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Posts Tagged ‘JNJ’

Building a “Dividend House”

Posted by mounddweller on February 26, 2018

Fellow Investors,

I am a frequent reader of articles on Seeking Alpha (www.seekingalpha.com).  There are several superb analysts who write regularly on the site.  There are also an innumerable number of hacks.  It doesn’t take long to tell which is which.  There are also many individuals, like myself, who just like doing their own analysis and publishing the results.  One such individual goes by the non de plume, “Dividend House.”

“Dividend House” is a person nearing retirement age who decided to take the bull by the horns, divest her and her husband’s portfolios of mutual funds and start investing in dividend growth stocks (DGI).  In order to make sense of her portfolio she devised a wonderful analogy of the stocks in her portfolio as being sections of a house, i.e. foundation, walls, roof, etc.  If you’re so inclined you can read about her Dividend House model here: https://seekingalpha.com/article/3791466-build-dividend-house-stocks-go.

Recently, Dividend House, posted another article discussing the possible need to replace one of the stocks in the foundation portion of her portfolio.  The stock she was considering replacing was Owens & Minor (OMI).  OMI is a healthcare company with an excellent record of growing dividends.  However, in recent years, the turmoil in the healthcare industry has wreaked havoc on its business model and forced it to adapt or die.  For this reason Dividend House was considering removing it as a foundational stock.

After reviewing Dividend House’s criteria for foundational stocks and the overall methodology for building her portfolio, I made the following observations:

  • With over 60 stocks, she had too many stocks in her portfolio, and
  • Stocks that form the foundation of a portfolio should very rarely need to be sold.

I told her if it were my dividend house I would simplify the criteria for foundational stocks to only include those which met the following:

  • Stock must be a Dividend King (50+ years of annual dividend increases)
  • Dividend growth must have exceeded and have a reasonable expectation for continuing to exceed the annual rate of inflation.

My rationale was simple as well. The overall goal of the portfolio is to provide a safe and growing stream of income in retirement. She also want to sleep well at night (SWAN). A dividend king stock has proven to be resilient in all kinds of markets and economic conditions. As long as you can reasonably expect its business model to continue to be successful and its growth to exceed the rate of inflation nothing else should really matter.

I would also have fewer stocks in my foundation. Foundational stocks should be big, ‘cornerstone’ size investments. I would have more, smaller positions in my wall stocks and even more and smaller positions in my roof stocks.

After writing these comments, I decided I would spend some time coming up with what I thought would be a good foundation for a DGI portfolio.  However, before doing that I had to come up with a methodology for how I would build my own dividend house.

First, the foundation.  I previously referenced my simple criteria for selecting foundational stocks.  I also decided that foundational stocks would constitute 50% of my total stock portfolio and that each position would be less than 5% of the total stock portfolio.  Thus, my foundation would consist of no more than 10 stocks.

Next, are the walls.  The criteria for wall stocks is similar to those of the foundation.  The only difference being that the stock must be a Dividend Aristocrat, having increased its dividend annually for at least 25 years.  The walls would constitute 25% of my overall portfolio.

The criteria for stocks in the roof of my dividend house would consist of equities that have raised their dividends annually for at least 10 years.  In aggregate, they would constitute no more than 15% of my DGI portfolio.

Finally, I would also have a garden section of my dividend house.  This would consist of ‘up and comers’ in the world of DGI stocks.  They might not have any record of annual dividend increases but have the potential for rapid revenue growth and eventually might become consistent dividend growers as well.  The garden would constitute no more than 10% of my total DGI portfolio.

After building this framework I then spent some time determining what stocks should be placed in the foundation of my dividend house.  Using David Fish’s latest DGI spreadsheet which you can find here: http://www.dripinvesting.org/tools/tools.asp, I found that there are currently 27 companies that qualify as Dividend Kings, i.e. having raised their dividend annually for 50+ years.

As you might expect many of the names in this list are well known large cap stocks.  However, I also found several smaller, lesser known stocks which have very enviable dividend growth records.  To determine which 10 of the 27 stocks would best fit in the foundation of a DGI portfolio I decided to use the following criteria:

  • 10-year annualized growth rate of dividends
  • 10-year yield on cost (YoC), assuming investor had purchased stock 10 years ago at the 52-wk low.
  • 5-year YoC, assuming investor had purchased stock 5 years ago at the 52-wk low.
  • Free cash flow (FCF) payout ratio using the most recently available data. In most cases this was the fiscal year 2017 data, but in some cases was the trailing 12 months, and in a couple of cases was the 2016 fiscal year data.

7 of the 10 stocks selected were in the top 10 of the 10-year average growth rate of the dividend,
8 of 10 were in the top 10 of the 10-year highest yield on cost, 7 of 10 stocks selected were in the top 10 of the 5-year highest yield on cost, 4 of 10 were in the top 10 of the FCF payout ratio, and 3 of 10 were in the top 10 of all four criteria.  The results of my analysis are contained in the below table.

The 10 stocks I selected for the foundation of my dividend house, listed in alphabetical order are as follows:

  • Minnesota, Mining & Manufacturing (MMM), now more commonly known as 3M, is a large cap conglomerate which has increased its dividend annually for 60 years. I selected MMM because of its enviable ability, despite its size, to grow its dividend at a double digit rate.  It also has a very high 10-year YoC.
  • Colgate Palmolive (CL) is a well-known manufacturer of personal care products. It too, is a large cap stock.  It has increased its dividend every year for the past 54 years.  I selected it because of its high single digit growth rate in dividends as well as its leading position in a recession resistant industry.  People are never going to stop buying shampoo and toothpaste.
  • Genuine Parts Co. (GPC) is a lesser known but well respected manufacturer and retailer of replacement auto parts. It has increased its dividend annually for 61 years.  GPC is one of those companies that you rarely see mentioned on CNBC or on the lips of your friends as a stock tip at a cocktail party.  I selected it because it too is in a recession resistant industry and despite not being in the top 10 of 10-year average dividend increases, its annual dividend increases have handily outpaced inflation.  It also was in the top 10 for both 10-year and 5-year high YoC.
  • Hormel Foods (HRL) is a well-known name in the food manufacturing industry. It has raised its dividend for 52 years.  I selected it for its recession resistant business model and the fact that it was in the top 10 of all four of my selection criteria.
  • Johnson & Johnson (JNJ) is one of the most well-known and respected companies on the planet. It is a large cap stock that is diversified across the healthcare and pharmaceutical industries.  It has raised its dividend annually for 55 years.  I selected it for its consistent growth.  In my opinion, no DGI portfolio would be complete without it.
  • Lancaster Colony (LANC) is an amazing hidden gem. Like HRL, it operates in the food manufacturing industry.  It has zero debt and has raised its dividend for 55 years.  I selected LANC for its conservative balance sheet and its focus on returning capital to its shareholders.  Not only does this company pay out a growing annual dividend, it also pays out a special dividend every few years.  The past couple of times the special dividend alone has equaled 5%!
  • Lowe’s (LOW) is the well-known home improvement retailer. This large cap stock has also increased its dividend for 55 years.  I selected it because it was one of only three stocks that were in the top 10 of all my criteria.
  • Nordson Corp. (NDSN) is another one of those hidden gems I found. Prior to doing this research I had never before heard of it.  It is a manufacturer of packaging machinery.  It has increased its dividend every year for 54 years.  Despite it having a very low initial yield, it has one of the highest 10-year YoC.
  • Target (TGT), like JNJ and LOW, is another one of those household name stocks. It operates as a big box retailer.  It has increased its dividend for 50 years.  I selected it because despite its well published hiccups of the past several years (data security and amazon competition) it has managed to continue to rapidly grow its dividend.  It was also one of the 3 stocks which were in the top 10 of all of my criteria.
  • Vectren (VVC) is a lesser known utility stock. It operates both regulated gas and electric utilities in the Midwest.  It has increased its dividend annually for an amazing 58 years.  I selected it as the one utility in my foundational portfolio and also because of its conservative, slow growth, operations.

Before wrapping up this post I want to briefly comment on two prominent Dividend Kings that are conspicuously missing from my pick of foundational stocks.  They are Coca Cola (KO) and Procter & Gamble (PG).  Both of these companies, while continuing their streak of annual dividend increases, 55 and 61 years respectively, have faltered in the past several years.  Neither company was in the top 10 of any of my selection criteria.  I own KO in my current portfolio and as a result of this analysis I am considering replacing it.

Best Regards,

Troy

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SEP Closed Positions

Posted by mounddweller on September 18, 2011

Fellow Traders,

I finally was able to catch up and update the Historical Results and Open Positions pages of my blog.  I encourage you to take a look.  Also, I wanted to take a moment to post the trades I closed between the AUG and SEP expiration.

As you can see I closed 7 trades this month.  All were cash secured naked put trades.  Premiums received (net of commissions) totalled $1,040.82.  My maximum amount of capital at risk during the month was $73,500.  This equates to a ROIC of 1.42%.

I’m hopeful I will be able to take advantage of similar opportunities as they present themselves between now and OCT expiration in 5 weeks.

Regards,

Troy

 

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New NP Trades

Posted by mounddweller on August 18, 2011

Fellow Traders,

I entered three new NP positions today.  One is a weekly, the other two have a regular SEP expiration.  Below are the details of my trades:

First, let’s look at my Gamestop (GME) trade.  Long-time readers of my blog know that I’ve traded GME several times over the past few years.  It is a stock I’m comfortable trading at the right price.  Yesterday, after the market close they announced quarterly earnings.  Analysts weren’t happy with what the initially saw in the press release and the stock sold off hard at the open this morning.  Luckily, I was paying attention at the right time.  I was able to sell the SEP $18 puts for $0.65.  This all happened within the first hour of trading this morning.  Later in the day analysts (probably after the earnings conference call) formed a different opinion and the stock recovered swiftly, closing at $21.43 up 4.94%!  My ROIC for this trade is a very nice 3.49% with 16% DSP (based on the closing price of $21.43).

Next up is INTC.  I’ve been wanting to get back into an INTC trade for sometime now and finally today the opportunity presented itself.  I STO 5 AUG26 $19 puts at $0.20.  In my humble opinion INTC is a great buy at $19 so I have no qualms selling puts at that level regardless of market conditions.   If INTC holds above $19 my one-week ROIC will be 0.94%.  Annualized that’s north of 50%.

Last, but certainly not least, is another blue-chipper, JNJ.  I STO 2 JNJ SEP $57.50 puts at $0.62.  My ROIC for this trade is right at 1.00% with 8.96% DSP.  The reason I like this trade comes from my review of the 2-year price chart.  JNJ exhibited strong support at $57.50 during the sell-off last summer.

Other stocks I’m keeping an eye on for a possible NP trade are: T, ABT, MDT, CSCO, AFL, WMT.  You’ll notice all are solid blue-chip companies.  Now is not the time to gamble with anything but the very best.

Regards,

Troy

 

 

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MAR Wrap-up and New APR Trades

Posted by mounddweller on March 20, 2011

Fellow Traders,

Like many of you I’ve spent a good portion of this weekend reviewing how I did in March and looking for potential April trades.  Here’s a brief recap of my March activity.  First, my closed trades:

(1) Back on February 4th I sold 4 MRK MAR $31 puts at $0.35.  After commissions I netted $128.03.  These puts expired OTM.

(2) On February 28th I sold 3 RVBD MAR $35 puts at $0.45.  After commissions I netted $123.77.  This was one of my Deep OTM NP Strategy selections.  The puts expired OTM.

Now, onto my trades which remained open.

(1) First Exelon (EXC).  I started this trade almost one year ago, back on April 16th.  My most recent activity includes selling 2 APR $43 calls at $0.90 and then buying them back late last week at $0.30.  Also, earlier this month I sold 3 APR $40 puts at $0.50.  Between selling calls and puts, and the dividends received I have reduced my cost basis from $42.50 to $37.46.

(2) Next up is Hugoton Royalty Trust (HGT).  This is my third trade in HGT.  The first two were very successful.  I initiated this third trade back on March 1st, buying 500 shares of HGT at $21.50.  On March 17th I sold 5 AUG $22.50 calls at $0.80.    The strategy with HGT is to buy the shares, sell calls 4-6 month out, and then collect monthly dividends.

(3) CSCO is my next open position.  Back on February 10th I opened this trade by selling 5 MAR $18 puts at $0.21.  On Friday I rolled these puts out to JUN for a $0.70 net credit.

(4) NOK is up next.  I did a buy/write on them back on March 11th at a net debit of $8.17.  I sold the APR $9 calls. 

(5) My remaining open position is in Getty (GTY).  On March 14th I sold 5 MAR $22.50 puts at $0.55.  These puts expired ITM and thus I will have 500 shares of GTY put to me at $22.50 on Monday morning.  My plan is to sell the JUN $25 calls at $0.75 and collect the $0.48 dividend which will be paid in mid-April.

Now onto my my list of potential trades for April.

Let’s briefly look at each of these.

(1) First up is Gamestop (GME).  You’ll notice I have them listed twice.  That’s because I can’t decide which trade I like better.  I like the ROIC with the $19 put and I have traded GME at this strike price with good results before.  However, I like the $18 strike because there is better support at this price.

 (2) Next is CSCO.  As I mentioned above I am already short 5 contracts at the $18 strike.  This trade expands my position by selling more puts at a much lower strike.

(3) Aflac (AFL) is my next pick.  It has fallen sharply because of the tremendous disaster in Japan where it does a lot of business.  It closed at $50.47 on Friday well off its 52-wk high of $59.54.

(4) JNJ is up next.  I ‘borrowed’ this pick from by investing buddy Teddi over at www.fullyinformed.com.  JNJ is approaching bargain territory so this is a good trade despite the sparcity of DSP.

(5) AT&T (T) is fast approaching their ex-dividend date and is trading at a nice price.  Thus, I’m happy to enter a buy/write trade here and reinitiate a position in T.

(6) Last up is GTY which I discussed up above.  As I said before I intend to sell CCs against the shares I’m acquiring tomorrow.  With a dividend yield in excess of 8% I won’t mind holding this one for awhile.

Best of luck to all my readers out there.  Let me know your thoughts on my trades and I would enjoy hearing what trades you’re considering.

Regards,

Troy

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VISIONS Scout Run – 090510

Posted by mounddweller on September 5, 2010

All,

Happy Labor Day weekend!  I hope you all are enjoying the holiday.  I ran a VISIONS Scout screen this evening to see what might look good for the short trading week ahead.  The strong upward move last week produced a bumper crop of stocks meeting Ron’s criteria.   79 stocks have a Gold$ of 80 or better.  16 of these had a perfect Gold$ of 100.  A partial listing of the stocks found in Ron’s Scout Stocks to Buy report is embedded below.  Because of the large number of stocks on the list I had to limit it to the 38 having a Gold$ score of 90 or greater.

There are a number of stocks in the top 10 that caught my eye.  In particular I find XOM and WAG to be of interest.  Both are what I consider top-shelf, blue chip companies.  Both pay a moderate and growing dividend.    I already have a position in XOM.  I own shares, have sold CCs against those shares and also have open NP trades to acquire additional shares.  I am trading XOM using a strategy developed by my good friend Teddi over at www.fullyinformed.com.

I am interested in opening a position in WAG.  As I mentioned in my post from a couple weeks ago it is in recovery mode having fallen to a recent 52-wk low of $26.26.  I think it has great long-term growth prospects with the continued aging of the baby boomers.  It currently trades at less than 2x book value.  It has a dividend yield of 2.47% and a payout ratio of around 26% which means there is plenty of room for future dividend growth.

Other stocks in the top 10 that interest me are AEO, MRVL, and SNDA.  AEO is the retailer American Eagle.  Their target market is kids and young adults from 15-25.  They have an excellent balance sheet but I’m a little fearful of their near-term earnings potential.  Their target market has the highest unemployment rate of all in the US. 

MRVL is a high tech manufacturer of communications gear.  They too have an excellent balance sheet and trade at < 10x forward earnings.  SNDA is another Chinese online game stock.  You’ll recall I mentioned a couple of their competitors in my post two weeks ago. 

SNDA has over half of its market-cap sitting in cash on it’s balance sheet.  Thus, if you remove the cash from the calculation instead of trading at just over 13x forward earnings it is trading for about 6.5x forward earnings!  Dirt cheap! 

6 other stocks outside the top 10 also have Gold$ scores of 100.  They are: ADBE, SF, GPN, JNJ, GILD, and YHOO.  Of these I like JNJ and YHOO.  JNJ because it is the bluest of the blue-chips and is at an attractive price point.  YHOO because after all of the excitement about it being bought last year it has fallen off of everyone’s radar screen and is now plugging along in relative obscurity.

Hope everyone has a great week.  All of the big boys will be back on Wall Street after wrapping up their summer vacations in the Hamptons.  It will be interesting to see if they put their muscle behind power ing the market higher of if they decide to pull the plug based on the lousy economic data.

Regards,

Troy

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