• I’ve admitted it in the past; Im not the typical dividend investor. I started investing by trading, buying & selling every two weeks while most dividend investors usually buy and hold completing the sale transaction after several years holding their shares. In my opinion, the dividend investor is the upgraded version of the buy & hold investors. More often than not, the buy & hold and dividend investor is the same guy. I strongly believe in dividend investing, that is why 100% of my portfolio is composed of dividend paying stocks. I even wrote two books and created a whole investing platform around dividend stocks called Dividend Stocks Rock. Still, I’m not convinced a 100% buy & hold strategy is the best way to maximize your investment these days.

     

    The Investment Thesis Behind the Buy & Hold Strategy

     

    Before I present my view of investing, I think it’s important to mention why the buy & hold philosophy is so seductive for many investors. First, several famous investors have used this method in the past. Guys like Warren Buffett have reputations for success to make following their path seem logical. Invest in solid companies that you can understand and buy only if you intend to hold the stock for ten years… or more. This is roughly what you can learn from the buy & hold strategy.

    Then, there will be a horde of investors with shocking examples of company success over the years such as Coca-Cola (KO) which shows a total return of over 5,000% since 1978. But my point is not to debate as to whether or not you should buy & hold stocks for several years. This totally makes sense for your core portfolio, but if you want to maximize your return, I think you should add more trading habits to your investing strategy.

     

    The Way I See Things: a Buy & Hold Core + a Growth Segment

     

    I’ve had several reactions about my latest trade: selling a dividend aristocrats (McDonalds  NYSE:MCD) to buy a speculative company working in the oil industry which is down 35% since January 2014 (Black Diamond Group TSE:BDI). For many, this transaction looks like a trader’s move at best and like a gambler for others.

    I told you already: I’m not the typical dividend investor. I have a set of 7 investing principles I follow religiously and I also allow some cash to make “growth additions” to my dividend portfolio. The point is simple: I have most of my portfolio in shares of companies I truly want to hold forever (such as JNJ, KO, Telus(T), ScotiaBank (BNS), DIS, WMT, etc) but I also allow myself to forget about 1 of my investing principles if I think there is a great opportunity on the market. I have done it in the past with STX, INTC and HSE which all reported profits over 25% over a short period of time. I’m currently holding AAPL, HP, Gluskin & Sheff (GS) and Balck Diamond Group (BDI) in my “additional growth” segment. When I sold MCD to buy BDI, I simply sold a part of my core portfolio to transfer it to my “growth” segment. My point is the following, what if MCD is the new KO that did an astronomic 1.82% (plus dividend) over the past 16 years???

    buy & hold

    You see it right, someone who bought and held Coca-Cola (KO) since June 30th 1998 until today only made 1.82% in appreciation. Thank god there is a dividend attached to this stock!

     

    BDI’s drop in price is directly linked to the oil sand industry. BDI rents & sells modular equipment for remote areas. Its biggest market is renting modular homes in Northern Alberta for oil sand exploration businesses. However, nothing is stopping BDI from exploring other markets (basically any company with an interest to develop in a remote area) and generate additional revenue. The company shows solid fundamentals and pays over 5% in dividend yield right now. Between a stagnating company like MCD which is probably going to trade around $95-$100 in three years and BDI which can easily trade at $30 (from $19 right now) in 12 months, I’ll take the chance. Keep in mind that I’m not buying a weak company with shaky financials, if you look at BDI’s fundamentals, you will see that the company shows strong basics. Now it’s only a matter of going through the oil barrel storm before we see the light. The 5% dividend is more than enough to keep me waiting in the meantime.

    To be honest, in this specific situation, the perfect scenario would have been to keep MCD and use new money to buy BDI. But since I didn’t have more liquidity at the moment and have been following BDI for the past 18 months, I thought it was the right time to make this move.

     

    I’ve been using this strategy for a few years now and it has served me very well. Let’s see if its only luck or a solid investing strategy. I personally think it’s the latter!

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  • Wal-Mart just released its third quarter results with a great performance. To be honest, I think we were many to doubt about WMT’s ability to generate growth before the Holiday season.

    We will go through the main highlights of their reports, but first, we will analyze what Wal-Mart has been doing over the past five years and determine whether or not it should be part of your dividend portfolio.  Let’s see if “Save Money, Live Better” can translate into “Make Money, Invest Better”!


    wmt#1

    This dividend aristocrat has increased its dividend for 41 consecutive years. Over the past ten years, the dividend doubled more than twice! The dividend paid back in 2004 was $0.36/share and WMT will pay $1.88/share to shareholders this year.  However, lately WMT has struggled to show solid growth and deals with high margin pressures.

     

    Business Model

    Wal-Mart Stores Inc, operates retail stores in various formats under various banners. Its operations include three reporting business segments, Walmart U.S., Walmart International and Sam’s Club in three categories retail, wholesale and others.

    Here are a few numbers to show you how big Wal-Mart is:

    wmt#2

    The company has put several initiatives into action to increase sales with a more complete food offering, electronic departments’ new look and a massive investment in e-commerce. The battle in e-commerce is far from being a walk in the park as Wal-Mart will compete against Amazon, the champion of volume and recurring losses. It’s hard to compete against a giant who doesn’t care about profits for the sake of growth. In the brick-and-mortar industry, the consolidation of dollar stores also brings more powerful competitors. Yet, WMT remains the biggest retailer in America.

     

    Now let’s go dive further into the numbers. Following the first 4 Dividend Stocks Rock Investing Principles, I’ll take a look at Wal-Mart and share a full dividend analysis.

     

    Principle #1 High Dividend Yield Doesn’t Equal High Returns

    Did you know that the highest dividend yield stocks underperform more “reasonable” yielding stocks? The Hartford Mutual Funds company wrote:

    The study found that stocks offering the highest level of dividend payouts have not performed as well as those that pay high, but not the very highest, levels of dividends.”

    wmt#3

    Read more about this research here.

    As a dividend aristocrat, we can’t really expect WMT to pay a very high dividend yield. At 2.44%, we can’t really talk about a high dividend yielding stock. In fact, it would fall outside of many dividend investors’ filter research. It would have not been part of my own investing criterion a few years ago, but I’ve given more importance to another metric since then…

     

    Principle #2: If There is One Metric; It’s Called Dividend Growth

    If I had to go blindfolded to pick a stock and have only one metric to look at, I would pick dividend growth. This is the most important metric to me as it is a clear sign of the company’s financial health and its ability to pay me for years to come. Here’s an interesting quote from Saturna Capital:

    “Indeed, dividend growth has been a much larger determinant of equity returns in this new era of low benchmark rates and higher levels of uncertainty.”

    wmt#4

    You can get the full detail here.

    I previously wrote that the company quadrupled its dividend over the past 10 years. This means you can expect to see your dividend doubled about every five years.

    wmt#5

    The management team has clearly made a statement over the years that dividend growth is a priority. This helps any investors to be patient during tougher stretches. Since we don’t expect robust growth in sales or earnings in the upcoming year, it will be important to see how dividends will increase compared to its payout ratio.

     

    Principle #3: A Dividend Payment Today is Good, A Dividend Guaranteed For the Next 10 Years is Better

    I think it’s very important to cross the payout ratio with the dividends paid over at least 5 years to see where the company is going with its dividend policy. It’s a key indicator to know if the payout will continue to increase or if it will reach a plateau at one point in time.

    wmt#6

    WMT’s dividend increases and the payout ratio followed similar trends. While 43% is far from raising a red flag on Wal-Mart, the fact we went from 27.50 to this level in three years tells you earnings are not growing fast enough. We can expect WMT to continue raising its dividend in the future but if the company keeps it on the same trend, I will be worried 3-4 years down the road.

     

    Principle #4: The Foundation of Dividend Growth Stocks Lies in its Business Model

    A company that doesn’t have a sound business model won’t be able to sustain consecutive dividend increases over the long haul. On the other hand, businesses which pay dividends and increase them will outperform other stocks:

    wmt#7

    Source: Edward D. JonesDividend Stocks Rock

    Now how can you find these marvels? This is why you need other financial metrics to identify companies that will be able to sustain and increase their dividend for the next 10 years. At DSR, we look at the 3 and 5 year metrics for Sales and Earnings per Share (EPS) growth. We only select companies showing positive growth over both the 3 and 5 year periods. Since an economic cycle lasts between 5 and 8 years, a strong company should be able to post increasing sales and earnings over these periods. I’m using both EPS and Revenue data from Ycharts:

    DSR STOCK METRICS

    3 year revenues = 4.13% Pass

    5 year revenues = 3.33% Pass

    3 year EPS growth = 2.97% Pass

    5 year EPS growth = 7.56% Pass

     

    Wal-Mart Company passed the four tests easily. However, we noticed the 3 year EPS growth is smaller than the 5 year. We might even see negative numbers in 2015. Therefore, WMT may not pass our tests a year from now. On the other hand, WMT is the leader of the retail business and benefits from a highly stable business model generating important cash flow. Considering its history, I think it’s worth it to be patient with such a company. This is why WMT is still part of my core dividend portfolio.

     

    A Look at the Most Recent Results

     

    Wal-Mart reported third quarter consolidated net sales of $118.1 billion, which is up 2.8% over last year’s Q3 revenues of $114.9 billion. Beating analysts estimates.

    EPS is up by $0.01 compared to last year’s Q3 at $1.15 per diluted share. The company’s earnings beat analysts’ estimates of $1.12 per share, while revenue fell short of the $118.37 billion expectation.

    For  the end of 2014, WMT has narrowed its guidance to a range of $4.92-$5.02 from its previous range of $4.90-$5.15. Analysts are expecting FY2014 EPS of $4.99.

    21% increase in e-commerce sales, this is a perfect timing before the big season.

    This is not the most amazing growth ever, but still growth is growth, especially when your name is Wal-Mart! I will definitely keep WMT in my portfolio.

     

    Disclaimer: I personally hold WMT shares at the moment of writing this article. Also, WMT is held in some Dividend Stocks Rock Portfolios.

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  • I don’t know about you, but I’m in line to have another very successful year on the stock market. Last year, my RRSP account showed a 21.7% jump (50% in Cdn stocks and 50% in US). This year, I’m already at 15.7% and counting! But it’s not a reason to stop looking at my portfolio. After all, in the middle of October I was only +9%… The wind changes direction in short order these days! This is why I made a small change in my portfolio last week; since I don’t have cash on hand, I sold a less performing stock and bought an amazing opportunity. Buy when there is blood on the street they say…

     

    Where There Was Blood – Bought 188 Shares of Black Diamond Group (TSE:BDI)

     

    There was a lot of blood last week in the oil industry. The price of a barrel dropped by 25% since its peak this past summer. Most oil companies dropped accordingly. I bought Helmerich & Payne (NYSE:HP) earlier this year and the stock is now down 20% in my portfolio. HP is specialized in drilling oil & gas wells. If oil prices drop, chances of having new exploration contracts go down along the way.

     

    A similar phenomenon had hit Black Diamond Group (TSE:BDI) this year. After an awesome ride in 2012-2013, the stock plunged like a rock since this summer:

    bdi113

    The stock price has fallen by 46% since July 1st 2014. Why is that? BDI is specialized in providing temporary and permanent modular buildings. Its biggest market is oil sand exploration in northern Alberta. If the oil sticks around $75 a barrel, there won’t be many new projects out there as the oil sand operations are very expensive.

     

    BDI not only meets my investing principles but shows a great growth opportunity. This is not a stock that would qualify in my core portfolio (as I don’t think I want to hold this position for 10+ years) but this is definitely a great time to buy the stock. I bought my 188 shares at $17.73 on Tuesday November 4th while the stock took an 11% hit on that day. The company is now trading under a 15 PE ratio and pays over 5% in dividend yield.

     

    The management team made two important moves showing they believe in this company. On November 5th, they published their quarterly report announcing a dividend increase from $0.075/share to $0.08/share (dividends are distributed monthly). On top of this 6.67% dividend increase, the management team also bought back $30M worth of shares lately seeing the same opportunity I do.

     

    What Can You Do When You Want to Buy a Stock but don’t Have Cash on Hand?

     

    I had spotted BDI a while ago and was following its every move. I knew it was the right time to buy it last Tuesday after the announcement that Saudi Arabia reported they would maintain their current production level to keep oil price low (in order to retain their market share). The problem is that I didn’t have new money to inject in my account.

     

    So I took an hour and looked at my portfolio. I reviewed each company I hold and see if there was an opportunity to sell a stock. My first analysis led me to think: I only hold good companies… there is nothing to sell right now. This is why I had to go further. I started to look at the short term potential of each company. My goal was to buy BDI for a 12-18 month horizon so I had to see which stock would probably be “underperform” during this period. This is often the case with stocks included in my core portfolio. They are very strong companies paying an increasing dividend but from time to time, they can be dormant for a year or two when they go through a tougher period. This is exactly the case with McDonald’s (MCD).

     

    The stock isn’t going anywhere right now as the company struggles with margin pressures, China’s problems and sales stagnation. It won’t hurt my portfolio if I get rid of MCD now and buy it back later. After all, I’m trading a 3% dividend stock for a 5% yielding stock with great upside potential.

     

    I know most of you didn’t like MCD that much anyways, what do you think of my new acquisition?

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