Companies Die

Companies, just like human beings, follow a life-cycle. When boiled down to a rudimentary level, we can think of companies going through the phases of being born, growing through periods of childhood and adolescence, maturity after reaching adulthood and finally death.
A look at history
I recently looked up the oldest companies in the world. The oldest company on record is Kongo Gumi, a Japanese construction company that was founded in 578 CE  (that’s over 14 centuries ago!). The company was absorbed by a larger construction corporation (Takamatsu Corporation) just seven years ago after staying in the family for 40 generations!! The name, Kongo Gumi, however, survives as a subsidiary  of this construction group. Interestingly, a majority of the oldest surviving companies are Japanese – and 89.4% of all companies with more than 100 years of history are businesses employ fewer than 300 people.
The Dutch East India Company, or Verenigde Oostindische Compagnie, was one of the largest companies in the world founded in 1602. This was the first company in the world to trade shares in a public exchange, which eventually led to the creation of Amsterdam Stock Exchange. The company eventually went bankrupt in 1800. 
The first company to trade on the New York Stock Exchange in 1792 was The Bank of New York, founded in 1784 and still exists and publicly trades today. The company merged with Mellon Corp in 2007 and is now called The Bank of New York Mellon Corp (BK).
Dividends
The first ever dividend paid in the US was by a company called Citigroup (C), founded in 1812 and paid its first dividend in 1813. Unfortunately, Citigroup has lost its dividend paying streak and the title for the longest consecutive dividend paying streak goes to York Water (YORW), which has been paying dividends since 1816 (a 198-year streak!).
The oldest consecutive dividend paying company in Canada is Bank of Montreal (BMO), which has paid dividends since 1829, with The Bank of Nova Scotia (BNS) a close second that started paying dividends in 1832.
Companies die
The banking sector was hot and lucrative business in the 19th century and still continues to be. However, investors should be vigilant and monitor their investments while staying invested – as large corporations with a long history can go bankrupt and dissolve. The recent financial crisis provides us with plenty of examples of such events: 
  • Bear Stearns (1923-2008) was a global investment bank and securities trading and brokerage firm, which was absorbed by JPMorgan Chase (JPM).
  • Lehman Brothers (1850-2008) was the fourth largest investment bank in the US that went bankrupt in 2008.
  • Wachovia (1879-2008) was the fourth largest bank holding by total assets in the US, was absorbed by Wells Fargo (WFC).
  • Washington Mutual (1889-2008) was the largest savings and loan association in US that collapsed in 2008.

Stay Vigilant
Companies go through a life cycle of birth, growth, sustained maturity and death. Even if a company has had a great history and performed well in the past, investors should always stay vigilant on the future outlook and consider if the business model of a company is sustainable. The old adage buy and hold forever really should say buy and closely monitor. The new global economy, current environment and the connected world has made it easier than ever to start a new company. Whether a company will survive and thrive is a whole other story.
Disclosure: Long BNS, WFC. My full list of holdings can be found here.

Dividend Yield vs. Dividend Growth

Dividend Growth Investing involves not only picking dividend paying stocks, but stocks that grow their dividends year after year. Investing in stocks for income requires dividend growth investors to find a balance between the current dividend yield and the dividend growth rate (DGR). 
 
As a dividend growth investor, I want to build a dividend income stream to achieve financial independence. It is as important to build the present income stream as is the growth of dividends over time. Ideally I want the rate of dividend growth to beat the inflation rate by a few percentage points. This article takes a look at my portfolio holdings and present a visual representation of the current yield and the 5-year DGR.


A couple of items to note from the chart below are: only stocks are included (all funds from my holdings have been left out), and one stock – IAMGold (IMG.TO) is missing, as it recently cut their dividends to 0.

Observations

  • I want the equities either high on the y-axis or far to the right (within reason…as being too far to the right can be a red flag).
  • The numbers presented here are the current yields. I have held some of these stocks for years and the yield-on-cost is higher.
  • As the dividends rise, year after year, those equities will start moving to the right (when considering yield-on-cost)
Some observations about specific equities:
  • BCE Inc’s (BCE.TO) dividend growth rate is unsustainable at 25%, especially with its current payout ratio at 85% of earnings. I expect BCE to come down lower on the graph to a more normal level.
  • CHS Inc (CHSCP) has no dividend growth and although it has a good yield, I will be considering selling this position.
  • Only two equities are below the 2% yield line (far to the left) – The Jean Coutu Group Inc (PJC.A.TO) and Qualcomm Inc (QCOM). However, they both have high dividend growth rate (15.3% and 13.66% respectively), so I am not too concerned about the current low yield.
  • Wells Fargo & Co (WFC) saw a dividend cut during the financial crisis which made it drop below the 0% DGR line. However, WFC has started raising its dividends again, so I expect that to start moving up.

Overall, I am happy with the layout of the stocks I hold. In addition, I hold funds which are high yielders providing me with more income currently which I use to reinvest into my stock holdings.

 
What do you think of this representation? I think visually it provides me a viewpoint akin to a birds eyeview for my portfolio.
 
Full Disclosure: Long all equities mentioned here. My full list of holdings is available here.

Unilever (UL) Faces Some Headwinds in the Short Term

Unilever (UL) (UN) is a supplier of fast moving consumer goods with sales of its products in 190 countries. Unilever, along with Procter & Gamble (PG), is one of the most popular companies around the world in the consumer goods sector.Company Profile (from FinViz):The company operates through four segments: Personal Care, Foods, Refreshment, and Home Care. The Personal Care segment offers skincare and haircare products, deodorants, and oral care products. The Foods segment provides soups, bouillons, sauces, snacks, mayonnaise, salad dressings, margarines, and spreads. The Refreshment segment offers ice cream, tea-based beverages, weight-management products, and nutritionally enhanced staples. The Home Care segment provides home care products, such as laundry tablets, powders and liquids, soap bars, and various cleaning products. Unilever PLC offers its products under various brand names, such as Axe, Becel, Flora, Ben & Jerry’s, Bertolli, Blue Band, Rama, Brylcreem, Cif, Clear, Comfort, Domestos, Dove, Fissan, Heartbrand, Hellmann’s, Amora, Knorr, Lifebuoy, Lipton, Lux, Omo, Pond’s, Radox, Rexona, Signal, Closeup, Simple, St Ives, Sunlight, Sunsilk, Surf, TRESemm, Timotei, VO5, and Vaseline. The company was founded in 1885 and is headquartered in London, the United Kingdom. Unilever PLC is a subsidiary of The Unilever Group.

To read the full article, click here.

 

The Risks of Writing OTM Options

In an earlier post, entitled Generate More Income From Dividend Stocks, I discussed some simple option strategies to generate additional income, which involves writing out-of-the-money (OTM) put and call contracts. This post delves a bit more into the details of these strategies about how market conditions can favor or play havoc on the contract writer. I discuss details below on when not to use these strategies and the some of the disadvantages of these strategies.
The recent downturn in the market has revealed a lot of option strategists out there getting caught with their pants down. Over the last couple of years, we have experienced a tremendous run in the stock market. The year 2013 turned out to be one of the the best performing years in recent history, all thanks to the Fed keeping low interest rates, flushing the economy with cheap money and buying bonds, thus bolstering the stock market. Investors have been encouraged to take on risk and have been rewarded; But when times are good, bad things arent as obvious as normally should be.
Writing OTM Put Contracts
Writing OTM put contracts provides the writer with options income and works great as a strategy in secular bull markets. The writer is only obligated to buy the underlying security if the stock falls below the strike price. This is the situation that a lot of people have been caught in recently during the ongoing correction. Option writers have had to buy back the put contracts to minimize the loss.
Writing put contracts should not a strategy for the weak-at-heart trader. A company’s success and a rising stock requires a lot of hard work and it only takes a little stumble for the stock to come crashing  down. Remember that a stock never crashes up, it always crashes down. In addition, some other uncontrollable events may throw a wrench in an option writer’s strategy such as – an analyst downgrade, political conflict, threat of war or recession or simply the fact that a stock belongs to an index and there is a broad market selloff.
Writing OTM Call Contracts
Writing OTM covered call options provides the writer with options income and the writer only needs to sell the underlying security if the stock closes above the strike price. While this can be a good strategy in a sideways or bear market, this strategy does not work too well for the writer in situations such as: secular bull markets or rapidly rising stock values, analyst upgrades, positive earnings catalysts etc.
The other major problem with this strategy is that you are obligated to sell your shares for a company that is doing well and limits your upside potential for returns.

7 Reasons to Own Dividend Stocks

Dividend Growth Investing
Dividend stocks have come to the forefront in the last few years after the drop in interest rates from the Fed. Investors hungry for yield have rushed to dividend stocks, and rightly so, as a source of income. This list points out the best reasons to hold dividend stocks in your portfolio.
1. Investing vs. Trading: Staying invested in great companies provides you with income as opposed to growth focused stocks where you need to sell and exit the investment to realize any profit. The buy-low-sell-high mantra needs great timing to succeed, which has been proven extremely hard to pull-off even by professional investors.
2. Passive Income: Dividends can provide investors who want to achieve financial independence with an income stream. If your nest egg is big enough, you can retire on the passive income generated through dividend stocks.
3. Stability: Corporations that pay dividends are established companies with proven record and have reliable revenues year after year. Unless the company faces a disastrous situations where their core business is at risk, dividend paying stocks are more stable and follow more predictable patterns over time.
4. Resilience: In recessionary times, dividend stocks tend to perform better. A company that can maintain to pay its dividends through rough times demonstrates the quality of its business. These companies are bottom bound with better financial fundamentals.
5. Feedback: Once dividends are paid out, they are yours. They are not empty promises or financial trickery where numbers can be cooked and you have to take a company’s word for it. This gives the investors assurance that the company is really generating the profits that it claims to have.
6. Inflation: Inflation eats into a saver’s coffers. Dividend growth stocks increase their payouts year after year beating the inflation rate enabling your funds to grow with better returns.
7. Compounding: Investing in dividend stocks allows you all of the above and when the dividends are reinvested and grown over a number of years, the compounding effect can be truly staggering. Time is one of the biggest factors when it comes to taking an advantage of the compounding effect.
What are your thoughts on dividend investing? Have I missed anything else? Leave a comment.