So I’m on vacation, but I’m not dead. Before I go out and swim for a bit, I decided I’d execute some orders (sounds so much cooler than it is) on the stocks I’d been comparing/eyeing this weekend. As usual, I will preface this by saying I am new to this whole thing and if there were a gradient from completely green to Warren Buffett, I would be firmly in the green still.
That being said, I actually did my own analysis on the stocks I did purchase today, albeit nothing too deep or intensive. For example, I’m not to the point where I’m using P/E to determine whether I should invest. I’m sure I’ll get to that point, but for the moment I’m not going out on any crazy limbs by establishing myself with these companies. I’m keeping it simple.
So far, I’m using these metrics (which could be absolutely terrible, I’m sure) which I took largely from David Fish’s CCC list:
- Reasonable dividend payout (2 – 5% yield)
- Long history of increased dividends
- An upward trajectory in stock price over the past 5 years
Feel free to point out my terrible strategy. I am completely open to learning — that’s what this whole thing is about. For now, I’ll get into which stocks I bought!
Realty Income Corp (O)
I’m sure many of you are quite familiar with this one. I read that it is described as the “Monthly Dividend Company” on its Wikipedia article. Honestly, I didn’t even comprehend that this was a REIT stock until after I purchased it. But hey, it looks strong to me. The company was founded in 1969 and was recently added to the S&P 500. It’s had 22 years of consecutive dividend growth and its current dividend yield is at 4.85% from what I can tell. I bought in at $47.12 with 10 shares. This was my second out of three commission-free trades on Scottrade (yay!).
Target Corporation (TGT)
Last of my commission-free trades was Target. While I do own Walmart stock, it’s Target my family visits 4-5 times per week. Like Diet Coke, we have a personal stake in the success of this company and based on how it’s done previously, it seems like it will keep going strong for years to come, so by that measure I had no qualms going forward. It’s been around for over 100 years now and is also included in the S&P 500! Although I read that Target Corp’s dividend growth wasn’t so hot in recent years, it has still continued to climb over the last 32 years. The dividend yield is presently 2.46%, which is good enough for me. I bought 6 shares at $84.48.
This brings my total number of stocks owned up to seven (7) for a stock portfolio currently worth about $3,450.00.
First of all, well done on allocating funds for regular investing. It’s not an easy thing to do.
Based on my approach on dividends stock investing, I ask myself the following 3 questions:
1) Am I looking at a quality company?
2) Are the dividends any good?
3) Is this a good time to invest in the company?
For 1), I think your set of criteria is good. I also look at the ROE, operating margins, moat, credit rating etc.
For 2), I check the yield and the growth of the dividends. Also, the payout ratio as well as the FCF to see if it covers the dividends. Dividend history is also useful in this.
For 3), this is important because you don’t want to invest if a stock is over valued. Your future gains may be baked in already. For a timeframe of 20 years or more, it’s probably okay, but you still want to limit this. You should read the dividend growth investor blog who wrote many good articles on this topic.
I haven’t ran O or TGT through my spreadsheet so I can’t say for now they are good for you based on my 3 questions.
Also, for REITs, you need to look at the FFO – so the ratios are based on this eg P/FFO.
Div4son recently posted…Recent Buy
Excellent points. I’ll make sure to re-visit this post and your comment specifically before making my next purchase. ROE, for example, is very interesting. I Just learned what that is here-
And now I can apply that to the CCC list from David Fish.
Taking that into consideration, why would a company have a negative ROE? Target, for example, has -9.3 according to Morningstar; while Realty Income Corp has 4.8. Does this number matter as much with large corporate entities?
I’ll have to do some more reading there. As well as with ROIC.
#3 is the kicker. How do you determine if a stock is over or under valued?
Also, P/FFO? Where do I find consistent values for these things?
In any case, thank you for all your help.
If the income is negative, then the ROE is negative. It’s not necessarily a bad thing. Just look for the trends with 10yr, 5yr, 3yr averages over a period of time. If the trend is growing or steady then that’s a good sign.
For valuation, there’s lot of literature on this. A lot of people look at the PE ratio (current/forward) either compared with the market ~20 or against companies within the same sector or even against the median 5yr PE of the same company. But PE is just one way. You can also use P/B or P/S.
Again there are lots of ways of valuation. As long as you get to a ballpark estimate, then you are probably okay.
Div4son recently posted…Recent Buys (….Again)
I think both of these purchases are great buys. I’m looking between Target and Wal-Mart as potential buy for my next purchase right now.
Tawcan recently posted…Instilling financial responsibility in kids
Nice! I’d consider buying more of those right now as well since they are both down at the moment. Of course, it would be better for me if they went up but, as always, I’m in it for the long game. :)