The stock market carnage of the past few months has had me thinking long and hard about investing, to the point that I went to the library looking for advice. What I am wrestling with is the value investing side of me, who likes trawling the bargain basement thinks that oil stocks have been so badly beaten up that they must be a good deal now, but has definitely been burned by stocks that keep dropping. The cautious side of me is very concerned that prices will continue to drop and that instead I should limit my losses and stick to solid, boring, blue chip dividend payers.
Over the holidays I read a few books about a few strategies. I know this isn’t the most exciting blog post ever, but I wanted to share what I read.
First up was “Warren Buffett Stock Portfolio” by Mary Buffett. Her take is to buy old companies as they have predictable profits, are entrenched, and have an easier time staying competitive. Look for long-term consistency in earnings, over at least 10 years. Names on the Buffett list include Coca-Cola, Costco, Kraft Heinz, Moody’s, Procter and Gamble, Sanofi, Walmart, Glaxo and Johnson & Johnson.
Next on the list was “The Strategic Dividend Investor” by Daniel Peris.
He says the notion of earnings per share (EPS) growth has become so debased that it really is a useless measure of long-terms profit and dividend trajectories. For long-term investors, dividend growth is real earnings growth. As a cash payment, the dividend can’t be faked. Further, don’t solely look at dividend growth. He points to Colgate (often cited as a star) which raised its dividend by an average of 9.1% a year for 48 years. The up front yield is too low in his view (it’s about 1%), even with a 9% stock price increase.
He compares a company with a 2% dividend and 8% long-term dividend growth to a company with a 5% dividend and 5% annual dividend growth. It would take 33 years for the higher grower to exceed the payment from the slower grower. He also feels that a REIT with a yield below 5% and a low single digit dividend growth rate doesn’t make much sense as an investment.
If a slow-growing large company tells you it’s buying another large company so it can improve its growth profile, be very, very wary.
He explains free cash flow (FCF) as cash flow from operations minus capital expenditures. We want to make sure that it is rising and is enough to cover the dividend payment. FCF per share should be similar to EPS. For utility companies (who need to spend heavily on infrastructure) capital expenditures and dividends can exceed FCF. With other types of companies this would be a sign that the dividend needs to be cut, but it’s okay for utilities as they are regulated and have guaranteed return, and they are known to have cycles like this.
He likes telecom companies, such as AT&T and Verizon, which yield 6-7%. CenturyLink and Windstream generate cash returns of 8-9%. Vodafone and Telefonica yield 6-7% and BCE yields about 5%, Dividends in this sector have been on the rise. They can easily pay their dividends. It’s a mature industry and growth is slowing, customers are dropping landlines, but this will take years, so may as well invest and collect the dividends. He also likes Kimberly-Clark as a slow and steady grower.
Last on the list was “What’s Behind the Numbers” by John DelVecchio. He says that five common attributes of successful investing are
- Low price-to-asset value (book value)
- Low price-to-earnings (cash flow, high dividend yield with low payout ratio)
- A pattern of insider buying (company share repurchase included)
- A stock price that has declined (because of reversion to the mean)
- A small market capitalization (usually under $1 billion)
He suggests referring to the DRIP resource centre to look at their Dividend Champions list (www. dripinvesting.org).
- Dividend Champions: 25 year record of dividend increase, not necessarily S&P 500 companies
- Dividend Contenders: 10-24 years
- Dividend Challengers: 5-9 years
Dividend history can be found at dividata.com. Look for:
- Payout ratios less than 75% (except for REITs which can be higher)
- Stocks yielding at least 4% (he says ideally a 4.7% minimum)
- Long-term dividend growth rate of 10% or higher