Let’s do some Dividend Farming. DE

TGIF. It is another Friday, and we figured it was another good opportunity to buy another stock for the weekend. The S&P might have just made another bottom on 1/20/16. We are only 2 days after the bottom, so who knows if it will hold or go back down. But dollar cost averaging or entire portfolio will keep us buying.

One way of looking at dividend stocks is to look at it like planting a tree. The day you plant it, the tree might only give you a few pieces of fruit. After 10 years of growing, the tree will produce a lot of fruit to eat. The best time to plant trees was 10 years ago, the next best time to plant one is today.

We don’t own any heavy equipment manufactures yet. There are several best of breed heavy equipment manufacturers, in their own categories. We are going to select the one in farming to keep with our tree analogy. The best in breed for farming is Deere (DE), but you might know them better as John Deere, the large green equipment you might see driving down the road.

We are starting with them because we always need food. With mining equipment, the commodity bubble could last for a while, but farms need to make more food every year. While they can put off buying new equipment, that will lead to pent-up demand. As for a mining, this will happen to, but we believe at a slower pace.

Currently, Deere (DE) is very cheap. The company is selling for less than their revenue, at a P/S ratio of .92. As a comparison, AT&T (T) sell for a 1.5 P/S ratio. Deere (DE) is much lower and cheaper. And I do realize that is like comparing apples and cell phones (coincidence, I think not). But Deere (DE) is selling for a 25% discount to its 52 week high and AT&T is only 3% off its own. Now we still like AT&T (T), but we also believe in diversification.

Another way to show Deere (DE) is cheap is it has a 3.2% dividend yield. If we would have bought at the 52 week high, we would only get a 2.4% Yield. That is a 33% pay raise. Also, they have paid and raised their dividend since 2004, and they have paid some dividend since at least 1971. The company has been in business since 1837.

With our growing trees example, we will compare it with Deere (DE). We could have bought 1 share for about $40 ten years ago, and today Deere (DE) would have doubled to $80. The dividend payment went way up from about $0.61 to $2.40 per share. That would have brought your YOC (yield on cost) to 6% today, double our 3% I just got it for today. On top of the stock doubling, your total dividends received over that time would be $15.56. That adds up to a 9% growth rate without even reinvesting the dividends. This is a tree I want to hold for the next 10 years, hopefully longer.

So we bought 4 shares at $303.51, including those commissions the tree elves keep charging us. We will start our farming career with $9.60 a year in dividend from Deere (DE). With our garden on the side of the house, we plan on them both working out. It will probably be a while before our dividends pay for one of those large green John Deere tractors, but our 300 Square foot garden probably does not need one. Although, we would be happy for someone to donate 1 to us.

The Brains Behind our Dividends. INTC

Having some brains while investing is important, but do they have to be human brains? Computers, cell phones, and many other electronics have brains too. In them, they are often called a CPU (central processing unit).

The best of breed in CPU’S is Intel (INTC). When buying a computer for a long time, your choices was an Intel (INTC) or Advanced Micro Devices (AMD) CPU. Advanced Micro Devices (AMD) is a $2 billion company and Intel (INTC) is a $141 billion company. “Well, if I know anything about which number is bigger than the other number, I’d say that” (Hermes, Futurama) Intel (INTC) is bigger.  Advanced Micro Devices (AMD) does not pay a dividend and Intel (INTC) pays a 3.5%. This makes the comparison pretty easy for a dividend portfolio, Intel (INTC) wins.

Now there are other competitors out there. With our rule of only investing in businesses headquartered in the USA, this eliminates a lot of other choices. Eliminating a lot of other companies, we are left with Intel (INTC). While it is true that Intel (INTC) has missed a lot of the cell phone business, there are a lot more areas to compete. They are still winning in computers, helping them be a cash cow. And there is a lot more opportunity for future growth. Cars are getting more electronics all the time and we will eventually have self-driving cars. With the term “Internet of Things,” this will be another growth area. Internet of things refers to idea that more and more items will connect to the internet. Such as controls for your house, toys, machinery, appliances, video games, communications, and many more to come.

Now a few of their competitors do have different advantages and do a better job than Intel (INTC) in certain categories. If we put them side by side, Intel (INTC) has the best chips in CPU’S. And they have a massive R&D (research and development) budget and lots of profits to keep competing where they want to compete. Being best in breed does not mean being the best of everything. It means being the best in what you do. Making $11 billion a year is a good way to show you are the best.

So we bought 10 shares of Intel (INTC) for $307.60 with our commission. Starting out, they are going to pay us $10.40 a year, with increasing dividends in the future. Since 2002, they have been paying the same or increasing dividends every year without missing a beat. We like our odds.

Is AAPL a dividend stock?

At one point today, the S&P 500 was down 3.6%.  That is another painful day for everyone. So, I figure this was another good buying opportunity. The S&P 500 is down 15% from its 52 week high. And the market could go down another 15%.  Lucky, my time frame is far enough out that I do not to report my next quarterly  results to the market. So what to buy in this crazy market?

Well, Apple (AAPL), for a long time, did not pay a dividend. In 2012, Apple (AAPL) starting paying a dividend. Currently, their dividend yield is a little over 2%. Not the best for a dividend stock, but there is more. They are only paying out 22% of profits. This will help them increase their dividend payout ratio in the future. And with their large cash balance, they can keep buying back shares, which will also increase there dividends.  Their PE ratio is only a 10.2, which is low enough to be a value play.

This will not happen, but over the next year, Apple (AAPL) could buy back 20% of its stock with cash on hand and its earnings. Then they could increase their dividend to 50% of earnings. The math works out to increasing earnings to over $11 per share. Then we increase the divided to 50% of earning, making a dividend payment of $5.50 a share. This would get us to a yield of 5.8% in 1 year. Now Apple (AAPL) has a lot of users for its cash. But it is possible and we expect a large yield on our cost.

Therefore, we bought 3 shares of Apple (AAPL) for $289.42 with commission. This will give a nice $6.32 a year in dividends. And we expect this to increase a lot into the future. Not a bad setup, considering they are one of the coolest companies out there.

Picking a dividend Utility Stock. DUK

This was a nice 3-day weekend. The stock market was closed on Monday. I, however, had to work. But it has giving me extra time to look over my next stock pick. With my recent selections of Alcoa (AA) and American Airline (AAL), it is time to select a safer dividend stock. What dividend portfolio would be complete without a utility stock?

Utility stocks are a nice safe pick. While I do not expect a utility stock to double overnight, they have protected downside. For this, we are looking at electric utility stock. Utility stocks have a built in moat around them. It cost too much money to build two set of power lines to every house. Because of this monopoly to most houses, they get rewarded with extra regulations. But they do have less concern with competition. And because more and more things need electricity, the demand will keep growing. A large future trend will be electric cars, more connected devices to the internet of things, and many others to come. So this will protect our downside risk.

One advancement that could be a concern is solar panels. With them becoming more and more economical to manufacture, they will become more popular.  While yes, ever house that installs solar panels will decrease demand from the electricity, I think that it will be overcome. A lot of the solar power houses will still not buy giant batteries needed to store electricity or buy enough of them to become 100% off the grid. This means they still need access to the grid. So there will still be some revenue from this and probably a flat fee to pay for the power-lines. And the electric companies are building solar panel farms. When a solar panel farm is built, it will decrease the need for coal, natural gas, and other raw materials to produce power. This will save cost in the future. While we probably still need solar panel pricing to come down in cost even more, it will be a growing trend that will probably benefit the electric companies.

So now we need to pick a utility company. A lot of investors choose to invest in utilities by investing in utility ETF’s. Three of the subjective best are Utilities Select Sector SPDR (XLU), Vanguard Utilities (VPU), and iShares US Utilities (IDU). The first and second biggest picks in all of these are Duke Energy (DUK). By buying their biggest holdings, I have access to the movement of these ETF’s without paying the extra management fees. And Duke Energy (DUK) is a member of the S&P 500. So with them being the picks of all of these, it feels like a good way to pick a stable dividend utility stock. With a dividend yield of 4.5% and paying an increasing dividend for 11 years, it will be a nice addition to our stock list.

So we bought 4 shares for $300.56 including commission. This will add $13.20 a year to our yearly dividend money making machine. While giving us a small payment now, this can increase in the future.  And as this is our 1st pick in utility stocks, this will increase our diversification.

Buying a Bank Dividend Stock with Raising Rates. WFC

Well, the stock market is down again. The S&P 500 is down again by over 2.1%. This week has been a hard week for the market.  With the market going down big again, I couldn’t help myself, so I bought a new stock.

Well, the world seems to be in shock right now. A lot of indicators are saying the Earth might be slowing down. In fact, the earth’s rotation is slowing down by about 20 millionths of a second every year.  But that is not what we are talking about. We are talking about the world’s markets. The stock market is down about 8% so far this year.

So we are going to pick a trend that will eventually help us. Right now, interest rates are very low. The Fed hike interest rates by 25 basis points (0.25%). While this is a small amount, it is the start of a future trend. While slowing economies usually mean lower interest rates, there is not much more room to go down. While going negative is possible, that seems unlikely. Even if it takes 3 more years to go up to up to normal rates, we are in it for the long-term. And banks are making money now. They make more money when interest rates go up, because they get charge people more money. That is a positive trend, at least for the banks.

One of the biggest names in holding stock for the long-term is Warren Buffet. One of his quotes is “Our favorite holding period is forever.” The company he runs is Berkshire Hathaway. Currently, Berkshire Hathaway own over 9% of the stock in Wells Fargo (WFC). Now we could do a bunch of research, compare the best banks, and see which one is best. Or we can just piggy back off of his research and just use his pick. The benefit of a holder like Warren Buffet is that I don’t have to worry about him trading in and out of the stock to try to make an extra $10 or even $100 million. I assume he wants to hold it for the next 20 years to make $40 billion.  I based that on them owning $24 billion in stock doubling with a stable dividend. While my amount will be much smaller, I still want to make money. And this might surprise you, but I do not know him. So he could buy more, sell it all tomorrow, or anything else.  But I like my odds.

Now we should not just blindly buy everything he owns. Wells Fargo (WFC) has a PE of 12 and a dividend yield of 3%, which is good. With our expectation of rising interest rates to increase future profits, Wells Fargo (WFC) can increase their future dividend payments. What about the market being down? It can be great news for a dividend growth investor.  The stock was at $58 in July 2015 and we were able to buy it at less than $50 per share. So I got an $8/share discount or about 15%. While the stock can certainly go lower, as long as I get my dividend for the next 20 years, I am less worried about it.

On 1/15/16, we bought 5 shares for $252.75 including commission. This will add $7.50 a year to our dividends. By buying our first bank, we have further increased our diversification. While this hasn’t made us rich yet, we are well on our way.

Good dividend Pick with Low Oil Prices? (AAL)

On 1/13/15, it was a rough day, with the S&P 500 falling 2.5%.  That is a lot. What does that mean for me? Well, I think it is stocking buying time. Since our plan is to own our stocks for a long time, buying on down days will help increase our immediate dividend yield now and in the future.

One of the current issues with the market is low oil prices. Low oil prices mean cheap gasoline price. How is that a problem? I agree, I like cheap gas prices. The problem is a lot of oil companies are in too much debt. And when they have too much debt and struggle to pay their bills, it makes the people who lent them money worry. When you are losing a lots of money, you will be slower to reinvest your money. Would you slow down to figure out where you went wrong and build cash? This means that even though low oil prices is good for most people, it can be an issue for a large sum of money flowing around.

So, with the oil issue causing weakness in the market, I am thinking of buying something that directly benefits from low oil prices. Airline stocks have a large expense of oil. Well, they use jet fuel which is made from oil. With the price of jet fuel so low, it will help them make more money. Even with the chance of the economy weakening, it should affect them less this time around. There are fewer major airlines with the mergers and bankruptcies. This will help the protect them to the downside. And with the cost of oil down, it will make it easier to lower prices to keep the planes full.

But we need dividends, that’s why we are investing. Wait, let me check my list. Yes, we are still investing for dividends. While the airline industry dividend payments are still low, there is minimal reason why they cannot grow. Right now, American Airline (AAL) the dividend only 0.6% of revenue. If that went to 5% of revenue, the dividend yield would go from 1% to 8.3%.  That would be an awesome yield.  And many companies pay that percentage. And American Airline (AAL) is purchasing a lot of shares with how cheap they are. Their PE ratio is only a 6 and the P/S ratio is only a 0.6.  This is cheap enough to be worried about it. What do they know that we don’t? We believe the cheapness is from them being an airline and the past bankruptcies of the airline industry, which is a fair concern. So this pick is definitely not risk free. But with the improvements to the industry, we believe those can be a thing if the past.

So to answer our original question, can an airline, specifically American Airline (AAL), be a dividend stock. The answer is yes. We might have to wait for a while for a super large yield. We believe we will be rewarded one day.

So we bought 7 shares for $290.43 including commission. This will add $2.80 a year in dividends. While giving us a small yield now, this can greatly increase in the future.  And this is our 1st pick in transportation, which will increase our diversification. Plus, with it benefiting from low oil, it will benefit as long as oil is low.

This is a Crazy Market, Let’s Make a Crazy Purchase

This is a crazy market. Last year, there was a large stock market drop and the market finished pretty close to even. And this year, the market has already gone down a lot. We are still going through the first week of the year, and it is down a lot. While we won’t violate our stock rules, let see what crazy pick we can add to our portfolio.

Aluminum
Aluminum

Most dividend investors are probably thinking about a high yield stock as speculation. That seems too easy to us. Let’s go in the other direction. Let’s pick a stock in a sector that is in a lot of pain. The stock market feels that way anyways. We are going to pick up a low yield stock with a lot of potential upside.

We still want a best of breed stock. Going through our best of breed list, we have Alcoa (AA) in aluminum. Right now, aluminum is in pain, like most commodities. And aluminum is currently being over produced. Boooo. I know, let’s buy them anyways. Hmmmm, the stock market is down, the stock is in a hard sector, the immediate upside does not appear to exist, and it pays a small dividend. I know, let’s throw money at it and invest.

First, how did they become best of breed. This one was actually pretty easy. Can you name another large US aluminum manufacturer? No? Well, then by default, they have to be the best. Not a good enough reason to invest in the company, but it does satisfy one of our rules.

Second, do they pay a dividend? Yes, although it is a small amount. Currently, they pay about 1.4%. Not great, but it does meet another rule of paying a dividend. If we look at the history, they were paying $0.15 per share or more, or 5 times as much. That would bring them to a yield of 7%. That would be a great yield on our purchase price. And we are investing for the long term. But how do we get to that great yield?

Third, Alcoa (AA) is doing a lot of work to fix their business over the past few years. They have closed plants that are not making money, increasing margins. And they are selling more finished products such as the metal panels on the Ford (F) F-150 truck. And they are increasing their sales with many others, like Boeing (BA). Like most things, businesses go in cycles. When aluminum does go up, it will be a fun ride.

Forth, the downside looks limited. Over the last 5 years, the low was $7.70 per share. That is about 11% downside, although it could go down further or out of business. Going out of business seems unlikely, because if they have not already done so with cheap aluminum pricing, they probably will not. Even so, they are still profitable. That is a small amount of downside with the potential of so much upside.

So they appear to be a good dividend speculative pick. In addition, their P/S is only a 0.5. So for every $2 in sales, we are only paying $1 for the stock. And the dividend to revenue ratio is only 0.6% of sales. This is a very low amount, giving them a lot of room to grow their dividend in the future. So Alcoa (AA) could be viewed as a value stock instead of speculative. However, we are leaving them in our speculative section.

So we bought 33 shares for $292.12 including our commission. This will give us a dividend payment of $3.96. While this is currently small, we expect this to grow a lot in the future. And Alcoa (AA) is expected to split into 2 companies in 2016. This means we will have 2 companies that will be good investments. While Alcoa (AA) will remain our best of breed aluminum maker, we will see how the other half does. So we just bought 2 stocks for the price of one and expect both to do well. What crazy dividend stocks are you investing in? Feel free to post it below in the comment section below.

Who is the better Car Dividend Stock, GM or Ford?

It is now the 1st week of the new year. We have decided to buy another dividend stock. I bet you are shocked, being that we are a site about buying stocks.

We have decided to add a car manufacturer to our list of stocks. With the price of gas so low, it will make purchasing a new car easier for people. And the average age of cars in the US is 11 years old. This makes the average birth year of about 2004. Therefore, a lot of cars are a lot older than that. This means a lot of cars will need to replaced, which equals more new car sales.

Toy Cars
Toy Cars (Not Real Cars)

There are a lot of car companies to pick from. We do not want to buy all of them, so we are going to want to pick the best one for our portfolio. We are going to limit our choices to USA companies. We want our passive income in US dollars so we will not have to worry about the exchanged rates or foreign taxes. And since most/all car companies are worldwide, we get worldwide exposure, and they can worry about exchange rates. So, from our list, we will be excluding Toyota (TM), Volkswagen (VLKAY), and Honda (HMC). And since we are looking for dividends in this portfolio, we will have to exclude Tesla (TSLA). This leaves us with Ford (F) and General Motors (GM) to choice from.

We have decided to use 4 metrics to pick between them.

Dividend Yield: This is a simplest one. We can get the yield from a lot of stock sites. The higher the number, the more they pay you. Currently Ford (F) has a yield of 4.23% and General Motors (GM) is 4.26%. On a $1,000 investment, the difference would be $0.30 per year, making this is a Tie. No winner.

Dividend Revenue Payout Ratio: On top of yield, we want confidence that they can afford to pay. We will take the current dividend payment and divided it by the last 4 quarters of revenue. The dividend revenue payout ratio for Ford (F) is 1.64% and General Motors (GM) is 1.47%. That means General Motors (GM) could raise their dividend by 12% and be the same payout ratio as Ford (F). So the winner here is General Motors (GM).

P/E Ratio: This is a very common metric to compare stocks. P = Share Price and E = Earnings per share. The lower the P/E ratio, the cheaper the stock. Currently Ford (F) P/E ratio of 11.8 and General Motors (GM) is 12.5. Therefore, Ford (F) is the winner.

Revenue Growth: We want our stocks to be increasing their sales, because this will give companies the ability to increase their dividend payments in the future. From 2012 to last 4 quarters, Ford (F) increased its revenue by 8.7% and General Motors (GM) increased by 0.1%. Ford (F) is growing much faster, and is the winner again.

And the Winner is: With Ford winning 2 categories, Generals Motors (GM) winning 1, and one tie, the winner is Ford (F).

Ford (F) has been increasing its dividend in January for the last 2 years by $0.10 per share per year, and there is a good chance they will do it again. With our goal of making $12 per hour with this account, we will take $12/year and divide it by $0.70 per share, and round up to 18 shares of Ford (F).

Today, we bought 18 shares for a total of $254.86 including commission. At the current dividend rate, they are going to pay us about $10.80 per year. This is now our 3rd stock purchase. We are starting to get on our way to building a passive income stock portfolio of dividend paying stocks.

My 2016 Stock Dividends Goals

It is the start of a new year. While we have the goal of becoming finically independent, we could use some goals for this year to increase the likelihood that we will get there. Without Goals,

Goal 1: Our 1st goal is to make at least 24 stock purchases this year. This will give us the ability to dollar cost average our positions. It will also give us a reason to keep researching stocks to make more purchases.

Goal 2: To build our best of breed stock list. There are several main sectors like energy, manufacturing, banking, etc. And within those groups, there are several sub groups. In computers, there is hardware, software, clouds, servers, social media, and several more. While we are picking our stocks, this will give us a reason to pick best in breeds their categories. But besides the best of breeds we invest in, we want to get the rest of the categories filled out for when we are ready to invest in them. That way, when an opportunity presents itself, we will have the knowledge.

Goal 3: Read at least 6 books in finances. It is important to keep learning while we growth our portfolio.

Goal 4: Write at least 1 article for this site per week. This is a great place for me to learn. And by having to write articles for this site, I will have to have think out the reasons to buy the stock. It will help keep me honest and logical with my stock picks. Such as not changing my strategy, like buying a non-dividend stock even though it might be a good company.

Goal 5: Increase my projected dividend income by $600. This will be the hardest of the goal to meet. At a 5% dividend yield, I will need to increase the money invested by $12,000

With these goals above, this will greatly increase my dividend income and increase my knowledge to make even better purchases.

2016 Goals

How to get free shares of AT&T (T)?

What if we could get free shares of AT&T (T)? What if we could get shares without spending any money? Well, in a way, you can. It all depends in how you look at it. “Luke, you’re going to find that many of the truths we cling to depend greatly on our own point of view.” (Obi-Wan Kenobi, Star Wars: Return of the Jedi).

As of the writing this article, AT&T (T) cost $34.74. Where can we get this money? Well, often, cable bills can cost $150 a month or more. Log into your TV subscription account and see what you are spending money on. HDTV (high definition TV) service can cost $10 per month. Yea, the TV picture might be better, but is that worth $10 a month. Cancel that. Are you spending money on movie channels that you are not using? Canceling some or all of them could save another $15 a month. Do you the need the super-fast internet connection? Could you reduce you high speed internet from 25 mbps to 17 mbps, which is still a fast connection? Yes, some of you download might take 88 seconds instead of 60 seconds. But is it worth 22 seconds to save another $15 a month.

With just enough the ideas above, they will save $40 a month. As they say, “a penny saved is a penny earned” (Benjamin Franklin). Well, with the changes above, you are saving 4,000 pennies a month. Benjamin would be so jealous. That is enough money to buy 1 share a month. Yes, the current price is ~$35, but you are putting your monthly savings into AT&T (T). Therefore, another way to look at, you are buying 1 share of AT&T (T) for the cost of HDTV and some movie channels. Is the cost of not having some extra services worth 1 share of AT&T (T) per month?

Yes, it is possible that the price of AT&T (T) will go down. What if AT&T (T) goes down to $26 per share? Your investment will lose 25%. Ouch, that is no fun. “Khan!” (Spock, Star Trek: Into Darkness) What is the % loss on spending $10 on HDTV? After the month is over, your loss is 100%. You do not get any money back for watching HDTV. At the end of the month, you cannot sell the HDTV to someone else. It does not exist anymore. Yes, you can pay another $10 next month for another month of HDTV, but you will lose that money also.

So now we are investing money that we would have had a 100% loss anyways. And here is a little secret, you do not have to buy shares of AT&T (T). You can use that money to buy any other stock you want. Want to cut your cable bill with AT&T U-verse and invest in Verizon (VZ), you can. Shhh, do not tell AT&T (T). Or you could buy shares of Ford (F) if you want. Here is another little secret, you could spend the money on anything you want. Pay down debt, get a meal at a restaurant, or whatever. After 1 year, that $40 a month will equal $480 a year. That could get you a nice within driving distance vacation, a new tablet, or just leave it in your bank account. Well, I guess those are not really secrets. But anyways, the point is, would you rather give your money to the TV provider or use it for any things else you could want?

Here, we like investing our savings. We have followed our own advice above. We have gone on the TV provider’s website and reduced our cable bill by about $40 a month with the suggestions above. And we recently bought shares of AT&T (T).