Quarter 2 earnings season are in full swing as I write this. However, it is time for another entry to one of my favorite categories. I love talking about dividend increases, as I treat it similar to a pay hike. In this case though, I am being paid more for doing absolutely nothing! My contribution is simply analyzing a great business and investing my capital in them. The business does its thing and eventually returns cash back to me as a thank you. I simply take that cash and reinvest it. Eventually, this compounding snowballs into a machine that generates steady cash flow. This, in summary, represents the power of dividend growth investing.
In today’s post, I am going to talk about Stanley Black and Decker Inc. (ticker: SWK). Stanley Black and Decker recently announced a quarterly dividend hike of nearly 13%. This represents the 54th consecutive year of dividend increases for this company. Per Seeking Alpha, the 5 year dividend CAGR rate is 4.94%. So this recent dividend hike is certainly well above the 5-year rate.
“I am pleased to continue our trend of consecutive annual dividend increases, which reflects the continued confidence we have in the cash generation potential of the company. A strong and growing dividend is a key element of our shareholder value proposition, and is consistent with our capital deployment philosophy to deliver approximately half of our excess capital to shareholders over the long term.”
This is very pleasing to hear and shows that the management and board of directors at this company are committed to the interests of their long-term shareholders.
Stanley Black and Decker has been a beneficiary of the work-from-home and lockdown dynamics due to the pandemic in the last year. It is natural to expect people locked in their homes using this time to finish up some DIY projects around the house. Stanley Black and Decker boasts of several great brands such as Stanley, DeWalt and Black & Decker. I am a huge fan of the DeWalt power tools especially, I think they are best in class.
I will cover this company in a far greater detail in a future post. For now though, I will just enjoy this raise and look for next investment opportunity! A sincere and huge thank you to the hard-working employees at Stanley Black and Decker for this gift!
Do you own SWK in your portfolio? Did you receive any other dividend hikes in July? Please drop a comment below and let me know.
One name that keeps consistently coming up in my education as an investor is John C. Bogle, the person who gave us Vanguard and also the concept of index funds. I have been watching/listening to some of his interviews before his death in Jan. 2019. Even at an age of 87, the man was so sharp! And I must say, every single time I listen to him speak, I learn something new.
John’s statements are easy to co-relate with the historical stock market data i.e. passive index investing generally gives the investor better returns at lower costs compared to actively managed funds. It is for this reason that a large portion of my net worth is tied up in low-cost index funds from Vanguard.
Regardless of what your investing strategy is like, it would be wise to listen to experienced heads such as John and adopt those learnings into your overall investing mindset.
In this post, I wanted to highlight 10 such investing principles that I have heard from his various interviews/speeches/books.
1. Reversion to the mean
“Don’t choose funds based on past winners. One way or the other, all mutual funds do badly in one period and do better in another period“
This is true of all investments in general. Past performance alone cannot guarantee future results. With every investment, it would be wise to look towards the future and question if the investment makes a good long-term choice for your portfolio.
2. Time is your friend.
“Think of the value of compounding. Get yourself a little compound interest table and see that at 7%, money doubles every 10 years and it doubles again and again and again. And by the time you are at your retirement age, it might 35 to 40 times your original investment…maybe more than that.“
I demonstrated this very concept in my previous post where I discussed Yield-on-Cost. This is such a powerful concept that can achieved through a simple buy-and-hold strategy with dividend growth investing.
3. Buy Right and Hold Tight
“Pick a good fund and hold it through thick and thin. Don’t get despondent when it does badly, because it comes and goes. So don’t let yourself get distracted by changes in the fund performance or changes in the market.”
Again, some sound advice about any investment vehicle. During a market correction, it would be wise to disregard all the market headlines and look instead at the fundamentals of the businesses you have invested in. If nothing materially has changed, stay put.
4. Have realistic expectations
“I think common stocks should return at a nominal rate, nominal meaning before inflation…at a nominal rate of 7%. The dividend yield is very important in all this. Reasonable rate of return would be 7%, don’t look for 11, don’t look for 15, don’t look for nothing, don’t keep waiting for the next bear market….those are all guesses! Some of these guesses will come good, some not so good.“
Several pearls of wisdom in that statement alone. In general, when attempting to draw estimates about projected growth in your portfolio or also things like valuing a business, it is better to remain conservative. Other useful takeaway is to remain invested in the market and not wait on the sidelines.
5. Forget the needle, buy the haystack
“You don’t need to take the risk of owning individual stocks, take the market risk, which is high as it is“.
I think I largely agree that for a common individual who is least interested in the stock market news and the world of finance, this would be great advice. However, I prefer a slightly hybrid approach where I have a large portion of my net worth invested in low-cost index funds and a smaller portion invested in dividend growth stocks.
6. Minimize the Croupier’s take
“Cost is an important factor“
Ensure that if you are investing in a index fund, it is low-cost. The expense ratio can add up over time and take away a significant portion of your total return.
7. There is no escaping risk
“Think about this for a second..I don’t like the risk of the stock market. I am putting my money in a savings account or certificate of deposit. There is no risk there. Wait a minute! The return there is probably going to be about 1.5% and we are going to have 2.5% inflation. The real return is -1%! So is there any risk in putting your money in a savings account? You better believe it!“
Stay invested and stay the course. Obviously, set aside some cash for emergency expenses. But keep the remainder invested. Cash sitting in a bank account will slowly get devalued over time.
8. Don’t fight the last war
“Your job is to get the biggest gross return…inflation is going to take whatever it takes out of that. If it is big return, it will take a little of it. But if the gross return is small, it will eliminate it!“
Jack was referring to safeguarding against inflation through special funds like “inflation beaters” (his words, TIPS?). In general, my takeaway from this was staying focused on one primary strategy and to not make sweeping decisions based on problems that existed several years back or that might possibly exist several years into the future.
9. The Hedgehog beats the fox
“The fox knows many things. But the hedgehog knows one great thing. In our business, foxes are those harvard business graduates with their fancy computers…armies of them..who know many things. I know one great thing, which is if you own the market in a low-cost index fund, you are guaranteed to earn your fair-share of what the market is kind enough to give us, and lets be clear on this, whatever returns a bad market is mean-spirited enough to take from us. So it is the hedgehog who wins ultimately“.
Simple boring strategies ultimately have the highest probability of success, as compared to complicated strategies that involve timing the market.
9. Stay the course
“Let me start with this premise…Many investors lose because of their own behavior and not because of how stocks and bonds do. They are trailers…they buy something that has done well and expect it to perform the same in the future, and it doesn’t. A whole lot of bad behavioral patterns…the find a hot stock manager, they jump on the bandwagon and that does not work….that will not work. So figure out a sound program, set the right course and don’t let all these superficial emotional momentary things get in your way! Another way of putting that is, don’t do something, just stand there!“
Again, so many pearls of wisdom from the legend. I have previously written about cognitive biases and how that impacts investment decisions. A good investor must be cognizant of these and try their best to avoid such biases creeping in. Another advice is to avoid frequent tinkering with the portfolio based on market news. In fact, I find it easier at times to “zone out” and stay away from the news and headlines and instead focus on big picture and long-term fundamentals.
So there you go! Words from the legendary John C. Bogle. Dear Sir, I thank you humbly for all your contributions to this world. I am a better investor thanks to you.
Traditionally, the annual dividend yield for any given holding is defined as the annual dividends payed out divided by the current share price for the holding. As an example, at the time of writing this article, Visa (ticker: V) is trading a Price per share (PPS) of $238.47. Currently, Visa pays an annual dividend of $1.28. This gives us an annual dividend yield of 0.53%.
If one were simply looking at that current dividend yield as a screening criteria, 0.53% for Visa does not make it look like an attractive investment from a dividend cash flow perspective. However, throw in the notion of dividend growth from the company and also holding the stock for a really long-term, that initial dividend yield will compound into snowball and start yielding at a much higher rate in a few years. This is through the magic of yield on cost.
Unlike the annual dividend yield, Yield on Cost (YoC) is defined as the annual dividends being payed out currently divided by the original purchase price for the holding.
Let us explain this through a simple example, again sticking with our example for the Visa stock.
For our simple modeling, we will use the current 5-year Compound Annual Growth Rate (CAGR) of 18%. Compound Annual Growth Rate for dividends is defined as follows:
CAGR = [FV / IV]^1/n – 1
where, FV: Final value of the dividend after n years
IV: Current value of the dividend
Assume that you were going to purchase a Visa share today at the current stock price of $238.47. Also, assume that Visa can maintain this dividend growth rate for the next several years. With these assumptions, we get the following results:
Year
Dividend Amount
Yield on Cost
0
$1.28
0.53%
5
$2.93
1.22%
10
$6.70
2.8%
15
$15.33
6.42%
20
$35.06
14.70%
25
$80.22
33.63%
30
$183.51
77.0%
So from the table above, we see that the Yield on cost for year 0 starts out at the same rate as the typical annual dividend yield. However, we see that just by holding the stock for several years, and due to the power of compounding, the yield on cost with respect to the initial purchase price after a period of 30 years is a whopping 77%!
Therefore, for the compounding through yield on cost to work, there are the following important considerations:
Need to invest early enough to allow for the compounding to do its thing.
Need to purchase great companies with solid growth potential at a reasonable valuation (thereby ensuring a great starting dividend yield).
Now, I know the sceptic in you is asking some very pertinent questions about the model above:
Is it fair to assume that Visa will be able to grow at the same dividend CAGR for the next 30 years?
Good question. And most probably not. But it is reasonable to assume that Visa will be growing their dividends at a pretty aggressive rate for the near term and then slow down after that. Playing around with the dividend CAGR rates a little, we arrive at the following results:
5-year CAGR/ Years
0
5
10
15
20
25
30
12%
0.53
0.94
1.66
2.93
5.17
9.12
16.08
15%
0.53
1.07
2.17
4.36
8.78
17.66
35.53
18%
0.53
1.22
2.8
6.42
14.7
33.63
77
All values for YoC in percentages
Even if we assume a slowing down in the 5 year CAGR rate for the entirety of the 30 years, at a CAGR of 12%, the YoC is still is a respectable 16.08%.
But you have not assumed any re-invested dividends?
That is correct. I am assuming that dividends are not reinvested for the purpose of simplicity.
So does this mean that the current yield is irrelevant and one must always look at the dividend growth rate?
This is a classic question amongst all investors in the dividend growth community. And like with everything in investing, there is no black and white answer here as well.
In my case, I tend to categorize my portfolio amongst a mix of low current yielders with high growth rate, high current yielders with slower growth rate and also some that are in the middle of the road. Why so? Several reasons:
The categorization gives diversification to my portfolio: Some companies simply cannot raise their dividends at a faster rate because of the nature of the sector they are in e.g. public utilities, companies in the telecommunication sector.
Some companies are lot more mature than others: I hold some classic blue chip companies that have been around for several decades. They have an enormous market cap and will probably not be able to grow aggressively like some of their younger counterparts.
Momentum: Yes, I will admit it. Seeing some high yielding stocks now, giving me back good cash flows at present will motivate me to stick to this strategy. This is a strategy that requires enormous amount of patience. Seeing that cash flow working its magic is a re-assurance that this strategy is indeed working and will serve as a momentum boost. While this is more psychological than anything else, there is nothing particularly wrong about the approach.
Like with all metrics, I would recommend using YoC in conjunction with their several other financial metrics to analyze the health of your portfolio, rather than in isolation.
Half of the year 2021 has come and gone already. I can’t believe that I am writing my second month income update on this blog. Time is simply flying by! But the pursuit for finance independence achieved through dividend growth investing is not slowing down. Those dividend checks are coming along at a steady clip. So let’s jump into the update.
Dividend Income Received
During this last month, I received income from the following:
Company / ETF(Ticker)
Amount
AFLAC (AFL)
$4.68
Broadcom (AVGO)
$1.71
Church & Dwight (CHD)
$1.54
Duke Energy (DUK)
$3.62
The Home Depot (HD)
$6.74
Johnson & Johnson (JNJ)
$10.58
Lockheed Martin (LMT)
$6.70
3M (MMM)
$3.66
Microsoft (MSFT)
$1.31
NextEra Energy (NEE)
$1.02
Pepsi Co. (PEP)
$5.66
Southern Company (SO)
$5.81
Stanley Black & Decker (SWK)
$0.10
Target (TGT)
$0.81
T. Rowe Price (TROW)
$4.52
UnitedHealth Group (UNH)
$2.52
United Parcel Service (UPS)
$0.69
Visa (V)
$0.15
Waste Management (WM)
$0.73
Exxon Mobil (XOM)
$0.90
Schwab US Dividend Equity ETF (SCHD)
$13.64
iShares Core Dividend ETF (DGRO)
$2.37
Realty Income (O)
$3.79
STAG Industrial (STAG)
$1.45
Total
$84.70
This was a record breaking month as far as monthly income received. As I have stated in my previous posts, I hold REITs in tax-advantaged accounts such as HSA, Roth IRA. I hold shares from Realty Income (O) and STAG Industrial (STAG), both REITs that pay dividends on a monthly basis. Part of my capital in the HSA is also deployed into two dividend ETFs: SCHD and DGRO. Both ETFs are slightly different in terms of their sector allocation, giving me some overall diversification. I am reasonably happy with their performance in my portfolio. All in all, I have received dividend income from 22 companies during this month! That is also a record by itself.
Buys/Sells made during this period
I made the following purchases during this month:
Staying in the game purchases: ABBV, CAT, CHD, COST, HD, LMT, MSFT, NEE, PEP, PG, SWK, TROW, TXN, UNH, V, XOM
Other purchases: AFL, CLX, JNJ, JPM, MMM, SO, TGT, VZ
The “staying in the game” purchases are simply dollar-cost averaging into the stocks since the threshold for number of days since the last purchase made had expired (threshold configurable based on category of the holding in my spreadsheet setup). The tranche size is dependent on the current valuation of the stock in question (i.e. smaller tranche size for an overvalued stock).
In general, this is an overvalued market, so there are no screaming deep value stocks that interested me during this month. However, as the famous saying goes:
Time in the market is more important than timing the market.
So rather than wait on the sidelines hoping for a correction, I am choosing to deploy my capital into companies that I think are close to fair value. Among the options available, Clorox (CLX) is going through some correction as life in general returns back to some normalcy here in the US, and seems to be reverting to its mean providing a buying opportunity. The other purchases, I was happy with the valuation at this time, even if they are not available at deep discount.
I have no sells during this month.
So how did your portfolio perform during this month? Please let me know in the comments below!
Disclosure: Long all the stocks mentioned in this post.
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