I apologize for not updating my blog during the month of December. I've been swamped at work with year-end activities and distracted with the holidays.
During the month of December I missed a number of opportunities to buy stocks I liked at attractive prices, such as Coke and BP. I expect there will be some corrections in 2014 that will present additional buying opportunities. I did add to some existing positions in the beaten-down real estate sector at decent prices, namely Realty Income, Healthcare Trust of America and ARCP. In addition, I initiated new position in Ventas (VTR) when it dipped into the 56's, and in Kinder Morgan (KMI) below $36, though I should have picked up KMI at lower prices. Ventas is a blue chip REIT in my book, and will benefit from favorable healthcare demographics. Kinder Morgan is riding the wave of the US energy renaissance on private lands and should provide slow but steady dividend increases for years to come. I missed KMIs lows when it came under attack by the hedge funds who were shorting the stock, but still picked up a starter position at a reasonable valuation.
I ended 2013 with $18,300 in annualized dividend income outside my IRAs and 401Ks compounded over many years of saving and investing. My goal for 2014 is to end the year with an annualized dividend income of at least $20K. This is my retirement annuity, since like most people in the private sector I will not have a corporate pension.
Life is good, and only getting better.
Wednesday, January 1, 2014
Sunday, December 1, 2013
The Magic of Compounding
This over-the-top video focuses on compounding wealth through the superior returns achieved by investor Mohnish Pabrai. Be warned the video is on the slightly obnoxious side, but as dividend investors we have placed both our faith and our wealth in compounding returns over time until we reach that magical place of financial independence.
UCD Value Investing MBA Seminar featuring Mohnish Pabrai & Guy Spier
Thursday, November 28, 2013
Monday, November 25, 2013
Dividend Stocks hitting 52 Week Lows on a Day When the Market Inched to New All-time Highs
The Dow Jones Industrial average inched up to hit all-time highs today. Most components of the Dow are beyond fully valued. The neighborhood I live to live in are where quality stocks are within 10% of their yearly lows. I'm an anti-momentum investor who is always looking for a bargain where the market has irrationally and temporarily driven prices down. Looking at today's 52-week low list, I see some possible opportunities for the dividend investor:
Exelon - is an electric utility in the eastern and mid-western US. It is a low quality utility that has a poor history of enhancing shareholder value. The goal of management seems to be enrich themselves first, then worry about the shareholders later. Not the kind of stock a dividend investor wants to own.
CenturyLink is the third largest phone company in the US, trailing only Verizon and AT&T. CenturyLink was built from the mergers of a number of smaller telephone companies, such as Qwest and Embarq. Unless you're one of the big two, the telephone business can be challenging. CenturyLink cut it's dividend earlier in the year to use the money to pay down its hefty debt load. It is not outside the realm of possibilities that another dividend cut lies in the future. This is a marginal holding in my book that might be worth an investment were it to dip to the high $20s.
HCP Inc. is one of the premier health care REITS. This is the sweet spot of the REIT world with typically long leases and a stable tenant, hence the premium valuations of many of these companies. HCP has paid increasing dividends for 28 straight years, and is rated BBB+ by S&P. HCP has $22B in assets under management in the areas of senior housing, post-acute skilled nursing, life sciences, medical offices, and hospitals. This is a quality REIT that I'd love to pick up at even cheaper prices.
Health Care REIT is another solid health care REIT that owns 1183 properties consisting of senior housing, post-acute skilled nursing, hospitals, medical offices and life science buildings in 43 states, the UK and Canada. HCN pays out about 78% of FFO as dividends. Investors can expect modest dividend growth over the years along with modest FFO appreciation. Again, this is a REIT that is beginning to dip into the upper range of what I would consider an attractive price.
Ventas is also one of the premier health care REITS in the country. The company owns over 1470 separate properties in the areas of senior housing, skilled nursing facilities, hospitals and medical office buildings. With a market cap of around $18B, Ventas' high growth days may be behind it, but there is plenty of room for dividend growth, and share price appreciation at a more modest pace in line with a company of this size. I'd love to pick up a high quality name list Ventas at a few bucks cheaper than today and if the downdrafts in the REIT world continue I may get that opportunity.
AvalonBay Communities is an apartment REIT catering to upper end clientele. It seems to be reasonably well-run and has a premium portfolio of apartment building. But as an apartment REIT, it tends to have primarily short term leases with a lot of tenant turnover, leading to choppy, uneven earnings. For these reasons, and being a long-term shareholder, I would rarely consider investing in an apartment REIT, and will pass on this opportunity.
Exelon - is an electric utility in the eastern and mid-western US. It is a low quality utility that has a poor history of enhancing shareholder value. The goal of management seems to be enrich themselves first, then worry about the shareholders later. Not the kind of stock a dividend investor wants to own.
CenturyLink is the third largest phone company in the US, trailing only Verizon and AT&T. CenturyLink was built from the mergers of a number of smaller telephone companies, such as Qwest and Embarq. Unless you're one of the big two, the telephone business can be challenging. CenturyLink cut it's dividend earlier in the year to use the money to pay down its hefty debt load. It is not outside the realm of possibilities that another dividend cut lies in the future. This is a marginal holding in my book that might be worth an investment were it to dip to the high $20s.
HCP Inc. is one of the premier health care REITS. This is the sweet spot of the REIT world with typically long leases and a stable tenant, hence the premium valuations of many of these companies. HCP has paid increasing dividends for 28 straight years, and is rated BBB+ by S&P. HCP has $22B in assets under management in the areas of senior housing, post-acute skilled nursing, life sciences, medical offices, and hospitals. This is a quality REIT that I'd love to pick up at even cheaper prices.
Health Care REIT is another solid health care REIT that owns 1183 properties consisting of senior housing, post-acute skilled nursing, hospitals, medical offices and life science buildings in 43 states, the UK and Canada. HCN pays out about 78% of FFO as dividends. Investors can expect modest dividend growth over the years along with modest FFO appreciation. Again, this is a REIT that is beginning to dip into the upper range of what I would consider an attractive price.
Ventas is also one of the premier health care REITS in the country. The company owns over 1470 separate properties in the areas of senior housing, skilled nursing facilities, hospitals and medical office buildings. With a market cap of around $18B, Ventas' high growth days may be behind it, but there is plenty of room for dividend growth, and share price appreciation at a more modest pace in line with a company of this size. I'd love to pick up a high quality name list Ventas at a few bucks cheaper than today and if the downdrafts in the REIT world continue I may get that opportunity.
AvalonBay Communities is an apartment REIT catering to upper end clientele. It seems to be reasonably well-run and has a premium portfolio of apartment building. But as an apartment REIT, it tends to have primarily short term leases with a lot of tenant turnover, leading to choppy, uneven earnings. For these reasons, and being a long-term shareholder, I would rarely consider investing in an apartment REIT, and will pass on this opportunity.
| Name | Ticker | Current Price | Yield | Buy Price |
|---|---|---|---|---|
| Exelon | EXC | $27.23 | 5.34% | Pass |
| CenturyLink | CTL | $30.70 | 7.04% | $29.90 |
| HCP Inc. | HCP | $37.70 | 5.57% | $36.50 |
| Health Care REIT | HCN | $57.33 | 5.34% | $55.00 |
| Ventas | VTR | $58.15 | 4.52% | $56.00 |
| AvalonBay Communities | AVB | $116.86 | 3.58% | Pass |
Sunday, November 24, 2013
Going Where Most Investors Fear to Tread: O and ARCP.
This past week I stepped to buy more shares of two monthly dividend paying stocks that were already in the portfolio-- Realty Income and American Realty Capital Properties, two of the largest triple-net REITS in the country. I bought 20 shares of O at an average price of $38.75 and 40 shares of ARCP for $12.95.
In a market that is definitely frothy, with the normal dividend stocks that most dividend investors like being more than fully valued, REITS have been getting pounded, with many in negative territory for the year. Only time will tell if these are bargain prices, or if the stocks will go lower, but to the long term dividend investor it doesn't really matter. And as a dividend investor, you've got to love the accelerated compounding of monthly dividends.
Realty Income is considered a blue chip REIT with a BBB+ credit rating that has a consistent history of slowly raising it's dividend year after year. Don't expect any large moves from O, but do expect a slow, steady increase in dividends and share price over the years. O currently yields approximately 5.6%, and after its mega-acquisition of ARCT has 3,866 properties in 49 states and Puerto Rico. it's top 5 tenants are Fed-Ex, Walgreens, Family Dollar Stores, LA Fitness, and AMC Theaters, with no single tenant accounting for more than 5.1% of total rent. It's occupancy rates have never fallen below 96%. 2014 FFO is forecast to be between $2.53 to $2.58.
ARCP does not have a long history of consistency like Realty Income. ARCP went public two years ago with a portfolio of 63 properties and just two tenants. ARCP has been on an acquisition binge since going public, with it's most recent merger with Cap-lease (LSE) just consummated. The proposed merger with Cole Real Estate Investments (COLE) will create the largest net-lease REIT in the US with an enterprise value of $21.5B. Post-merger, ARCP is forecasting a dividend of $1 per share. FFO earnings guidance for 2014 is in the $1.13 to $1.19 range. Nick Schorsch's aggressive acquisition strategy may pay off for investors in the long run.
If lower prices present themselves on either of these stocks, I'll use the opportunity to nibble away.
In a market that is definitely frothy, with the normal dividend stocks that most dividend investors like being more than fully valued, REITS have been getting pounded, with many in negative territory for the year. Only time will tell if these are bargain prices, or if the stocks will go lower, but to the long term dividend investor it doesn't really matter. And as a dividend investor, you've got to love the accelerated compounding of monthly dividends.
Realty Income is considered a blue chip REIT with a BBB+ credit rating that has a consistent history of slowly raising it's dividend year after year. Don't expect any large moves from O, but do expect a slow, steady increase in dividends and share price over the years. O currently yields approximately 5.6%, and after its mega-acquisition of ARCT has 3,866 properties in 49 states and Puerto Rico. it's top 5 tenants are Fed-Ex, Walgreens, Family Dollar Stores, LA Fitness, and AMC Theaters, with no single tenant accounting for more than 5.1% of total rent. It's occupancy rates have never fallen below 96%. 2014 FFO is forecast to be between $2.53 to $2.58.
ARCP does not have a long history of consistency like Realty Income. ARCP went public two years ago with a portfolio of 63 properties and just two tenants. ARCP has been on an acquisition binge since going public, with it's most recent merger with Cap-lease (LSE) just consummated. The proposed merger with Cole Real Estate Investments (COLE) will create the largest net-lease REIT in the US with an enterprise value of $21.5B. Post-merger, ARCP is forecasting a dividend of $1 per share. FFO earnings guidance for 2014 is in the $1.13 to $1.19 range. Nick Schorsch's aggressive acquisition strategy may pay off for investors in the long run.
If lower prices present themselves on either of these stocks, I'll use the opportunity to nibble away.
Saturday, November 23, 2013
Tuesday, November 12, 2013
Is Old Tech Right for Dividend Investors
To me, technology stocks tend to be the ultimate for fad, momentum and market timer investors of all types, and not the usual shopping ground for value or dividend investors. However, old technology may be an exception to the rule. These companies have moved from their glamor growth days of adolescence to become solid middle-aged citizens making slow and steady progress. As a result, their PEs have shrunk back into value territory and their hoards of cash are now being deployed on dividends and share buybacks, something that would never even have been contemplated by these companies 10 or 15 years ago. The amount of foolish and expensive acquisitions has also slowed down now that they can no longer use an inflated stock price to pay eye-popping numbers for companies with little to no sales. Growth has slowed as well, and deflated PEs, but these companies still generate massive amounts of free cash flow.
Before I launch into my discussion and in the spirit of full disclosure, I work in the IT field and have numerous personal experiences with these companies. I’ll try not to let these experiences influence my opinions unduly, but it is hard not to form an opinion about a given company’s employees.
Microsoft is the tech company everyone loves to hate. It seems that Microsoft can do nothing right if you read the trade rags. I have a very different opinion. Microsoft has clearly been very slow in anticipating technology trends, and has been playing catch-up to its more nimble peers. You can’t argue that, whether it is search, online email, game consoles, operating systems….. they have been slow on the draw. They have also grossly overpaid for acquisitions and been forced to write down some of these investments. But unlike much of the tech press, I’d argue that Steve Balmer has actually positioned the company pretty well for the future. Windows 8.1 is actually a good operating system that is configurable enough to hide some of its most annoying features. The Surface 2 is a wonderful small form multi-purpose PC that corrects many of the short-comings of the 1st generation Surface. Office is under threat from Google Docs and LibreOffice for basic functionality, but continues to be a cash cow for the company. The Windows phone is a low cost alternative to the iPhone that, in my opinion, provides a better user interface than Android and will continue to chip away market share. Azure hosting services and SharePoint are both doing extremely well, while Bing and Xbox are lagging. Their pending acquisition of Nokia continues their metamorphosis into an Apple-like company that produces both hardware and software. I’ll add one last comment that their sales people are very easy to work with and knowledgeable about the company’s products. At $37 Microsoft is a little rich for my blood, and would prefer to pick it up under $34. I view Microsoft as a steady-eddy kind of stock in the tech sector.
Hewlett-Packard is a company that is in deep trouble and deservedly sells at a bargain price. They are on the wrong end of just about every technology trend and in their desperation have made foolish acquisition after foolish acquisition looking for a quick fix to their problems. Printers are the crown jewel or their operation, and selling printer ink refills is a very profitable business, but even their printer business is declining. In their recent quarterly report, the only sector in their business portfolio that didn’t decline was software with a 1% increase in revenue. Whether Meg Whitman can turn this company around remains to be seen, but she has at least but a stop to their streak of ridiculously overpriced acquisitions and directed access cash to stock buybacks instead. I don’t view HP as a long-term hold kind of stock, because I think their decline is almost inevitable, but they could make an interesting turnaround play for short-term money. Their sales force in my experience was inept and uninformed about their own products, and their service was spotty at best. There is not enough of a margin of safety for me to buy this low-quality stock at these prices, and I certain would not consider HP to be type of stock a dividend investor would want to hold for decades. It was a turnaround play when it hit the mid to low teens. HP isn't going out of business tomorrow, but I would think of buying unless it drifts back into the low twenties, and only then as a short-term speculation.
Oracle provides database products and services as well as a number of customizable packaged business solutions built on top of their database engine. They also sell Unix/Linux hardware through their Sun subsidiary. As a customer, the oracle database engine is a first rate offering, but Oracle as a company is truly a pain-in-the-ass to work with. Most other customers I’ve talked feel the same way, and regret their decisions to buy Oracle’s packaged business solutions. The typical customer spends a small fortune getting their business solution implemented (much more than their ever would have guessed), but are unable to switch to a different product because the costs to switch are almost as high as the costs to implement. Oracle attempts to nickel and dime their customers at every turn. I refuse to do business with them and won’t buy their stock.
Apple is still a tech darling though their stock price has come back down to earth. Apple is known for producing high-quality, but expensive products from the iPod to the iPad to the iPhone and PCs. I won’t buy their products because I can find cheaper alternatives that satisfy my needs, but that doesn’t mean I don’t admire the company. The concerns with Apple are the dependency on a few key products that if they fall out of fashion or get leapfrogged by another company could have a devastating impact. The other problem is what to do with the hoard of cash that is not benefiting the shareholders in any way sitting in the bank (oh, to have those kind of problems). Carl Icahn is trying to force Apple’s management to use this cash in a shareholder friendly way. Apple is a tech company to buy at the right price, but investors need to keep a close eye on the company. Things could turn bad for them very quickly if they are out-innovated by another company.
Cisco still owns the network. They also now own IP-phones and are entering the blade server market. Gone are the days where they paid billions of dollars for companies with no sales. Like the IBM of old, no one ever gets fired for buying Cisco. Cisco has a reputation for nickel and diming their customers, but to a lesser degree than Oracle. Cisco has become much more shareholder friendly and is a buy with a yield above 3%.
Intel was the dominant chip maker of the PC-era. They missed the boat on mobile and notepads, and are now trying to catch up and gain market share in those growing markets. Investing in Intel is a bet that their scientists can close the gap with competitors like Qualcomm. In the meantime, they have the free cash flow to support the necessary R&D investment and capital spending require to refocus their operations to devices other than the PC.
A word of caution on investing with technology companies. It is rare that any of them can stand the test of time and the rapid pace of technology change. Investors need to closely monitor these companies and technology trends and be ready to pull the plug when it is obvious that a company has lost its technological edge, least they get stuck slowly dying company like Blackberry.
Before I launch into my discussion and in the spirit of full disclosure, I work in the IT field and have numerous personal experiences with these companies. I’ll try not to let these experiences influence my opinions unduly, but it is hard not to form an opinion about a given company’s employees.
Microsoft is the tech company everyone loves to hate. It seems that Microsoft can do nothing right if you read the trade rags. I have a very different opinion. Microsoft has clearly been very slow in anticipating technology trends, and has been playing catch-up to its more nimble peers. You can’t argue that, whether it is search, online email, game consoles, operating systems….. they have been slow on the draw. They have also grossly overpaid for acquisitions and been forced to write down some of these investments. But unlike much of the tech press, I’d argue that Steve Balmer has actually positioned the company pretty well for the future. Windows 8.1 is actually a good operating system that is configurable enough to hide some of its most annoying features. The Surface 2 is a wonderful small form multi-purpose PC that corrects many of the short-comings of the 1st generation Surface. Office is under threat from Google Docs and LibreOffice for basic functionality, but continues to be a cash cow for the company. The Windows phone is a low cost alternative to the iPhone that, in my opinion, provides a better user interface than Android and will continue to chip away market share. Azure hosting services and SharePoint are both doing extremely well, while Bing and Xbox are lagging. Their pending acquisition of Nokia continues their metamorphosis into an Apple-like company that produces both hardware and software. I’ll add one last comment that their sales people are very easy to work with and knowledgeable about the company’s products. At $37 Microsoft is a little rich for my blood, and would prefer to pick it up under $34. I view Microsoft as a steady-eddy kind of stock in the tech sector.
Hewlett-Packard is a company that is in deep trouble and deservedly sells at a bargain price. They are on the wrong end of just about every technology trend and in their desperation have made foolish acquisition after foolish acquisition looking for a quick fix to their problems. Printers are the crown jewel or their operation, and selling printer ink refills is a very profitable business, but even their printer business is declining. In their recent quarterly report, the only sector in their business portfolio that didn’t decline was software with a 1% increase in revenue. Whether Meg Whitman can turn this company around remains to be seen, but she has at least but a stop to their streak of ridiculously overpriced acquisitions and directed access cash to stock buybacks instead. I don’t view HP as a long-term hold kind of stock, because I think their decline is almost inevitable, but they could make an interesting turnaround play for short-term money. Their sales force in my experience was inept and uninformed about their own products, and their service was spotty at best. There is not enough of a margin of safety for me to buy this low-quality stock at these prices, and I certain would not consider HP to be type of stock a dividend investor would want to hold for decades. It was a turnaround play when it hit the mid to low teens. HP isn't going out of business tomorrow, but I would think of buying unless it drifts back into the low twenties, and only then as a short-term speculation.
Oracle provides database products and services as well as a number of customizable packaged business solutions built on top of their database engine. They also sell Unix/Linux hardware through their Sun subsidiary. As a customer, the oracle database engine is a first rate offering, but Oracle as a company is truly a pain-in-the-ass to work with. Most other customers I’ve talked feel the same way, and regret their decisions to buy Oracle’s packaged business solutions. The typical customer spends a small fortune getting their business solution implemented (much more than their ever would have guessed), but are unable to switch to a different product because the costs to switch are almost as high as the costs to implement. Oracle attempts to nickel and dime their customers at every turn. I refuse to do business with them and won’t buy their stock.
Apple is still a tech darling though their stock price has come back down to earth. Apple is known for producing high-quality, but expensive products from the iPod to the iPad to the iPhone and PCs. I won’t buy their products because I can find cheaper alternatives that satisfy my needs, but that doesn’t mean I don’t admire the company. The concerns with Apple are the dependency on a few key products that if they fall out of fashion or get leapfrogged by another company could have a devastating impact. The other problem is what to do with the hoard of cash that is not benefiting the shareholders in any way sitting in the bank (oh, to have those kind of problems). Carl Icahn is trying to force Apple’s management to use this cash in a shareholder friendly way. Apple is a tech company to buy at the right price, but investors need to keep a close eye on the company. Things could turn bad for them very quickly if they are out-innovated by another company.
Cisco still owns the network. They also now own IP-phones and are entering the blade server market. Gone are the days where they paid billions of dollars for companies with no sales. Like the IBM of old, no one ever gets fired for buying Cisco. Cisco has a reputation for nickel and diming their customers, but to a lesser degree than Oracle. Cisco has become much more shareholder friendly and is a buy with a yield above 3%.
Intel was the dominant chip maker of the PC-era. They missed the boat on mobile and notepads, and are now trying to catch up and gain market share in those growing markets. Investing in Intel is a bet that their scientists can close the gap with competitors like Qualcomm. In the meantime, they have the free cash flow to support the necessary R&D investment and capital spending require to refocus their operations to devices other than the PC.
| Name | Ticker | Current Price | Yield | Buy Price |
|---|---|---|---|---|
| Microsoft | MSFT | $37.62 | 2.98% | $34.00 |
| Hewlett-Packard | HPQ | $26.39 | 2.20% | $21.00 |
| Oracle | ORCL | $34.34 | 1.40% | Pass |
| Apple | AAPL | $519.92 | 2.35% | $475.00 |
| Cisco | CSCO | $23.45 | 2.90% | $22.50 |
| Intel | INTC | $24.21 | 3.72% | $22.50 |
A word of caution on investing with technology companies. It is rare that any of them can stand the test of time and the rapid pace of technology change. Investors need to closely monitor these companies and technology trends and be ready to pull the plug when it is obvious that a company has lost its technological edge, least they get stuck slowly dying company like Blackberry.
Monday, November 11, 2013
The Warren Buffett Way
Some commentary on CNBC by Robert Hagstrom, author of "The Warren Buffett Way," on Buffett's recent investments and whether the investment style is evolving over time. The investment thesis for IBM, in my opinion, is modest growth coupled with a heavy share repurchase program = an ever increasing ownership interest in a company with a shrinking share base and increasing dividends = above average returns for the investor.
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