In this month’s portfolio update, I’m going to explain how I research Dividend Stocks.
This includes the characteristics I look for in companies, mental filters, and key financials
to analyze. But don’t worry, I’ll still give you an update on my entire portfolio’s
performance and all my new buys. So let’s roll the intro. (Intro Vid)
My name is Zach and you should leave a like and subscribe to the channel if you enjoy
the video. Before we start, I’d like to remind everyone that you can join a community
discord server and see my entire portfolio if you support over on Patreon. Link in the
description. With that said, let’s dive into the numbers.
Since May 2020, I’ve gone from $32,939 to $69,154 dollars invested. My current dividend
yield on cost is 4.49% and my compound yield, which includes reinvested dividends, is 4.7%.
The differential between the dividend yield and compounded dividend yield stayed at .20%.
The only reason it didn’t increase this month is that I sold 2 stocks.
My current dividend portfolio value is $88,654. It only increased slightly this month, despite
me investing more money. This was due to the market seeing a slight correction during the
month of September. The S&P 500 saw a 5% decline over that time. This is the first negative
month in quite a while, which can be a good thing. The main goal of my portfolio is to
build a growing source of dividends and free cash flow generating assets. So when the price
of stocks goes down, then I can buy at a higher dividend yield on cost and free cash flow
yield. The other special thing about September is that it was actually my largest month of
dividends so far! That’s right! In September, I earned $309
in dividend income. This gives me a 3-month rolling average of $230.94. Notable payments
from last month include $127.63 from ExxonMobil, $41.57 from Walgreens Boots Alliance, $25.68
from Chevron, $20.78 from PepsiCo, $12.89 from Kroger, and $9.54 from Microsoft. I reinvested
all of these dividends, which helps put the dividend snowball in action.
Here you can see my current cost allocation by sector. Communication Services is my largest
at 27.7%, followed by Consumer Defensive at 25.6%, Technology at 14.5%, and Energy at
12.5%. Alright now let’s look at my recent transactions.
I sold out of ED and BGS. BGS resulted in a 114.39% profit and I sold ED at a 12.8%
profit. In total, these 2 stocks gave me a 47.97% return. I reinvested all of the $2,666.13
into new stocks. I bought 5 shares of Kroger at an average
cost of $39.84, giving me a 2.11% dividend yield on cost. 10 Shares of the J.M. Smucker
company at an average cost of $119.65, giving me a 3.31% yield on cost. 20 Shares of Walgreens
Boots Alliance, at an average cost of $46.55, giving me a 4.10% yield on cost. 5 Shares
of Microsoft at an average cost of $288.55, giving me a 0.86% yield on cost. Finally,
I bought 15 Shares of Altria at an average cost of $46.24, giving me a 7.79% yield on
cost. So overall, I invested $4,861.49 in new stocks. This results in $156.80 in current
annual dividends and a 3.23% yield on cost. I’ve made videos analyzing all of these
stocks so you should check out my stock review videos for more of an explanation. The reason
I bought them at this time is mainly that they were available at an attractive price.
With Microsoft, I decided that I’m going to start dollar-cost averaging into that stock
again unless it becomes egregiously priced. Now let’s get to the topic of the day, how
I research dividend stocks. Throughout this explanation, I’m going to be using my stock
research tool. It’s not yet available for the public, but if you click the link in the
pinned comment and description of the video then you can enter your email to be notified
as soon as the website launches. When I was creating this tool, I wanted to
centralize all of the financial data I look at when analyzing a stock. This includes things
like revenue, free cash flow, margins, share buybacks, dividend growth, etc. But before
you even get into the financials, it’s important to make sure you have the right long-term
investing mindset. I’ve picked up a lot of this through my studying of Warren Buffett.
Anytime you purchase a stock you are buying a part ownership stake in a business. So your
thought process needs to be as though you’re a business owner. Rule number 1 is to make
sure you understand the company you’re investing in. I say this all the time in my stock review
videos, but it’s so crucial. Imagine you were asked to invest in some random local
business. The idea that you would simply throw money at it without doing your due diligence
is nuts. This doesn’t change just because a company is listed on the public market with
a stock ticker and price that goes up and down.
So how do you actually go about building this understanding? Well, to start you can read
a basic description. Then, go to their website investor page and read their Annual Reports
and Quarterly 10Qs. Typically, these have in-depth sections where they describe all
their business segments, risks, and how they actually make money. However, there will be
many companies where you still can’t make an informed conclusion. Luckily, you don’t
have to understand every business. You can filter out areas where you lack expertise.
This is what Warren Buffett calls staying in your circle of competence. Many people
find it easier to start with companies you already have a decent understanding of, such
as products and services you use on a regular basis. Keep it simple.
Next, you want to determine whether the company has an economic moat. This is some kind of
competitive advantage that protects the company from the threat of competition. Examples of
this include strong brands, patents, network effects, economies of scale, product ecosystems,
etc. The strength of the moat helps determine how reliable a companies earnings and future
growth are over the long term. Alright, so those are some of the qualitative
filters to think about when investing. Now, let’s look at the financials. On the first
look through, the main things we’re trying to gauge are the current performance, growth
rates, and how reliable the earnings seem. Let’s start with the example of Microsoft.
Here you can see consistent and growing earnings over the long term. This graph shows Non-GAAP
Earnings per share, which excludes large one-off costs. Some of the key things to pay attention
to are Revenue, Net Income, and Free Cash Flow. In general, consistently increasing
performance is a good thing. I calculate the compound annual growth rate for each metric
over 1 3, 5, and 10 year intervals. Also, I find that visualizing them over quarterly
and annual intervals can be very helpful in building an intuition of their performance.
I like to use per share financials because it accounts for changes in the number of shares
outstanding over time. This is a more accurate representation of your ownership as a shareholder.
Speaking of shares, let’s look at the shares outstanding. In best case scenario you want
a company that consistently buys back shares. What this does is it increases the relative
value of each share outstanding. This is one way that a company can return value to shareholders.
It’s not a deal-breaker if a company is increasing its share count, but you should
be aware that your ownership is being diluted. When looking at the Balance sheet, every company
has a unique situation. In general, you want positive shareholder equity. Also, you want
to make sure the debt situation is reasonable. In a great situation, you’d have negative
net debt. However, positive net debt is not at all a bad thing. You just need to make
sure the company can reasonably pay it off over time given their free cash flow. Looking
at margins can also help you learn more about a business. This varies a lot across different
types of businesses. In general, you want higher margins. A company like Microsoft has
high margins since it’s a software business. However, a business like Walmart has very
low margins since it’s a high volume retailer. This doesn’t necessarily mean one’s better
than the other, they’re just different types of businesses. Ultimately, it all comes down
the free cash flow generation. This is the money that is available to all investors before
cash is paid out to make debt payments, dividends, or share repurchases.
So as a Dividend Growth Investor, the main things you need to focus on are Free Cash
Flow and the Dividend. When it comes to the dividend, I look for a history of consistent
dividend growth every year. This shows that the management is committed to returning capital
to shareholders via dividends. Look at what the compound annual growth rate of the dividend
is over 1, 3, 5, and 10 years. You also need to look at the payout ratio of the dividend
with respect to free cash flow. Since dividends are derived from free cash flow, they have
a correlated relationship. You need to make sure the dividend payout is at a sustainable
level. A low payout ratio means the company has a lot of room to reinvest earnings, buy
back shares, and increase the dividend over time. However, many established and single-focus
companies will give out a higher percentage of their earnings as dividends. This is because
they don’t need to reinvest as much to stay competitive. Examples of this are companies
like Coca-Cola and PepsiCo. A safe dividend is one that is reliably below free cash flow
generation. It’s okay to have occasional outliers, but this is the fundamental yardstick.
When you hear people talk about yield traps you just need think back to this point. Is
the current dividend sustainable? And can it grow overtime? A lot of the time a high
dividend yield can be a great buying opportunity. It all depends on the fundamentals. Many people
seem think just because a yield is high that makes it risky by definition. That’s absurd.
You need look to the actual fundamentals and their ability to pay. However, this idea of
the yield trap does have merit in some cases. If a business is low quality, declining, and
has an unstainable long term dividend then it very well could be a yield trap.
There are many different kinds of dividend investors. Some try to optimize current yield
and lives off dividends, while others try to optimize total return and focus on dividend
growth. I’m young and have a long investing horizon, so I fall into the latter category.
However, that does not mean you blindly buy stocks with high dividend growth. Over the
long run, dividend growth per share should not exceed the growth of free cash flow per
share. So you should look to free cash flow growth as your metric. But growth is only
part of question. An often underlooked aspect is how certain are you about future growth.
There is an inherent execution risk in any business, especially if you’re expecting
a company to grow at high rates for a long period of time.
So these are all questions I ask myself when researching a stock. It helps me filter down
to companies that I’m interested in owning long term. Now, how to I decide when to buy
a stock? This all comes down to valuation. I built out these calculators that help do
discounted cash flow and the dividend discount model. The main ideas here are how much current
free cash flow is there, how much will it grow overtime, and how sure are you. If you
want to understand this process then I made a highly detailed video where I explain how
Warren Buffett analyzes stocks. In fact I have, a playlist of videos, where I explain
3 different methods of calculating intrinsic value. Link in the description.
I hope this video helped explain my investing framework when it comes to researching dividend
stocks. It’s been evolving overtime and I’m sure it will continue to change as I
learn more. If you want to gain access to my stock research tool then click the link
in description and pinned comment to enter your email and be notified when my website
launches.
Thank you for watching Dividend Data. I’d greatly appreciate it if you leave a like
and subscribe to the channel. If you follow me on Twitter, link in the description, you
can real-time updates of my buys and dividends coming in. You can support the channel over
on Patreon, where you can gain access to a community discord server. The link is in the
description. Please leave a comment below and thank you for watching!