Tag Archives: Investing

Is Diversification Important in the Accumulation Phase?

One of the common themes that is included in most investment books is the need to maintain a properly diversified portfolio. Most recommend that you hold a minimum of 5-10 stocks in your portfolio and that no sector account for more than 20% of your total portfolio. A lot of other dividend growth investors prefer to maintain a portfolio size of at least 35-50 stocks so that if any holding cuts or eliminates their dividend, the loss in annual income will not be so great that it isn’t made up by dividend raises from other stocks.

If you have seen my portfolio page, you will see that not only do I not have that many positions but that I also am not very diversified by sector either. REIT’s and oil stocks make up a disproportionate amount of my portfolio and I have received many questions since starting this blog in regards to my diversification. Right now, being in the very early years of the accumulation phase I am comfortable not being diversified.

Instead of adding new positions just for the sake of diversifying into new sectors and balancing out my portfolio more right now I am content to continue adding whatever company presents good value at the moment and fits with my current goals. For example over the past year wanting to increase the overall yield of my portfolio and jumpstart my dividend income I invested a lot in oil companies, adding to my positions in Chevron, BP and Exxon Mobil. With the oil majors all trading at fair and undervalued prices due to the decline in oil prices I was able to both increase the yield of my portfolio while also getting great companies at a fair price.

Personally I believe diversification only becomes truly important as you get closer to actually living off of your dividends. Obviously I wouldn’t want REITs and oil stocks to continue to make up such a large percentage of my portfolio once I’m actually ready to retire early. My tentative goal right now is to be equally balanced in a few years after I have the chance to start some more positions. In the meantime though, I plan on continuing to load up on stocks that present good value and worry about becoming completely balanced out later down the road.

So what do you think? Do you think it is necessary to have a diversified portfolio when starting out or do you think diversification is something you can ignore for a while you build up your portfolio?

Switching to Drips

For the last two years I’ve been dripping only stocks in my Roth IRA. In the taxable brokerage account I’ve been taking them as cash and combining them with fresh capital every few months to make a separate stock purchase or use it towards paying off my credit card bill by buying stock through Loyal3.

Well that changed a few days ago as I’ve decided to start dripping all my dividends in both my Roth and taxable brokerage accounts. Due to the service being unavailable, dividends received from Loyal3 will continue to be selectively reinvested.

So why the change?

First off, I haven’t been making as many regular large purchases as I originally planned on doing so, meaning it sometimes goes several months between even touching my taxable account. Since I prefer to keep my commission costs less than .5%, I like to save up around $1400 before I buy more stock. By automating how I handle dividends and choosing to drip all of them, this puts the capital to work instantly, buying more shares which in turn will produce more dividends. Nice way to keep growing the account even when fresh capital for purchases is limited.

Second, I’ve been reading a lot of articles and blog posts recently that show just how much of a stark difference there is in total returns when you take dividends as cash vs. reinvesting them in the stock. Dividend growth is also accelerated a lot as well. Granted, I’ve always reinvested dividends by doing so selectively but it usually took a long time to do so. Looking through my Roth IRA transactions I can see that when I initially bought 15 shares of Realty Income I was earning $2.73 a month in dividends. Now, fast forward to today, I am earning $2.86 per month. There has been a few small dividend increases (less than 1 cent) from Realty since then. Everything else has been the result of dripping. Now that’s a small increase on a pretty small position in that account. Not a big deal, right?

Now imagine if I had done this with the 109 shares of O I have in my taxable account. The $19.92 I am currently earning each month in that account could buy almost another 1/2 share per month. Over the course of the year, that is almost 6 additional shares that I didn’t have before.

But what about valuation?

Looking through the stocks in my portfolio there isn’t a single one that is so overvalued that I wouldn’t consider buying more shares out right, if those were my only investing choices. With a long-term investing timeline, I’m comfortable overpaying a bit for shares in quality companies like those in my portfolio since there is plenty of time for earnings to increase and “grow into the valuation.” Besides paying up for at most, half a share in a company per month isn’t that big of a deal. It just allows the compounding snowball to grow that much quicker.

Simplifying Things

Dripping dividends and automating that part of your investing activity also makes it much simpler. No more transferring money around to take dividends from one account to use in another account toward a purchase. Just let everything run on autopilot and add more stock through fresh capital when it’s available. It also takes away the temptation to spend those dividends as you can’t spend money you don’t have.

Going Forward

Like most things, I imagine my thoughts on this topic will change as the years go by. That’s all right and what makes this fun. Can’t just do the same thing all the time, right? Gotta mix it up every once in a while and try new ways of doing things. I could see myself switching back to selectively reinvesting dividends, combining them with fresh capital each month to make a purchase once (1) I have the income necessary to make a normal sized purchase each month and (2) once my account is producing a significant amount of dividends. An extra 50 bucks or so doesn’t really help me out getting the required amount to invest each month. Once that figure climbs to be several hundred, maybe I’ll rethink this strategy.

 

Disclosure: I am long O. Please see my portfolio page for a complete list of my holdings.

So what are your opinions on the subject of dripping vs. selectively reinvesting? Or do you not reinvest dividends and simply use them to supplement your current income? Sound off in the comments and let me know what you think! 🙂

Credit/Debit Card Policy Change for Loyal3

Good evening everybody! Sitting here watching the NFL draft (come on Bill, we need a TE for my Patriots 😉 ) and I saw the following e-mail pop up on my cell. Since it relates to investing here on the blog, I figured I’d share it with all of you.

CaptureIf you’ve been reading me for a while here, you’ll know I’m a fan of Loyal3’s commission free brokerage service. Since January, I’ve been using it to dollar cost average into positions in Coca-Cola (KO), Target (TGT), and McDonald’s (MCD). This e-mail highlights a policy change regarding using credit/debit cards for purchasing stock which has been one of the nice perks with this service. With no commissions, if you use a credit card you can literally be paid to buy stock with cash back rewards.

So now you’ll be limited to only buying stock with a credit/debit card in the amounts of $10, $25, and $50 which have always been the default options on the site with previously an option to set your own amount. Since I usually make buys in purchases above $50 and always use my credit card to harvest those cash back rewards, I guess I’ll now have to make those buys in smaller batches. Since it looks like you’ll still be allowed to buy more with a card, you’ll just need to split up your purchases into amounts of $50 (or $10/$25). The $2500 maximum total investment each month will still be in place.

I asked a Loyal3 rep through their chat feature on their site and they said making multiple small purchases of those preset amounts will be allowed. However they recommend you waiting at least a few minutes in between placing orders so the system doesn’t think the same order is being sent multiple times.

Kind of a pain, and not really sure why they would made the switch, but I’ll still continue to use them as long as the trades remain commission free. Still one of the better brokerages to slowly build up a dividend growth portfolio.

What do you think of Loyal3’s new policy? Will this affect your use of the service?

 

Monthly Investing Recaps: April 2014

At the start of each month I detail all my buy/sell activity for each of my 3 individual stock portfolios: Loyal3, Roth IRA, and Taxable Brokerage accounts. It’s just one way I am chronicling my journey to financial independence here at Starting From Zero.

In addition to these 3 accounts, I also continued investing in my Thrift Savings Plan (TSP) again this month. Right now I’m contributing 4% of my base pay but may adjust this in the future. The majority of my investing will still be in my taxable and Roth accounts. The TSP is basically a 401k plan for federal employees including the military. It only offers index funds but does have probably the lowest expense ratios around, even lower than Vanguard. Right now I’m putting my contributions in the C Fund which mirrors the S&P 500 and the S Fund which is a small cap index fund. Since these deposits typically take a while to reach my account, I won’t be detailing those transactions here.

With my tax refunds hitting my account this month I was able to invest more than normal as I put all of my refund into stocks. Here is what I did in April.

Loyal3 Account

Buys

7.72 shares of Coca-Cola (KO) @ $38.86 per share.

1.6361 shares of Target (TGT) @ $61.12 per share.

8.3479 shares of Target (TGT) @ $59.89 per share.

Sells

None.

Quick Hits: After receiving my tax refund this month I put all of my normal monthly investing capital to work here increasing my stake in Target. I plan on continuing to dollar cost average into KO as long as it remains at or below $40 as I would like this dividend champion to be a core holding in my portfolio.

Roth IRA

Buys

7 shares of Visa (V) @ $199.30 per share.

22 shares of Aflac (AFL) @ $61.00 per share.

Sells

None.

Quick Hits: I received a combined federal/state tax refund of just over $2800 which I quickly put to work initiating two new positions for my portfolio. I detailed my buy list recently and ended up going with Visa and Aflac. With its low yield it is easy to look at V as only a growth stock and not consider it as a dividend growth stock. However, the global payments processor now has a 7 year history of raising their dividend since going public and with a low payout ratio and high earnings growth figures to be able to continue doing so at a high rate in the future. With the shares dipping below $200, off a 52 week high of $235, and trading at a reasonable 25x earnings I started a position.

Aflac is a dividend champion in the insurance industry with a 31 year history of annual dividend raises. Due to currency concerns regarding their large amount of business in Japan, AFL is trading at a very attractive P/E of 9.

Taxable Brokerage

Buys

None.

Sells

29 shares of Powershares Financial Preferred ETF (PGF) @ $17.81 per share.

Quick Hits: This was one of my first purchases when I started buying individual stocks/ETF’s last year. I was attracted by the fund’s high yield and monthly payouts and not exactly understanding how preferred shares work, started a position. While the monthly payout is nice for individuals needing income today, I’d rather have more growth so I sold all my shares this month at a little bit of a loss and reinvested that money in my Loyal3 account.

 

Full Disclosure: I am long AFL, KO, TGT, and V. This post is not intended to be a buy or sell recommendation on any stock or ETF mentioned and is designed for educational/entertainment purposes only. Only you are responsible for your investing and I always encourage you to conduct your own research prior to investing. Please see my disclaimer page for more information.

How was your April for investing? What do you think of my buys/sells for my portfolio? Share with a comment below and thank you for reading.

Investment Account Types

After choosing your investment strategy, deciding on where to make those investments from is the next step.

For those of you new to investing here is a quick rundown of common accounts that you can use to save for retirement.

Non-Retirement (Taxable) Brokerage Accounts: This is where I have the bulk of my stocks currently, though this year I want to focus more on putting more money in tax-advantaged accounts. Although I will be using the dividend income produced by this account for financial independence/early retirement, the account isn’t technically a retirement account as it has no tax advantages like IRA’s and 401k’s. The big benefit to having this type of account is that I can withdraw funds (dividends and principle) at any age, whether that be once I’m 40 (and hopefully financially independent 🙂 )or even tomorrow if I need some extra cash to supplement my current income. As these types of accounts aren’t tax advantaged, there are no contribution limits.

401k: With the days of defined benefit pensions mostly over, the 401k has become the primary retirement savings tool for most people. These plans are offered through your employer and generally allow you to invest in various mutual funds/index funds. Some employers may even match your contributions up to a certain percentage, essentially giving you free money. Generally contributions to 401k’s are made with pre-tax dollars, meaning the contributions will be tax deductible when you put them in but will be taxed when you begin withdrawing them. However there are some plans that now offer a Roth version, meaning the money you contribute is made with after-tax dollars, which although won’t give you a tax break today, can be withdrawn tax-free when you retire. For 401k’s you can’t withdraw funds until you turn 55 or 59 1/2 depending on your situation. The contribution limit per year by the employee is $17,500 (employer matches don’t count toward the limit).

IRA’s: There are two primary types of IRA’s: Traditional and Roth. The traditional option work the same as most 401k’s with contributions being pre-tax dollars. The Roth is made with after-tax dollars. The main difference between IRA’s and 401k’s are that IRA’s are accounts you can start on your own whereas you must work for a company that offers a 401k plan to participate in that type of investment vehicle. The great thing with an IRA is that you have more freedom to invest the way you want. You can choose to invest directly with a mutual fund company and invest in their funds or you can open a brokerage account as an IRA, giving you the option to not only buy mutual funds, but also individual stocks and ETF’s. This is how I have my Roth IRA set up, as a brokerage account.  Money put in traditional IRA’s cannot be accessed until you turn 59 1/2 without incurring an early withdrawal fee and paying taxes. For Roth accounts, you can withdraw the amount of your contributions (but not any earnings) anytime. All additional funds in Roth’s cannot be accessed until you turn 59 1/2 without incurring a penalty. The current annual contribution limit for all of your IRA’s combined (if you have multiple ones) is $5500.

So what’s my plan for using these different types of investment accounts?

Right now I invest in a combination of the 3, with the bulk of my portfolio in a taxable brokerage account (and my Loyal3 account which is structured the same way as taxable) made up of dividend growth stocks, the rest in a Roth IRA of more dividend growth stocks, and a small part in my Thrift Savings Plan (federal employee 401k) which is made up of index funds. My TSP account will be probably be rolled over into a traditional IRA once I leave the military so I can invest into stocks instead of just index funds.

What about you? What type of investment accounts do you use? Thanks for reading. 🙂

Target’s Credit Rating Cut, Are You Concerned?

Being a long-term investor with almost 20 years until I plan on retiring, I usually don’t give much stock to short-term issues and news that comes from my stock holdings. However I do subscribe to Seeking Alpha’s market current alerts so I can keep up with all the goings on with my investments. The majority of them don’t influence me much but are good to know to keep up with what my stocks are doing like acquisitions, share offerings or buyback announcements, and of course my favorite: dividend announcements, particularly those increase ones. 🙂

Yesterday I received this one in my e-mail: S&P cuts Target’s credit rating. The rating was cut from A from A+ due to a weak 4th quarter, which was highlighted by the data breach at their stores, resulting in 40 million payment card records being stolen. This combined with a more difficult than expected roll-out in Canada has dropped the stock from its 52 week high of $73.50 to its current $59.98 as of the close of Friday’s trading.

Since the data breach and weak 4th quarter results analysts and financial writers all over the internet have started predicting the eventual demise of the company. Although the short-term doesn’t look that great for the retail giant, I’m more concerned with where the company is going to be 5-10 years and more from now.

Despite having earnings fell to $3.07 in 2013 from $4.52 a year prior, free cash flow per share actually increased from $3.09 to $4.78, which is enough to cover the dividend and continue their 46 year history of raising the dividend. The increase in free cash flow per share is partly due to the firm’s share buyback policy which over the past decade has reduced the share count from 912 million in 2005 down to 642 million at the end of 2013. With earnings likely to be impacted in the short-term I expect them to slow down on the buyback so they can continue returning part of their free cash flow to shareholders. Their dividend growth should still be decent considering they had been increasing dividends by 21.4% over the last ten years. Even if it drops by half of that, I would still be happy as it would still be quite a bit above the rate of inflation.

Overall I believe Target (TGT) to be a buy today at these levels and I plan on continuing to dollar cost average into the stock in the coming months. As a dividend growth investor with a long-term investing horizon, I try not to worry too much about the short-term ups and downs of a company’s performance. Very few firms will ever grow linearly and never have any issues. A credit rating cut doesn’t look good for any company, but even with it, Target still has a good rating and one that is investment grade. Even though the Canadian expansion may not be going as well as hoped, I like that the firm is not standing pat and resting on their laurels and still looking to grow their business to better compete with others in their sector, like Wal-Mart (WMT).

While not a core holding for my portfolio, Target is one that makes a good complement to my other holdings and one I plan on holding a long time. Here are some links to places to further research Target and some recent blog posts on the stock if you want to look into the stock further.

Morningstar: Target

Reuters: Target

Why Did I Purchase this Dividend Paying Company For a Third Month in a Row? by Dividend Growth Investor

Recent Buy: Target by Dividend Mantra.

4 Reasons Why I Added Target To My Portfolio by Detail Investor @ Seeking Alpha.

Full Disclosure: I am long TGT and WMT. Please see my disclaimer page and do not take anything I said here as a recommendation to buy any stock. Always do your own research before buying.

What do you think of Target as a dividend growth investment? Do you have currently hold it in your portfolio and are you looking to add more with the recent weakness? Let me know in the comments below. 

Why Are IRA Contribution Limits So Low?

When I first started learning to invest, one of the first things that I learned about when it came to retirement accounts was the Roth IRA, mostly from the teachings of my father. Sounded like a really good plan at the time and I couldn’t think of any drawbacks to it. Although my contributions would be taxed prior to going into my account so that I could withdraw money tax free in retirement, I was and still am in a low enough tax bracket where it seemed like a great trade-off. Plus I could get to put in $5500 a year which I assumed would be plenty to save for retirement. As I progressed in my investing and embraced the dividend growth strategy I decided achieving financial independence would become my new goal instead of a “normal” retirement age. The key to this I quickly learned, by way of reading great blogs such as Mr. Money Mustache and Dividend Mantra was that saving and investing a high percentage of my income, 50% or more, was really the key to achieving this goal.

Once I got my spending under control and began this new frugal lifestyle completely, I realized how quickly I was going to max out my Roth each year, leaving me to have to invest the rest of my savings into taxable brokerage accounts. While having a large chunk of my investments in taxable accounts will allow me more flexibility in early retirement, I would still like to take full advantage of my Roth as I’ve learned more about being able to withdraw contributions (principle) from these accounts before 59 1/2 years of age without penalty. I tried to figure out any other way of contributing more to a tax-advantaged account. I looked into maybe opening a Traditional IRA, I figured if I did that, maybe I could contribute $5500 to both? 😉 After a very short google search I quickly realized that this would not work. The $5500 limit is for all the IRA’s you own, regardless if you have multiple accounts or account types. 🙁

What’s the point of the government trying to give incentives for people to save for their own retirements and be self-sufficient if you are going to limit how much they can save? Shouldn’t ol’ Uncle Sam allow people like me, who despite their relatively low income want to put away large amounts of money each year for their retirement? Plus, I imagine a majority of the individuals out there with IRA’s probably invest in mutual funds and probably don’t have the investing itch that I do, investing the rest of my money in a “non-retirement” account. So what did I do? I did what any good citizen should do, write my Congressman.

Figuring I had a better shot at getting a response if I diversified a little, I sent the same e-mail to both the Representative from my district and both of my state’s Senator’s. A staff member of one of the Senator’s actually called me to discuss my proposal to increase the limit for at least for those in the lower tax brackets but he didn’t seem to really understand what I was asking for and just gave me a lot of political bullshit. The second sent me an e-mail which you can see below explaining how the government can’t afford to raise contribution limits to tax-advantaged accounts like IRA’s and 401k’s due to the potential lost revenue.

Dear Mr. SFZ,

Thank you for sharing your views on the system of retirement tax incentives. I agree with you about the importance of encouraging Americans to save for their retirement, particularly given employers’ increasing shift from defined-benefit pension plans to defined-contribution plans, and many Americans’ concerns about whether they will outlive their savings. 401(k) plans and IRAs serve a crucial role in facilitating retirement savings, and I will carefully consider the effects of any proposed changes to these incentives in upcoming tax reform efforts and budget negotiations.

While retirement tax incentives like IRAs undoubtedly benefit our society by encouraging people to plan ahead for their future financial needs, I cannot commit to expanding their reach. As it stands, these tax incentives will cost the Treasury approximately $117 billion this fiscal year in forgone tax revenue, and in a time of tightened budgets and growing national debt, we must be cautious about increasing this figure, whether by raising allowable contributions or by reducing penalties for early withdrawal. That said, I remain open to tax reform proposals that tweak this system in fiscally responsible ways.

Once again, thank you for being in touch with me. I will be sure to keep your thoughts in mind while I work on the wide range of issues that come before the Senate. Please feel free to contact me in the future on other matters that I can bring to the Senate’s attention.

 

Best Regards,

ANGUS S. KING, JR.
United States Senator

This is the actual e-mail, copied and pasted directly from my g-mail account with just one minor name change. 😉

So basically I have to hinder my investing, impacting my retirement goals because the government can’t afford any additional lost revenue. If a 21 year old can get his financial house in order and develop a long-term approach to his financial management practices, why can’t the government?

In the mean time until our country can get it’s massive spending habit under control so it won’t “need” all this tax revenue and contribution limits can be raised I plan on continuing to max out my IRA(s) and investing the majority of the rest of my monthly savings in my taxable brokerage/Loyal3 accounts. I’m also starting up my Thrift Savings Plan contributions this month which although will not allow me to invest in dividend growth stocks, will allow me to put more money away in a tax-advantaged account on top of my $5500 IRA contribution.

What are your thoughts on IRA and 401k limits? Do you believe they should be raised? How about for individuals with lower incomes? Share your thoughts and opinions below with a comment. Thanks for reading! 

Updating my Potential Buy List

Time to share my current Buy List of dividend growth stocks. These are stocks I have done research on and are on my short list of potential stocks to buy soon. I like to keep such a list to help me narrow down my purchases each month and keep me on track. The stocks listed are separated into two categories, Stocks I Currently Own, and New Stocks.

First, the stocks I currently own that I consider would like to purchase more of at current market prices.

Chevron (CVX)-My original cost basis for the oil major was around $120 a share and it is currently trading below that at $117. The company has paid out growing dividends to shareholders for 26 straight years. The current P/E is 10.61 which compares favorably with its 5 year average of 10.3.

Coca-Cola (KO)-The king of dividend growth stocks. 😉 With a current P/E of 20 I consider KO to be fairly valued and have been accumulating shares using my Loyal3 account recently and plan on continuing to do so as long as the stock remains around $40 a share.

General Electric (GE)-General Electric has been doing all of the right things lately as they continue to recover from the recession and the dividend cut that ensued. The firm has gradually been reducing the size of its financial arm and going back to its industrial conglomerate roots. With over a $200 billion dollar backlog of orders, the company is on track to get back its status as a blue chip dividend payer.

McDonald’s (MCD)-Another stock currently trading at what I consider fair value. While MCD doesn’t have as much of a margin of safety in the share price as I’d normally like, with a very long-term investing horizon, I feel comfortable paying up a little for a quality stock as I detailed here.

Philip Morris (PM)-With 2014 slated to be an investment year for the company, the stock has taken a bit of a hit recently, currently trading 16% below its 52 week high. I originally initiated a position at $89 so I would be thrilled to be able to pick up some more at almost $10 a share less.

Target (TGT)-Between the data breach and not so great start to its expansion in Canada, TGT has taken quite a bit of a hit recently and is now trading 19% below its 52 week high. Although I expect the dividend growth to slow over the short-term due to its recent troubles, I expect TGT to recover and continue to be an excellent long-term holding. Like KO, I plan on continuing to dollar cost average into the stock each month using Loyal3.

Now for stocks that would be new positions for my portfolio.

Aflac (AFL)-While AFL doesn’t have a high starting yield at 2.4% the stock has a great dividend growth rate history with averages of 8.1% and 16.8% for the past 5 and 10 years respectively. The biggest thing the dividend champion has going for it right now is a great valuation with a P/E of just 9.3 which is a discount to both its historical P/E and that of its sector.

General Mills (GIS)-Similar to MCD, General Mills isn’t trading with very much of a margin of safety with a P/E of 18.7, slightly above its 5 year average of 16. I’d really like to add this stock to my portfolio this year but will be waiting for a pullback before I make a purchase.

Kinder Morgan Inc. (KMI)-Kinder Morgan is a company I’ve been reading a lot about recently and wouldn’t mind adding it here at current prices where it currently trading at $31, down from its 52 week high of $41.49. Nice combination of a high starting yield, high dividend growth rate, and an attractive entry point.

 

Full Disclosure: I am long CVX, KO, GE, MCD, PM, TGT. Check out all of my holdings here. This post is meant for educational/entertainment purposes only and should not be considered as a buy or sell recommendation for any stock mentioned.

What do you think of these stocks? Do you hold any of these in your portfolio or looking to add them? Let me know in the comments! 🙂

McDonald’s Stock Research

Lately with all the saving I’ve been doing to get ready to move into my own apartment off base, I haven’t had a lot of money left over each month to invest with. Therefore I’ve been doing all my stock investing in my commission-free Loyal3 account. The last few months I’ve mostly just been buying shares of Coca-Cola (KO) as the stock has continued to trade at a fair valuation.

Although Loyal3 is great with their no commission or fee set-up, it is limited by the number of stocks you can buy. The whole list can be found here. Browsing through them the other day I separated out all the ones that (A) paid a dividend and (B) has increased that dividend for at least 5 years. This is what I came up with: Coca-Cola, Dr. Pepper Snapple (DPS), Hasbro (HAS), Kellogg (K), Mattel (MAT), McDonald’s (MCD), Microsoft (MSFT), Nike (NKE), Pepisco (PEP), Target (TGT), VF Corp (VFC), and Wal-Mart (WMT). Not a bad list to choose from by any means.

I plan to continue to dollar cost average into KO and add more to my TGT position as long they remain fairly valued and undervalued in the case of TGT also but wanted to add a new position to continue diversifying my portfolio. Of the ones mentioned above, I decided to go with the home of the golden arches: McDonald’s, to add this month.

As I’m sure most of you know, McDonald’s is a global fast food franchise with locations in over 100 countries. It was founded in 1964 and currently has a market cap of $96 Billion. The dividend champion has been increasing their dividend for 38 years now. While the latest dividend increase of 8.7% disappointed some dividend growth investors after seeing double digit increases over the last few years since 2008, the stock still has a 5 year dividend growth rate of 13.9%.

Taking a look at the rest of the company’s fundamentals, McDonald’s has a current P/E ratio of 17.6 which compares favorably with their 5 year average P/E of 17. The forward P/E is fairly low at 14.9 which is below the S&P 500’s average forward P/E of 16. Going back ten years, MCD has been able to grow earnings per share every year except in 2007.

This trend is expected to continue in the future with estimated 8.4% earnings per share growth over the next five years, about the same as the past 5 years. This should allow the company to continue to raise the dividend in line with earnings growth and with a payout ratio of only 58.38%, allows the company to grow the dividend in excess of earnings if they choose to do so.

In conclusion, McDonald’s looks like a good long-term investment opportunity at its current valuation considering its dividend growth history, expected future earnings per share growth, and dividend growth rate. I will be starting to dollar cost average into this stock starting this month.

Full Disclosure: I am long KO, TGT, and will be initiating a position in MCD soon. Please see my disclaimer page.

What do you think of McDonald’s as an investment right now? Does anyone else own it in their dividend growth portfolios? Thank you for reading.

 

What are you saving for?

Ok, so now we’ve hopefully got our finances under control by avoiding lifestyle inflation, and setting up a properly funded emergency fund. The next step is deciding on your long-term goals and the reason you are investing. Do you want to achieve financial independence early? Still retire in your 60’s but have more cash flow to travel? Save up for a child’s college expenses?

The answers to these questions are very important and must be considered when deciding to start investing. If you are in your 20’s and planning on retiring at age 65, you will be investing differently than say, a 40 year old preparing to send their oldest kid off to college in 5 years, or a 21 year old like me trying to reach financial independence by age 40.

Before you open a brokerage account and buy that first stock, take some time to figure out your long-term goals. Then you can create a plan for your investing actions that will allow you to achieve these goals. I’d recommend actually writing it down so it is more concrete and you can reference it later. This plan will keep you focused on achieving your goals through good economic conditions and bad. If you don’t have a plan, it is too easy to lose your way and get discouraged when you run into adversity (think 2009 recession 🙁 ).

Once you figure out your reasons for wanting to invest you can then start investing. I’ll be posting my investing plan that will allow me to achieve my long-term goals here soon.

What are your reasons for choosing to invest? Leave a comment below.