• A couple of weeks ago, I listed my personal goals for 2015. It will be a very busy year as I expect to retire from my day job in 2016. But besides my personal goals, I also have to take care of my investments! Let’s take a look at how I did in 2014…

     

    2014 Portfolio Review

    I’m quite satisfied with my investment return in 2014. At one point in time, I was almost beating my 2013 return! But then the price of oil sunk and hit my portfolio. I finished 2014 with a respectable +16.4% (including dividend). My portfolio pays a current dividend yield of 2.79%. This seems pretty low, but that’s because several of my picks went up greatly in the past two years (I’m over +30% since January 2013). Another interesting fact is all companies I hold raised their dividend in 2014.

    My best moves in 2014 were to increase my position in Apple (AAPL) and keep investing my new money in US stocks. As a Canadian, this boosted my return since the Loonie kept losing feathers to the Greenback. Apple is just an amazing company and it will continue to rock the mobile market now that Samsung is experiencing margin problems due to its “shoot everywhere and hope to kill” marketing strategy.

    Among my best performers (besides AAPL at +39.69% before dividend), I have Lockheed Martin (LMT) (+31.83%) and Disney (DIS) (+23.50%) with high returns excluding dividend. I have also many companies showing small double digits returns including dividend (JNJ, NA.TO, GS.TO, T.TO, WMT).

    My worst moves (so far) were to sell CVX and HSE and replace them with two oil related companies: Helmerich & Payne (HP) and Black Diamond (BDI). So far, both stocks are down the drain since the price of a barrel can’t stop falling. HP drills wells so investors are afraid the company may lose exploration contracts and Black Diamond rents modular equipments/homes and their major clients are oil sand exploration companies in Alberta. Numbers should be all right in 2015 since both companies will continue to honor their current contracts. However, I don’t expect a dividend increase this year for these two stocks. As long as oil prices remain volatile, they will be a heavy weight in my portfolio that I have to carry. At least, the dividend is good!

     

    Asset Allocation Review

    After working on my portfolio since 2010 to make it a 100% dividend stock investment in 2012, I have finally achieved a great diversification in terms of asset allocation:

    dividend guy asset allocation

    68% of my portfolio is invested in US stocks compared to 32% in Canadian companies. My biggest sector is Consumer, cyclical with 18% followed by all other sectors between 13% and 14%. It’s a well balanced portfolio preventing any market hit on a single sector. Therefore, even if my two oil related stocks (HP and BDI) continue their drop in 2015, it won’t affect my portfolio much (combined together, they are worth less than 9% of my portfolio.

    Since I expect to sell everything and leave on my RV trip, I don’t plan on adding new money in this portfolio for 2015. This will be the first year I skip an RRSP contribution. I prefer to use my money to pay off all my personal debts in order to improve my financial situation before I leave. The plan is to sell everything and keep roughly 50 to 60K invested (on top of my RRSP). I’ll have 0 debt and don’t plan on withdrawing money from the 50-60K either. Therefore, upon my return in late 2017, I should have enough cash for a down payment to buy another house!

    There are a few companies I’d like to add to my portfolio at the moment but I’m also happy with the ones I have in hand right now. Therefore, I don’t expect to trade much in this portfolio, sadly!

    Investment Return Expectation

    I’m pretty confident in the US economy for 2015 and since my portfolio is almost 70% invested in US stocks, I’m looking to get another double digit return this year, what are your return expectations?

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  •  

     

    This was the Bank Week at The Dividend Guy Blog where I’ve discussed if you should invest in an all-bank portfolio and I’ve reviewed Wells Fargo (WFC) latest quarterly performances.

    On a more personal note; yesterday was probably among my favorite days of the year; it was the day where my bonus was deposited! I’m paying all my personal loans in January! This will leaves me with my mortgage, my car loan and my RV loan. I’m one step ahead toward my dream of retiring in about 18 months. Especially if you consider that once I sell my house, I will pay my three remaining debt!

     

    Other bloggers posted very interested post this week:

     

    Div Hut made some recent purchases. I like TD, you can’t go wrong with the biggest Canadian bank in term of assets, heh?

    In the same train of thought, My Dividend Pipeline also bought TD!

    But My Dividend Growth decided to go with ScotiaBank (BNS)

    Captain Dividend added Exxon Mobil (XOM) to his portfolio. I’m still not convinced it’s the right timing to buy oil producing companies (I’m already burnt by HP and BDI ;-) ).

    Dividend Engineering is looking at Baxter International (BAX). Did he read my Best 2015 Dividend Stock book? Hint; BAX is part of the 20 US stocks I’ve selected to perform in 2015!

    Dividend for Starters explore the world of energy stocks. Many investors are tempted to invest in this sector at the moment. Maybe you should consider it too?

    Dividend Life bought BHP Billiton (BBL). Definitely, everybody talks about oil stocks while I talk about banks!

    Dividend Yield lists a few interesting picks in the large cap pool. I personally like Qualcomm (QCOM).

     

    Don’t forget to take a look at my Best 2015 Dividend Stock book!

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  • During the 2008 financial crisis, all US banks dropped like a rock. All of them? Not really, there was one bank that survived this catastrophic year and even posted a small gain of 1.31%. While the S&P 500 lost 37.6% and the worst banks such as Citigroup (C ) and Bank of America (BAC) lost 76.8% and 65.30% respectively, the “Warren Buffett bank”, Wells Fargo (WFC), bought Wachovia banks and became the 4th largest bank by assets and the largest bank by market capitalization.
    Wells Fargo WFC

    But not everything was perfect for WFC. In early 2009, the bank cut its dividend by 85% and was showing a negative return of -71% from January 1st 2009 to March 6th 2009. It wasn’t doing much better than its peers.

    Now that the financial crisis is definitely over and interest rates are about to move higher again in 2015, Ben from Sure Dividend and I decided to analyse two strong banks; JP Morgan Chase (JPM) and Wells Fargo (WFC). Below you will find my analysis of Wells Fargo. Click on SureDividend’s JP Morgan Chase analysis here.

     

    Business Model

     

    Wells Fargo & Co is a diversified financial services company. It provides retail, corporate and commercial banking services through banking stores and offices, the internet and other distribution channels to individuals, businesses and institutions.

    Wells Fargo has put customer service among its top business priorities a while ago. It is known for its sustainable & responsible business approach and was recently voted #1 best bank in customer service for the past two years. According to a study made by the AMA (American Marketing Association), top customer service business tops the market all the time (full research here).

    But the bank is not only friendly to its customers, it’s also everywhere across the United States and has a very strong sales force:

    Wells Fargo WFC

    Source: Wells Fargo Investors Relation Website

    They are now #1 for mortgages, middle market commercial loans, small business loans and auto financing. On the flip side of things, they are “only” #3 for brokerage services and #4 for wealth management (based on AUM).

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

    Wells Fargo WFC

    Read more about this research here.

    Wells Fargo dividend yield is definitely not among the highest. With a dividend yield under 3% since mid 2009, you won’t be a happy camper if you are looking for a high dividend yield. However, if you look at both before and after the 2008 crisis, the dividend yield is relatively stable:

    Wells Fargo WFC

    It was hovering slightly over 3% before the crisis and it is now quite stable around 2.75% since the end of 2012. The orange line of the graph shows you that while the dividend yield is stable, the payout is consistently increasing if you ignore the crisis (once again). What does this mean? Bigger payouts and higher stock return as the yield remains almost unchanged.

     

     

    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.”

    Wells Fargo WFC

    You can get the full detail here.

    The WFC dividend growth story shows 21 consecutive years (from 1988 to 2009) of dividend increases. It was so close to becoming a dividend aristocrat and everything was thrown in the trash when the company cut its dividend by 85% to save its balance sheet and some previous liquidity. Good news is, the company quickly got back on their feet and grew back the dividend payout to where it was in only 5 years:

    Wells Fargo WFC

    As you can see, patient investors didn’t have to wait that long to see the dividend come back. Now that the US economy is back on track and that the American consumer has less debt and is more inclined to spend, the loan business should do very well in 2015.

     

    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.

    Wells Fargo WFC

    You will notice something very interesting when you do the exercise for the past 10 years. The dividend payout is back to where it was in 2009 but the payout ratio is 20% lower. In other words, the company’s ability to pay dividends is stronger today than it was right before the crisis. Over the past 5 years, the dividend increased by 600% while the payout only increased by 45%. There is definitely some accounting tricks here (as provision for bad debts swung big time during that period), but still, the company is now stronger than ever.

     

     

    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:

    Wells Fargo WFC

    Source: Edward D. Jones – Dividend 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 = -0.56% Fail

    5 year revenues = 14.88% Pass

    3 year EPS growth = 20.74% Pass

    5 year EPS growth = 40.92% Pass

     

    Due to hectic numbers over the past 5 years, WFC hasn’t shown on our “DSR Radar”. I usually look for smoother trend lines when I look at EPS, Dividends and Revenues growth. It wasn’t the case for Wells Fargo over the past few years, but it doesn’t mean it will be the case for the future. Since the US economy should remain strong and this bank is a leader in many core products, WFC could be an interesting play for the years to come. After all, investing is not about what happened yesterday, it’s about what it will happen tomorrow.

     

     

    A Look at the Most Recent Results

     

     

    Wells Fargo delivered its Q4 earnings on January 14th. The bank is showing slightly higher than expected EPS and revenues. EPS are at $1.02  (compared to $1.00 last year) while $1.01 was expected. Revenues also beat expectation by 200M$. Wells Fargo Chairman and CEO John Stumpf had the following comments: “Wells Fargo had another strong year in 2014, with continued strength in the fundamental drivers of long-term performance: growing customers, loans, deposits and capital. As a result of this performance, we were able to return more capital to our shareholders during the year. Our success is the result of our 265,000 team members remaining focused on meeting the financial needs of our customers in the communities we serve. As the U.S. economy continues to build momentum, I’m optimistic that our diversified business model will continue to benefit all of our stakeholders in 2015.”

    As mention in this analysis, WFC benefits from its “classic” loan business in a growing economy. Wells Fargo’s great ability to cross sell better than its competitors enable the bank to cut price and be more competitive. They offer better pricing to their clients while making more profits than their competitors by selling more products (with a smaller margin). It’s a win-win situation between a bank and customers! You can still compare to JP Morgan Chase analysis on Sure Dividend.

     

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

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