty Income (O), these two companies will provide me decent dividends in the real estate category.

The purpose of this portfolio is income replacement. I have a desire to one day live off these dividends. The dividends must be completely safe even during economic recessions. The companies I invest in must have products that have strong demand and are not at the whims of "fads" that come in and out. The portfolio chart below highlights companies that I consider Core positions as Green. Yellow positions are Supporting positions and Red are Speculative. My dividend investing philosophy holds strong with the Core names but the Speculative names are purely for capital gain alpha.

Positions can only be labeled as Core by me if the companies have demonstrated that they can withstand the test of time, they offer products or services that the economy uses no matter what, and have a proven track record of dividend safety and dividend increases.

At this time, my portfolio is spitting out $9290 in dividend per year. The highest dividend paying month is January which is $1026. My portfolio is heavily weighted into Consumer Staples companies. These types of companies offer products we use every day such as water and beverages, shampoo, toothpaste, toilet paper, electric utilties, food, cleaning products, or nonprescription medicine. Consumer Staples tend to have less alpha than more volatile industries like Energy, Technology, and Discretionary. However, my goal is income predictability and safety and Consumer Staples offer the best return for the associated risk to me. Many of the companies I invest in are dividend aristocrats with over 25 continuous years of dividend increases.

My goal in the future is to increase my holdings in the Healthcare and Utilities space. Right now I am a bit too heavy in the Consumer Staples, however I like each of the companies I am holding now in the Consumer Staples sector. For Healthcare, I am looking to add more to JNJ and BDX. And for Utilities I am waiting to add more to NEE.

If Industrials ever pull back, I will be looking to add to names like MMM, ITW, and a military defense name like GD. However, industrials are way too hot right now. I do hope to increase my weight in Industrials eventually since my weighting is way too light at this time. Industrial companies will always pull back as their betas are rather high. When the economy slows down that will be my chance to add into high quality companies at an low price. Industrials tend to overshoot downwards when the economy slows down.

In terms of Financials, I do not like investing in banks. They are too risky for my taste and I do not know how to read their financial statements. It's far too complicated and I do not know who they are lending money to. I tend to prefer financial middlemen companies. These include payment transaction companiesl ike Visa and MasterCard. They offer "tollroad" type operation and have no lending risk. I believe the future will be cashless especially for the rest of the world. Many of the developed nations in the world still use cash and Visa + MasterCard is the future, hence my extremely long stance on V and MA.

Technology companies have enjoyed a very strong run. I have unfortunately been left out. I never chase price gain as I am always about the income from dividends. If the technology companies ever pull back I will open my eyes to high quality dividend paying technology companies like MSFT, ACN and ORCL. Although I view Amazon, Facebook, and Google as leaders in their respective industries I just cannot get myself to invest in anything that pays no dividend so I will watch those giants on the sidelines.

My annual dividend is almost hitting $10,000. I think by the time summer ends I will be able to cross the $10k a year mark in passive dividend income :)  Took me a long time to get here, and it's great to see my money generating more money. The reason my dividend has been rising faster than expected is because I accumulated a large cash position around January 2017 through May 2017. I eventually deployed all the cash to earn more dividends since I eventually decided I will not be using the cash for anything else within a 3 year period. If the cash is not needed, I will invest it automatically even if the market is high low or flat. I always keep around $7000-10000 in emergency cash just in case something bad happens.

The graph below shows my current progress to $1MM. Not much happened in the last month. Many of the companies I hold became cheaper in June which helps boost the dividends I can acquire for each purchase I perform. I don't forecast any surprise cash increase into my portfolio, my income will be quite the ordinary for the rest of the year. I may have a slight bump down in a few weeks when I move into a new rental apartment (curse the living costs in the bay area).

Happy Investing