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What The Last 5 Years Taught Me About Investing

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I didn’t know it back then, but 2013 was a crucial year in my life. At that time, I had been the happy owner of The Dividend Guy blog for the prior 3 years (I bought it in 2010). While I was building my online business, I was also managing a portfolio worth over $100M for my wealthy clients. I remember that back then, many of my clients were nervous about the stock market. The 2008 crash was very fresh in their memories and we were already talking about Greece’s debt problem and a potential Euro Zone explosion. I kept telling them that it was a good time to invest in the market. Not because I wanted to make more money on their backs, but because it was true. I was investing all my money in the market myself. When I look back on this period of my life, I realize that I’ve learned a lot about investing.

Today is always the right day to invest – but have a plan

Back in 2013-2014, many experts agreed that it was probably the worst time to invest in the stock market. I went back in time and found those marvels:

“Of course, with stocks at all-time highs, some seem to have nowhere to go but down.”

~Business Insider

“At ValuEngine.com we show that 77.8% of all stocks are overvalued, 45.2% by 20% or more. All 16 sectors are overvalued; consumer staples by 17.6%, retail-wholesale by 26.4% and utilities by 9.8%.”

~ Forbes

“The market has jumped nearly 30%. This means the stock market’s rally has been based solely on people paying more money for the same amount of earnings — this is known as “P/E multiple expansion.”

~ Motley Fool.

At that same time, I bought 3 of the best performing stocks in my portfolio: Apple (AAPL), Disney (DIS) and Lockheed Martin (LMT). Please note that while AAPL was in a slump, DIS and LMT were trading at their 52-week high. Yet, “today” was still the right day to buy them:

Source: Ycharts

It’s a blessing that I kept investing, right? But I didn’t do it without a plan. I didn’t pull out the newspaper and pick a few companies off of the “favorite editor’s picks” list. I’ve built a complete and proven investment process based on academic studies and my personal experience.

As a private banker, I had access to tons of studies and I called on some of the finest brains in the industry to validate my theories. This is how I invested my money with confidence. Last year, I disclosed my personal return and proved that I beat the market between 2012 and 2017. My latest income report also shows that I’m on the right track to beat the market once again in 2018. I have had similar results with my portfolio models at Dividend Stocks Rock too.

There is no magic in my returns. I’m not a genius. I’m not a guru. I’m just a serious investor with a solid plan. The longer you wait, the more you leave money on the table. All stocks are on sale today; you just have to wait 10 years to realize it.

Dividend cuts happen even during bull market – make sure you don’t suffer

When we ride a bull market, it seems that bad news doesn’t hit the front page that often. You might think that since 2013, dividend cuts have been rare. Which kind of companies would fail their shareholders when:

Unemployment keeps reaching new lows,

Interest rates offer cheap loans,

The economy keeps growing,

Companies keep beating analysts’ estimates,

The government lowers taxes,

Etc.

Well it happens more often than we like to pretend. The last 5 years haven’t been a walk in the park for everybody. The oil industry was greatly affected by the plunge of the oil barrel prices due to overproduction. 2014-2016 has been a dark time for many Canadian Oilsands companies:

Source: Ycharts

The energy sector isn’t the only industry that suffered many dividend cuts. More recently, we had giants such as General Electric (GE), Owens & Minor (OMI) and Anheuser-Busch Inbev (BUD) cutting down their distributions.

The last 5 years taught me that no company is solid enough to avoid dividend cuts. Investors must track their holdings on a quarterly basis and make sure their investment thesis remains valid. If you have doubts; don’t wait and get rid of the rotten apples.

2013 – a turning point in my life

At the beginning of this article, I told you that 2013 was one of the most important years of my life. But that wasn’t because I had a great career in the private banking industry or because I built a successful blog. 2013 was the year I built Dividend Stocks Rock; my dividend investing platform.

Since the platform was a success, this service enabled me to take a sabbatical year in 2016 to travel the world for twelve months. I grew my business during that year and I was also able to quit my day job when I came back in 2017. It’s been a little over a year that I’ve been living my dream life as I help other investors learning the ropes of building a strong dividend growth portfolio generating safe revenues.

The reason my investing strategy works, the reason why DSR works for others is because I apply a simply, yet efficient, set of rules. I don’t overthink, I don’t change my plan, I don’t permit guesses. DSR has been built on the very same foundation I use to manage my portfolio. As a result, I invested the totality of the commuted value of my pension plan ($108K in 2017) using exclusively DSR tools.

Two companies to hold for the next 5 years

Keeping both lessons in mind, I’d like to leave you with two great companies that may or may not seem overvalued right now, but will definitely be  trading at a higher price 5 years from now. I’m fairly confident both companies won’t cut their dividends during that time and are most likely going to hike their payouts each year going forward.

You can download my analysis of Microsoft (MSFT) and Nutrien (NTR.TO).

Video of the Week: DSR is Turning 5!

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Again, this week’s video is not a regular stock pick and I’ve got a pretty good reason for it! My baby, Dividend Stocks Rock, will turn five in a couple days! This video explains why I created this website and how I think it helps investors finding rock solid dividend growth stocks. It is also a big thank you to those who have been following me all these years, either here or on DSR! There will be more to come, I promise. 😉

Video

If you enjoy the videos format and want more of them, subscribe to my YouTube channel!

Verbatim

00:01 Mike Heroux: Hey fellow investors, this is Mike Heroux from Dividend Stocks Rock, I hope you’re doing well today ’cause I am doing amazing. I am super proud to value tell you DSR will turn five years old on December 9th. Yeah, it’s been five years that Dividends Stock Rock has been helping thousands of investors. It’s a big milestone, because most businesses don’t even survive those five years, the first five years of its very existence, and DSR did not only survive, but thrive through it. And then, our membership has grown and improved through time, and now we’re serving over 1000 members. It’s been a big deal.

00:47 MH: So back in 2013, I was in Saint Louis with one of my friends, my partner, actually, in this adventure. And we were attending FinCon, which is a financial blogging conference where bloggers and media meet, exchange marketing and content strategy to improve their blogs, to improve their business. And between two conferences, I received an email from Jeremy, the former author of The Dividend Guy Blog, the blog that we purchased in 2010. And the guy has built a great website with a great infrastructure, but just didn’t have time to make it a business. That was the beginning of Dividend Stocks Rock. So he sent us an email asking if we were willing to buy the infrastructure and build the membership, finish his work, basically. Start from scratch, but with a solid foundation, and then help investors building their own investment thesis, their own investment process and finding quality dividend-paying stocks.

01:50 MH: So a few months later, on Halloween’s Day, on October 31st, we built our portfolio models and we started tracking them. I’m very proud to say that, in the past five years, none of our Dividend Stocks Rock portfolios has shown a dividend cut. All our companies actually increased their dividend year after year. And this is because we have a strong investment process behind it, we keep track of everything, we update those portfolios on a quarterly basis, and this probably explains a lot of our success. On December 9th, 2013, we opened the doors to the public, so it was the first time that members could actually pay us to receive our financial newsletters, look at our portfolios, and get our stock reports. I was quite anxious about it, because I’ve been blogging since 2006, and I had my share of success, but also of failures, and I was not sure if my readers were ready to pay for a membership website. But the answer was great, and it was anonymous, people loved it, and I still have lots of members that are with us today, five years later. So that’s a huge proof of trust and success, and I’m very proud of that.

03:13 MH: So now, DSR is not only a membership website helping investors throughout their investing journey, it’s more like a place where you can learn how to fish, ’cause I’m not the next stock picking guru, I’m not the next Warren Buffett. My goal is to teach you how to fish, teach you how to build your own investment thesis, your own investing process, and select the dividend stocks that you want in your portfolio with great success, while you can avoid dividend cuts as well. Throughout the years, DSR has evolved a lot more than portfolio models and a weekly newsletter. We now have over 300 stock cards that are being updated twice a year. We offer customized reports. We track over 1000 dividend-paying stocks on both Canadian and US markets, which is quite rare in the industry. We have done over 50 webinars in the past 12 months, and DSR have not only helped thousands of members to invest their money, it also helped me to build my dream life.

04:22 MH: In 2016, I was able to take a sabbatical year, use DSR as my main source of income, and I travelled the world for one year with my family. My three children, my wife and I, we were in a small RV, and we drove across Canada and then the United States, and then all the small countries in Central America, to end up in Costa Rica for three months. We enjoyed that so much, that when I came back, I decided to quit my job as a private banker, that kind of job that is prestigious with a full pension plan, good pay job, good paycheck. But I was only able to help 300 to 400 clients a year with this job, and I really wanted to reach thousands of investors. This is why I decided to quit, and then to put all my energy, all my passion into DSR. So 12 months later, 2018, we’re celebrating our fifth anniversary, and I just want to tell you that I am grateful for you being a reader, a follower, maybe a member. So I wanna thank you for being there, for watching my videos, watching my webinars, reading my stock reports, supporting me by commenting on Twitter or on YouTube.

05:45 MH: Just wanna tell you that I’m grateful, and I do that because I’m passionate about the stock market, and I’m so glad that I get to meet all those investors like you. So thank you for being there for those past five years, and I just can’t imagine where DSR will be five years down the road, in 2023, actually, that would be crazy. And I just hope that, at that time, I’ll have a full office with 20 employees, and we’re going to be able, not to help thousands of investors, but tens of thousands. So thank you again and keep following me. I’ll keep giving you as much value as I can, ’cause I really like dividend-paying stocks, and I think that we can all be successful on this investment journey. Cheers.

Top 5%+ Juicy Canadian Dividend Stocks

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Yesterday, I’ve made my list of my favorite 5%+ yielder on the U.S. market.  Finding solid companies paying high yields is a very difficult task. Many investors think they can simply pull out a filter including a 5 year history and some more metrics and they can build their portfolio by picking any stocks in this basket. This sounds a lot like the perfect recipe to suffer from dividend cuts in a few years from now!

Since I started Dividend Stocks Rock 5 years ago, I haven’t suffered a single dividend cut. This is mostly because I follow a strict investment process and follow each company quarterly. The following are examples of companies that meet my retirement rules.

Inter Pipeline (IPL.TO)

Inter Pipeline Ltd. is an energy infrastructure business engaged in the transportation, processing, and storage of energy products across western Canada and Europe. IPL is among the rare companies making our list of the top dividend energy stocks. The company operates four distinct business segments: Oil Sands Transportation, consisting of three pipeline systems; NGL Processing, including both natural gas and off-gas processing facilities; Conventional Oil Pipelines, consisting of 3,900 km of pipeline across three systems; and Bulk Liquid Storage.

Inter Pipeline (IPL.TO)

Source: IPL Q3 2018 fact sheet

IPL stock has been down most of 2018. This is the case with many pipeline companies. However, you can see that it’s a “sector thing” as IPL just closed a record year with double-digit FFO increase for the year. Management increased its dividend significantly and still shows an FFO payout ratio well under control.

Polaris Infrastructure (PIF.TO)

Polaris Infrastructure Inc is a renewable energy company. It is engaged in the operation, acquisition, and development of renewable energy projects in Latin America. In fact, Polaris owns and operates San Jacinto Geothermal power plant in Nicaragua. PIF has a contractual price per MWh (Power Purchase Agreement or PPA) with the government including annual escalator through 2029. Management recently announced the acquisition of Union Energy Group Corp. This transaction will open the door for many hydro electric projects in Peru and will help PIF to diversify its business model.

Polaris Infrastructure (PIF.TO)

Source: PIF October presentation

The investment thesis around Polaris Infrastructure is a risky play that could pay off a lot. While management has proven its ability to increase its revenue and cash flow consistently since 2014, the stock plunged severely in 2018. This all happened because of the violence in Nicaragua. PIF shows a solid contract and great execution providing increasing cash flow and allowing management to pay off debts. Geothermal energy is part of the future for many countries, and it is a reliable & green source of power. Unfortunately, political instability gathers all the attention. If you are willing to take the bet, PIF could definitely make you richer. While there is a problem with the current president, Nicaragua shows the strongest GDP growth in Central America. Now that the company has found another growth vector in Peru. We think PIF will be a solid investment in the Utility sector.

Enbridge (ENB.TO)

Enbridge owns and operate an impressive network of liquid (OIL) and natural gas pipelines. ENB is able to transport energy from coast to coast, from north to south. ENB shows about 96% of its business done through “take-or-pay” contracts. The pipeline is like a toll on a highway; people pay for each use and the company piles-up the cash.

Enbridge (ENB.TO)

Source: ENB Q3 2018 presentation

Companies do not pay a high yield for no reason. ENB raised its debts and number of shares with the merger of Spectra. As pipelines require lots of capital to build and maintain, Enbridge may find itself in a position where cash is missing. After all, management has plenty of projects to fund, a double-digit dividend growth promise to keep and larger debts to repay. There is always a possibility where this scenario turns bad.

Enbridge clients enter into 20-25-year transportation contracts. The company is already well positioned to benefit from the Canadian oil sands (as its Mainline covers 70% of Canada’s pipeline network). Now that is has merged with Spectra, about a third of its business model will come from natural gas transportation. The company has a handful of projects on the table or in development. Among those projects is the Line 3 replacement. The company expects the completion of this project in mid-2019.

Emera (EMA.TO)

Emera is an energy and service company. Emera’s main market is Nova Scotia as it owns Nova Scotia Power, the province’s main electricity provider. Emera owns power plants and distributes natural gas in Canada, the USA and the Caribbean. This utility employs over 7,000 workers and serves more than 2.5 million customers. Tampa Electric (41%), NSPI (14%) and Maritime Link (11%) generate most of EMA’s earnings.

Emera (EMA.TO)

Source: EMA Q3 2018 investors presentation

Emera has been increasing its dividend payment each year for over a decade now. With the purchase of TECO energy, management intends to continue its tradition. The company forecasts a 4-5% dividend growth rate throughout 2020 while targeting a payout ratio of 70-75% (Emera Investors Presentation). At 5%+ dividend yield, this is a keeper for several years.

Emera is a very interesting utility with a solid core business established on both sides of the border. EMA now shows $28 billion in assets and will generate revenues of about $6.3 billion. It is well established in Nova Scotia, Florida and four Caribbean countries. This utility counts on several “green projects” with hydroelectricity and solar plants. This decreases the risk of future regulations affecting its business as the world is slowly moving toward greener energy.

BCE (BCE.TO)

BCE is the largest Canadian telecom by market cap, about twice the size of Telus. It shows the most balanced business model among this small group. BCE has shown a very solid dividend profile for several years and my analysis proves it will continue to rise in the future. All BCE services are based on some sort of monthly subscription generating a consistent base for cash flow.

BCE (BCE.TO)

Source: BCE investors fact sheet

BCE debt level is not be underestimated. BCE is a giant… with a giants debt. This is not a perfect situation as interest rates are now rising. And, as the Canadian Government keeps pushing for more competition in the wireless industry, BCE may see additional competitors adding more pressure on margins in the future.

When you have the opportunity to invest in a strong yielder like BCE, and still hope for a small stock appreciation growth, you must take a hold of it. BCE shows a well-diversified business model and will continue to generate strong cash flow in the future. The company is a real money printing machine. As BCE is part of an oligopoly (Telus, Rogers and BCE controls about 90% of wireless market), there is limited competition and high barriers to entry. Since BCE offers a wide array of products, it can increase revenue generated by each customer.

Final Thought

Most of those companies have been selected in our 100% Canadian retirement portfolio. You can learn more about how we created safe portfolios generating 4-5% yield each year (and growing their dividend!). I’ve recently hosted a free webinar on this topic and you can now watch the free replay here:

Click here to watch the webinar replay

(must enter your email to register).

Disclaimer: We hold IPL, PIF, ENB, EMA and BCE in our portfolios.

 

Featured Image Source: Pixabay

My Favorite 5 Stocks Paying a Juicy Yield Over 5%

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Each year, they would receive juicy dividends, see their payments increasing and their portfolio growing in value. Wow! This really looks like buying a seafront house in Hawaii for $200K, doesn’t it? Unfortunately, however, many 5% yielders end-up cutting their dividend.

A 5% yield is only good if it keeps getting paid

Over the past few weeks, investors got hit by dividend cuts coming from well-known businesses. As I’ve highlighted last week in this article, large caps, dividend achievers and popular dividend paying stocks have  their shareholders recently:

  • General Electric (GE) destroyed 92% of its dividend payment;
  • Owens & Minor (OMI) went for a 71% axe swing at its dividend;
  • Anheuser-Busch InBev (BUD) killed 50% of its dividend;
  • And Buckeye Partners (BPL) crushed its dividend by 41%.

So much for those who thought high yielders were safe, right? At the same time, it would be a false assumption of thinking that all high yield stocks would end up with a similar fate. If you follow strict investing rules, you may find those hidden gems that keep rewarding their shareholders with generous payments. I wanted to help you out through your research by sharing my (rare) favorite stocks showing a 5%+ yield.

My favorite 5 stocks paying over 5% yield

Five years ago, I started my investing platform, Dividend Stocks Rock. I’ve built and improve this service to become one of the most efficient tools to find dividend growing companies. For several years, I was reluctant to pick high yielding stocks. However, through additional research and by applying my 7 investing rules, I was able to find a few hidden gems. As I will celebrate Dividend Stocks Rock’s 5th anniversary in December, I thought of picking 5 Stocks with a 5%+ yield. Yield posted is as  of November 7th.

Blackstone (BX) 6.88% yield

Blackstone is an asset manager with $456 billion in assets under management (AUM) that comes from private equity, real estate funds, hedge funds, and credit funds. BX doesn’t invest in the stock market but developed a strong expertise in alternative assets investing in the past 30 years. BX receives money from institutional clients or wealthy families and invests it as a general partner in the mentioned asset classes.

Blackstone (BX)

Source:  BX Q3 2018

Blackstone is a complex beast. BX could look like another asset manager offering a generous dividend yield to shareholders. However, it is more complicated than that. Since Blackstone keeps a cut of the profit realized on its investment, both revenues and earnings go up and down from one quarter to the other. Moreover, the strong dividend payment is also based on performance. Still, the company shows steady assets under management growth and benefits from its good reputation.

W. P. Carey (WPC) 6.25% yield

Founded in 1973, W.P. Carey is one of the largest diversified net lease REITs. WPC operates as a self-managed diversified real estate investment trust. The company owns and manages commercial real estate which is leased to companies on a long-term basis. The REIT manages 1,186 properties covering approximately 133 million square feet as of September 30, 2018 (including the merger with CPA:17). Its portfolio is located primarily in North America, Northern and Western Europe and is well-diversified by tenant, property type, geographic location and tenant industry.

W. P. Carey (WPC)

Source: Q3 investors presentation

WPC is a long lasting and well managed REIT offering a great solution with a solid yield and decent dividend growth perspectives for income seeking investors. WPC shows an impressive occupancy rate (around 99%) and a top 10 tenants concentration of 32%. WPC shows a great business model with diversified sources of income. WPC counts roughly 30% of its revenue coming from Europe. Considering the recent acquisition, WP is now a serious candidate for any retirement portfolio. The dividend will continue to keep up with inflation and shows a 6% yield. Finally, WPC is part of the dividend achievers list.

EPR Properties (EPR) 6.05% yield

EPR specializes in Triple Net Leases. This is when the tenant agrees to pay all real estate taxes, building insurance, and maintenance in addition to normal fees expected under the agreement (rent, utilities, etc.). EPR shows nearly 400 locations rented by over 250 tenants for a total asset book value of nearly $7 billion. EPR’s main business is focused on entertainment (158 megaplex theatres, 11 family entertainment centers), recreation (32 golf complexes, 12 ski areas, 21 attractions) and education (63 public schools, 14 private schools and 69 early childhood education centers).

EPR Properties (EPR)

Source: EPR investors presentation

EPR has a strong business model in a growing industry (entertainment). It will do well as the economy continues to grow. With the recent stock price drop (high of $84 back in 2016), this is a good opportunity to buy a high yielding REIT paying monthly dividends. EPR still shows an appetite for growth in the upcoming years and should benefit from the current economic tailwind well into the future. Management expects FFO/share of $5.75-$5.90 while paying $4.32 in dividend for 2018. The distribution is safe, sleep well.

Hannon Armstrong (HASI) 5.74% yield

HASI provides capital and services focused on reducing climate changing greenhouse gas emissions (“GHG” or carbon emissions) as well as mitigating the impact of, or increasing resiliency to, climate change. It focuses primarily on energy efficiency, renewable energy, and other sustainable infrastructure markets. HASI shows about 175 investments and managed $4.8 billion worth of assets. It expects to invest around $1billion per year going forward. Its portfolio shows 47% of investment in solar, 26% in wind, 22% in efficiency and 5% in sustainable infrastructure.

Hannon Armstrong (HASI)

Source: HASI investors presentation Nov 2018

It’s hard not to invest in a 6-7% yielder that believes in renewable energy. HASI shows confidence in its business model and is ready to invest about $1 billion each year to grow. We have clearly seen a trend towards  solar and wind energy recently, and as oil prices pick up, you can expect the trend to continue to go stronger. Going forward, investors should expect a dividend policy matching inflation (2-3%). This is more than enough to beat inflation while enjoying a high yield.

Lazard (LAZ) 4.14% yield, 7.25% with special dividend

Lazard, together with its subsidiaries, operates worldwide as a financial advisory and asset management firm. The financial advisory segment offers services regarding mergers and acquisitions, strategic advisory matters, etc. LAZ was founded in 1840 and manages over $189B. It is well known for its experience in asset management and in M&A.

Lazard (LAZ)

Source: LAZ investors presentation

Lazard’s power resides in its quality advisory segment. LAZ is surfing on the current market tailwind in the M&A activities, while gaining market shares. LAZ has also developed a strong expertise in real asset management, which is gaining popularity among investors. Paying fees to have Lazard managing your money seems justified. Strong from its presence in 170 countries, Lazard aims to expand across the world. In late months, LAZ acquired a banking boutique in Canada in 2016 and opened a new office in Mexico in 2017. It has also built a strong brand in China for the past decade. The company has been beating down on the market recently creating a great opportunity. While the dividend yield is currently over 7%, it includes a special dividend. Management has started the tradition of rewarding shareholders in February with extra cash flow distribution for the past 4 consecutive years.

Tomorrow, I go Canadian!

Since I’m Canadian and I know lots of my readers are following this market, I’ll do the same exercise for Canadian stocks, stay tuned!

 

Featured Image Source: Pixabay

Video of the Week: Stock Cards Tutorial

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This week’s video is not a regular stock pick. The DSR Stock Cards are one of our members’ favorite tool at my membership’s website: Dividend Stocks Rock. This video should help you out in understanding all the strategy behind and why they have been built that way. I also thought it could be useful for you as it can also help you building your own investment strategy and analysis process.

Video

If you enjoy the videos format and want more of them, subscribe to my YouTube channel!

Verbatim

00:02 Mike Heroux: Hi everyone. This is Mike Heroux from Dividend Stocks Rocks. Today I’m doing something a little bit different than usual for my weekly video. It’s actually a tutorial to explain one of our most successful and most used tool at DSR, which is the stock cards. We have created stock cards. Those are two-pagers analyzed for each companies that we follow at DSR and members of, also the possibility to request stock cards being made on pretty much any dividend growth stocks on the market. In order to do so, they just send us an email and then we add it to our worklist and within about like maybe five or six weeks, we are able to pull it out, because we are updating all stock cards twice a year and we add on average of six, seven new stock cards each week as well. Those are being sent on Fridays. I’m gonna share my screen with you, and I’m going to do a quick tour on how to look at these stock cards, how to understand it, and how it basically works.

01:12 MH: There you go. Let’s do it that way. Now we are on the website. If you select the stock card, you have the option between the US and the Canadian. All stock cards are protected by your membership. If you’re not a member of DSR, you will not have access to those pages. If you go down here, you have all the stocks that you do, so you can sort them through symbol or ticker if you prefer. You can sort them through names as well, or you can pull out a search. Let’s check here and I’m going to pull out for Gentex because this is one of my favorite company at the moment. So you have basic information, but this is not what we’re looking for. We wanna look at the stock cards, so pulling out the stock cards, I’m gonna zoom in a little bit on this one. The first thing that you see here right on the corner is the date that the latest update of the analysis. So this one was done in August.

02:16 MH: You basically have the business model. So basically, in a few words, we’re trying to explain to you what the business does. Obviously, it’s not a lengthy and complex definition, but it should be enough for you to understand what’s happening with this company and in which field it’s working. On your right side, you have our pro-rating. Pro-rating is a basic rating that we have. It is explained in the website, so it basically goes from one to five. So from a streaming sale that it is a one, as an exceptional buy as rated as a five. So it’s a classic buy-hold-sell rating.

02:55 MH: We also have a dividend safety score right here. Dividend safety score of one means that the company has recently cut or is about to cut its dividend. At two, you have a dividend with no growth and most likely going to be cut at one point in time. If you go at three, then you have a dividend that will likely follow the inflation, I mean a dividend growth rate obviously, and then dividend four and five meaning that the company is shareholder-friendly, wants to increase its dividend in an important matter going forward. Then you have a small comment if the company is fairly valued, overpriced, or underpriced as well, and we’ll have more explanation with the dividend discount model just below. So a company in a nutshell, those are three points basically just giving you a quick picks of what is Gentex is about, and then you move on to our investment thesis.

04:00 MH: It’s important to understand that the result of this two-pager document is most likely coming out from 12 to 15 pages of research. So we’re trying to condense everything. We try to make the best summary as possible, because the point of DSR is helping you making an efficient decision, not having you reading like 5000 words each time you wanna look into a company. Basically it’s just to give you a quick overview. But fear not, we have major research on the background, and we have written a lot of things before going to that investment thesis, which is only a few lines. Then you move to the final part of the first page, which is the valuation. We use the dividend discount model with two dividend growth rates. The first one here, it calculates the value of the growth rate for the first 10 years. So, depending if the company is doing well or not, we’re going to adjust it according to that. Right now we have used an 8% dividend growth rate for the first 10 years, and then we also use a terminal dividend growth rate, meaning that starting from year 11 and forward we usually take a smaller growth rate because we want to remain cautious and conventional in our analysis.

05:21 MH: Now, going to the metrics, what you have here is you have the value according to the discount rate. The discount rate is the rate of return that you expect on your investment. So if you expect a rate of return of 9%, and you assume a high single digit dividend growth rate, the intrinsic value, so the value you should pay for a Gentex in order to receive that 9%, should be around $25. After that, you have the premium, so meaning that if the stock’s price right now trades around $28, $29, that means that’s you’re paying a 10% premium on it. On the other way around, if the stock’s price is around $23, then it means that you have a 10% discount on what you believe should be the intrinsic value. Keep in mind that as any valuation model, the dividend discount model is not perfect. It has several flaws. We have covered it into a longer webinar. Just keep in mind that this is just an indication. I would never trade based on the valuation given from the dividend discount model. I think that the investment thesis and the dividend safety score is a lot more important.

06:37 MH: So from time to time, you will see undervalued stocks rated as a two, a sale, or rated as a three as a hold, because there are other reasons why we think that; Yes, on the one side, the dividend discount model gives us an attractive valuation, but overall, the company doesn’t meet our growth vectors, doesn’t meet our other investment thesis or fundamental inside a company, so it’s not worth our money or our time.

07:09 MH: Now moving forward to the second page, this graph is being updated about twice a year. So we show what we call the “dividend triangle.” Basically we are looking at a company’s growing revenue, growing their earnings in order to be able to grow their dividend. What you see here is revenue, earnings, and dividend. The three lines are shown on this graph. It shows you the trend over the past five years. It gives you an indication of what’s going on from time to time depending on what’s happening with tax regulation and so on. You will see earnings per share, for example, going up or down suddenly. So this gives you just a hint that you have to do further research. You have to dig into the quarterly reports, and most of the time we will explain the variation on the stock card.

08:01 MH: Now moving on to the metrics, we have type of holdings. At DSR, we divide them into a specific type of holding, so either growth, so you’re holding those companies with sometimes will show more volatility, a little bit more risk, but higher potential for stock value growth, so stock value appreciation. And you also have the other type of holding which is core, which is most likely the type of classic dividend holding, like “sleep well at night.” A company like Coca-Cola, for example, will fall into the core sector because we don’t expect much growth from it, but you do expect steady dividend growth and a small stock price valuation going on. We also mentioned the sector, so it’s always interesting if you look at your sector allocation. You wanna make sure that you don’t put too much companies into the same sector, this is why we mention it here. Current dividend yield P ratio, those are common metrics. On the other side, you have the five-year revenue earnings and dividend growth. Those are annualized rates. So this means that Gentex shows a revenue growth rate of 10%, year after year over the past five years.

09:21 MH: So obviously, it could be like 12 for one year, 15 the other, and then 8th, but it goes down to the equivalent of 10% each year for that five-year period. As you can see, those are pretty strong numbers obviously, and this is why Gentex is rated as a five in terms of a pro-rating. You have the payout ratio. This is based on accounting numbers. So basically we just follow what happens to the earnings, not the adjusted earnings. This reflects the accounting payout ratio. So this from time to time will show a very high payout ratio over 100%, and then you’ll read the dividend grow perspective, and you’ll find out that those, the dividend payment is safe and everything is fine. So this means that we have dug into the quarterly statement, into the annual statements and find out what was the adjusted payout ratio was, and then we determine that it was a good pick or not.

10:21 MH: Now, second to last section, potential risk. Even though we really like Gentex, there are also competitors. There are also risks around this company. So we have to disclaim it. So this is why we describe all the… Everything that could potentially go wrong in this one, so you know exactly what to expect and you know where the risk could be coming from. And finally, dividend growth perspective. This is where we’re going to tell you how many years the company has been increasing its dividend, year after year, what to expect in the future. So with this one, you can expect a high single digit dividend growth numbers for the next decade. We explain a rationality behind it, so it gives you a little bit more information on how we use the DDM in order to calculate our evaluation at the same time.

11:14 MH: I hope that you have enjoyed this short video explaining the stock card. If you have any questions, just send us an email. I’ll be very happy to help you out with those. Once again, we update those stock cards twice a year. If you have any companies that you don’t see at DSR that you would like us to review, send us a quick email, we add it to our worklist and get our team working on it and then we just publish a few weeks later. That was it for this one. So happy investing and see you during our next video. Cheers.

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