Recent Buy

As I've stated before I would like to show readers exactly when I buy and sell any positions. I decided to make two moves today. In this market it's tough to find value, and it's extremely difficult to find great companies trading for a discount. I have been holding on to a small amount of cash for the past week or so and missed the downdraft the market experienced back in the middle of the month. In the end, I don't trade on trends. I believe in buying quality companies at a fair price every single month, as funds allow. To be honest, I had planned to allocate some funds towards starting a position with AT&T, but Big Blue ran away from me. So, I had to look elsewhere for deals.

I decided to start a position with a new holding, and I decided to direct some funds towards my largest holding.

I purchased 40 shares of TEF on 3/31/2011 at $25.24 a share. Based on the last known dividend payment, this investment will provide me with $72.00 in dividends this year. I like the international exposure and growth, I love the entry dividend yield and dividend growth of this company. They have grown dividends for 8 years, and I think the Latin American market is going to provide revenue growth in the future. I had my mind set on a telecom, and since T had a large run lately with the news of the T-Mobile merger, I felt TEF was a nice addition. I talked a little about TEF recently, and mentioned how I wanted to diversify my portfolio a little further, and wanted to increase my portfolio's overall yield. The entry yield per Google Finance is stated at 6.82% right now, but it's a little misleading as Telefonica recently stated they were raising the dividend by 14%. With that increase, it's an entry yield over 7%.

I also purchased 17 shares of JNJ on 3/31/2011 at $59.41 a share. At current dividend rates, this investment will pay me $36.72 this year in dividends. I'm confident that the dividend payout from JNJ will be increasing shortly, however. I feel anything below $60 per share on JNJ is a significant value with little downside and a lot of upside potential. I don't think it's going to pop anytime soon, due to the ongoing quality control issues and recalls, but I think this is a great entry point for a long-term holding. This price is right in line with my cost basis and I feel very comfortable about that. Warren Buffet has a large investment in JNJ and I think he also sees a lot of value in this great company. I believe once the quality control issues are resolved and management starts righting the ship we'll see some increased interest in this health care stalwart. The entry yield right now is at 3.65%, which is a fantastic entry yield for a dividend-grower like JNJ, and that's before figuring the likely increase in April. They have been growing dividends for 48 years, and I don't think that is going to stop anytime soon. This position is now my largest in the portfolio, and I will probably not be adding more anytime soon so as to diversify into other holdings. But if it drops below $57, I may reverse that decision!

Overall, I'm happy with my trades. Both companies I purchased have largely missed the run-up that the markets have experienced over the last couple weeks. Both companies are a little out-of-favor with investors, with JNJ's recalls and TEF's large exposure to a weak western Europe market. But, just when a company is most out-of-favor is when I like to strike. I have largely become fully-invested at this point and my cash position has been temporarily depleted. I'll have some more allocation to cash next month and we'll see where the markets are at that point.

What do you think about the trades I made?

Thanks for reading.

My VOIP Cell Phone

Since deciding to live in more frugal ways in order to maximize my investments and savings, I've become very creative in cutting expenses. Most of my expenses are fairly "fixed" and can't really be changed at the moment. These types of expenses would include rent, my car payment and student loan repayments. I can't reduce my rent until my lease has expired and I can't change my car payment amount. Well, I take that back; I probably could change my car payment amount by refinancing and lengthening the time frame for the loan and therefore pay more interest. But that would really be counterproductive.

One of the expenses I've become pretty creative about is my cell phone bill. It wasn't that long ago that people lived just fine without cell phones. However, these days you can't pry a cell phone out of someone's clutches. They have really become an integral part of most people's lives and it has transformed the landscape of technology and blurred the lines between wants and needs. I understand the excitement behind owning a cell phone. Being able to contact your friends and family at a whim is very comforting and certainly having one in the car in case of an emergency is almost necessary. I'm not that old, but I do remember being in high school with no cell phones around. I do remember a time when a cell phone wasn't an expense or a necessity. I asked myself if I was really all that unhappy or underprivileged back in those days. I came up with the answer that I wasn't.

Let me state that I don't have a home phone. Besides my handy iPhone, I have no other way to contact people. Having that cell phone is extremely important to me, being able to contact family and friends back home in Michigan. However, I really became irritated with paying that $80/month bill to AT&T for my basic iPhone plan.

At a 3% entry yield it would take $32,000 in equities to pay that $80 bill every month!

Would I rather have $32,000 in equities, or a cell phone? I chose the former. So, what can I do? I require a method to contact family back home when I'm at work, home, or on the go. I don't have a home phone. My parents are a little beyond chatting on Facebook. I definitely do not want to rely on occasional emails.

I solved my problem by downloading an application on my iPhone that allows me to use a VOIP service to make and receive phone calls. I can make and receive phone calls anywhere there is a wifi signal. This includes all my time at work and home. This also includes many of the locations here around my city. Wifi is extremely widespread these days and I actually find difficulty NOT locating free Wifi. The only downside to this option is that I don't have coverage when I'm physically driving in my car. If I had a lengthy drive to and from work this option probably wouldn't work as I would require a cell phone for emergencies. However, this could easily be solved by keeping a cheap prepaid phone in the car and using it STRICTLY for emergencies. You could then use the VOIP service for all your other phone calls. I use a service that gives me a local phone number, unlimited minutes and voicemail. Anytime wifi is in range it will ring with incoming calls just like my AT&T service used to. I currently pay $9.99 per month. By making this switch I have saved a llittle over $70 per month. I'm very happy with that.

This method won't work for everyone. I'm not suggesting that you cancel your cell phone. However, thinking outside the box can sometimes yield incredible results. For me, this works. I have a 7 mile commute to work and I have wifi access at home, work and most places in between. I believe the money I'm saving every month with my VOIP service will directly lead to increased savings and an earlier retirement.

Thanks for reading.

Weekend Reading - March 26, 2011

Here are some excellent articles from the past week from fellow dividend growth investors.

The Return of Financial Dividends
Dividend Growth Investor discusses the recent announcement that many large financial institutions have been given a green light to start raising dividends. He is staying away from many of these large banks and I largely agree.

Canceling My Cell Phone Insurance
My Journey to Millions talks about canceling cell phone insurance. I honestly don't carry such insurance and actually completely canceled my cell phone plan a couple months ago. I'll talk about that later.

Dividend Portfolio Analysis: Part 1
Dividend Partisan takes time to analyze his portfolio, specifically diversification. I think it's a great idea to analyze one's own portfolio every so often to make sure it's still meeting objectives.

The Usefulness of Asset Allocation
Dividend Monk posts about asset allocation, something every investor should take take time to review. Asset allocation is a very important part of an investor's overall strategy.

Best Stocks For Dividend Investing
Buy Like Buffett continues his best stocks for dividend investing series. He discusses the very popular Kinder Morgan Energy Partners. Not my cup of tea, since I shy away from MLP's, but I have looked at KMI.

Don't Touch These 5 Dividend Stocks!
Dividends Value writes about how important it is to buy and hold. He also discusses some other very important pointers when it comes to dividend growth investing. A fine article, and it also highlights some core holdings.

Yum Brands: Dividend Growth with A Side of Debt
The Dividend Pig analyzes Yum Brands. I agree with his conclusion. It's overvalued right now with a relatively low entry yield and higher debt than most are comfortable with. The growth story in China is intriguing, however.

How To Track Your Dividend Income
The Passive Income Earner gives some great tips on how to track your monthly dividend income. Tracking and comparing dividend income monthly and yearly is a necessity.

February 2011 Dividend Income Update
My Own Advisor reviews his monthly dividend income for the month of February. These types of articles are my favorites because it shows people real world examples of how successful dividend growth investing can be. Nothing beats collecting that check from your favorite business.

The Japan Effect
Dividend Ninja discusses the recent tragedy in Japan and shows readers that there are some real bargains out there. He reminds readers to stay the course and most of all remember that this is a human tragedy. Donate if you can.

Thanks for reading.

Three High Yield Stocks On My Radar

Looking at my portfolio over the last few days, I have noticed that I only have one high-yield stock currently in the stable. That one stock would be my position with Altria (MO). I consider a high yield anything over 5.5%, especially in this low-rate environment. I have a long watch list that I monitor and update daily. Being a dividend growth investor, there are relatively few stocks on this watch list that yield over 5.5% currently. I thought I would talk today about a trio of stocks that I am currently interested in that do have a high entry yield with dividend growth.

Telefonica (TEF)

I have been interested in Telefonica for some time. They are a global telecom company stretching multiple continents. They have large wireless and fixed-line businesses in Spain and the Czech Republic. They also have large positions in the U.K. and Germany. In addition, they receive a large number of revenue from the telecom businesses in Latin America. If you're looking for international exposure, this is it. They have a large current entry yield at 6.8%. They have grown dividends for 8 years and have a dividend growth rate of 20% over the past 5 years. Very healthy. It currently trades at an attractive 7.98 times earnings. The payout ratio is difficult to figure due to the exchange rates and semi-annual payments with the ADR, but calculating using the last known dividend in U.S. Dollars, the payout ratio is just north of 56%. This stock is definitely on my radar.

AT&T (T)

AT&T has been on my radar for quite a while. I think they are a well-run company in a challenging U.S. telecom market. The only thing currently keeping me on the sidelines from initiating a position is the current possible acquisition of T-Mobile. I'm not skilled enough to fairly value this transaction, being as large as it is. I'm not quite sure how this is going to turn out, in terms of shareholder value. I do like the fact that it will make AT&T the largest wireless provider in the U.S., but I'm not sure about shareholder dilution. I do like the high current entry yield at 6.03%. It has had a bit of a run-up over the past month while I've been on the sidelines with analysis paralysis, gaining over 2.2% over said time period. The 27 years of dividend growth is obviously very attractive, but you have to be o.k. with assuming low forward growth in this challenging market. The stock's valuation is pricing that assumption of low growth in, currently trading at an attractive level of 8.87 times earnings. It has a well-covered dividend, with a payout ratio of 53%. I'm currently watching for weakness before initiating a position.

Altria (MO)

Although I currently have a position with Altria, it is a small position. I'm considering adding to my position, in order to increase my overall portfolio's yield. This company is not for the faint of heart, nor a person who has intense personal objections to smoking. I currently possess neither, so I have no problems investing in sin stocks. I actually favor it's brother Phillip Morris International for the international exposure and growth, but Altria is a safe pick for a challenging U.S. market that faces little competition and virtually no chance for new competitors to enter the marketplace. The current ban on advertising tobacco products locks Altria into a position of dominance. It's a cash machine and has pricing power unlike almost any business I can think of. I honestly don't believe that someone will immediately quit smoking when they see their pack of Marlboro is 10 cents higher today than it was yesterday. They will pay that extra 10 cents. And that's why I love Altria. They have a current entry yield of 5.86%. I don't think it is a particular value at it's current price; it is trading at a price/earnings ratio of 13.86, which is well in line with some of it's major competitors. It is a fair deal for a dividend powerhouse of this caliber. It has been raising dividends for 42 years, which is very impressive. I only wish I would have gotten into MO a few years ago, before it spun off Kraft and PM. This is a company that rewards it's shareholders. It does have a high payout ratio north of 80%, but they have stated many times that it's well within their goals of returning most of their earnings back to the shareholders. They also have a large stake in SABMiller, which many analysts believe is undervalued on the books. I'm very likely to increase my position on weakness.

I am long MO.

Thanks for reading.

Paradise

  

I think everyone should find their own little piece of paradise in life. I may have found mine. I decided to move to Southwest Florida in mid-2009. Up until that point I had lived in the southeastern portion of Michigan for my entire life. I grew up in Detroit, and lived a great deal of my life about 40 minutes east of Lansing. I can appreciate certain aspects of the state, such as: season changes, white Christmases, cider mills and relatively cheap housing. The thing I most miss about living there is the fact that my family and friends still live there. If it wasn't for that fact I don't think I'd miss Michigan at all.

This blog focuses on living frugally and building a passive income stream. I believe that living in Florida helps me with these goals in many different ways that Michigan (or other northern states) simply can't. First, Florida does not impose a state personal income tax. This, for me, is really all the reason I need. Michigan currently imposes a flat 4.35% state income tax. While I'm trying to get 4% yield out of my portfolio, Michigan is taking slightly more out of my income. Seems very counter-productive to me. The fact that Florida imposes no state income tax is really quite wonderful. I don't make a lot of money, and 4.35% of my income isn't a lot of dough...but it's still over 4% of my income. And I like keeping it. While this is simply a comparison between two states, because I'm familiar with and have lived in both, you could really do this exercise with any state you choose. Ask yourself, how much of your income is being paid to the state? There are currently only 9 states that do not impose a personal income tax, so odds are good you live in one that does.

Another thing that I love about living in Florida is all the free activities you can partake in year-round. While many states offer free activities, whether it be fairs or concerts or anything else, Florida is one of the few states that you can enjoy these types of things year round. The beach is one activity that comes to mind pretty quickly. I can drive to Siesta Key and park for free. I can walk out to the beach and enjoy some of the best views the United States has to offer, then I can watch the sun set along the horizon. I can do all of this without spending 1 penny. That's pretty attractive. Exercising outside is also free and easy year-round. In colder states, it's pretty imperative that you have a gym membership if you want to get a good workout all year. Down here, I can work out just the same in January as I can in June. A lot of what I'm writing is based on my own experiences, and I don't particularly enjoy being outside when it's below freezing. That's just my take on life and I usually prefer warm weather.

I've been kicking around the idea of living without a car. Being in Florida makes this a lot easier than many other areas of the U.S., in my opinion. Other than living in one of the few major cities with excellent public transportation such as Chicago, New York or Washington D.C., I would not care at all for biking/busing my way to work and personal obligations when it's 20 degrees outside. This past winter it averaged right around 65 degrees during the day in my particular area. That is very comfortable for a nice bike ride. Walking, busing, bike riding and any other public transportation needs are a little more comfortable when you're not fighting the elements. I really like the idea of not writing the monthly check to the insurance company, not filling up my car every 2-3 weeks and not depositing money into my bank's account for the auto loan. My overall transportation costs average over $400 per month. I agree that living without a car is a little "extreme", but I also think spending that much money to travel to and from work is a little "extreme". Living in a very warm climate does allow a little flexibility in this area of life.

I'm really not trying to convince anyone to move to Florida. The less competition for housing and rent there is, the less my housing bill costs me! But seriously, this is just my take on a wonderful state. I really came down here for a new opportunity and simply because I really dislike cold weather. I didn't like driving in snow, I didn't like having the highest auto insurance rates in the states. I didn't like scraping snow off my windshield, I didn't like warming up my car for 20 minutes. I have gained not only new opportunities by moving to Florida, but I lessened my overall tax burden in the process. I saved myself over 4% of my income. I opened myself up to free activities, beautiful beaches, gorgeous weather year-round and the possibility of living without a car and saving the associated auto costs. I increased my ability to live frugally, and therefore invest more of my net income.

Seems like a great decision to me!

Thanks for reading.

Weekend Reading - March 19, 2011

Here are some excellent articles from the past week from fellow dividend growth investors.

Six Dividend Payinng Sin Stocks to Consider
Dividend Growth Investor highlights some "sin stocks" to review. I have a few of these in my portfolio, and haven't really thought about DEO until reading this. Very interesting!

Becton Dickinson (BDX) Dividend Stock Analysis
Dividend Monk analyzes Becton Dickinson, a high quality medical supplies and devices company. A wonderful company at an attractive valuation.

3 Dividend Stocks That I Will NEVER Lose Money On
Dividends Value highlights what he calls "Golden Stocks". Very interesting read!

Accumulating Wealth: Series Conclusion
Dividend Partisan concludes his series on wealth accumulation. Spend less than what you earn, and invest the rest.

Evan's Biggest Fear
My Journey To Millions talks about his biggest fear-being unsuccessful. It's something a lot of us in this community can relate to.

McDonald's Analysis: I'm Still Lovin' It
The Dividend Pig talks about McDonald's, a company I am very bullish on. Great food, great company. He mentions a couple things I didn't in my recent analysis, including the great management they have. Great read!

Thanks for reading.

Why I love PepsiCo

I have a confession. I love Coca-Cola, and I drink the red can everyday. I drink it pretty much exclusively. But that does not bias me against PepsiCo or any other beverage company. I really love PepsiCo, and wanted to devote today's post to that love. Yesterday, I stopped in at my local Publix to grab some simple groceries, including a case of Coke, some bread and some jelly. I don't do much grocery shopping! As I was walking down the beverage/snack aisle, I looked to the left side of the aisle in amazement at a wide economic moat. Almost the entire snack selection was devoted to PepsiCo offerings. In fact, the only product that had any respectable shelf space that wasn't a PepsiCo product was Pringles (a P&G product). Your local grocer's offerings may be different, but that was my experience. I looked at the right side of the aisle and it seemed to have the traditional 1/3 Coca-Cola, 1/3 PepsiCo, 1/3 miscellaneous lineup. Very impressive. Dominant.

A little about the company, per Morningstar:

PepsiCo manufactures, markets, and sells a variety of salty, convenient, sweet, and grain-based snacks, as well as carbonated and noncarbonated beverages and foods. The firm's organizational structure comprises three primary business units: PepsiCo Americas foods, PepsiCo Americas beverages, and PepsiCo international. The company's broad portfolio of brands includes Pepsi, Gatorade, Tropicana, Lay's, Doritos, and Quaker. 

I think that sums up PepsiCo pretty neatly. The only thing to argue with might be the fact that PepsiCo actually operates in four primary business units: PepsiCo Americas Beverages, PepsiCo Americas Foods, Europe, AMEA (Asia, Middle East and Africa). This, according to PepsiCo's Investor Profile.

I have consumed many PepsiCo products over the years and can really say that they produce quality products. I personally prefer Coca-Cola over Pepsi, in terms of flavor, but I think there are no substitutes for Mountain Dew, Cheetos and Doritos. And, just because I prefer Coca-Cola over Pepsi in flavor doesn't mean that I don't like Pepsi. I love Pepsi and enjoy it immensely. And back to Mountain Dew...Mellow Yellow??? That is a joke of a competitor. I think Mountain Dew has no rival. These comments of mine are a little beside the point, as PepsiCo actually generates approximately 66% of their revenue from the food division. I really like that. I also like that PepsiCo has continually diversified away from the carbonated beverage industry, which may see small growth. I like the Aquafina, Tropicana and Gatorade introductions most. I think all three taste great. I also like the growth in Russia, with the agreement to acquire 66% of Wimm-Bill-Dann. Wimm-Bill-Dann is one of Europe's biggest dairy products companies.

Let's take a look at some of the financial aspects of the company.

Earnings per share have had impressive growth.  Over the last 6 years we can see it has grown at an annual rate of 10.6%

Earnings Per Share ($)
1Q 2Q 3Q 4Q Year
2010 0.89 0.98 1.19 0.85 3.91
2009 0.72 1.06 1.09 0.91 3.77
2008 0.70 1.05 0.99 0.46 3.21
2007 0.65 0.94 1.06 0.77 3.41
2006 0.60 0.80 0.88 1.06 3.34
2005 0.53 0.70 0.51 0.65 2.39

Revunue growth also looks very nice, pretty substantial. Revenue growth over the last 6 years has averaged an annual rate of 12.9%. I like that.


Revenue (Million $)
1Q 2Q 3Q 4Q Year
2010 9,368 14,801 15,514 18,155 57,838
2009 8,263 10,592 11,080 13,297 43,232
2008 8,333 10,945 11,244 12,729 43,251
2007 7,350 9,607 10,171 12,346 39,474
2006 7,205 8,599 8,950 10,383 35,137
2005 6,585 7,697 8,184 10,096 32,562

Let's take a look at the juicy stuff, dividend growth. Dividend growth has managed a very healthy 14.5% over the past 6 years.That is higher than the growth in EPS. The most recent raise was only 6.4%, which is nice, but I do hope that level goes back up to the 9-10% range going forward. I do think it's very sustainable. The current payout ratio is just under 50%, which does leave room for dividend growth going forward.


Dividend Per Year ($ Per Share)
2010 1.89
2009 1.775
2008 1.65
2007 1.425
2006 1.16
2005 1.01

Entry yield right now is 3.04%. I think an entry yield over 3% on a company like PepsiCo is very attractive.


People can really go back and forth in the cola wars; PepsiCo vs. Coca-Cola. I think they are both phenomenal companies and both very much worth ownership in any dividend growth portfolio. I own both and I feel great about that. I think they are different companies though. With Coca-Cola, you are getting an iconic carbonated beverage company with a brand and image that can be recognized by almost anyone. I could arguably say that the logo is the most valuable in the world. While they do also produce non-carbonated beverages, they are most known for the Coca-Cola portfolio. With PepsiCo, you are getting a dominant snack food company that also produces beverages that are carbonated and non-carbonated. I really think owning both is the way to go, and you're covering all bases.

The company has risks, as all companies do. Health awareness can sharply affect PepsiCo, as most of their offerings are generally considered unhealthy. They do offer diet versions of the colas, they have water and sports energy offerings, the oatmeal brand is very healthy and the expansion into dairy and other beverages internationally is all very comforting, however. The long term debt has risen in recent years, and should be monitored. The waste that this company produces can be looked upon as negative by anyone who has their best interests in the environment. However, PepsiCo has recently developed the world's first 100% renewable sourced PET plastic bottle.

Overall, I am comfortable owning PEP for the long haul. They have a large economic moat, thanks to their dominance in the snack food category and economies of scale. I think buying PEP at levels under $66.47 represent an attractive buying opportunity.

I am long KO and PEP.

Thanks for reading.

Cut Cable

One of the cornerstones of my investing philosophy is to live frugally. Frugal living offers many benefits to the individual investor, which I'll expound upon frequently as I post. My foremost goal is to retire by 40 years old, paying expenses with the passive income stream I will have built by then. Living frugally will offer you a two-fold approach to increase your overall wealth and make retiring early possible, even with a modest income. First, by spending less money you will naturally have more money at the end of every month with which to invest. Second, you'll have less operating expenses, and therefore will require less passive income to live on.

Every month I will write at least one article on how to live frugally. This may be something as small as an observation on daily expenses, or something major-such as a life changing event.

I'd like to talk today about cable television. I decided to cut cable television a couple months ago. Before this event, I had never really thought about living without cable TV, as I really enjoy sports events and certain cable network television shows. Also, the idea of 24-hour news and updates from around the world is appealing. My monthly cable bill was totaling over $100, which included my basic cable service, high-definition box and channels, unlimited high-speed internet and an upgraded Starz package.I looked at my cable bill and did a simple calculation:

At a 3% entry yield it would take a $40,000 investment to pay that bill every month!

And that is a simple calculation, before figuring taxes. That is pretty astounding. I thought to myself, there must be a better way. I quickly decided to cut that bill by more than half and end my subscription for cable television, but retain the high-speed internet. My bill now comes out to just over $45 per month, which is a little easier to swallow.

How do I cope without cable television? Very easily. I purchased a small, amplified antenna which picks up about eight high-definition TV channels. I was actually able to watch the Super Bowl free, and in high-def. I also retain most major morning news outlets and local evening news. This is all beside the point, as I really don't watch a lot of television. The point is this: most content is now readily available online. I can usually watch almost any cable show a couple days after it's released and I can watch a large amount of content live, in a streaming format. I can visit Hulu, YouTube or individual network websites for free online content. I can also decide when and where I watch that content. So, not only do I save money, but I also offer myself more flexibility. After cutting my cable TV, I really am astonished I didn't do it sooner. I don't know why I didn't do it earlier, but I do know that life after cable is very palatable and the extra $50+ per month I can save and invest is very, very nice.

Don't get me wrong. I'm not saying everyone should call up their cable provider and immediately cancel their cable television services. I am saying, however, that perhaps looking at your bill and investigating whether any services can be downgraded or eliminated might be worth the time. Saving just $50 on cable allows me $600 per year with which to invest or save.

That $50 per month I no longer spend means I need $20,000 less in equities (using the calculation above) with which to retire. 

Saving money amplifies your ability to retire early by not only allowing your money to accumulate faster and therefore compound faster, but allows you more flexibility on how much passive income you will really need later in life.

I am living cable-free. I am also happier than ever.

Thanks for reading.

Weekend Reading - March 12, 2011

Here are some excellent articles from the past week from fellow dividend growth investors.

Proctor and Gamble - The Ultimate Dividend Stock?
Dividend Partisan analyzes Proctor and Gamble - a core holding for most dividend growth investors.

Step 2: Consider a Yield Target
Dividend Monk talks about the second step in his guide to build and manage a dividend growth portfolio. His 9-step guide can be seen here.


List of 195 Stocks Every Income Investor Should Know About
Dividends Value lists a number of different stocks pulled from valuable Aristocrat, Achiever and Champion lists.

Coca-Cola (KO) Dividend Stock Analysis
Dividend Growth Investor analyzes Coke...a bread and butter stock.

Confectioners Industry Comparison
The Dividend Pig compares confectioners, an industry not commonly discussed. Nestle looks very attractive!

Updating My Value Dividend Portfolio
My Journey To Millions lists a couple of really interesting charts that narrow down his choices among current Dividend Aristocrats. Very interesting charts and Aflac looks better priced than I had first thought. Gotta love the duck!

Thanks for reading.

McDonald's - A Wonderful Company

 

Living as frugally as I do, honestly I don't visit McDonald's very often. I decided early this morning I was going to write about McD's and decided to visit a McDonald's location close to my work today for lunch (for research and yummy goodness). I ordered a #1, which for anyone living under a rock is a Big Mac meal. This brand has such recognition and exposure, I bet there are very few people that don't already know that fact. Just one reason it's such a great company. I sat down to eat my lunch next to a father and his young son. The child was eating a Happy Meal and he was actually proclaiming to his father "This is my favorite restaurant in the whole world!". That kind of stuff gets me pretty excited about a business. I know some people blather on about separating emotion from investing, but I like the old story about Peter Lynch shopping with his wife and discovering a pantyhose brand to invest in after his wife proclaimed how great the product was. A great product is usually produced by a wonderful company.

A little about the company, per Morningstar:

McDonald's generates revenue through company-owned restaurants, franchise royalties, and licensing pacts. Restaurants offer a uniform value-priced menu, with some regional variations. As of December 2010, there were 32,700 locations in 117 countries, including 26,300 operated by franchisees/affiliates and 6,400 company units. 

Of course, that tells us little about McDonald's. This is a global icon. It has a large moat around it's business and it's revenues absolutely crush any comparable food chain. It's brand and logo can be recognized by almost anyone, anywhere. I think they have a wonderful brand, a great image and a solid product lineup.

McDonald's financial positions are very strong. Let's take a look.

Earnings per share have more than doubled since 2005. EPS has grown by an annual clip of 20.75%.

Earnings Per Share ($)
1Q 2Q 3Q 4Q Year
2010 1.00 1.13 1.29 1.16 4.58
2009 0.87 0.98 1.15 1.11 4.11
2008 0.81 1.04 1.05 0.87 3.76
2007 0.63 -0.59 0.83 1.06 1.93
2006 0.46 0.56 0.67 0.61 2.30
2005 0.56 0.42 0.58 0.48 2.04

Revenue growth is also impressive. Revenue has grown by 2.94% per year.

Revenue (Million $)
1Q 2Q 3Q 4Q Year
2010 5,610 5,946 6,305 6,214 24,075
2009 5,077 5,647 6,047 5,973 22,745
2008 5,615 6,075 6,267 5,565 23,522
2007 5,293 5,839 5,901 5,754 22,787
2006 4,914 5,367 5,671 5,634 21,586
2005 4,803 5,096 5,327 5,235 20,460

Dividend growth is also very wonderful with this company. Obviously this is the juicy part of the investment and this is what we, the shareholders, get in return for our faithful investment into the company. It's money returned to use for reinvestment or other capital allocation as we see fit.

Dividend growth has averaged 39% over the last 6 years, but slowed from 2009-2010 with a 10.2% increase.

Dividend Per Year ($ Per Share)
2010 2.26
2009 2.05
2008 1.62
2007 1.50
2006 1.00
2005  .67


Excellent, excellent, excellent growth in this area. However, it should be noted that the payout ratio has also increased during this amazing run. I expect slower, but generous increases going forward. Commodities across the board are increasing and even McDonald's is not immune to an increase in input and foot costs. They are however, one of the biggest players in the world and do have immense pricing power and economies of scale from which to spread out the impact. The consumer will eventually see some of these costs passed on.

Overall, I love McDonald's. I think they are second to none when it comes to the fast food arena. I love the makeovers and the "upscale" lounges they now employ in a number of restaurants worldwide. The coffee and smoothie section as part of the McCafe brand has caught on well. They are expanding on healthy choices. They are expanding the footprint in emerging markets. I see a lot of growth still ahead for McDonald's.

The company does have risks. The company does not have the healthiest portfolio of food offerings. There is some backlash over that, including a suit in California over the inclusion of toys in Happy Meals. The economy is still fragile and commodities are starting to increase across the board. Higher input costs mean higher prices for the consumer, which could lead to people going elsewhere. I really don't believe this will happen, as my opinion is that McDonald's offers some of the best tasting and highest quality fast food around. I think only Wendy's offers food of comparable quality, but their lounges are often not as upscale and the food is usually much higher in price.

My opinion is that this is a wonderful businesses. It is trading at an attractive 16.74 P/E ratio with an entry yield of 3.18%. I think anything below $82.44 is an attractive price point. Although it is not the best value on the market right now I do think it's a wonderful business with an attractive entry yield, a substantial dividend growth history and a wonderful lineup of products. It has one of the world's most recognizable brands and has an extremely large moat around it.

I am long MCD.

Thanks for reading.

Dividend Income Update-January/February 2011

Each month I will post dividends received in the prior month. I will break these down by company and amount of dividends received per company. Since I recently started this blog, and I would like it to chronicle all of 2011, I will post dividends received in both January and February.

January Dividends Received

• SYY - $7.54
• MO - $19.76
• WMT - $6.05

Total dividends received for the month of January: $33.35

February Dividends Received

• PG - $16.86
• ABT - $18.04

Total dividends received for the month of February: $34.90.

Obviously, a month-over-month increase in dividends received is nice, but this was merely a product of my holdings and the month that dividend distributions fall on. I would like to see every month consistently go up, but my portfolio is still in the initial stages and still building...and therefore I may not receive an ever growing stream of income until my number of holdings are large enough that income is spread out evenly over the course of the year. I am far behind my goal of producing a total of $1,200 in total dividend income for the year of 2011. I have produced a total of $68.25 through the first two months of 2011, but I am improving with every month that goes by and every purchase I make. I hope that with the vast amount of my net income I am saving by living frugally, and then putting to work for me I will make up ground in the second half of the year. Wish me luck!

Thanks for reading.

Recent Buy

I believe in being candid and speaking frank. One of my goals when I first decided to blog about dividend growth investing and frugal living was that I wanted this to be a window into my life. Instead of just crunching numbers and posting charts I wanted to show any followers of this blog exactly what I'm doing with finances and how I'm going about executing my plan. This blog is going to be very personal, and I hope any readers enjoy it.

In the interest of being candid I will post every time I execute a trade, whether it be a buy or sell. My most recent trade was just before this blog was started, but I wanted to share.

I purchased 39 shares of HGIC on 2/24/2011 at $35.73 a share. Fair values for this stock ranged from $38.00 to $41.00 a share. I felt that the lower end of that spectrum was fair and I feel that anything below $36.00 per share represents a great deal on this company.

A little about the company, per Morningstar:

Harleysville Group provides insurance services. The company underwrites property and casualty insurance policies, primarily in the Eastern and Midwestern regions of the U.S. It offers commercial automobile, workers' compensation, and multiperil insurance, as well as personal automobile and homeowner's insurance. The company markets its policies through almost 2,000 insurance agencies, and maintains offices in about a dozen states.

 I'll be honest. The track record over the past few years is not overly fantastic. EPS has been a little erratic.

Earnings Per Share ($)
1Q 2Q 3Q 4Q Year
2010 0.29 0.61 0.76 0.76 2.42
2009 0.61 0.72 0.89 0.86 3.07
2008 0.79 0.31 0.15 0.16 1.44
2007 0.71 0.82 0.83 0.82 3.19
2006 0.67 1.43 0.69 0.71 3.49
2005 0.39 0.48 0.54 0.60 2.01

Revenue is also a little erratic, but growing.

Revenue (Million $)
1Q 2Q 3Q 4Q Year
2010 239.0 243.5 249.8 254.0 986.3
2009 246.9 244.5 244.3 245.0 980.6
2008 261.9 261.5 232.5 229.4 985.3
2007 236.9 242.3 242.1 240.7 962.0
2006 239.5 276.5 241.1 242.0 999.2
2005 232.7 236.7 239.2 239.7 948.3


However, entry yield is pretty solid at just over 4% at time of purchase. The dividend growth is also a nice story, with 24 years of dividend growth. The most recent increase was 10.77% going from an old dividend rate of 32.5 cents per share to a new dividend rate of 36 cents per share, paid quarterly. Insurance is a business I understand, and a business that Warren Buffet enjoys as well. Insurance is something people will always need and it's pretty easy to understand how a spread works. They receive the premium in advance and invest that money to receive a rate of return from which they reinvest or pay out claims. It's a great business model, and one that will be in existence 10 years from now and 100 years from now. One thing that I don't particularly like about HGIC is the small, regional footprint of the business as they operate primarily in the Northeast and Midwest areas of the United States.

In terms of insurance companies I am bullish on Aflac and Chubb, and really would love to own both. I feel that the entry yield on those companies is a little low and the price perhaps a bit high right now. I prefer entry yield being above 3%, but will accept a slightly lower entry yield if growth is high enough. Anything below 2.5% is pretty much out for me. Cincinnati Financial is another I've looked at, but growth has been very slow over the past 5 years, and they also have a small geographical footprint.

Overall, I am happy with my investment in HGIC. I have wanted to invest in a small-cap company for some time now to try and diversify away from the mostly large-cap bluechips I invest in on a regular basis. There is a lot of growth potential with HGIC, and the entry yield is rock solid.

Thanks for reading.

Income/Expenses for February 2011

Each month I will post my income/expenses for the previous month. I track every dollar in and out, so what you see is exactly what I earned and spent (rounded to the nearest dollar).

Income from February 2011:
$3,191--Regular Paycheck
$34--Dividends
$160--Bonus and Spiffs

Total Income:
$3,386

Expenses from February 2011:
$637--Rent
$287--Car Payment
$180--Student Loans
$93--Restaurant
$76--Auto Insurance
$58--Groceries
$40--Fuel
$47--Fast Food and Pizza
$44--Internet
$17--Pharmacy
$9--Mobile Phone (iCall VOIP)
$50--Everything Else*

Total Expenses:
$1,542

*-The Everything Else category includes things I don't have a regular budget for. In this case, it was the cost to do taxes on TurboTax ($37) and roses for Valentine's Day ($13).

I managed to save 54.4% of net income. Total savings were $1,843. Of that money saved I contributed $1,200 towards investments. The rest went to my cash/short term positions. I am trying to build a separate emergency fund. I think $5,000 is appropriate for my income/expense levels. I am very close to that mark right now.

This budget was very close to my final tally from January 2011. The restaurant budget exceeded my normal expenditures due to an expensive meal out for Valentine's Day. I don't go out much, due to my frugal living doctrine, but my girlfriend would probably kill me had we not gone out to a really nice romantic meal for Feb. 14th. It was worth it and it was a nice night out. Also, the cost to do my taxes are not a usual budgeted item, but a necessary evil. Next month's budget will actually include the cost to balance my taxes, as I owed the IRS a small sum.

 I will post a real exact budget every month. Some thoughts for the future are I plan reducing rent by 30-40% once my lease is up in August. Until then, I have to deal with my past decision to sign up for a relatively expensive lease. I am also contemplating living car-free. That would free up a lot of funds every month with which to invest. This decision will revolve on where I live next and how close that location is to work/groceries etc. We will see.