Growth Stock Dollar-Cost Averaging

After my recent article covering the role of utility stocks in DRIP accounts specifically and income accounts generally, I was happy to hear from a few of you that you have successfully owned various utilities for 15+ years, and been pleasantly surprised by the steady returns (and occasional S&P 500 index outperformance) that has occurred over the years. For me, I found it interesting to hear that Western U.S. utilities have performed on pace with Southeastern U.S. utilities, something I didn’t find intuitively obvious.

I’ll have to add that to my study list over Christmas–first, is the stereotype of coastal regulation accurate? If so, by how much? And how does this affect the investment returns? If the returns are nearly equal, I wonder if there is some type of valuation differential that could explain the parity. Maybe the presumption of intense regulation for electric utilities in states like California lead … Read the rest of this article!

The Arsenal of the Income Investor

I have been thinking about some of the recent ruckus in the oil industry, and the perpetual trend of poor timing regarding oil stocks–when the earnings are exploding and the valuations are high, people run towards these firms. And when the dividend cuts start coming, the retreat escalates. I understand why it happens–few want to see collapsing earnings, dividends, and stock prices of the companies they own, but the performance of anything oil-related is tied to the cyclical performance of oil.

The reason why you only pay 10x earnings for Exxon when earnings are growing fast (rather than something like the 20x earnings you regularly see with Coca-Cola) is that these firms often carry plummeting earnings far off in the distance. If you bought Exxon in 2003, the reason why you only pay 10x earnings is because you know that years like 2008, 2009, 2014, and 2015 will come along … Read the rest of this article!

A Hidden Advantage of Happy Businesses

There are many reasons why “happy businesses” are able to earn excess returns, and we have already spent considerable time covering the ability of a strong brand to charge a premium price compared to the generic creators. The appeal of a happy business, however, extends beyond the core products themselves to the products closely related to a given business empire that are under-scrutinized.

Did you see the recent news out of Voorhees, New Jersey? Some gas station owner has decided to stop selling gas at the competitive price of $1.80 per gallon and instead is selling gas at the non-changing price of $3.98. The fine people of Voorhees have been right to dislike this business practice of selling a commodity at a clear premium relative to the peers, but the legal analysis of the townsfolk is a bit off.

People like Jeff Pettitt are threatening legal action against the gas … Read the rest of this article!

Finding 7.5% Dividend Yields

Since 1980 onward, it has been unusually difficult to find stocks that yield over 7% at the time of investment, are of sufficient quality, and can support the high dividend payout with earnings. Almost three decades of expanding P/E ratios (or, in the case of cyclical companies, just valuations) and a shift towards stock buybacks or dividends has put income investors in the hard spot of finding assets that generate high current income.

Possibly my favorite income stock right now is Royal Dutch Shell (RDS.B). It’s quality comes near that of Chevron and Exxon, but offers a much higher starting dividend yield. It doesn’t have the elevated debt levels at Kinder Morgan or BP that could make a dilutive share offering at low prices a realistic possibility if the price of oil stays low for a while. And it doesn’t have the issue of Conoco where it is almost exclusively … Read the rest of this article!

Why Shareholders Come First

In one of the great twists of 20th century American capitalism, Henry Ford’s attempt to support employees of The Ford Motor Company and the city of Detroit back in 1916 had the unintended side effect of creating case law that put the shareholder returns of the company ahead of all other interests.

Most of us today are used to the notion of measuring dividend yield according to the prevailing price of the stock. If Philip Morris pays out a $4.08 dividend, and the price of the stock is $87.32 per share, we would say that the current dividend yield on the stock is 4.67%. Unless you really get into this stuff, you’re probably not inclined to think “Philip Morris has 1.5 billion shares paying out $6.12 billion.” The concept expressed relates to the same elements, but we often choose to relate the income generated compared to the current price because … Read the rest of this article!