Sure Dividend HIGH QUALITY DIVIDEND STOCKS, LONG-TERM PLAN

Transcription

1 Sure Dividend HIGH QUALITY DIVIDEND STOCKS, LONG-TERM PLAN April 2014 Edition By Ben Reynolds

2 Table of Contents The 8 Rules of Dividend Investing... 3 Real Life Examples... 3 Rules 1 to 5: What to Buy... 4 Rule # 1 The Quality Rule... 4 Rule # 2 The Bargain Rule... 4 Rule # 3 The Safety Rule... 5 Rule # 4 The Growth Rule... 5 Rule # 5 The Peace of Mind Rule... 6 Rules 6 & 7: When to Sell... 7 Rule # 6 The Overpriced Rule... 7 Rule # 7 The Survival of the Fittest Rule... 7 Rule 8: Portfolio Management... 8 Rule # 8 The Hedge Your Bets Rule... 8 April 2014 Newsletter - Thoughts... 9 The Top 10 List Stocks to Sell Stocks to Hold Review of April s Top 10 Stocks Wal-Mart Stores, Inc Exxon Mobil McDonald s Corporation Coca-Cola PepsiCo Kimberly Clark Corporation Clorox Corporation Chubb Corporation Target Corporation AFLAC Incorporated How to Use this Newsletter For Monthly/Regular Savers For Large Lump Sum Savings Ending Thoughts... 23

3 Page 3 The 8 Rules of Dividend Investing The 8 Rules of Dividend Investing clarify the process of selecting high-quality dividend growth stocks so you know exactly what and when to buy and sell. Each rule is based on common-sense principals from extraordinarily successful investors Each rule is quantifiable and actionable Each rule is academically tested and has historically improved long-term returns Real Life Examples The Top 10 high-quality dividend growth stocks for April are below so you have an idea of what business the 8 Rules select. Rank Ticker Name Yield Payout Growth Volatility 1 WMT Wal-Mart Stores Inc. 2.51% 39.51% 8.63% 19.14% 2 XOM ExxonMobil Corp. 2.58% 34.24% 8.26% 25.33% 3 MCD McDonald's Corp. 3.30% 58.37% 7.14% 20.14% 4 KO Coca-Cola Company 3.16% 64.29% 8.01% 18.71% 5 PEP PepsiCo Inc. 2.72% 52.50% 6.43% 17.39% 6 KMB Kimberly-Clark Corp. 3.04% 60.68% 6.04% 17.45% 7 CLX Clorox Company 3.23% 66.19% 6.35% 18.40% 8 CB Chubb Corp. 2.24% 21.81% 5.99% 27.24% 9 TGT Target Corp. 2.84% 46.15% 8.40% 30.14% 10 AFL AFLAC Inc. 2.35% 21.94% 9.96% 43.52% The majority of 8 Rules stocks are well known businesses with a long history of profitability. They are familiar household names. This is because they have been so successful for so long. I personally feel a sense of relief knowing I am invested in tried and true businesses that have withstood the test of time. I hope you do as well. Without further ado, the 8 Rules of Dividend Investing: Rules 1 to 5 give you what dividend stocks to buy Rules 6 to 7 give you when to sell Rule 8 covers portfolio management

4 Page 4 Rules 1 to 5: What to Buy Rule # 1 The Quality Rule The single greatest edge an investor can have is a long term orientation Seth Klarman Common Sense Idea: Invest in great businesses that have a proven long-term record of stability, growth, and profitability. There is no reason to own a so-so business when you can own a great business for a very long time. Financial Rule: Invest only in stocks with 25 or more years of consecutive dividend increases Evidence: The Dividend Aristocrats (stocks with 25+ years of rising dividends) have outperformed the S&P500 over the last 10 years by 2.88% per year. Source: S&P 500 Dividend Aristocrats Factsheet, February , page 2 Rule # 2 The Bargain Rule Price is what you pay, value is what you get Warren Buffett Common Sense Idea: Invest in businesses that pay you the most dividends so you can increase your cash flow from your investments. Financial Rule: Rank stocks by their dividend yield. Evidence: The highest yielding quintile of stocks outperformed the lowest yielding quintile of stocks by 1.76% per year from 1928 through Source: Dividends: A Review of Historical Returns by Heartland Funds, page 2

5 Page 5 Rule # 3 The Safety Rule The secret of sound investment in 3 words; margin of safety Benjamin Graham Common Sense Idea: If a business is paying out all their profits as dividends, they will have nothing left to grow the business. When a downturn in the business occurs, they will have to cut the dividend. Invest in businesses that have much higher profits than they do dividend payments so your dividend payments are secure. Financial Rule: Rank stocks by their payout ratios. Evidence: High yield low payout ratio stocks outperformed high yield high payout ratio stocks by 8.2% per year from 1990 to Source: High Yield, Low Payout by Barefoot, Patel, & Yao, page 3 Rule # 4 The Growth Rule All you need for a lifetime of successful investing is a few big winners Peter Lynch Common Sense Idea: Invest in businesses that have a history of solid growth. If a business has maintained a high growth rate for several years, they are likely to continue to do so. The more a business grows, the more profitable your investment will become. Financial Rule: Rank stocks by their long-term revenue growth. Evidence: Growing dividend stocks have outperformed stocks with unchanging dividends by 2.4% per year from 1972 to Source: Rising Dividends Fund, Oppenheimer, page 4

6 Page 6 Rule # 5 The Peace of Mind Rule Psychology is probably the most important factor in the market and one that is least understood - David Dreman Common Sense Idea: Look for businesses that people invest in during recessions and times of panic. These businesses will have a relatively stable stock price that will make them easier to hold for the long run. Financial Rule: Rank stocks by their long-term volatility. Evidence: The S&P Low Volatility index outperformed the S&P500 by 2.00% per year for the 20 year period ending September 30 th, Source: S&P 500 Low Volatility Index: Low & Slow Could Win the Race, page 3

7 Page 7 Rules 6 & 7: When to Sell Rule # 6 The Overpriced Rule Pigs get fat, hogs get slaughtered Unknown Common Sense Idea: If you are offered $500,000 for a $250,000 house, you take the money. It is the same with a stock. If you can sell a stock for much more than it is worth, you should. Take the money and reinvest it into businesses that pay higher dividends. Financial Rule: Sell when the normalized P/E ratio is over 40. Evidence: The lowest decile of P/E stocks outperformed the highest decile by 9.02% per year from 1975 to Source: The Case for Value by Brandes Investment Partners, Page 2 Rule # 7 The Survival of the Fittest Rule When the facts change, I change my mind. What do you do, sir? John Maynard Keynes Common Sense Idea: If a stock you own reduces its dividend, it is paying you less over time instead of more. This is the opposite of what should happen. You must admit the business has lost its safety and reinvest the proceeds of the sale into a more stable business. Financial Rule: Sell when the dividend payment is reduced or eliminated. Evidence: Stocks that reduced or eliminated their dividends had a 0% return from 1972 through Source: Rising Dividends Fund, Oppenheimer, page 4

8 Page 8 Rule 8: Portfolio Management Rule # 8 The Hedge Your Bets Rule The only investors who shouldn t diversify are those who are right 100% of the time John Templeton Common Sense Idea: There are 10 stocks on your list each month. They are ranked in order. When you go to invest, buy the highest ranked stock of which you own the least of on the list. You will be spreading your bets over different businesses as time goes by. Better yet, you will still be investing in great businesses at fair or better prices. Financial Rule: Buy the highest ranked stock of which you own the least. Evidence: 90% of the benefits of diversification come from owning just 12 to 18 stocks. Source: Frank Reilly and Keith Brown, Investment Analysis and Portfolio Management, page 213

9 Page 9 April 2014 Newsletter - Thoughts March was a flat month for stocks in general, with the market returning 0.69%. The past year 5 years have been fantastic for stocks as a whole, with the S&P 500 up 129%. Currently, the market appears to be somewhat overvalued. The Shiller P/E ratio, which compares the S&P500 s price to its earnings for the last 10 years, is at The Shiller P/E average is only I expect some turbulence in the next several years as the market reverts to its historical P/E average. Of course, none of that really matters. When you invest in great businesses, it does not matter what the market does. When it is increasing, you are growing your dividends and principal. When the market goes down, you have the opportunity to buy great businesses cheaply. There is no losing situation when you are sure you are investing in the best businesses in the world. That is the confidence I want you to have as we go forward in this bull market. No matter what happens, buying great businesses for the longterm will reward you financially.

10 Page 10 The Top 10 List The stocks below had the best ranking based on the 8 rules of dividend investing. They are ranked in order from 1 to 10 below. Rank Ticker Name Yield Payout Growth Volatility 1 WMT Wal-Mart Stores Inc. 2.51% 39.51% 8.63% 19.14% 2 XOM ExxonMobil Corp. 2.58% 34.24% 8.26% 25.33% 3 MCD McDonald's Corp. 3.30% 58.37% 7.14% 20.14% 4 KO Coca-Cola Company 3.16% 64.29% 8.01% 18.71% 5 PEP PepsiCo Inc. 2.72% 52.50% 6.43% 17.39% 6 KMB Kimberly-Clark Corp. 3.04% 60.68% 6.04% 17.45% 7 CLX Clorox Company 3.23% 66.19% 6.35% 18.40% 8 CB Chubb Corp. 2.24% 21.81% 5.99% 27.24% 9 TGT Target Corp. 2.84% 46.15% 8.40% 30.14% 10 AFL AFLAC Inc. 2.35% 21.94% 9.96% 43.52% Stocks to Sell The stocks below used to be on the top 10 list, and should be sold. NONE Stocks to Hold The stocks below used to be on the top 10 list. They have since fallen off the top 10, but should be held. NONE

11 Page 11 Review of April s Top 10 Stocks Wal-Mart Stores, Inc. Overview Wal-Mart Stores, Inc. is the world s largest retailer, operating 10,942 stores under 71 names in 27 countries. They own Wal-Mart, and Sam s Club. The majority of their stores are in North and South America. Safety Wal-Mart is among the most stable companies in the world. Their core focus is to reduce prices for their shoppers. As they increase scale, they can decrease prices in a positive feedback cycle. This process has made them one of the largest businesses in the world. The 2007 to 2009 recession affected Wal-Mart minimally. In fact, their earnings per share did not decrease during the recession. Relevant Stats 10 Year Dividend Growth Rate: 15.35% Consecutive Years with Dividend Increase: 41 Expected Future Dividend Growth: 10.00% Forward Dividend Yield: 2.52%

12 Page 12 Exxon Mobil Overview Exxon Mobil is the largest oil company in the world. It is the successor to Rockefeller s Standard Oil. Exxon Mobil holds the record for highest profits for a corporation in a year. In fact, the top 5 highest profits in a year belong to Exxon Mobil. 1. Exxon Mobil (2008) $46.55 billion 2. Exxon Mobil (2007) $45.01 billion 3. Exxon Mobil (2006) $44.47 billion 4. Exxon Mobil (2005) $42.22 billion 5. Exxon Mobil (2011) $41.84 billion 6. Apple (2012) $41.47 billion Exxon Mobil splits its operations into 3 categories: Upstream (79% of profits), Downstream (10% of profits), & Chemical (11% of profits). Upstream: Exploration & production of oil 79% of profits Downstream: Refining, processing, & transportation 10% of profits Chemical: Production of oil based chemicals 11% of profits Safety Exxon Mobil is among the safest companies in the world in which to invest due to the enormous profits from its upstream division. They are financed conservatively with low debt compared to income. Exxon s biggest long-term threat is that another form of energy will eventually replace oil. Worldwide oil demand has been increasing every year due to rapid economic development, primarily in Asia. In the very long term (50 years, 100 years, 200 years?) we may move on from oil. For the foreseeable future, the world will run on fossil fuels. Relevant Stats 10 Year Dividend Growth Rate: 9.81% Consecutive Years with Dividend Increase: 31 Expected Future Dividend Growth: 7.50% Forward Dividend Yield: 2.58%

13 Page 13 McDonald s Corporation Overview McDonald s Corporation operates over 35,000 restaurants. About 80% of its restaurants are franchised, with the remainder operated by McDonald s Corporation. McDonald s was founded in McDonalds is the most recognized fast food brand worldwide. McDonald s is a global corporation with more revenue coming from Europe than the US. Safety McDonald s Corporation is known worldwide for its Golden Arches, Big Mac burger, and salty French fries. They have one of the most valuable brands in the world. McDonald s is known as a kid friendly restaurant that serves cheap food quickly. McDonald s faces head winds from competing fast food brands and a trend toward healthier food. In spite of this, they have increased revenue per share by about 8.5% over the last 10 years. Mcdonald s Corporation is virtually recession-proof due to their low priced food items. During the recession of 2007 to 2009, McDonald s Corporation earnings per share increased. Relevant Stats 10 Year Dividend Growth Rate: 21.26% Consecutive Years with Dividend Increase: 38 Expected Future Dividend Growth: 8.5% Forward Dividend Yield: 3.71%

14 Page 14 Coca-Cola Overview Coca-Cola is the largest beverage company in the world. They have 4 of the world s top 5 sparkling (carbonated) beverates: Coca-Cola, Diet Coke, Fanta, & Sprite. Coca-Cola also owns the following brands: Dasani, Minute Maid, Powerade, Simply Orange, Vitamin Water, Smart Water, Honest Tea, NOS Energy Drink, and Odwalla (among many more). Coca-Cola beverages are enjoyed in over 200 companies, with 1.9 billion servings consumed each day. Safety Coca-Cola was established in The world has changed substantially since then. Out of all that change, consumers still enjoy the taste of Coca- Cola. Coca-Cola is well diversified within the beverage industry with diet, energy, and health conscious options. It is difficult to imagine a scenario where Coca-Cola does not continue to provide quality non-alcoholic beverages to the world. The economic downturn from 2007 to 2009 did not significantly affect Coca-Cola due to the low cost of their products and the power of their brand. Earnings dropped from $1.51 in 2008 to $1.47 in By 2010, earnings had increased to $1.75 per share. Coca-Cola is among the safest and best branded businesses in the world. Relevant Stats 10 Year Dividend Growth Rate: 8.01% Consecutive Years with Dividend Increase: 51 Expected Future Dividend Growth: 9.00% Forward Dividend Yield: 3.16%

15 Page 15 PepsiCo. Overview PepsiCo is a worldwide food and beverage corporation. They have 22 brands that do over $1 billion per year in sales. Some of their notable brands are listed below. Drink Brands: Pepsi, Gatorade, and Tropicana Snack Brands: Doritos, Ruffles, Cheetos, Lay s, Sabritas, & Quaker Safety PepsiCo will continue being a strong, stable company as long as around the world continue to eat salty snacks and drink sodas, sports drinks, and juices. PepsiCo does comparably well during recessions. There Earnings per share only dipped from $3.34 to $3.21 during the recession of 2007 to Relevant Stats 10 Year Dividend Growth Rate: 11.20% Consecutive Years with Dividend Increase: 42 Expected Future Dividend Growth: 5% Forward Dividend Yield: 3.12%

16 Page 16 Kimberly Clark Corporation Overview Kimberly Clark Corporation develops, manufactures, and markets personal care products. Kimberly Clark Corporation is Split into 4 operating divisions which each have well known brands: Personal Care: Consumer Tissue: K-C Professional: Health Care: Huggies, PullUps, Depend, Kotex Kleenex, Scott, Viva Jackson Safety, Smith & Wesson, Wilson Various medical products In 2013 Kimberly Clark had revenues of $10.79 billion in the US, $2.99 billion in Europe, and $8.12 billion in Asia, Latin America, and other. The bulk of their growth comes from outside the US. Kimberly Clark is expected to spin-off its Health Care division to shareholders this year. Safety Kimberly Clark sells products that do not go out of style at a premium price due to their strong brand. The brand Kleenex is so dominant that many people call tissues Kleenex, even if it isn t the Kleenex brand! Tissues, paper towels, diapers, and feminine care products will be around for a long time to come. Kimberly Clark does not face any dangers from changing technology or industry trends. Kimberly Clark is fairly recession proof, as the majority of their products are essentials that are purchased regardless of the economy. Kimberly Clarks earnings per share dipped from $4.25 in 2007 to $4.06 in Relevant Stats 10 Year Dividend Growth Rate: 8.16% Consecutive Years with Dividend Increase: 42 Expected Future Dividend Growth: 4.00% Forward Dividend Yield: 3.05%

17 Page 17 Clorox Corporation Overview Clorox is a diversified consumer products corporation. In 2013 they had revenues of $5.6 billion spread over 4 operating segments. The top brands in each operating segement are listed below: Cleaning (32% of sales): Clorox, Pine-Sol, 409, Tilex, Green Works Household (30% of sales): Glad, Kingsford, Fresh Step, Scoop Away Lifestyle (16% of sales): Hidden Valley, Brita, Burt s Bees, Güd International (22% of sales): Clorox, Burt s Bees, Ayudin, Mistolin Safety Clorox is overly reliant on US sales compared to many of the other stocks in the top 10. Currently, 78% of sales come from the US. Their brand name products have strong recognition and have little risk of obsolescence. Clorox performed very well during the recession of 2007 to They did not have a drop in revenue, earnings, cash flow, or dividends. The business is comprised of staple household products that are purchased regardless of the state of the economy. Clorox carries a substantial amount of debt relative to cash on hand. They have a 7.9 interest coverage ratio to cover their debt, but they are more leveraged than many of the other companies on the top 10 list. Relevant Stats 10 Year Dividend Growth Rate: 10.39% Consecutive Years with Dividend Increase: 36 Expected Future Dividend Growth: 6.50% Forward Dividend Yield: 3.23%

18 Page 18 Chubb Corporation Overview Chubb Corporation sells home, car, business, & supplemental health insurance. Chubb Corporation sells insurance through independent agents and brokers throughout North & South America, Australia, Europe, & Asia. They were established in In % of Chubb s premium revenue came from the US with just 25% coming from other countries. Their premium revenue by category is broken down below: Commercial Insurance: $5.3 billion (43%) Personal Insurance: $4.3 billion (35%) Specialty Insurance: $2.6 billion (22%) Safety Chubb Corporation approaches insurance very conservatively. Their combined expenses and claims have been less than premium revenue every year since 2002; all investment revenue has been profit since Chubb Corporation s earnings are more volatile than many of the consumer products companies on this list due to the nature of the insurance industry. Chubb Corporation was not significantly affected by the 2007 to 2009 recession. Book value per share dipped only slightly from $38.56 in 2007 to $38.13 in By 2009, book value per share had rebounded to $47.09 Relevant Stats 10 Year Dividend Growth Rate: 9.25% Consecutive Years with Dividend Increase: 32 Expected Future Dividend Growth: 4.00% Forward Dividend Yield: 2.24%

19 Page 19 Target Corporation Overview Target is a discount retailer operating in the United States and Canada. They sell a wide variety of products in their stores; including groceries, pet supplies, electronics, and apparel. Target was founded in They have 1,797 stores in the US, and 127 in Canada. Safety In the short-term, Target has been negatively affected by a data breach that resulted in the loss of credit card data for around 70 million people. Longterm, Target is a stable discount retailer with a strong brand that should continue to grow profitably. Target is different from most of the other corporations on this list in that it does not do business outside of North America. The lack of geographic diversification leaves Target more exposed to weakness in the US economy. Target remained profitable during the 2007 to 2009 recession. Earnings per share fell from $3.33 in 2007 to $2.86 in 2008 before recovering to $3.30 and then $3.88 in 2009 & Relevant Stats 10 Year Dividend Growth Rate: 20.27% Consecutive Years with Dividend Increase: 42 Expected Future Dividend Growth: 14.00% Forward Dividend Yield: 2.84%

20 Page 20 AFLAC Incorporated Overview AFLAC sells life, health, and cancer insurance policies primarily in the US & Japan. Approximately 78% of revenues came from Japan in 2012, with the remaining 22% coming from US operations. AFLAC is the largest seller of cancer insurance in the world. AFLAC focus on finding new distribution channels for their products. In Japan, their insurance products are sold at banks and post offices. Safety AFLAC s profits are subject fluctuations in the USD/Yen exchange rate. Revenue & profits were down by about 20% due to weakness in the Yen. AFLAC s revenue concentration in Japan makes it susceptible to the Japanese economy. AFLAC s earnings per share are more volatile than many of the consumer products corporations on this list. The long-term outlook on the insurance industry is very stable compared to other industries. I cannot imagine people forgoing insurance at all in the future. Relevant Stats 10 Year Dividend Growth Rate: 15.77% Consecutive Years with Dividend Increase: 31 Expected Future Dividend Growth: 8.50% Forward Dividend Yield: 2.35%

21 Page 21 How to Use this Newsletter For Monthly/Regular Savers Invest in the top ranked stock you own the smallest dollar amount of each month. Over time, you will build a well-diversified portfolio of great businesses purchased at attractive prices. Examples Portfolio 1 Portfolio 2 Ticker Name Amount Ticker Name Amount WMT Wal-Mart Stores Inc. $ 1,002 WMT Wal-Mart Stores Inc. $ 4,374 XOM ExxonMobil Corp. $ - XOM ExxonMobil Corp. $ 4,878 MCD McDonald's Corp. $ - MCD McDonald's Corp. $ 4,353 KO Coca-Cola Company $ - KO Coca-Cola Company $ 2,952 PEP PepsiCo Inc. $ - PEP PepsiCo Inc. $ 3,309 KMB Kimberly-Clark Corp. $ - KMB Kimberly-Clark Corp. $ 4,864 CLX Clorox Company $ - CLX Clorox Company $ 6,660 CB Chubb Corp. $ - CB Chubb Corp. $ 2,367 TGT Target Corp. $ - TGT Target Corp. $ 2,818 AFL AFLAC Inc. $ - AFL AFLAC Inc. $ 6,243 If you had portfolio 1, you would buy ExxonMobil, the top ranked stock you own least. If you had portfolio 2, you would buy Chubb Corp., the top ranked stock you own least. When a stock comes up to be sold, sell it and use the proceeds to purchase a new stock (or stocks) from the top 10 list. Always purchase the highest ranked stock you own the least of. As your investments pay you dividends, reinvest them alongside your normal monthly savings amount. You will slowly be investing more each year as your dividends increase. This information is not personalized advice. It is for informational purposes only. Please see disclaimer at end of newsletter for more.

22 Page 22 For Large Lump Sum Savings Invest in each of the top 10 stocks, so that you own the same dollar amount of each of them. Example If you invest $50,000 your portfolio will look like this: Portfolio Ticker Name Amount WMT Wal-Mart Stores Inc. $ 5, XOM ExxonMobil Corp. $ 5,000,00 MCD McDonald's Corp. $ 5, KO Coca-Cola Company $ 5, PEP PepsiCo Inc. $ 5, KMB Kimberly-Clark Corp. $ 5, CLX Clorox Company $ 5, CB Chubb Corp. $ 5, TGT Target Corp. $ 5, AFL AFLAC Inc. $ 5, When a stock comes up to sell, sell it and use the proceeds to purchase a new stock (or stocks) from the top 10 list. Always purchase whatever stock is highest ranked that you own the least dollar amount. As your investments pay you dividends, reinvest them into the highest ranked stock you own least. Reinvest your dividends when you have enough money to make the transaction cost (your brokerage trading fee) less than 1% of the total order cost. Example If your broker charges $8.00 per transaction, you should only reinvest your dividends when you have over $800 to invest. This information is not personalized advice. It is for informational purposes only. Please see disclaimer at end of newsletter for more.

23 Ending Thoughts Investing is a marathon not a sprint. The benefits of this may not be evident one to three months from now. Over the long-term, you will benefit from having a strong portfolio constructed of growing dividend paying businesses. Through the ups-and-downs of the market, always keep an even keel. Too much excitement on the ups will lead to depression on the downs. Think of market down turns as sales on great businesses. If you feel happy that you can buy great business for cheap, then you will be happy with whatever the market does. I hope you have enjoyed reading this newsletter. I want to hear what you think! If you have any questions, comments, or feedback, please send me an at ben@suredividend.com Sure Dividend is offering a 30-day free trial period for anyone who subscribes this month. You will immediately receive the May newsletter, and will receive the June newsletter on or before the first Monday of June. To subscribe, go to Disclaimer Nothing presented herein is, or is intended to constitute, specific investment advice. Nothing in this newsletter should be construed as a recommendation to follow any investment strategy or allocation. Any forward looking statements or forecasts are based on assumptions and actual results are expected to vary from any such statements or forecasts. No reliance should be placed on any such statements or forecasts when making any investment decision. While Sure Dividend has used reasonable efforts to obtain information from reliable sources, we make no representations or warranties as to the accuracy, reliability or completeness of third-party information presented herein. No guarantee of investment performance is being provided and no inference to the contrary should be made. There is a risk of loss from an investment in securities. Past performance is not a guarantee of future performance.