New Website! Get Rich Brothers!

I have recently set sail on a new adventure with my brother. We have decided to combine our efforts on a single site:

http://www.getrichbrothers.com

This is an exciting time for us as we put this website together as we are certain we can provide a better experience and greater value for our readers working together rather than separately. Please join us and get involved with us!

Your truly,
The Dividend Titan and one half of the Get Rich Brothers

Top Three Excuses For Poor Performance

In the stock investing world, companies are required to report their earnings quarterly and management is required to assess their performance over that period while typically also projecting what they expect going forward. From reading countless annual reports, I have compiled a Top Three list for what I find to be the most inexcusable excuses that management teams employ to absolve themselves of responsibility for underperformance.

 

1) “Weather Related”

Can anyone remember a time when weather wasn’t impacting the way we live our lives? Every Winter I can remember has had snowstorms and every Summer has had heat waves. These are not valid reasons for missing targets. They are events that can and in many cases should be expected and planned for.

 

2) “Challenging Macro Environment”

This one is just broad enough to encompass nearly anything and everything conceivable that might happen in the course of doing business. No one is expecting management to be able to predict everything that is going to happen across the globe, but this excuse is akin to saying, “We’re not really sure what was going on and once we did the accounting we realized we were behind.”

Really, this excuse is so vague that it is unclear how management goes about remedying it going forward. The macro environment is always going to be challenging and uncertain.

 

3) ­“Margins Squeezed Due To Seasonal Deals”

Every year has basically the same seasons and holidays. A management team that cannot anticipate it will be discounting items through December or any other month to generate sales is frighteningly short-sighted. I would rather not trust them with my investment dollars.

 

If the companies you’re invested in are using any (or worse, all) of these excuses, it may be a sign to consider other venues. As an investor, you should be aware of who is managing the companies you hold stock in. If management is responsible for the good times, they should be able to also point inward when times get tough.

The Market Keeps Going Higher

It seems that lately each time I turn on the business news I hear about how the markets are setting new records time and time again. It puts pressure on anyone sitting with a large cash balance to want to put their money to work in order to chase the incredible capital appreciation that just keeps rolling. Analysts routinely revise their price targets higher on stocks and the frenzy around the stock market rages.

Given the nature of this rising market, what are investors to do?
One thing that I always try to remember when hysteria abounds is that the same analysts who raise their price targets and who plead their case as to how high the market can go are the same analysts who will be arguing about the bottom when (yes, when) things turn around. No market rises in perpetuity without a slowdown at some point and certainly not a market that is being fuelled with liquidity from central bank policies.

The most money I ever invested in a single year was done in 2009 when the market was low and optimism among stock market “gurus” was hard to come by. I held faith that the companies behind the market would remain strong and build market share in a difficult environment. I looked to the continued dividend increases and solid earnings power of the strongest companies in the world such as Coca-Cola (NYSE: KO) and Wal-Mart (NYSE: WMT) as reassurance that my money was best invested than held on the sidelines.

Now, years later, I feel markets have pushed too high too fast and I do not trust the levels the market is at. I am hesitant to commit serious amounts of money in a market that is propped up by money printing. If the global economy was truly healthy, what would be the need for added stimulus?

Still, I am content knowing that I am participating in the rise of the market on the basis of money already invested at prices that offer me a margin of safety if things do turn back. My companies continue to churn off cash flow and have each become stronger than when I first bought them at lower prices. This allows me the patience to wait for better prices in the market today. Further, if my companies did see a tumble in their stock prices, I could simply add to them with new cash as their fundamentals continue improving.

If I had no position in the market at this point in time, I would likely consider building some small starter positions to get some skin in the game, but I am averse at this point to jumping into the water completely by buying heavily.

My stance on the market will develop over time as well. For instance, if the stock market were to stagnate, I may add some funds as valuations improve. I always remember that as long as my time horizon is for the long-term, the key is to own terrific businesses and continue building on that foundation.

Full Disclosure: Long KO.

Twitter IPO

As most everyone has heard by now, the social networking site Twitter (NYSE: TWTR) went public this past Thursday, November 7, 2013.

 What does this mean for investors?

If you like using Twitter, buying its stock allows the opportunity to have a share in the company and in its fortunes going forward. By the end of trading on Thursday, Twitter had been valued at roughly $31.7 billion by investors.

Twitter soared from an opening price of $26 into the $40s instantly and has been deemed a very successful IPO offering. That said, smaller retail investors were not able to get in on the IPO and were led to make their purchases on the open market. From its close on Thursday the company fell 7.24% in Friday trading as some investors took money off the table.

Given its massive worldwide usage, there is no doubt that Twitter has outstanding reach with consumers and has found its way into the households of everyday citizens. With over five hundred million tweets per day, there is a lot of content for the company to look at turning into dollar signs. The question over time will be how the company can continue to monetize itself and build on its ad-revenue to generate earnings.

I find it difficult to accept a $30 billion price tag on a company that is not generating profits. What an investor has to accept if they purchase Twitter is that they are buying the hope of future profits and gains while accepting the risk that Twitter may never realize this. There is substantial execution risk in that management may not be able to bring their vision of the company to fruition. Companies in such a situation are subject to extreme volatility in their share prices. For instance, should Twitter miss analyst estimates each time they announce their earnings reports, investors should be aware that they may be subject to serious downside on their stake in the company.

 Competition...

Twitter faces competition from many other social media companies which all vie for advertising dollars and for the eyeballs of users globally. Facebook (NASDAQ: FB), LinkedIn (NYSE: LNKD), and other big-hitters are all working to carve out their own space within the online arena. Over time, I find it likely that users will become overburdened (if they are not already) and social networking sites will get thinned out as people become more selective with their time and choosy as to where they decide to build their online presence.

The bottom line...

I will not be buying Twitter any time soon. While Twitter may offer upside in the form of capital gains, a company that is not kicking off profits does not pay a dividend (and certainly not a stable one), and as such it falls outside of my investment criteria.

The company poses an unnecessary level of risk for my portfolio and does not meet my minimum requirements for investment. While I do operate on Twitter as @DividendTitan, I will pass on owning its shares.

Full Disclosure: No position in any stock mentioned and no intention to initiate one within the next 72 hours.

Is Apple a Dividend Growth Stock?

Steve Jobs had a simple and powerful vision for his company, Apple (NASDAQ: AAPL). He wanted to produce user-friendly, top-of-the-line products with a distinct feel and texture to them that would excite consumers and keep them coming back for more. In building his brand, Jobs was careful to differentiate what he offered from the products of his competitors. When someone is using an Apple product, they know it.

Over the past decade we have had the opportunity to watch Apple’s share price climb from around ten dollars per share to heights of over seven hundred. Since Jobs’ passing, Apple has gained recognition by brand consulting firm Interbrand as the number one brand in the world; dethroning long-time leader Coca-Cola (NYSE: KO) in the process.

Jobs’ successor, Tim Cook, has been guiding Apple since 2011 and has yet to launch his defining product. The world awaits and speculates as to just what the next major driver for Apple’s growth will be. The “Apple TV” is widely regarded as the next product that will expand Apple’s ecosystem. Using the Cloud, the Apple TV could potentially send Apple’s value soaring as it would be something different than just an upgraded operating system on a new version of the iPhone. It would once again be something for people to get excited about with Apple.

I view Apple as one of the most interesting stories in the stock market universe. When Apple initiated its dividend in 2012, many observers felt this was a statement on the part of the company that it felt it could no longer grow as effectively as it has in the past. Initiating a dividend is often viewed as a company throwing up its hands and accepting that the skyrocketing growth of the past has come to an end. At the same time, with Apple, there was the issue of +$100 billion in cash sitting and waiting to be put to work. Investors were growing impatient while Apple lined its coffers.

Given that Apple has only recently initiated a dividend policy, it is difficult to determine whether that policy will be maintained and whether the dividend will be increased in significant fashion going forward. I typically will not pay much credence to a company that has not at least demonstrated five to ten years of solid dividend growth, and this is one of the reasons that leaves me without any shares of Apple at this juncture. Currently sitting just below five hundred dollars per share, Apple is yielding in the 2.5% range, which is decent, but not that great of a lure for me at this point.

I do not consider Apple a dividend growth stock to buy as an anchor for a portfolio. Apple’s products and continued business rely on people purchasing more of their products going forward. Apple relies on a “cool factor” for public approval. Apple depends on consumers to continue shelling out hundreds of dollars for products that – for the most part – they “want” but do not necessarily “need”. Without a basic necessity for people to purchase the products, I can conceivably envision Apple at some point in the future not being able to maintain a dividend growth trajectory despite their rock solid financial position at this point in time.

While I have no crystal ball, I am wary of investing in companies where I have difficulty seeing their future ten to fifteen years out. I have very little idea of who will be the technology leader in 2030. As such, I would be uncomfortable putting my investment dollars to work not just in Apple, but in this industry as a whole.

Full Disclosure: Long KO. No position in AAPL and no intention to initiate one within the next 72 hours.

Rogers To Offer Its Own Credit Card

Rogers Communications Inc. (TSX: RCI.B) has announced that it has been granted approval to begin offering its own credit card by the Office of the Superintendent of Financial Institutions. Rogers hopes to begin offering this credit card to consumers within the next year.

From its own website, Rogers has announced that the final step in the application process has been completed and that those who use this credit card will earn themselves rewards points. Since earning points with Rogers will strengthen the link between the company and its customers, this may be viewed as a move to encourage customer retention.

In 2011, I first wrote about Rogers entering financial services and at the time I pointed out the risk that Rogers would stray from its core offering into uncharted waters. Time will tell whether Rogers is able to navigate the financial landscape profitably and avoid attracting only high-risk customers to its credit products.

I have been viewing the reaction of individuals on the various media postings of this announcement. The public perception and most highly “liked” comments are those that view this move by Rogers as “one more opportunity to rip off consumers”. I find this interesting given the fact that this credit offering is something that a person would need to apply for in order to opt in to it. While I cannot see myself getting one of these credit cards, I think that “more choice” is better for consumers – to each their own, is my view.

Should the addition of a credit card to Rogers’ portfolio prove successful, this will be one more stream of earnings to bolster dividend increases down the road for shareholders. I will be watching closely over the next few years to see how many customers Rogers is able to add and how accretive this will be to earnings. Competition from the already strong Canadian banking sector and other retailers will make this a challenging proposition.

The key to everything will be building a base of quality customers on a large enough scale to make this worthwhile. If this succeeds, I will look for similar moves from Bell Canada (TSX: BCE) and Telus (TSX: T) as well.

Full disclosure: Long BCE. No position in RCI.B or T and no intention to initiate one within the next 72 hours.

Separation Anxiety

I am often asked what I like best about dividends. I will detail my position here.
In the investing world, there are basically two ways to make money:
a) The first and most popular way is to buy something when it is cheap and sell it at a higher price later (buy low, sell high). This is the method of trying to achieve capital gains through well timed purchases and sales. It is akin to killing off your cattle to sell their beef, or to cut down your trees to sell their lumber.
b) The second way is to achieve cash flow through purchasing productive assets. This can be done in the same way that a dairy farmer milks his cows perpetually to simply sell the milk, or likewise the owner of an apple orchard who collects and sells the apples from his growing apple trees rather than cutting them down for their lumber. Dividends live here.

So, it becomes a matter of Capital Gains vs. Cash Flow (Dividends) – though over time an investor is likely to experience both.

When you own a company whose future prospects you believe in, it is in your interest to want to continue to hold those shares. Wealth builders through history have been “accumulators”. The way to achieve lasting financial strength is to continue to accumulate productive assets over time. This leads me to my first point.
1) Separation anxiety; aligning your interests with your company.
The problem with trying to achieve capital gains with a company that does not pay a dividend is that some day you will need to sell your position in the company to get any benefit from having owned the shares. I view myself very much as a stakeholder in the companies I own. I believe in their future wellbeing. As such, when I buy a company, I hope to never have to sell it. When I am paid my regular dividend, I believe that my interests and the company’s interests are aligned. We are able to grow together over time.
Selling my shares would mean I would have to end my investing relationship with the company (or lessen it, at least, if I sold only some of my shares). With every purchase I make, I genuinely hope that those shares will be in my final Will some day. Though I will indeed sell my shares if the story changes, that is never my intention at the time of purchase.

Over the very long term, companies typically trade in what might be regarded as a fair range as to their value. In the short run, however, the stock market is incredibly volatile and is traded emotionally. So, my second point:
2) Dividends are more stable than share prices.
Dividends are determined by a company’s fundamentals and future prospects while the stock price may be influenced by any number of factors – many of which may have no specific bearing on the particular company itself. Chasing capital gains can be a tricky business as even if you identify that a stock is overvalued, that does not mean it will go down any time soon. Investors trying to buy low and sell high often suffer from the long periods of time that they need to wait to be “proven right” by the market.
The passive dividend investor who is satisfied with the stocks they own is able to sit back and let the tidal wave of the stock market ebb and flow while they collect their money.

From studying businesses over many years, I have seen companies go on countless acquisition sprees to expand their empires. They often reach far beyond their “circle of competence” (as Warren Buffett would say) and try to operate businesses that are distinct from what they currently do. This can be a destroyer of shareholder wealth and brings me to the final reason I will share today that I love dividends:
3) Restraint on management.
Dividends impose restraint on management. Once a company has initiated a dividend policy and increased their payout for a decade or longer, it becomes a part of the culture. It becomes one of the last things that a company would want to tamper with. Knowing that a dividend must be paid and increased annually, management becomes less prone to going on wild expansion ventures and tends to be more careful with investor dollars.
Even with the slew of recall issues Johnson and Johnson (NYSE: JNJ) has had over the past few years, I doubt whether they even considered touching their dividend payout –even behind closed doors.

So, for investors like me who suffer from “separation anxiety”, the best plan of action is to own quality, dividend growth stocks for the long term and collect an ever-increasing cash flow.

Full Disclosure: Long JNJ