How Do We Execute a Dividend Growth Investing Strategy?
If you are reading this article, then I assume you are considering a dividend growth investing strategy, but are stumped on how to pick dividend stocks. And it's great that you are looking to get into the market; with interest rates the way they are, even putting your money in an FDIC insured bank account is a guaranteed loss of purchasing power over time. But you probably are confused as to where to start. What makes a great company? How do you know that the dividend won't be cut or the company won't go out of business?
There are no guarantees of anything in life, and that extends to investing. Even dividend growth investing has risks to it. But the risks are low; much lower than most people attribute to the stock market. In fact, the risks of not investing are even greater than that of making bad investment decisions! But don't worry. If you have a conservative investment philosophy that gravitates you towards high quality businesses that have a history of paying and raising dividends, then you should be fine.
But, it all comes back to the question of how to pick dividend stocks. How do you analyze their fundamentals and metrics to see if the company in question is worth owning or not? You don't simply want to chase yield; those high rewards come with high risks, and you might find that your investment isn't paying you a dime a couple years down the road because it turns out that 17% yield was unsustainable. So how do you find great businesses to buy that are both low in risk but will generate healthy streams of passive income that will allow you to live a life free of a traditional day job?
My dog is still unamused by your inability to do things yourself.
I can't tell you a foolproof answer. Everybody has their own methods of analyzing stocks, and some people will place a higher value on certain metrics than on others. And so much of the analysis is subjective that one person might look at a company and draw a completely different conclusion than someone else. Don't worry, that is perfectly normal. As you grow as an investor, you will develop your own methods, as have I over time.
What I can share with you, in detail, is how I analyze prospective companies. I'm not perfect, and people with more experience than I have their own methods that are probably better than mine. I'm sure most dividend investors are a little bit more analytical than me, whereas I can sometimes fly by the seat of my pants with this. But we all learn over time, and now is the time to start. So let's begin by analyzing a prospective business on Yahoo Finance. We will be analyzing a business that I have actually been looking at and am planning to buy as soon as I have the capital, but do not take anything I say as a recommendation to buy, sell, or hold. I can only teach you how to pick dividend stocks; I can't outline an entire portfolio for you. I am not a professional broker or analyst and I do not possess a Series 7 License.
So with that little disclaimer out of the way, let's head over to Yahoo Finance, shall we? This is something your grandparents didn't have, and this one website will allow you to achieve a life of financial freedom that only the wealthy elite had access to back in the 1800's. Open it up in a separate tab so you can follow along with this article and type into the stock ticker “XOM”. We are now analyzing Exxon Mobil. Not only will you learn the metrics I use, but we will follow the exact “ritual” that I follow when I analyze a company. Hey, I have my own way of doing things.
So let's begin, shall we?
The Summary Page
The Beginning of Your Financial Journey
Alright, so as of this writing, it is September 27, 2014 and we are analyzing Exxon Mobil (XOM). Right now, the stock price is at $95.43/share. Sounds expensive, right? Well, let's look around.
There are two columns right below the stock price. I ignore the stuff on the left, so let's look at the stuff on the right. Now we don't care about the day's range (we are not day traders), but we do look at the 52 week range. Hmm, 84.79 – 104.76. The stock price is right in the middle. It's neither at it's lowest point for the last year, nor at the highest it's been during that time either. That doesn't tell us everything (just because a company is at it's 52 week high, let's say, doesn't mean it can't go higher), but it is good to keep in mind. We know the stock price has been higher, so there is a possibility it's on a downswing. We'd rather buy at a lower price, after all. But it could also go back up, as we've seen it all the way at $104. Let's analyze further, as this only gives us part of the picture.
Next we go down to the market cap, skipping a couple of metrics that I don't really know how to analyze. The market cap is pretty much the total value of the company. Sort of. There's a formula to it, but it's basically the price of purchasing every single last outstanding share of the company. So it's more or less the value of the company as a whole. And Exxon Mobil is a whopping $406.98 billion! A $400 billion company. Man, I wish I had that much in my bank account. But we can see that this is a very large company. “Large cap” companies are defined as being worth over $10 billion, and tend to be much safer than small cap companies. So we can see that Exxon Mobil is a very safe company to invest in, at least if we are going by it's sheer size. But then again, size isn't everything unless you are a giant Japanese monster, so let's continue (and yes, I just shamelessly plugged a completely unrelated article. I need the money, alright?).
Next is the P/E, or Price-to-Earning Ratio, and this is where we start seeing whether the company is expensive or not. The P/E ratio is the price of the stock for every dollar it makes. So right now the P/E is 12.17. So this company is trading for more than 12x what it is actually earning. Is that bad? Is that good? The truth is, it's very subjective. The stock market is very high right now, and many companies are at a P/E ratio of nearly 20, and many are way above that! So for me, a P/E ratio of 12 is pretty good. I don't know if “cheap” or “discounted” would be the right words, but it's definitely a price I'd be willing to pay.
If you wanted to know how P/E is calculated, then the next metric is what we are going to look at. Of course, Yahoo Finance calculated the P/E for us anyway (we know it's 12.17), but you still want to know what the Earnings part of the Price-to-Earnings ratio is, right? So look right underneath P/E. You are looking at EPS, or Earnings Per Share. Earnings Per Share is the amount of profit the company takes in for each share. And we see that for every share of the company, Exxon Mobil makes $7.84. That's pretty good. Most companies seem to be a few bucks below that. But more importantly, the EPS must be judged as good or bad in comparison to the next metric. The dividends.
If there are two things that the uninformed investor focuses solely on, it is the stock price and the dividends. While they are not the be all end all of the analysis, that doesn't make them unimportant figures since every other metric you will be looking at is all for the sake of judging those two numbers. Now, we see that the dividend metric (located directly underneath the EPS) has both an actual number and a yield. Do not make the mistake of chasing yield; just because something is paying 10% doesn't mean you should throw your life savings into it. Instead, look at the dividends and EPS together.
So the Annual Dividend for XOM is 2.76 (2.80%). That means that every year, a single share of this company will pay you $2.76. Doesn't sound like much, right? Remember, that's one single share. The current yield of 2.80% means that at the time of purchase, each share will pay you that percentage of the stock price for that year. So if one share costs you $95.43, then that share will pay you 2.80% of $95.43, which works out to $2.76. But remember that the yield fluctuates with the price; a shrinking dividend yield may not indicate a shrinking dividend, but a growing stock price. A high yield may not indicate a huge dividend, but a smaller share price. And remember that we are looking for businesses that increase their dividends over time. So if you are buying a business that is paying $2.76 on a $95.43 price, but the company grows its dividend by 10% over the next few years, then that means that you will be receiving a yield on cost of much more than 2.80% a few years from now as a reward for your patience. In other words, if you bought the stock right now, and the dividend increased after a few years to $5, then you are receiving way more that 2.80%, even if the stock price is growing faster than the dividend and pushing the current yield down (because remember, you would have bought at the current price, not the future higher price).
So we want to get an idea if Exxon Mobil has the funds available to pay that dividend. For each share, they earn a profit of $7.84. Meanwhile, each share pays a dividend of $2.76. So not only do they have the money, but it looks like that got some to spare. This looks very good, and we will look at other numbers to back this up.
For now, let's take a look at their stock chart.
The Stock Chart
Is it Up or Down Today? Who Cares!?
Ah, the stock chart. The line graph that shows whether the stock is up or down. Up, and people are celebrating and dancing. Down, and stockbrokers are leaping out of skyscrapers. We don't really care about that. A stock can do anything on any day. We want to see the long term picture that the 52 week range didn't tell us.
As to why I'm not posting a screencap, it's because I not only not know how to, but my laptop would probably catch fire if I tried. God knows it can't do anything else. If you want to see something catch fire, here's a tech demo for the 2008 reboot of Alone in the Dark.
So on the right of those columns is the stock chart (you can't miss it), and let's set it to “Max”. This gives us a long term history of the company. We can see that outside of 2008-2011, the company has done nothing but grow. That $40 dip a few years ago is nothing to fear; not only was the entire economy suffering then, but we can see that the stock bounced right back.
Actually, Exxon Mobil's stock chart teaches us two very important lessons about dividend growth investing.
First, even a huge dip is nothing to be afraid of. If you have a great company, it will bounce back. Oh sure, reanalyze the company to see what happened. But unless you feel that there has been a change in the company's fundamentals and are uncertain about it's future, you probably won't see a reason to sell. People follow a herd mentality, and the delay of a single project or the replacement of a corporate manager can have people selling their stock like the company was going out of business tomorrow. Reanalyze and if the price is lower while the company's fundamentals are the same, then you might want to consider buying more rather than selling. The most important rule is: Don't Panic. Thank Douglas Adams for that one.
Also know where your towel is.
Second, I don't know why Exxon Mobil went down, and believe it or not, I'm not researching it (I'm not saying that you shouldn't, but remember that this is a run on how I do things). In my eyes, either they were affected somehow by the 2008-2009 crash (not only did the Great Recession take its toll on the whole economy, but the stock market as a whole bottomed out with the Dow Jones and the S&P 500 both dropping more than 20%), or oil and gas prices went down during that time as well. It doesn't matter, because when you have a great business, then it doesn't really matter how the economy is doing or where the market is today or what the price of oil or cotton or gold is this week. A great business is a great business and that's what you are looking for.
So with that out of the way, go to the blue column all the way on the left. Under “Company”, click on the link labeled “Profile”. It's time to see exactly what Exxon Mobil does.
The "Art" of Dividend Growth Investing
The Profile page tells us what type of company Exxon Mobil is and what they do. Why don't I do this first? Because I don't. I'm taking you through my personal ritual.
So we see what sector/industry the company is as well as a basic rundown of what it does. Now I'm not going to talk about the classifications that Yahoo Finance gives us, but I do want to talk about sectors for the moment.
While a shrewd investor looks at each business individually, you also want to know basic facts and nuances about certain sectors, as well as develop a strategy in what you will or won't invest in. I don't like luxury stocks (hotels/casinos), investment brokerages, or tech stocks. They are unnecessary, cater to a certain class of people, and/or don't own any physical assets. Tech stocks' software can be copied, and plus, would you even understand what they do? I don't know how great Facebook's stock is doing, but will it be around in ten years? Don't laugh; remember Myspace? If you're under 25, you probably don't. Luxury companies only perform well when the economy performs well, and is that the case right now? Consumer discretionary companies also tend not to get purchased by me. If it's not something necessary, then they would be the first to take a hit when the economy takes a hit, take the hardest hit, and recover the slowest. If they paid dividends, they would likely be cut or eliminated. That defeats the whole purpose of dividend growth investing. I also shy away from automotive companies and pharmaceuticals, believe it or not. Way too much money gets spent on R&D for my taste, money that could be sunk back into the business or paid to investors as dividends. With the car companies, they have to research not just how to make the car perform better, but how to improve its aesthetic quality and be able to do it every year. Pharmaceuticals have to do years of research to make sure their product is safe, then get FDA approval, and finally hope that there are no side effects that gets the product pulled from the shelves. Pharmaceutical penny stocks have completely failed because of stuff like that.
If you want safety in your investing, then you want to invest conservatively. Investing conservatively doesn't mean investing tiny amounts of money; it means investing in companies and sectors that have been around for a long time and will continue to be around for a long time, whose products we use everyday one way or another and will always have a demand no matter the state of the economy, and/or who have a wide variety of popular brands. Food, utilities, commercial real estate, energy, financials, shipping/railroads, and consumer staples. Did you know that probably half the brands of food, personal care products, and laundry/dish detergents out there are owned by a handful of companies? Johnson & Johnson owns Band-Aid, Listerine, Clean & Clear, Neutrogena, Sudafed, and Tylenol. Did you know that Mr. Clean, Crest, OralB, Head & Shoulders, Febreze, Old Spice, and Nyquil are all owned by Procter & Gamble? The same company that owns Axe, Suave, and Dove also owns I Can't Believe It's Not Butter and Lipton Tea!
And the same gamer that owns DestroyerofN00bs96 also owns CosmicPlaya_1337!
Heavy Duty Analysis for the Serious Investor
On the Key Statistics page, you will notice that there are a lot of numbers. I'll be completely frank, I don't know what half of them even mean. But we don't need to. Certain metrics tell us more about the company than others, and while the metrics I use may differ than the metrics others look at or that even you may eventually look at, it still doesn't change the fact that just because you can't understand every single little number, it doesn't mean that you can't make an informed decision on how to pick dividend stocks.
Let's recap so far: Exxon Mobil is a very large international energy company that's trading for a decent price (though it has been much higher recently) and is earning far more per share than it is paying in dividends. Alright, not bad. It's looking good so far, but let's really roll up our sleeves and get to the nitty gritty.
So we have two large columns. Let's start from the top left, work our way all the way down and then work our way up to the top of the right column. I call this the “U-Turn”, and I've been calling it that ever since I wrote this sentence. Consider it trademarked.
So we get a reminder that we have a $400 billion company on our hands here. A couple places below that, we see the Trailing Annual P/E (in other words, the current P/E) and the Forward Annual P/E. The Forward Annual P/E is a forecast of the P/E ratio for the coming year based on current performance. This isn't set in stone as anything can happen next year, but it can tell you if the company is likely to get cheaper or more expensive next year (which doesn't necessarily mean the stock price itself going up or down, but I will admit I tend to think of it that way). I have a couple companies that I am waiting until next year to buy because the Forward Annual P/E is predicting a pretty huge drop in the share price (which is nothing to be worried about, as the share price rarely has anything to do with the actual value of the company), but it's not the case with Exxon Mobil. The current and forecasted P/E ratios are about the same, which tells me that the stock price will either hold steady, or grow/shrink at the same rate as the company's fundamentals. Either way, it solidifies my position that now is a good time to buy (based solely on value) and that waiting for the price to drop is probably a useless endeavor.
Next are four metrics that I really don't pay as much attention to as I should. Profit Margin, Operating Margin, Return on Assets, and Return on Equity. I like to check and make sure that all of them are as high as possible, but I'm going to come out and say that I have never made a decision based on these numbers. I'm only mentioning them because I do look at them, mainly Profit Margin (the measure of how much a company takes in per item/sale in relation to how much each item costs), but I really don't analyze them the way I should. I couldn't even tell you what's a good percentage for each. I sort of use my gut here. I'm a terrible investor and I'm sorry.
Also, I pooped on your rug. I'm sorry for that too.
Next I look at their Quarterly Earnings Growth. This is a measurement of how much the company made in earnings (profits, not revenue) in comparison to the previous quarter, or three month period. Right now, their growth is 28%, which is quite the increase in earnings! However, don't be scared by a negative number there. Remember that it is only a comparison between the earnings of two quarters, not an actual measure of their earnings themselves (we've already seen the Earnings Per Share, and if you look above, you can see that Exxon Mobil's Gross Profit was about $136 billion). If a company made $100 billion in profit one quarter and $50 billion the next, you would see the Quarterly Earnings Growth as -50%. Seems like a scary number next to an earnings metric, but remember that the company still made a $50 billion profit. Still, if you see a particularly large negative number, you may want to swing on over to the articles on the Summary Page to see if there has been a reason for the drop in earnings, as well as research the company's earnings reports (you can probably Google it) to see if the drop was a fluke or a long running problem. A company that makes less and less in profits is a company that will have less and less to pay its investors in dividends, after all.
After that, I look at Total Cash and Total Debt, which is $6.08 billion and $21.76 billion, respectively. The Total Cash is the amount of liquid assets the company has readily on hand (as opposed to non-liquid assets such as real estate, pipelines, oil wells, etc.). It's their cash. The Total Debt is how much money they owe their creditors. I'm pleasantly surprised; an energy company requires oil wells, methods of exploration for resources, machinery and facilities for refining, etc. It's very capital intensive and often requires a lot of leveraged resources, meaning the company would have to borrow money to pay for these necessary expenditures. I would have thought that Exxon Mobil's debt would have been higher, but $21 billion of debt on a company worth over $400 billion? That's more than pretty good. Even though they don't have the cash on hand to pay down the entirety of their debt (and realistically, who on this planet has enough cash to pay down every penny of their debt? If anyone had that, there wouldn't be any debt), if Exxon Mobil for whatever reason decided that they needed to pay off every single penny of their debt tomorrow, they have more than enough assets that they could sell to do so without any lasting damage to the company.
One other thing about company debt; if you see they have an excessively large amount, but you've otherwise found yourself really liking what you see so far, ask yourself a couple questions. First, is this sort of debt normal for this type of business? Some types of companies (such as maritime shipping companies) will have larger capital expenditures for day to day expenses (they needed to buy a fleet of tanker ships) than other businesses (a flower shop) that they needed to go into debt for. Even if you're not an expert on these different types of businesses—because I'm sure not—still ask yourself, “Is this high level of debt normal”? Also, do a little digging (either on the articles on the company's Summary Page or even on the Message Boards) to see if the company is either paying down that debt or if the debt was taken out for infrastructure improvement purposes. Both show that the company is thinking strategically and looking for long term prosperity for its investors rather than unsustainable short term gains. The former option means they are looking to free up cash flow, and the latter means they are looking to control costs and increase revenue. A high level of debt might seem like it would put the dividend on shaky ground, but unless it's to fund day to day operations on a business that shouldn't have a high level of debt, it's not the end of the world. Even if the business is unable to fund any increases in the dividend for awhile or has to cut it for a couple years, it would still be worth it to keep an eye on it.
Below that is the Operating Cash Flow (sometimes called the Free Cash Flow), which is how much cash is being generated by their day to day business activities. It's a bit different from Total Cash; the former indicates a reserve while the latter includes cash that's going out, going towards debt or dividends, or being invested into non-liquid assets. Exxon Mobil has an Operating Cash Flow of $48.94 billion, which is incredibly good. What counts as a good cash flow can be subjective; I sort of tend to go with a gut feeling based on all the other factors I've looked at so far. Honestly, it can be very tricky. You want it to be positive and high enough so that even if it's not covering the dividends, it might be enough to whittle away at the debt over time or be sunk back into the business for improvements. I'd love to give you a magic number, but I can't.
But a higher cash flow is an indicator of strong revenues or low overhead costs. If you have a $400 billion company and you see the Operating Cash Flow is in the millions or even in the negatives, it's time to start asking a couple questions. But it's not the time to declare the company a terrible buy either. Sometimes there are perfectly good reasons for a negative cash flow, such as the introduction of a new product or the restructuring of their infrastructure to make their operations more efficient. Every company is different, and if you're looking to differentiate a high quality business from a poor one, you'll need to do a little digging. A quick trip to their Summary Page to look at some of the articles there usually clears up everything for me, and if necessary, a Google search can tell you more.
So that's it for the left column. Let's take this party on over to the right column. We'll start from the bottom and work our way up, continuing to analyze the metrics to see if Exxon Mobil is the right fit for my dividend growth investing portfolio.
Now I just want to share a metric that, while I don't really use it, I want you guys to know about. The Ex-Dividend date is the date that you have to own the dividend by in order to get that quarter's dividend. The previous ex-date for Exxon Mobil was August 11th, so we clearly missed that quarter's dividend (which got paid on September 10th, if you look up one notch). Since I know that Exxon Mobil pays a quarterly dividend (I've already analyzed this company before writing this article), I know that the next ex-date will likely be November 11th, and likely for a December payout. Many people like to time their purchases to ensure that they get that extra payout, but I find it distracting, to be honest. One single payout will not make a huge different for someone who plans to be an owner of a business for decades and decades, and might cause you to make improper judgments on whether or not to buy. Remember the principles of value investing; buy based on the value of the company, not on whether their ex-date is coming up or if you just missed it. It doesn't matter. If you are aiming for a great business that has a history of paying and increasing their dividends, you will receive more than enough cash from it over the years. So ignore the Ex-Dividend date.
Instead, look a couple spaces up to the Payout Ratio. Exxon Mobil's payout ratio is 33%. That means that, of all its profits, the dividends only comprise a third of it. That's great! A low payout ratio is what you want; it shows that the company is not only comfortably paying that dividend, but has plenty of room to grow it. If we had a high ratio, it would mean that the company is struggling to pay, and will either have to increase revenue or lower costs in order to raise the dividend. What different people are comfortable with changes from investor to investor. I personally prefer that the payout ratios are below 75%, others want them below 50%. I can't tell you the right answer; only you know what you are comfortable with. Just know that the lower the ratio, the stronger and more stable that dividend is, and the more room it has to grow. Growth is important in dividend growth investing.
What we see from the payout ratio further solidifies my comparison between the EPS and the annual dividend and the conclusion I drew from it. The dividend is stable and has room to grow. But will it? Let's move on.
I move up a few spaces and look at two metrics: The Trailing Annual Dividend Rate and the Forward Annual Dividend Rate (the former of which Yahoo Finance mistaken labels as Trailing Annual Dividend Yield. Oops). They are $2.64 and $2.76, respectively. Now you might notice that the Forward Rate is actually the same as the current rate. This might be a bit confusing, so let me try to piece it together for everybody. Like the Trailing and Forward P/E ratios we looked at before, this is what the dividend is currently now and what it is forecasted to be next year. Remember, “forecasted”, not “guaranteed”. It is based on most recent quarter's dividend, which is then multiplied by four to represent a full year's dividend payout. So pretty much, it looks like the company just recently increased its dividend. The timing of my analysis makes this a bit confusing, but the conclusion is precisely what we are looking for in a prospective stock.
I don't look at the Trailing and Forward Yields since those are only in relation to the stock price, and we don't know where the stock price will be next year for sure. Plus, if we are buying now, then we don't really care about where the stock price will be next year as we wouldn't be planning to sell, so therefore we we don't care what the yield will be. Who cares how the yield stacks up to the price we didn't pay for it? As long as the dividend itself is stable and increasing, that is the most important thing. The plan is to hold this stock forever and live off the dividend income, after all.
The only other thing I really look at on this page, if you move up quite a good bit, is the 200 Day Moving Average, which for Exxon Mobil is $99.71. That is the average price for the last 200 days. Unlike quarters or fiscal years, which have scheduled start and end dates, this is a moving average that records based on the prices of the last 200 days from the time of the analysis. Now, we know the stock is at $95.43/share. We saw the that, based on the 52 week range, that it's right about in the middle. And right now, the stock is trading at right below average. But remember that they aren't measurements of the exact same thing; if the stock had been trading near the 52 week high of $104.76/share for the bulk of the last year, then the average would likely be higher, maybe $102, let's say. So let's pretend for a second that that's the case. The stock has the same 52 week range, but the 200 Day Moving Average is about $102. $95 is a significant drop from $102, so that would tell us that the company is trading at a significant discount. As long as the fundamentals of the company are strong (which we've seen that they are), then I would say to definitely buy if that were the case.
But right now, between the P/E Ratio, Forward Annual P/E Ratio, price in relation to the 52 week range, and price in relation to the 200 Day Moving Average, I would say that Exxon Mobil is pretty averagely priced. Not quite pennies on the dollar, but not the massively expensive investment I predicted it would be before analyzing it. In my opinion, Exxon Mobil is going at a good price.
I just want to mention one other thing about the concept of “cheap” vs “expensive”. It is a mistake when considering buying a stock to frame it in terms of “I will buy it at XYZ dollars per share” or “I want to have XYZ amount of shares”. Ultimately, the equity or value of your holdings is what matters. If you have $10,000 worth of a company that is trading for $100/share and someone else has $10,000 worth of a business trading for $10/share, it doesn't matter that the other person's investment yielded him a higher number of shares or less money spent per share. You still both have $10,000 worth of your investments. The total value of the investment (and the dividends it pays you back) is more important than how the investment is cut up. Think of it like this: if I have a pizza that's cut into sixteen slices, does that mean I have more pizza because I have sixteen slices instead of eight? No, that's silly. It's still the same size pizza pie, and it's no different here. Having 10 shares of a $100 stock is no different than having 100 shares of a $10 stock. Many people shy away from a company because they can only afford a couple shares, but that sort of thinking distorts the true value of an investment even from a completely price-centric analysis (which you shouldn't really be doing anyway).
Anyways, let's do a quick examination of the real meat-and-potatoes of this: the dividend history. Go all the way over to the blue column on the far left side of the page and click on Historical Prices.
Amazon Price: $34.95 $18.01 Buy Now
(price as of Sep 13, 2016)
The Dividend History
This Is Why We're Here
Now for the final leg of our lesson on how to pick dividend stocks. We want to look at the dividend history and see if Exxon Mobil has a long history of paying the dividend or not.
This is important as a spotty dividend history might tell us that the company has struggled to pay its shareholders in the past and will likely continue to struggle. A company with less than three years of consistent payouts, in my mind, has no dividend history. As a matter of fact, a poor dividend history will automatically override everything thing else I've analyzed (and no, a great dividend history won't automatically override terrible fundamentals and metrics, but it will press me to take a second look at the company and do a bit more digging). Remember that everything we've analyzed is to determine if the company will be paying and raising their dividends for decades to come (and whether it's at a decent buying price, but we're not concerned with that in this context). This is dividend growth investing, and dividends are the name of the game. If the company has a spotty dividend history, then I automatically move on to the next company. I shouldn't have to worry about getting my money. I have a day job for stress.
Speaking of which...................
So go to Historical Prices like I said before. You will see a place to change the dates, and to the right of that, you will see four options. Leave the dates alone. Choose on “Dividends Only” and click on the button that says “Get Prices”. We will now see Exxon Mobil's history going back to 1970.
We don't need to go all the way back that far, but we can see on the first page of the results alone that Exxon Mobil has been paying dividends since at least 1998 (and very minimal research is needed to know that it's been paying consistently for far longer than that). We see that the company has paid a consistent quarterly dividend and has raised their dividend at least once a year. More impresively, the Great Recession didn't cause them to miss a beat. Whereas so many companies have a huge dividend cut around the 2008-2009 range that I tend to ignore, Exxon Mobil didn't even not raise the dividend during that time! That's right. Not only did they not cut or elimiate their dividend due to the economy tanking in 2008, they actually still raised the dividend!
This is what I am talking about when I talk about the low risks that the stock market can provide someone with a conservative investment philosophy. People point at the market and go “If you were an investor in 2008, then you lost everything! Stocks are way too risky!”. Really? How many people had their day jobs as their only source of income, only to lose them when the economy crashed? How many people struggled to get by? They say the 9-5 job offers stability, but in that unstable period, it was the person holding onto—and buying more of—Exxon Mobil that was able to sleep soundly at night know that his or her finances were secure. Between the Great Depression and the Great Recession, between two World Wars, a major terrorist attack in New York, markets crashed. Jobs were lost. Banks went under and accounts were wiped out. But Standard Oil, Exxon Mobil, and whatever other name it went by held steady through it all.
Do you still think the stock market is dangerous and risky?
Putting It All Together
Does XOM Belong In Your Dividend Portfolio?
Before I make my final decision, I like to look at the message boards and the articles about the company that show up on the main Summary Page. The message board is theoretically for further insight on the company, but in actuality I just use it to laugh at traders patting each other on the back as they talk about how they sold their stake in great businesses just because the stock was up a couple bucks. Yeah, great job, guys.
The articles are a bit more informative. They can often shed a little bit more light on the business in question. Certain nuances about their business model that you don't really get from the Profile page and would have otherwise have to have been researched on the company website, for example. Other things include explanations of recent swings in the stock price, recent hurdles a company is fighting to overcome, or its plan to introduce a new product to the market. For example, a recent article explains a recent upswing in the stock price, as investors are reacting enthusiastically the news that Exxon Mobil discovered oil and condensed gas in an artic oil well jointly owned with another energy company called Rosneft, which is owned by the Russian government. Another article talks about Exxon Mobil's plan to sell a small, unprofitable oil refinery in California, thus completely divesting from the state and delivering value to shareholders via decreased costs.
While these articles (and the message forums, if you can tune out most of the noise and immaturity) can help paint a larger picture of the business, it's your analysis of the company that will ultimately decide if you want to add this company—whatever company you're analyzing—to your porfolio.
I am no expert. You saw every step of my ritualistic routine as we walked through it together. It's not perfect, and many better investors than I have employed better analytical methods than I. I fly by the seat of my pants and cherry pick what metrics I use. I will make mistakes. No investor is perfect and even Warren Buffett has messed up. My method is an ongoing and developing one, and while it works for me, it may not work for you.
But I wrote this article because many great investors talk about theories and talk about certain metrics in a vacuum and sort of leave you, the beginner, scratching your head wondering how to apply it in reality. Hopefully this complete walkthrough becomes a starting point for you to engage in your own method of analysis. And hopefully it paints a larger and clearer picture of how to analyze a business than other articles that touch on basic concepts but never actually apply them in a real world setting.
If I had a nickel for every time I read an article telling people to only buy great businesses at a discount without actually walking them through how to do it........................
This? No, these are my Infobarrel earnings since June.
According to my analysis, Exxon Mobil is trading at a fair price right now. It's an incredibly large multinational firm that is in no danger of going under and is not subservient to the economic volatility of any single nation. They are well known and visible, and I indirectly use and support their products everyday when I use anything that consumes oil. Gas prices are high right now which does wonders for their profits, and they also create commodity petrochemicals. Their debt is manageable and their earnings more than cover their dividends. And what a dividend history! Years and years of constant dividend growth—even during terrible economic times and major market crashes—stretching back before I was even alive. This is the power of dividend growth investing.
Other analysts may come to different conclusions I do, or they may come to the same conclusion in a different way. I can't tell you what to think. As I said before, I am not a professional broker or analyst and I do not possess a Series 7 or any other sort of investment license. I simply walked you through my way of doing things, and my personal opinion is that Exxon Mobil is a great company to buy. It's an incredible rarity that I announce my financial decisions on the Internet (actually, this is the first and quite possibly last time ever), but I do actually plan on buying this company. It's a high quality business that I believe will continue to reward me for being a shareholder for the rest of my life. How much will I buy? Well that's something I'm not going to reveal on here.
But if I use my Infobarrel earnings, I should have my first share in about a decade.
Will there be bumps in the road? Sure! Will the stock dip? It did before! It will do so again. The stock market could crash again, driving down their stock. The price of oil could drop drastically, dropping their profits along with it. There are so many economic factors, legal factors, and commodity factors that could do anything to this stock at any time. But as long as Exxon Mobil continues to reward its shareholders with that growing dividend, I'm not going anywhere. As long as you're right about the business, you don't have to worry about anything else.
The First of Many
The Diversified Dividend Portfolio
Remember that in order to shield yourself from mistakes, you will want to diversify into a number of different companies across a variety of sectors. Even great industries such as energy, consumer staples, or utilities have ups and downs. You shouldn't be reliant on any single one. Diversification is the key; you should be looking to minimize risk just as much as you are looking to maximize return. In fact, minimizing risk should be the higher priority.
Exxon Mobil gave us something very easy to analyze, but very often, great companies won't always have such perfect numbers. Great companies experience drops in revenue or earnings, or they might have high debt, or a high payout ratio. Many companies will have something you see that you don't like. Do your research and invest based on the overall picture. Always ask if what you are seeing is normal for this type of business (for example, a heavily industrialized company might have a pretty high level of debt, so debt would be something that shouldn't scare you off in that situation) or if a recent hiccup is due to macroeconomic factors rather than the business itself. If you feel that the business is sound, you understand what they do and how they make money, you feel that it's at a fair or discounted price, and you have reason to believe that they will strengthen that dividend, then I would say it's a go.
But make sure you are in it for the long haul. Reinvest the dividends that you earn and add new capital every so often (every month if possible). As I said before, at first it will seem small, but the compounding effect takes its toll sooner than you think. And I will show you now how utterly powerful compounding dividends are.
If you were to invest $10,000 into Exxon Mobil, then with a 10% growth rate (which is its actual 5 year dividend growth rate), then you would have earned $6,336.26 over a ten year period with an annualized yield of 5.06% if you consistently reinvest the dividends. So holding onto it for twenty years would earn you double that amount, right? Wrong. Holding onto $10,000 worth of Exxon Mobil for twenty years will net you $45,740.35 in dividends, with an annualized yield of 9%! Just imagine how much you would earn after forty years ($534,072,867.62)!
And that's without adding any extra capital to the mix.
Even for those of us that don't have $10,000 to throw around, a simple $1,000 investment will earn you $609.26 in dividends in ten years, and $4,398.11 in twenty. Remember that while those results come from reinvesting those dividends, the dividends are still passive income. Just imagine having Exxon Mobil as but one company in a diversified portfolio of great businesses paying rising dividends every three months.
Are you convinced of the power of dividend growth investing now?
So that's my basic rundown on how to pick dividend stocks, and how powerful dividend growth investing is. If you start early and invest aggressively, not only will you create streams of passive income that will support you through retirement, but you will put yourself in a position to retire much earlier than 65. Dividend growth investing is the not only the safest way to use your money, but it protects you from the inherent risk of the traditional day job that can be taken from you at any moment. By developing a method of analyzing companies, and by developing patience and discipline, small investments today can snowball into perpetual income machines. And a perpetual passive income machine means true financial freedom.