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Video of the Week: Looking Nice in Gentex’ Mirrors!

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As you might have read about it here, I now do live webinars and certainly have fun doing so. I have been surprised by the positive interest attendees had towards many of my stock picks. This is how I came to the idea of sharing here some of my “Video of the Week”, during wich I go through a company recent news or results and explain why I believe it is currently a good or a bad pick for a dividend investor.

Video

Verbatim

0:00:00.9 S1: Hey fellow investors, this is Mike McNeil from Dividend Stocks Rock. Today I wanna talk about Gentex, ticker is GNTX, a small company doing auto-dimming mirrors, flying on the radar on most dividend growth investors, actually this is why I wanna discuss it. But before I… Just a small disclaimer, so everything that you are seeing on this video, everything that’s being produced by Mike McNeil under the banner of The Dividend Guy Blog or the Dividend Stocks Rock, is not to be taken as stock recommendation or financial advice. In fact I am not your personal broker, I am not your advisor, therefore you cannot sue me if you’re losing money after watching this video. I strongly urge you to do your own due diligence. And on the good side of things, you won’t have to pay me a dime if you’re making money.

0:00:52.6 S1: So yeah, so Gentex is a small company, dominating a niche market which are auto-dimming mirror. It used to be luxury products add-on on vehicles like Cadillacs and stuff like that. Right now about 25% of cars are having auto-dimming mirrors. But what is very interesting is 92% of them are made by Gentex. As regulations and safety concerns are growing, chances are auto-dimming mirrors will come to medium and cheap cars. So therefore, there are plenty of growth for Gentex for the next 10 years with this technology. And don’t worry about it, it is fully protected, a thousand patents around those tech… This technology and the company is investing massive money in R&D to make sure that it keeps on edge against its competitor.

0:01:52.2 S1: It is also using this technology now to create auto-dimming windows for aircraft, so this is another growth vector for the company in the years to come. Then again a little bit of a luxury product, but as it becomes the standard, Gentex will dominate another market over there. And in Europe they also have a SmartBeam technology, those are beams that are going from high beams to low beams as they cross another vehicle. So it’s quite popular in Europe, not too much in North America so far; however it is coming. As I said regulations, safety concerns, so everything around automotive right now is about more safety. And Gentex is playing that game. They also develop fire protection productions and… Products, sorry, and automotive electronics. So, all those new features, new products will also push Gentex to another level.

0:02:54.5 S1: Interesting fact, revenue growth double digit over the past 10 years… Over the past five years at 10% annualized growth rate. Earnings per share 18% annualized growth rate over the past five years. And dividend, of course I’m a dividend investor, we have a growth of 8.5% annualized growth over the past five years. You wanna know what is the best part of it? Payout ratio right now is around 26%, which means that a combination of strong world vectors and management that is already shareholder-friendly, you’ll have lots of payouts increase in the upcoming years. Gentex has proven its commitment towards its dividend growth policy already. They have successfully increased its dividend for the past seven years. And finally the stock has been doing very well in the market. But it’s still under valued according to our dividend discount model calculations.

0:03:53.0 S1: If you wanna hear more about Gentex or any other videos I make, please follow the link after the… This video ends. Join The Dividend Guy Blog newsletter. I’m sending one newsletter for free per month and I’m also advising you on… Not advising you but telling you that I’m pulling out new videos. This was Mike McNeil from Dividend Stocks Rock, don’t forget to subscribe to my YouTube channel and take good care.

 

 

A Million Dollar at 59 Isn’t Enough

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Retirement, Early Retirement, Financial Independence and Early Retirement (FIRE) are very popular topics among personal finance bloggers. I could even say that the concept of FIRE is particularly popular among dividend bloggers. Guys like Joe @ Retire by 40 and Jason at Mr. Free at 33 made it. Some others like Mark @ My Own Advisor & Bob @ Tawcan and Bert & Lanny @ Dividend Diplomats took a different path, but they are all savvy savers. They are budget aces. I’m not like that… definitely not. But that doesn’t mean I’m not interested in FIRE.

Not too long ago, I mentioned my retirement D and C plans on Seeking Alpha. In that article, I explain that I will reach the psychological mark of $1M at 65 (D plan)… or 50 (C plan). A lot of investors write that it is not enough. That aiming for $1M at retirement is like aiming at poverty level (I barely exaggerate). Are they right? Am I foolish? As it is often the case in finance, the right answer is “it depends…”. I’ll try to explain what I mean by telling you about my 4 retirement plans… Let’s start with the “boring plans” today, and I’ll follow-up next week with the 2 “interesting plans”.

The Boring D&C Plans; Having $1M between 59 & 65

My “bad” retirement plans include having $1M between the age of 59 and 65. What’s the difference between both plans? Simply, that if I don’t save a penny in the next 29 years, I’ll have to wait until 65 to get my million dollars. If I save $500/month starting now, I can cut 6 years to my retirement. I’ve used a 6% investment return in both cases. Considering I’m 100% invested in equity and that I invest for 23 to 29 years, this makes plenty of sense. Statistically speaking, it totally makes sense. Even if you take the last 20 years of the S&P 500 total return, you get an annualized return of 6.48%. This includes the techno bubble and the world’s most important stock crash of 2008.

You can see my calculations results here:

Graph Source

Graph Source

Inflation is your enemy

Honestly, I was quite surprised to see how many people were saying that 1M$ was not enough to retire in 25-30 years from now. The main point was to consider inflation. I know it very well because I’m a former financial planner. Inflation is probably the most overlooked factor when calculating your retirement plan. First, we tend to forget this concept as the inflation over the past 10 years was almost nothing. But there is a problem with the stats we pull-out; its composition.

When you look at the Consumer Price Index (CPI) to know if inflation went up or not, you are looking at the wrong direction as a consumer. This indicator is good for a country or a central bank, but not so much for a citizen.

Both countries show inflation rate of roughly 1.5% annually; source Ycharts

If you have some time, I’d suggest you read the CPI definition of your country to understand. Mine (Canada), can be found here. Here’s how the basket of good was composed in 2015:

  • Food: 16.45%
  • Shelter: 26.79%
  • Household operations, furnishings and equipment: 13.01%
  • Clothing and footwear: 5.68%
  • Transportation: 19.48%
  • Health and personal care: 4.98%
  • Recreation, education and reading: 11.02%
  • Alcoholic beverages and tobacco products: 2.58%

I know very well that food (family of 5 with 2 teenagers doing lots of sports!) is taking a lot more than 16% of my budget, and transportation is a lot smaller as we only have 1 car. But if car prices have been low (my monthly car payment is roughly the same for the past 12 years with 3 different cars), then the country will say inflation is low. If food price has increased significantly during that time, then “my inflation” is a lot larger than my country’s. For that reason, I calculate an inflation of 2% for my retirement.

How can you retire with so “little money”?

Once you factor inflation in my “million dollars”, I get a present value of $563K (retiring at 65) to 634K (retiring at 59). The present value refers to how much your future value is worth today, or how much it will be worth at retirement, in today’s dollar (factoring the inflation).

Therefore, it’s like pressing fast forward and waking up tomorrow at 59 with $634K in my bank account. Do I have enough to retire? Imagine I keep the same numbers: inflation rate of 2% and investment return rate of 6%. That makes a net investment return of 4%. If I apply the “4% withdrawing rules”, I could indefinitely (or almost) withdraw 25K from my portfolio. Then, I’ve calculated how much I can afford to withdraw each year and burn my nest egg to the ground by the time I pass away (let’s say 30 years). I found that I could live on $35K (indexed with an inflation at 2%):

Year Starting amount  Withdrawal End Amount
1  $        634,000.00 -$ 35,000.00  $  634,940.00
2  $        634,940.00 -$ 35,700.00  $  635,194.40
3  $        635,194.40 -$ 36,414.00  $  634,707.22
4  $        634,707.22 -$ 37,142.28  $  633,418.84
5  $        633,418.84 -$ 37,885.13  $  631,265.74
6  $        631,265.74 -$ 38,642.83  $  628,180.28
7  $        628,180.28 -$ 39,415.68  $  624,090.48
8  $        624,090.48 -$ 40,204.00  $  618,919.67
9  $        618,919.67 -$ 41,008.08  $  612,586.28
10  $        612,586.28 -$ 41,828.24  $  605,003.53
11  $        605,003.53 -$ 42,664.80  $  596,079.04
12  $        596,079.04 -$ 43,518.10  $  585,714.60
13  $        585,714.60 -$ 44,388.46  $  573,805.71
14  $        573,805.71 -$ 45,276.23  $  560,241.24
15  $        560,241.24 -$ 46,181.76  $  544,903.05
16  $        544,903.05 -$ 47,105.39  $  527,665.52
17  $        527,665.52 -$ 48,047.50  $  508,395.10
18  $        508,395.10 -$ 49,008.45  $  486,949.85
19  $        486,949.85 -$ 49,988.62  $  463,178.91
20  $        463,178.91 -$ 50,988.39  $  436,921.95
21  $        436,921.95 -$ 52,008.16  $  408,008.62
22  $        408,008.62 -$ 53,048.32  $  376,257.91
23  $        376,257.91 -$ 54,109.29  $  341,477.54
24  $        341,477.54 -$ 55,191.47  $  303,463.23
25  $        303,463.23 -$ 56,295.30  $  261,998.00
26  $        261,998.00 -$ 57,421.21  $  216,851.40
27  $        216,851.40 -$ 58,569.63  $  167,778.67
28  $        167,778.67 -$ 59,741.03  $  114,519.91
29  $        114,519.91 -$ 60,935.85  $    56,799.10
30  $          56,799.10 -$ 62,154.56 -$      5,676.79

Considering that my wife and I will also get Canadian’s Old Age Security pension, I can count on an additional $1,000 per month at the age of 70 (let’s figure they push it back to that age in the meantime). This pension would cover any shortfall my portfolio could have (just in case my 6% investment return over the next 50 years isn’t accurate). In other words; I count the OAS as a safety net, not to be part of my budget.

Now, can we live with $3,000 per month? Absolutely!

Considering my house will be paid in full at retirement, I will have more than enough with 3K per month. At the moment, my family budget is about 6K per month, and this includes feeding 3 children (2 teenagers), paying for their tuitions (private school for the oldest one), activities and my mortgage payment. Once my children leave the house, I’ll be rich! Hahaha!

Jokes aside, my monthly budget will fall under $2K per month. Therefore, I will even be able to afford a nice trip to Europe each year! On top of that, I will still be sitting on a 500K+ safety net as my house will be paid in full and is already worth near $400K today.

So…. Is $1 million is enough?

My short answer is yes… and you just read my long answer, hahaha!

But that’s the boring plan. That’s the “if everything goes wrong” plan. Honestly, I already consider myself retired. I’ll explain to you why next week!

1st Quarter Goals Review

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Each year, I find it very important to set goals. Some people think resolution is just a one-week thing; I rather see it a sets of road stops throughout a larger path. If I want to become something in 10 years from now, I must start today to take action. At the beginning of 2018, I set 5 important goals. Since I review tons of companies on a quarterly basis, I thought it was just normal to do the same thing with my business. Let’s review my goals then and see where I am.

01 Double my online revenue and make $30K+ in a month

This was probably the most ambitious goal of this short list. I started the year on fire with a total revenue of $20,703 USD (so almost 26K in Canadian dollar). After January, I realized that this whole thing wasn’t a dream anymore; it was happening. Then, February was okay, and March was a catastrophe. I’ve spend the last month of the first quarter doing two things that are cash flow destroyers:

#1 I spent two weeks on vacation doing all kinds of cool things, but that didn’t include working.

#2 I spent another two weeks working on long-term projects.

Therefore, after three months, I’m not showing a +100% revenue increase, but rather +47%. I can’t complain, but I’m not there yet. However, I understand now that my next quarter will most likely be similar as I intend to work on several long-term projects. I had the option of generating 12K/month now or making 50K+/month in a year from now. I chose the later option. It’s tougher on my cash flow today, but it will have a solid payout shortly.

02 Clear my line of credit ($19K)

Ah! Paying down debt has always been my Achilles’ heel. I’ve always been better at making more money than spending less. However, I must admit that for the first time in my life, I’m getting very good with my budget. We were able to reduce our expenses enough to pay ourselves with a break in Guatemala and pay down my line of credit by 1K. Yeah, I know, without this escapade in Central America, my line of credit would be at 16K instead od 18K now… But as weird as it seems, this trip was probably what will make the difference for the rest of the year as I really set my growth plan over there.

03 Go to Guatemala and buy tickets for Vietnam in 2019

Well, that’s half way done! My trip to Guatemala was incredible. I savoured each moment of it, and it gave me back my invincibility. I also realized that I will need to do this kind of trip often if I want to keep this flame burning inside of me.

In May-June, I will seriously start looking for airplane tickets. Once I buy them, there will be no turning back. I’ve set my Vietnam trip in early 2019 the same way I set my 12-month RV trip; I set a date (January 2019) and I will manage the rest along the way. I’m confident I will make it and buy my tickets during this summer.

04 Build a six pack

Oh boy… that is such a failure right now it’s not even funny. Instead of starting from 170 pounds and building some muscle, I started to eat and drink each evening. I was so consumed by the adaptation to my old life while I was building a business that I’ve completely lost track of this goal. The wake-up call happened when I had a doctor’s appointment, and I was weighting 196 pounds at the beginning of April. Damn! I’m a fatso now! It’s been two weeks and I’m taking my life back. I started running again, and I cut down wine to one day per week. I eat less; I’m efficient and have more energy. I’ve taken the long road to get to my goal, but I keep my eyes on the target.

05 Hire my second full-time employee

This one is also a “temporary” failure. Over the first two months, I looked at hiring a student in finance to train him. This didn’t go the way I wanted. There weren’t many applicants for the job, and those who applied simply didn’t know much about the stock market. I’m in a weird position where I need someone with financial knowledge, but I can’t pay him a nice salary. Therefore, I end-up with nothing.

For now, I’ve put this idea back on the shelf. Instead, I’ve changed my schedule and optimized my time. I can now do a lot more during my work week. I will wait until I can offer a “real” paycheck to a “real” employee. I think it will be worth it as quality has its price!

What will be my priority for this quarter?

For the current quarter, I’ll focus on losing weight and buying my tickets for Vietnam. Interestingly enough, if I eat and drink less, I not only have more money in my pockets, but I also have more energy to work more! Therefore, by getting in a healthy shape, I will pay for my airplane tickets at the same time! I love killing two birds with one stone, don’t you?

Video of the Week: Microsoft is Killing It!

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As you might have read about it here, I now do live webinars and certainly have fun doing so. I have been surprised by the positive interest attendees had towards many of my stock picks. This is how I came to the idea of sharing here some of my “Video of the Week”, during wich I go through a company recent news or results and explain why I believe it is currently a good or a bad pick for a dividend investor.

Video

Verbatim

00:00 Mike McNeil: Hi, everyone. This is Mike McNeil from the Dividend Guy blog. And welcome to this stock pick of the week. Hope you’re doing well. I just came back from a week off in Guatemala. I took some time to think about my business, relaxing on a hammock by the Lake Atitlán. It was a great experience. First thing I did when I came back is I bought myself a new PC, a new camera, and here I am in HD about to tell you about one of my favorite techno stock. First, small disclaimer. Everything that you get from this video or from Mike McNeil under the Dividend Guy blog is for informational and entertainment purposes only. I am not your broker or your personal advisor, therefore, you cannot sue me if you’re losing money from my stock ideas. On the good side of things, you don’t have to pay me a dime either if you’re making money.

00:49 MM: So now, let’s talk about Microsoft, an old tech that has successfully transformed his business model going into growth mode again. A lot of people will tell me, “Well, Mike, 40% of Microsoft business is still linked to personal computer.” You’re right. Last quarter showed a revenue growth of 2%, which is kind of boring. PC sales are sluggish. A lot of people think even that my children in 10 years from now, won’t even use a PC to work. So why the hell I’m talking about Microsoft today as a growth company? Well, the thing is, this segment will probably continue to generate strong cash flow year after year for several years to come. They have also integrated the video game business inside this division. So all the cool kids playing with Xbox, and Xbox Live are making Microsoft richer. I think that the video game industry will be a growth vector. It’s a healthy and profitable game industry. There aren’t many players. Actually, you can think about PlayStation and Xbox.

01:53 MM: A few people still use the Wii from Nintendo, but the bulk is going towards those two players. So in other words, Xbox is there to stay, and it will grow in the upcoming years. Where it gets very interesting is when we’re talking about the second largest segment of Microsoft, which is the productivity business. This part is including is Office 365 suite. And a few years ago, a lot of people didn’t notice that, but Microsoft did something very clever. They switched from a one time software sell business to a subscription one. The main difference is that now, people are paying yearly subscriptions to get access to Office 365. We tend to forget about it. It becomes like a cellphone bill that they pay on a yearly basis. Therefore, on short term, it adds the revenue because the subscription is a lot cheaper than paying for the full Office Suite one time sales software. But the good thing is, now it is being paid every year, so Microsoft doesn’t have to convince its existing client to pay more money for basically the same software with just smaller rates.

03:09 MM: The second thing here, the reason why productivity segment showed 25% revenue growth during Q2 of 2018 is because they have integrated a lot of new solutions in their business model for businesses. We all know that Microsoft has a strong bond with corporate America. A lot of people are saying, “Well, this is already there. Microsoft is already their provider for many services. What new can be done? What else can be developed?” Well the thing is, Microsoft is spending a lot of money on acquisition and developing their own services. So now, they’re able to integrate services like LinkedIn, Skype, and Teams, which is the Microsoft response to the popular workspace slot. So what it meant, the team’s application now accounts over 200,000 people using it. And this number keeps growing. So basically instead, for a company that wants to improve its productivity and looks for other solutions, they don’t have to deal with five, 10, 15 providers anymore. They can just call Microsoft, and get all their services from the same place.

04:27 MM: So integration is a big game over there. I’ve decided to teach the icing on the cake for the last point, which is the Cloud business. The Cloud is the buzz word around the tech industry for the past three years. And Microsoft has additionally benefited from it. First, they have built Azure, which is the public number two Cloud service behind Amazon AYS services. A lot of people are saying, “Well if Amazon is so dominant in this field, is there room for others?” Well, actually, Amazon proved that there’s a lot of margins in this business, so a lot of profits to be made. So there’s definitely plenty of room for other large players like IBM, Google, and Microsoft. The thing with Microsoft is that Azure has posted 10 consecutive quarters with 90 plus revenue growth quarter to quarter increased. So basically, this service is doubling its size every year right now for the past three years. So it is quite impressive, and there’s definitely more room in this business.

05:42 MM: The second sub segment is basically all the Cloud services offered to businesses. Microsoft has over 800 case studies on their website showing how they have held businesses moving towards a Cloud-based solution. So then again, their strong bonds is working for them and the cloud era is going to grow for another decade easily. Speaking of growth, we are a very far away from what Microsoft used to be at the time of Bill Gates. You remember that a long, long time ago, in a galaxy far, far away, Bill Gates told us back in 2000, that Microsoft would probably never pay a dividend because it was focused on growth. Well then, it has been 14 consecutive years with a dividend growth and we’re not talking about a 2-3% growth, we’re talking about 82% total growth in the past five years. So we are looking at a strong company, which is a leader in its industry that has strong growth vector and still has a lot of money to spend on shareholders. Their payout ratio is below 40% right now, so you can expect double digit dividend growth for the next 10 years, which is quite awesome if you’re looking for future revenues.

07:06 MM: Right now, the stock may seems to be overpriced. I’ve heard that song before, I’ve actually picked up shares around $75 bucks back in September/October 2017. People were saying,”Oh, just wait until Microsoft drops to $55 or $60 bucks.” Well, guess what? Those people are still waiting. On my side, the stock is now around 80,000, sorry $80, $90, I get confused with the numbers. So the stock is now at $90-ish, the dividend is keeps going up and I’m making a lot of money. I wouldn’t be surprised that Microsoft would hit $100 by the end of 2018, due to this strong business model.

07:53 MM: If you want to know more about Microsoft or get notified with more videos, just in the blog, follow the line, subscribe to my newsletter, the Dividend Guy Blog newsletter. Each month, I will be producing a free newsletter, you’ll get few contents and if you’re a regular on YouTube, just subscribe to my channel and then you’ll be aware of my weekly stock pick. This was Mike McNeil from the Dividend Guy Blog and happy trading.

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Can You Make the Difference Between Good News and Bad News?

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At the beginning of the month, Intel (INTC) shares dropped drastically upon news that Apple (AAPL) would drop the world class chip maker to make its own. My first thought was “God why two companies I like have to beat-up on each other like this?”. And my second thought “this is a good opportunity to buy INTC shares). This is exactly what I published on Twitter:

You are going to tell me “yeah, Mike, that’s easy! When the stock drop on bad news, it’s good news for investors!”. Not too fast fella. How do you welcome dividend cut news? That’s what I was thinking.

Source: Ycharts

Here’s something very confusing about the stock market; sometimes good news means bad news and vice versa. After my tweet about INTC, my best friend asked me how do I make the difference between good news and bad news when it comes down to trade. I wanted to share my thoughts about how to analyze news that has a serious impact on a stock. Here are a few of my tricks to trade on news.

01 Don’t get overexcited/over panicked

Source: Ycharts

I’m always fascinated to see how the stocks is filled with market professionals who should know what they are doing, but trade with the rationale of a teenager in love. The chart above shows how Walmart (WMT) traded over the past 7 months or so. I’ve picked those dates since I remember how I was surprised to see WMT going up by more than 20% over the same news: digital sales growing.

I agree it was good news for both the company and shareholders, but does it worth 2 jumps of 10% each within the same month? The answer was obviously “no”. For that reason, the stock dropped like a rock in the following quarter. The point is that WMT didn’t have a catastrophic quarter in February, it’s just that the market was overhyped and realized it expected too much.

Whenever there is news affecting a stock by 5-10% in a single day, it should catch your attention, but leave your emotions asides.

02 Before you read more about the news, go back to your investment thesis

I think the worst thing you could do as an investor is probably to trade on a stock you know nothing about. A 10% movement (up or down) should not be a trade trigger if you don’t already know where the company is coming from. For example, I couldn’t care less when Facebook (FB) dropped like a rock recently as I never followed the company. Now that the market is very polarized around its failure, there is no point for me to analyze the company. I’ll get more noise than anything throughout my research. As I explained how to catch a falling knife, the whole idea is to have your buy list ready and pull the trigger when there is a big movement. If your investment thesis isn’t ready, your brain will just play with you and you might end-up making a bad decision.

03 Read the news, assess its long-term impact and decide if you should buy, sell, or simply do nothing!

In most cases, the latter option is probably the best. I’m all for building a triple digit club instead of getting 10-30% quickies here and there. The problem when there is a big movement on the market is that emotions get involved.

You will either become too nervous to think straight or to excited to see the bad side of the news. I think it’s even better if you wait a few days before making any moves. The major swing happens a few hours after the announcement is released anyway. After that, everything calms down and you deal with a new “normal price”.

When rumors around Apple making its own chip and dropping Intel appeared I didn’t flinch. Sure Apple is a big client for INTC, but the chip maker is a lot more than “Apple’s supplier”. Over the past couple of years, INTC has developed a completely different business model around the cloud with its data-centric services (which is about 50% of its business now). It will also be involved in artificial intelligence (AI), and nanotechnology. Does the fact that Apple will make its own chips for its Macs change anything to data centric services, AI and nanotechnology? This news change nothing in the investment thesis. Therefore, if INTC was on my buy list (instead of being part of my DSR portfolios already), I would definitely benefit from this drop to buy some shares.

Final thought

There was a time where I used to trade a lot on news, I was 23. I don’t do it too much these days. I prefer sticking with companies for a longer span of time and cash more dividend along the way. I think that a dividend growth investing approach is a lot less stressful and definitely more profitable than trading news like they were hot cakes, don’t you think?

Disclaimer: I hold INTC & AAPL shares in my Dividend Growth Portfolios

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