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    Not so long ago, I shared with you that I opened an RESP (children’s education fund) for my kids. I started investing in mutual funds mainly for two reasons: the first one was because I found $200/month wasn’t enough to buy stocks. I explained how it was a mistake in my recent article. But there is also another reason why I did this: because I find it difficult to manage other people’s money.

     

    I really like to take risk and am comfortable having my portfolio move up and down. But when it comes to other people’s money, I find it harder to live with market fluctuations.  I know that it is still my money being invested for my children’s tuition fees but I’m also aware this money won’t be used by me, it will be used by them. This is why I’m not too keen to build a 100% stock portfolio for them. I would rather build a growth mutual fund basket with 75% in stocks and 25% in preferred shares.

     

    What Happened Back Then

     

    When I was still a kid (read: in my 20’s), I was making lots of money from the stock market (during the years 2003 to 2007). I started with 20K leveraged in 2003 and “retired” from this strategy in 2007 to buy my second house. Luckily for me, I didn’t lose much in 2008 (I was -27%) since I used most of my money to buy a house the year before. But that was the nice part of my trading story. There is also an ugly part.

    In early 2006, I entered into a position with a penny stock, a mining company called Northern Shields (NRN.V). Here’s what happened to my money:

    nrn1

     

    I did some cost averaging and kept buying while it was going up. I was quite proud of my $5,000 position that became over $10,000 within a few months. Since I had so many successes in the past three years and was +71% in 2006, my mother asked me to put an additional $5,000 with me in this trade. I was super excited to show my mom how good his son was with money! A few months later, NRN was scheduled to report their progress in September 2006 and I had my lawyer’s appointment to buy my house in November. This was the perfect timing to buy a BMW with the profit from NRN after they announce they found what they were looking for and the stock hit $5.00 in a few days… Well, this was the scenario anyways!

    nrn2

     

    This is what happened: I lost 50% of my money in a heartbeat. Before the loss, my average price was around $0.75/share, my mom’s was about $1.00. She lost $2,500 because of me and I was ashamed. The NRN report wasn’t very good and the stock plunged.

     

    I Don’t Want to Lose Other’s People Money Anymore

    This little story taught me that I shouldn’t take for granted that everybody has the same risk tolerance and is willing to lose money on a trade in penny stocks. I’m not trading those kinds of stocks anymore but I still have this bitter taste in my mouth. Sometimes, I would like to buy certificated of deposit for my kids just to make sure the money I save for them stays the same. I know it’s stupid at the same time as I at least need to protect my savings from inflation. Still, I’m afraid to manage this money for my children.

     

    I will overcome this fear and start investing “their” money in dividend stocks shortly. But I will definitely pick blue chips with low risk for them! I will also be more nervous about this account, but in the end, I know it is the right choice to make; manage this money the way I manage my retirement fund!

     

    Have you ever managed money for somebody else, how did it go?

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  • Back in 2012, I did a Procter & Gamble (PG) analysis. At that time, I concluded this was a great dividend stocks but there wasn’t much space for future growth to a relatively high P/E ratio and additional pressures on margins. It seems I was dead wrong:

    PG#1

    The company went through a tougher period after my analysis (at least, I’m not a complete fool! Hahaha!) but took actions and it is now on the roll. You can see on the following graph that EPS went down on 2013 but kicked back up rapidly. This explain how the stock reacted over the past 18 months:

    PG#2

    It seems their $10Billion productivity plan announced in February 2012 worked well as their EPS increased faster than their sales. Still metrics look better today than they were not so long ago. Following the first 4 investing principles, I’ll take a second look at Procter & Gamble.

     

    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.”

    PG#3

    While PG dividend payouts keep increasing year after year, its dividend yield remain in the “more reasonable” range. It is currently around 3%.

    PG#4

    Considering the stock price went up significantly during the past two years, the dividend yield has dropped from 3.50% to 3.00% simply because shares went up faster than the dividend payout.

     

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

    If I had to go blindfold to pick a stock and have only one metric to look at, I would pick dividend growth. This is the most important metrics 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.”

    PG#6

    When we talk about dividend growth, we can definitely put PG on a podium. The company has been increasing its dividend for 58 consecutive years. The payout increased by 153% in the past 10 years. As you can see in the graph below, the growth is not only impressive, but it is also very stable and predictable. This is something I really like as a dividend investor:

    PG#7

    There are absolutely no worry about the management will to increase dividend in the future either.

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

    It is one thing to look at the company’s past, but the 58 consecutive years of increasing dividend doesn’t mean much if the company won’t be able to keep it up for another 10 years or more. PG dividend history is very impressive, but there is more.  The company could have decided to aggressively increase its dividend and jeopardize its long term ability to sustain it. This is why it is also important to look at the payout ratio. Since 2010, the payout ratio increased but not dramatically. It is still very showing a very reasonable rate of 45%.

    PG#8

    This means the company has adopted a sustainable model for raising its dividend and won’t jeopardize the company’s future since there is more than sufficient money to pay investors.

    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 increase over the long haul. On the other side, businesses which pay dividends and increase them will outperform other stocks:

    PG#9

    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 on 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. Here’s what PG metrics looks like:

    DSR STOCK METRICS

    3 year revenues = 0.80% Pass

    5 year revenues = 1.61% Pass

    3 year EPS growth = 0.67% Pass

    5 year EPS growth = -1.20% Fail

    Procter & Gamble passes 3 of the 4 test. It fails the 5 years EPS growth mainly to margin pressures experienced in 2012 (go back to the second graph of this article). But the company has taken control of its expenses and bounced back rapidly. The key here is not to stop at the metrics but to look further. As you can see, the growth for both revenues and EPS are not phenomenal, far from it. But it’s normal; Procter & Gamble is not a techno stock with a great innovation. It is one of the largest and best known companies in the world. PG operates in over 180 countries and they have divided their widely diversified operations into 5 divisions:

    Beauty (Head & Shoulders, Olay, Dolce & Gabbana, Gucci & Hugo Boss fragrance)

    Grooming  (Braun, Gillette)

    Health Care (Always, Crest, Oral-B, Vicks)

    Fabric Care & Home Care (Dawn, Duracell, Febreze, Gain, Iams, Tide)

    Baby Care  & Family Care (Bounty, Charmin, Pampers)

    You can’t obviously expect a huge growth from such company in the consumer products. However, it is definitely one of the strongest stocks to build a core portfolio. Now… the question that kills; is Procter & Gamble too expensive right now? This brings me to my 5th investing principle:

    Principle #5 Buy When You Have Money in Hand

    I personally go with this moto: once you have selected the right stock, the right moment to buy it is now, time will do the rest.

    You can read the full explanation why here.

    Principles #1 to #4 cover how to find the right companies. Once you have found them, the sooner you buy the stock, the sooner you start cashing its dividend. I wrote PG was too expensive at a P/E of 19 back in 2012 (mind you, the market was trading around 14 at that time). But the stock bounced back and now trades around 21.5… is it too expensive? Not if you look the 10 years history:

    PG#10

    It is definitely not cheap, but how long will you have to wait before PG hits a 18-19 multiple? It’s easy to play Monday morning quarterback but I rather buy the stock when I identify it is a strong dividend growth stock based on my investing principle and move forward.

     

    Most Recent Quarter Update – Still Unsure to Buy it…

     

    Procter & Gamble biggest news in their latest quarterly report was definitely its plan to exit its Duracell personal power business by making it a stand alone company. PG’s EPS is down to $0.68 compared to $1.03 a year ago. However, excluding special items, PG’s EPS is in line with analysts’ estimates at $1.07. Sales were almost flat at $20.79 billion vs $20.83 billion a year ago (this is also what analysts expected). 2015 expectations remain the same with low single digit growth. There is no deal on PG right now, this is why PG is a HOLD and definitely not a buy.

     

    Disclaimer: I don’t hold PG shares at the moment of writing this article but PG is part of our Dividend Stocks Rock Portfolios.

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  • Genuine Parts just released its third quarter results with record sales totaling $4.0 billion were up 8% compared to the third quarter of 2013. EPS were also up by 11% ($1.24 vs $1.12).

    We will go through the main highlights of their reports, but first, we will analyze what Genuine Parts has been doing over the past five years and determine whether or not it should be part of your dividend portfolio.

    GPC#1

    This dividend aristocrat has not only increased its dividend payment since 1957, it clearly shows growth on all fronts: revenues, earnings and dividend payments. GPC forecasts a revenue growth of 7-8% for this year.  Following the first 4 Dividend Stocks Rock Investing Principles, I’ll take a look at Genuine Parts 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.”

    GPC#2

    Read more about this research here.

    As a dividend aristocrat, we can’t really expect GPC to pay a very high dividend yield. However, I was surprised to see that GPC paid more than a 4.50% yield not so long ago (in 2010).

    GPC#3

    GPC now shows a relatively high PE ratio at 20.17. It was trading at 14.45 back in 2010 when the yield was higher. Therefore, even if the dividend went from $1.65 in 2011 to $2.225 now, the price went up accordingly. However, the dividend growth of this stock is very interesting…

    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.”

    GPC#4

    You can get the full detail here.

    If you wonder about dividend growth for GPC, you can see what they are posting on their own website:

    GPC#6

    The dividend will probably double (or be very close) within 10 years, which makes an annualized dividend growth rate of ±7%. After 58 consecutive years with a dividend increase, it’s not a surprise that GPC shows almost twice the growth of the S&P 500  over the past 5 years (+131.19% vs +73.46%). Now, can GPC continue to please dividend investors in the upcoming years?

     

    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. When I did the exercise with GPC, I noticed that it was able to push its dividend on a steep uptrend while decreasing its payout ratio.

    GPC#7

    GPC could have paid even more to investors but management preferred to keep additional cash flow to ensure sustainable growth. This tells you a lot about how this company is managed. The additional cash is also use to ensure growth for the future.

     

    GPC not only shows good results but also grows by acquisition. In 2014, they bought Garland  C. Norris, EIS, Electro-Wire and Impact products. GPC continually looks for companies to buy  with revenues in the range of $25M to $125M. These bites are easy to chew on and don’t affect their balance sheet in a negative way. Their ability to integrate new companies reflects in their earnings which show a steep uptrend. GPC  will continue to be a leader in its industry and we won’t lack for car parts in the near future.

     

    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:

    GPC#8

    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 = 7.90% Pass

    5 year revenues = 5.03% Pass

    3 year EPS growth = 13.60% Pass

    5 year EPS growth = 8.56% Pass

     

    Genuine Parts Company passed the four tests easily. The automobile parts industry is relatively stable and GPC benefits from its leadership position to generate consistent cash flow. It’s important distribution network combined with great locations and branding makes it a very strong company. In addition to this solid business model, GPC has the ability to generate more growth through acquisitions. This company is continuously buying smaller players and has become a pro at integrating acquisitions to create more synergy.

    A Look at the Most Recent Results

    For the first nine month of the year, sales are up 9% compared to the same period in 2013 and EPS are up by 2.92%. If we include an adjustment related to the acquisition of GPC Asia Pacific in 2013, the EPS would have been also up by 10% for the same period. This tells you GPC’s business model works well in a bullish environment. GPC doesn’t only grow by acquisition. When you look down on where the sales boost come from, you will find that 5.4% is coming from internal growth and 3.3% from acquisition. Genuine Parts is having a small bite of acquisition at a time and does a great job handling its own growth. Management keeps in mind its cash flow statement along with its strong balance sheet.

    GPC finished its third quarter by increasing its FY2014 earnings guidance to $4.56-4.60 and sales of $15.2 billion. GPC is definitely a good addition to a dividend portfolio!

    Disclaimer: I do not hold personally GPC shares at the moment of writing this article. However, GPC is held in some Dividend Stocks Rock Portfolios.

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