Posts Tagged 'dividends'

It Really is All About Dividends

All was not lost in 2018, if you had the proper plan.

2018 was brutal. 10% up and 10% down in the spring followed by an upward trending summer and early fall. Then Bam! The third quarter set near term records, and not in the right direction, culminating in a 15% drop in a month. What happened Santa?

Suddenly all the new market geniuses created since the election weren’t so smart after all. Simple trend followers were forced to consider that things like earnings and valuations really do matter.

Worse, everything was down. Every S&P 500 sector was negative. Bonds were negative. With seemingly no place to hide, what is an investor to do?

I recently had a conversation with a client that is going to retire this summer. Their concern was that they couldn’t afford the portfolio loss right before retirement. My response was that even with a loss on their net worth, the income, the dividends paid by their portfolio actually increased substantially in 2018. An investor will not go broke if they can live off their dividends and income.

But that is theory. How did it actually work? I did a quick analysis for this client. He owns 24 stocks, with about 30% of the account value in a money market – opportunity money. As the markets decline yields increase, so I have the cash to pick up higher-yielding quality investments later at lower prices to increase his income. Of the 24 stocks held 21 increased their dividend payout in 2018 over their 2017 payout. Two lowered their dividend and one kept it the same. Pretty good batting average. The average unweighted increase in dividends was 11.87%. Meaning the 11.87% assumes equal weighting of all holdings. Since his portfolio is not equally weighted he saw an increase proportional to his holdings, his change in income could have been more or less than 11.87%. So let’s just say +/- 10% on the year. That is a pretty good gain in income anyway you slice it.

This why I always talk about having a plan and sticking to it. Plans may not be needed in raging bull markets, but they are the key to survival in bear markets. Our plan looks something like this: Identify high-quality dividend-paying stocks; Identify those selling for under intrinsic value; Identify those with substantial free cash flow to enable them to increase their dividends annually. Part II is to follow our defined macro signals to raise cash as a market declines to create a war chest for buying more at better prices.

If you don’t have a plan, if you don’t know where your retirement income will come from, feel free to give me a call or drop me an email. We’ll show you how to navigate these markets without having to dust off the resume in retirement.

Happy New Years, and Wishes for Good Returns in 2019!

Bill DeShurko Ofc: 937-434-1790 or Bill@401Advisor.com

Mr. DeShurko is a registered representative of Ceros Financial Services, Inc, (Member FINRA/SIPC). Ceros is not affiliated with 401 Advisor, LLC or Fund Trader Pro. The views expressed are those of Mr. DeShurko and do not necessarily reflect those of Ceros Financial Services, Inc., its employees or affiliates.  Past performance is no guarantee of future results. 
All investing involves risk.

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Dividend Investing

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401 Advisor, LLC specializes in building client portfolios using dividend paying stocks due to their long term history of providing superior returns over non dividend payers. I recently contributed to an article posted by U S News on their web site. The article highlights warning signs that a stock may be cutting their dividend in the future.

Update on one of our Dividend and Growth Plus Strategy Holdings

DuPont beats by $0.04, misses on revenues. DuPont’s (DD) Q3 EPS came in at $0.45 and beat consensus by $0.04, while revenue climbed 5% to $7.73B but missed expectations by $50M. “Third-quarter sales volumes and operating earnings were stronger across most businesses compared to a soft quarter last year,” said DuPont Chairperson and CEO Ellen Kullman. “Fourth-quarter operating earnings will be up substantially from last year. For the full year, we are on track to deliver modest earnings growth.”

Comment: Earnings news is good for maintaining DuPont’s current 3.03% yield. With a modest 13.8 P/E ratio there should be positive momentum behind the stock price moving into the fourth quarter based on guidance for earnings to be up substantially in the fourth quarter.

Why We Use Dividend Paying Stocks for Income

At 401 Advisor, LLC one of our three investment strategies for our client assets is a model that primarily uses dividend paying stocks to produce cash flow. Dividends can be paid out to clients for income, or reinvested to provide portfolio growth through the purchase of additional shares.

The one disadvantage of choosing a strategy that narrows the investment options (only stocks that pay dividends in this case), is that different subsets of the overall market will both outperform and underperform the entire market for different periods. From the beginning of May through the end of June was one of those periods of underperformance for dividend paying stocks. Not only did we see underperformance, but we also saw uncharacteristic volatility. I wrote about this on my post on June 21, “Market Comment“.

This is when having a strategy that fits your investment goal is important. Matching strategy to objective allows us to focus on what is most important to our clients. In this case, income and preferably rising income.

 I looked at 17 of our portfolios’ top holdings. While this would not necessarily represent any individual’s portfolio, every one of our Dividend and Growth Opportunity strategy investors will hold several of these stocks. For the averages I just used a simple average and looked at stocks only, none of the ETF holdings.

I first looked at each holding’s price performance from May 1, 2013 open through the close on June 21st. I then looked at the first dividend paid in 2013 and the most recent and annualized the two to look at the difference.

Taking a simple average the “portfolio” has a year to date price gain of 4.17%, but a loss of 4.67% from May 1 through June 21. For an investor on January 2nd, the portfolio yield would have annualized to 4.57% for the year based on first quarter dividend payments. But based on the most recent dividend payments, the annualized yield would be 4.69%, a raise of 2.56% (annualized to 5.12%). Plus dividend stalwarts McDonalds and Verizon  typically raise dividends in the third quarter. With official inflation running at about 1.5% our income investors have received a nice raise in return for the volatility we’ve seen this year. In fact our largest loser in the portfolio, UHT has actually increased its dividend from $0.62 per share to $0.625 per share. Relatively small, but showing that a yield increase is not dependant on price appreciation.

For a retiree especially, income and income growth are their typical primary investment objectives. Well chosen stocks, based on free cash flow analysis, will continue to pay, and as we’ve seen actually increase dividend payouts, even in declining markets.

Despite recent weakness and some continuing uncertainty over rising interest rates, a focus on dividends is a long term profitable strategy. Below is a graph from Ned Davis research that shows that dividend paying stocks, and specifically stocks that increase their dividends outperform the overall market.

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bill@401advisor.com • 937.434.1790

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Charles H. Dow Award Winner 2008. The papers honored with this award have represented the richness and depth of technical analysis.

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