Investing Idea - Dividend Growth
This thread can be used for discussion in regards to this strategy, as well as to track a dividend growing portfolio that I'll start today, as per challenge suggested by ksgill. My objective is dividend growth, so that I can live off the perpetual growing income without harvesting the principal. Therefore, beating the index is not the main goal for these ports (because I will never sell these companies) but I will compare with that since I believe that acquiring a solid business at sound valuation that keeps growing earnings, it will produce better results than index investing. The exception for me to sell a business is only if fundamentals deteriorate. I will track earnings yearly to monitor the portfolio.
The new DGI port (for both Canadian and US ports) started in 2015, through Investopedia simulator. I used to have the port via portfolio123, but I was unable to continue, details are on this post. I no longer update the Investopedia simulator - all purchases done there are now reflected on a spreadsheet that is updated automatically daily, and also on FAST Graphs, the tool that I use to calculate valuation. Until the new website is available, the spreadsheet screen shots will be posted here monthly.
How it started
$100,000 was initially allocated for all Canadian companies, equally distributed between them. For the US portfolio, it will be built as I buy the companies for my own portfolio. This would demonstrate how I would build a portfolio from scratch, adding a company at the time.
The Canadian DGI portfolio was built first.
The initial purchases for Utilities sector can be seen here.
The initial purchases for Energy sector can be seen here and here.
The initial purchases for Industrial sector can be seen here and here.
The initial purchases for Telecom sector can be seen here.
The initial purchases for Financial sector can be seen here.
The initial purchases for Materials sector can be seen here.
The initial purchases for Information Technology sector can be seen here.
The initial purchases for Consumer Discretionary sector can be seen here, here and here.
The initial purchases for REITs can be seen here.
The initial purchases for Consumer Staples can be seen here and here.
I'll update this post with the links for the initial purchases regarding other sectors.
All these purchases are now reflected in the spreadsheet and in FAST Graphs.
Starting in 2017, I plan to post monthly updates on my purchases through funds that come from money that I save + dividends from companies I'm already invested on.
Transaction updates (buy / sell)
February 2017 purchases.
As of January 2017, there are 159 companies on my watchlist, 62 Canadian and 97 US.
Canadian: No companies so far.
US: No companies so far.
I only bought what I consider fairly valued at the time of purchase. The rest will be bought when it gets fairly valued. I've setup buy orders for the price that I want, so that will be reflected on the ports that day.
It goes without saying that you should do your due-dilligence and be familiar with the risks associated with each business being acquired (or with the overall risks of index). This is a long term strategy. Don't ever follow any strategy blindly. Evaluate if it fits your goals.
These companies already passed my criteria for quality. Below is what I'll be buying, from time to time, once each business is trading at or below its intrinsic value.
62 Canadian companies, sorted by sector:
divided by sector:
Energy: CNQ, ENB, ENF, KEY, PPL, IPL, SU.
Materials: BOS, CCL.B, SJ.
Industrials: CNR, CP, FTT, MDA, RBA, RCH, STN, TCL.A, WJA.
Consumer Discretionary: CCA, CGX, CJR.B, CTC.A, DOL, LNR, MTY, QSR, SJR.B, TRI.
Consumer Staples: ATD.B, EMP.A, HLF, LAS.A, MRU, PJC.A, SAP.
Financials: BAM.A.TO, BNS, CWB, EQB, GS, HCG, IAG, IFC, LB, MIC, NA, RY, TD.
REITs: AP.UN, BEI.UN, REF.UN.
Information Technology: CSU, ENGH, OTEX.
Telecom: BCE, RCI.B, T.
Utilities: ACO.X, CU, EMA, FTS.
97 US companies, sorted by sector:
Energy: CVX, XOM
Materials: APD, ECL, PPG, SHW
Industrials: CTAS, DNB, DOV, EMR, EXPD, GD, GE, GWW, ITW, MMM, NDSN, NOC, PH, PNR, RTN, SWK, UTX
Consumer Discretionary: COH, DIS, DRI, GPC, JCI, KSS, LOW, MCD, ROST, SBUX, TGT, TJX, TUP, TWX, VFC
Consumer Staples: ADM, BF.B, CL, CLX, COST, GIS, HRL, HSY, KMB, KO, KR, LANC, MKC, MO, PEP, PG, PM, SYY, TAP, WBA, WMT
Health Care: ABBV, ABT, BAX, BCR, BDX, CAH, JNJ, MDT, UNH
Financials: AFL, AMP, BEN, BLK, CB, SPGI, TROW, WFC
REITs: HCP, O
Info Tech: AAPL, ACN, ADP, BR, CSCO, IBM, INTC, MA, MSFT, ORCL, PAYX, QCOM, TXN, V
Telecom: T, VZ
Utilities: AWR, SO, VVC
Performance details for 2015 can be seen here.
Performance details for 2016 can be seen here.
How my selection process works
This is the process that I use to find the candidates for my watchlist and how I determine valuation:
I first plot 10-year period of earnings of a company to determine their earnings growth rate. I only consider companies with positive earnings growth rate for that period. Depending on the rate, to determine fair valuation, I either use Graham's formula (when earnings growth rate < 5%) or an extrapolation of Graham and Lynch (when earnings growth is between 5% and 15%) or Lynch's formula (when earnings growth rate > 15%).
The extrapolation uses normalized (historical) P/E rate for fair valuation.
Then I look to estimated earnings, by checking market consensus from different analysts + corporate guidance from last earnings results and last annual reports. That will give an idea of the approximate estimated earnings growth. Then I compare that rate with the past 15, 10 and 5-years growth rate, to see if the estimated growth is in line with the past growth. Unless big changes were done recently or are underway, I consider the worst case scenario by overriding the estimated earnings growth with the earnings growth rate from the last 5 years. Then I plot that estimated growth with the fair P/E from step 1, to find out the growth estimated for next 1, 2 and 3 years from now.
That would determine what is a good price to buy it. Then, to do the final check that this company still has solid fundamentals, I check the historical and current data from balance sheet, income statements, profit margins, roa, roe, roi, liquidity ratios, price to book and to sale, payout ratio and shares buyback. As long as it matches reasonable levels and in line with past history, it looks good to me. I plot data for these indicators for the last 5 and 10 years.
This whole process is done fairly quickly if you know what to look for and have the right tools that can pull that information handy. However, it can be very time-consuming if one doesn't have the proper tools. So many people don't bother doing it, but I find the 3 steps above critical for success - at least risk is mitigated as best as I can. I use portfolio123 to screen and check some data and FAST Graphs to plot earnings and fundamentals.
For income trusts / REITs / pipelines, I use the same process as above, but I plot Funds From Operations (FFO) instead of operating earnings, I calculate valuation using P/FFO instead of P/E.
For banks / financial institutions:
"The analysis to calculate the intrinsical value of a bank is very complex. Unlike most typical corporations, banks do not produce products or services that they sell to the public. Instead, banks essentially use other people's money to make their money. When analyzing a typical balance sheet, it's all about analyzing assets versus liabilities. For most companies, debt represents an important and significant liability. However, with banks, debt is actually the raw material, which the bank utilizes to create its product (typically loans). In other words, much of the debt on a bank's balance sheet is equivalent to the product inventory on a typical company's balance sheet. Unfortunately, this is not as straightforward as it is for a company that produces something. A bank's balance sheet contains very complex provisions for loan losses, trading portfolios, investments, etc.
The asset side of a bank's balance sheet is also very different. With banks, their assets are anything that they can sell for value. Most banks do own hard assets such as buildings and real estate; however, these hard assets typically represent a very small portion of the asset side of the balance sheet.
Loans are generally the major asset of banks. However, there are various categories of loans, and subsequently loans carry significantly different levels of risk to the bank.
To learn more about analyzing the value of a bank, check this article by Chandan Dubey on the financial website Guru Focus titled "Valuing a Bank Made Simple: The Balance Sheet."
When investing, the 2 main fundamental metrics to evaluate banks are Common Equities per Share or book value and Return on Equity (ROE). More info about that is on the paper titled "Valuing Financial Service Firms" by Aswath Damordaran published on April 2009."
Here is an example of how I do my research when evaluating a business, to determine if it meets my quality criteria.
Here is an example of how I calculate valuation and the importance of buying a business when fairly valued.
Which website / platform do you use to pull data regarding company quality and valuation?
FAST Graphs is the platform that I use to plot earnings and determine valuation (portfolio123 is used to gather fundamentals for further due-diligence when evaluating a new or existing business).
How can FAST Graphs help me to determine fair valuation of a business?
FAST Graphs platform automatically calculates what is considered fair valuation, given the earnings growth ratio of company. The following articles might help to understand it better, and how to use this tool.
Earnings calculations by FAST Graphs
A Primer on Valuation: Testing the Wisdom of Ben Graham’s Formula
Forecasting Future Earnings Is The Key To Successful Stock Investing, Consensus Analysts’ Estimates Provide A Solid Starting Point
The Interpretation of the Earnings and Price Correlated F.A.S.T. Graphs™ Made Simple
Orange Earnings Valuation Reference Line Utilizing Three Formulas
If the earnings payout ratio is high and unsustainable, wouldn't cash flow payout ratio be high and unsustainable as well?
Please see response via this post.
Do you factor in exchange rates when making purchases?
No, I have zero consideration to what the FX gain might be. My US stocks are in RRSP only, so they are not subject to withhold taxes (and I get a bit of diversification, since I'm heavily invested in Canadian stocks on my taxable account). I contribute to my RRSP at every paycheque and reinvest the dividends where I find appropriate. Therefore, I dollar-cost-average the conversion to US (which is done only once, dividends settle in US$ and I do further conversion until withdraw times come). I see the current premium on potential currency depreciation as the cost to be exposed to good companies, that has a longer record of resilience regarding dividend growth, and which belongs to a stronger economy .
My setup is US dividend growth stocks (investing) in RRSP + Canadian dividend growth stocks (investing) in taxable account + US and Canadian stocks for trading (dividend and non-dividend) in TFSA.
If you're going to to any USD CAD conversions in large amounts, and your broker charges a large amount to convert, you might want to consider Norbert Gambit method.
First, I strongly recommend laying out the foundation by reading these books:
- The Intelligent Investor, by Benjamin Graham;
- Security Analysis, by Benjamin Graham
- Common stocks and Uncommon Profits, by Philip Fisher
Investopedia has a lot of great material to understand it further. For example:
Finding value in Financial Reporte and Balance Sheet
Finding value in Income Statements
However, not every sector is evaluated the same way. Reading the Investor's presentations, annual reports and listening through earnings call is a great way to learn how each industry operates and what metrics can be useful. For example, pipelines and real estate income trusts should be using Adjusted Funds from Operations instead of operating earnings, given the high depreciation expenses. Some industries have specific non-gaap metrics to determine how healthy (or risky) they really are.
To learn more about growth stocks:
- One Up on Wall Street, by Peter Lynch
Other great reading material:
- Stocks for the Long Run, by Jeremy Siegel
- Investing Psychology, by Tim Richards
- Berkshire Hathaway Shareholder letters - Warren Buffet
- Behavioral Portfolio Management - C. Thomas Howard - or his book
EDIT (10/29/2014): portfolio123 doesn't have Canadian ETFs. So XIC will have to be tracked separately. Initial purchase was 2,161 shares of XIC at $23.13. That would give a dividend of $1,383.04, which gives an initial yield of 2.76%. Also, SPY portfolio was modified to start with $50k, so that $50k is allocated to xic and $50k to spy (the same way that $50k are for Canadian stocks and $50k are for US stocks). Since SPY has an initial yield of 1.89%, the initial yield of indexing port is 2.32%, while initial yield of DGI is 2.66%.
EDIT (11/18/2014): This is my watchlist (majority is already invested on my real life portfolio). These companies will be added as they get fairly valued:
EDIT (11/18/2014): Described how I do my due-dilligence. See details above.
EDIT (11/28/2014): Canadian portfolio updated, bought 60 shares of CNQ.TO at $38. Added the equivalent to XIC (96 shares at $23.53). Previously, there was 2,161 shares of XIC at $23.13. Total of XIC shares now: 2257. XIC ACB: $23.15. Also, US portfolio updated, bought 36 shares of NOV at
$66. Added the equivalent cash amount to SPY port and bought SPY.
EDIT (12/1/2014): US portfolio updated, bought 22 shares of ECL at $104.35. Added the equivalent cash amount to SPY port and bought SPY.
EDIT (12/8/2014): Canadian portfolio updated, added $13,800 with today's decline and bought 6 stocks:
37 bei.un $61.88
53 cgx $43.09
47 na $49.16
58 ppl $39.53
50 ref.un $46.42
56 t $41.14
Added the equivalent cash amount for XIC and purchased additional 614 shares at $22.47. Total XIC shares now: 2871. XIC ACB: $23.00.
EDIT (12/26/2014): Added 2014 performance info here.
EDIT (1/12/2015): Added $6,900 cash to buy more of CWB.TO, FTT.TO and PSI.TO. Cash from dividends ($362.19) will also be used, so a total of $7,262.19 to buy equal amount ($2,420.73) of these 3 stocks. Details on today's post. Same amount of cash ($6,900) was added to buy XIC, besides using the dividend cash ($336.83), so a total of $7,236.83 to buy XIC. Total XIC shares: 3,192. ACB: $22.95. Also, added cash ($2,089.06) to buy VZ on the US portfolio, using that cash + dividend cash. The same cash was added to the SPY port, and more SPY was purchased using that + the dividend cash available.
EDIT (1/21/2015): Added $12,000 cash to the Canadian DGI portfolio, to buy MIC.TO, BDT.TO, HCG.TO, AP.UN.TO and BOX.UN.TO. The same amount was added to buy 528 shares of XIC at $22.7. Total XIC shares: 3,720. ACB: $22.91.
EDIT (2/3/2015): Updated Canadian Watchlist. 66 companies in total now. 2 removed (CTY, BDT). Trades will be updated later (selling BDT, buying other companies that are fairly valued now). See updated list above.
EDIT (2/3/2015): Sold BDT shares (402 shares at $11.8). Sold around the same amount ($4,743.6) in XIC (198 shares at $23.95). Total XIC shares: 3,522. ACB: $22.91. Cash left: $4,742.1.
EDIT (2/12/2015): Purchased companies from the 2015 list according to valuation criteria. Details on the post for today. Same amount was purchased for XIC. Total XIC shares: 6,909. ACB: $23.49.
EDIT (2/16/2015): Updated US Watchlist. 78 companies in total. No companies removed. Many companies from Info Tech added now, that have paying and increasing dividends. See updated list above.
EDIT (02/20/2015): SPY port will be tracked manually, as I've been doing for XIC. I need that port slot to evaluate a new portfolio model for trading Canadian companies. As of today, SPY port has 285 shares total, ACB = $199.1, as it can be seen here. All purchase transactions are recorded here.
EDIT (5/1/2015): Purchased OTC and WJA. Details on the post for today. Same amount was purchased for XIC. Total XIC shares: 7,057. ACB: $23.506.
EDIT (5/15/2015): Added info regarding valuation on fixed-income type of securities and financial equities.
EDIT (6/11/2015): It's been 8 months since the port started, so I checked all holding for fair valuation and I added more positions for the Canadian portfolio. Details on the post for today. Same amount, for comparison, was purchased for XIC. Total XIC shares: 8,267. ACB: $23.523.
EDIT (7/4/2015): Same exercise for US stocks (as I did above with the Canadian ones). Details on the post for today. Same amount, for comparison, was purchased for SPY. Total SPY shares: 487. ACB: $202.5. This link for Summary details. This link for Holdings details.
EDIT (8/9/2015): Updated formatting for better clarity.
EDIT (10/25/2015): Started new portfolio on Investopedia Simulator. Details here.
EDIT (3/23/2016): Updated Canadian Watchlist. 64 companies in total. Removed CMG. Sell order for my real and simulated portfolio issued accordingly.
EDIT (3/30/2016): Updated US Watchlist. 98 companies in total. Added: Material sector: DNB, EXPD, GD, NDSN, NOC, PH, RTN; Consumer Discretionary: DIS, KSS, TWX; Consumer Staples: LANC; Utilities: AWR, VVC.
EDIT (4/25/2016): Added probation list, sold and removed the following companies from my port: Canada: SCL and PSI; US: NOV.
EDIT (9/26/2016): Updated "Reading Suggestions" section with C. Thomas Howard's book.
EDIT (1/7/2017): Updated my Canadian watchlist and Probation list. On the Canadian side, renamed ESL to ENGH, sold CVL and IMO and added KEY and LAS.A. Rationale for these decisions can be found on this post.
EDIT (1/13/2017): Updated my US watchlist. On the US side, renamed MHFI to SPGI and sold EMC, which is now DVMT (it doesn't plan to pay dividends). Sold 50% of LANC and used the proceeds to buy AMP. Rationale for this decision can be found on this post.
EDIT (1/30/2017): Updated with link for my 2016 Performance. Updated with post explaining the differences on payout ratio from earnings versus cash flow, regarding dividend sustainability. Updated February 2017 purchases.
EDIT(3/03/2017): Updated the Reading Suggestion.
EDIT (5/21/2017): Added new FAQ.
EDIT (7/22/17): Removed BOX.UN (since it went private to BPY) and replaced with BAM.A (which owns their other Brookfield public subsidiaries)