I'm Getting Spoiled With Dividend Raises

The main focus of my portfolio is to purchase stocks that raise their dividends in the future. The stream of dividend will grow over time due to reinvested dividends, investing fresh capital and companyie raising their dividend. In the few weeks four of my companies raised their distributions to their loyal shareholders.

Altria Group (MO) - Announced that its board of Directors voted to increase Altria's regular quarterly dividend by 9.1% to $0.48 per common share versus the previous rate of $0.44 per common share.

Philip Morris (PM) - Announced a 10.6% dividend hike. The Board of Directors agreed to raise the company's quarterly dividend to $0.94 per common share up from $0.85 a share.

Microsoft (MSFT) - Announced on Tuesday that its Board of Directors declared a quarterly dividend of $0.28 per share, reflecting a $0.05 or whopping 21.7% raise over the previous quarter. On top of that, the Board of Directors also approved a new share repurchase program up to $40 billion in share repurchases.

McDonald's (MCD) - McDonald's Board of Directors declared a quarterly dividend of $0.81 per share. This represents a 5.2% increase over the company's previous quarterly dividend.



The big surprise was Microsoft. I expected a 2-3 cent, or 9-13% raise, I'm got a 22% raise! Great. This is what it's all about. Seeing my dividends get raised. It makes my day when I read I'm getting a pay raise, especially when it's way more than I expected!

Thanks for reading.

What I Look For in Dividend Stocks

My investing strategy entails purchasing high quality dividend growth stocks. The goal of my investing portfolio is to purchase stocks that will raise dividends in the future. The stream of dividend income will be used to fund my early retirement, making be completely financial independent. The dividend growth will protect my income stream against inflation.

But what exactly am I looking for in stocks. These are a few specific characteristics I'm looking for when researching stocks.

Strong competitive advantage
The first thing I'm looking for are strong competitive advantages. This is what Warren Buffett calls "wide moat businesses". It is very difficult to take away market share from such businesses due to their customer loyalty.

These features protect the companies from competitors and help them generate higher return on equity and charge higher prices to customers.

Wal-Mart, a very successful retailer, has marketed itself as the lowest price retailer for almost everything consumers spend their money on. Due to the size of Wal-Mart it is enable to to squeeze lower prices from it suppliers, they pass these low prices on to the customer. The low prices are Wal-Mart's competitive advantage.

The Coca-Cola Company, worlds biggest soft drink producers, is best known for its most prominent drink, Coke. It's a strong global brand, consumers a willing to pay a premium for the product. There are alternatives to Coke, like Pepsi, but any Coke drinker can taste the difference between a Coke and a Pepsi. The quality of Coca-Cola is the reason why multiple generations keep drinking the sugar flavored drink. This strong band name is a competitive advantage The Coca-Cola Company has. Another company with a portfolio of strong brand names is Philip Morris Co. It sells cigarettes outside the united states and owns the strong Marlboro brand.


A steady business model
A steady business model, what does that mean? It means that the business isn't subject to rapid changes. This results in shying away from start-ups and most technology companies. Technology has to be innovative, if it's not, it will lose its competitive advantages. In the tech sector, moats can evaporate quickly, we all remember Eastman Kodak, market leader in camera's in the past, now basically bankrupt. It failed to adept to the  a big market changer, the digital camera.

A steady business model like Coke is much more appealing to me. The company has been selling sugar flavored syrup for over 130 years now, this makes the profits very predictable and thus easy to predict future profits and future dividend growth.

Small companies do not have establish their moats yet. Shying away from small companies might result in me missing out on the next Apple. You just have to remember, for every success story like Apple, there are 100 not-so-success stories. I can't pick the next Apple, so I'm not trying to. I stick to steady businesses.


A strong balance sheet
When researching a stock, I always take a look at the balance sheet. I'm looking for a low debt/equity ratio.  I want the company to be able to cover its interest payments very generously (interest coverage ratio). I do not like companies with big debt loads, this could bring problems in the future when interest rates rise.

Some companies have huge amounts of cash sitting on the balance sheet. Microsoft for example has more than 70 billion dollars in cash & equivalents the last time I checked. This bale of cash, if used intelligently, can provide great shareholder returns. This money can be used for expansion of the business, acquisitions, share buybacks and dividends. A strong balance sheet is always a plus.



A history of paying and increasing dividends
Being a dividend growth investor, I focus on dividend paying stocks. I want my portfolio to produce a rising stream of income that protects my principal and income from inflation. Companies which have raised their dividend for decades typically are mature and  stable businesses, which generate a sufficient amount of cash to expand and share with the shareholders in the form of dividends and share buybacks. When a management has committed itself to raising the dividend year after year, it gets ingrained in the corporate culture.


An attractive valuation
I don't want to pay too much for a business. No matter how wonderful a company is, no business is worth any price. Overpaying for businesses could result in sub par total returns. We saw this during the dot-com boom or irrational exuberance in the late nineties. Household names like Coca-Cola and Wal-Mart were trading for 40 times earnings. The investor who bought stocks at those valuation were experiencing sub par total returns for the last 13 years.

As a rule of thumb, I do not to pay more than 20 times trailing earnings for a stock, unless I feel very confident about the future growth prospect of a business.


Conclusion
I briefly discussed a few characteristics I look for in businesses.Of course there are multiple other factors I take into account.  When I think of buying a stock, I don't ask myself the question: "What will go up next week?" I think about the things I discussed above. These are things make a business a good business, in my opinion.

When the business is good, the stock will eventually follow.


Thanks for reading

I am very close to selling my Intel shares

Today Intel announced its dividend for Q3. The board of directors decided to keep the dividend static for the fifth quarter in a row, I was really anticipating a  raise of at least 1 cent per share.

This forces me to make a decision. Intel is losing the tablet and mobile business, therefore future earnings are hard to predict. While the stock might appear cheap now, it could be considered a value trap by some.

I held onto the stock for its raising dividends and high yield. A dividend that is static for five consecutive quarters, that is not a good sign. Although it might be a smart move by the board, conserving cash to strengthen the business.

I'm just not sure how to interpreted this. I might sell in the near future and use the proceeds to buy something that I'm more sure of.

I have to think about it for a little bit. Do I hold onto the stock, or do I sell and buy something else? I'm interested to see what other bloggers will do with their Intel shares. I know a lot of dividend growth investors have a position in Intel. What do you think, sell or hold?

Thanks for reading.

Warren Buffett on rising Coca-Cola dividends

Warren Buffett is one of the most successful investors in history. Berkshire Hathaway's chairman has a reputation of eloquence in his annual shareholder letters. I was reading the 2010 annual letter to shareholders this morning. One of my favorite passages came from page 18, he was talking about how time is the friend of the wonderful business.

I couldn't agree more. I try to spot great businesses, acquire them for a reasonable price, let time do the heavy lifting and compounding work its magic. A great business at some point generates more money in the form of dividends than you put into, you can use that money to fund your lifestyle, retire early or buy more pieces of great businesses.

Buffett on Coke's rising dividends:

Other companies we hold are likely to increase their dividends as well.  Coca-Cola paid us $88 million in 1995, the year after we finished purchasing the stock.  Every year since, Coke has increased its dividend.  In 2011, we will almost certainly receive $376 million from Coke, up $24 million from last year.  Within ten years, I would expect that $376 million to double.  By the end of that period, I wouldn’t be surprised to see our share of Coke’s annual earnings exceed 100% of what we paid for the investment.  Time is the friend of the wonderful business.

When you start out collecting these stocks that pay rising dividends it might be frustrating because the cash generators only produce a trickle in the beginning. But a trickle becomes a drip, a drip becomes a stream, a stream becomes a torrent and a torrent becomes a deluge. That's how compounding works. It starts small and starts growing, faster and faster. Nobody started his first year dividend investing and getting thousands of dollars in passive income immediately. It starts small, that shouldn't stop you from beginning.  You have to start somewhere!

For more shareholder letters from Warren Buffett, read more at www.berkshirehathaway.com/reports.html

Thanks for reading.

Why are you saving so much?

Back in December my family went to Berlin to celebrate new years eve there. In Berlin It's called "Silvester".  It was a great time. The times when I'm most happy, is when my entire "core family" is together, meaning me, my brother, my sister, brother in law, and my parents. Somehow it brings me great joy to see them all together at the same time.

Back then, my brother in law asked me the following question: "Why are you saving so much, and why are you investing it?"

To be honest, I didn't have an answer ready, and just said "I don't know, Isn't saving money the right thing to do?" and that was the end of the conversation really. Deep down I knew this wasn't the answer that really did it for me, recently i started thinking about this, a lot. This simple question really struck me, why am I saving my money, why am I not enjoying it now? 

Fast forward to today, I started thinking about that question. And I came up with what is the right answer for me. Even though, I couldn't articulate that question in the way I wanted to five month ago, I can do that now.

I have the passion to be rich, I don't want the two million dollar house or the Bugatti, I want the independence, I am desperately craving it. 

Toying around with the idea of buying Visa

Really, Visa? As a dividend growth investor my main goal is to create a portfolio containing high quality dividend paying stocks, which hike their dividend yearly, giving me an ever growing passive income stream of dividends to, finally, live off.

The portfolio's of fellow dividend growth investors are typically stuffed with stocks like Coca-Cola, Procter & Gamble, Exxon, Chevron, Johnson & Johnson, General Mills, Wal-Mart Stores, McDonald's and Philip Morris. Notice how Visa is not on that list.

The first $100,000 is the hardest

I'd like to talk about how hard it is to accumulate 100,000 from a standstill, a great Charlie Munger quote:

It was a good day for dividend growth investors

Sloppy growth, high unemployment, Europe in a recession, unsustainable Government debt, wars... These two dividend champions respond to the economic struggles by raising their cash distribution at a healthy clip:

The joy of dividends

Consider the following scenario:

Your friend, Joe, just got a job at Wal-Mart for $10 an hour. After FICA and other withholding he takes home $8. Over the course of the next two weeks Joe works 86 hours. That's 10 days, 8.6 hours a day, from 9.00 till 17.36, without breaks, sitting behind the cash register, sweeping floors and dealing with customers. 
At the end of this period his manager writes him a check for $688. Joe walks out of the building, to the parking lot, hands me the check without saying a word. I put it in my pocket, step into my car, and drive off into the sunset. Those 86 hours, as Joe was working, I was playing video-games, hanging out with friends, reading, watching movies and relaxing. Yet, I now have his paycheck.