Joan Loken NW Region Manager

Transcription

1 1 Joan Loken NW Region Manager

2 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 2

3 Agenda BetterInvesting Principles Dividend Investing vs. Fixed Income Dividend Basics S&P Dividend Aristocrats Finding Dividend Stocks 3

4 BetterInvesting Principles Invest Regularly Be consistent- Take advantage of dollar cost averaging Reinvest Earnings Use the magic of compounding Invest in Growth Companies Look for companies with increasing sales and earnings Diversification By company size and sector 4

5 BetterInvesting Principles Buying high quality, solidly growing individual stocks with a long term horizon may provide superior returns Long-term investing reduces drag caused by capital gains taxes & trading costs Buy-and-hold investing requires lower time commitment than active strategies Long horizon helps reduce risk of stock investing 5

6 BetterInvesting Principles Goal is for the portfolio to double in value in 5 years from: Capital Appreciation Dividends (though not all companies pay) Price/Earnings Ratio Expansion (from contrarian practice of buying undervalued compared with historical trends) Goal is for the portfolio to beat the market in any single year 6

7 BetterInvesting Principles Holding carefully selected stocks over long term produces best results No stock follows schedule, always ups & downs in price If original assumptions deteriorate, sale recommended & follow-up discontinued Torpedo can come out of dark at any time 7

8 BetterInvesting Principles Buy & Hold does not mean Buy & Forget When a mistake is made, acknowledge error and sell Waiting to get even is a self-defeating strategy 8

9 Dividend Investing vs. Fixed Income 9

10 Bonds Yielding Little 10

11 Emerging Market Debt 11

12 Dividend Investing vs. Fixed Income Source: investorsfriend.com 12

13 Dividend Investing vs. Fixed Income Since 2009 the ishares Bond Fund increased 88% while the ishares DJ Select Dividend Portfolio grew 130% 13

14 Dividend Investing vs. Fixed Income Source: Investorplace.com 14

15 Dividend Basics 15

16 Dividend Basics A dividend is something of value usually cash, but sometimes securities that is transferred from a corporation to shareholders The payment of dividends is not a legal obligation for a corporation Companies must satisfy all other financial obligations first They are declared only at the discretion of directors Dividends on preferred stocks must be paid before common 16

17 Dividend Basics However, dividends tend to be sticky companies create a clientele for their shares with dividends Reductions are rare, even in tough times We expect the best overall results from stocks with 3%-7% yields high enough to matter, low enough to be reliable and growing Josh Peters, Morningstar 17

18 Evaluating a Dividend Is it safe? Strong financial position Narrow or wide economic moat Manageable payout ratio; depends on company/industry Will it grow? Earnings growth drives long-term dividend growth Avoid businesses in secular decline (i.e. rural telecom) Is management committed to growing the dividend? 18

19 Evaluating a Dividend What s the return? Average Yield + Annual Price Appreciation (using forecasted average P/E) = Projected Average Total Return on the Stock Selection Guide (SSG) Buying companies when undervalued (below its average P/E) allows returns from P/E Expansion Buying stocks at low comparable P/E valuations can bring additional returns Income & growth potential Do better than bonds in the face of inflation 19

20 Key Terms The dividend rate is the amount of regular dividends paid per share, usually shown on an annualized basis The dividend yield is the dividend as a percentage of the share price. The payout ratio is the percentage of earnings paid as dividend A dividend increase is a hike in the cash paid per share (not the yield) The dividend growth rate is the advance of the dividend rate over time Payment $0.305 Dividend frequency 4x/year Annualized rate: $1.22 Stock price (6/22/12) $38.44 Current yield: 3.2% FY12 earnings estimate $2.54 Payout ratio: 48% Likely increase for FY13 $0.10 Percentage hike: 8.2% Paid in FY07 $ year CAGR: 11.1% Source: Morningstar 20

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23 Dividend Payers since 1987 Source: Proshares.com 23

24 S&P Dividend Aristocrats 24

25 Aristocrats vs. S&P

26 Aristocrats vs. S&P

27 Sector Mix Dividend Aristocrats 27

28 Sector Weight Comparison 28

29 Sector Analysis of the Dividend Aristocrats AS OF

30 Sector Analysis of the Dividend Aristocrats 30

31 Sector Analysis of the Dividend Aristocrats 31

32 Sector Analysis of the Dividend Aristocrats 32

33 Dividend Aristocrats Low Payout Ratios o < =70% preferred Clean Balance Sheets o Debt to capital ratio < = 50% Durable Business Models o Decades of operating experience o Industries with very slow rate of change Low Industry Cyclicality 33

34 Industry Diversification S&P

35 Top Ten Financial Ratios Dividend Payout Ratio Free Cash Flow Return on Invested Capital or ROE Operating Profit Margin Asset Turnover Sales Growth Debt to Capital Net Debt / EBIT Price-to-Earnings Ratio Total Shareholder Return 8 Of 10 ratios are shown on the (SSG) Stock Selection Guide 35

36 Dividend Payout Ratio MMM 36

37 Dividend Payout Ratio 37

38 Free Cash Flow Paycheck PAYX Cash Flow measures a company s ability to generate cash flow to maintain operations US Steel (X) 38

39 Cash Flow PAYX & X (Purple Line) 39

40 Return on ROE (Graphs on SSG) ROE Warren Buffet s Favorite Financial Ratio o High ROE compounds earning faster o Has a some competitive advantage PAYX X 40

41 Operating Profit Margin BetterInvesting looks at Pre-Tax Profit Margin o Difference Operating Margin includes interest o Median profit margin is ~ 12% o Higher margins can be a sign of economic moat o Pay close attention to level and consistency PAYX X 41

42 Asset Turnover Tells us how many dollars of sales each dollar of assets generated Companies that generate more sales from assets can squeeze out more profits A company with low margins can generate good return if its asset turnover is high Companies that efficiently use assets can improve asset turnover & ROIC Not Tracked on SSG 42

43 Sales Growth Trend in Sales informs about volatility and ability to continue to expand sales NUE BDX 43

44 Debt-to-Capital Tells proportion of financing to debt o Debt-to-capital ratio < = 50% o Too much debt in hard times with dwindling cash flow will pay debt before dividend PAYX - Company with no debt X 44

45 Net Debt / EBIT Ratio compares a company s debt to earnings o EBIT stands for earnings before interest and taxes o EBIT is measured over the course of one year o Measures ability to pay debt o Ratio < = 2.0 o Companies with more stable earnings can afford somewhat higher ratios Not tracked on SSG 45

46 Price-to-Earnings Ratio Average market P/E multiple 15 Prefer to buy companies < 20 P/E Stable companies with faster earnings growth BI guidance is buy at or below the company s average P/E Additional returns come from P/E Ratio expansion Buying stocks at low comparable P/E valuations can bring additional returns 46

47 Total Shareholder Return (TSR) A 6% dividend yield does little if the stock price falls over 40% Well-managed business should be in line with broader market If shareholder value is destroyed, ask why would this trend reverse itself John Templeton, The four most dangerous words in investing are: this time it s different 47

48 Total Shareholder Return (TSR) Ecolab ECL ECL increased TSR greater than market over these 3 time periods 48

49 Total Shareholder Return (TSR) US Steel (X) X lost TSR over these 3 same time periods 49

50 Morningstar Portfolio Objectives Target Returns 3%-4% yields, 6%-9% dividend growth 5%-7% yields, 3%-5% dividend growth How much yield can you get today? For a reasonably well-diversified portfolio (15-20 individual stocks with multiple sectors represented), 3%-6% is doable When you give up yield, require a lot more growth! 50

51 How Much Income? Portfolio with average 3% dividend yield $1,000,000 = $30,000 annually or $2,500/month* $400,000 = $ 12,000 annually or $1,000/month* $250,000 = $ 7,500 annually or $625/month* * qualified dividends are taxed at the same rate as longterm capital gains, which is 15 percent for most individual taxpayers 51

52 Guidelines for Dividend Stocks Yield o 3-6% acceptable o 7-9% questionable, review for safety o For > 10%, is it sustainable, could be red flag Payout Ratio o 50% is acceptable o 75% is questionable Dividend Growth o 10 years continuous payment history o At least 5% annual growth past 5 years 52

53 Evaluating Stocks Evaluating Dividend Paying Stock o For Income o Annual Return o Safety 53

54 Safety Threats to Dividend Safety o High payout Ratios o Weak Free Cash Flow o Declining Sales & Earnings o Weak Balance Sheets o No Proven Commitment to pay growing Dividends 54

55 Finding Dividend Stocks 55

56 Finding Stocks Finding Dividend Paying Stocks o Value Line o Library or subscription o BetterInvesting Online Stock Screener o Included with subscription o Morningstar Newsletter o Library or subscription o Manifest Investing o Subscription 56

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63 Morningstar Newsletters 63

64 Stocks in current active portfolio. Star rating indicates Price to Fair Value. 3 Stars indicates price close to Fair Value. 4 Stars ~ 10% under Fair Value. 2 Stars indicates ~ 10% over Fair Value. 64

65 Comments on reason for consideration or caution. 65

66 Manifest Investing - dashboard 66

67 Manifest Investing - Screener 67

68 Manifest Investing Screener Results 68

69 Manifest Investing Daily Screen Daily screen of high quality companies in the Sweet Spot 69

70 BetterInvesting s Investment Tool Stock Selection Guide (SSG) 80% of what you need to know is on the SSG o However don t forget the other 20% The other 20% is judgment research & interpretation o Understand the company s business o Understand how it makes money o Review and Check current news on industry, (competitors) and the company itself o Evaluate carefully 70

71 Acknowledgements Thank you to: o Joe Parks o Deane Jaeger o Doug Gerlach o Simply Safe Dividends o Morningstar 71

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