Thinking about Investing? Start Now

The below chart illustrates the importance of investing early and the power of compounding interest. When it comes to investing time really is on your side.

Case 1:
• $2,000 invested annually in years 1 to 5
• No contributions after year 5
• Assumed rate of return of 10%
• Interest compounded annually.
• All interest is reinvested.
• Total invested $10,000

Case 2:
• No money invested in years 1 to 10
• $2,000 invested annually in years 11 to 40
• Assumed rate of return of 10%
• Interest compounded annually.
• All interest is reinvested.
• Total invested $60,000



You have probably seen similar charts on the front of mutual advertisements and although I’m not a huge proponent of mutual funds I think the underlying message is valid---The earlier you start investing the better.

The Secret to Financial Success

Many people have the view that finances and investing is some kind of mystical puzzle that once solved will instantly eliminate all their financial troubles. The code will be broken and the chest of gold will fly open (just watch any late night infomercial). In my opinion the notion of a financial quick fix is the most dangerous and damaging perspective that anyone can have. Having this view effectively removes individuals from their current financial problems. It rationalizes the belief that you don’t have to diligently and effectively manage your money because once you figure the secret out everything will be OK.

In my opinion the real secret to financial success is the realization that there is no secret, and that for 99.99% of the population (myself included) there is no formula or secret that is instantly going to solve all your financial problems. The real secret to financial success can be found by following these 3 easy steps:

1. Spend less money than you make.
2. Invest your saved money.
3. Repeat 1 and 2 until you can retire.

Well the secret is out...that’s really all there is to it.

If Only You Had the Inside Scoop

Bought too early? Sold too soon? Should have seen it coming? Well don’t feel too bad, here’s a list compiled by Micheal Brush of MSN Money of some of biggest insider mistakes of 2007.



*The losses above were as of Jan 18, 2008. As we know the market hasn’t performed well this year so many of the above losses are potentially much higher.

Toyota - Soon to be the Worlds Biggest Car Maker?

Toyota’s strategy of shifting their focus to emerging markets seems to be paying off as they are now expected to surpass GM in annual sales by the end of 2008 making them the world’s largest automaker.

According to an article by Martin Foster in the New York times.

“While sales declined in North America, they increased in Asia, especially in Indonesia and Thailand, and in other regions including South and Central America, Africa and Oceania.

In the nine months through December, less than half of Toyota sales came from its showrooms in North America.

Sales to North America slid to 44 percent from 57 percent a year earlier, while Asian sales rose to 25 percent from 15 percent.”

As a consumer it’s no surprise that GM is about to be bumped from the #1 spot. I am by no means a picky shopper but for me it’s basically at the point that when I’m car shopping I don’t even bother looking at North American cars anymore. My reason for this is simple...I want to own a car that isn’t going to break down and from experience and the experiences of people I know GM can’t seem to meet my single criteria.

DRIPS

What is a DRIP?

DRIP stands for Dividend Reinvestment Plan. There are 3 different types of DRIPs however they all work on the same principle, instead of shareholders receiving dividend payouts in cash they receive their dividend payout in the form of more company shares.

3 basic types of DRIPs

Company Run
This type of DRIP is administered directly through the publicly traded company. Fractional shares are permitted in this type of DRIP meaning that if you receive a quarterly dividend of $1 and the share price is $5 you would receive an additional 1/5 of a share. Additionally, many company run DRIPs also provide shareholders some incentive for staying enrolled ie – 3% bonus to the regular dividend. Company run DRIPs also usually offer a Share Purchase Plan which is a plan that allows investors to buy additional shares with no commission.

Transfer Agent-Run
For the shareholder this type of DRIP is the same as a company run DRIP. Transfer Agents are employed by companies to streamline their DRIP process and reduce the administrative costs associated with running a DRIP. Transfer Agents run DRIPs for a many customers and as a result can run offer the same program to multiple companies using the same resources resulting in lower costs.

Brokerage Run
Many brokers will now allow customers to reinvest their dividends at no cost. This type of DRIP is not a “real DRIP”, it is more of a service that the brokers provide to their customers and is often referred to as a “synthetic DRIP”. One benefit of brokerage run DRIPs is that they will allow you to DRIP many companies that do not even have a formal DRIP program. This allows investors to now DRIP virtually every blue chip company on the US exchanges. Although synthetic DRIPs have really expanded the number of drippable companies they do have a few drawbacks. The first of which is brokerage run synthetic DRIPs do not allow for fractional share ownership, only full shares will be purchased and the remainder of the dividend will be deposited as cash into the customers trading account ie-company ABC has a $15 quarterly dividend and a $10 share price, this would result in the customer receiving 1 share of ABC and $5 cash instead of 1.5 shares. The second drawback of brokerage run DRIPs is that share purchase plans are not available. If you want to buy additional shares you have to pay the regular commission price of your broker.

Facebook Worth 15 Billion?

For those of you who haven’t heard of Facebook here is an extract from the “about” section of Facebooks website.

About Facebook
Facebook is a social utility that connects people with friends and others who work, study and live around them. People use Facebook to keep up with friends, upload an unlimited number of photos, share links and videos, and learn more about the people they meet.

Anyone can join Facebook
All that's needed to join Facebook is a valid email address. To connect with coworkers or classmates, use your school or work email address to register. Once you register, join a regional network to connect with the people in your area.

Discover the people around you
Facebook is made up of many networks, each based around a company, region, or school. Join the networks that reflect your real-life communities to learn more about the people who work, live, or study around you.”

Microsoft recently invested $240 million for a 1.6% stake in facebook while Hong Kong billionaire Li Ka-shing invested $60 million for a 0.4% stake. Using those figures, would value the company at a whopping $15 billion. I have little doubt that the 4 year old company and its 23 year old founder are brilliant but are they worth $15 billion? Just to put this into perspective here are the market capitalizations of some popular U.S large caps.

Walgreens – $38.3 billion
Brookfield Properties – $7.9 billion
Lowes – $35 billion
Newmont Mining – $20.6 billion

Although there is no denying the popularity or marketing potential of Facebook I would have reservations about investing in an online “social utility” that is valued the same as 75% of Newmont mining. The valuation may be appropriate if its current growth were to continue indefinitely however, personally I think there is a chance that Facebook has the potential to become a “flavour of the month”. Anyone remember geocities? Of course there is a chance that it may stick around however, if I had $15 billion to invest I think I would rather take my chances and buy 100% of Brookfield Properties and half of Newmont Mining than gamble on Facebook. Which would you rather own?

Stock Selection Process

Here is the general process I use to evaluate a stock.

1. Are their products/services in a growing or stable industry?
-for me this would exclude companies such as newspapers, tobacco etc. Basically, I look for companies that I think will still be around in 50 years.

2. Do they have a competitive advantage or are there large barriers to entry?
-for example companies like TRP and CNR have huge barriers to entry. Other than the billions of dollars that would be required to build the infrastructure it would takes year and years to get the proper approvals.

3. Do they have a history of returning value to shareholders?
-for example, JNJ has raised their dividend for the last 44 years. MMM has paid a dividend since 1916. A history of share buy backs would also be a plus.

4. Are they trading at a reasonable price?
- I use my fair value calculation when appropriate.

To calculate fair value I use a modified discounted cash flow model. Basically, I calculate the present value of the future dividend income and the present value of the future estimated EPS (multiplied by the PE ratio that I think the company SHOULD be trading at) and the sum of those two numbers is the fair value

My stock selection process has evolved over the years and I find it effective to select companies for my particular investing style. However, for other strategies or investing styles my selection process would be very ineffective. I’d also just like to note that the formula I use to calculate fair market value is not valid for all types of companies. For example, it’s not effective for many REIT’s or resource companies as their share prices are generally based on NAV, FFO, or reserves which are not included in my formula.

Thinking about Taking a Vacation?

If you love adventure and go on vacation for an adrenaline rush then you might want to check out the below hot spots. Reuters has compiled a list of great travel destinations for the really depressed/insane. The article entitled “Travel Picks: The world's top 10 dangerous destinations” provides a brief description of each destination as well as the possible risks ie- warlords, kidnapping, land mines etc…

Here they are in order of danger:

1. Somalia
2. Iraq
3. Afghanistan
4. Haiti
5. Pakistan
6. Sudan
7. Democratic Republic of the Congo
8. Lebanon
9. Zimbabwe
10. Palestinian Territories

To view the entire article please click here.

How Much Does It Cost To Beat the Market?

I was recently reading the New York Times and came across a very interesting article by Mark Hulbert. In his article he outlines the results of a recent study that attempted to quantity the collective cost of Americans trying to beat the market. The study entitled “The Cost of Active Investing” found that collectively it is costing Americans roughly $100 billion annually to try and beat the market. The study “took into account the fees and expenses of domestic equity mutual funds (both open- and closed-end, including exchange-traded funds), the investment management costs paid by institutions (both public and private), the fees paid to hedge funds, and the transactions costs paid by all traders (including commissions and bid-asked spreads). If a fund or institution was only partly allocated to the domestic equity market, he counted only that portion in computing its investment costs.

Professor French then deducted what domestic equity investors collectively would have paid if they instead had simply bought and held an index fund benchmarked to the overall stock market, like the Vanguard Total Stock Market Index fund, whose retail version currently has an annual expense ratio of 0.19 percent. The difference between those amounts, Professor French says, is what investors as a group pay to try to beat the market.”

The results of this study imply that there are really only 2 strategies that investors should stick with:

1. Buy and hold a diversified portfolio.
2. Play the market through low cost ETFs.

To view the entire article please follow this link.

New Billionaire on Top

There’s been a little shuffling at the top of the billionaire list this year. Warren Buffet is now officially the world’s richest man. His net worth is now an estimated $62 billion up from $52 billion last year. His 10 billion dollar ride has ended the 13 year reign of his longtime friend Bill Gates who was been bumped down two notches to the world 3rd richest man. But come on...once you hit a few hundred million does it really matter anymore? Regardless here is a list of the top 20 richest people in the world.

1. Warren Buffett
2. Carlos Slim Helu
3. William Gates III
4. Lakshmi Mittal
5. Mukesh Ambani
6. Anil Ambani
7. Ingvar Kamprad
8. KP Singh
9. Oleg Deripaska
10. Karl Albrecht
11. Li Ka-shing
12. Sheldon Adelson
13. Bernard Arnault
14. Lawrence Ellison
15. Roman Abramovich
16. Theo Albrecht
17. Liliane Bettencourt
18. Alexei Mordashov
19. Prince Alwaleed
20. Mikhail Fridman

25 Stocks to Avoid

In November I remember reading this article by Jon Markman over at MSN Money Central. In his article he explains his rational for avoiding the following 25 stocks. I just wanted to say nice call Jon.

To read the entire article please click here.

25 COMPANYS JON MARKMAN SAYS TO AVOID

1. Merrill Lynch (MER, news, msgs)
2. Lehman Bros. (LEH)
3. Bear Stearns (BSC)
4. Bank of America (BAC)
5. Citigroup (C)
6. Washington Mutual (WM)
7. KeyCorp (KEY)
8. Wachovia (WB)
9. Moody's (MCO)
10. McGraw-Hill (MHP)
11. YRC Worldwide (YRCW)
12. JB Hunt Transport Services (JBHT)
13. Con-Way (CNW)
14. Knight Transportation (KNX)
15. Old Dominion Freight Line (ODFL)
16. McClatchy (MNI, news, msgs)
17. The New York Times (NYT)
18. Gannett (GCI)
19. Arctic Cat (ACAT)
20. Bed Bath and Beyond (BBBY)
21. Williams-Sonoma (WSM)
22. La-Z-Boy (LZB)
23. Stanley Furniture (STLY)
24. Bassett Furniture Industries (BSET)
25. News Corp. (NWS)

Are We In a Recession?

The talking head on business networks like CNBC have been debating the issue now for months, “are we going into recession?”. Some economists are saying yes we are while others are saying no. Well Warren Buffet has an answer for us…yes we are in a recession.

Based on the technical definition of a recession (two consecutive quarters of negative GDP growth) we haven’t entered a recession. However, Mr.Buffet was recently quoted as saying “I would say, by any commonsense definition, we are in a recession”. That’s good enough for me. If the world most successful investor says we’re in a recession I believe him.

How Many Securities Should You Have?

I’ve been asked this question before and my general rule of thumb is 20. I think that if you own over 20 stocks you run the risk of becoming too diversified. If you’re too diversified you basically become the market and if that’s the case why waste the time and commission fees buying individual stocks? Simply buy some low MER index funds and get it over with, because if you diversify too much you’re going to mimic the index anyways.

There are of course exceptions, for example if you’re pursuing a high risk strategy such as penny gold stocks it would probably be wise to create a basket of these high risk stocks and hope for a few big winners. Additionally, if your portfolio is under $70,000 I don’t think that you should be aiming to hold 20 stocks. I believe that if you can’t commit a minimum of 2.5% to 3% of your portfolio to a stock you probably shouldn’t buy it. I will often buy a half position ie- 2.5 to 3% of a stock and if it increases and grows into my target 4 to 8% of my portfolio great! but if not I will wait and average down to increase the weighting.

[No information provided on this site should be interpreted as either advice or a recommendation. Please do your own research and consult your own financial advisor before buying or selling.]

Citigroup

“Citigroup is organized into four major business groups: Global Consumer; Markets and Banking (M&B); GlobalWealth Management; and Alternative Investments. The Citigroup Global Consumer business includes banking services, credit cards, loans and insurance. The M&B business is in about 100 countries and advises companies, governments, and institutional investors on the best way to realize their strategic objectives. The GlobalWealth Management division at Citigroup is comprised of The Citigroup Private Bank, Smith Barney (private wealth management), and Citigroup Investment Research,and serves both private and institutional clients.”

Here are my reasons for buying:
-As a general rule I’ve found that the best time to buy large multinational blue chips is when everyone else hates them.
-Currently 45% of their revenue is generated outside of the United States and their current focus is to increase this number to 60%.
-They have the world’s largest credit card operation.
-In my opinion they are extremely well positioned to expand their international operations.
-Management is aggressively working to rebuild their capital base.
-The potential exists to unlock some value if Citi is broken up into separate entities.
-I believe long term this franchise will be a survivor

PE – 34.3
Estimated 2007 PE – 8.9X
Estimated 2008 PE – 6.8X
Current dividend yield – 5.13%
Price/Book – 1.1X

Other Facts:
-S&P recently downgraded them from 5 stars (strong buy ) to 3 stars (hold). However, they have a 12 month $35 price target
-Argus recently reduced their 1 year target price to $35 from $55 but are maintaining a buy rating.

Calculated Fair Value:
I’ve calculated the fail value of C (based on current information) to be approximately $32.81. My estimate is a little more conservative than both S&P and Argus however, from it’s current price there is a 31% upside.

I initiated a half position in C last November and a bought another quarter position last week. I will continue to watch the developments on this name and am not opposed to initiating another quarter position in the future. What are your thoughts?

[I currently own shares of C. No information provided on this site should be interpreted as either advice or a recommendation. Please do your own research and consult your own financial advisor before buying or selling.]

Johnson & Johnson - (JNJ)

“Johnson & Johnson is engaged in the manufacture and sale of a broad range of products in the health care field in many countries of the world. The company's worldwide business is divided into three segments: Consumer; Pharmaceutical; and Professional.”

Dividend Yield: 2.64%
Dividend Yield 5yr Avg: 1.9 %
ROE levels of above 21% for the past 10 years
Current P/E– 17.3
Projected 2008 P/E –14.3
Projected 2009 P/E – 13.6
4 Star rating from S&P - $74 one year target
Argus rates it a buy with a $75 one year target

Other information:
-44 years of consistent dividend growth.
-3 year average dividend growth rate: 14%
-5 year average dividend growth rate: 15.5%
-5 year average dividend payout ratio: 40%
-Dividends issued to shareowners every quarter since 1944.
-Dividend raised each year for 44 consecutive years.
-Sales have increased each year for 73 consecutive years.
-Double digit Earnings increases for 21 consecutive years.
-44% of sales outside of North America

Calculated Fair Value:
The fair price I calculated for this stock is $67.

[I currently own shares of JNJ. No information provided on this site should be interpreted as either advice or a recommendation. Please do your own research and consult your own financial advisor before buying or selling.]

Subprime – Do We Have a Problem Managing Risk ?

Due to the ongoing subprime fiasco many banks and financial institutions are in the process of redefining how they assess risk. As an investor I find it hard to believe that these major financial players could have miscalculated risk to the degree that it now has some of them teetering on bankruptcy while potentially throwing the U.S into a recession. Personally, I’m hoping that they knew the risk and were just greedy. As an investor the greed argument is much more reassuring than the notion that almost all of the major financial players in the U.S do not have the ability to accurately assess risk, and therefore were investing in products that they didn’t understand.

Recently Citigroup Chairman Win Bischoff was quoted as saying “managing risk within a bank is not just a matter of relying on internal processes but also requires taking the right decisions at the top of the company”. Is this new? Is he proposing a new standard for risk management? His quote leaves me asking “what were they doing before?”

This might be my naivety but I had assumed that since the bread and butter of financial institutions is assessing risk that the top brass was already committed to “taking the right decisions at the top of the company”. I was under the impression that the huge pay checks distributed to those at “the top of the company” were because they were able to assess risk and make decisions. Just to put this into perspective, recently ousted CEO Chuck Prince is leaving the company with $94 in vested stock in addition to the $53.1 million he made over the last 4 years. While former of Merrill Lynch CEO Stanley O’Neal is being pushed out for a paltry $161.5 million. With salaries approaching the hundred million mark I’d say yes Mr. Bischoff perhaps… “managing risk within a bank is not just a matter of relying on internal processes but also requires taking the right decisions at the top of the company”.

Note: This post was republished with permission.

3M – Increases Dividend

On Feb 11th, 3M announced a 4.2% increase in their quarterly dividend. Making 2008 the 50th consecutive year that the company has increased their dividend. Although, the dividend increase is only marginally above the rate of inflation their payout ratio has slowly been coming down. The 5 year average payout ratio is approximately 39% while their current payout ratio is about 33.5%. The Moneygardener has suggested on his blog that perhaps the paltry dividend increases are a result of 3M bulking up for future acquisitions and I certainly agree that’s a probable option. However, another reason for the small dividend increase could simply be that management is taking a cautious approach. I’m speculating that the management at 3M is like most of the large and small players in the market and just waiting to see what happens to U.S economy. Will there be a recession? If so how bad will it be? Although, 60% of 3M’s revenue now comes from outside the U.S they are still very closely tied to the U.S economy and are often used as a barometer for it's overall health. As an investor in 3M I like to management taking a cautious approach. Personally, I would rather a small dividend increase in uncertain markets than a large dividend increase that could become unsustainable if global markets start to erode.

Warren Buffet’s Holdings as of September 30, 2007

As Warren Buffet is arguably the worlds most successful investor I think it’s worth the time to periodically check his holdings to see where he’s deployed his capital. The below chart lists his holdings as of September 30, 2007. Although, this information is around 4 months old Warren Buffet is a very long term investor and has been quoted as saying “Our favourite holding period is forever” as such I don’t think the composition of his portfolio would have changed in any significant way since September.

2008 U.S Dividend Growth

2007 was a great year for dividend growth investors with over 60% of the S&P constituents increasing their dividends. On average the companies comprising the S&P 500 increased their dividend payments by a healthy 9.7%. Total dividends paid by S&P 500 companies broke a new record with a whooping $256.6 billion distributed to shareholders. This is up $31.8 billion from $224.8 billion in 2006.

According to S&P analysts dividends will continue to rise 2008 with the average estimated increase to be 9.3%. However, this growth is not expected to be evenly distributed amongst the S&P 500 group of companies. U.S financials are going to be the obvious laggards as virtually all growth in that sector is expected to be muted by the on going sub-prime fiasco.

My personal opinion is that 2008 will be a terrible year for large dividend paying U.S financials. However, I also believe that they will probably be over punished, over sold and possibly ignored by many investors. Thus creating the possibility of 2008 being a once in a decade buying opportunity for quality, dividend paying large cap U.S financials.

Currency Hedge – A Defense for a U.S Recession

Many economists now believe that the U.S will be entering (or is in) a recession. This slow down in the economy coupled with the aggressive rate cuts by the Federal Reserve have been putting downward pressure on the U.S dollar. The devaluing of the dollar is certainly beneficial for our exporters (as it makes them more competitive on a global scale). Although, the slowdown in our domestic economy is obviously a negative for most of our large corporations the resulting depreciation of the dollar does have some resulting positive effects on our large U.S multinationals. For example, 60% of 3M’s revenue comes from outside the U.S. Those earnings are then inflated when they are repatriated back into U.S currency for accounting purposes. The result of this is even if sales remain flat internationally the year over year revenue statements would show an increase in earnings. Another great dividend paying option in this environment is Johnson & Johnson (JNJ) who generate 44% of their sales outside of North America. Stay tuned as I’ll be analyzing JNJ next week.

3M - MMM

Let’s start things off by taking a look at this member of the “Broad Dividend Achievers”.

“3M Company is a diversified technology company with leading positions in consumer and office; display and graphics; electronics and telecommunications; health care; industrial; safety, security and protection services; transportation and other businesses. They are an integrated enterprise characterized by substantial intercompany cooperation in research, manufacturing and marketing of products.”

They trade under the symbol MMM on the New York Stock Exchange and are included in the following indexes Dow Jones Composite, Dow Jones Industrial, S&P 100, S&P 500 and S&P 1500 Super Comp.

-Current P/E – 14.5X
-2008 Estimated PE – 14.7X
-2009 Estimated PE – 13.3X
-ROE – 37.74%
-Current Yield – 2.36%
-5 Year Average Yield – 2%
-Current Payout Ratio – 33.5%
-5 Year Historical Payout Ratio – 39%
-3 year dividend growth rate – 10.02%
-5 year dividend growth rate – 10%

Other Facts:
-Dividend History: Paid quarterly since 1916
-60% of their revenues now come from outside the US
-Have a long history of innovation
-S&P Rating: 3 stars, Hold, $85 target price
-Argus Rating: Buy, $105 target price

Calculated Fair Value:
The fair value calculated by the American Dividend Investor is $85.62. This is virtually identical to the target calculated by the analysts at S&P. This represents a 7.86% discount to the current price of $79.52.

[No information provided on this site should be interpreted as either advice or a recommendation. Please do your own research and consult your own financial advisor before buying or selling.]

Welcome!

Welcome to the launch of the American Dividend Investor!

Purpose of this Blog
This blog was created to educate and inform individual investors about both the benefits of a dividend growth investment strategy as well as provide them with a thorough analysis of individual dividend paying American securities.

It is the hope of the authors that this site will become a resource for both novice and experienced investor alike and will allow readers to gain the tools, resources and knowledge necessary to build their own successful dividend paying portfolios.

What’s So Good About Dividend Based Investing Anyways?

1. It’s common knowledge that over the last 100 years stocks have returned an average of 10%. However, what’s not revealed in that 10% figure is that 50% of the total return consists of dividend.

2. A growing dividend is usually a good indicator that a company is healthy. Annual dividend increases indicate that the executive and director insiders are sufficiently confident in the long term prospects of the business to payout their earnings as dividends.

3. Trading costs are reduced as minimal trading is required in a dividend growth portfolio.

4. Annual dividend growth can protect your income stream against inflation. Additionally, companies with a history of increasing their dividend can usually pass much of the price inflation on to their customers.

5. The share price of the company usually increases with the dividend (ie-you don’t see many high quality blue chips yielding more than 4% because the share price increases with the dividend)