Completion of MCD Position

MCD Logo

MCD Logo

As discussed yesterday, I had two trades for MCD scheduled for this morning.  I have replaced the 10 shares of McDonalds in my brokerage account with 27 shares in my traditional IRA.  Both trades were market trades that executed at $95.01 per share.

This trade completes the establishment of my full position in MCD, and allows me to direct future investment capital into different companies.  With the recent dip from $100/per share it lowers my entry point a little also.

While MCD faces some tougher competition from other fast food chains – such as YUM – than it has in the past, I’m fairly comfortable that due to its sheer size and international scale it will maintain a dominant position.

I am hoping for an ongoing annual dividend increase of 9% per year or more, which is a little less that it has given in recent years.  My starting yield is over 3%, so I can live without a double digit dividend growth rate, but would certainly welcome it!

The completion of this position in McDonalds takes care of diversification into the ‘dining out’ sector of the economy. I am enjoying see my portfolio grown in breadth, and seeing these great names slowly added.  These are not exciting investments I am making, but hopefully they will prove to be successful ones in the long term.

Purchase of 27 shares of MCD at $95.01, for a cost basis of 2,565.27. Dividend yield at time of purchase is 3.13%. Dividend Reinvestment enabled. Initial dividend income $83.16 annually.

Moving My McDonalds Holdings to Make Space for Nestle

I have been doing some thinking about how best to split my portfolio amongst my Taxable brokerage account, my Traditional IRA (an old 401k rollover) and my Roth IRA account.

I have a surplus of uncommitted funds in my Traditional IRA, and a shortage of free cash in my Taxable account. This is proving a bit troublesome as some of the companies I have an interest in – namely RDSA (Shell) and NSRGY (Nestle) are best purchased in a non tax advantaged account.

Word on the interwebs is that the Nestle dividend is subject to partial withholding, but that those moneys can be recovered at tax time. To do this however, the ADR must be held in a taxable account. Is this accurate? I’m not sure – but I’m going to assume so for now,

To this end I have decided to liquidate my partial position in McDonalds from my regular brokerage account, to free up this cash for a possible Nestle purchase. At the same time I will use some of the uncommitted cash in my tIRA to establish a full MCD position in that account, taking advantage of the dip in price of Mcdonalds in the last week or two.

The net result of this change will be:

  • MCD moves from partial to full weighting in my portfolio.
  • Roughly $1000 will be freed up in my brokerage account for a possible future purchase of NESTLE – or another company that similarly benefits from placement in that account.
  • I no longer have to scrimp and save my ‘new’ investable capital to finish building out my MCD position.

I may end up doing something similar with my KO holdings one day, but for now I will leave them as is.

I have placed the orders for these two MCD trades to execute tomorrow. They will be fee free thanks to my brokerage firm – well, if I ignore the 2 cent sales fee from the SEC.  I will post a McDonalds positions update to reflect this once the trades have gone through.

For portfolio tracking purposes I will adjust my cost basis in MCD to whatever value Merrill Lynch shows me. This won’t reflect the fact I lost a bit of money since my initial purchase, but I can live with that slight discrepancy in the name of keeping things simple.

Additional KO Purchase – How Not To Trade

KO Logo

KO Logo

One benefit of having commission free trades in my Brokerage account is that I need not worry about trading fees on small purchases.  With the current drift down in the prices of Coca Cola (KO) I decided to spend the cash I had on hand to build on the partial position of Coke I built earlier.  I was able to muster about $500 for additional Coke shares today.

This is still not enough to obtain my full desired holding, but since prices are down I thought I would dollar cost average down while I could. Unfortunately I ran into a small glitch with my Brokerage…it is a bit embarrassing, but I don’t mind looking foolish so I’ll share it!

The purchase order I placed was not permitted to proceed as the sum exceeded 95% of my available funds.  The reason why was not stated, but my best guess is they like to leave a little for any trading fees (not that this applies in my situation).

To resolve this issue I went back and decreased the share count by one, then resubmitted the order.  Alas, the buy order defaulted back to sell – so I actually ended up reducing my position instead of adding to it.

Word to the wise…never employ me as your broker!!

After this giant ‘doh’ moment I placed a limit purchase for 25 shares – including rebuying the 13 I unintentionally sold – this time correctly.  The order triggered and was executed shortly before the end of trading for the day.

Increased my initial position of 25 shares by 12 net new (13 sold, 25 purchased) shares of KO at $38.78 with dividend yield of 2.89% (almost 3%, but not quite!). I still have at least one KO purchase more to complete – when funds allow – to reach my target position of $2500.

Current position of 37.1729 shares of KO has a cost basis of $1441.56. Dividend yield is 2.89%. Dividend Reinvestment enabled. Annual dividend income for position is $41.63.

 

 

Purchase of WMT – Low Price Domination

CLX Logo

WMT Logo

Today my limit order for Walmart (WMT) was triggered as the share price fell below $74.00  I had chosen this value as my entry point based on Morningstar’s perceived “Fair Value” for the company.

While I wanted to add WMT to my portfolio, I did not want to overpay.  Purchasing at a fair price (admittedly only one research firms view) seemed a good place to start. Also, as a purely psychological bonus, the price dropping to this point puts the Dividend Yield on Walmart over the 2.5% barrier.

I have a high degree of confidence the WMT dividend is safe, as it has an unblemished history of 39 years of increasing dividends. The proportion of earnings paid out as dividends is under 40%, leaving plenty of buffer for lean profit years plus plenty of scope for future dividend increases. It also leaves plenty of cash flow to be used for the ongoing stock buybacks.

For the last 5 years dividend growth has been over 13% on average, while I would be delighted to see that continue that may prove difficult to maintain over the longer term. Based on past performance I expect annual dividend growth to easily average over 10% per year, which will rapidly increase my initial 2.53% dividend yield and produce impressive yields on cost in future.

Wal-Mart has been trending down the last few days – even dropping below their 200 day moving average, for those who are into charts – after some negative news on the earnings and revenue front.

Second quarter earnings only rose 1.3%, and same store sale comparisons were flat overall.  This news appears to have scared off some investors, but I am confident that Walmart will work through these issues with time.  Eventually the US economy will rebound and low income shoppers will increase their spending again.  The bad news is a buying opportunity for me.

With the addition of a full (i.e. roughly $2500) sized position in WMT to my portfolio, I have fulfilled my desire to have an ownership in a dominant retailer.  I’m optimistic the firm – with its emphasis on low prices – will remain best in class in its field, and should prove a lucrative investment. Assuming the Walton family doesn’t end up taking Walmart private (as their share of the company grows due to the ongoing share buybacks) I plan on keeping this investment for life.

Purchase of 34 shares of WMT at $74.20, for a cost basis of 2,522.95. Dividend yield at time of purchase is 2.53%. Dividend Reinvestment enabled. Initial dividend income $63.92 annually.

 

Purchase of CLX – Bleach and Bags from Clorox

CLX Logo

CLX Logo

I’ve had a goal of purchasing one of the major consumer staple companies since first starting to build this portfolio a few months back.  Unfortunately, for the time I’ve been monitoring these companies most of them are very generously valued by the market – which makes me doubt the wisdom of buying in at these prices.  I purchased a full position in Clorox (CLX) today.

CLX (Clorox), PG (Proctor & Gamble) and NSRGY (Nestle) are all on my watch list.  While I consider NSRGY to currently offer the best value for money, I wish to purchase it for my taxable brokerage account.  Given the dearth of free cash in that account – and my ongoing attempts to complete my KO and MCD positions – Nestle is currently not on the table for me.

Proctor and Gamble seems to be experiencing a period of transition and uncertainty; switching back and forth between Lafley, then McDonald, and now Lafley again as CEO.  I have high hopes they can improve execution going forwards, but would like to see a discount in the share price while they sort things out. Failing that it is not on my immediate purchase list.

I recently placed a limit order for CLX at $85.12, and this price triggered with todays’ broad based drop in the markets.  Interestingly my trade confirmation says it executed at $85.04, but that I paid $85.27.  My trades are commission free, so I am not entirely sure why the discrepancy – this was my first triggered limit order, so I imagine I will learn about the intricacies of pricing for these as I gain more experience. UPDATE – following morning I received my official confirmation, and I did pay $85.04, not sure what the $85.27 amount was referring to.

For now some more on Clorox and why I find it appealing. Firstly, it is the only firm in this corner of the Consumer Staples sector that Morningstar is currently rating as a buy. I found their research arguments solid and could see nothing obvious to disagree with.

I do know when I go to the store and see the price of Clorox Bleach now I am amazed at how much prices have gone up. I used to buy a lot of bleach for my pool back before I had it converted to saltwater, and it used to be a lot cheaper.  The $4+ bottles of bleach at my local Kroger are mind bogglingly expensive to my eye, but presumably they are still selling them successfully!

Dividend confidence is important to me, and I have a very high degree of confidence that consumers will continue to buy Glad trash bags and Clorox bland breach no matter what the state of the economy.  I really don’t see anyway CLX can slide into bankruptcy or meet any other similarly disastrous state.

The dividend earnings payout ratio for Clorox is a little higher than I’d like at 66%.  Due to this I anticipate relatively small dividend growth in the next few years. I’ll be happy if the company achieves a DGR of around 7% per year over the next decade.

I do not feel I got a great purchase price on this investment, but it was at least not grossly overvalued.  I really wanted exposure to one of these type firms, and right now they only way to get it was to pay a little more than I really wanted too.

I should now be able to put off any future purchases off this type – PG, KMB, JNJ, NSRGY – until a time that the valuations are more attractive.

Purchase of 30 shares of CLX at $85.04, for a cost basis of 2,551.20. Dividend yield at time of purchase 3.33%. Dividend Reinvestment enabled. Initial dividend income $85.20 annually.

 

 

Purchase of CSX – Adding Rail to my Dividend Portfolio

CSX Logo

CSX Logo

Today I added CSX Corporation to my portfolio. I consider a ‘full position’ as $2500, which worked out well for this purchase as I was able to buy a round 100 lot at the securities current market price of just over twenty five dollars. While not as significant a purchase as Warren Buffetts’ BNSF takeover, it seems pretty substantial to me!

The idea of adding a Rail investment is something I have actively considered for a few months now. While I’m not convinced I got a screaming deal on CSX, both Morningstar and S&P currently rank CSX as a buy, which could not be said for its major competitors. I am satisfied I purchased at a reasonable valuation.

The Class I CSX rail network is entirely along the Eastern seaboard of North America, extending its tentacles up into part of Canada and as far West as New Orleans, St Louis, and Chicago. While this does – to a certain extent – make CSX a regional play, it is a very large region indeed.

The best feature of the railroad industry to me is the very wide moat to entry. If a new firm wishes to build a new railroad line, it is going to prove very difficult. Not only is the required capital immense, but obtaining the right of ways would be next to impossible – especially on the densely populated West Coast.

With limited competition on any given route, and much lower costs than alternatives like highway or air freight, I see the industry as having a pretty solid future.

One future development that intrigues me is the impending completion of the expansion of the Panama Canal. Associated port developments in Florida promise to result in a large increase of imports to the United States unloading in Miami (and also elsewhere along the Atlantic coast). A lot of these imports could potentially be placed aboard a CSX train in Jacksonville en route to their final destination. I’m hoping this serves as a tailwind for CSX results in years to come.

I am optimistic about the dividend story for CSX. At the time of purchase its Dividend payout ratio is below 35%, leaving plenty of room for future dividend growth. For the last ten years the dividend has averaged a hike of about a 20% increase per year, I am hoping these sizable increases continue for a few more years so as to quickly hike my dividend yield on cost up over what is admittedly a rather lukewarm initial dividend yield.

Purchase of 100 shares of CSX at $25.45, for a cost basis of 2,545.00. Dividend yield at time of purchase 2.36%. Dividend Reinvestment enabled. Initial dividend income $60.00 annually.

Purchase of IBM

IBM Logo

IBM Logo

IBM has been on my watch list for some time now. It is a major holding of Warren Buffett’s Berkshire Hathaway for a few years now, and he continues to make additional purchases periodically. While I’m not a big fan of tech stocks in general, when Buffett acts I tend to listen.

I’ve thought periodically about taking a position in this company, but have been deterred by it’s low dividend. With the recent price dip (below $189), the dividend yield has spiked to 2%. While not great, with the large dividend increases each year (I hope for 13+% raises) and current low payout ratio (27%) I hope to see a respectable yield on cost within 5 years or so.

I am attracted to IBM’s strong share repurchase program, which will gradually increase my small ownership stake of the company over time. If IBM achieves its 2015 Roadmap goals – one of which is $20 of earnings per share in that year, then there will be ample opportunity for them to boost their dividend payout significantly.

I would also expect success in that endeavor to lead to an increase in the stock price – which will making my dividend reinvestments (and the firms stock repurchases) more expensive, is something all investors would like to see in the long term.

Purchase of 14 shares of IBM at $188.32, for a cost basis of 2,636.48. Dividend yield at time of purchase 2.02%. Dividend Reinvestment enabled. Initial dividend income $53.20 annually.

My Dividend Investing Goals

On this site I plan to document my investment in a selection of dividend growth stocks. While I’ll start of small, I hope to build a sizable portfolio over time.

The main criteria for my stock purchases will be:

a) Yield. Each purchase will have an initial yield of 2.5% or more, but I am willing to be flexible on this.

b) Dividend Growth. I would like to see reliable and consistent dividend increases – an average of at least 8% annual dividend growth over time. If the initial yield is higher I may accept a lower dividend growth rate.

c) Quality. I’m seeking what are generally considered ‘blue chip’ companies. I’ll do my best to avoid speculating on the ‘next sure thing’, something I have been guilty of in the past.

d) Value. Ideally I would purchase all these great stocks at a bargain price. Unfortunately it is no longer 2009, and many great dividend stocks are priced fairly – at best – or overvalued. I will endeavor to find the best values I can, but am willing to pay a moderate premium for the very best companies with the intent of keeping them forever.

In future posts I will identify the initial stocks on my wish list (at the right price), and document and discuss my purchases.
I also plan to layout an exit strategy for individual stocks. These purchases are planned to be for life, but sometimes a company’s future prospects turn bad (Kodak Eastman anyone?) and a sale is in order.