Thursday, May 9, 2013

Latest buy: GE

In April I haven't bought any stocks, instead I accumulated some cash. A lot of dividend growth stocks are pricey. There are a hand full of stock that I like at today's prices. Those include Chevron, Exxon, General Electric and IBM.

Today's buy:

  • 66 shares of General Electric Company. (GE) @ $22.85
This purchase will add $50.16 to my annual dividend income.

General Electric is the original blue chip. Not only is it one of the original components of the Dow Jones, but it remains one of the largest industrial and financial concerns of the world. 

A little history about the stock price. Back in September of 2000, General Electric stock hit an all-time high of $58.50 per share. That same year, diluted earnings per share were $1.27 and cash dividends were $0.57. This makes an earnings yield of a paltry 2.17% and a dividend yield of only 0.97%. At the same time, you could park your money in Treasury bonds and collect a risk free 5.90% on your money. Yet, foolish "investors" kept investing in GE stock while valuation was completely divorced from reality.

Today, the stock trades at about 16x earnings, or a 6.25% earnings yield, which I think is a fair price.

In 2008-2009, when the financial crisis hit, GE Capital got in trouble, destroying shareholder value in the process. GE Capital always was a potential threat in the business. 
GE Capital has focused the last few years on strengthening the balance sheet. This is the result:

Over the coming few years, many analysts expect the dividend to grow at a rate of 13% per annum (according to the analysts at Let's presume you aren't that optimistic and, instead, imagine the growth rate is about 10% over the next years, I'd have a yield on cost of about 5% within 5 years. I like that.

Thanks for reading, take care.

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