• Last week, I was going through the archives for this blog. Since there are over 1,300 articles written over almost five years, there was a lot to look at! But a series caught my attention. It was a series of six posts from the original owner of this blog called “The Dividend Key”. They were short posts that spoke to young dividend investors as they referred to well documented researched. This gave me the idea of revisiting the 6 Dividend Keys and produce a 6 Days to Dividend Growth Investing. This series will cover my overall investing process and is addressed more to beginner investors. At the end of this series, you will be in a good position to not only start investing, but also to avoid most newbie mistakes.

    So if you are an experienced investor, don’t skip this series right away. Why don’t you share it with a friend instead? I bet he will thank you. You are ready? All right! Let’s start with Day #1.

     

    Day #1 What is Your Purpose when Investing?

     

    The purpose why you invest will direct your investment philosophy as a whole. Funny enough, most investors never stop for a moment to really think about why they invest. As an investor, you want to make money. That’s obvious. But can you answer the following:

    Do you want to make money today? This month? This year? Or for retirement in 25 years?

    Do you want to earn monthly income from your investments?

    What is most important for you; your portfolio yield or your portfolio return?

    Are you looking to reach financial freedom through passive income?

     

    The reason why it is so important to know exactly why you invest is because you will track it. There is a very powerful moto in management and it goes like this; you get what you measure. In other words; if you pay enough attention to something and take the time to measure, analyze and modify it to achieve your goal, you will obtain results. Those results will be driven by your measures.

    For example, if you measure school grades, you are more likely to work harder to obtain good grades. On the other hand, it doesn’t mean that your study methods are efficient as you aren’t measuring how hard you work, but only the end result. If you want to improve your efficiency at a test, you will measure both the time and quality of studying vs the result obtained. The same philosophy applied to investing.

    At the moment, all my available money is invested in a retirement account. Since I don’t need this money for the next 25 years, my main focus is total return. I don’t really mind if I built a high dividend yield portfolio or if I get an equal amount of payouts from month to month. My goal is to beat the benchmark and successfully grow my portfolio. I measure my total return on a quarterly basis and compare it to the overall market and dividend ETFs.

    I know other bloggers focus on how much they receive in dividend payouts or how much in yield their portfolio generates. These metrics for me are completely useless. My point is simple; if you build a high yield dividend portfolio and focus solely on the payouts, your capital may lose in value and you won’t even notice! I’ve seen many investors showing poor total returns because they focused on the dividend payments instead of looking at their holding as a whole.

    It’s not because you become a dividend growth investor that you have to forget about the basics of investing. The dividend distribution should be seen as a bonus to your investment return, not as the core of growth in your portfolio. I’ve mentioned this several times on this blog but I would rather buy stocks with a low dividend yield such as Apple (AAPL) or Disney (DIS) and see their stock price surging while cashing in my bonus.

    In my opinion, you can’t really start investing if you haven’t stopped for a moment find what you are looking for. I will not aim for the highest total return once I retire. Metrics such as sustainability of payments and reduction of volatility will be more important for me at that time.

    As you can see, there are no magical answers. Basically, each answer is a good one. You simply have to find why YOU want to invest and build an investing strategy around this thought. Day #2 will be about which investing strategy to choose and why I’ve personally picked dividend growth investing.

    2 Comments   |   Read more >
  • There is nothing easier than buying a dividend stock. Who would ignore owning shares of a company that sends you a cheque quarterly? The whole idea of building a passive income portfolio is very seductive. On top of that; it seems pretty simple at first. Once you run a stock filter, you will always find a great list of attractive companies generating passive income. The problem usually comes once you have bought shares of a few companies.

    Will you stick to the same sectors?

    Should you buy both US and Canadian stocks?

    How do you diversify from one stock to another?

    How can you generate more growth for your portfolio?

    Should you buy another company or increase your position in a current holding?

     

    These and many other questions come to any investor’s mind when it’s time to not only buy or sell a stock, but to build a solid portfolio. I’ve received several emails with regards to portfolio management from my readers and I hope this post will answer a good number of them.

    I mention that I want to answer some, not all questions regarding portfolio management. This is because I manage my portfolio according to two different philosophies at the same time. I separate my own holdings into two different segments: A core portfolio and a Growth portfolio. Today’s post is about how to build a dividend growth portfolio. We’ll talk about the core portfolio later on.

     

    1

    What is a Dividend Growth Portfolio?

    The first question to answer is obviously what a dividend growth portfolio is. The answer is pretty simple; it depends on who you ask! This is why it is so important to define what the word growth in a dividend portfolio means. In portfolio management theory, we usually find two types of portfolios: Value and Growth. By definition; a dividend portfolio is more often seen as being managed with a value approach. Several dividend paying companies are blue chips or well established companies. This is the part of my portfolio that I call the core portfolio.

    However, the growth component is crucial for all portfolios. Considering dividend stocks, do we talk about dividend growth or capital growth? What about looking for both kinds of growth? When I discuss the topic of a dividend growth portfolio; I’m looking to buy companies that will both contribute to increasing my payouts but also boost the value of my holdings. Therefore, a dividend growth portfolio includes companies that have a great potential to grow in value as well as keeping dividend payouts increases at the center of their priorities.

    I always start my research by applying my 7 investing principles. This is the same starting line when I want to work on both my core portfolio and my growth segment. The difference happens once I sort the list of potentially interesting stocks. This is why it is important to understand which stock would qualify for the core portfolio and which stocks are more growth oriented.

     

    2

    What is the Difference with a Regular Dividend Portfolio?

    The previous definition of dividend growth is a little bit counter intuitive for some investors. After all, how can a company focus on growing their business through acquisitions, selling new products or developing new markets and keep increasing its dividend? All the above mentioned business strategies requires the same thing above all; cash flow. If we know something in finance is that cash flow is limited. It’s a very difficult task to hit both growth within the business (sales) and outside the business (dividend payouts). In theory, the “best dividend payer” would not be companies showing the best growth potential.

    There are plenty of solid businesses which are mature and prefer to pay additional cash to their investors rather than try to risk precious cash flow towards a development strategy (tell the Target (TGT) CEO about it!). When I think about a solid dividend stock with limited value growth potential, I think of a utility stock or a consumer defensive stock. These two sectors are known to deliver solid dividend payments but the company will not really show double digit sales or earnings growth for a long period of time. These companies will be selected to be part of my core portfolio; those I will keep for several years if not forever.

    Therefore, the main difference between a regular dividend portfolio and a dividend growth portfolio (according to my own definition) is that the growth portfolio will include stocks showing a great potential for capital appreciation in the first place. This is the number 1 criteria to select a stock in such portfolio. The idea is to select stocks in a position to generate a double digit capital growth. This leads to the next question; what will bring this potential growth?

     

    3

    What Will Bring Growth to the Portfolio?

    A strong capital gain realized on a trade will be the result of three factors:

    #1 Buying an undervalued stock

    #2 Buying a company that will surprise the market in the years to come with stronger than expected results

    #3 Buying stocks with higher risk

    Let’s start with #1 as buying and undervalued stock is probably the most obvious tip any investors will receive in his life; buy low, sell high. The problem is that this hint is so obvious that it is probably the hardest thing to do in investing. The market rolls 24/7 with people analyzing every tidbit of news, every report, and every data release very carefully. Therefore, it is very hard to buy an undervalued stock with information everybody gets. However, there is an easy way to achieve it. If you buy sound companies evolving in a “bad” sector, you will be buying undervalued stocks. For example, during the 2008 credit crisis, all banks, without exception, took a hit in their price value. The big 6 Canadian Banks (BMO.TO, RY.TO, TD.TO, BNS.TO, NA.TO, CM.TO) dropped more than 50% around December 2008. A wise investor who bought them during this period is making over 125% return in six years. At the moment of writing this article (February 2015), the oil crisis is creating a new opportunity for investors to buy undervalued stocks. I added more shares of two of my holdings (Black Diamond Group BDI.TO & Helmerich & Payne HP) during this period. I am convinced both companies will survive the storm and will continue to pay generous dividends in the meantime.

    While my trick to buy undervalued stocks usually works, it is harder to find a trick that works all the time when you look for companies that will surprise the market. The street is full of wannabe gurus who pretend to know what the next big thing is. But they don’t know, and I don’t know either! I’ve successfully bought Disney (DIS) and Apple (APPL) at moments where investors didn’t see these companies potential to surge. Disney sustained its amazing growth through successful movies (Frozen in 2014 and Star Wars to come end of 2015) while Apple’s “rebirth” with sales stronger than ever after disappointing the market for several quarters in a row. I don’t have any process to find these stocks. They usually appear after a screener and I give some thought on where the company is heading. I could be right, I could be wrong. From time to time, I hit a homerun as I did with the above mentioned stocks. The key is to first identify companies with strong fundamentals, then, you can see where the growth will come from.

    The third way to generate capital gains with a stock is to buy a company with higher risk that has overcome its challenges. The perfect example is probably Seagate Technology (STX). I often use this example to illustrate how you can pick stock in a very challenging moment and make lots of money with them. When I bought STX, it was trading under a P/E of 5. The problem was the market didn’t see a bright future for hard disks plus the company’s manufacturing plant was flooded the previous year. I bought the stock knowing there was high risk, but I bought STX thinking the company could continue selling hard disks for a while and use its cash flow to develop other technologies (cloud computing). It doesn’t always work that easy, but this is why it is call “buying a company with higher risk”. A good example right now would be Mattel (MAT) which lost 41% from January 2014 to February 2015 all because of bad sales. The company struggles to find growth and its toys are losing popularity. However, nothing is over yet with this company and it could definitely bounce back.

    Sometimes, there is a combination of three factors that makes you a hero when you are able to find the ultimate dividend growth stock. Still, even though the idea is to find a stock with higher capital gain potential, I don’t pick stocks to hit a homerun each time. I often prefer to start my research in a sector that several investors leave or show a great potential in the future. It’s always easier to pick a stock in a good sector than picking a good stock in a bad sector!

     

    4

    Which Sectors are Generating Additional Growth?

    The answer to this question will obviously change from one year to another. Each year, you will find an abandoned or unloved sector by investors. At the beginning of 2015, this sector is the resources & energy sector. Not so long ago, it was the financial industry. There are also sectors providing higher chances of growth such as consumer cyclical and technology. The consumer cyclical will ride any positive economic wave and generate powerful results during the expansion part of the economic cycle. Disney is a good example but you can also find interesting picks in the automobile industry at the moment. Uni-Select (UNS.TO) recently sold its US division to Icahn fund and saw its stock price soar by 16% in one day. Magna International (MB.TO) has literally crushed the S&P TSX over the past 5 years showing a capital appreciation of 329% vs 32%. Finally, Genuine Parts (GPC) has beat the S&P 500 since January 2013. Not bad for an “old aristocrat”, huh? As you can see, the automotive part business is definitely a good sector for investors right now. But the best moment to buy those stocks was 2 years ago.

    More and more techno stocks have started paying dividend. The yield is not always very high if you take AAPL for example, but mature companies are usually sitting on piles of cash. At one point, they don’t have enough profitable projects and decide to pay a part back to investors. This is how Microsoft (MSFT) started a while back ago. I remember that I once read that MSFT would not pay dividend to investors when Bill Gates was still the CEO. Time changes and now investors can count on a solid dividend payer when they buy Microsoft. Still, technology advancement can bring any techno stock to a whole new level. MSFT did it with cloud computing services, Garmin (GRMN) is growing due to technology applied to fitness gadget and Apple keeps selling more smartphones.

    As you can see, if you want to build a dividend growth stock portfolio and be successful, you have to follow several stocks in different sectors at the same time to make sure you find the perfect match. This obviously includes more trades in a year than a regular dividend portfolio. As the dividend investing thinking is closer to the “buy & hold forever” model, the dividend growth portfolio aims at a higher rate of rotation.

     

    5

    How Often Should You Trade in a Dividend Growth Portfolio?

    I often receive this question by email from readers. What is the perfect number of trades in a portfolio to make money and not eat your time going through financial statements while managing your money? The first part of the answer lies in the size of your portfolio. The larger it is, the more often you will trade. In the dividend growth part of my portfolio, my time horizon to hold a stock is 2 to 3 years. This is usually the time required to materialize the potential I *think* I see in a company. After this period, the stock is either sold or it becomes part of my core portfolio. For example, when I bought Apple, the goal was to pick a falling knife as the price dropped from $700 to $400 something. However, today, I see this stock as a core element of my portfolio since it shows very strong fundamentals.

    Other stocks are sold mainly because I don’t see additional potential and fundamentals are not strong enough to convert into a core stock. This was the case with STX as I sold it when sales started to plateau again. The stock kept going up, but I don’t mind; my money was made.

    I don’t have a specific amount of trading established for my portfolio. I prefer following my holdings quarterly when all companies post their financial results and then, I make trades if necessary. I basically sell a stock whenever the reason why I think there will be growth fades away.

     

    6

    How Can you Apply All your Investing Principles to Find Dividend Growth Stocks?

    If you have read about my investing philosophy and the criteria I use to manage my portfolio, you noticed I’m quite picky. If you follow the same rules, you may find that the number of dividend growth stocks is limited. I usually find my best picks for growth purposes when I allow myself to cheat a little. I’m not saying I ignore my investing rules; I simply bend one or two at a time. The most common rules I bend is with regards to dividend yield and payout ratio.

    I tend to select stocks with a 2% dividend yield and higher. Even at 2% I often ignore them to concentrate on everything that pays higher than 2.5%. But from time to time, I find a gem hidden in the low dividend yield basket.

    The same thing applies with the payout ratio. In an ideal world, none of my holdings would show a payout ratio exceeding 85%. But sometimes, you have the possibility of buying undervalued stocks with a high payout ratio. If you can explain why it is high today and how it can go down in a year or two, you are set to pick a very interesting company.

    If I can explain why earnings or revenues don’t show positive growth over 3 or 5 years, I might also consider buying shares as long as I can see the potential of higher sales in the future. There is one very important thing: don’t ignore all rules at the same time. I never pick a stock that shows a low dividend yield, high payout ratio and erratic sales and earnings. That would be closer to gambling than investing. The goal remains to invest in line with my principles, not to forget about all of them because I read good news about a company in the newspaper!

    A Real Example of a Dividend Growth Portfolio

    If you read this whole article till the end, it’s because you are very interested in dividend investing and therefore, you deserve a reward ;-). I’ll share with you my positions in my Dividend Stocks Rock dividend growth portfolio for $25,000. This portfolio was created on October 2013 and shows a total return of 28.42% as at February 2015. The portfolio includes 5 Canadian and 5 US stocks and beat our benchmark by 12% since October 2013.

     

    100growth

     

    Obviously, this portfolio evolves rapidly and trades are made from time to time. I’ve made a total of 12 dividend portfolios including growth and core component for all budgets (from 1K to 500K+). The purpose is to build real time portfolios you can follow and use as a starting point for your own holdings. All portfolios are offered to Dividend Stocks Rocks members only and they receive a real time email when a trade is made. If you wish to take a look at what Dividend Stocks Rock looks like, you can hit this page and learn more about our dividend investing platform.

     

    DSR YCHART BOTTOM

    1 Comment   |   Read more >
  • Last Thursday, Telus (T.TO or TU), beat the analysts’ estimates once again with net income rising by 7.6% and EPS by 8.5% compared to last year’s quarter. Overall, here’s what Telus did in the past quarter:

    - Strong new customer growth (135,000 connections, 118,000 post paid mobile, 28,000 Telus TV and 22,000 high speed internet).

    - Leading customer loyalty

    - Mobile based clientele up by 3.8% to 8,1 million customers

    - $1.5 billion returned to shareholders through shares buybacks and dividends paid

    - Aim for more growth (2015 revenue growth guidance at 5%)

    The stock is up 170% for the past 5 years and I don’t even count the dividend yield. Besides the short drop during the summer of 2013 due to the potential entry of telecom giant Verizon (VZ) in the Canadian market, the stock has barely ever suffered during this period. Now that the threat of seeing Verizon selling mobile phones to Canadian is gone, Telus keeps breaking records. A quick look at its profile will convince you it’s a strong blue chip to add to your portfolio:

     

    telus profile

     

    But how Telus can keep up its growth? Most importantly, how Telus can keep a 10% dividend growth rate in the future? Is is time to sell Telus and cash out your profit or is there still lots of battery power to keep talking on the phone?

     

    This Canadian Dividend Aristocrats started paying a dividend in 1999 and has never stopped increasing since 2001 (after a dividend cut between 2000 and 2001). The dividend paid quarterly in 2001 was $0.075 per share and is now at $0.40 per share.

     

    Business Model

    Telus has been providing communication services for over 100 years. The business has evolved greatly over the past 20 years. We can now divide the Telus business model into two segments:

    Wireless services

    This is now the bread and butter of the company. Telus is known for keeping its clients and shows a high profit margin per customer. With a growing client base (up 3.8% to 8.1 million), Telus wireless services assure an interesting growth for the future. They also cover all Canada’s important part:

     

    telus network

     

    Wireline Segment:

    Telus not only provides wireline phone services but also internet connectivity and TV cable services. While the wireline phone business is slowing down, Telus compensates by adding other wireline services to its wireless customers. That explain why the internet and TV services are growing this fast.

     

    Now let’s go delve further into the numbers. Following the first 4 Dividend Stocks Rock Investing Principles, I’ll take a look at Telus 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.”

    Read more about this research here.

     

    Therefore, the point is to pick companies with a good dividend yield, but not aim for something way above the market. Telus’ dividend yield is currently around 3.70%. This yield is not only more than inflation rate but also above the prime borrowing rate. You can then even buy this stock on margin and pay the interest with only the dividend payout. This places the company above the average dividend yield but not in the first quartile of the highest dividend payer either. In other words; Telus dividend yield is in the perfect spot to provide both a great sources of revenue and higher than average capital appreciation.

     

    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.”

     

    5 yr us returns growth

    You can get the full detail here.

     

    In term of dividend growth, Telus is hard to beat over the past few years. Management aims at a 10% dividend growth rate since 2011. They intend to increase their dividend twice a year which is, once again, above the average on the market. They want to achieve this growth by maintaining a payout ratio in the range of 65%-75%. So far, Telus has kept its promises:

     

    telus dividend paid

     

    As both revenues and earnings are going up at about the same pace, Telus should be in a good position to continue according to plan until 2016. No dividend growth rate indications are shared with investors after this period. We can assume the growth rate will continue but maybe not at this pace.

     

    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.

     

    telus payout ratio

     

    Telus’ payout ratio went from 40% to 65% within three years. However, while the dividend payout has never stopped increasing, the payout ratio is now stable between 60% and 66%. This is in line with management’s target and shows earnings started to increase faster than the dividend. With a strong client base, we can expect Telus to keep generating sufficient cash flow for years to come.

     

    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:

     

    returns of sp

    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 = 5.00% Pass

    5 year revenues = 3.27% Pass

    3 year EPS growth = 7.13% Pass

    5 year EPS growth = 2.75% Pass

     

    Telus shows a perfect score with a 4 on 4 test score. The earnings growth over the past 3 years is also in line with the most recent numbers (EPS growth of 8.5%). This leads me to think the company will continue to benefit from its high profitability per client competitive advantage for the future.

     

    Is Telus’ Growth Done Yet? Should you buy more or sell and smile?

    So far, I’ve painted a pretty pink portrait of this company. I actually think Telus is still a good investment right now for both Canadians and Americans investors (the stock trades under TU on NYSE).

    On the other hand, we know the Canadian Government is insisting on increasing the number of competitors in the mobile business. Right now, Telus (T.TO), Bell (BCE.TO), and Rogers (RCI.B.TO) are almost alone to share the market. The Govt thinks it will better for customers if bigger players (such as Verizon a few years) enter the market and “democratilize” prices. If this ever happens, Telus’ growth perspective will fall to zero for a while… Also, the Canadian market comes close to saturation; therefore, there are not many new customers to acquire if it’s not from the competition. This usually leads to lower margin and a difficult clientele acquisition process.

    Overall, the company doesn’t trade at a super high PE ratio (19) and shows great growth perspective for the future. While there are always a few clouds over the mobile industry in Canada, I think Telus is still a good company to add to any dividend growth investor’s portfolio.

     

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

    6 Comments   |   Read more >
  • Page 1 of 2012345...1020...Last »