Regular readers of this blog already know we’re a bit obsessed with the Oracle of Omaha. With a 19.7% compounded return for shareholders over four decades, Warren Buffett is easily one of the most respected and successful investors of our time.
However, over the course of his life Buffett has always been staunchly invested in domestic companies. Although he has diversified over the years, a majority of his current portfolio is invested in the United States. Which made us wonder if there were similarly successful investors in other parts of the world. One of the most prominent examples of an investor who’s successfully applied the Buffett method to create wealth is Canadian entrepreneur Prem Watsa. Here’s a closer look at his investment style, career, and top investment picks:
About Prem Watsa
For insiders in the financial industry, the manager and chief investor of Fairfax Financial Holdings Ltd. (TSX:FFH) requires no introduction.
Watsa was born in Hyderabad, India and moved to Canada in his early 20’s to study for an MBA. He eventually got a job in an insurance company and convinced his boss to leave the firm and start a new insurance venture with him. Their partnership eventually bought another insurance company called Markel Financial, which was eventually renamed Fairfax Financial Holdings.
Over the past three decades, Watsa has managed to grow the book value of this small insurance company by 20% compounded annually. Today, he’s one of the richest men in Canada with an estimated net worth of $1.1 billion.
Watsa follows the same model to create wealth as Buffett. The core of his operation is insurance. Several insurance companies held by the firm generate what is known as ‘float’ – a large fund of premiums that can be freely invested by the company. Similar to Berkshire Hathaway, Fairfax applies this float to invest in the stock market can create phenomenal returns over a long period of time. This is essentially professional investing in the best monthly dividend stocks canada with interest-free leverage.
Another thing Watsa has in common with the Oracle is his focus on top quality companies he can buy for cheap. Over the years He has managed to create a rock-solid portfolio of some of the best monthly dividend stocks canada has to offer. His conservative value investment style combined with easy leverage is the secret to his success. So, here’s a closer look at what he’s invested in and how he generates those large dividends each month:
Leucadia is a business conglomerate with various holdings. The company offers a 1% dividend yield and makes up nearly 0.6% of Fairfax’s portfolio. This company holds a number of positions in the telecommunications and healthcare sectors, however its biggest holding is an international investment back called Jeffries. Jeffries offers long-dated debt investments and manages equity investments and banking needs for its clients. Over the past few years the company has managed to further diversify its operations and reduce leverage. This is, by any definition, a safe and growing dividend stock.
One of the few companies Prem Watsa shares with Warren Buffett is US Bancorp. USB makes up 1.8% of his portfolio and offers a 2.1% dividend yield at current prices. The reason this bank holding company could be so popular is that it outranks all its competitors in virtually every measure of a bank’s efficiency. It has better return on capital, better profitability, better payout ratios, and more attractive capital adequacy ratios. While most investors are still vary of banks due to the fallout from the financial crisis, professional investors know US Bancorp is special. It has a better credit rating than many of its biggest competitors, including Wells Fargo and JPMorgan. In fact, the bank’s debt is comparable to large corporations in America such as Disney and Starbucks. It’s probably one of the best monthly dividend stocks canada investor Watsa owns.
Johnson & Johnson isn’t just a company both Buffett and Watsa hold dearly, it’s one of the best loved Dividend Aristocrats in America. JNJ, as we’ve discussed previously in our ‘Forever Dividend Stocks’ essay, has a diversified portfolio of some of the most well known consumer brands in the world. It currently offers a 2.7% dividend yield and makes up 1.5% of Watsa’s portfolio.
You may not have heard of Kennedy Wilson Holdings or KW, but it is the second largest holding in the Fairfax portfolio after Blackberry. It currently makes up about 21.6% of the whole portfolio and is one of the highest dividend payers in that portfolio. The dividend yield is an impressive 3.4%.
Kennedy Wilson is a real estate company that manages a portfolio that spans the globe. The company is in a unique position of being worth less than its investment carrying value. While the carrying value of its real estate portfolio is $11 billion, its market capitalization is just $2.3 billion. The company operates with a 2x equity leverage multiple and has managed to generate an internal return rate (IRR) of a whopping 30%.
There has been double digit growth in the net operating income and dividends from the company over the past several years.
Although this is an international real estate manager, most of its portfolio is made up of commercial and multifamily properties spread across the western United States.
Although both Buffett and Watsa own a major chunk of IBM, they have both been cutting their stakes in recent months. Buffett has cut his stake by half since the peak in 2011. Meanwhile, Watsa also reduced his stake in IBM this quarter as the investment thesis changed. Nevertheless, IBM remains one of the largest tech companies in the world and a lucrative dividend payer. Last full year the company generated nearly $80 billion in sales and about $11 billion in net cash flow. It applies economies of scale to create growth in big data, cloud computing, and predictive analysis. However, this is a space with intense competition from equally wealthy opponents such as Apple, Amazon, and Google.
Helmerich & Payne is an interesting company that’s had a rough few years as the price of oil declined. The company gets contracts to drill for oil, a market which was substantially hit by the decline in oil exploration over the past few years. Now, the company makes up about 2.3% of Prem Watsa’s portfolio and manages to pay out a 4.5% dividend yield.
While the market was collapsing all around it, the company managed to increase the number of operational rigs and deleverage its balance sheet. It now holds more than 28% of the market share and has some of the lowest debt ratios in the industry. In other words, HP is a stable and growing player in a volatile market with a strong balance sheet.
South Korean steel company POSCO makes up less than 1% of Watsa’s portfolio. But it offers the highest dividend yield of them all – 11%. POSCO is an odd pick for Watsa and may not be well suited to most retail investors. When you buy the ADR of a foreign stock the dividend yield is subject to taxes. Not to mention the exchange rate makes the final return less predictable. It’s interesting to note that Watsa bought a stake in POSCO just when Buffett bailed on the stock. He sold his entire stake in 2012 after holding it for more than 5 years.
Prem Watsa is one of the most fascinating and successful investors of our time. Not only has he managed to generate wealth for his shareholders. But he has managed to do so with a more interesting portfolio of stocks than Warren Buffett.
While a good chunk of the portfolio is focused on the best monthly dividend stocks canada has to offer. Most of these holdings are small. His largest holding, Blackberry, has had a rough run and doesn’t even pay a dividend. Watsa isn’t focused on dividends as much as he is on value and a good contrarian bet. His purchases tend to go against the grain of the investment community and he usually comes out on top.
There’s no ‘right’ way to success. Success in business and investing tends to come in different forms. Sooner or later you’ll understand yourself well enough to know what your investment style is. Sticking to that particular investment style over the long run is one of the best ways to generate and sustain wealth.
If your chosen style is long-term, value-based dividend investing like we promote on this site, you will need a particular set of skills to achieve the results you seek. Dividend investors are a rare breed in this world of big data and high frequency trading. It’s not a sexy style of investing. For a dividend investor, the here and now counts for just as much as the promise of a bright future. By taking the yield on a stock today and estimating its future growth, you can secure your financial freedom and create wealth over the long haul.
More people are turning to dividend investing than ever before. With interest rates at record lows and a lacklustre real estate market, retirees and income seeker simply have nowhere to turn. Dividends have been a life-saver over this past century as companies pay out hefty sums and use the rest of the cash to expand their business and create capital appreciation through the stock price.
If you identify as a dividend investor who’s got an eye on all monthly dividend stocks, here are ten skills you’ll need to make this strategy work:
Learning simply doesn’t end with high school or college. Investors need to absorb and analyze as much data as they can find. Warren Buffett once said that the reason he was such a great investor was because he reads nearly all the time. He called the phenomenon compound knowledge and believed that learning about the world should never really end. This absorption of knowledge will only come to you if you’re naturally curious or develop a skill for reading and learning all the time.
Dividend investors must be laser-focused on the value of a company. Buying a stock when it’s trading below its intrinsic value is the core philosophy of value-based dividend investors. Which is why dividend investors should probably take a course on dividend discount or discounted cash flow methods used in professional financial circles to arrive at the value of a company before investing.
Dividend investors need a healthy dose of realism and skepticism. The capital markets are a crowded space with millions of actors who all have different objectives. Sometimes some deals seem a bit too good to be true and that’s usually because they are. Some companies and investment trends tend to sneak up out of nowhere and catch the whole market’s attention. Back in the late-1990’s, tech stocks were all the rage. In the early 2000’s, everyone seemed to believe Enron was the world’s best organization run by the world’s smartest professionals. By the mid-2000’s everyone was investing in real estate because it seemed to be an asset class that could only appreciate over time. All these trends ended in absolute disaster. Any dividend investor who remained skeptical and kept focus on all monthly dividend stocks during these boom-bust cycles would have preserved capital.
Being a contrarian is very similar to being a skeptic. However, while skeptics look at everything pragmatically, contrarians are willing to make an independent bet that goes against conventional wisdom. In other words, they put their money where their mouth is and aim to create immense profits by proving the market wrong. Contrarians can be looking at all monthly dividend stocks that are out of favor in the market. If the pharmaceutical and metals sector has had a bad time, the market prices of their stocks will be depressed to an unreasonable degree. This presents an opportunity for contrarian investors willing to do the research and place their bets. At the moment, the American retail sector could be fertile grounds for a contrarian bet.
Thanks to the internet, data is now everywhere. Public companies need to release data immediately so that everyone in the market can take advantage of it. As a dividend investor you may find it difficult to obtain data that’s proprietary or unique. Which is why you need to analyse the data better than anyone else to be able to gain an edge. Picking through corporate governance issues, understanding the tax system to be pick out loopholes, and figuring out accounting tricks that may be at play are all crucial skills for dividend investors.
Creating a strategy is multiple times more important than setting a goal. Planning and discipline are crucial skills for dividend investors who may have to experience some dramatic events in global capital markets. Your portfolio needs a planned structure that will allow it to withstand bear markets and flourish in bull ones. You also need parameters for diversification, debt, and return expectations. In other words, you need to set yourself some rules and stick to them. This will enable you to manage your portfolio wisely and create wealth in a systematic way over time.
Dividend investors are value seekers. And value seekers need to be patient with their convictions. If you’ve done your research, looked through all monthly dividend stocks, and bought a company while its stock price was beaten down, you may need to wait for the market to realize you’re right. Don’t lose patience with a great company if it doesn’t show results right away. If you’re confident about your analysis and have the ability to bear paper losses for a few years, stick to your bets no matter what. With dividends and earnings coming in you will be rewarded sooner or later.
One of the most crucial skills any investor needs is objectivity. Retail investors often get too emotional about their investments and this leads to mistakes based on psychological biases. Don’t fall prey to the Dunning-Kruger effect. Read up about clustering, bandwagon, anchoring, and confirmation biases to make sure you aren’t falling prey to any of them. The best way to avoid a bias is to develop a scientific method of picking and selling stocks and sticking to it with discipline. Creating rules and investing based on set parameters will help you eliminate bias in the stock selection process.
Dividend income seeker needs to be persistent with their investments. All monthly dividend stocks face difficult business conditions sooner or later. The market tends to ebb and flow. There’s a high chance of making a mistake or investing at the wrong time. The best investors know how to learn from their mistakes and improve on their strategy.
Consistent and perpetual learning is only possible if the investor isn’t put off by sudden and unexpected failures. Some of the best investors on the planet have suffered dramatic losses in their holdings when they first started. From George Soros to Carl Icahn, some of the wealthiest investors have lost a ton of money on some foolish investments. The reason they’re successful is because they picked themselves up and continued investing. Dividend investors should aim to do the same.
Finally, investing is all about knowing business. Picking a stock from a universe of all monthly dividend stocks is like going into business with new partners. You get a stake in the company and part of the profits. So, it is essential that you understand the company’s products and services. You also need a keen sense for what sells and what is likely to make a lot of money in the long run. This commercial sense may be your most valuable asset as an investor.
Dividend investors are a different breed. These investors focus on income as well as growth. A stock that pays a regular and growing dividend is keeping a promise to look after its shareholders. This is the sort of conviction that attracts dividend investors.
To be successful, dividend investors need to do more than just pick out all monthly dividend stocks. They need to be patient, curious, determined to go against the grain, analytic, and pragmatic. With all these skills dividend investors can create a solid dividend portfolio that guarantees financial freedom over the long term.
“Everything in valuation gets back to interest rates,” said the Oracle of Omaha, Warren Buffett, in a recent interview to Yahoo Finance.
Professional investors like Buffett focus intently on interest rates while making investment decisions. This is because earning a return on your money is the primary objective of making investments. The logic seems clear. If the risk-free rate of return offered by your country’s government is close to, or higher than, the return offered by going into a business, why would you take the risk of investing in a business at all?
Most of the models we’ve used on this site to value stocks (Discounted cash flows, dividend discount models, and gordon growth models) all rely on interest rates to discount back future earnings to present values. In other words, interest rates are vital to asset prices across the board.
Fortunately, investors who’ve been looking for monthly dividend stocks to buy have had a great run over the past eight years. Interest rates have hit record lows and have stayed close to zero for nearly a decade now. That’s pushed asset prices up tremendously. It’s been one of the longest running bull markets in Wall Street history. However, it could all be coming to an end as the Federal Reserve finally starts to raise interest rates again slowly.
Here’s how this gradual trend will affect your dividend portfolio and what you can do about it:
Rising Interest Rates Are Inevitable
Rising interest rates, at this stage, are inevitable. Most traders, analysts, professional investors, and academics agree that the Fed will raise interest rates. They only disagree on how much and how slowly rates will rise. So, average investors can expect the rate to go up one way or another.
In 2015, the Federal Reserve started raising rates from 0% for the first raise since 2006. While the rate stood at 0.5% last year, this year it is 1.25%. Eventually, the rate will gradually creep upwards till the Fed is comfortable that no more increases are needed. This is a historic move by the world’s largest economy and it will have some very real impacts on consumers, investors and businesses.
Rising Rates Are a Big Deal
Rising interest rates tend to push banks to raise their prime rate. This is the rate at which the country’s banks lend to everyone, so you will see a domino effect on credit card, business loans, and federal borrowing costs immediately.
Rising interest rates generally do not have much impact on long term loans such as mortgages or auto loans. But they can have a seriously negative impact on business profits, home sales, and overall consumer spending. In fact, Goldman Sachs notes that when rates rise, only the banking sector benefits and every other part of the business sector profits suffers.
Some Industries Will Suffer
Certain types of industries will bear the brunt of this escalating interest rate spike. As the interest rates and costs of borrowing go up, companies that heavily rely on debt could face issues. The two biggest concerns are probably utilities and REITs.
Mortgage and equity REITs currently offer exceptionally high dividend yields. However, these trusts are driven by the overall cost of borrowing. Their entire business model is fuelled by debt. Rising costs will squeeze their profits and even push some of them to verge of bankruptcy.
Similarly, Utilities are a low-margin, high cost industry. To remain competitive, companies in this sector need to keep borrowing to fund their capital expenses. With rising costs their debt burden will expand, putting the whole operation at risk. Companies like Consolidated Edison (ED), Southern Company (SO), and Duke Energy (DUK), which have been alternatives for income seekers, could all see their balance sheets come under pressure.
Meanwhile, a higher interest rate could steal investors away from boring old world stocks that pay a steady dividend. Mature companies that have no opportunities for growth have been relying on income-seeking investors to keep their stocks steady. As interest rates rise many of these income seekers will stop looking for monthly dividend stocks to buy and simply purchase a certificate deposit instead.
Others Will Thrive
However, it’s not all bad news. Some stocks and companies will thrive as interest rates rise over time. These are companies that rely on the interest rate to earn their income. A good example is the banking industry, where large banks earn interest on the loans they give out to businesses and consumers.
Another example is the insurance industry. While most people believe insurance companies earn money from the premiums they collect, insurance earnings actually originate from the interest earned on the collected premiums. These companies are forced to invest their float in risk-free or low risk assets like government bonds and treasuries. This has had a drastic impact on their earnings for the past decade. That could be about to change.
Finally, low debt companies and consumer stocks will also thrive. Companies that have very little debt on their books will earn more on their cash hoards and be able to make better investments in expanding their business. While profits could be squeezed, sales will pick up as spending improves. People who finally earn a healthy return on their savings accounts will be more likely to spend the cash on consumer goods like new smartphones, laptops, cars, and houses.
Here’s What You Can Do
Focus on low debt consumer companies and financial firms that benefit from a rise in interest rates. When looking for monthly dividend stocks to buy, pick out firms that have a long history of growing dividends, low debt, and a consumer focus.
These could include banks like Bank of America and consumer tech companies like Apple. Apple has taken full advantage of the low-interest rate climate to stock up on debt and pay shareholders a healthy dividend. However, the overall level of debt is significantly lower than assets and cash on the balance sheet. Meanwhile, banking leaders like Bank of America saw their profits and revenue jump as interest rates crept up in 2016. BoA reported a massive surge in profits (nearly $3.9 billion) and announced a 60% boost in dividends last year.
Considering how inevitable an interest rate increase now seems, focus on high quality consumer, banking, and insurance stocks as you look for monthly dividend stocks to buy.
Dividend stocks have been the primary focus of this blog since inception. We believe that the risk-reward balance offered by these stocks is unparalleled. Part ownership of companies that have a tendency to generate and grow profits over the long term is a powerful wealth creator.
However, wealth is relative. The risk-free rate of return or interest rate on government-backed assets has a direct impact on the price of all assets within a market. Is your government’s bonds or a local bank’s safety deposit accounts offer you a higher yield than a company’s stock, picking security is a smart move. Most income seeking investors have looked for monthly dividend stocks to buy over the past ten years as interest rates hit record lows. However, as interest rates steadily rise in the coming years dividend stocks could seem less attractive. Utility, REITs, and heavily indebted companies are particularly vulnerable to a steady rate hike.
Nevertheless, some dividend paying stocks will always outshine risk-free assets. Companies with low debt and a vested interest in high rates will outperform the general economy. Their rising profits over the years will give you a better return than any government treasury bond or certificate of deposit. Over the near-term, focus on blue chip stocks with a long dividend history, sensible capital structure, and attractive growth opportunities.
What’s better than a company that pays a steady dividend? Well, here are Dividend Appreciation we believe the only thing better than a company that pays a sustainable and growing dividend is a company that can pay a sustainable and growing dividend every month.
While most dividend paying stocks pay their shareholders once a year or once every quarter, some rare companies believe in paying out money every single month. All monthly dividend stocks have one thing in common – steady cash flows. They usually have business models that lend themselves to consistent cash returns to shareholders. All monthly dividend stocks help their shareholders match their investment return schedule to their monthly expense schedule. This makes it easier for investors to live off their dividend income from investments.
We’ve covered these monthly dividend stocks before. Back in August this year, we created a list of all monthly dividend stocks on the market. We talked about their strengths and weaknesses and general business models. However, there have been new additions to this list since then. Six new companies have become part of the list of all monthly dividend stocks. Here’s a closer look at all the newcomers:
Dartmouth, Canada-based Chorus Aviation operates a charter airline service in Canada. The company operates under two brands – Jazz Charter and Air Canada Express. Chorus has been paying monthly dividends for a few years now, but it’s been added to the list because US residents can buy the stock and expect the dividends to be taxed at the ‘qualified dividend’ rate. We’ve discussed the qualified dividend previously on this blog. Chorus offers a 5.48% dividend yield at the moment which makes it one of the highest dividend yielding companies on this list. The payout ratio is also a relatively low 58%, which means the company has enough of earnings to cover and perhaps grow the dividends in the coming years.
North America’s largest independent energy retailer is another Canadian company that makes the list of all monthly dividend stocks. Although the company is still primarily an oil supplier to some of the largest companies in the country, new verticals such as natural gas, electricity, and solar power products should help it tap into growth.
Over the past few years the company’s earnings and dividends have been growing at a steady clip. In fact, distributions have increased by 16% since the start of 2016. By the fourth quarter of this year, the management is committed to increasing the dividend by 2% every quarter. That’s an impressive but tangible goal considering the payout ratio is still relatively low at 58%. Crius Energy Trust has relatively low long term debt, low costs of customer acquisition, and a lot of cash and cash equivalents on the book. In its most recent earnings report, the company claims to have nearly $50 million in total cash and cash equivalents on its books. At the current rate of dividend distribution, that cash could sustain the dividends for five years.
NASDAQ-listed Gladstone Land Corp is a part of the Gladstone Group. It’s a real estate investment trust like many of its other Gladstone counterparts. However, this REIT is exclusively focused on farming land and parcels that can be leased out for agricultural activities. With a 3.88% dividend yield, this is a relatively lucrative REIT with a massive portfolio of land focused on a specific niche. Land parcels the trust operates are located in Arizona, Michigan, Nebraska, Florida, Oregon, California, and Colorado.
At the tail end of last year, appraisers estimated the value of their portfolio at $455 million. That’s $37 per share worth of land while the stock trades at $13.64. Over the past two years the company has increased its dividends a total of six times. Overall, since 2015 the company’s dividends have expanded by 45%. Meanwhile, Adjusted funds from operations remain fully covered. Farmland is a relatively stable and lucrative niche of the REIT market and Gladstone Land Corp seems to be on the path to impressive growth.
Pennant Park may offer a juicy dividend yield of 8.27%, but this high yield comes with some risks. At the moment, this is one of the highest yielding stocks in a list of all monthly dividend stocks. However, the dividend paid out is higher than the investment income this company earns from the loans it gives out to small and medium-sized businesses across the country.
The company offers different sorts of floating rate loans to businesses. These could include secured debt, senior notes, second lien debt, mezzanine loans, or private high-yield debt. However, the company has a broadly diversified portfolio of over 86 different companies. Most of these companies belong to different sectors which may reduce the risk somewhat. Also, 99% of the loans given out by this business development company is floating rate, which means as interest rates rise in the coming years profits could expand too.
The total portfolio is worth $770 million and it earns a 8.2% yield on cost, which is entirely paid out to shareholders every month.
Canada-based Superior Plus supplies sodium chlorate, chlor-alkali and potassium and sodium chlorite, besides propane to the US and Canada. Over the past few years the company has managed to bring down long term debt on the books. From a total debt to adjusted EBITDA of 4.6x in 2012, the ratio is now just over 2.1x. Earnings have been steadily increasing while debt has been cut over the past half decade.
Listed on the Toronto Stock exchange, Superior Plus offers a 5.5% dividend yield and is part of the exclusive club of all monthly dividend stocks. Antitrust regulations prevented the company from acquiring Canexus Corp earlier this year. Regulators believed that the combined entity would have a stranglehold on the market for sodium chlorate, a chemical that is used to make paper white during manufacturing. Goes to show how significant Superior’s market share is in the Specialty Chemicals industry.
Calgary-based Transalta Renewables is a hydro electricity supplier featured in the top 25 of all monthly dividend stocks. The company owns and operates over 40 facilities. This means the operations are geographically diversified. The contracts the company manages to sign tend to have a long-term impact on earnings. On average, each contract lasts about fifteen years which offers clear visibility of revenues for the foreseeable future.
That’s not all, the company is also one of the deepest value buys on the market right now. It offers a 6.76% dividend yield and trades at a fantastically low 1.5x book value.
We’ve finally added more stocks to the list of all monthly dividend stocks. These six stocks round off a total of 41 stocks that pay a dividend every single month. This sort of payment schedule should closely align with your monthly living expenses. Investments that pay you a monthly dividend could make it easier to achieve and maintain financial freedom.
However, these are just stocks that pay a dividend monthly. There is no reason to invest in a company solely because of its dividend schedule. You must consider other factors while picking dividend investments. Run a health check on your dividend companies to see if the company can maintain or even grow its dividends over the long term. Pick companies you understand and have studied closely. Add them to your dividend portfolio only when you feel the market price is below the intrinsic value of the firm. Make sure the long-term debt or annual payout ratio is not too high.
Reasonable dividend investing could make it easier for your to live entirely off the income from your investments.
There’s nothing more inspiring than a success story. Every year, thousands of people across the world achieve financial freedom and create immense wealth by saving meticulously and investing wisely. Many of these investors have picked the dividend investing strategies we’ve touched on in this blog.
While you may have heard of legendary investors like Warren Buffett and Peter Lynch, this piece is focused on ordinary investors who made millions through simple dividend investing and no professional experience whatsoever. Investors who often held down their day jobs and earned a humble wage while shaping a dividend portfolio that would make them humongously wealthy.
From an IRS agent to a humble janitor, here are the five most inspiring ordinary investors who used all monthly dividend stocks to create riches:
Let’s jump into what is probably the most interesting story on this list. If you’re a dividend investor who looks out for all monthly dividend stocks, Ronald Read is likely to be your hero.
Read was a common janitor and gas station attendant in Vermont. Neighbours in his little town of Brattleboro didn’t know much about the shy and private man, besides the fact that he loved to chop wood and stayed to himself. Read never came across as anything more than a janitor driving around in his used Toyota Yaris. That is until the day he died in June 2014.
Shortly after, his lawyer opened up the safety deposit box he had left as a donation to the Brooks Memorial Library and the Brattleboro Memorial Hospital. She was shocked to find stocks and bonds collectively worth an estimated $6 million. Read, it turns out, had a hidden talent for picking stocks.
His lawyer insists he didn’t have professional financial training or other sources of income. Read pretty much picked familiar names that paid a hefty dividend and held on for the long term. His investment portfolio included hefty stakes in some of the most well known companies in America, including AT&T (NYSE: T), Deere (NYSE: DE), GE (NYSE: GE), General Motors (NYSE: GM), Bank of America (NYSE: BAC), and CVS (NYSE: CVS).
People who interacted with him say he pinched every penny, picked stocks he understood and paid regular dividends, reinvested wisely, and held for the long term. A combination of intuition, patience and relentless frugality made this part-time janitor a multi-millionaire through dividend investing.
Russ had a pretty ordinary life. He served in the military during the second world war and came back to work as a lawyer in Chicago. He retired at the age of 45 and decided to spend his life serving his local community.
In the 1940’s, Gremel decided to put a humble $1,000 into the stock of a local pharmacy. Believing that there will always be a need to buy medicines and cosmetics locally, he decided to never sell his stake in the company. His minor stake in Walgreens is now worth over $2.2 million. That’s a compounded annual return of 11.2% every year for seven decades. The Walgreens Boots Alliance (WBA) is a phenomenal Dividend Aristocrat. In fact, even Bill Gates owns a major chunk of the company’s shares.
A few years ago, Russ donated his entire stake to the Illinois Audubon Society which is now called the Gremel Wildlife Sanctuary. He believes this was the best use of the money as people can now use the wildlife reserve to connect with nature for decades to come. Now 98 years old, Gremel lives in the same house he’s always lived in with his adopted pet Chihuahua, Tiger III.
Former IRS auditor has a unique investment success story. Part of the reason her story is so inspiring is the fact that she started off with very little money. In 1944, the recently retired auditor had a nest egg of just $5,000. She also had a humble pension that generated $3125 every year.
During her time as a tax auditor with the IRS, Scheiber learnt some valuable lessons about creating wealth in America. First, all the stock returns she saw from wealthy people had significant amounts of money locked away in stocks. Second, wealthy people held their stakes for as long as possible to avoid paying capital gains taxes. Relying on dividend income instead was a smarter way to accumulate wealth. Third, her bad experiences with stock brokers during the market crash of the 1930’s had left her with a sour taste for hiring investment professionals.
With this in mind, Scheiber began analyzing companies by herself and buying stakes in blue chip firms with stable dividends. She created a well diversified dividend stock portfolio with all monthly dividend stocks. Some of her biggest successes included Coca-Cola (KO), Schering Plough (later acquired by Pfizer), Bristol-Myers (BMY), and PepsiCo (PEP). By the time she passed in 1995, her portfolio was worth a whopping $22 million. That’s an incredibly impressive annual return of 18.2%.
Her focus on quality and dividends made her a millionaire many times over.
Another janitor who made a fortune through a portfolio with all monthly dividend stocks is Genesio Morlacci. Morlacci worked as a janitor at University of Great Falls in Great Falls, Montana, for decades. He started off as the owner of a dry cleaning business with some local real estate investments. However, in his late-40’s Morlacci retired and worked as at the university part time. Over the course of decades his dividend stock portfolio appreciated and when he died in 2004, Morlacci left the university a donation worth $2.3 million.
Grace Groner is another dividend investor who managed to turn a humble sum into a massive fortune. She lived through the Great Depression, so living frugally came naturally to her. Grace also worked as a secretary at Abbott Laboratories (ABT), so she assumed the best place to invest her money was with her employer. She bought 3 shares in 1935 at $185 and kept reinvesting all her savings and dividends into ABT stock.
By the time she died in 2010, her fortune was close to $7 million. Her will designated the wealth to Lake Forest College, her alma mater. The stake in Abbott Labs yields nearly $250,000 in dividends every year and is helping thousands of students pursue studies abroad and take up internships through Lake Forest.
Other Wealthy Ordinary Investors
This list is by no means exhaustive. There are many more hidden millionaires living ordinary lives and investing in a portfolio of all monthly dividend stocks. Ordinary investors like husband-wife duo Gilmore and Golda Reynolds turned their investments into a $22 million fortune. Retired teacher Thomas Drey Jr, spent most of his time at the local library reading up on companies and picking great investments. He left the library $6.8 million.
Similarly, retired teacher Jay Jensen turned his meagre salary into a multimillion dollar portfolio through dividend stocks. Florence Ballenger teamed up with her husband to make more than $6 million and Gladys Holm followed her boss’ investment strategy to create a $18 million fortune.
There are probably a lot more hidden millionaires with immense wealth and sizable dividends.
Time is common element between all the investors here. Not only did these investors live really long, but they started early and had the patience to hold their winning bets for several decades. Reinvesting the dividends from all monthly dividend stocks helped them put the power of compounding to work. Goes to show how a simple and straightforward dividend investment strategy can create tremendous results.
We’ve discussed the exclusive Dividend Aristocrats Index before. The S&P 500 DIVIDEND ARISTOCRATS (TICKER: SPDAUDP) index is the best place to start for any income seeking investor looking for the most stable monthly dividend stocks. It’s an index of blue chip companies that have managed to maintain or grow their dividends for 25 years or more.
Consecutive dividend increases over such a long duration is usually a very encouraging sign. Not only does it prove the business model is sustainable, but it also shows that management is trying to reward shareholders. As the dividends grow over time, shareholders can see their wealth stay on par with the company’s successes. Companies on the list are also the ones most likely to keep growing as their industry expands and their business model evolves.
Right now, the index includes over 50 companies with a median market cap of $33 billion. The index has managed to outperform the S&P 500 since its launch in 2005. In other words, this is a great index for dividend investors.
However, the index is constantly evolving. New stocks are added and old ones taken off when their fundamentals change. Some of the most stable monthly dividend paying stocks are on track to be included on the list in the near future as they complete 25 consecutive years of dividend increases. Here’s a list of some of the most likely candidates for future dividend aristocrats:
Although the dividend yield on SBUX is below 2%, there’s plenty of room and potential for growth. By 2021, the premium coffee chain aims to have at least 37,000 stores globally. That’s a major feat for any company since most restaurant and cafe chains struggle to crack beyond their local region. Also, nearly half of the stores are owned by the company while the other half are licensed franchises. This means SBUX can supercharge growth if it moves completely to the franchise model like McDonald’s. Starbucks pays out only 44% of earnings, which means there’s a chance the dividend could grow as the earnings improve. Last year the dividend was increased by 25%. If this trend continues, SBUX could be a part of the Dividend Aristocrats soon.
Nike is another potential blue chip dividend gold mine. The fitness apparel retailer has managed to boost dividends for 8 years in a row so far. Yet the dividend payout ratio is still nearly 30%, which means there’s room to grow. Although the dividend yield is still relatively low at just 1.7%, the company has managed to grow dividends by an average of 14% a year for the past three years. If the trend towards wellness and fitness continues to grow, Nike could see its sales and profits expand.
Disney is probably one of the most interesting dividend stocks at the moment. It has a massive portfolio of some extremely valuable tangible assets, such as the Star Wars and Marvel comics Intellectual Properties. However, the stock has been falling for the past two years. This is because the trend of cord cutting is affecting the core sports streaming business of ESPN. Keeping the NBA and NFL rights is expensive while falling subscriptions have put a squeeze on Disney’s bottom line.
However, the company is determined to make a change and boost earnings from online video streaming and original content. At the moment, the stock yields 1.7% and is trading at 11 times forward earnings. With 7 years of consecutive dividend growth and a low payout ratio, DIS has the potential to create tremendous value for shareholders willing to hold for the long term.
The iPhone maker has gone from no dividends to some of the most generous dividends in the market. Since the dividend program was initiated by Tim Cook in 2012, Apple has increased its dividend and buyback program in each of the past five years. At this point, the company pays the largest dividend in the world. In 2017, it is on track to distributed $13 billion to shareholders in the form of dividends. Although the dividend yield is still just 1.7%. Apple pays out about 37.7% of its annual earnings. Considering the company has nearly $238 billion in cash on the books and potential for more growth with newer device launches in the future, this is certainly a stock that will someday be a Dividend Aristocrat.
Another tech giant that pays out heavyweight dividends is Microsoft. Microsoft may have been struggling to keep up with competition in the tablet and smartphone era, but it’s still a cash generating juggernaut. The company has $126 billion in cash on its books and has reported substantial earnings growth in the past three years. Under new CEO Satya Nadella, the company has refocused on its core enterprise market. With its advanced AI capabilities and cloud computing platform, Microsoft is well ahead of rivals Oracle and SAP. The company pays out a 2.2% dividend yield with a 55% payout ratio, so there’s plenty of room to grow. The dividend has been growing every year for the past ten.
With issues over revenue and insider selling over the past few years, Gilead has had a bad run that’s beaten the stock down. The result is a pharma company with a strong balance sheet paying out an above-market dividend yield of 2.7%. It’s HIV drugs portfolio and opportunities for M&A can help the company create growth in the future. Meanwhile, the payout ratio remains at a relatively low 26%. GILD also trades at a serious discount at just 8x trailing earnings. It’s a contrarian bet for income seekers willing to wait for a turnaround.
Semiconductor manufacturer ADI specializes in chips that help signal transmissions and data conversions. The company has the ability to generate cash at a fantastic clip and continues to beat Wall Street Analyst estimates. Analysts expect the stock to deliver 10.6% compounded annual growth in earnings over the next five years, which could lead to substantial gains in dividends. With a 1.97% dividend yield, ADI is a rare tech growth opportunity for income seeking investors.
Republic Services (RSG)
Solid waste management and disposal company Republic Services offers a decent yield and a long history of dividends. It’s been paying dividends for more than 14 years and currently offers a 2.12% yield. Analysts downgrades for the industry have hurt the company’s shares on the market. However, the stock still trades at a lofty 25 times earnings. With only one other company, Waste Management, offering competition, this could be a great bet on the industry if you’re willing to put up with the premium valuation.
The specialty pharma company may only yield 0.77% at the moment, but it has an impressive history of dividends for fourteen years in a row. The company manufactures and distributes over-the-counter medication that helps with allergies, smoking cessation, and gastrointestinal issues. In fact, the company holds 70% of the market in over-the-counter meds. If operations improve and the management can refocus on the core assets, the company could reward shareholders handsomely over the years.
The Dividend Aristocrats Index has lived up to expectations and outperformed the S&P 500. Great quality, high-yield and the most stable monthly dividend stocks often outperform the market average. That’s because sustaining a generous dividend over decades is incredibly difficult. Only the best companies can create enough cash to keep paying higher dividends over time.
The 55 stocks on the Dividend Aristocrats Index are genuinely great dividend companies. These are some of the most stable monthly dividend stocks in the country. However, income seeking investors can uncover rare and lucrative opportunities by looking at the fringes of this index. The stocks listed here are all capable of making the list if they can sustain growth over the next few years and return capital to shareholders. Perhaps buying them now would be prudent.
However, income seeking investors and average investors often overlook a vital part of the equity universe – international stocks. From India’s leading private bank HDFC Bank (NYSE: HDB) to French waste management company Veolia Environnement (NASDAQOTH: VEOEY), the American stock market is home to some of the world’s best companies. This is a universe filled with incredibly valuable but often underappreciated opportunities.
Here’s a look at some of the best monthly dividend paying stocks from across the world:
Aegon N.V. (AEK)
The Hague, Netherlands-based Aegon is a multinational insurance provider. The company has over EUR 417 billion in assets and managed to bring in $36.5 billion in revenue last year. It employs more than 31,000 employees across the globe.
Aegon has had a tough run with a hit on profitability in recent years and concerns about its capital adequacy. However, the stock is so beaten down that the stock offers a whopping 7.55% dividend yield at the moment. Recently, the company swung back to profitability. It also has a long history of paying dividends. The company is also on track to generate 10% return on equity by 2018 through a series of cost cuts and fee expansions over this year. It’s an interesting opportunity for those willing to take a closer look.
BHP Billiton Plc ADR
The world’s largest miner has a restructuring plan in place which could make it an interesting investment opportunity. By selling off its North American shale assets and a share in its potash project in Canada, the company hopes to bolster its balance sheet. BHP will shift focus to its core markets of iron ore and coal, with a little bit of petroleum. All three sectors should do well as growth picks up in emerging markets like India and China over the next few years. NYSE-listed BHP offers a 4.2% dividend yield and is currently trading at 18.4x earnings.
AU Optronics Corp. ADR
Taiwanese manufacturer AU Optronics is a key supplier to the world’s biggest consumer tech company – Apple. The company has always been a formidable supplier of LCD screen panels to the consumer tech industry, but with Apple’s support and investment it could turn into an AMOLED manufacturing leader. Besides this, the firm is a deep value investment opportunity. It has managed to amass a broad and valuable portfolio of intellectual properties that can help it ride long term trends in the tech sector. The stock offers a 4.3% dividend yield and trades at an astoundingly low 3.8x trailing twelve month earnings.
Braskem S A ADR (Sponsored) Repstg Pfd A
São Paulo-based Braskem is a Brazilian specialty chemicals company that develops thermoplastic resins. BAK could be the best investment for income seeking investors looking to pour money into Brazil. While the country suffered a deep recession in 2014-2015, Braskem managed to triple profits and lower its debt. It’s still a deeply undervalued stock that offers a 2.8% dividend yield and pays out only a quarter of annual earnings to shareholders.
Advanced Semiconductor Engineering, Inc. ADR (Sponsored)
Kaohsiung, Taiwan-based ASE Inc. assembles and tests semiconductors for some of the leading consumer tech companies. According to reports from a few years ago, ASE had a 18.9% market share of the semiconductor assembly and testing services (SATS) industry. Its services have been used to bring together some of the most famous consumer tech products on the market, including the Apple Watch. NYSE listed AX offers a 3.6% dividend yield and trades at 12.9x earnings.
Anglo–Swedish AstraZeneca is a biotech leader, which isn’t an industry that’s commonly featured on high-yield dividend lists like this. However, AstraZeneca is a pharma giant with a healthy dividend payout history. The dividend was rather average till the company suffered a sudden blow in this July. The pharma company saw a major immunotherapy drug fail tests, which is the worst possible outcome for a pharma company. Immuno-oncology drug Imfinzi failed FDA drug trials which sent the shares into a tailspin.
AZN stock was down nearly 15% since the news broke. It’s recovered since then, mainly because investors must have realized the company has $5 billion in cash and a market cap of $73 billion. It’s currently trading at 23x earnings and offers a 2.69% dividend yield.
The Latin American telecoms giant has a user base of 284 million. The company controls nearly 70% of the wireless and internet broadband market in Mexico and holds a major chunk of the market in Argentina, Colombia, and Brazil.
The company has a market cap of $38, which is a lot smaller than a few years ago. Tensions over the NAFTA agreement and other major headwinds in the sector have sent the stock plummeting. For a while, the stock was near its 2008-09 financial crisis low. With a 1.87% and consistent year-on-year growth in a relatively stable industry, America Movil could be a great buy for an income seeking investor.
British American Tobacco (BTI)
After China National Tobacco and Philip Morris International, British American Tobacco or BAT is the world’s third largest tobacco company. Besides its flagship brands Dunhill, Kent and Lucky Strike, the company owns major stakes in some of the largest tobacco companies in the world. Tobacco companies like BAT are a tough bet. The business is stable and growing, but some investors may shun an investment in a product now seen as a health hazard. BAT is well aware of the challenges of selling tobacco to the developed world, so it’s turning its attention to the developing world.
The company generated nearly $15 billion last year in revenue and paid a consistently higher dividend. Next generation vapor products are likely to boost revenue even more. Next year, sales of vapor products will generate $1 billion for the company and will most likely reach $5 billion by 2022. With a dividend yield of 2.3% and PE of 11, this is a great sector for income seekers.
British drinks giant Diageo is a dividend machine. The company has paid a consistently growing dividend since the 1990’s. However, the dividends have been growing in British Pounds, US dollar dividends have been volatile due to the fluctuations in exchange rates. Nevertheless, Diageo is probably the world’s largest drinks company with nearly $16 billion in revenue, most it earned in emerging markets. The company pays a 3% dividend yield. China’s Kweichow Moutai recently overtook Diageo as the world’s largest spirits company. But with fresh product launches and new acquisitions, the company seems to be equipped for future growth in the spirits and beverages market across the world.
Toronto-Dominion Bank (TD)
While banks with a strong balance sheet and a hefty dividend are rare in America, Canada seems to still have some to offer. TD is one of the biggest banks up north and is a consistent dividend payer. The bank has managed to sustain its profits and growths by focusing on retail consumers rather than large corporate clients. With retail businesses like Scottrade, the company can sustain its profit margins and reduce risk. The dividend payout has grown by 11% annually since 1995 and total returns have been nearly 16% CAGR over the past five years.
Some of the best dividend investment opportunities are beyond American shores. The stocks listed here are all well known in their foreign markets and have the ability to create substantially good returns for shareholders. Luckily, they had ADRs or stocks listed here in the US.
While these companies are fantastic and have low intrinsic risk coupled with high dividend payouts, they’re not entirely risk free. Foreign companies earn money in their native currency and the translations to USD could make the dividends and profits volatile from an American investor’s perspective. There could also be issues with double taxation when it comes to foreign stocks. Finally, foreign companies don’t follow the US standards for financial reporting. The reports could be less regulated or have an odd schedule for most investors in the US.
If you’re aware of the risks and willing to do your research, foreign stocks like these could prove to be a goldmine of dividend opportunity.
“Do you know the only thing that gives me pleasure?” oil magnate John D. Rockefeller once asked, “It’s to see my dividends coming in.”
Rockefeller was, perhaps, the richest man in recorded history. He got into the oil business when oil was a barely understood commodity and created the world’s first too big to fail multinational conglomerate. Adjusted for inflation, his net worth is estimated to have touched a peak of $336 billion. Understanding this wealthy and successful businessman’s obsession with dividends could be the key to unlocking the secret to financial freedom.
Rockefeller, or any other business or investments tycoon will be quick to point out that there is only one way to gain financial freedom – earning passive income from wealth.
In other words, yield on investment is often the single most important element of financial freedom for an individual. While there are many ways to create passive income, some of the most successful investors have favored one method over time – dividend investing.
Investing in dividend stocks is a strategy that has helped millions of investors create wealth and live off their investments over the generations. It is a technique that has stood the test of time and continues to deliver results for patient and astute investors willing to make the effort.
In this piece, we’ll be taking a closer look at dividends to figure out the best way to get started with this form of investing. From fundamental concepts to complex valuation techniques, this piece should help any investor (regardless of experience) get started with dividend stocks and create an income-generating portfolio that guarantees financial freedom.
Investing in stocks is about investing in businesses. The point of a business is to generate a profit. But what a company or business does with the profit is where the magic lies.
Let’s say you own 100% of a lemonade stand. Luckily, your business generates a profit in the very first year. At the end of this initial year, you have a decision to make. You can either take all the profits out of the business and spend it or you can reinvest it back into the business to help it grow. Usually, the final decision will be a combination of paying yourself and reinvesting.
If you extrapolate this example to a much bigger business that you don’t own completely, you can see where dividends come from. Any large publicly listed company may create a profit by the end of the financial year. At the end of the year the company’s management team must make the same crucial decision. How much to reinvest into the business to fuel growth and how much to pay the shareholders (owners) of the company? Whatever money is paid out to shareholders is called a ‘dividend’.
Another way to think of dividends is as ‘free’ or ‘leftover’ cash. When a business sells goods it creates cash. A large part of that cash is used to pay for more goods, pay the company’s employees, fund marketing, and a plethora of other expenses. Employees and suppliers must be paid their dues, so they have a claim on this cash. This leaves behind the net profit. However, all of the net profit is not free to use. Management may decide that some of the net profit needs to be held on the company’s books for future security. They may also hold cash back to reinvest in business growth. Whatever is left over is free to use and is generally paid out to the business’ owners in the form of a dividend.
Dividends, in other words, is cash that has no other use within the business.
Why Are Dividends Important?
There’s more than one reason professional investors love dividends and income seeking investors should take a closer look at them.
Dividend paying companies are more stable than most publicly traded companies. Dividends cannot exist without healthy and sizable profits. Therefore, only a profitable company can pay out dividends.
Dividends are also remarkably sticky. Once a company has adopted a dividend policy it is very reluctant to slash or adjust the dividend. This is because shareholders and investors see dividends as a promised sum they are owed every single year. It is their rightful claim on the company’s profits.
Another reason dividends are important is because they signify optimism. Management will not pay part of the profits back to shareholders if it expects rainy days or saturated profits. Declaring and sustaining a dividend is a signal that the management believes the company will continue to grow and roll in the dough.
Professional investors take these indications seriously when valuing a company. Dividends can be used to size up an opportunity and effectively place a value on the whole business. The dividend discount model, gordon growth model, and dividend yield are all methods of calculating the actual value of a business by the dividends it pays out.
Retirees and income seeking investors also benefit from dividends. While interest rates on government bonds and bank fixed deposits have declined over the past few years, dividend yields have remained steady. The yield on a dividend paying stock could be comparable to rental income from a property or interest yield on a junk corporate bond. In other words, dividends are a safe and accessible option for those who want to live off their investments.
In fact, the income from dividends is so high that a major chunk of the total return from stock markets has been in the form of dividends. A study by Dr. Ian Mortimer and Matthew Page, CFA fund co-managers of Guinness Atkinson Funds, suggests that nearly 52% of the total return of the S&P 500 since 1940 can be attributed to dividends and dividend growth. In other words, dividends account for more than half of the market’s return over the long term.
These are some of the reasons dividends are important. Any investor, whether seeking income from investments or not, must include dividend-paying stocks in the portfolio. Dividend investing, in some form, is an absolute necessity to create wealth and achieve financial independence.
The Strengths and Weaknesses of Dividend Investing
As with any other investment strategy, dividend investing presents some key advantages and some unique disadvantages. Let’s start with the advantages:
Perhaps the biggest advantage of a dividend-paying company is the relative stability of the investment. A dividend-paying company is less likely to suffer significant drops in share price, sales, or profits. A Bank of America report found that dividend-paying stocks had a lower beta than the average market. Beta is a measure of volatility in stock prices. Companies that paid dividends had stock prices that were (on average) less likely to move around. This result was consistent across countries and many emerging market dividend-paying stocks have only 80% of the volatility of their key stock markets. The reason for this is simple – only mature companies pay a dividend. Dividend paying companies are more likely to operate in mature markets which have been naturally saturated, such as telecoms and energy.
When it comes to a dividend-paying company, you can assured of one thing – it’s making a profit. Only profitable companies declare or offer dividends to shareholders. This means the financial health of a dividend payer is already better than a high-risk company losing money for many years.
Sales, growth, profits, and new opportunities for a business are all unpredictable. There’s simply no way for certain to know exactly how much profit a company will make or how quickly the sales will grow. However, dividends are sticky. Companies are reluctant to cut them in order to avoid sending a bad message to shareholders. So, they usually end up playing safe and declaring a dividend they can sustain very easily. Apple, for example, spends nearly $13 billion every year on dividends for shareholders. While that may seem like a lot of money, the iPhone maker actually has $261 billion cash pile on the books. In other words, Apple could stop selling or creating a profit for 20 years and still keep paying the dividend it currently pays out. That’s the sort of predictability professional investors love.
For retirees and income seeking investors, there’s nothing quite like a dividend. Dividends are a set of payments from stocks that can be high enough to support a living. Some stocks pay dividend yields in double digits. Examples include ARC LOGISTIC PARTNERS LP (NYSE:ARCX) [Dividend yield 11.3%], ENERGY TRANSFER PARTNERS (NYSE:ETP) [Dividend yield 10.7%], and WADDELL & REED FINANCIAL, INC. (NYSE:WDR) [Dividend yield 10.4%]. High dividend yields can also be offered by blue chip companies such as AT&T [Dividend yield 5.4%] and Sunoco [Dividend yield 11.1%].
Professional business valuation techniques rely on data that any investor can know for certain. The more certainty and predictability in a metric, the more useful it is for valuation. Dividends fit the bill for valuations perfectly. Not only are they the ultimate form of free cash flow, but they are also highly predictable and relatively stable over long periods of time. Techniques such as the dividend discount model and the Gordon growth model use the dividend to figure out the intrinsic value of the whole company.
There’s a lot of reasons to add and hold dividend stocks in your portfolio or create an income-focused portfolio consisting of mainly dividend stocks. However, dividends are no silver bullet for financial challenges. Dividends alone cannot offer you an easy way to financial independence. There are certain disadvantages to focusing on dividend investing exclusively.
Lack of growth:
As mentioned before, dividends are offered by mature companies who do not need the cash for reinvestment. ‘Safe’, ‘stable’, and ‘mature’ are not terms you would associate with phenomenal growth. In other words, dividend investors compromise the opportunity for high growth for high stability and ready cash flows. Companies that are already very profitable have saturated their market. High dividend payers operate in boring industries such as telecoms and energy distribution. High growth companies need all the money they generate to keep fueling expansion. This is why high-tech stocks such as Amazon and Google have never paid a dividend.
Although dividends are taxed at a much more favorable rate than personal income, there is no denying the fact that dividends imply a tax liability. Individual investors effectively pay tax twice on dividends because the corporation has already paid taxes on net income and dividends are payments from after-tax net income. You can try to lower your taxes on dividends in multiple ways, but there is a certain amount of value lost regardless.
No substitute for fixed-income securities:
In today’s’ low interest rate environment many income hungry investors are seeking yield in dividend paying stocks instead of traditional investments. Real estate, corporate bonds, bank deposits, and government treasuries simply do not offer the sort of return that dividend stocks can promise. However, unlike traditional fixed-income securities dividends are a promise that can be broken. Management can cut or suspend a dividend with just a few months notice. On the other hand, a bank deposit or corporate bond must keep paying the assured interest payments no matter what happens (barring an outright default). So, dividends may offer higher returns but they’re no substitute for fixed income financial instruments.
The Perfect Dividend Investment Strategy
Investing for the dividends is a uniquely clever way to attain financial independence. As an investor, you have the opportunity to invest in businesses that have great managers at the helm and fantastic growth opportunities. Dividend investing will help you create a portfolio that generate enough of free cash flow to meet your monthly expenses.
Creating a rock solid dividend income portfolio requires a degree of business insight, a healthy dose of intuition, basic knowledge of financial concepts, and thorough research.
The best way to start is to outline your objectives. Do you want to generate money from your investments to meet your monthly expenses? How much do you spend a month? How much money do you have available to readily invest in the stock market? Do you need cash flows every month or can you manage your finances even if the cash comes in once a year?
Answering these questions will help you calculate your required return on investment. If your monthly expenses are $2,000, your annual expenses are likely to be $24,000. If you aim for a return of 2.4% on your assets you will need $1,000,000 in assets to invest. On the other hand, if you only have $200,000 in capital, your required rate will have to be 12%.
A good way to set an objective on required rate is to refer to the risk-free rate. The yield on a government treasury bond, for example, is very nearly risk-free. The yield on a 20-year US Treasury bond is currently 2.57%. So, to justify a long-term investment in dividend stocks your yield must be much higher than this risk free rate. On the other hand, it is advisable to be pragmatic about how much return you can expect. The highest dividend paying stocks currently only offer 11% to 14% annual yield. So there is a natural cap on how much yield you can expect on your dividend investments.
The next step is to ask yourself what kind of investor you are. How good are you at reading annual reports and figuring out the financial health of a company? How good is your judgement of a business opportunity? Which industries are you most familiar with?
Based on the answers to these questions, you can start picking stocks with a suitable yield from a list or screen of all the stocks that meet your requirements. Narrow the list down based on all your required criteria until you only have 20-odd stocks remaining. Then distribute your capital neatly in each of these stocks to maximise yield and minimize the exposure to any single stock. Diversify your assets so that no single stock or investment contributes more than 10% or 15% of your total net worth.
Every year, come back to this portfolio and see what adjustments you can make. Sell the stocks that are overvalued. Sell companies that have experienced a sudden shift in their economics or business model. Buy more stock of companies you believe are still undervalued. Rebalancing in this way will keep the yield up and your stocks neatly managed.
Picking The Right Dividend Stocks (Dividend Health Checks / 37 Monthly Dividend Stocks)
Of the 504 stocks listed on the S&P 500, 97 pay no dividends at all. That means nearly 80% of the S&P 500 index has dividend paying stocks. From that incredibly rich and diverse universe, picking the right stock could get tricky.
But there’s an easy way to narrow down a list of 407 dividend paying stocks to just a handful which you can add to create a rock solid portfolio for retirement and regular income. Start by cutting the list of 500 into dividend tiers. As shown in the chart below, you can probably divide the whole market into specific segments based on yield:
Once you’ve done that, eliminate stocks from the lower two sections and focus on the rest. The remaining list can be further narrowed based on your preferences for certain financial attributes or your knowledge of specific industries. If you comfortable with a stock that has a high return-on-equity, focus on the stocks with the highest ROE. If you have experience in the pharmaceuticals and technology industry, focus on stocks in these sectors. Narrow down the list based on your personal preferences and core competencies. Never pick an investment or a company you don’t fully understand.
At this point, you’ve probably got a list of stocks with a reasonably high yield that meet all your criterias and operate in industries you understand well. At this point it’s probably a good idea to run a health check on the dividend from each company. A dividend health check will tell you how sustainable the dividends are over the long term.
Checking the health of a dividend involves looking for the following:
Healthy cash flows
Good industry prospects
A sustainable payout ratio
Opportunities for earnings growth
Dates, Taxes, Fees, and Other Minor Details
Creating a dividend portfolio isn’t just about finding the right stocks and adding them to a collection. Minor details such as taxes, fees, and dates can play an important role in how your investments perform.
If you’re investing for dividends, you need to understand how the dividend payment system works. There are four crucial dates you may need to account for when picking a dividend stock. Declaration Date is the date that the dividend is announced by the Board of Directors. Date of Record (or Record Date) is the date the number of shareholders eligible for the dividends are finally recorded. Ex-Dividend Date (or Ex-Date) is the date when the amount of dividend per share is taken out from the share’s market trading price. Finally, Payment Date (Payable Date) is when the dividend is paid into the shareholder’s account.
Transaction fees is the money you pay your broker to execute the stock buy or sell orders on your behalf. These transaction fees may seem miniscule, but they can quickly chew into your overall returns from investment. The cost of completing a transaction has plummeted over the years as new technology has made it significantly easier to buy and sell shares. However, brokerages can still charge extortionate fees for inactivity or management of the account. Even a single percentage point in added fees can significantly reduce the amount of wealth you create over time. Go for the lowest priced broker you can find.
Dividends have a special place in the American tax system. They’re not taxed as capital gains or personal income in most cases. If you can manage to hold onto your stock investments for the long term, most of your dividends will be ‘qualified’ under the tax system. This means you may owe 15% tax on the dividends you receive regardless of the amount or your personal tax bracket. By lowering taxes on your dividends you can boost the impact on compounding on your wealth.
A clever way to cut out all the effort and invest in a dividend portfolio is to simply buy a dividend-focused ETF. Exchange traded funds are like off-the-shelf portfolios created and managed by professionals that you can buy directly on the stock market. So, if you wanted exposure to all the dividend-paying stocks on the S&P 500, you could buy SPDR S&P Dividend ETF (SDY). Similarly, if you wanted exposure to the prestigious Dividend Aristocrats Index you could buy the ProShares S&P 500 Dividend Aristocrats (NOBL). ETFs are a shortcut for retail investors who want a ready-to-go solution.
When it comes to dividend investing, the world’s most famous investor is a believer. The Oracle of Omaha Warren Buffett is a self-confessed dividend addict. Buffett loves dividends from the companies he operates. Although his investment vehicle Berkshire Hathaway has never paid a dividend. Buffett reportedly earns $6,780 every minute in dividends from his investments.
One of his best dividend investments was Coca Cola Co. (KO). Buffett confessed that he was already consuming four bottles of Cherry Coke back in 1989 when he seriously started considering picking up KO stock. There were two things that appealed to him about the company. Coke was expanding rapidly overseas and was already a well-established brand in the US. If that brand appeal and saleability could be replicated abroad, Coke was a clear winner.
Another thing that might have caught Buffett’s eye was that KO was trading at 16x net profit. This was a remarkably cheap valuation for a mature company with tremendous growth potential.
Finally, the analysis boiled down to the dividends this mature company offered. In 1989, KO offered nearly $1.20 per share in dividends. At the time, the payout ratio was 42% (healthy) and the dividend yield was 2.76% (respectable). Between 1970 and 1989, the stock’s dividends had quintupled from $0.24 to $1.20.
Buffett still holds KO stock and it is still one of the biggest success he has ever had. For every $1,000 he invested in the stock he has..
As 2017 draws to a close, it’s worth taking a look back to see how the markets have performed and if there’s a chance to sink your teeth into a juicy dividend opportunity.
Year-to-date, the S&P 500 is up a jaw-dropping 13.4%. That’s a tremendous return for the index that’s often considered the bellwether of the US economy. However, with a trailing PE ratio of 22.4, the market is well above its 16.5x historic PE average. In July, Goldman Sachs said that the market seems to be overvalued regardless of the method used to measure overvaluation. In other words, this isn’t the time for bargain-hunting.
As the market valuation rises, dividend seekers and value investors struggle to find good deals. Stock prices seems to be too out of whack with fundamentals. Investors seem to be irrationally exuberant. Good investments seem trickier to pull off.
With that in mind, it could be worth taking a look at some of the market laggards. Digging through stocks that haven’t performed as well or ones that haven’t gained much attention is a core element in contrarian investing. This could lead to some underappreciated and highly valuable investment opportunities. However, they could also be duds or value traps.
Nevertheless, here are all monthly dividend stocks you should consider for the end of the year if you’re looking for something undervalued or unconventional:
Starwood Properties is a Grade A commercial mREIT that currently offers a 8.8% yield. Generally, mortgage REITs like Starwood that give out loans to fund commercial property purchases are riskier than traditional REITs. The difference lies in their inherent sensitivity to changing interest rates. If the US FED decides to increase the interest rate by a single percentage point the consequences for these mREITs could be devastating. However, Starwood’s portfolio is more diversified and its loans have a variable yield, which means it is less sensitive to interest rate fluctuations than other similar securities.
This unique REIT that owns and operates outdoor billboards and advertising space has been beaten down by a lot this year. OUT offers a 6.8% dividend yield and a history of stable and growing cash flows. Outfront Media is more than just a boring billboard operator. The company has applied its clever proprietary technology called out-of-home (OOH) to offer advertisers location based data on people who live or pass by their billboards. Combined with digital billboards and prime real estate, this is an advertising company with staying power.
Taubman Centers is a Retail REIT that offers a 4.8% yield. Bloomfield Hills, Michigan-based TCO owns and operates 25 regional shopping centers across the US. Recently, they’ve also unveiled some prime shopping centers in China and South Korea, further extending operations to the Far East. TCO has a portfolio that consists of some of the most premium malls in the country. Of the top 109 malls in the US, Taubman controls 82% and 64% of the A+ and A++ rated properties. This is a retail REIT firmly focused on premium retail real estate with high yields.
iShares International Preferred Stock (IPFF)
Preferred stocks act like a combination of bonds and ordinary stocks. These special stocks offer a higher dividend yield than ordinary stocks and/or special privileges to the holder. This iShares ETF combines some of the best preferred stocks to offer retail investors access to the best dividends in corporate America. The fund keeps 90% of all its assets in the S&P International Preferred Stock Index, which offers exposure to US preferred stocks. The rest is in a combination of derivatives and international preferred stocks. Although the ETF restricts itself to developed markets only. It offers a 4.55% dividend yield at an expense ratio of 0.55%. So far this year the ETf has returned 9.66% total.
PowerShares Preferred Portfolio (PGX)
The PowerShares ETF is similar to the iShares one but it offers a higher dividend yield at 5.6% and a lower expense ratio at 0.50%. This ETF is arguably better because of its narrow focus on financial companies that offer low risk and high yields. Nearly 74% of its whopping $5.4 billion in assets are invested in financial companies such as insurers, banks, and other intermediaries. The portfolio also includes international financial heavyweights such as HSBC Holdings plc (ADR)(NYSE:HSBC) and Barclays PLC (ADR) (NYSE:BCS).
Elkhorn’s preferred ETF is a new and innovative product that aims to reduce the risk to investors while maintaining yield. The ETF offers a 5.3% dividend yield at 0.47% expense ratio and much lower volatility throughout the year. It achieves this by focusing assets on the highest quality preferred dividends on the market. The ETF picks stocks from the S&P U.S. High Quality Preferred Stock Index and has poured nearly 48% of assets into financial and insurance companies. Boston Properties, Inc. (NYSE:BXP) and Pitney Bowes Inc. (NYSE:PBI) are two of the top holdings in the portfolio.
Global X SuperIncome Preferred ETF (NYSEARCA:SPFF)
This is a super high yield monthly dividend stock that scours the global looking for the juiciest dividend opportunities. The ETF offers a 7.33% annual dividend yield and a healthy 0.58% expense ratio. The top three holdings in the portfolio are high-yield preferred dividends from Barclays, Allergan, and GMAC Capital Trust.
Grupo Aeroportuario del Centro Norte (OMAB)
San Pedro, Mexico-based OMAB is an airport operator with more than 13 airports under management. The stock has taken a beating since Donald Trump took office and started disrupting the relationship the US has shared with its southern neighbor. Since the stock is down, the dividend yield is up to an all-time high of 4%. Over the past five years the company has managed to add new properties, new routes, and new amenities to service the growing air traffic in North America. Earnings have grown by 10% on average every year, while dividends have grown by 20% on average each year over the same period.
Garmin is another overlooked dividend stock. Investors have mostly neglected Garmin because the brand is still closely associated with the vehicle GPS trackers it makes. Considering every smart device on the market has a built-in GPS tracker, Garmin’s core market is shrinking at a dramatic clip. However, investors have failed to notice that the company’s gross margins have stayed at 55% and net income actually grew 7% this past year. That’s mainly due to the company’s success in the wearables sector. In the fourth quarter of 2016, Garmin had a 6.2% market share of the global wearables market.With a dividend yield of 4% and a foothold in the next big tech market, this is a dividend stock worthy of investor attention.
Scotts Miracle-Gro Company (NYSE: SMG)
SMG isn’t a typical pick for investors, but it is a proxy play for the growing legalization of marijuana. The company isn’t directly involved in any weed-based manufacturing or distribution, but it does have investments in the sector. One of their subsidiaries acquired hydroponics firm General Hydroponics in 2015 and the firm also has a stake in desktop hydroponics company AeroGrow International Inc. SMG offers a 2.8% dividend yield.
Sometimes it helps to look where no one else is looking. Dividend investing isn’t just about finding great stocks and buying them to hold forever. It’s about making a judgement about the price and value of a firm to see if you’re getting a bargain for something valuable.
Since the stock market seems overpriced at the moment, looking for unconventional opportunities like the ones listed here could prove worthwhile. From companies that operate in the marijuana industry to outdoor billboard management REITs, these are all dividend stocks that have a healthy yield and tend to fly under the radar. While not all of them are excellent investments, you could look to make a contrarian bet on any one of them to augment your income portfolio.
Investing hinges on one fundamental concept – value. Everything in the market has some value and investors need to figure out if the value of a certain investment is out of line with its market price. In other words, the trick to successful investing is buying stocks for less than they’re worth.
Considering the amount of money that has been pouring into the equities market over the past few years, it’s relatively difficult to find good value in the market right now. Stocks are at record highs and investors are seeking out the cheapest monthly dividend stocks to maintain their yield as fixed-income securities disappoint. As interest rates hit record lows and stock prices hit record highs, finding value is becoming increasingly difficult.
Nevertheless, some of the cheapest monthly dividend stocks are still trading at or near their intrinsic value. Here’s a list of the cheapest monthly dividend stocks and income opportunities you should consider as 2017 draws to a close:
A well-diversified and well-managed property investment company, Brookfield Property Partners is a Bermuda-based Limited Partnership. The LP grows by raising fresh capital and investing it in real estate assets spread across the world. The current portfolio has holdings as diverse as a toll road in India and a gas port in Australia. Income collected on these properties is passed onto investors without corporate taxes. The current dividend yield is an impressive 4.6%. A fresh equity raise of $1 billion meant the LP had to create new units and dilute the holdings of existing shareholders. The stock price fell over 6% on the news which creates the ideal buying opportunity for long-term investors who appreciate the growth and stable income potential of BPY.
It doesn’t get more old-school than Ford Motors. Despite its stable dividends and rock-solid management, the company’s stock has been falling for much of the year. That’s pushed the dividend yield to a historic high of over 5.57%. The company’s stock trades at a PE ratio of just 10.6x. Competitor Tesla has proven that the automotive industry is in for some serious disruption over the coming decades. Investors seem to be underestimating Ford’s ability to catch up with the industry and develop self-driving, electric cars of its own within a few years. With nearly $28 billion in cash on the books and plans to launch self-driving cars on a large scale in a few years, investors seem to be mistaken about Ford’s potential.
Gamestop is a dicey investment opportunity. It could either be a wildly undervalued dividend stock with immense opportunities for growth or a value trap. Despite a drop in sales, the company has managed to improve gross margins since 2008. The company also has very low long-term debt. Considering the $312 million cash pile and healthy annual revenues, the company can pay all the debt off within a year. With a jaw-dropping dividend yield of 7.25% and a PE ratio of just 6x, Gamestop could be an excellent bargain for those willing to make a contrarian bet.
Dividend king Hormel Foods offers a 2.2% dividend yield. Besides Spam, Hormel owns over 30 different brands in the food aisle, most of which are market leaders in their respective niches. The company faces a number of challenges as it tries to grow overseas and expand its portfolio. The focus must be on keeping the prices low as the retail space heats up and managing the revenue from overseas sales as a much stronger dollar chews into the bottom line. Currently, HRL trades at 19x earnings and the company has managed to grow dividends every year for the past 50 years. It’s a stable and undervalued Dividend Aristocrat that income seeking investors should consider.
A Small cap dividend king, Lancaster Colony currently offers a yield just shy of 2%. The company’s revenues are split between retail and food sales. The two verticals are Specialty Foods and Glassware and Candles which bring in over $1.2 billion in revenue. With healthy gross and net profit margins, the company has managed to grow dividends in each of the past five years. The company currently trades at 28x earnings which may seem overvalued but is in line with the rest of the industry.
A fast growing Internet of Things (IoT) company, InterDigital offers a 1.7% dividend yield. That sets it apart from almost every technology company on the market. The company has been creating technologies that support wireless gadgets since the 1970’s. They have been instrumental in the development of the 2G and 3G mobile data standards which are now mainstream. Experts believe the company has immense opportunities for growth as hardware and consumer products are wirelessly connected to the internet. As devices get smarter a faster mobile network standard will be needed and InterDigital could cash in on the eventual boom in 5G. Trading at 16 times earnings (PE ratio) and 5 times sales (PS ratio), this seems to be a delightfully undervalued tech growth opportunity for investors. The fact that it generates an income is just icing on the cake. The stock is already up by 50% so far this year.
It may be in the midst of a crisis, but Equifax is still a business with a wide moat, stable earnings and a healthy dividend yield. The 1.6% dividend yield isn’t stunning but since the company’s payout ratio is just 29% there’s tremendous room for growth in eventual payout. After the massive data breach on the company’s servers, Equifax took a hit on its reputation and stock price. The stock was down 35% as news of the cyber attack spread over the week. Management has done a terrible job of communicating with and responding to consumers, but the company is somewhat protected by its position as part of an oligopoly of credit rating agencies. The company is also a relatively stable earnings and dividend growth engine. Investors with a contrarian streak and an appetite for risk should consider this recent crisis a buying opportunity.
A well diversified 100-year old conglomerate, Carlisle Companies Group is a remarkably stable Dividends Aristocrat. The company has managed to maintain its focus on highly engineered products that yield a high margin over the past century. The nearly 30% gross margin is better than four quarters of all the companies that operate in the same industry. With a 6% bump in dividend this year the company clocked up its 41st consecutive year of dividend growth. That puts it firmly in the Dividend Aristocrat Index. However, the company lacks recognition on Wall Street and tends to fly under the radar. That could be the reason the stock trades at an attractive 16x earnings despite the 1.6% dividend yield.
Big tobacco is probably one of the best industries for high dividend yield and stability. Altria is one of the best. We’ve discussed Altria and its dividend before on this blog. Not much has changed since then. The industry is still highly regulated which means barriers to entry are high. Altria is trying to diversify, but pays out a healthy 3.8% dividend yield to shareholders willing to be patient. Tobacco remains a highly lucrative industry that keeps building up cash. Altria’s flagship Marlboro brand seems to be gaining market share. While the stock is down this year, which could present a buying opportunity.
The most common mistake dividend investors make is to focus too much on yield and not enough on value. The nine stocks mentioned here offer more than just a high yield. These are undervalued monthly dividend stocks that investors can buy at a bargain right now.
The price of purchase is nearly as important as the rate of growth or annualized dividend yield.