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)