Where I disagree with Buffett and Munger

(PS: this is not a click-bait, I do indeed disagree with Buffett and Munger 🙂 )

Dear Readers,

It has been very difficult to make time to blog in the recent few weeks. However, I am hopeful that things should improve on that front and should be able to make some time towards my passion for writing on my favorite subject i.e. dividend growth investing.

I was thinking of what would be a good topic to write about for my next post, and after a lot of thought, I decided to pick a rather controversial topic: the one about diversification vs concentration in a portfolio. Simply put, if you are investing your capital in a few businesses, should you focus your bets on a few stocks that you understand very well OR should you diversify your investments across a few sectors with the knowledge that you may not necessarily be an expert on each and every one of them.

This has been a long standing debate in the world of investing. And like with every debate on investing, it too evokes strong opinions. I happened to be discussing this subject with a friend of mine and while he and I agreed that diversification is the way to go for the average retail investor, he cited how two of the most famous and successful investors of our time, Warren Buffett and Charlie Munger, were against diversification.

So I decided to do some digging and found the following video from the 1996 Annual Berkshire Hathaway meeting, where one the shareholders puts this very question to Buffett and Munger. Check out the video below:

To quote Buffett on this (pay special attention to that statement in bold, we will revisit it soon):

But I can assure you that I would rather pick — if I had to bet the next 30 years on the fortunes of my family that would be dependent upon the income from a given group of businesses, I would rather pick three businesses from those we own than own a diversified group of 50.

So clearly Buffett does not believe in diversification and instead recommends a concentrated portfolio consisting of businesses that one understands very well.

I am going to take a contrarian stance and disagree with Buffett here from the perspective of the average investor. In my humble opinion, this is terrible advice for the average retail investor. Now I know what you might be thinking: what do I know in comparison to Buffett, one of the greatest investors of all time. Sure, I may not be as successful as Buffett, but what I do understand very well are my limitations as a regular Joe investor. Hear me out here for a second and then you can make up your mind.

I contend that how you and I understand and evaluate businesses is drastically different from how Buffett and Munger understand businesses. So when they claim that they understand a particular business well, it is NOT the same as my claim that I understand a business well. We both may understand a specific business in our own limited capacities. In fact, their knowledge base is so profound that their knowledge will vastly outweigh mine.

For these reasons, it makes very little sense for Buffett and Munger to diversify. Similarly, it makes very little sense for the average retail investor to NOT diversify.

To drive home this point further, fast forward to the 2021 Annual Berkshire Hathaway meeting. Here is a video for your reference ( between 13:34 and 16:54). In the meeting, Buffett shares a list of the top 20 companies (by market cap) in 2021 and asks his audience to guess how many of these companies figured on a similar list back in 1989. He then shares the second list with the audience from the year 1989. Here are the snapshots of the two lists for your reference:

Notice that none of the companies from the 1989 list are on the 2021 list. In fact, you may have not even heard of several of the companies in the 1989 list.

So, following Buffett’s advice, if I as a regular retail investor, were to simply invest in three businesses that I *thought* I knew well in 1989, imagine how that would have turned out for me? To make matters even worse, I looked at a similar list for 2000, nearly ten years after 1989. You can check out the list here. Once again, apart from General Electric and Exxon (prior to its merger with Mobil Corp.), the top 10 list looks drastically different.

Interestingly, in the 2021 Berkshire Hathaway meeting, Buffett goes on the advocate for low-cost index funds.

One thing it shows incidentally is that it’s a great argument for index funds is that the main thing to do is to be aboard the ship. A ship. They were all going to a better promised land, you just have to know which one was the one that necessarily get on. But you couldn’t help but do well. If you just had a diversified group of equities, US equities, that would be my preference, but to hold over a 30 year period.

I recommend the S&P 500 index fund, and have for a long, long time, to people. And I’ve never recommended Berkshire to anybody, because I don’t want people to buy it, because they think I’m tipping them into something I’d never. No matter what it was selling for. And I’ve made it public. On my death, there’s a fund for my then-widow, and 90% will go into an S&P 500 index fund, and 10% in treasury bills.I like Berkshire, but I think that a person who doesn’t know anything about stocks at all, and doesn’t have any special feelings about Berkshire, I think they ought to buy the S&P 500 index.

So did Buffett change his stance? Well, I am not sure. But I would agree with the Buffett of 2021, in that index funds are the perfect solution for someone who does not know what he/she does not know about stocks and businesses.

Let me know your thoughts below. Regardless of whether you agree or disagree with me, I would like to hear your opinions on the subject.

Monthly Income Update – May 2022

My dear readers,

The last few weeks have been really tough as far as finding any free time whatsoever towards blogging. As you might be aware, I switched jobs recently and a new job takes a lot of time especially during the initial stages where there is a steep ramp-up. Combine that with family health issues and then the end of the school year and other family activities, summer approaching etc., I have absolutely no free time for anything else. And that is how it should be. Family comes first after all.

That said, I am as strongly committed to my pursuit of financial independence through dividend growth investing as I am to this blog. This blog is very much a part of my investing journey. Which is why come what may, I will find some time to post my monthly income updates. This way, I can atleast make some time to look at my portfolio and see what is going on.

Lets get into the numbers then, shall we.

Dividend Income Received

Sl. No.Company / ETF (ticker)Amount
1.Apple Inc. (AAPL)$2.31
2.AbbVie (ABBV)$20.61
3.Albertsons Inc. (ACI)$1.21
4.Caterpillar (CAT)$1.12
5.Clorox (CLX)$51.19
6.Costco (COST)$2.71
7.Procter & Gamble (PG)$10.15
8.AT&T (T)$1.16
9.Texas Instruments (TXN)$57.77
10.Verizon (VZ)$24.7
11. Realty Income Corp (O)$12.5
12.STAG Industrial (STAG)$3.5
13.JP Morgan Equity Income ETF (JEPI)$1.4
Total$189.88

So a total of 13 companies/ETFs rewarded me a monthly income of $189.88. Among these, TXN was highest dividend income payer, closely followed by CLX. I am very happy with my current percentage position in TXN. I have previously written about why this is one of my core holdings and why I am very bullish. I also made about $49.31 in option trading by writing covered calls. This brought my grand total for monthly income to about $239.19. At the same time last year, I had made about $35.96. So if you look at the YoY growth, this is about a 500%+ increase! Granted that a lot of this growth is due to the volume of my invested capital at this point in my journey. But still…500%+ is pretty staggering.

I added a new position in JEPI in one of my tax-advantaged accounts. JEPI is an actively managed fund that generates income by selling covered call options on large cap stocks. The trailing 12-month distribution yield is about 7.96%, at the time of writing this. I also looked at the top-holdings and the overall fund prospectus and their focus is mostly around the SP500 stocks tending towards low-volatility and that they believe are approaching over-valued territory. At the time of writing this, their top four holdings are Bristol Myers Squibb (BMY), Hershey (HSY), Progressive (PGR) and Coca-Cola (KO), all of which seemed overvalued per my analysis as well. Overall, I liked the exposure of relying on a covered call ETF in my tax-advantaged accounts. This is an interesting exercise, giving the benefits of covered call option trading without having to spend as much time. The high distribution yield is an interesting play in what is a very high inflationary environment. Anyway, we will see how this turns out.

Buys and Sells

There were no sells this month.

As far as buys, there was a lot more activity as my pending buy orders go triggered. Among the big buys, I added to my positions for MSFT, TROW, TXN and JPM. Some smaller “staying in the game” purchases included AFL, V, VZ and TGT. TGT and WMT got slaughtered this month as far as their stock prices after their earnings results. None of this was particularly surprising (to me atleast), because the effects of inflation, the situation in eastern Europe and the lockdowns in China were bound to have their impacts on companies in this sector. TGT, in particular, has been a big beneficiary of the lockdown paradigm for the best part of the last two years. So a reversion to the mean was certainly on the cards. Overall though, I think the business fundamentals are sound and I do not see this company going away soon atleast in my lifetime.

Summary

Yet another month is in the books. I am really hopeful of being more regular with my blog updates. We shall see. Let me know in the comments below as to how is your portfolio doing and how was your May.

See y’all in the next post…

Monthly Income Update – Apr 2022

Dear Readers,

While it has been incredibly hard to make some free time to blog and/or engage with the fintwit community in the last few weeks, I try my best not to miss out on my monthly income updates on this blog.

The monthly income update series is a pretty important component of this blog both for myself as well as readers of this blog. Why? Firstly, it is perhaps the most important (if not the only) metric of my portfolio’s performance. The goal of my portfolio from day 1 has been simply: generating a reliable growing stream of passive income. Too often this aspect is lost on others in the investing community who are hyper-focused on beating the market and capital appreciation. While capital appreciation is important to my portfolio as well, it is not the primary objective. For this reason, I do not even bother sharing the full portfolio value in my performance updates. Lets focus our results on our starting goals and ignore the noise.

Secondly, it serves as motivation for both myself and my readers. This is not a medium to brag about “look how much money I made this month”. Instead, I want to show YOU, the reader, the power of the compounding effect through this investing strategy. And if an average joe like myself can do this, you can do this too!

Lets get into the update then…

April was a brutal month for stocks in general. S&P500 is down by nearly 10% in the last one month alone and several popular growth stocks have been crushed. As far as my portfolio goes, it is not fallen atleast as dramatically as the S&P500 (w.r.t time-weighted return, 6% drop since the start of the year as compared to a nearly 13% drop in S&P500 during the same period).

Dividend Income Received

Sl. No.Company / ETF (ticker)Amount
1.JP Morgan Chase (JPM)$11.11
2.Realty Income Corp (O)$12.22
3.STAG Industrial (STAG)$3.51
4.CareTrust REIT (CTRE)$6.51
5.Orion Office Reit Inc. (ONL)$0.30
Total$33.65

So a total of 5 companies contributing a grand total of $33.65 for the month in terms of dividend income. If you are wondering and have some thoughts along the lines of “why the heck is this guy going nuts over 33 bucks for? That’s hardly going to cover any expenses!”, just bear with me for a second. Firstly, this is 33 bucks that I did not have have before and something which I earned while I was focusing on my life and day-job. Secondly, at the same time last year, I had made $12.59 in monthly dividend income. Granted that I have invested capital in these stocks in the during this time, but some of these stocks have also raised this dividends by a certain percentage to add to this income. The year-over-year increase is around 167%!! Not bad for something that I did not even lift a finger for, eh?

Also, some of these contributions have just happened organically i.e. take ONL for instance. This is not a REIT that I had originally invested in, but rather was a product of a spin-off from Realty Income late last year. I simply just held onto the shares I received from the spin-off.

I decided to not trade options during this month again. Firstly, my mental bandwidth was exhausted due to some family health issues recently. Secondly, the downward trend in the overall stock market and the potential positions where I could write some covered calls meant that my asking price for an OTM option call contract was going to be that much lower. It also turns out to be the earnings season, and there is generally a lot of volatility in price action closer to earnings release. I decided to pass on this for this month atleast.

Buys and Sells during this month

Trading was very very minimal during this time, what with all the health issues in my family. There were no sells, because nothing had fundamentally changed with any of my holdings to warrant such a move.

As far as Buys, I added slightly large tranches to my following positions: JPM, WHR, TROW.

All of the above seemed to be trading near (or below) my fair value estimates. TROW has been absolutely hammered in 2022. I have a pretty sizeable position this holding and I will continue to hold while keeping a close eye on the next earnings release to see the management’s discussion of the results.

As far as smaller tranches, I also added some PEP, PG and HD. Among the three, HD seemed reasonably valued while PEP and PG were my “Staying in the game” purchases i.e. purchases which I had to make for my core holdings after a fixed time limit per my investing strategy.

IRAs

This seemed like a good time to max out both mine and my spouse’s IRAs. The downward trend in the market presented a good opportunity to invest in a broad-market index fund that I hold in my IRA. This is something that I ensure I complete during the early half of the year, as a result of which I can keep any remaining capital for investing in my individual brokerage account. I want to stress that as far as priorities, maxing out my 401(K), HSA and then IRA accounts are much much more higher priority for me than investing in any individual brokerage account. It is just a matter of discipline and ensuring that I invest in my retirement accounts first before investing in anything else.

Summary

Another month is in the books. This has been a roller-coaster of a month for me with starting a new job and also dealing with family health issues at the same time. Here is hoping for a better month up ahead!

See you all in the next post. Until then…

Update – 5/1/2022

Dear Readers,

This is intended to be a brief post. Blog updates have been slow over the last few weeks. This is owing to two major reasons. Firstly, I recently switched jobs and, in general, the initial few days/weeks at the new job are rough, as one begins to ramp up and get up-to-speed. Secondly, one of my family members based outside the country landed up in the hospital again due to a recurrence of an issue with the surgery that had happened earlier in the year. This is terrible news to receive at any time, but it is especially hard when you have just switched jobs.

As a result, this last month has been mentally and emotionally draining for myself and my family. We were seriously contemplating if we would need to travel out of the country on an urgent basis. This was especially challenging considering our employment benefits (primarily health insurance) per the new employer’s plan were yet to kick in and travelling during this time could be tricky.

While life was happening, I obviously had to ignore my portfolio and the world of investing in general.

Things have thankfully started coming back to normalcy again and the family member is out of danger (touch wood). I finally had a chance to look at my portfolio and saw all the red, which made me….. well…excited. 🙂 Why? Because this means potential buying opportunities. April was expected to be a slow month for me as far as earned dividend income. I will cover more of this in a monthly income update post that should be up very shortly.

As I write this, earnings season is on us, so I will be using my free time in the next few weeks digesting the data in these 10-Qs especially for companies that are on my “need to analyze further” list.

I sincerely hope that all of you guys reading this post are doing well, staying safe and healthy and making good progress in your own journeys towards financial independence.

See y’all in the next post!

Monthly Income Update – Mar 2022

My dear readers,

Hope you are all doing well, staying healthy and staying invested in your own future. Unfortunately, the situation in Eastern Europe continues to remain volatile and this has had its impact on the markets world-wide. My own personal life is also going through some interesting changes as I discussed in my previous post.

At the risk of sounding like a broken record, I will restate again that dividend growth investing as a strategy has been incredibly helpful during these turbulent times. Its truly passive nature is a huge blessing. I have not been checking on my portfolio and it is mostly in “auto-pilot” this whole time. What is amazing is that while my portfolio has been in this hands-off mode, it has generated a record amount as far as dividend income since its inception!

Let us get into the numbers to emphasize this point.

Dividend Income Received

Sl. No.Company / ETF (ticker)Amount
1.AFLAC Inc. (AFL)$14.48
2.Church and Dwight Co. (CHD)$2.11
3.Duke Energy (DUK)$4.97
4.The Home Depot (HD)$9.58
5. Intel Corp. (INTC)$3.65
6. Johnson and Johnson (JNJ)$36.25
7.Lockheed Martin (LMT)$46.80
8. 3M (MMM)$48.46
9.Microsoft (MSFT)$6.83
10.NextEra Energy (NEE)$1.71
11.Pepsi Co. (PEP)$8.70
12.Snap-On Inc. (SNA)$4.26
13.The Southern Co. (SO)$10.67
14.Target (TGT)$2.18
15. T. Rowe Price Group (TROW)$57.66
16.UnitedHealth (UNH)$2.92
17.Visa (V)$9.61
18. Whirlpool Corp. (WHR)$22.75
19.Waste Management (WM)$0.66
20. Exxon Mobil (XOM)$2.68
21.Schwab’s US Dividend Equity ETF (SCHD)$23.34
22.iShares Core Dividend Growth ETF (DGRO)$5.85
23.Realty Income Corp. (O)$11.66
24.Digital Realty Trust (DLR)$34.59
25.STAG Industrial (STAG)$3.48
Total$375.85

So, a total of 25 companies/ETFs contributed a grand total of $375.85 in terms of total monthly income. This is the first time my portfolio breached the $300 mark since its inception, making it a a new record. At the same time last year, I had earned $68.37 in total monthly income. The YoY growth is nearly over 5x and it is mostly due to the diligent and rather aggressive investment of capital into this portfolio. My largest payment came through TROW, which is something that I have been investing into pretty aggressively since the start of the year. The stock itself has plummeted from it highs back in December and I was seeing so discernable change in fundamentals.

So far, in this quarter, I have earned a total of $669.73 in terms of dividend income. At the same time last year, my total quarterly dividend income was $94.48. So even the quarter-over-quarter performance is truly impressive.

As far as my projections for the rest of the year, I am expecting to be averaging around the $250 mark in terms of monthly dividend income. Fingers crossed, I am looking in good shape to hit the $3000+ mark of earned dividend income for the year, which is one of my goals for this year.

This was expected to be a “heavy-paying” month in terms of dividend income. I am expecting April to be a LOT more quieter in terms of that metric. I am planning on writing some options to boost my income. This is, of course, time-permitting and if the market conditions are conducive.

Buys and Sells during this month

Like I said before, this was a busy month on the personal front. So trades were limited.

I continued adding small tranches to my existing position for TROW. The other stock that was in my radar was WHR. While there have been no telling changes in fundamentals, I think Mr. Market is probably thinking that inflationary pressures are going to have a bigger impact on WHR’s performance especially in Asia and other world markets. While there is some grain of truth in this sentiment, the reaction is a little over-the-top IMHO. Good buying opportunity for me as the starting yield looks very attractive, dividend is relatively safe and the stock is relatively cheap.

AT&T (T) was in the news during the month with the CEO elaborating about the previously announced plans for spin-off involving Discovery and WarnerMedia and also about the dividend cut. T has been one of my worst investments and a stock I wished I had never owned. This was something that I had purchased during my initial days as a dividend growth investor and I made the rookie mistake of chasing the yield and also believing the hype around “oh this is conglomerate and look at how many businesses they own etc.”. This was my stupidity, because one quick look at their balance sheet and the quality of the management would have told me that this is a bad investment decision. Thankfully, because of a categorized dividend growth portfolio strategy, I have safeguards in place against my own stupidity. I have placed T in the “speculative” category of my portfolio and, therefore, only invested a limited amount of capital in them. I will continue to hold this stock for now. However, I have actually no interest in the newly formed spin-off and also holding T as a pure telecom play, as I already hold Verizon (VZ) and I think they are a much better player in the telecom space as compared to T. More on this in a future post.

I continued adding to my position in DLR as this was still attractively priced. I am using every opportunity to dollar-cost average into two ETFs, SCHD and DGRO. Both these ETFs have performed pretty well and give me a good mix of attractive dividend-paying companies. I hold these ETFs and REITs in my tax-advantaged accounts (HSA and ROTH IRA). Investing in ETFs in this account helps me not have to track these accounts as far as individual stock positions (except REITs).

Watchlist

I am taking a serious look at JP Morgan Chase (JPM) and The Home Depot (HD). JPM stock has been on a steady decline since the start of the year, dropping nearly 22% in this period. A quick look at the Price-to-Tangible Book Value seemed bring this into my radar where the price starts looking attractive. I did not see any significant change in fundamentals, but then this is only a cursory look. Will need to dive deeper.

HD still seems to be hovering closer to my estimated fair value and I continue to dollar-cost-average, adding small tranches whenever an opportunity presents itself.

Summary

So another record-breaking month is in the books. I do hope to get a bit more active on the blog and Twitter in the coming few months (fingers crossed).

Take care and see you in the next post..

The Savings Rate – Revisited

My dear loyal readers,

I sincerely value your readership and appreciate your patience over the last few weeks in sticking with my blog updates. I am hoping that I have not lost you. Life has been crazy busy over the last several weeks. As I stated in my previous post, I am going through an fairly significant change in my professional life which has been consuming a lot of my free time. I would finally like to talk about this in this post.

Before getting started, I wanted to take you back to the topic of “Savings Rate” which I have also talked about previously on this blog.

A simple equation to look at your savings is as follows:

Savings = Income Generated – Expenses

Our objective is to improve the savings rate to the best extent possible, because higher the savings, the more capital we have to invest into our own future. For dividend growth investing to work as a strategy, it is important to ensure that we are investing as much capital as we possibly can atleast during the accumulation phase of our investing journey.

None of this should be overly controversial as the subject of improving the savings rate is pretty critical to the success of ANY investing strategy, let alone dividend growth investing.

The part of the equation that does not get as much attention as it should is the “Increasing Income” part. Since we are so hyper-focused on the “reducing expenses” part of the equation, we generally ignore the aspect of getting better at our day jobs and “coast” through it. Some of this is due to the relative comfort of our job, we understand it pretty well, why push ourselves in the quest for something better? Is it really worth it?

In my case, I saw a couple of interesting dynamics that prompted me to seriously ponder over this question. The rising inflation was one of these factors. At the time of writing this, we are seeing record-high levels of inflation and it is unclear how long this situation will last. The other dynamic was a question about my employer’s profitability in the years to come. As an investor, I am now used to reading through financial statements and questioning aspects of the businesses that I am invested in. I used some of these learnings to study the financial statements of my own employer. The exercise revealed some interesting insights. I was able to make reasonable approximations about the company’s long-term profitability and make reasonable guesses about how long it would take me to reach my financial goals if I would stick with this employer. It also dawned on me that while things are great with my employer at present, there is only so much I could do to boost my pay beyond a certain level. Ultimately, this exercise prompted me to start considering other options.

Interviewing in my area of expertise (i.e. tech sector) is incredibly hard and requires months of arduous preparation. This is because the interview process itself is fundamentally broken thanks to the FAANG (Facebook/Meta, Apple, Amazon, Netflix, Google) style of companies. These companies have tailored the software engineering interviews to include questions surrounding topics that an engineer would have typically studied back in graduate school. These questions, while academically interesting, have arguably little practical relevance. Unfortunately, the rest of the tech industry has been so enamored by these FAANG companies that they have replicated the interview process as well. It can be mind-numbingly stupid at times, but there is nothing much anybody can do about this.

Anyhow, the mere thought of preparing for interviews can be demotivating by itself. In my case though, I had to look past this and focus on my larger goals. So I prepared….juggling my responsibilities between a full-time job, my family responsibilities and using every little free time available to prepare.

After interviewing with several potential employers, I landed up with offers from a handful of them. Apart from evaluating the offers themselves, I studied each employer’s history by looking through their annual SEC filings, reading up about the management itself and factoring those into my decision making. This is something that I never did previously in my career. I would mostly look at the role itself, look at the offer in isolation, rely on the recent media news about the company and just take a blind leap of faith about the health of the company. My education as investor has forced me to research these other aspects of a potential future employer and use that to make a decision.

In the end, I am happy that I went through this process. Change is incredibly hard to accept especially as one progresses through life. But sometimes it is important to take a step back, analyze and make a difficult decision. At this point, I have no idea if my decision is right or not. But the decision is based on a logical premise, and that is all that is in my control.

Update – 3/20/2022

Dear Readers,

I have been a little slow with my updates on both my blog as a well as on Twitter. Couple of reasons here: (1) I am going through an important change in my professional life, and (2) I was out vacationing with my family during spring break.

Let me first elaborate on (2). The last two years have been incredibly tough for my family. 2020 started with this dreaded pandemic that not just impacted my family but a lot of folks worldwide. But right around this time, we had a family emergency which forced us to plan a sudden trip outside the country at the peak of the pandemic in March 2020. We were lucky to be able to travel and get back into the country before any major travel restrictions were put in place. If that was not enough, in early 2021, the state that I live in had to deal with one of the worst winter storms that it has seen in over a century. This event left us without water and electricity for almost a week in sub-zero temperatures. We were barely recovering from this when we learned of another family emergency which once again forced us to travel outside the country. This was just around the time when the Delta variant was peaking, which made our travel back into the country very eventful again. Towards the end of 2021, we were again faced with the news of another family member needing to go into surgery.

In the midst of all this madness, my family has never had some time off to chill, relax and have a fun trip somewhere. So with spring break around the corner, we decided to go on a nice road trip to a nearby town which is a 2-hour drive from our place. The trip was a lot of fun. What was amazing was that during this break, all the places that we visited were CROWDED. And from what I could tell, I could barely see anyone wearing masks or practicing social distancing. This didn’t hamper our experience. On the contrary, it actually felt nice. It felt…normal for a change.

I will skip talking about (1) during this post, but I will certainly bring it up in a future post on the blog very shortly. This is pretty significant news and deserves a post of its own.

Anyhow, while I have been busy with life, I had actually stopped looking at my portfolio. Actually, I was only getting the notifications regarding the dividend checks and that made my vacation even more enjoyable 🙂 That right there, my friends, is the reason why dividend growth investing strategy works.

That is it for this post. I will be back shortly with another one within the next few days. Take care, stay safe and healthy!

Monthly Income Update – February 2022

Time for a monthly dividend income update post. Before I start though, I wanted to drop a note regarding the current situation in Eastern Europe. It is difficult to remain focused and talk about things like personal finance and related topics when there is so much turmoil due to a war-like situation. My prayers are with the people of Ukraine and I hope that sanity prevails.

As far as my life, things are extremely hectic. Work is busy as usual, but our family has a whole are busy during the week with various activities. While all of this is going on, I have not even been paying any attention to the market. In fact, preparing for this blog post forced me to open my portfolio and see what was going on! No surprises there, no drastic drops etc.

Lets dive right into the update then.

Dividend Income Received

Sl No.Company / ETF (ticker)Amount
1.Apple (AAPL)$2.20
2. AbbVie (ABBV)$19.96
3.Albertsons Co. (ACI)$1.20
4.Caterpillar (CAT)$1.12
5.Clorox (CLX)$40.42
6.Procter & Gamble (PG)$8.74
7.AT&T (T)$2.12
8.Texas Instruments (TXN)$34.55
9.Verizon (VZ)$23.13
10.Realty Income (O)$11.37
11. STAG Industrial (STAG)$3.47
Total$148.28

So a total of 11 companies contributing to the final monthly income of $148.28. At the same time last year, I earned a grand total of $12.86. So that represents an YoY increase of nearly 1053%! While that is great, I do realize that such growth is expected at this relatively early stage of my dividend growth journey. I am also trying to track the percentage of my dividend income earned through shares bought via DRIP strategy (i.e. purely organic growth as opposed growth through the capital I am investing). Unfortunately, it is a little tricky since I was initially using M1 Finance as a brokerage early last year which does not have a traditional DRIP service available like with the big-house brokerages like Fidelity (my current brokerage) or Schwab. M1 uses a pooled-dividend strategy. It is something that I need to put some further thought.

My largest dividend payment came through Clorox closely followed by Texas Instruments. Both are top-tier companies in the my portfolio allocation strategy. I am especially interested in Texas Instruments at present, especially considering the situation in Eastern Europe and its impact on the semiconductor industry.

Buys and Sells

No sell activity during this period.

As far as buys, I added to my following existing holdings: Texas Instruments, T Rowe Price Group and Whirlpool. These were larger tranches weighted in accordance to the category of the portfolio.

I also add a smaller tranche of Clorox, mostly because I believe in this business and the quality of the products. I think the dividend is safe and I do not see this company going away soon, atleast in my life-time. The other company that I was tempted to buy but resisted was 3M (ticker: MMM). With this one, while the current dividend is safe and the stock is attractively priced, I am not sure about the growth prospects in the near term. I am also paying close attention to how the management is going to wade the company through these troubled waters in the next couple of years. This will go a long way in terms of my belief in the company and its overall growth prospects. So far, it has been a mixed bag and hence I am circumspect.

Summary

Another month is in the books. I am chugging along in my dividend growth investing journey and staying invested even in these turbulent times in the market. What about you? How did your month go? Are any of the companies listed above in your portfolio as well? What are your thoughts? Please drop a comment and let me know.

The Little Book of Valuation – Book Review

Howdy friends! Hope you are all doing fine, staying healthy and sticking to your investing goals amidst all of the craziness in the world right now. As if things were not depressing enough with this COVID nonsense, the sky-high inflation rates, constant talk of interest rate hikes etc. the world now has a potential-war like situation in eastern Europe. I needed a distraction. So I decided to pick up a book on investing and read. No better way to enrich my knowledge and ignore everything else in the world.

We all know that investing is not an exact science. The process cannot be simply coined as a mathematical expression such as A + B = C. That said, it is not (or rather should not) be based on “hunches” and random guesses either. As an engineer, I like to treat the subject of making decisions based on rationality and through analytical arguments. This is why the subject of valuation interests me immensely.

Simply put, if you cannot ascertain the value of something you are about to purchase, you will make a huge mistake at some point.

So I picked up “The Little Book of Valuation” by Prof. Aswath Damodaran to refresh my understanding of the subject.

Who is Aswath Damodaran?

Prof. Damodaran teaches corporate finance and valuation at the Stern School of Business at NYU. If you follow finance content on Youtube, you may have run into his channel by accident. He also maintains a blog and his website is a treasure chest of all kinds of tools, spreadsheets and models that are available for FREE for anyone to use.

I cannot think of anyone who has written/spoken so eruditely on the subject of valuation. In fact, if you have not already done so, I *strongly encourage* you to go binge watch his playlist on Valuation. It might take a few watches, but you will learn a TON. It is certainly some of best finance content on Youtube, IMHO.

Initial impressions

The “little book” series are generally very good reads. They are concise, distilled and straight to the point. From that standpoint, the reader gains a lot from just a single read and does not need to spend a lot of time reading.

Valuation, however, is a very math-intensive subject. So I was not sure how such a complicated topic could be distilled down without losing the reader. To his credit, Prof. Damodaran does a fantastic job here. He first introduces the fundamentals of why valuation is important, followed by a discussion of valuation fundamentals and tools needed for the trade. Then there is a discussion on approaches to valuation, a walk through of how valuation can be applied to companies that are at various stages in their life-cycle and finally wrapping up with special cases in valuation.

Where valuations can go wrong

Source: Prof. Aswath Damodaran, slide-deck from Valuation class Spring ’22

So everyone understands that valuation is important, but the subject that does not get as much attention is where valuations can go wrong. Prof. Damodaran covers this subject first up. Here were some of my takeaways from the book:

  • Valuation is hard and the odds of getting it wrong are very high.
  • The investor’s personal biases and preconceptions impact his/her ability to value a company objectively. I have written about this subject previously on this blog.
  • Valuation can be made over-complicated fairly quickly. If you can value a company using a model with three inputs, there is no point in using five inputs. Less is more. And while it might sound counter-intuitive, more research and data points can actually lead to more confusion.
  • All valuation models are imprecise. We are not attempting to estimate the fair value of a stock up to 3 decimal places. The idea is to be close enough to the right answer and also add in a sufficient “buffer” (aka margin of safety)

Two approaches to valuation

In the chapters that follow, Prof. Damodaran goes into the aspects of HOW to go about doing valuation. Two primary approaches are discussed: intrinsic valuation and relative valuation. For intrinsic valuation, the value of an asset is determined by the looking at its future cash flows, its potential for growth and its associated risks. Prof. Damodaran focuses primarily on Discounted cash flow (DCF) valuation method here and discusses variations of this method. At its heart, the DCF method is ideal for estimating intrinsic value of an asset since it attempts to ascertain the present value of all estimated future cash flows discounted back at a risk-free rate. That statement in bold is the key, and the endeavor is to find a reliable method of estimating future cash flows for a specific duration AND also coming up with a fair risk-free rate.

Prof. Damodaran submits that while most discussions around valuation typically revolve around the DCF method, most assets in real-life are valued using relative valuation. For instance, if you are in the market for buying a house, you will look at the other similar sized houses in the neighborhood and come up with a “fair” value of the house you want to buy. Can one use a similar method for comparing stocks of two companies? The answer is yes, but with a few caveats:

  • For a fair apples-to-apples comparison, the two companies that you are comparing need to be in the same sector.
  • Then the question is what parameter one can use for the comparison. Common examples include multiples such as price to earnings multiple/ratio, price to book value, price to funds-from-operations (FFO) for REITs etc.
  • Another variation is to look at a company’s multiple against the average of a group of companies within the same sector. The understanding being that by averaging, you are most likely going to be comparing the company of interest against a more “typical” company in the sector.

Each approach (intrinsic or relative) has its pros and cons. For instance, estimating future cash flows for growth companies or companies that are relatively early in the lifecycle is quite challenging (the book dedicates a whole chapter to this subject). Relative valuation is not perfect either regardless of whether you were comparing two companies or a company against a group of companies from the same sector. For instance, during the dot-com bubble in 1999-2000, several companies that were investing in internet were all ridiculously overvalued at the same time.

IMHO, when in doubt, it might be ideal to use a combination of both the approaches to determine if this is an ideal investing opportunity or if something looks fishy.

The chapters that follow go through several interesting case studies where DCF is performed to value companies. 3M (MMM) is picked as an example for the introduction to DCF. In the second half of the book, Prof. Damodaran then discusses how valuations can be performed for companies at various stages in their lifecycle. For his discussion, Prof. Damodaran picks Under Armour (ticker: UA) as an example of a company that is growing rapidly. As an example of a mature company, Prof. Damodaran picks Hormel Foods (ticker: HRL) and explains how valuation could be performed and discusses variations to the traditional DCF method. Finally for a declining business, Prof. Damodaran picks Las Vegas Sands Corp. (ticker: LVS) and explains how such a business should be valued.

In my view, this is where I really enjoyed reading the book and where all the learnings from the previous chapters were reinforced.

Special Cases

Prof. Damodaran dedicates the final half of the book towards companies where the traditional DCF valuation may not be applicable as readily. Three examples covered are: valuing a bank or a financial institution, valuing a cyclical company and finally valuing a company with a large amount of intangible assets (for eg. patents)

Valuing a bank or a financial firm using a method such as DCF tends to be tricky for several reasons: most banks or financial firms are under regulatory constraints, making them treat capital differently than the rest of the market. The standard accounting rules for banks are slightly different as compared to other companies in the market. The treatment of debt within a bank is different as compared to a regular company. In a bank’s case, debt is more like raw material used to fund something else and as a result the process of determining the cost of capital becomes tricky. Finally, it is hard to estimate free cash flows because the aspect of defining net capital expenditure or working capital for a bank or an insurance company can be tricky. In this chapter, Prof. Damodaran introduces the aspect of Gordon Growth Model or Dividend Discount Model as an alternative to estimate fair value. For a more rigorous discussion of the subject, I point the interested reader to this page.

Valuing cyclical companies such as those belonging in the industrial sector or companies that are dependent on commodity prices is not as straightforward. For instance, for companies that rely on natural resources such as oil, how can we factor in the situation where we can potentially run out of this resource completely in our fair-value estimation? To deal with fluctuations in commodity prices, Prof. Damodaran recommends using the normalized commodity prices and earnings for such companies. Choosing this can make a critical difference in our estimation of a fair value. For instance, if the current price for a barrel of oil is $50, but our estimate for normalized price for a barrel of oil is $100, the company we are trying to value may look overvalued simply because of our chosen normalized price of that commodity.

Summary

While I am a huge fan of Prof. Damodaran’s lectures and his thoughts on the subject of valuation, my overall sense was that I was a bit disappointed with this book.

The book covers the subject of Discounted Cash Flow valuation method in sufficient detail. The associated case studies using real public companies is also very enriching and rewarding. The book does a great job of laying down the foundation material explaining the WHY of valuation and the common pitfalls with valuation.

Where the book loses its shine is when it starts covering the subject of HOW valuation is performed. I got a sense that a lot of “dense” material was crammed into a few pages to meet the requirements of being “A little book”. Valuation is a math-heavy topic and topics that involve mathematics simply cannot be distilled down. Doing so complicates things for the reader instead of making the material simpler.

As an engineer, I did not find any issue with following the math. I quite enjoyed it on the contrary. I just wished it was given enough “love” in the book :).

Where this book excels is when it covers the subject of valuing companies at different stages in their life cycles and also the special cases where DCF cannot be readily applicable. I thoroughly enjoyed those chapters and gained some interesting insights for me ponder over further.

Have you read this book? What are your thoughts regarding it? Let me know in the comments below.

Dividend Increases – Feb 2022

We are living in interesting times. While I would normally refrain from talking about politics on this blog, some news items are just hard not to talk about. News just broke out today about Russia’s invasion of Ukraine. I sincerely hope and pray for the families in Ukraine and the other affected areas.

Towards the end of the day, I wanted to take a quick peek at what Mr. Market’s reaction to this news was like. I was surprised to see that S&P500 end up 1.5% higher than the start of the day! This just confirms that it is almost impossible to rationally predict how the market is going to react to anything. And this is exactly why I stick to dividend growth investing. I stand a chance to rationally predict the outcome of the dividends paid out by the companies I am invested in. But relying on capital appreciation is a bit of a lottery.

Lets talk about something a little more positive though. With earnings season in full swing, this was also the time for dividend increase announcements. And I had a few of them to report here:

  • T. Rowe Price (ticker: TROW) : TROW stock is getting hammered since the start of the year. It has seen a drop of nearly 26% since mid January. One of TROW’s peers, BlackRock (ticker: BLK), a stock that I do NOT own, is also seeing a similar drop in the same time frame. A did a quick peek of the fundamentals of TROW and, AFAICT, nothing with the company itself has changed. When I looked through the earnings call transcript, I did see one comment from the CEO Rob Sharps: “It was a challenging year for net flows with redemptions concentrated in U.S. equity growth portfolios, partly driven by client rebalancing after a period of robust returns.” The analysts and Mr. Market seem to have hung onto that comment. From what I can tell, this is a well run company with extremely good margins and no debt. And management was not concerned with the stock price drop either. They announced a 11.1% increase to their quarterly dividend. This marks the 36th consecutive year of annual dividend increases since their IPO, quite outstanding! The stock is currently trading at a FWD price to earnings ratio of 11.54 with a dividend yield of 3.38%.
  • 3M (ticker: MMM): 3M had a fairly decent quarterly earnings release. But the stock has got hammered since the start of the year like TROW, seeing a drop of nearly 20%. In this case though, there is a legitimate concern. 3M recently lost a lawsuit around defective earplugs sold to the US military. 3M also has a lot of debt on their balance sheet and management has been focusing on paying that off (as they should). In the midst of all this, the board announced a 1 cent increase to their quarterly, similar to last year. This naturally made a lot of investors grumpy. While I am not super happy about this situation, I am still reasonably confident about this company’s long-term future. But having said that, I will be keeping a close eye on the management’s actions in the coming few quarters and decide accordingly. The stock is currently trading at a FWD price to earnings ratio of 13.87 with a phenomenal starting dividend yield of 4.06%.
  • NextEra Energy (ticker: NEE): NEE is another one of these stocks that has seen a significant drop of nearly 19% from its highs late last year. The only reason I could attribute to the stock drop was the leadership changes happening within the company, with the previous CEO Jim Robo stepping down expressing a desire to retire after a decade long tenure. He is now replaced by John Ketchum, who was previously CFO. While that is ongoing, I think the fundamentals of the company are still intact and they expect a double-digit earnings growth and nearly 8% profit growth for the rest of the year till 2025. The board announced a nice 10% hike to their quarterly dividend. The stock is currently trading at the FWD price to earnings ratio of 25.86 and with a decent starting dividend yield 2.35%.
  • Whirlpool Corp. (ticker: WHR): Whirlpool is one of my recent entries in my portfolio after having been on the research watchlist for a long time. I finally pulled the trigger a few months back. The corporation boasts of some strong brands under its umbrella. The company has clearly been a beneficiary of the work-from-home trends introduced due to COVID. However, from what I researched, the profit margins, more specifically the ongoing EBIT margin (this is the metric that the management likes to cite in their presentations) have been improving from below 2% in 2008 after the GFC to about 6% before COVID news hit us. Since then the margins have improved to nearly 8% in 2021. I also like that the management has been very shareholder focused by aggressively buying back shares and also dividend increases. This last increase of 25% was therefore not all that surprising. The stock is trading at a FWD price to earnings ratio of 7.17 with a solid starting dividend yield of 3.54%.
  • Church and Dwight (ticker: CHD): CHD is within the bond-like category in my portfolio. Good solid brands like Arm and Hammer, Oxiclean, Trojan etc. I think these are staples for any household and they are not going anywhere in the next decade. The board announced a 4% quarterly dividend increase. The company has paid a quarterly dividend for nearly 121 years! Quite staggering! While the dividend increase itself is disappointing considering the current inflation levels, I understand caution on the part of the management considering the economic environment we are in with frequent supply chain issues and pricing challenges with retailers. The stock is currently trading at a FWD price to earnings ratio of 30.03 with a lousy starting dividend yield of 1.09%.
  • Intel Corp. (ticker: INTC): Another recent entry into my portfolio, INTC reported its fourth quarterly earnings recently and announced a 5% hike to their quarterly dividend. CEO Pat Gelsinger reiterated the focus towards delivering on their IDM 2.0 strategy. Mr. Market, however, decided to focus solely on the gross margin contraction of 3.2% and the stock tumbled. The stock is currently trading at a FWD price to earnings ratio of 12.85 with a solid starting dividend yield of 3.27%.
  • Home Depot (ticker: HD): HD delivered a strong quarter once again and at the same time announced a 15% hike to their quarterly dividend, making this their 140th consecutive quarter where they have paid out a cash dividend. This dividend increase surprised me as I was expected a hike closer to around 9-10%. Immediately after the release, the stock dropped an astonishing 9% because management forecasted that they expect slower growth and thinner margins in the coming year. The stock is currently trading at a FWD price to earnings of 19.25 with a nice starting dividend yield of 2.4%.
  • Pepsi Co. (ticker: PEP): I reserved the last spot for the newest entry into the Dividend King, PepsiCo announced a 7% dividend increase recently after a strong quarter. PEP is one my core holdings and it is a darling of the dividend investing community for a reason. The stock is currently trading a FWD price to earnings ratio of 24.87 with a decent dividend yield of 2.55%.

So there ya go. Those were the dividend increase announcements that I received since the start of the year. Some of these were along expected lines, some very surprising in a good way and some very disappointing. But I will take them which way they come!

Do you own any of these companies? What increases have you received so far this year? Let me know in the comments below!

PS: You can also connect with me on Twitter @LifeWDividends.