Dividend Update

Dividend Income Update – July 2016

 

Dividend UpdateJuly’s dividends received from my ownership shares in my taxable and retirement accounts have been recorded, and I’m sharing another monthly update for tracking the progress of my dividend income.  My taxable accounts include Merrill Edge, fractional shares that remain in Computershare, and a couple of stocks I own in Loyal3.  Cumulatively, there were 9 companies in which I own a small percentage stake in that sent me my portion of profits distributed as dividends for $39.90.  Please don’t laugh, lol!  The shares I’ve gifted this year has really set me back a couple of steps, but I intend to keep plowing ahead, paycheck by paycheck, month after month to continue to acquire ownership shares in the best businesses on the planet.

My two largest holdings for the July payout were The Coca Cola Company and Realty Income, aka The Monthly Dividend Company.  As I mentioned in last month’s update, I gifted 25 shares of Realty Income a couple of months ago, and 24 shares of Coca-Cola last month.  I made sure I waited until the ex-dividend date so that I could receive the dividends based on the shares I owned prior to gifting.  Waiting until after the ex-dividend date allowed me to receive an extra $8.40 from Coca-Cola.  Not a whole lot, but a little something extra.  This means, I’ll  be receiving less the next time around until I can add more to my position.

In my retirement accounts, I received $656.44 of which the bulk of this coming from a dividend I received in a mutual fund Davis New York Venture (NYVTX).  In total, I received $696.34 which was reinvested automatically.

Below is a list of every dividend I collected for the prior month.   

 

NOTE: I utilize google docs feature so you may have to click on the tab for “07_2016” to see July’s Dividends.

 

I’ve updated my Dividend Income page to reflect July 2016 dividends.

cash flow

Million Dollar Ownership Portfolio Dividend Income Update – June 2016

 

cash flowFirst I would like to apologize for not issuing these posts out as timely as I’d like to be issuing them. Definitely something I acknowledge as “needs improvement” and will make a point to prioritize accordingly. As mentioned in my recent post on my dividend income update for myself, I’ve been very busy on a side project to substantially reduce my monthly expenditures that I will hopefully be able to share very soon. It has taken most of my time here lately.

 

So it’s past due to once again provide an update of the dividends generated from my parents million dollar portfolio. I’m hopeful that by providing a monthly update of the dividend income that this idle portfolio produces, a light may turn on for someone that will realize how simple it is to manage your own money if it’s invested in high quality companies that share their surplus cash to owners. Dividends are issued to owners based on your pro-rata shares. The more shares that you own, the more profits you’re entitled to as a part owner. The beauty is that each dividend that get’s reinvested, almost guarantees you that you’ll receive a higher amount the next time around because your fractional shares will pay out too.

 

I hope this transparency will help expose and educate on the true nature of the compounding effect. As time goes by, I urge you to pay close attention to the two components at work 1) dividend reinvestment, and 2) growing dividend income. The dividend reinvestment provides more shares, such that the new shares payout their own dividends, and the growth of the dividend accelerates the compounding effect. What is more apparent with a larger portfolio, that is sometimes missed with a small portfolio, is the remarkable nature of the reinvestment. I’m currently forecasting this portfolio to pay out over $36,000 in dividends this year and every single dividend will be reinvested to earn even more dividends the following year. The companies I’ve invested in for my parents typically increase their dividends annually as well.
By focusing on the dividends received, rather than the portfolio value, I hope to help my readers become aware that being a long term owner of some of the most profitable businesses in the world is really my preferred way to reduce risk in portfolio management. All it takes is awareness, and a disciplined approach to accumulating these assets month after month, so that one day this money will fully fund your recurring and nonrecurring expenses in retirement.

 
June 2016, turned out to be a personal best and monthly all time peak for this portfolio at $5,298.81!!! This amount marks a 56.21% increase from the $3,392.16 received in June of 2015. See table below:

NOTE:I call this an idle portfolio, but approximately $225k was added in December of 2015 from a cash in-lieu of pension from a former employer.

 
Leading the pack is big oil! My parent’s portion of their ownership in Shell paid them $941.44 and BP paid out $613.50. In total for Shell, BP, CVX, and XOM, my parents portfolio (IRA + Roth IRA) received $2,383.42 from big oil profits. Since gas prices have been staying between $2 and $2.25, it’s been costing me approximately $28 – $30 to fill up a 14 gallon nissan rogue tank each week. Using a very rough estimate 1 fill up each week for 52 weeks out of the year costs in the neighborhood of $1,600 for the year. In theory, if I owned the amount of shares my parents owned, this could essentially pay for my gas for life. There’s a certain sweetness in my mind to think of how nice it would be to win free gas for life, and my parents portfolio could actually do that for them. And since there is a very small chance I could win free gas for life, I’m placing my money in these very assets to accumulate which will essentially guarantee my future self free gas for life one day.

 
If you’d like to see the impact of these dividends being reinvested, I’ve structured the portfolio views of my parents million dollar ownership portfolio in a manner to highlight the 1) new shares acquired through reinvested dividends, and 2) increases in the dividends over time. I’m using 5/22/2016 as my baseline date to track the progress from this point forward. The bottom three rows sums up the totals and indicates the % change and absolute change. Over time, you will be able to see the change in 1) shares, 2) the market value of their IRA, 3) declared dividends, 4) annual dividends received, and 5) even the yield on cost will increase over time.

 
If you take a look, this million dollar ownership portfolio already contains an additional 103.20 shares from dividend reinvestment since the baseline date of 5/22/16 when I started recording this information here at InvestorPeek.com
share growth

 

I’d love to hear your thoughts about this portfolio and the dividends this portfolio produces. Do you think it will last for the next 20 to 50 years? Your comments are highly encouraged and welcomed.

Div Income Update

Dividend Income Update – June 2016

 

Div Income UpdateSix months are in the books for 2016, and I’m making my second monthly update for tracking the progress of my dividend income.  My goal is to purchase shares of dividend paying stocks every single month and to re-invest the monthly dividends I receive from the shares I already own so that the new reinvested shares will also pay me more dividends next time around.  Ideally, my dividends should trend upwards similar to my dividend forecaster.  To be honest, I’m a little upset with my savings rate this month because of a major side project that I’ve been working on that I plan to share very soon.  If all goes as planned, I should be able to substantially reduce my monthly liabilities and allocate a much larger surplus towards buying more dividend income every month.          

Because I primarily max out my 401k and roth IRA before I add any significant money to my taxable accounts, you’ll see most of my progress being made in these two categories for the first part of the year and my taxable account will receive my attention towards the later half of the year.  For this reason, I’ve decided to separate my monthly dividends in these two buckets (taxable accounts and retirement accounts) sub-totaled and then totaled in the same table.   

This means my dividend income for June 2016 will look out of whack, simply because I’ve captured dividends received from my 401k.  I actually think this will be appropriate since I’ve reconfigured my 401k towards dividend paying funds, so if you’re interested in the funds I use for dividend growth investing in my 401k, please check out my portfolio page.  This new structure has also made me realize that I need to allocate more dollars to my taxable accounts so that I can utilize these dividends for my monthly expenses well before the average retirement age.  I really, need to kick it up a notch!  Hopefully, I’ll complete my side project very soon, and I’m already licking my chops to be able to invest more.

Below is a list of every dividend I collected for the prior month.   

NOTE: I’ve been playing with the google docs feature so you may have to click on the tab for “06_2016” to see June’s Dividends.

I’m definitely satisfied for the monthly total, but I’m very upset about the small amount for my taxable account.  In the past, I combined my Merrill Edge accounts (taxable/roth) and by doing so I wasn’t noticing how idle my taxable account seems.  I may be being too hard on myself, because I’ve also gifted a sizable amount of shares this year and satisfied the last little bit this month when I parted ways with 25 shares of  Realty Income and 24 share of Coca-Cola.  I desperately want to replace these gifted shares, but will have to be patient for a pull back in their stock price.

I’d love to hear feedback from you regarding the change I’ve made in reporting my dividends.  Do other’s track 401k dividends?

 

I’ll update my Dividend Income page to reflect June 2016 dividends.

Investment Simulation

Dividend Growth Investing Exposed

 

Investment SimulationDividend Growth Investing Exposed – A Portfolio Simulation Experiment

Back in late 2011 and early part of 2012, I became somewhat obsessed with a few different observations and concepts and this was right about the time everything investing I had been reading and studying started to really make sense for me.  At the time, I had been investing my personal money since 1996, experienced the easy money of the late 90’s, lost my butt (almost my condo) in the 2000 dot-com bust, suffered another crash in 2008, and at the end of the day I realized I had been spinning my wheels for years and I knew that something wasn’t right with my investing efforts.  The concepts I am referring to are as follows and are in no particular order:

  • There was a select ‘elite’ group of only about 100 US businesses that had been paying and increasing their dividends to shareholders every single year for over 25 years called the “Dividend Champions” by an analyst named Dave Fish over on seeking alpha.
  • The average 10 year dividend growth rate for many of these companies was well over 10% annually, well over the rate of inflation, and well over my annual pay raises I was receiving by my company.
  • Owning shares in these businesses entitled me to the profits generated by these businesses via dividend payments. (dividends are a portion of profits given back to shareholders)
  • The more shares I accumulated in these businesses, the more profits I would receive.
  • One day I could use these dividends to pay for gas, food, my mortgage, vacations, weddings, cars, charities, you name it without  having to sell a single asset.

The list of US companies that have continuously increased their dividend payments to shareholders for over 25 years can be found at http://www.dripinvesting.org/ website.  It may be helpful to download the Dividend Champions spreadsheet and toggle back and forth between the sheet and my post as I trace through my observations.  The names of businesses will be very familiar to you.  The first one I’d like to use as an example is Aflac Inc., ticker symbol AFL.  I’m not going to step through every column because it’s fairly self-explanatory, but the key points I’d like to draw your attention to are the number of years AFL has increased their dividend to shareholders, 33.  If you tab over to columns AL through AO, you can observe the Dividend Growth Rate (DGR) for 1-yr (6.8%), 3-yr (5.6%), 5-yr (6.7%), and 10-yr(13.6%).

Other names include:

Chevron; 28 years; 1-yr (1.7%), 3-yr (6.8%), 5-yr (8.5%), and 10-yr(9.4%)

Clorox; 39 years; 1-yr (4.1%), 3-yr (6.8%), 5-yr (7.5%), and 10-yr(10.4%)

Coca-Cola; 54 years; 1-yr (8.2%), 3-yr (9.0%), 5-yr (8.4%), and 10-yr(9.0%)

Colgate-Palmolive; 53 years; 1-yr (5.6%), 3-yr (7.1%), 5-yr (8.1%), and 10-yr(10.5%)

Johnson and Johnson; 54 years; 1-yr (6.9%), 3-yr (7.1%), 5-yr (6.9%), and 10-yr(8.8%)

Lowes; 54 years; 1-yr (24.4%), 3-yr (19.3%), 5-yr (20.6%), and 10-yr(26.1%)

McDonald’s; 40 years; 1-yr (4.9%), 3-yr (6.2%), 5-yr (8.8%), and 10-yr(17.8%)

PepsiCo; 44 years; 1-yr (9.1%), 3-yr (9.5%), 5-yr (8.2%), and 10-yr(10.9%)

Sherwin-Williams; 38 years; 1-yr (21.8%), 3-yr (19.8%), 5-yr (13.2%), and 10-yr(12.6%)

Target; 48 years; 1-yr (13.7%), 3-yr (17.8%), 5-yr (20.8%), and 10-yr(19.6%)

I could point to Walgreens, Wal-Mart, Stanley Black & Decker, Proctor & Gamble, McCormick, Exxon, Brown-Forman (AKA Jack Daniels), Altria, 3M Company, etc.

Hopefully, you’re starting to get the idea.  These are some phenomenal growth rates year after year.  In some cases throughout the Vietnam War, Oil Embargo, Grenada, Invasion of Panama, Gulf War, Al-Qaeda, Iraq War, 911, ISIS, natural disasters like Hurricane Andrew, Katrina, etc. Profits still gush through these companies registers day after day and get sent to shareholders typically on a quarterly basis.

But these numbers often go unnoticed by the untrained eye.

They’re not really tangible to the unaware.

Folks are only focused on the value of their holdings rather than the profits received by their holdings.

So I set out to simulate how a theoretical dividend growth portfolio would perform and what I built has absolutely convinced me that this method is the surest way to ever-increasing wealth.  Quick warning, this spreadsheet is very busy and I’ll try to walk you through it the best I can without making you fall asleep.  But I really want you to pay attention because this really is some life changing stuff I’m about to share.  Also, keep in mind, this is a model that is attempting to simulate annual contributions into dividend paying stocks, quarterly dividend reinvestment, annual dividend increases, and annual fluctuations in stock market performance to capture the ups and downs.  Because it is a spreadsheet, there are definitely some flaws in the design such as I can not simulate the daily price changes and various timing of contributions.  In reality, contributions can occur at any time the market is open and this forecast does not claim to be perfect.  But I think it is good enough to demonstrate enough observable information to draw some great life changing conclusions.  It certainly was enough for me, and I hope you will find value in it.

I went back and googled the S&P performance for the last 15 years, going all the way back to 2000.  If you look at the 7th column labeled “Average Annual Price Growth”, I entered the annual percent change of the S&P as recorded each year for the prior 15 years.  As you can see, it was really nasty back in 2000, 2001, and 2002.

So let me explain what you’re looking at.

This model represents a collection of stocks purchased during a year that has an average starting dividend yield of 3.5%.  Over the last 5 years, I’ve been able to do this consistently.  Many DG investors self impose an entry criteria of 3 or 4% yield, so I’m in the middle.  There wasn’t any rhyme or reason, why I chose 3.5%…it’s just my starting point.  Year 1 shows  $5000 invested in the year 2000  at  an average price of $50 per share, resulting in the total starting shares set at 100 shares.  If I change the entry price to $100, then the shares would change to 50.  The point is, it doesn’t really matter what starting price I select, because we’re focused on the entry dividend yield and the spreadsheet will adjust accordingly.  You can see that  3.5% div yield on $50 is $1.75 for the year, so dividing this number by 4 represents the quarterly dividend.

Stepping you through the process beginning with the 100 shares, the next iteration resembles the first dividend purchasing .88 shares at $50 price point, then .88 shares are added for the second dividend payout to the 100.88 shares making the position 101.76 shares at $50 price point, then .89 shares on the 101.76 shares ending with 102.65, etc.  You should be able to notice the flaw in my spreadsheet model.  These dividends are being reinvested at the same $50 price point, and we know that this really doesn’t happen in the real world.  But again, this should be good enough to paint the dividend growth picture and draw some “ah-ha-moment” conclusions.  At the end of year one, the $5,000 investment earns $181.21 in dividends due to the quarterly dividend reinvestment compounding effect.  Had the dividends not been reinvested, the dividend is $175.  The math checks.

photo1

 

The second year, this investor plans to invest $1,200 per month the entire year.  In fact, he plans to do this for the next 15 years.  If you follow the rows, the market ends the year down 9% in 2000, so you can see the $50 price point is down to $45.50 in 2001 so the $14,400 is able to buy more shares, plus the dividend grew 10%.  If you scroll all the way over to the right, I listed 13 companies mentioned above that over the last 10 years, have averaged a dividend growth rate of 13.93% together, so the 10% I’m using is not outside the realm of possibility (and again, this is an academic study such that we can draw some conclusions).  Note, because I’m using percentages, it really doesn’t matter what price I’m using if I made it $500 per share, the shares would adjust accordingly.  At the end of year two, the portfolio earns $826.86 in dividends.

Dividend Growth - 10 Yr avg

 

Year 3, you can see the market ended the year down another 12% so the 2002 price point is now $40.05 and the annual $14,400 contribution buys even more shares, and those shares are paying a higher dividend.  End of year three, the portfolio earns $1,735.19.

Chart description

 

I hope by now you don’t need me to continue to step through this and you can see after 15 years of committing $1,200 per month to dividend growth investing, these dividends can realistically grow to over a whopping $85,000!!!  That is some real cash and could easily cover my annual expenses plus a generous accelerating cushion for free spending.  It didn’t matter that the market was up some years, and down others, as long as you limit your investing dollars to quality companies that can continue to pay increasing dividends, the portfolio will grow nicely.

Sheet explanations

As you can see the average annual price growth over the 20 year period was only 5.88%.  But the real dollars received compounded at 41.47%!!!!  Cumulatively, the portfolio generated over $1M in dividends.

Now isn’t that interesting.  The fact is, once the portfolio is throwing off $25K and is being  reinvested to buy more shares in addition to the $14,400 being contributed, the compounding becomes explosive.  In math terms, exponential.  This has everything to do with staying committed to accumulating shares in up and down markets, the dividend reinvestment to boost your shares, AND the growth of the dividend.

Lastly, this model helped me to realize, that with dividends being reinvested, my portfolio can far exceed the standard market performance metrics often published by Morningstar or other media outlets of market performance.  I love how the latest commentary centers on how historical rates of returns were always in the 10% range, but now investors should only expect 5 or 6% like there’s no hope anymore.  Based on the model above, it shows 5.88% can turn into a $2M portfolio and paying out over six-figure income (as long as the companies I’m invested in are strong enough to continue to pay out increasing dividends).  I don’t  know about you, but think I would be very happy with an outcome like this.   If you’re interested in seeing how a real $1 million dollar portfolio behaves in the market for the next 10 years, please follow my updates to my parents portfolio dividend income page.

Your comments are very welcomed.  What do you think of my dividend growth portfolio simulation?  Do you think for the most part, it’s accurate enough to model the performance of a dividend growth portfolio?

 

*Source for S&P returns: http://www.moneychimp.com/features/market_cagr.htm

 

If you’d like a copy of my spreadsheet for your personal use, use this link and navigate to “File” –> “Download as”.

 

recent buy

Recent Buy – Gilead Sciences

 


Recent Buy – Gilead Sciences

Per the company website, “Gilead Sciences (Nasdaq: GILD) is a biopharmaceutical company that discovers, develops and commercializes innovative therapeutics in areas of unmet medical need. The company’s mission is to advance the care of patients suffering from life-threatening diseases worldwide. Gilead has operations in more than 30 countries worldwide, with headquarters in Foster City, California.”  GILD was founded in 1987, and since then has grown to become one of the world’s largest biopharmaceutical companies, employing over 8,000 people across six continents.  

Gilead’s primary areas of focus include human immunodeficiency virus (HIV), liver diseases such as chronic hepatitis C virus (HCV) infection and chronic hepatitis B virus (HBV) infection, cardiovascular, hematology/oncology and inflammation/respiratory.

I first recognized that maybe the market was mispricing shares in GILD, conducted research, and picked up my first couple of shares back in February and haven’t looked back since.  

The first thing I like to do when I first start to analyze a company is to pull up the financial statements and dig in.  Once I enter the available data in my google sheet, what kind of useful information can I observe?   In  Gilead’s case, I can see some interesting and useful information with the data captured in the table below.  

Financials GILD 6.12.16

 

Shareholder Equity (aka Net Worth) has been accelerating at over 29% per year growing from $1.8 Billion to $18.5 Billion.  Shareholder equity is business speak for a company’s Net Worth; that is total assets minus total liabilities.  When you buy shares in a business, essentially you are buying a share of the company’s net worth and a share of the company’s future cash flows.  Ideally, both of these will be growing nicely.

Capital expenditures have been growing as the business grew, but are extremely low relative to the cash produced.  It takes very little capital for Gilead’s ongoing operations.  

Share buybacks have resulted in the decrease in outstanding shares from 1,836 million in 2006 to 1,521 million in 2016. A history of consistent share repurchases is helpful, because it shows that the company is willing to help out long-term holders of stock with increased proportional share of earnings and the business over time.

Free Cash Flow has been growing like mold on a 2 month old pack of bread which is interesting.  Diving into the annual report to learn more, I observed that Gilead experienced exponential growth beginning in fiscal year 2014 by introducing new therapies for Hepatitis C Virus (HCV) and cancer.  Their HCV drug Sovaldi received approval in the US in December 2013 and by the end of 2014; 170,000 chronic HCV patients had already been treated with the new drug in over 40 countries.  Also in 2014, Harvoni was approved and is identified as the first once daily single tablet regimen for the treatment of chronic HCV and provided cure rates of 94-99 percent.  This resulted in over a 320% increase in annual free cash flow and the stock price accelerated from a 2013 low of $39.45 to a 2014 intraday high of $116.83 accordingly.  In 2015, free cash flow rocketed to almost $19.6 Billion (an almost 60% increase from 2014) and the stock price hummed along to peak at an intraday level of $123.37.  Fast forward to today and the stock has been hovering in the $80’s and a quick look at the trailing twelve month Free Cash Flow is currently in the $17.741 Billion range, but 2016 is still underway so we shall see how the books align with the issue of the next annual 10-k report.

Circling back to the aforementioned table, I can take the FCF and divide it by the shares outstanding to derive the FCF per share.  From this I can calculate the cash yield.  Cash yield is a quick and dirty metric I use to determine if the business may be mispriced or not.  Cash yield is basically the amount of cash a company generates divided by the total purchase price.  It’s a high level big picture kind of metric.  An example may help.  If I were a billionaire and could purchase Gilead in its entirety, I would pay the market capitalization or market cap.  That is, total share outstanding x’s the market price.  As of June 12, based on Friday’s close of $84.45, would equal approximately $110 Billion.  Based on 2015’s FCF of $19.852 Billion (today’s price at last year’s free cash flow) translates into a cash yield of 18%.  Stated another way, if I purchased the entire company for $110 Billion and I earned $19.852 Billion the following year, my cash on cash return would be 18%.   This seems extremely high to me for such a fast growing profitable company and is definitely not the norm in today’s market.  If you glance back at my table, I took the time to calculate the Cash Yield utilizing the lowest price for each year over the last ten.  I’m using the lowest price because the cheaper the price you pay corresponds to a higher yield you receive.  The $80 price point in today’s market represents the best cash yield you could have received at any point over the last 10 years!

To provide a relative frame of reference, Johnson and Johnson has a market capitalization of approximately $322 Billion and 2015’s FCF of just under $16 Billion which translates to a 4.9% cash yield.  Stated differently, a hypothetical investor could pay $110 Billion to acquire GILD and immediately begin to earn $19 Billion or acquire JNJ for $322 Billion to immediately earn $16 Billion.  You can see this makes GILD seem very attractive relative to the cash generated.  But I’m not going to sit here and say that Gilead will be the next JNJ either.

JNJ has been around since 1886, has been paying increasing uninterrupted dividends since 1963 and essentially is a combination of over 200 companies that fall under the parent Johnson and Johnson holding company; so from a risk perspective, GILD does not have this type of rich history and still has a lot to prove to long term investors.

Additionally, the company announced its first quarterly dividend to shareholders in June of 2015 at $.43 per share, and in April of 2016 announced they would increase the quarterly dividend to $.47 which translates into a little over a 9% growth rate.  To  me this represents a certain level of comfort that management believes that earnings are stable enough to begin to reward shareholders and I’m glad to see this.  I try not to count my chickens before the eggs hatch, but there’s a small voice in the back of my head that’s somewhat excited to be able to invest in such a profitable business at the beginning days of the dividend being instituted.  Time will only tell, but I’m hopeful this could be the early days of what ends up becoming a long time dividend growth machine in the years to come.  A 9% increase for the first year is just the type of activity I like to see management make.  At this pace, the dividend could double in 8 years.  Bottom line, I’m willing to put my money where my mouth is to see if Gilead may become one of many lucrative winners that my future self in 20 years can be thankful for.

Calculating the intrinsic value for Gilead is very tough especially given that GILDs cash flow has significantly spiked in recent years.  The surest way I know to protect myself is to be very conservative in my FCF forecasts, and try to factor in one heck of a margin of safety.  A quick glance back at the table above, identifies that GILDs FCF has a 9 year compounded annual growth rate of 37.52%, but again, the majority of this long term historical growth has been somewhat obscured by the spike beginning in 2014 and 2015.  It would be great if that would continue, but It wouldn’t be good engineering practice to assume this type of growth at this early stage in the game.  If I pretend the last two years didn’t occur, GILD’s cash flow has compounded at over 14% from 2006 to 2013, which is still a very nice pace.  

So let me play with a few scenarios.  If I take the $19.52 Billion FCF from 2015 and assume zero growth for the next 10 years and then a terminal 3% into perpetuity, I calculate the intrinsic value of $255 Billion or $195 per share using a 9% discount rate.  At Friday’s $84.45 this represents a 56.73% margin of safety which is a lot to work with.  However, I’m not sure they can sustain this level, and none of the analyst at Morningstar or elsewhere seem to think they can either.  But if I discount the year one cash flow to say $16.5 Billion and assume a FCF growth of negative 5% for the next 10 years and then 3% into perpetuity using the same discount rate assumptions, then I still calculate an intrinsic value of $150 Billion or $114.47 per share.  With these assumptions, GILD still looks under valued with a margin of safety of 26.23%.  I don’t know if that’s correct either because the TTM is already higher at $17.7 B.  So what is the market valuing GILD right now?  If I reverse engineer the FCF forecast, I had to utilize a negative 9.5% FCF rate, and a reduced FCF of $16.5 B to arrive at a $110 Billion valuation, and I’m willing to bet money that Gilead will fair better than this.  So I’m comfortable that GILD is under valued at this price point and I’m happy to be an investor.

DCF Gilead 6.12.16

So how did I put all this together to conclude that Gilead was worthy of my hard earned cash?  Let me count the way:

  • Shareholder equity and free cash flow have grown respectively at 29% and 37.5% annually

Chart GILD 6.12.16

  • Management has shown to be good stewards of the cash by buying back shares and implementing a dividend.  First year increase was over 9%.
  • Cash yield is an absurd 16.02% for the current TTM (trailing twelve months)
  • Margin of safety calculations suggest Gilead would need to earn less than they currently earn and continue to decelerate cash flow by 9.5% per year for the next 10 years and then grow at 3% into perpetuity to arrive at today’s value and that just doesn’t seem like a very logical and likely scenario based on their history, current revenues, and minuscule capital expenditures.
  • Personal valuation takeaway: GILD is an undervalued growth story in the making and I don’t believe I’ve missed the boat at this price point.

For the month of May on two separate purchase dates, I picked up 15 additional shares for a total of $1,240.24 for an average per share price of $82.68.  I purchased these using a nondeductible contribution into my IRA and transferred into my Roth IRA.  You can see the impact to my portfolio via my monthly portfolio updates.  Brokerage disclaimer: I qualify for 30 free trades each month at Merrill EDGE via platinum rewards so I do not incur transactional costs.

 

Your feedback and alternate perspectives with respect to my analysis are welcomed and highly encouraged.  Have you considered adding Gilead to your portfolio?
Full Disclosure: Long GILD, JNJ

Dividend Update

Parents Dividend Income Update – May 2016

 

 

Dividend UpdateHello Again!  This post marks my first post of my parents monthly dividends received at InvestorPeek.  My parents have graciously agreed to let me share the progress of their portfolio alongside mine as a real life academic case study for the investment community to benefit from.  My intentions are to educate folks on the power of Charlie Mungers “sit on your ass” investing technique, once you’ve accumulated a nice nest egg that’s filled with literally some of the best assets in the world.  Gut check time will occur during the next bear market sell off if market values decline 10 – 40%, and I’m patiently optimistic my parents will agree to sit still and let compounding work its magic.  Jeremy Siegel from his book The Future for Investors is famous for coining the phrase, “bear market protector and return accelerator” when referring to dividends.  The important lesson being, according to Siegel: “Market cycles, although difficult on investors’ psyches, generate wealth for long-term stockholders. These gains come not through timing the market but through reinvestment of dividends.”     The extra shares purchased while deeply discounted, will cause this portfolio to rocket ahead once prices begin to stabilize; so bear markets can be leveraged to accelerate your wealth.

I’m hopeful that my monthly updates of this portfolio will become a wonderful insight to the investment and DGI community.  This portfolio is large enough to accelerate at a nice pace all on its own, and is truly a rapidly growing dividend income machine!  

I hope this transparency will help expose and educate on the true nature of the compounding effect.  As time goes by, I urge you to pay close attention to the two components at work 1) dividend reinvestment, and 2) growing dividend income.  The dividend reinvestment provides more shares, such that the new shares payout their own dividends, and the growth of the dividend accelerates the compounding effect.  What is more apparent with a larger portfolio, that is sometimes missed with a small portfolio, is the remarkable nature of the reinvestment.  I’m currently forecasting this portfolio to pay out over $36,000 in dividends this year and every single dividend will be reinvested to earn even more dividends the following year.  The companies I’ve invested in for my parents typically increase their dividends annually as well.  

By focusing on the dividends rather than the portfolio value, I hope to help my readers become aware that being a long term owner of some of the most profitable businesses in the world really pays dividends in the long term.  All it takes is awareness, and a disciplined approach to accumulating these assets month after month, so that one day this money will fully fund your recurring and nonrecurring expenses in retirement.

Parents Dividend Income May 2016

Note: My Parents received free shares and $2.78 cash in lieu of fractional shares of Ingevity Corporation which was due from WestRock successfully completing the separation of its specialty chemicals business, Ingevity Corporation, as an independent public company whose shares are listed on the New York Stock Exchange (NYSE) under the symbol “NGVT”.  Under the terms of the separation, WestRock stockholders received one share of Ingevity common stock for every six common shares of WestRock stock held as of the close of business on May 4, 2016.  NGVT shares began trading on the NYSE as of May 16, 2016.

 

$1,466.36 represents a 44% increase from the dividends they received this time in 2015.  If you’d like to see the impact of these dividends being reinvested, I’ve structured the portfolio views of my parents IRA in a manner to highlight the 1) new shares acquired through reinvested dividends, and 2) increases in the dividends over time.  I’m using 5/22/2016 as my baseline date to track the progress from this point forward.  The bottom three rows sums up the totals and indicates the % change and absolute change.  Over time, you will be able to see the change in 1) shares, 2) the market value of their IRA, 3) declared dividends, 4) annual dividends received, and 5) even the yield on cost will increase over time.

 

I’d love to hear your thoughts about this portfolio and the dividends this portfolio produces.  Do you think it will last for the next 20 to 50 years?  Your comments are highly encouraged and welcomed.

 

I’ll update my parents Dividend Income page to reflect May’s dividends.

 

 

Dividend Update

Dividend Income Update – May 2016

 

Happy Saturday.  This post marks my first post of monthly dividends received at InvestorPeek.  What better way to start it off by posting about a primary key focus of my investment objectives:  cash flowing dividend income.  I’ve been following the early retirement and dividend growth investing community for years, and I’ve decided to get off the sidelines and share my progress to the world.  I’m compounding my wealth one month at a time.  After years of failures, studies, forecasts, and assessments, I’m 100% convinced this is the correct approach for me and is the path to achieve my wealth creating goals.  It’s definitely not a get rich quick scheme, but once momentum sets in, compounding will accelerate beyond your wildest forecasts for sure.

The dividend income from May was more than double than the income I received in May of 2015. This was primarily due to my American Express position I began accumulating aggressively this past February when I noticed how obscenely mispriced AXP was in the low $50’s relative to the huge cash flow this company produces. Just to give a perspective of where I’m coming from, AXP earned over $9 Billion in cash flow for 2014 and 2015 and has a market value as of today of just over $62 Billion.  Back in February the market cap was in the mid $50 Billion range.  

It’s no secret that AXP has been in the news for losing the Sam’s Club contract and such, but that’s what gives me the opportunity to accumulate at grossly mispriced valuations.  If it’s not really apparent how grossly mispriced this really is, let me help by highlighting that Coca-Cola’s annual cash flow is less than this, at just shy of $8 billion, and has a market capitalization of a whopping $194 Billion.  Heck BHP Billiton that is in the beaten down oil and commodities industry earned $7.3 billion and has a market cap of over $70 Billion and I believe they’re grossly mispriced too.  If we compare to one of AXPs peers; well Visa earned over $6 Billion for their fiscal 2015 and currently has a market value of over $192 Billion.  For those of you that are billionaires out there, what would you choose if someone offered the following choice: spend over $192B for the rights to receive $6B each year, or spend $62B for the rights to receive $9B each year.  The AXP investor receives their money back in a little over six years and all gravy there after.  The Visa investor receives their money back in 32 years assuming no growth. Obviously, the no growth scenario isn’t exactly how the real world works, but if the mystery Billionaire investor was considering the choice between the two then Visa would need to grow cash flow at 69% per annum to achieve the same result of the 6 year payback that AXP would provide with ease.  I agree that Visa has a higher growth opportunity, but I’m not willing to bet on them at this price.  In my view, there is plenty of margin of safety built into the price of AXP the market place is currently offering and that’s why I began accumulating them back in February.

My average cost basis for AXP is $53.04 and based on the current dividend of $1.16, my dividend yield on cost is currently 2.189%.  This doesn’t exactly translate into high yield territory but I lean towards the value investor side of the spectrum more than the dividend growth side.  Besides, AXP is still one of Warren Buffett’s largest positions comprising of 151,610,700 shares or 14.82% of the Berkshire portfolio, and I tend to think it’s because AXP produces significant amount of cash for its investors.  In Warren’s case, that translates to 151,610,700 shares x’s $1.16 = $175,868,412 every year and growing!!

This was supposed to be a post about the progress of my dividends received for May and not necessarily a post about the current valuation of American Express.  What you’ll see below is a list of every dividend I collected for the prior month.  

 

Monthly Dividend Income Update 6-4-2016

 

Monthly Dividend Income Chart 6-4-2016

I’ll update my Dividend Income page to reflect May’s dividends.

Full Disclosure: Long all stocks owned above, especially American Express.

 

Investment Portfolio

Portfolio Update – June 3 2016

 

investor33Hello World!  This is my very first post at InvestorPeek.  I’ve got a lot of other posts coming, but wanted to start with this update to my portfolio to get a feel for posts and linking back to the portfolio page.  My Portfolio page is composed of my Personal Investment Accounts with various platforms, a traditional IRA that I use to fund my Roth IRA, and my 401k.  I plan to provide monthly updates to the balances to keep a record of my progress.  As I accumulate assets, I will update this page, typically on a monthly basis, to account for new purchases and changes to the market values.

My Portfolio views are structured in a manner to recognize the two components of compounding; 1) new shares through purchases and reinvested dividends, and 2) increases in the dividend.  I’m using 5/21/2016 as my baseline date to track the progress from this point forward.  The bottom three rows sums up the totals and indicates the % change and absolute change. For example, you should be able to see the change in shares, market value, annual dividends, etc. as time goes on.  As the two components of compounding take effect you’ll see the growth of the dividend income I receive based on the the shares I own.

 

My Ownership Portfolio

My Ownership balance as of May 21, 2016 totaled $40,682.25.  The current updated table listed below captures the timestamp and values as of the today’s update.  I call this my “ownership portfolio” because my number one goal is to accumulate ownership shares for the rest of my life.  These shares are my bundle of rights to profits the companies earn.  It is not my goal to speculatively trade for stock price.  I’m focused on increasing the passive income of this portfolio so that one day the income will exceed my recurring and non-recurring expenses.  The majority of my portfolio consists of dividend paying stocks. If you’re interested in seeing my monthly dividend income, visit my dividend income page.

Download (PDF, 75KB)

 

My Roth Portfolios

My Roth balance as of May 21, 2016 totaled $24,220.00.

The current updated table listed below captures the timestamp and values as of the today’s update.

Download (PDF, 67KB)

 

My 401k Portfolio

My 401K balance as of May 21, 2016 totaled $423,504.09.  The current updated table listed below captures the timestamp and values as of the day of update.

Download (PDF, 61KB)

 

Disclaimer: The information above is updated each month. Although all figures are thought to be correct, no guarantee is expressed, nor should any be implied.

Portfolio Total

On May 21, 2016, my combined investment portfolio total was $488,406.34.

As of this update, my investment portfolio total is $501,606.46 when combined.  An increase of $13,200.12 from the established baseline date and officially crosses the half million mark.  Although that is a nice milestone for me in and of itself, my real goals are focused on the income that this portfolio will produce.  I imagine over the years the valuations will swing wildly from peak to trough but as long as the company stays strong and continues to generate excess cashflow for shareholders I’ll continue to accumulate new shares and track my dividend income.

I hope you’ll appreciate, find value and entertainment in tracking my progress. How do you track your financial progress?  Do you focus on increasing your passive/dividend income, or do you simply monitor your total market value?  Do you DRIP invest or pool your dividends to make new purchases? Please share process and goals by commenting on this page. I’d be interested to learn how others monitor and track their wealth.