Dividend Income March 2017: BHP back in the game

Hi there, thanks for stopping by. It’s time for my monthly dividend income review.

Seven strong companies have contributed to my March dividend income in the amount of around USD 424 (the Swiss francs trades more or less at parity to the USD). Compared to the previous year, that’s an increase of 6.8 % mainly due to organic growth (dividend hikes).

And there’s some good news from my stock holdings. Continue reading Dividend Income March 2017: BHP back in the game

The flipside of high yield stocks

 

In 2009, marking the beginning of my path as a dividend growth investor I had put aside the amount of Swiss Francs 15’000 (CHF; trades more or less at paritiy to the USD) in savings and decided to buy stocks of following companies (CHF 5’000 for each position):

  • Deutsche Telekom (acquisition price: around EUR 9)
  • Nestlé (acquisition price: around CHF 36)
  • Royal Dutch Shell (acquisition price: around EUR 17)

These three investments in very different and unrelated industries (telecommunications, consumer staples, oil & gas) built the fundament of my stock portfolio at that time. Companies with very specific business models,  particular strengths and weaknesses and contrasting dividend policies.

I want to show you my returns (2009 – 2017) from Deutsche Telekom, Nestlé and Royal Dutch Shell and share my thoughts on investments in high yield stocks.

Holding Deutsche Telekom, Nestlé, Royal Dutch for 8 years – and much longer

When I made my stock acquisitions in 2009, the dividend yields of Deutsche Telekom and Royal Dutch Shell were well above 7 % whereas Nestlé’s was more modest, significantly below 3 %.

Including the projected dividends for 2017, Deutsche Telekom has paid me back around CHF 2’400 or almost 50 % of my initial investment . As of today, the stock price stands above EUR 16 which implies a book gain of more than 75 %. My engagement in Deutsche Telekom has been pretty rewarding so far, even more if you take into account the strong depreciation of the EUR against the CHF (in 2009 the CHF/EUR Exchange rate stood at 1.5, as of today it is 1.08). My total return (collected dividends & book gain) is almost 100 % of the initially invested amount of CHF 5’000.

Nestlé’s dividend returns were handsome as well. So far, I have received around CHF 1’500 in cash, representing 30 % of my initial investment. Nestle’s share price has more than doubled since 2009. My total return: almost 140 %.

Royal Dutch Shell has been my top dividend contributor from the beginning with a yield on cost of well above 7 %. I reinvest the quarterly dividends unless the stock price has risen too much (above EUR 30, I take the dividends in cash). My stock count increased from 200 to over 300 since 2009. Including the projected dividends for 2017, Royal Dutch Shell will have returned to me over 60 %  (roughly CHF 3’000) of the invested principal amount of CHF 5’000. Today, the stock price stands at around EUR 24.5 which represents more than 40 % book gain. My total return in CHF is around 80 %.

Dividend histories of Deutsche Telekom, Nestlé and Royal Dutch Shell

When you take  a look at the graph above, showing my yields on cost with regard to Deutsche Telekom and Nestlé, it is pretty clear, that both companies have completely different dividend policies- and patterns.

Nestlé has consistently increased its dividends for decades. From 2009 to 2017, my yield at cost slowly climbed from 2.33 % to 3.8 % (after witholding taxes, reimbursements not included!).

Deutsche Telekom in contrast shows a much less consistent dividend history, going back just to 1996. There were several dividend cuts in the past. From 2009 to 2015, my yield on cost fell quite significantly from 7 % to around 3.5 % in 2015 and has been climbing since then. Without the deprecation of the EUR against the CHF the decrease would have been less dramatic. But nevertheless, my yield on cost has been moving downwards compared to 2009. And yet, my investment has paid off quite nicely and the business outlook is promising. Since 2015, Deutsche Telekom has hiked it dividends by 10 %, in line with the development of the Free Cash Flow (FCF). Cash generation is robust and has been expanding in the last three years. But telecommunication businesses require huge capital expenditures (investments in networks etc.). Regulations (especially in the European telecommunication market) and tough competition put enormous pressure on margins.  FCF will certainly not be as predictable and stable as it is with consumer staples and I wouldn’t be too surprised if my yield on cost settled in a range between 3.5 and 4 % in the medium and long term.

Royal Dutch Shell has not cut its dividends since World War II and has been an extremely reliable cash machine, making generations of investors smile. Operating in a very volatile, cyclical business, the road to wealth by investing in Royal Dutch Shell has never been as smooth as with Nestlé. The dividend does not go up every year but nevertheless, Royal Dutch Shell has been very generous to shareholders for over 70 years.

Some considerations on high yield stocks

At the beginning of my path as a dividend growth investor I was particularily attracted by stocks with high dividend yields. Investing in Deutsche Telekom and Royal Dutch Shell seemed to me a no-brainer at that time providing nice (immediate and long term) returns and meanwhile showing a moderate risk profile.

Investing in high yield stocks can be very rewarding but only under the condition that

  • the purchase price makes sense and there is a sufficient margin of safety,
  • the company is particularily well positioned with a broad economic moat and
  • business fundamentals and cash generation remain intact for the foreseeable future.

If these criteria are not met, I would certainly not invest in that company as it poses the risk of tapping into a value trap.

High yield stocks are not “to invest and forget”. It’s not like participating in Johnson & Jonson, Hershey, Unilever, J.M. Smucker, Disney, Pepsico or Nestlé. These companies are extremely solid and provide such reliable and strong growth, that you can litterally count on being bailed out over the medium term even if you overpaid.

That’s almost certainly not the case with high yield stocks, even if you invested in the industry leader. Why is that?

Well, because more often than not there is a reason behind the fact that a stock has a high yield (let’s say over 5 %).

A high yield indicates pressure on the stock. There might be a near or medium term challenge e.g.

  • the market (over-) reacted to some legal issues
  • a transformation process is ongoing with some uncertainties with regard to the future earning power and risk profile of the company

or there might be some longer term headwinds such as

  • (new) regulatory requirements putting pressure on the profitability (just think of banks having to fulfill capital requirements)
  • dramatically changing business fundamentals (just think again of banks in an ultry low interest environment or just look at oil companies in a “lower oil price for longer environment”)
  • etc.

Most of the time, a high yield comes at a price for the investor (higher volatility of earnings, less predictable dividends, higher debt level etc.) and the stock has to be watched carefully.

You can see high yield stocks in sectors like oil and mining, telecommunication, insurances and banking. They are often operating in cyclical and capital intense businesses.

Some people say that a “particularily high yield” is an indication

  • for massive problems,
  • for low quality of the ompany and
  • that a dividend cut is just around the corner.

Well, I don’t think that these three worries are met cumulatively with high yield stocks most of the time and would suggest a more differentiated view on these businesses.

Firstly: There might be massive headwinds, but a strong company is able to adapt and to overcome problems.

Secondly: With regard to the quality of such a business, just think of Chevron, or Altria for instance. I’ve seen their dividend yields well above 4 % several times over the last decade. There are people that hesitated to buy Chevron when its stock price fell below USD 80 in early 2015 just to buy when the price shot up above USD 110. The same people first critized the negative FCF of the company and its massive debt load just to change their position a few months later in order to praise “the high quality of the company and brighter outlook“. Most of them were reluctant to buy because the stock price fell (and dividend yield shot up) and were eager to acquire some shares when the price recovered. Don’t get me wrong: the criticism is fair, Chevron is still funding a big portion of its dividends through debts, even after oil prices have recovered a bit. My point is: the stock price resp. the dividend yield alone is certainly no indicatation with regard to the quality of the company.

Thirdly: Some investors just can’t forgive dividend cuts and dump their stocks as soon as there are signs that payouts might be slashed in the near future. Fair enough. But just bear in mind, that a dividend reduction is by far not the end of the company. Just think of General Electrics, Bank of America, Rio Tinto, BHP Billiton. I am quite optimistic that these companies will still thrive twenty years from now.

Conclusion

Since 2009, Deutsche Telekom, Nestlé and Royal Dutch Shell have returned almost 100 % of the initially invested amounts. Nestlé’s yield on cost has been climbing smoothly to 3.8 % (after witholding taxes, reimbursement not included) whereas Royal Dutch Shell’s has been steady at around 7 % over the years. My yield on cost regarding Deutsche Telekom has been falling from 2009 to 2015 but has recovered quite a bit and currently sits above 4 %.

Investing in high yield stocks can be rewarding but it can be very tricky. It’s important to make sure that there is a sufficient margin of safety and not to rely too heavily on these companies.

I like to have a good mix between lower- and high yield stocks and always try to put rock-solid stocks at the core of my portfolio. These businesses offer me a much lower dividend yield in the near term but provide stability to my portfolio and reliable organic growth for the future. That’s one reason why I just love my positions in consumer staples (e.g. Nestlé, Unilever and Heineken) and pharma companies (Roche, Bayer, Novartis etc.). It’s great to see them grow. Slowly but steadily.

I am not in a hurry at all. I am enjoying my path as a dividend growth investor.

 

Do you have high yield stocks in your portfolio? Or do you avoid them?

 

Disclaimer

You are responsible for your own investment and financial decisions. This article is not, and should not be regarded as investment advice or as a recommendation regarding any particular security or course of action.

USD 4’300 projected dividend income 2017

That’s exactly how I like it!

My dividend stock growth machine is gaining steam. 

Slowly and steadily. 

Compared to 2016, my projected dividend income will be 10.5 % higher, climbing from USD 3’800 to USD 4’200 largely due to dividend hikes and by adding two positions. 

I am pretty sure that by the end of 2017, my dividend income will be well above USD 4’500.

Strong and reliable dividend growth

My goal is simple:

increasing dividend income by at least 15% year over year through organic growth (dividend hikes), reinvestments and by adding new positions (see my Passive income review 2016 and outlook and my Stock Investments in 2016).

In my blogpost Dividend increases regarding my stock holdings I made a first overview regarding organic dividend growth of my stock investments. The list above shows you an update. As you can see, 26 of my stock holdings announced their 2017 dividends so far, 6 companies will report their 2016 results in a few weeks resp. have not yet published information on dividend increases for 2017.

Most of my holdings show nice dividend hikes. “High yielder” in my portfolio such as Royal Dutch Shell, HSBC and GlaxoSmithKline offer dividend reinvestment plans. My stock count will develop quite nicely over time. 

Slow dividend growth is nothing to lament about! Nestlé’s dividend hike for example was relatively small. But here’s the thing: my yield on cost less witholding taxes is 3,8 %. Taking into account the reimbursement on the basis of a double taxation treaty lowering the Swiss witholding from 35 % to 15 %, my yield will be substantially higher, being at around 4.5 %. Over the last 8 years, Nestlé has steadily increased its dividend payments and returned to me well over 30 % of my initial investment.

I love reliable and stable businesses.  Nestlé made generations of investors a fortune just by taking a long term view, sticking to their holding and by letting the company doing its work.

More dividend income increases expected

So far, I’ve added two new positions in 2017:

  • beer producer Heineken (see A refreshing investment) and
  • tobacco company Imperial Brands (Davidoff, Cohiba, Montecristo etc.).

My investment portfolio is getting more defensive and these two position will add USD 160 to my dividend income in 2017. I expect future growth to be at a high single digit rate.

And there is more growth to come during the year. As said, 6 companies of my investment portfolio have not yet announced their dividend increases. Among them oil supermajors ExxonMobil and Chevron. I am pretty sure that there will be dividend hikes albeit significantly lower than in the past years. Oil prices recovered quite a bit since the terrible drop in 2015 and of course these companies are streamlining at an amazing pace and ramping up huge projects which should show improved operative cash flow quite significantly.

Given the strong boost of our savings rate, now being well above 60 %, I expect my investments into new positions to be a bit higher than in the previous year (2016: USD 16’000).

I don’t mind market fluctuations and have been investing on a regular basis for almost a decade now. But with stock indices at record highs and mushroomed share price valuations, I am gettting a bit more cautious. In my view it’s sensible to be extremely selective and to keep additional cash just to take profit when there is a market retreat which makes it easier to identify suitable investment oportunities. Either way, my portfolio will be doing just fine over the long term. 

My journey as a dividend growth investor is becoming more and more fun.

 

Have you added new positions to your portfolio lately? Have there been some dividend hikes?

 

Disclaimer

You are responsible for your own investment and financial decisions. This article is not, and should not be regarded as investment advice or as a recommendation regarding any particular security or course of action.

A refreshing investment

I just love to participate in companies that have strong brands, great long-term growth prospects and a broad economic moat. Take the Dutch-British consumer goods company Unilever for instance. Did you know that 2.5 billion people use resp. consume its products each day? Unilever owns 400 brands, it’s a massive business operating in following four segments resp. divisions:

  • Foods (Knorr, Rama, Lätta, Maizena etc.)
  • Refreshments (Lipton Ice Tea, Magnum, Ben & Jerry’s etc.)
  • Personal Care (Dove, Axe, Rexona, Dusch Das, Signal etc.)
  • Home Care (Omo, Persil, Coral, Cif, Skip etc.)

I see plenty of catalysts for growth and  a well diversified, extremely stable business model.

In the last three years, I took some exposure in cyclical sectors and commodities (Rio Tinto, BHP Billiton) as well as in banks, but I consider defensive stocks such as consumer staples (Coca Cola, Nestlé, Diageo, Unilever) and pharma companies (Bayer, GlaxoSmithKline, Roche, Novartis) as the backbone of my investment portfolio. And I want to give it an even more defensive shape. What I like is stability and healthy growth of my passive income (see dividend increases regarding my stock portfolio).

Heineken N.V., my first purchase in 2017

You will certainly guess my choice when I want to drink a beer on a hot summer day.

But in additional to its flagship brand, the world second largest beer producer Heineken offers 250 regional and international brands such as Amstel, Tiger, Desperados etc..

The valuation of the stock was slightly below 20x earnings when I made my investment. Certainly not cheap, but in my view a fair price, given the company’s growth prospects, solid fundamentals and strong brands. For 2016, Heineken reported organic revenue growth of 4.8 %, net profit was 8.5 % up organically. Heineken has a broad economic moat, a strong and stable free cash flow and a healthy dividend payout ratio of around 30 %.

Some brief considerations on alcohol investments

People have been drinking beer, wine and spirits for centuries. The alcohol industry has performed excellently during the last 100 years due to the high level of underlying profitability and stability. Companies such as Brown-Forman, Diageo, Anheuser-Busch InBev, Heineken and Carlsberg operate in durable and growing markets. Brand loyalty is extremely strong.

So, are shares of these wonderful businesses in such an attractive industry the perfect long-term investment? Well, it depends on the price you pay.

Take for example Anheuser-Busch InBev. (Budweiser, Corona, Stella Artois, Beck’s, Löwenbräu etc.) which is by far the world largest brewing company. In October 2016, it purchased SABMiller and concluded a merger of the two entities. Before that transaction in 2016, shares of Anheuser-Busch Inbev. hit EUR 120 per share which corresponds to a valuation of well above 25x earnings. Early in 2017 the stock price came down to around EUR 100. Given its stagnating core brands and the massive debt level, the current prices seem more reasonable and attractive to me. After the completion of the merger, Anheuser-Busch InBev. has the potential to unfold its staggering earning power, deleverage and grow dividends in the medium and long term.

When some temporary factors pressure down the price earnings ratio of a consumer staples company with such a compelling brand portfolio, such a broad economic moat and bright long term growth prospects, that’s where I get interested.

As it is always when it comes to an investment: it is only rewarding unless you overpay.

 

What do you think of my investment in Heineken? Which branches and industries do you consider as the backbone of your portfolio?

 

Disclaimer

You are responsible for your own investment and financial decisions. This article is not, and should not be regarded as investment advice or as a recommendation regarding any particular security or course of action.

Dividend increases regarding my stock holdings

Since 2009 I have been building an investment portfolio consisting of dividend paying stocks with the purpose of transforming it in an ever growing passive income machine over time.

Today, my stock portfolio consists of over 30 positions and has a market value of almost USD 140’000. But more importantly, since 2009 the companies in my share portfolio have returned a total of USD 20’000 in dividends and will provide at least USD 4’500 in fresh cash for 2017. I expect my annual dividend income to continue to grow by 15 % on a Year on Year (YoY) basis. As in the past, half of that growth will derive from new positions (see My stock investments in 2016) and the other half is expected to come from organic dividend growth and dividend reinvestments (see Passive Income review 2016 and Outlook).

So far, over 70 % of the businesses in my portfolio have published their full year results for 2016 and already given information regarding dividend payments to be expected in 2017. That allows me to make some projections regarding organic dividend growth and my expected Yield on Cost (YoC) regarding each position (see chart above). Of course, most of these dividend announcements are still subject to the approval by the annual general meeting. I calculate YoC on the basis of the net cash payments I will receive this year. For simplification purposes, I do not take into account reimbursements I will receive with regard to witholding taxes. The Swiss witholding tax on dividends for instance is 35 % but I can lower that tax rate to 15 % on the basis of a double taxation treaty which will significantly increase my dividend yield on my holdings in Nestlé, Roche, Novartis, Swiss Re etc.. These reimbursements will likely take place in 2018 with regard to deductions on my stock dividends in 2017.

My financial portfolio is denominated in Swiss franc and I hold major positions in EUR, USD and GBP. So there might be some devations with regard to my projections concerning YoC due to exchange rate fluctuations. Over the long term, these fluctuations will smooth out and of course as an dividend growth investor in the accumulation phase, a strong Swiss franc towards other currencies is a real blessing (see also The day when my portfolio dropped by 15 %).

So far, dividend growth looks fine. As soon as the rest of the businesses in my investment portfolio will release 2016 results and dividend announcements, I will update my chart and briefly cover each of my stock positions.

 

What about your stock holdings? Have there been some nice dividend hikes? Any dividend cuts?

 

Disclaimer

You are responsible for your own investment and financial decisions. This article is not, and should not be regarded as investment advice or as a recommendation regarding any particular security or course of action.

 

The day my portfolio dropped by 15 %

My path as a dividend growth investor

My first steps in the stock market go back to 1999, somewhere near the peak of the “Dot-Com Bubble” which left my investment portfolio consisting of two high tech stocks with a hefty book loss of over 50 % when the bubble eventually burst in spring 2001.

Quite an unpleasant and discouraging start as an investor, right?

Well, it turned out that these early experiences served me well.

I was kind of forced to take a long-term perspective and to become patient in order to successfully pursue my goal to building up a stock portfolio providing me with a reliable and ever growing passive income stream over time. Continue reading The day my portfolio dropped by 15 %

Dividend Income January 2017

Hi there! Appreciate you stopping by. It’s time for my first monthly dividend report in 2017!

But before that, just a short look back to 2016: my investments in shares generated around CHF 4’000 in passive income and I target an increase of 15 % through dividend increases, dividend reinvestments and by adding new positions. Continue reading Dividend Income January 2017

Slowing dividend growth is nothing to lament about

Can an investment in a solid and attractive – but “maturing” – company deliver decent returns despite slowing dividend growth?

Yes. But it is extremely important not to overpay and to take a long term view.

There are several wonderful businesses in my investment portfolio where I expect future growth to be weaker than in the last decades. I think in particular of Coca Cola, Nestlé, Novartis and Roche.

The Swiss company Roche has a market capitalisation of well above USD 200 Bn and is one of the largest pharma and biotechnology businesses in the world. It’s just massive!

In 2011, I acquired 18 non-voting shares of Roche at a price of around Swiss Francs 135 (CHF; trades more or less at parity to the USD).

Few weeks before I made that investment, shares of Roche had become kind of “unpopular” due to some damped expectations regarding profit contributions of one of its blockbuster drug. The stock price came down by around 20 %, making an investment even more attractive to me.

The worries of the market proved exaggerated, Roche delivered solid results and stock price quickly recovered. In the last four years, the trading range was between CHF 230 and 280.

I don’t focus too much on the stock price or book gains/losses regarding my investments, but it is still interesting to see how some short term market expectations can lead to quite a nice entry price.

Much more important for me is the cash flow I get in form of dividends.

When I make an investment, I want to see at least these two things over time:

  • the market value of the principal amount to stay “intact”  on a inflation-adjusted basis. I mean hereby that the market value should grow more than 3 % year over year (YoY)
  • dividends to grow three percentage points above inflation YoY

If a stock investment does not meet (or  excel) these two criteria, it does not contribute to my wealth building process.

Roche’s dividends from 2005-2010

The dividend payments in that time period were as follows (in CHF; gross amounts before witholding tax): 3.00, 2.50, 4.60, 5.00, 6.00. The payouts doubled in just five years which is very strong.

If someone had bought Roche in 2005 and is still holding that investment, he or she would have been rewarded handsomely in the past and will be so spectacularily in the future.

From 2005 to 2015, Roche showed a dividend growth rate of well above 14 %. But there are two crucial points to consider:

  • The last five years (2011 – 2015) of that time period showed a significant slowdown of the dividend growth rate to less than 6 %.
  • The payout ratio substantially increased, even the slowed dividend growth from 2010 to 2015 exceeded the growth of earnings per share (EPS) in that period.

Roche’s dividends 2011-2015

From 2011 to 2015 the dividend payments (in CHF; gross amounts) from Roche were as follows: 6.80, 7.35, 7.80, 8.00, 8.10. The 5 year dividend growth rate was around 5.9 %, much less than in the past.

My investment in Roche falls exactly in that slow growth period.

Fair enough. Let’s have a look at the development of the yearly cash returns compared to my initial investment of CHF 135 in 2011 (yield at cost). The deduction of the Swiss witholding of 35 % has hereby to be considered (if there is a double taxation treaty with the country of the investor, twenty percentage points can be reimbursed to that investor to lower the tax rate to 15 %).

My dividend yields at cost (after witholding taxes) from 2011 to 2015 were as follows: 3.25 %, 3.54 %, 3.75 %, 3.85 %, 3.9 %.

I expect my dividend yield at cost for 2016 (paid in 2017) to be well above 4 %. In the last five years, I collected over 18 % of the invested amount in dividends.

These are quite decent returns so far (I don’t even factor in the book gain or dividend (re-) investments).

Just to put the dividend returns into relation: The dividend yield of my total portfolio currently stands at around 3.3 %, “organic growth” due to dividend hikes of my holdings has been between 3 % and 4 % in the past years. So Roche was an important contibutor to “organic growth” of my portfolio and I expect it to be so in future.

Conclusion

Roche is a leader in biotechnology, cancer treatment and diagnostics. The company shows a 28 years of consecutive dividend growth. The business has a broad economic moat and shows strong fundamentals and attractive growth prospects.

The increasing payout ratio of Roche shows that EPS growth didn’t catch up with dividend growth. For decades, the payout ratio was low (under 20 %) and “jumped” above 40 % in 2003. Since the financial crisis starting in 2007 the payout ratio climbed  steadily to settle currently at around 55 %. Still quite comfortable. Dividends are very well covered by free cash flow and there is some room for growth. But I expect dividend growth hikes to be modest in the future.

As a long term investor I don’t complain about that. A slowing payout is even prudent by the company.

I will rather have a look whether

  • the “cash generation machine” is intact,
  • fundamentals remain strong and
  • the growth rate is well above inflation.

Stocks of an outstanding company such as Roche acquired at a fair price can still deliver very decent returns over time. And if dividends are reinvested, the compound effect can do miracles.

 

Disclaimer

You are responsible for your own investment and financial decisions. This article is not, and should not be regarded as investment advice or as a recommendation regarding any particular security or course of action.