INVEST IN DIVIDEND GROWTH!

Transcription

1 INVEST IN DIVIDEND GROWTH! because dividends ARE important! Presented by John R. Rogers Director, Rocky Mountain Chapter Wednesday, February 8, February 8, 2017 StockUp 1 Disclaimer The information in this presentation is for educational purposes only and is not intended to be a recommendation to purchase or sell any of the stocks, mutual funds, or other securities that may be referenced. The securities of companies referenced or featured in the seminar materials are for illustrative purposes only and are not to be considered endorsed or recommended for purchase or sale by BetterInvesting TM National Association of Investors Corporation ( BI ). The views expressed are those of the instructors, commentators, guests and participants, as the case may be, and do not necessarily represent those of BetterInvesting TM. Investors should conduct their own review and analysis of any company of interest before making an investment decision. Securities discussed may be held by the instructors in their own personal portfolios or in those of their clients. BI presenters and volunteers are held to a strict code of conduct that precludes benefiting financially from educational presentations or public activities via any BetterInvesting programs, events and/or educational sessions in which they participate. Any violation is strictly prohibited and should be reported to the CEO of BetterInvesting or the Director of Chapter Relations. This presentation may contain images of websites and products or services not endorsed by BetterInvesting. The presenter is not endorsing or promoting the use of these websites, products or services. This session is being recorded for future use. 2 What We ll Cover Dividend Pros and Cons Dividend Pros and Cons Stock Price and Dividends Contrasted Emotional Impact and Doing the Right Thing Key Definitions and Relationships: PE, Payout, Yield, Total Return Dividend Growth Stocks: Historical Out-performance The Link Between ROE and Dividend Growth Stocks Apple, LKQ, and Gentex The Safe, Low Volatility Bond vs a Risky Dividend Portfolio Total Return and Cash Flow Comparison Inflation: The Silent Thief Value Line, Morningstar, and BI Dividend Growth Portfolios Investing Guidelines Websites, Newsletters, and Books PROS Tend to be much less volatile Paid to wait through price turmoil Helps keep you calm in wild markets Keeps you focused on fundamentals, not price Dividends are real cash that you can re-invest Management can manipulate earnings to make themselves look better Pro Forma earnings CONS Dividends taxed as received Buy-back alternative, taxes deferred Management buys when price is high Precludes your re-invest choices No accountability February 8, 2017 StockUp 3 February 8, 2017 StockUp 4 1

2 Panic Mister Market is Schizophrenic Euphoria Euphoria: Buy high cause you don t want to miss out on the rally. Panic: Sell low cause you don t want to lose any more money. Buy high/sell low that s no way to make money DIVERSIFIED PORTFOLIO OF GROWING DIVIDENDS! February 8, 2017 StockUp 5 February 8, 2017 StockUp 6 Panic Euphoria Get off the roller-coaster and on to the escalator Euphoria: Buy high cause you don t want to miss out on the rally. Panic: Sell low cause you don t want to lose any more money. Buy high/sell low that s no way to make money February 8, 2017 StockUp

3 Being Paid to Wait Dead Money Growing dividends imply growing earnings. Price will eventually follow. 9 February 8, 2017 StockUp 10 Some Key Definitions and Relationships DEFINITIONS Payout % = Dividend / EPS PE = Price / EPS Yield = Dividend / Price RELATIONSHIPS Payout % = Yield X PE Div / EPS = Div / Price X Price / EPS Payout % / PE = Yield For a constant Payout PE down and Yield up (buy?) PE up and Yield down (avoid?) To grow dividends, management must increase earnings and/or payout Calculating Total Return Payout % / PE = Yield Total Return = Dividend Yield plus Price Growth February 8, 2017 StockUp 11 February 8, 2017 StockUp

4 Dividend Growth Outperforms Dividend Growers or Initiators Stagnant Dividends Dividend Cutters or Eliminators Non-payers Ned Davis Research February 8, 2017 StockUp 13 February 8, 2017 StockUp 14 Automatic Data Processing (ADP)

5 Clorox (CLX) Deere (DE) ROE: Return on Equity ROE: Where it comes from EQUITY: Assets minus Liabilities What you put in plus what the company puts in RETURN: What part of an invested dollar is returned to the investor through business activity Broad Market Average: 15% ROE BUSINESS ACTIVITY PROFIT MARGIN Net Profit/Sales ROA Return/Assets ROE Return/Equity X TURNOVER Sales/Assets LEVERAGE Assets/Equity February 8, 2017 StockUp 19 February 8, 2017 StockUp

6 ROE: Where It Goes Growing the business Organic growth Acquisitions Stock buy-backs Dividends February 8, 2017 StockUp 21 February 8, 2017 StockUp 22 Example: Apple Computing (AAPL) 5 year average ROE: 34.7% Max growth rate all earnings re-invested: 34.7% Value Line estimated EPS growth: 11.5% Value Line FTM EPS: $9.25 Portion of EPS needed for growth: (11.5/34.7) = 33.1% 33.1% of $9.25 = $3.06 needed for growth That leaves 66.9% of EPS for dividends, buy backs, and acquisitions Dividend: $2.28; Payout = $2.28/$9.25 = 24.6% 42.3% of EPS or $3.91 is for other uses Stock buy-backs Acquisitions Dividend increases 5 Yr Historical growth 15.3% My SSG growth est.: 7.9% February 8, 2017 StockUp 23 This bar-chart shows what Apple Computer needs for growth and current dividend payments and what is available for other uses such as stock buybacks, acquisitions, dividend increases, or a one-time dividend payment. My personal SSG projects a 7.9% growth rate; Value Line projects growth of 11.5%; the 5 year historical growth rate is 15.3%

7 Example: LKQ Corp. (LKQ) 5 year average ROE: 13.6% Max growth rate all earnings re-invested: 13.6% Value Line Estimated EPS Growth: 18.5% Value Line FTM EPS: $2.05 Portion of EPS needed for growth: 18.5/13.6 = 136% 136% of $2.10 is $2.79 needed for max growth They are $0.74 short. What can they do? Restrict growth Raise capital Borrow funds Strengthen business Should NOT pay a dividend % Debt to Tot Cap: 51.7 TTM ROE: 14.6% February 8, 2017 StockUp 25 Example: Gentex (GNTX) 5 year average ROE: 17.9% Max growth rate all earnings reinvested: 17.9% Value Line Estimated EPS Growth: 12% Value Line FTM EPS: $1.30 Portion of EPS needed for growth: 12/17.9 = 67% $0.87 of EPS is needed for growth Dividend: $0.36; Payout = $0.36/$1.30 = 27.7% That leaves 5.3% or $0.07 for Stock buy-backs Acquisitions Dividend increases Cutting it close! February 8, 2017 StockUp 26 Income Centered Portfolio Invest $10,000 in each of the following: Oil Company Real Estate Investment Trust (REIT) Master Limited Partnership (MLP) Fast Food Franchise World-wide Retailer Electric Utility National Bank Comparisons: Dividend Centered Portfolio VS Bonds Invest $70,000 in these instruments in January 4, 2004 and cash them in December 31, 2015 A Bond with a 4.05% Coupon (10 Yr Treasury) Reputed the safest investment possible An Income Centered Portfolio: Diversity controls investment risk Compare Total Returns, Rates of Return, and Cash Flow February 8, 2017 StockUp 27 February 8, 2017 StockUp

8 12 Year Bond The Oil Company Total Return AIT = Face value of bond plus accumulated interest = $93, Total Return AIT: Dividends plus Capital Gains = $25, February 8, 2017 StockUp 30 $60,000 PORTFOLIO TOTAL RETURN ORIGINAL AND FINAL YIELDS ORIGINAL FINAL $50, % $40,000 $30, % 10.96% 8.20% 12.58% $20, % 6.69% $10,000 $0 OIL REIT MLP FAST FOOD RETAIL UTILITY BANK Before Taxes After Taxes % 3.54% 3.58% 3.94% 4.05% 4.05% 3.19% 2.22% 0.99% OIL REIT MLP FRANCHISE RETAILER UTILITY BANK BOND

9 AIT Total Returns Oil Company: $25,399 REIT: $29,998 MLP: $23,707 Fast Food Franchise: $47,637 World-wide Retailer: $13,184 Electric Utility: $19,924 Bank: $20,156 Portfolio TOTAL: $180, Year Bond: $93,814 Difference: $86,191 So that was the great recession? Where is the highly volatile, high risk stock portfolio? February 8, 2017 StockUp Inflation The Sneak Thief 4000 Deflated Annual Cash Flow in Constant 2004 Dollars 4.72% Annual Inflation Rate Inflation Fighter Rate of Inflation 4.08% 3.84% 4.02% 3.09% 3.46% 2.90% 2.61% 2.48% 2.83% 1.60% Inflation Loser YEAR 0.10% PORTFOLIO BOND February 8, 2017 StockUp

10 DEFLATED CAPITAL APPRECIATION BIT Deflated Capital Appreciation Capital Appreciation in $ In constant January, 2004 dollars Portfolio 12 Yr Bond January, 2004 $70,000 $70,000 December, 2015 $107,207 $48,661 Purchasing Power +$37,207 $21, YEAREND What happened to the safe, low volatility bond? PORT BOND 37 February 8, 2017 StockUp 38 Value Line Dividend Growth Portfolio Morningstar Dividend Growth Portfolio Great Recession Average ROE: 30.5% Average Yield: 3.36% 39 Average ROE: 25.8 Average Yield: 3.97% Morningstar Expected Return: 7.16% Expected Total Return: 11.13% Expected Market Return: 10.37%

11 BI Dividend Growth Portfolio Average ROE: 20.9 Average Yield: 2.31% Projected Return: 21.2% Guidelines Better Investing Specific: Invest in quality growth, Buy only at a good price, Invest for the long term Reinvest dividends Diversify to reduce risk Dividend Add-ons Avoid dividend non-payers Avoid dividend cutters Sell if dividend is cut Dividend growth > inflation Payout ratio < 80% Depends on stability 1.5% < Yields < 6% ROE > 18% Economic moat 41 February 8, 2017 StockUp 42 Websites dividendinvestor.com dividendgrowthinvestor.com seekingalpha.com thedividendguyblog.com edividendstocks.com REIT.com dividend.com February 8, 2017 StockUp 43 February 8, 2017 StockUp

12 TickerTalk & StockUp TickerTalk 11/16/2016, Growing Dividends DO Matter! by Craig Braemer 10/13/2016, Finding Dividend Stocks by Joe Parks 9/22/2016, Using ValueLine Data A Cautionary Tale by Suzi Artzberger 5/26/2016, Additional Checks to Assess Dividend Safety by John Diercks 2/18/2016, A Closer Look at Return on Equity by John Rogers 7/15/2015, GAAP vs. non-gaap EPS Data by Ann Cuneaz StockUp 5/6/2015, Bridging the GAAP How to Evaluate Data Differences by Ann Cuneaz Newsletters DividendInvestor with editors Michael Hodel & David Harrell of Morningstar Motley Fool Income Investor with editor James Early, The Motley Fool AAII Dividend Investing February 8, 2017 StockUp 45 February 8, 2017 StockUp 46 Reading The Dividend Growth Investment Strategy or How to Keep Your Retirement Income Doubling Every Five Years by RoxAnn Klugman, 2001 The Ultimate Dividend Playbook by Josh Peters, Morningstar, 2008 Yes, You Can Become a Successful Income Investor by Ben Stein and Phil DeMuth, 2010 Be a Dividend Millionaire: A Proven, Low-Risk Approach That Will Generate Income for the Long Term by Paul Rubillo, 2010 Better Bank Stock Analysis Presented by Ross Meredith, Rocky Mountain Chapter, BetterInvesting Wednesday, March 8, :30 9:45 PM Eastern Time February 8, 2017 StockUp

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