Thursday, October 27, 2016

One More Home Run!

Almost two years ago, I wrote about the San Francisco Giants beating the Kansas City Royals in game 7 of the World Series, the annual championship series of Major League Baseball in North America. Of the 57 runs scored in that series, only two were home runs.

I don't think we'll see only two home runs between the Chicago Cubs and the Cleveland Indians this year! In Game 1 of the 2016 World Series, catcher Roberto Perez hit two home runs to back up a shut-out performance by starting pitcher Corey Kluber and reliever Andrew Miller. The Indians won 6-0.

In case you're wondering what baseball has got to do with dividend growth investing, I use the term home run to describe any position in my portfolio that has crossed the 100% mark in total returns.

Today, I'm happy to announce that I've scored another home run with DivGro! While my goal with DivGro is to build a growing dividend income stream, it is fun to see some stocks perform well enough to become home run stocks!

In my days as a trader, I often sold half of my shares when a position became a home run position. I justified the action by saying that now I'm playing with "house" money. I no longer think that way. In fact, I'm more than happy to hang on to home runs and to continue collecting the growing dividends.

Here is a list of my previous home run stocks, some of which I've sold with the goal of preparing DivGro for covered call options trading:
  • Home run #1: General Dynamics Corporation (GD) – up 139% (38% annualized)
  • Home run #2: Nippon Telegraph & Telephone Corp (NTT) – closed for 125% gain (37% annualized)
  • Home run #3: Digital Realty Trust, Inc (DLR) – closed for 102% gain (44% annualized)
  • Home run #4: Altria Group, Inc (MO) – up 99% (33% annualized)
  • Home run #5: Reynolds American, Inc (RAI) – up 102% (43% annualized)
  • Home run #6: Main Street Capital Corporation (MAIN) – up 101% (28% annualized)
Once a position reaches home run status, I don't cancel the status when the share price drops and total return falls below 100%. So MO retains home run status despite being up "only" 99% at this time.

Home Run #7


My seventh home run stock is Microsoft Corporation (MSFT). I bought 80 shares at $31.76 per share in August 2013, with a starting yield on cost (YoC) of 2.9%. MSFT now trades above $60 and after several dividend increases, my YoC is 4.9%. Payback is 12.7%, meaning I've received 12.7% of my original investment back in the form of dividends.

MSFT is trading 14% above my fair value estimate of $53.28. The stock has a streak of 15 years of dividend increases and an impressive 10-year dividend growth rate of 15%. Microsoft is one of only two companies with a AAA credit rating. (Johnson & Johnson (JNJ) is the other company).

Home run stocks present dividend growth investors with some (pleasant) challenges. Are the stocks overvalued or are they suitable for further investment? Is it OK to increase your average cost basis by buying more shares at much higher prices? What's the implications of reducing your average YoC when you buy more shares at lower yields?

I mentioned before that Chowder, a Seeking Alpha contributor Chowder, advocates buying shares of a great dividend growth stock that continue to experience higher earnings expectations, even as the share price rises to meet fair value. He calls the strategy dollar-cost averaging up. He argues that fair value estimates will increase with higher earnings expectations and that the stock price will follow. The strong often gets stronger.

My sixth home run stock, MAIN, is one example where I've continued to add shares at higher prices:

The chart is a little outdated (September 5), but illustrates the point. It shows five occasions when I bought shares of MAIN. My average cost basis is $21.71 and my average YoC is 10.2%. With MAIN trading at $34.17 per share, the stock currently yields 6.5%.

Returning to the earlier questions, should I buy more shares of a home run stock even if doing so would increase my average cost basis and reduce my average YoC? Assuming the stock trades at or below fair value, I don't see any reason to shy away from buying more shares. In fact, I like the idea of dollar-cost averaging up, especially if I get to increase my investment in great dividend growth stocks that experiencing higher earnings expectations.

Do you have home run stocks in your portfolio? Do you dollar-cost average up? Please let me know in the comments section...

16 comments :

  1. Nice going, FerdiS. Thats quite a few home runs...those are some really good returns over the years. Gotta love a bull market :)

    R2R

    ReplyDelete
    Replies
    1. Hi there, R2R -- thanks for commenting! You're totally right that the bull market has allowed me to hit some home runs! And, yes, I love bull markets!

      Delete
  2. I love home runs.

    I used to sell 1/2 as well but like you, I now hold on if I think they will grow EPS or raise their Divi

    ReplyDelete
    Replies
    1. Yeah, its great to see an investment get to home run level -- especially dividend growth stocks! Take care and happy hitting!

      Delete
  3. I had one that was up over 600 percent but it has fallen hard still up over 200 percent i think. specializes in truck parts if it falls some more i will definatly buy more hopefully a good dividend raise in order which will shoot the company right back up. I will have to look to see how many homeruns i have i had one over 300 percent but added to it and it is now at 48 percent but my dividend is higher. Tradeoffs i guess lol

    ReplyDelete
    Replies
    1. Over 300% is fantastic! Congratulations! I'm enjoying these home runs, but I enjoy the regular dividend checks and dividend raises more!

      Take care and thanks for commenting!

      Delete
  4. My biggest home run stock in NVDA, which is one of the best performers in the entire market this year - I was going to buy at $19 and finally got in at $28, which I thought was getting upper bound of fair value. I've been buying on the way up at $40, and most recently bought at $60 when it popped on earnings. It's now at about $70+, basically a 3-bagger for the year. Since I've been buying on the way up, it's kind of hard psychologically because I'm kicking myself for not buying more earlier, but I love what they're doing and think they're positioned well for future of VR/ Autonomous, etc. Again, this is all over the course of the past year. Honestly, this stock is probably objectively very overvalued, and a case could be made for selling. But I will probably just hold and look for momentum to drive it higher, and plus, like i said, I like the company. I think any good portfolio should have some steady eddies and big bets/ hyper-growth areas that may be riskier.

    ReplyDelete
    Replies
    1. NVDA is a fantastic stock with some great growth prospects. And you're right -- the areas of virtual reality and autonomous vehicles will secure NVDA's future for many years to come. The psychology of dealing with winners is interesting. I think we're wired to sell winners before we should and to hang onto losers longer than we should.

      Congratulations on getting a 3-bagger in a year... that's great! Enjoy the ride!

      Delete
  5. In my wife's or my portfolio: CHD (up 416%), V (up 499%), BDX (up 157%), MMM (up 145%), TSX: BAM.A (up 282%), PAYX (up 138%), HSY (up 117%), JNJ (up 115%).

    We also have ADP which is up 119% but that is somewhat misleading because ADP spun off BR and that is up 125% and also CDK and that is up 152%. We have several others that are up between 50% - 100%.

    Clearly, this growth did not all happen in one year.

    The growth in dividends is equally exciting!! $9300 CDN in 2007 has grown to what is on track to be $86,000 - $90,000 CDN by the end of 2016.

    God bless market meltdowns!! :)

    ReplyDelete
    Replies
    1. Hi Chuck -- thanks for sharing your home runs! The fact that you've hit so many home runs with solid dividend growth stocks is evidence that dividend growth investing works! I don't care that it took a while to get there, the fact is you stuck with strategy and it is paying off very handsomely.

      $90,000 CDN is fantastic -- WOW! You're reaping the benefits of a disciplined execution of your investment strategy and I hope my readers are as inspired by your story as I am!

      Take care and please visit again soon!

      Delete
    2. Thanks! Very painful for me to recall all the "wouldas, couldas, shouldas" which I why I excluded them in my previous post! I have certainly made my share of mistakes (commission as well as omission) Oh to be able to go back in time!

      Dividend investing does work and I am glad to see that you and many of your readers are on the right track. I am somewhat concerned, however, that many investors out there are stretching for yield and are throwing caution to the wind. I mean, seriously, when an investment has a current yield north of 6 - 7% in this low rate environment, wouldn't you think that one's "spiddy" senses would kick in and warn you to run away? Good grief! Some people are going to get burned big time come the next economic crisis.

      I've bookmarked your site for easy access in the future! :)

      Delete
    3. Hi Chuck -- I think most of us have examples of regretful trades... but that's what makes all of this interesting. Nobody can tell the future and we can only act on current information!

      I agree with you about not chasing yield. A good balance between higher dividend yielding and higher dividend growth stocks is best. I do own at least one very high yielding stock (PNNT), but I'm watching it carefully and will bail out as soon as the company cuts the dividend. I may even close the posistion end of December after the next dividend payment.

      Thanks for following my site and happy investing!

      Delete
  6. Love big softy.

    Hopefully they know what they're doing spending $25B on LNKD. That's a lot of cash, and management doesn't have the best track record with splashy acquisitions.

    Congrats on the home run, and thanks for the reminder of how annoying the 2014 postseason was. I had almost successfully repressed those memories.

    ReplyDelete
    Replies
    1. Yes -- Microsoft has done well and I like where it is going. Like you, I'm somewhat skeptical of spending so much on LNKD and we'll have to see if this investment turns out better than prior splashy acquisitions. LNKD seems to have expanded its reach in the last year or so -- hopefully that trend continues.

      If you're trying to repress 2014 postseason memories, you'll appreciate my feelings about how the Giants gave up a 3-run lead in the top of the 9th in game 4 against the Cubs in the Division series this year. And let's not even talk about what happened to the Golden State Warriors last year...

      Delete
  7. Bail AFTER the company cuts the Dividend? That's like closing the barn door after the cows have fled! If they cut the dividend the price will drop BEFORE you have chance to sell.

    Perhaps you'll be able to collect your end of year distribution and get out before any dividend cut is announced.

    Wishing you all the best with this one!

    ReplyDelete
    Replies
    1. PNNT froze its dividend right after I bought my first shares in September 2013. My yield on cost was 9.6%. I added more shares this year at a yield on cost of 15.5%. Call it a dividend grab or a way to "quickly" recover from share price losses I've sustained. With dividends taken into account, today I'm in the black and can sell my shares for a small profit.

      Why did I buy PNNT in the first place? Well, apart from the rookie mistake of chasing yield, I figured the BDC has shown resilience and the ability to pay (and raise) its dividend in the wake of the 2008 recession. I wrote "I think PNNT is a good investment for DivGro considering its attractive yield. In my opinion, the high yield affords a little more risk. And PNNT has shown confidence that it would be able to maintain, rather than have to reduce, its distributions."

      So far, I've been right. PNNT has maintained its distributions. But I don't think it will be able to do so much longer...

      Delete

Contact Form

Name

Email *

Message *

Follow by Email