Sunday, September 13, 2020

How To Be An Unsuccessful Dividend Growth Investor

Recently, I listened to Derek Sivers on Shane Parrish's Knowledge Project podcast. My favourite part of the conversation consisted of Derek reading his directive How to Stop Being Rich and Happy. I loved Derek's minimalist, instructive and pithy directives and they made me want to challenge myself to write my own . Since I don't feel qualified to draft the affirmative set of instructions, I thought I'd reverse engineer and draft my ideas regarding what it takes to be an unsuccessful dividend growth investor. My next entry will be examples of the ways in which I have disobeyed the below six instructions over the years. 

How To Be An Unsuccessful Dividend Growth Investor

     1.       Chase Yield

-          Pay no attention to payout ratios, declining revenue and profits, or management’s guidance. Forget about dividend growth, higher yields mean more cash now.

2.       Think Short-Term

-          Constantly monitor your portfolio, pay attention to every little movement of stocks, and trade frequently. More trading means more profits.

3.       Ignore Valuation

-          Since you’re basing your buying and selling decisions on your thoughts and gut feelings, ignore what the companies you transact on are actually worth. Stocks are merely numbers on a screen, and no-one knows what a fair price might be more accurately than you.

4.       Do No Research

-          No amount of regulatory filings, in-depth analyst analysis, or contrarian pieces could provide you with additional insight into the stocks you choose to purchase. Never let research change your gut feelings..

5.       Brag About Successes

-          Using every social media account you have, brag about any stock on which you make money. Everyone will know how successful you are, so there’s no need to outline your investments that resulted in losses. Obviously the losers were not your fault. 

6.       Forget Diversification, Focus on Concentration

-          Why diversify away market risk when you can only buy a handful of winning stocks. Holding three or maybe four stocks in your portfolio will ensure you maximize returns since you'll only be investing in your best ideas. 




Friday, August 14, 2020

Picking 10 Companies to Hold for 10 Years - Part 4: Popular Picks

For the last post in this series, I thought it would be interesting to see which companies were the most popular for people to pick in order to hold for 10 years. With 128 replies to Dividend Growth Investor's tweet, and most of the replies listing U.S. companies, I was also curious to see how my U.S. picks would compare to the most popular choices.  

The process I undertook to determine the most popular picks was very low-tech. I simply copy and pasted the complete twitter thread into a word processor. Using the thread, I searched the name and stock symbols for the companies that seemed popular and recorded those mentions. I didn't record any company with less than five mentions. Then the mentions were ranked by popularity. The resulting top 10 most popular picks are below:

Microsoft – 41

Johnson & Johnson – 31

Google – 30

Amazon – 29

Visa – 26

Pepsi – 17

Berkshire – 14

Disney – 11

Apple – 11

Facebook – 10

 

Some interesting facts about the top ten choices:

  • Four companies do not pay a dividend (Google, Amazon, Berkshire and Facebook).
  • Of the above companies, the highest dividend yield  is 3.0% from Pepsi. 
  • Of the above companies, the longest streak of consecutive dividend raises belongs to Johnson & Johnson at 58 years. 
  • Eight of the top ten picks are part of the top 10 biggest businesses by market capitalization in the U.S. (only Disney and Pepsi are not)

For those of you interested in the next ten most popular choices, here they are:

 

Starbucks – 9

P&G – 9

McDonald’s – 8

Coca-Cola – 7

Costco – 7

Tesla – 7

Mastercard – 6

Abbvie – 6

Home Depot – 6

Realty Income – 5

 

I was pleasantly surprised that my five picks of US stocks (Microsoft, Johnson & Johnson, Amazon, McDonald's and Realty Income) were all accounted for in the top 20. It's also interesting to note that nine of the ten companies above pay dividends, which is more in-line with what I would expect given Dividend Growth Investor asked the thought provoking question. 



Which of the above 20 companies do you think will generate the highest returns over the next 10 years???


Wednesday, August 12, 2020

Picking 10 Companies to Hold for 10 Years - Part 3: U.S. Companies

Having establishing my criteria for picking companies to hold for the next 10 years, this post will explain how my five U.S. companies meet, or in one case, doesn't exactly meet, these criteria. Before progressing, I want to give credit to Justin Law for taking up the torch from David Fish and updating the Dividend Champions spreadsheet which can be found on this website. I encourage you to visit the site filled with valuable resources for dividend-focused investors, including the Champions spreadsheet which is updated monthly. 

In case you haven't had a chance to look at the criteria entry, the six criteria I used to pick the five U.S. companies that I would hold for 10 years are:

1. Dividend Yield & Dividend Growth
2. Established Track Record
3. Reasonable Valuation
4. Diversification (across sectors and geographically)
5. Momentum
6. Current Ownership (or high on my watch list)

My five U.S. companies are:



Realty Income:
Wanting to select at least one U.S. REIT, I felt the obvious choice was "The Monthly Dividend Company". Over its 51-year operating history, Realty Income has paid out 601 consecutive months of dividends, raised the distribution 91 times, and provides good geographical exposure across the U.S. through their 600+ tenants. Although the stock in down about 10% in the last year, the price is a reasonable multiple of about 19X trailing FFO. A key risk to consider is the ability of Realty Income's tenant base to continue to pay their rent despite the coronavirus pandemic. The fact that 91.5% of tenants paid their July rent should provide some comfort in that respect.

Johnson and Johnson:
Based on demographics alone, choosing a healthcare company to invest in for the next 10 years seemed like a good choice. What JNJ provides in terms of geographical diversification (almost half their revenue is generated outside the U.S.), product diversification (providing consumer, pharmaceutical and medical devices), along with the potential upside from their covid-19 vaccine make this a worthwhile selection. The 58 consecutive years that company has increased its dividend, and the current ~2.8% yield (despite the 15% YoY increase in share price) help make the pick easy. The downside I see for JNJ is the regulatory risk and possible lawsuits that could materially impact their financial results. Still, I feel comfortable owning shares for the long-term. 

Microsoft:
When considering a global technology company to include in my picks, Microsoft seemed obvious for a couple reasons. With about 48% of revenue generated outside the U.S., Microsoft is truly global and nature and has an incredibly strong credit profile reflected in their AAA S&P rating. With the share price up over 55% in the last year, the company has experienced strong momentum. When looking at dividend and valuation metrics, the company has a very modest 1% dividend yield, but has grown their payout annually for 18 consecutive years, including a 7% raise last year. The biggest downside I see with Microsoft is a lofty valuation of 36X trailing earnings, which is hard to justify given the ~13% revenue growth over the last year. 

McDonald's:
With 63% of their sales generated outside of the U.S., and one of the most recognized logos in the world, McDonald's seems like a good bet to hold over the next 10 years. With 44 consecutive years of dividend increases (including about 8% last year), and a 2.4% yield, management has proven that returning cash to shareholders is a priority. On the other hand, the stock price is down about 5% over the past year, yet the company continues to trade at a rather lofty 33X trailing earnings. More than another other company in the ten I have selected for this exercise, I think the coronavirus pandemic could have lasting negative effects on McDonald's sales. I do take some comfort in the fact that local McDonald's drive-through was constantly busy during the three months of partial shutdown here in Quebec. 

Amazon:
The strikes against Amazon are pretty obvious: no dividend, trading at 121X trailing earnings, and the only company I don't personally own of the ten selected. Why would I pick it to own for the next 10 years? Momentum is a factor (up almost 80% in the last year), geography/product diversification, and most importantly, market domination. I'm not sure any other single company (possibly Zoom?) stands to benefit more from this pandemic than Amazon. Are people more comfortable shopping online during a pandemic? Are they thankful to be entertained by Amazon Prime movies, shows and video games? Does Amazon web services stand to grow as more businesses move to web-based storage and software? The big risk I see for Amazon is regulation. Hearing Jeff Bezos not guaranteeing to Senators that Amazon didn't use competitor selling data to create their own private label products was alarming. I wouldn't discount having some sort of forced breakup thrust upon the company by a regulatory authority (more than likely outside of North America)...but, Bezos has a way of sniffing out opportunities to profit where others don't follow. I won't bet against him succeeding over the next 10 years.


Do you see any key risks in my five choices above that I overlooked???








Tuesday, August 11, 2020

Picking 10 Companies to Hold for 10 Years - Part 2: Canadian Companies

Having establishing my criteria for picking companies to hold for the next 10 years, this post will explain how my five Canadian companies meet these criteria. Before progressing, I want to give credit and acknowledge the Dividend Growth Investing & Retirement website operator that compiles the monthly Canadian Dividend Growth All-Star list which I use extensively. I encourage you to sign up to receive this valuable resource each month. 

In case you haven't had a chance to look at the criteria entry, the six criteria I used to pick the five Canadian companies that I would hold for 10 years are:

1. Dividend Yield & Dividend Growth
2. Established Track Record
3. Reasonable Valuation
4. Diversification (across sectors and geographically)
5. Momentum
6. Current Ownership (or high on my watch list)

My five Canadian companies are:

Telus:

The strength of Telus’ case to be included in a short-list of Canadian companies starts with their 5% yield, around 7% dividend growth last year, their commitment to growing their dividend growing forward, 16 years of consecutive dividend increases, and reasonable price at around 17X trailing earnings. Telus fails the momentum criterion (price is basically flat over the last year), and revenue is Canada dependent. Perhaps more than any other company on the Canadian list, Telus faces some regulatory risk as it relates to the Canadian Radio-television and Telecommunications Commission demands to lower their Internet prices, a key electoral promise for the governing Liberals in the last federal election. However, I feel this risk is partly offset by the dominant position that Telus holds as a telecommunications company in Western Canada.


Royal Bank:

I felt compelled to include one bank in my list of five companies that I would feel comfortable holding over the next decade, and decided on picking the largest bank in Canada by assets. Royal provides an attractive 4.7% yield, which it grew at around 8% last year (no expected dividend growth this year given covid-19), and is priced at a bargain 8X of trailing earnings. Although Royal has some operations outside of Canada, they are largely dependent on the Canadian economy, and their shares are down about 5% over the past year, showing poor momentum. Given how reliant Royal Bank is on the Canadian economy, a key risk is likely the tepid growth that Canada could experience as a result of the coronavirus pandemic.


Brookfield Infrastructure Partners (“BIP”):

As one of my largest holdings, I felt compelled to include BIP as it meets so many criteria. Solid starting yield 4.4% (with dividends being paid in USD), 12 consecutive years of dividend growth (~7% raise in January), a downright reasonable price of ~13X trailing FFO, and worldwide diversification through their four operating segments (utilities, transport, energy, data infrastructure). Momentum is modestly positive, with the stock up about 10% in the last year. The key risk I see with BIP is the complex corporate structure that might pit management priorities against those of unit holders. That said, I do think Bruce Flatt manages the larger Brookfield empire as well as any CEO in North America.

 

Granite REIT:

Although it’s not the best known REIT in Canada, Granite is worth including in a portfolio designed to prosper for a decade. Due to the strong momentum of it’s share price (up 25% over the last year), the initial yield isn’t super impressive at 3.7%, nor is their growth of distributions at 2.7% last year. However, Granite has an established track record of raising their distributions annually over the past 9 years, is still priced pretty reasonably at ~20X FFO, and has excellent geographical diversification with more properties in the US (34 at YE19) than Canada (26), along with some 31 properties in Europe. Although management has decreased the concentration on revenue further away from Magna, the key risk for Granite still relates to having about 40% of their revenue generated from one tenant that operates as a supplier to the cyclical auto industry.

  

Fortis:

In terms of criteria outlined yesterday, Fortis earns easy checkmarks on dividend yield (3.5%) and dividend growth (6% raise last year), established track records as shown with 46 years of consecutive increases, current ownership and has great geographical sales diversification for a Canadian company with about 56% of FY19 revenue generated in the U.S., and minor operations in the Caribbean. However, Fortis is a bit pricey at around 20X trailing earnings and the share price has basically been flat over the past year, failing to gain any momentum. Like any other utility operating across multiple jurisdictions, regulatory risk has the potential to materially impact business results.



Are there great Canadian companies that you think meet all the criteria and should have been included in the above five?






Monday, August 10, 2020

Picking 10 Companies to Hold for 10 Years - Part 1: Criteria

Since I haven’t written much this year, I thought I’d try something different this week and expand on a fun thought experiment suggested on Twitter by Dividend Growth Investor in late July. As per the screenshot below, DGI asked which five companies you would be willing to hold for the next ten years. Not being one to play according to the rules, I decided to reply with both my Canadian and U.S. picks.

 

Today, I wanted to break down the criteria I thought were worth considering when making my picks. Not to say that all of my picks adhere to all these criteria, but only that it’s important to establish a framework when making any investment decision. Here’s an overview of the criteria I had in  mind while tweeting my response:

 

Dividend Yield & Dividend Growth: Given how much credence I put into dividend yield and growth in my investment process, I thought this was an obvious starting point to consider evaluating any company for investment.

 

Current Ownership: I’m a fan of Nassim Taleb’s writing and one of his most influential books on me was Skin in the Game. Additionally, by limiting myself to companies I already own (or are high up on my watchlist), I shrink the universe of possible picks down to a more manageable number of businesses.

 

Established Track Record: It’s probably my pessimistic side that severely limits my ability to pick high growth companies in which to invest. To counteract this weakness, I choose to invest in established companies that have a history of generating sufficient profits over a long period of time that enable management to reward shareholders with dividend payments and hopefully increases.

 

Reasonable Valuation: With one possible exception, all of my picks are pretty reasonably valued. I do think several of the businesses I have selected are trading at a slight premium to fair values, but I’m alright with paying that premium given the low-interest rate environment in which we find ourselves.

 

Diversification: Granted, I cheated by doubling the number of companies I was allowed to pick, but diversification by industry and geographic focus were considerations for my picks. For instance, the number of global healthcare companies listed in Canada is limited to Bausch Health (formerly Valeant), which has nowhere close the global reach and importance than Johnson and Johnson.

 

Momentum: Largely as a result of recently finishing Daniel Crosby’s The Behavioral Investor, I’ve been thinking more about momentum as a factor in my investment process. Although exceptions abound, I generally think stocks that have trended upwards in the last the last year will continue to do so, barring any unforeseen obstacles.

 

Tomorrow, using the criteria established above, I’ll provide a breakdown of why I chose the five Canadian companies to hold for the next ten years.

 

Are there obvious criteria that I missed when making my selections???