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+ + This website was designed as a part of an assignment for ISM 6225. We do not claim any ownership of the content herein. Webpage is created for educational purposes only and we are not responsible to how the information is used outside of education. +
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+ + ++ Web page content is related to dividend investing. +
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+ + With economic fundamentals now weakening significantly and pointing to just 1.5% GDP growth in the first half of 2019 (half 2018's growth rate) valuation becomes more important than ever for putting new money to work. + + It can feel overwhelming, but don't let that stop you, because you really can do it. Start today. Here's how: +
+ ++ Do not wait until next month, because that becomes next year, and so on - until your child is 14 + and you realize you simply may not have enough time to build a substantial fund for them. + Procrastination is a powerful, insidious human tendency, and you need to commit to beginning this journey immediately. +
+ ++ Setting aside just $15 a month is a great start when you're in the early days of parenthood. + Even if you're only using a savings account, the key is to automate the process so that you are routinely depositing that $15 every single month. + While it may seem small, putting away $15 on a monthly basis into an account with 1.00% interest will yield $3,569.21 in 18 years. + Invest in a manner that generates a 5% return, and that number grows to $5,839. Scale up the monthly contribution each year, and the number grows exponentially. +
+ ++ Within the first six months of your child's life, you should decide + what type of dedicated account you will use for college funding over the remainder of his or her formative years. These are your primary options: +
++ Accounts that provide tax-free growth when the dollars are used for educational expenses, whether it be college or a private grade school/high school. + The contributions go into the account after tax, but earnings accrue tax-free. Your individual state may also provide a tax break through a sponsored plan. + It's a compelling and effective way to save. However, 529s do not come without caveats. If the child chooses not to go to school, the account can be changed + to another family member and used properly. If the account is used for non-educational expenses, the earnings are taxed and you could be susceptible to an IRS + and state penalty, as well. +
++ A brokerage account opened by a parent (or grandparent) in which money is invested to provide long-term growth for the period until college. + These accounts provide greater flexibility than 529 plans and can be used for any expense to benefit the child. The parent is simply funding the account, + making decisions on how it is invested, and then taking out proceeds as needed to support their child - everything from college to new shoes to a car. + Keep in mind, though, that when the child reaches the age of majority (depending on the state, age 18 to 21), he or she then technically "owns" the account + and can do whatever they want with it. There are some tax advantages with a custodial account, but not nearly as favorable as with a 529 plan. + For example, the first $1,050 of earnings in a custodial account are tax free, and the next $1,050 is taxed at the child's tax rate (usually $0). + Earnings beyond that $2,100 per year, however, are taxed at the parent's tax rate, so amassing significant assets in a custodial account can lead to tax pain + for the custodian. +
++ Some parents hedge their bets. What if Junior decides not to go to college? What if he decides to surf in Oahu after high school instead? + A Roth IRA funded over the formative years can be tapped to assist with college, but if that doesn't happen, it is there for the parents' retirement. + Contributions to the Roth can be taken out tax- and penalty-free at any time for any reason. Any earnings that are used for college expenses can avoid IRS penalty as well, + but they would be taxed as income. Earnings can come out tax-free once the Roth owner (the parent) is over 59. +
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+ With economic fundamentals now weakening significantly and pointing to just 1.5% GDP growth in the first half of 2019 (half 2018's growth rate) valuation becomes more important than ever for putting new money to work.
++ With the S&P 500 up 10% YTD and now historically fairly valued (based on forward PE) buying quality undervalued dividend growth stocks is one of the best strategies you can use. + + The key is to have the right watchlists to know what's worth buying at any given time. I'm fortunate to build and maintain such watchlists as part of my career as a value-focused income growth investment analyst. + + This weekly watchlist series is designed to be a tool to give you solid investing ideas, so you can always know what's the best place to put your hard earned money to work at any given time. Specifically in companies with high margins of safety that have less to fall in a market correction, and which are all coiled springs that are likely to deliver outsized total returns if their valuations return to historical levels. + + To paraphrase a famous Latin quote (Fortuna Eruditis Favet "fortune favors the prepared mind") +
+"Fortune favors the prepared investor, and so disciplined investors prepared with quality watchlists and high savings will eventually make a fortune."+ + + +
+ This group of dividend growth blue-chips represents what I consider the best stocks you can buy today. They are presented in five categories, sorted by most undervalued (based on dividend yield theory using a five-year average yield). +
++ For the purposes of these valuation-adjusted total return potentials, I use the Gordon Dividend Growth Model, or GDGM (which is what Brookfield Asset Management uses). Since 1956, this has proven relatively accurate at modeling long-term total returns via the formula: Yield + Dividend growth. That's because, assuming no change in valuation, a stable business model (doesn't change much over time) and a constant payout ratio, dividend growth tracks cash flow growth. +
++ The valuation adjustment assumes that a stock's yield will revert to its historical norm within 10 years (over that time period, stock prices are purely a function of fundamentals). Thus, these valuation total return models are based on the formula: Yield + Projected 10-year dividend growth (analyst consensus, confirmed by historical growth rate) + 10-year yield reversion return boost. +
++ For example, if a stock with a historical average yield of 2% is trading at 3%, then the yield is 50% above its historical yield. This implies the stock is (3% current yield - 2% historical yield)/3% current yield = 33% undervalued. If the stock mean-reverts over 10 years, then this means the price will rise by 50% over 10 years just to correct the undervaluation. +
++ That represents a 4.1% annual total return just from valuation mean regression. If the stock grows its cash flow (and dividend) at 10% over this time, then the total return one would expect from this stock would be 3% yield + 10% dividend (and FCF/share) growth + 4.1% valuation boost = 17.1%. +
++ The historical margin of error for this valuation-adjusted model is about 20% (the most accurate I've yet discovered). +
++ Fundamentally, any company is worth the present value of all its future cash flow. That's as basic a valuation method as you can get. However, in reality, the future is uncertain, and the discount rate you use, as well your growth assumptions, can make a DCF model say pretty much anything you want. +
++ This is why I consider Morningstar's 100% long-term, fundamentals-driven and conservative analysts to be a great source of DCF estimated fair values. +
++ Those analysts generally assume slower growth than the analyst consensus and even sometimes management itself. As a result, Morningstar four and five star rated companies can be thought of as "strong buy" or "very strong buy" recommendations, respectively, from analysts whom I consider among the best in the business. +
++ Above you can see the top-rated companies that my Deep Value Dividend Growth portfolio owns. Every company presented here is one that my own long-term, valuation-adjusted total return model (based on the one Brookfield Asset Management has been using for decades) expects to generate at least 13% long-term total returns (margin of error 20%). +
++ Note that only the companies with "5-star prices" are ones that Morningstar has done a deep dive on. The "Q" rated companies are merely compared to their peer groups, and thus, not necessarily as reliable. +
++ But DCF is far from the only valuation method you should consider. +
+ ++ Remember that Yale valuation study that looked at stocks based on P/E ratio? Well, the venerable P/E ratio is one of the most popular valuation approaches, and for good reason. While no valuation method is perfect, a good rule of thumb (from Chuck Carnevale, the SA king of value investing and founder of F.A.S.T Graphs) is to never pay more than 15 times forward earnings for a company. +
++ Chuck usually compares companies to their historical P/E ratios, and he's ranked in the top 1.4% of all analysts tracked by TipRanks (based on the forward 12-month total returns of his recommendations). While 12 months is hardly "long term," the point is that Mr. Carnevale is a fantastic value investing analyst, and so, his rule of thumb is well worth keeping in mind. +
++ Here's DVDGP's portfolio holdings that have forward PEs of 15 or less. +
++ Note that stewardship rating is Morningstar's estimate of the quality of the management team. P = poor (DVDGP's policy is to avoid all such companies), S = standard (average to good), and E = exemplary (very good to excellent). +
++ But while both DCF and forward P/E are great methods to value a company, personally my absolute favorite, and what I use to invest my own money and make most of my recommendations, is Dividend Yield Theory, or DYT. This is how I create my five watchlists, which I intend to use to invest all my savings for the rest of my life. +
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+ Dependable dividend stocks that routinely grow their payouts are welcome in any environment. But they seem especially attractive nowadays.
++ Stock market volatility is back with a vengeance. The Dow Jones Industrial Average went from powering ahead to an all-time high of 26,828 on Oct. 3 to losing 8% + in the span of about three weeks. These kinds of rocky markets tend to give investors motion sickness. But they can add a dose of Dramamine to their portfolios - in the form + of reliable dividend-growth stocks. +
++ "Dividend growers, which tend to be quality companies, have generally shown greater resilience in unsteady markets and could address concerns about dividend stocks + in a rising-rate environment," write Tianyin Cheng, director of strategy and ESG Indices at S&P Dow Jones Indices; and Vinit Srivastava, head of strategy and ESG indices + at S&P Dow Jones Indices."This argument applies to not only to the U.S. large-cap space, but it also extends to small- and mid-cap segments and international markets." +
+ ++ Dividend stocks - with long track records of rock-solid rising payments tend to generate superior returns over long periods of time and can help investors + weather shorter periods of market turbulence. +
+ ++ Telecommunications stocks are synonymous with dividend payments. Customers pay for service every month, which ensures a steady stream of cash to fund dividends. + AT&T (T, $29.09) - the largest U.S. telecom company - is a perfect example. +
++ AT&T has raised its dividend on an annual basis for 34 consecutive years, and typically boasts one of the highest dividend yields in the Standard & Poor's 500-stock index. + That's in large part because of the cash flows generated by the telecom business, which enjoys what some call an effective duopoly with rival Verizon (VZ). + Together, the pair command roughly 70% of the U.S. wireless subscriptions market. +
++ Chevron (CVX, $111.53) is an integrated oil giant that also has operations in natural gas and geothermal energy. And like its competitors, + Chevron hurt when oil prices started to tumble in 2014. The energy major was forced to slash spending as a result, but - reassuringly - it never slashed its dividend. +
+ ++ Cut to today, and the outlook for oil looks much more stable. Oil prices topped $75 per barrel in early October. Kiplinger forecasts that prices will range + from $65 to $70 a barrel through the end of the year - a far better environment than what energy companies were dealing with a few years ago.With three decades of + uninterrupted dividend growth under its belt, Chevron's track record instills confidence that the payouts will continue. +
++ Coca-Cola (KO, $45.92) has long been known for quenching consumers' thirst, but it's equally effective at quenching investors' thirst for income. + The company has paid a quarterly dividend since 1920, and that dividend has increased annually for the past 55 years. +
++ With the U.S. market for carbonated beverages on the decline for more than a decade, according to market research, Coca-Cola has responded by adding bottled water, + fruit juices and teas to its product lineup to keep the cash flowing. In addition to the namesake Coca-Cola brand, KO also sports names such as Minute Maid, + Powerade, Simply Orange and Vitaminwater. +
++ A descendant of John D. Rockefeller's Standard Oil, today's Exxon Mobil (XOM, $77.53) remains one of the world's largest oil companies and is + the single biggest company by market value among Standard & Poor's 53 Dividend Aristocrats. +
++ As a dividend stalwart - Exxon and its various predecessors have strung together uninterrupted payouts since 1882 – + it continued to hike its payout even as oil prices declined in recent years. Exxon has increased its dividend for 36 consecutive years, + and has done so at an average annual rate of 6.3%. That includes a 7% boost to its quarterly checks announced in late April. +
++ Kimberly-Clark's (KMB, $102.31) well-known brands include Huggies diapers, Scott paper towels and Kleenex tissues. Like other makers of consumer staples, + Kimberly-Clark holds out the promise of delivering slow but steady growth along with a healthy dividend to drive total returns. Analysts polled by Thomson Reuters + expect earnings to grow at an average annual rate of 4.8% over the next five years. +
++ Kimberly-Clark has paid out a dividend for 83 consecutive years, and has raised the annual payout for the past 46 years. +
++ Like Coca-Cola (KO), PepsiCo (PEP, $110.45) is working against a long-term slide in soda sales. It too has responded by expanding its offerings of non-carbonated beverages. + One advantage Pepsi has that Coca-Cola doesn't is its foods business - the company owns Frito-Lay snacks like Doritos, Tostitos and Rold Gold pretzels, and demand for salty + snacks remains solid. +
+In August, the company struck a deal to acquire at-home carbonated drink maker SodaStream (SODA) for $3.2 billion.
+Pepsi has paid out a quarterly dividend ever since 1965, and the company has raised the annual payout for 46 consecutive years.
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+ + Investing: The act of committing money or capital to an endeavor with the expectation of obtaining an additional income or profit. + Legendary investor Warren Buffett defines investing as “… the process of laying out money now to receive more money in the future.” + The goal of investing is to put your money to work in one or more types of investment vehicles in the hopes of growing your money over time. ++
+ Investing is really about “working smarter and not harder.” Most of us work hard at our jobs, whether for a company or our own business. + We often work long hours, which requires sacrifice and adds stress. Taking some of our hard-earned money and investing for our future needs is a way + to make the most of what we earn. +
++ Investing is also about making priorities for your money. Spending is easy and gives instant gratification—whether the splurge is on a new outfit, + a vacation to some exotic spot or dinner in a fancy restaurant. All of these are wonderful and make life more enjoyable. But investing requires prioritizing + our financial futures over our present desires.Investing is a way to set aside money while you are busy with life and have that money work for you so that you c + an fully reap the rewards of your labor in the future. Investing is a means to a happier ending. +
++ There are many different ways you can go about investing, including putting money into stocks/dividend stocks, bonds, mutual funds, ETFs, real estate + (and other alternative investment vehicles), or even starting your own business.Every investment vehicle has its positives and negatives.Understanding how + different types of investment vehicles work is critical to your success. For example, what does a mutual fund invest in? Who is managing the fund? + What are the fees and expenses? Are there any costs or penalties for accessing your money? These are all questions that should be answered before making an investment. + While it is true there are no guarantees of making money, some work on your part can increase your odds of being a successful investor. Analysis, + research and even just reading up on investing can all help.Now that you have a general idea of what investing is and why you should do it, + it's time to learn about how investing lets you take advantage of one of the miracles of mathematics: compound interest. +
+ + + + ++ Compounding is the process of generating more return on an asset's reinvested earnings. To work, it requires two things: the reinvestment of earnings and time. + Compound interest can help your initial investment grow exponentially. For younger investors, it is the greatest investing tool possible, and the #1 argument for + starting as early as possible. Below we give a couple of examples of compound interest. +
++ An investment of $10,000 in the stock of Apple (AAPL) that was made on December 31, 1980 would have grown to $2,709,248 as of the market’s close on February 28, 2017 + according to Morningstar’s Advisor Workstation tool. This translates to an annual return of 16.75%, including the reinvestment of all dividends from the stock.Apple started + paying dividends in 2012. Even so, if those dividends hadn’t been reinvested the ending balance of this investment would have been $2,247,949 or 83% of the amount that you + would have had by reinvesting.While Apple is one of the most successful companies, and their stock is a winner year-in and year-out, compound interest also works for index funds, + which are managed to replicate the performance of a major market index such as the S&P 500. +
+ ++ Another example of the benefits of compounding is the popular Vanguard 500 Index fund (VFINX) held for the 20 years ending February 28, 2017. + A $10,000 investment into the fund made on February 28, 1997 would have grown to a value of $42,650 at the end of the 20-year period. + This assumes the reinvestment of all fund distributions for dividends, interest or capital gains back into the fund.Without reinvesting the distributions, + the value of the initial $10,000 investment would have grown to $29,548 or 69% of the amount with reinvestment.In this and the Apple example, current year + taxes would have been due on any fund distributions or stock dividends if the investment was held in a taxable account, but for most investors, these earnings + can grow tax-deferred in a retirement account such as a employer-sponsored 401(k). +
+ + ++ Another way to look at the power of compounding is to compare how much less initial investment you need if you start early to reach the same goal.A + 25-year-old who wishes to accumulate $1 million by age 60 would need to invest $880.21 each month assuming a constant return of 5%.A 35-year-old wishing + to accumulate $1 million by age 60 would need to invest $1,679.23 each month using the same assumptions.A 45-year-old would need to invest $3,741.27 + each month to accumulate the same $1 million by age 60. That’s almost 4 times the amount that the 25-year old needs. Starting early is especially helpful + when saving for retirement, when putting aside a little bit early in your career can reap great benefits. +
++ There are many types of investments and investing styles to choose from. Mutual funds, ETFs, individual stocks and bonds, closed-end mutual funds, + real estate, various alternative investments and owning all or part of a business are just a few examples. +
++ Buying shares of stock gives the buyer the opportunity to participate in the company’s success via increases in the stock’s price and dividends + that the company might declare. Shareholders have a claim on the company’s assets in the event of liquidation, but do not own the assets.Holders of + common stock have voting rights at shareholders’ meetings and the right to receive dividends if they are declared. Holders of preferred stock don’t + have voting rights, but do receive preference in terms of the payment of any dividends over common shareholders. They also have a higher claim on + company assets than holders of common stock. +
++ Bonds are debt instruments whereby an investor effectively is loaning money to a company or agency (the issuer) in exchange for periodic + interest payments plus the return of the bond’s face amount when the bond matures. Bonds are issued by corporations, the federal government plus + many states, municipalities and governmental agencies.A typical corporate bond might have a face value of $1,000 and pay interest semi-annually. + Interest on these bonds are fully taxable, but interest on municipal bonds is exempt from federal taxes and may be exempt from state taxes for + residents of the issuing state. Interest on Treasuries are taxed at the federal level only.Bonds can be purchased as new offerings or on the + secondary market, just like stocks. A bond’s value can rise and fall based on a number of factors, the most important being the direction of + interest rates. Bond prices move inversely with the direction of interest rates. +
++ A mutual fund is a pooled investment vehicle managed by an investment manager that allows investors to have their money invested in stocks, + bonds or other investment vehicles as stated in the fund’s prospectus.Mutual funds are valued at the end of trading day and any transactions to + buy or sell shares are executed after the market close as well.Mutual funds can passively track stock or bond market indexes such as the S&P 500, + the Barclay’s Aggregate Bond Index and many others. Other mutual funds are actively managed where the manager actively selects the stocks, bonds or + other investments held by the fund. Actively managed mutual funds are generally more costly to own. A fund’s underlying expenses serve to reduce + the net investment returns to the mutual fund shareholders.Mutual funds can make distributions in the form of dividends, interest and capital gains. + These distributions will be taxable if held in a non-retirement account. Selling a mutual fund can result in a gain or loss on the investment, + just as with individual stocks or bonds.Mutual funds allow small investors to instantly buy diversified exposure to a number of investment + holdings within the fund’s investment objective. For instance, a foreign stock mutual might hold 50 or 100 or more different foreign stocks in + the portfolio. An initial investment as low as $1,000 (or less in some cases) might allow an investor to own all the underlying holdings of the fund. + Mutual funds are a great way for investors large and small to achieve a level of instant diversification. +
++ ETFs or exchange-traded funds are like mutual funds in many respects, but are traded on the stock exchange during the trading day just like + shares of stock. Unlike mutual funds which are valued at the end of each trading day, ETFs are valued constantly while the markets are open.Many + ETFs track passive market indexes like the S&P 500, the Barclay’s Aggregate Bond Index, and the Russell 2000 index of small cap stocks and many + others.In recent years, actively managed ETFs have come into being, as have so-called smart beta ETFs which create indexes based on “factors” + such as quality, low volatility and momentum. +
++ Beyond stocks, bonds, mutual funds and ETFs, there are many other ways to invest. We will discuss a few of these here.Real estate investments + can be made by buying a commercial or residential property directly. Real estate investment trusts (REITs) pool investor’s money and purchase + properties. REITS are traded like stocks. There are mutual funds and ETFs that invest in REITs as well.Hedge funds and private equity also fall + into the category of alternative investments, although they are only open to those who meet the income and net worth requirements of being an + accredited investor. Hedge funds may invest almost anywhere and may hold up better than conventional investment vehicles in turbulent markets. + Private equity allows companies to raise capital without going public. There are also private real estate funds that offer shares to investors + in a pool of properties. Often alternatives have restrictions in terms of how often investors can have access to their money.In recent years, + alternative strategies have been introduced in mutual fund and ETF formats, allowing for lower minimum investments and great liquidity for investors. + These vehicles are known as liquid alternatives. +
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