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.

 

 

The magic wisdom of Mary Poppins

Drawing by the blogauthor

We have a wonderful custom in our family. Every year at Christmastime we watch the film “Mary Poppins”.

It’s a lovely musical fantasy comedy, produced by Disney in 1964. The main character, Mary Poppins, is a magical woman who descends from the clouds after having received an advertisement from the family Banks searching for a nanny to look after the two children Jane and Michael.

The wonderful messages in the dialogues and songs of the film are timeless:

  • having time with your loved ones
  • being the master of your own dreams
  • having fun
  • finding fulfillment in life

Continue reading The magic wisdom of Mary Poppins

My Stock Investments in 2016

Hi there, thanks for stopping by!

As promised in my latest blogpost Passive Income Review 2016 and Preview I will to give you a brief overview on the stock purchases I made this year.

In 2016 I invested the amount of Swiss Francs 16’600 (CHF; trades more or less at parity to the USD) into stocks of following five companies: Coca Cola, Walt Disney, Diageo, HSBC and Bayer.

I target a year over year growth of my dividend income of at least 15 % whereas

  • half of that growth is expected to come from organic growth (dividend hikes) plus dividend reinvestments and
  • the other half derives from new acquisitions.

According to my projection, the five stock investments I made in 2016 will increase my 2017 dividend income by at least CHF 500. I expect that amount to grow by around 7.5 % each year due to organic growth and dividend reinvestments.

In 2016, Bayer, Diageo (I collected one of two semester dividend payments in 2016) and HSBC (I collected two of the quaterly dividend payments in 2016) already contributed to my income in the amount of CHF 205. In 2017 I will get dividends from Coca Cola’s and Walt Disney’s for the first time.

Now my considereations regarding the stock investments.

Coca Cola

In December, 76 shares were acquired at a price of USD 40.3.

I view consumer staples and health-care shares as the backbone of my investment portfolio. I took some exposure into cyclical sectors and raw materials in the last two years as I saw attractive oportunities. In the long run though I want to give my stock portfolio a more defensive shape. There are some companies in these sectors I find interesting (e.g. J.M. Smucker) but stock prices are yet not there where I would feel comfortable.

I’ve had an eye on Coca Cola for some years. The stock has been trading in a range between USD 38 and USD 48 since 2012. I saw USD 40 as an interesting entry price and put a corresponding electronic order which was executed in December 2016.

I am well aware that the phenomenal earning per share (EPS) and dividend growth of the last decades are not likely to be replicable, but Coca Cola is still a very solid business with attractive prospects. More than half a century the company increased its dividends year over year. I don’t view a stagnant stock price over some years per se as a bad thing especially not when you reinvest the dividends and benefit from the compound effect.

Coca Cola’s payout ratio stands between 60 and 70 % which is higher than the decades before. It is very obvious that EPS-growth did not not keep up with the dividend increases of the last few years.

But  the company has a strong balance sheet which has even improved in the last years. Coca Cola is sitting on over USD 20 Billion in cash. So, plenty of options for acquisitions (like the bottling operations from SABMiller in Africa) and future growth.

Walt Disney

In November, 40 Shares were acquired at a price of USD 91.8.

I had an eye on Walt Disney for months and wrote about the company in one of my blogposts in October 2016 (Disney is a wonderful company but is the Price fair?). Since then, the price came down quite a bit and I made the purchase slightly above USD 90. Certainly not cheap but I am fine with that price.

Diageo

In June, 132 shares were acquired at a price of GBP 20.75

Spirits and beer producer Diageo is a consumer staples company I have been looking at for several months. It has a great product portfolio with brands such as Johnnie Walker, Smirnoff, Captain Morgan, Baileys, Guiness Beer etc.

Unsurprisingly, you almost never see that company becoming really cheap. There is a wide economic moat and growth perspectives look very promising to me. I consider my purchase as “acquiring a piece of an attractive business for a fair price”.

HSBC

In June, 466 shares were acquired at a price of GBP 4.6

A relatively large portion of my investment portfolio already consists of bank stocks. From the perspective of a long-term dividend growth investor (I want to hold my investments for decades unless fundamentals significantly deteriorate) I have quite mixed feelings concerning banks. There are

  • some few undervalued jewels,
  • several fine businesses trading at an attractive price and of course
  • many value traps.

I think the banking industry as a whole  is one of the very few investment segments where shareholder value has been destroyed over decades.

Fair enough. When I saw the stock price of HSBC being beaten down ahead of the Brexit vote I just couldn’t resist. In my view, HSBC is one of the very few banks to consider as solid businesses to invest in, of course always under the condition that the price is right and that there is a sufficient margin of safety.

When I made the investment in May 2016, the stock price was significantly below book value and price earnings ratio looked attractive to me. HSBC’s debt profile is robust and the bank’s core capital has been significantly strengthened. In August 2016, HSBC announced to start a share buy-back plan in the amount of USD 2.5 Billion (to finish early 2017) and to hold dividends steady.

Bayer

In January, 30 shares were acquired at a price of EUR 103.

Bayer operates in four segments: pharmaceuticals, crop science, animal health and  consumer health with well-known brands such as Aspirin, Alka Selzer, Bepanthen, Elevit, Supradyn, Rennie etc.

Bayer showed good performance in the past with strong EPS-growth and nice dividend history.

I had an eye on the company all trough 2015 and was particularily pleased to see the stock price coming down from EUR 140 to around EUR 100 in January 2016 at the time when I entered the position.

In May 2016, Bayer publicly disclosed to make an all-cash offer of USD 62 Billion to acquire the agriculture company Monsanto. The offer was increased to USD 66 Billion when Bayer and Monsanto finally came to an agreement regarding the merger. The closing of the transaction is expected by the end of 2017. Over 85 % of the offered amount has to be financed by a combination of debt and equity. Bayer will carry over USD 40 Bn in debts after the merger and promised to start deleveraging quickly.

There is no doubt, that Bayer has a track record of sucessfully acquiring companies, but this is by far the largest one ever. Bayer knows when there is an attractive investment oportunity, but from a perspective of a shareholder I see some downsides:

  • the combined company will be more subjected to cyclical factors, the generation of  profits and cash will become more volatile.
  • the relatively high debt load will be a drag for the next years to come. Bayer promised to strictly deleverage after the merger which is fine, but there is less room for dividend hikes.
  • financing in part with equity will lead to a dilution for shareholders.

As said, I take a long-term view in regard to my investments and unless there will be a severe recession (such as the last one we saw from 2007 to 2009) over the next years, the combined compay has the potential to deliver double digit EPS-growth in future and – hopefully – shareholders will be compensated appropriately for their patience.

 

What do you think about the companies I invested in? Which investments have you made in 2016? Feel free to share your thoughts.

 

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.