Investing - dennis mccain

When Dividend Growth Guys Get Excited

1/29/2014

When stock prices fall, dividend growth investors get excited. They know that dividends aren’t affected by stock prices. Dividends are paid out of earnings and earnings are related to revenue, not stock price. In fact, as dividends remain steady or slightly improve as stock prices fall, the corresponding yield increases proportionally. And yield is where the dividend growth investors are focused when it comes to buying decisions. Yield is about as deep as dividend growth investors delve into the world of technical analysis.

Dividend growth investors are pretty adept at finding companies that have consistently paid as well as increased their dividends over a period of several years. They also have their own rules on how many years, what’s the minimum yield, and what’s the growth rate needed to initiate a buy. So when the market falls as it has for the last few days, dividend growth investors get excited.

If you're a dividend growth investor, get excited.

Weekly Chart of the DOW Jones Industrial Average

Yesterday's Market Melt Down

1/25/2014

"The way to make money is to buy when blood is running in the streets"
-- John D. Rockefeller, Co-Founder of Standard Oil.

When the DOW Jones Industrial Average falls 318 point in a single session as it did yesterday, it tends to get everyone's attention. Quickly. It can easily become the main news story during the nightly national newscasts and can end up on the front pages of the morning newspapers. For the veteran trader, it's just a data point in a long string of data points reaching back months and years.

Daily chart of the DJIA, 24 Jan 2014

As you can clearly see on the charts below, the DOW Industrial Average and the S&P 500 Large Cap Index actually started deteriorating during the first week of January. Anyone watching the charts would have easily seen this happening realtime. Once identified and confirmed by the RSI, the MACD and the deteriorating ADX, it's easy to take appropriate measures.

DOW Jones Industrial Average

S&P 500 Large Cap Index

One of those measures is to realize that when these two market indices start to falter they tend to take individual stocks with them. So noticing these charts would have sent the astute investor to the individual charts associated with their particular positions. The appropriate assessment would be based upon knowing the appropriate price point that would signal a buy in that stock and then to determine whether their individual stocks were overbought or oversold. The answer to that question would dictate the action that needed to be taken. (A really astute investor would already know that information and would have already determined the appropriate action to take as a result of this type of event).

I believe in owning dividend growth stocks but I also believe that stocks can, at times, be overbought or oversold. Most investors look for oversold equities when they are making their initial buys but they never seem to reassess their holdings to determine if they are overbought. Sometimes stocks can get ahead of themselves and even a dividend growth investor needs to take his profits and move them into another dividend growth stock that is oversold.

Walgreens

1/23/2014

The following is an excerpt from my article "Walgreen Stock is Overvalued and It's Time To Take Profits" which was originally published on the website Seeking Alpha.

"The Walgreen story is a great story of a company with a great future, but it's a story that everyone already knows. And because everyone already knows it, the stock has become overbought and is now overpriced based on its fundamentals."

To continue reading this article, please click here.

Dividend Growth Investing is Brilliant

1/20/2014

Dividend Growth Investing is such a brilliant and elegant idea it’s amazing that it’s not the basis for all investing ideas. In its purest form it’s simply identifying and then buying stocks that grow their dividends over time. It’s such a simple idea that it’s often overlooked by investors who are searching for a more sophisticated and therefore complicated method of investing. Yet even simple ideas begin to get complicated once you try to execute them.

"And I had an old fashioned idea that dividends were a good thing."
-- James MacArthur, Actor, Investor

Here is how I implement this simple idea of dividend growth investing.

Looking for, and discovering, companies that increase their dividends annually is easy for me and for any other investor with an internet connection. There is little, if any, work involved in finding these companies. The work has already been done and is freely available on the net for everyone to see. Companies with a consistent record of improving their dividends each and every year are identified and segregated into categories or lists. These lists are based upon the number of years that the companies have been increasing their dividends. All an investor has to do is decide how many years of consistent dividend increases his investment strategy requires before acquiring a position in that company.

The Dividend Contenders List contains stocks that have been increasing their dividends for at least 10 years, the Dividend Aristocrats and Dividend Champions Lists contain stocks that have been increasing their dividends for at least 25 years, and the Dividend Kings List contains stocks that have been increasing their dividends for at least 50 years. Personally I prefer to begin my research with the list of Dividend Aristocrats. This list currently contains 52 companies but it’s updated monthly because occasionally companies are added or eliminated from the list. After screening these companies for additional criteria I’m generally left with a sufficient number of companies to select from for my next acquisition. If, after screening, there aren’t enough acceptable companies from the Dividend Aristocrats List, I’ll move down to the Dividend Contenders List and look for additional candidates. With the limited funds I currently have to invest, the Dividend Aristocrats List generally provides a sufficient number of companies for my requirements.

Once I have a list of stocks that increase their dividends every year, I slim down the list by eliminating those stocks that pay a dividend of less than 2.5%. Of the ones that are eliminated that are close to my dividend yield threshold, I calculate the price point to which these stocks would have to fall in order for their dividend yield to increase to 2.5%. This provides me with a list of candidates that I could sell covered puts against and successfully enter a position that pays a dividend with my minimum yield expectation.

The next thing I look for is a company with a dividend that is increasing each year at a rate greater than inflation. Since inflation varies from year to year, I put more emphasis on recent dividend growth rates (1 year and 3 year) than I do on longer term growth rates (5 year and 10 year). I want to know that the dividend that I’m buying today will grow over time at a rate greater than inflation and therefore my purchasing power will increase over time as well.

I have an overall total annual expectation on my investments of at least 8% per year. This is a total return on my investments and is the sum of both dividends and price appreciation. Therefore a stock that pays a dividend of 2.5% would be expected to increase its stock price 5.5% to equal 8% total return per year. If a stock pays more than 2.5% in dividends, then that stock would need to appreciate proportionally less in order for me to obtain the minimum 8% total return. Obviously all of us would like more than 8% but this is the minimum expectation for all of my equities.

I’m also always looking to compound my dividends by reinvesting into shares of companies that have a total return of at least 8%. This would allow my portfolio to double every 9 years without any growth and even fewer years with added benefit of growing dividends. Add in any personal savings and the portfolio grows even faster.

Since a company’s dividends are paid out of profits, dividends won’t grow very fast unless the company’s revenues and earnings are also growing. Assuming that a company maintains a constant payout ratio, revenues and earnings will need to grow at 8% per year in order to increase dividends at this same rate. When they don’t, dividends won’t grow either. I always check to make sure that revenues and earnings are relatively consistent over time but I also know that there are other factors like profit margins, product development and seasonality that often play a role in sales and profits. This in turn will also affect payout ratios. All of these items have to be monitored at least quarterly to ensure that the shares of the companies that I own continue to perform as necessary in order for my portfolio to increase as expected.

Most dividend growth investors have similar requirements when it comes to finding companies that are worthy of investing in. Most dividend growth investors also hope and expect their investments to perform as expected which is to continue along this same growth path for years to come. Unfortunately there’s no guarantee that this will ultimately happen. This is exactly why I monitor each company quarterly to ensure that they meet or exceed the same requirements that I expect of any new purchase. When these minimums aren’t met, then it’s time to move on.

So far these ideas are a pretty simple and straightforward method of looking at companies. I look at revenues, earnings, dividends, stock prices, payout ratios and growth rates. As long as they move forward in sync I maintain ownership and my wealth grows along with the companies themselves. It’s also a strategy that lets me know at least quarterly if any of the companies in my portfolio are falling behind those initial buy parameters. If they do it results in a sell decision. This has been my investment strategy for a long time and it has done very well for me.

There is also a special category of companies in addition to the list of Dividend Aristocrats that I’m always interested in. This category is made up of companies that are either Master Limited Partnerships, Real Estate Investment Trusts, or Business Development Companies. These companies must distribute at least 90% of their profits to their shareholders. Each of these companies are also required to pass along 100% of their tax liability to their shareholders. In those case where one of these companies pays a dividend of at least 8%, I’m interested in looking further at their fundamentals to see if they surpass additional criteria I have for acquiring a position in any company. I normally don't expect the stock price of the companies in this category to increase from year to year but I also don't expect the stock price to fall either. If I can get an 8% return by way of the dividend alone, I’m happy for these stocks to maintain their present price from year to year. I’ll settle with compounding the 8% dividend quarterly and annually. In some cases these dividends are paid monthly and the compounding occurs even faster.

"A large income is the best recipe for happiness I ever heard of."
-- Jane Austin, Author

If this is all I wanted to do then I think I’d have a successful investing career. But I also use options to enhance my dividend income. I use covered puts to enter into investments at the best price and hence receive the best possible dividend yield. I also use covered calls or outright stock sells if the stock price has gotten ahead of itself. One of the signals that a stock’s price has gotten ahead of itself is when I see revenues, earnings and dividends improve in sync with each other while the yield begins to fall. This is an obvious result of the stock price advancing faster than the other parameters. It signals to me that investors have bid the stock up too fast and it’s time to take some profits. One way that I do this is by selling covered calls against the stock and pocketing some of that price advance in anticipation that the stock will fall back over the duration of the call. Another way to monetize this is to sell the stock at the inflated price and then either wait for it to fall back and buy it again or sell covered puts to get back in and pocket the option premium. Either one of these two actions is acceptable. The only difference is the tax consequences associated with selling the underlying stock which may have been held for an extensive period and has a substantial capital gain versus selling short term options.

This strategy has been my investment strategy for a number of years and has provided me with a set of guidelines as I approach my buying and selling decisions. It’s a simple strategy but I’ve learned over the years that simple strategies that can be written down, easily explained and are actually executable will be successful over time.

Good Luck and Good Trading.

Upstream Oil and Gas MLPs

1/15/2014

"Formula for success: Rise Early, Work Hard, Strike Oil."
-- J. Paul Getty, Oil Man and Founder of Getty Oil.

While researching upstream exploration and production companies that are both organized as a master limited partnership and increase their dividends at least annually, I found six companies that I am interested in. I am beginning to accumulate small positions in each of these companies and I will continue to monitor their performance as I increase my positions. These companies are BreitBurn Energy Partners (BBEP), Legacy Reserves (LGCY), Linn Energy (LINE), Memorial Production Partners (MEMP), QR Energy (QRE) and Vanguard Natural Resources (VNR). Four of these companies distribute dividends on a monthly basis (BBEP, LINE, QRE, VNR) and two pay on a quarterly basis (LGCY, MEMP). I expect that eventually all six of these companies will distribute dividends on a monthly basis.

None of these companies have a long or consistent history of increasing revenues and earnings. That normally would signal to me to look elsewhere for new investments. But I’m interested in MLPs and companies that increase their dividends annually and each of these companies are an MLP and have a history, albeit short, of annually increasing their dividends.

Understanding the Oil and Natural Gas Industry

The oil and natural gas business is a vast and complicated sector for investors. A general understanding of the oil and natural gas sector can help an investor in determining where to invest. A good place to start is to understand how this sector makes its money.

The oil and gas industry is normally divided into three sectors and most oil and gas companies fall into one these three sectors: upstream, midstream and downstream. There is also a fourth category of oil and gas companies referred to as integrated oil companies and these are usually large multinational companies that operate in all three sectors simultaneously. Examples of large integrated multinationals include BP, Chevron, Murphy Oil, Royal Dutch Shell, Total and ExxonMobil.

The upstream sector is usually referred to as the exploration and production (E&P) sector. The upstream sector includes searching for potential underground and/or underwater oil and natural gas, drilling exploratory wells, and operating wells that recover oil and gas from known fields. The midstream sector involves the pipelines and storage facilities for the transportation, storage, and wholesale marketing of crude and refined petroleum products. Midstream oil and gas companies move product from production sites to refineries and deliver refined products to downstream distributors, customers and utilities. The downstream sector refers to the refining of crude oil and processing of natural gas as well as the marketing and distribution of products derived from oil and gas. The downstream sector includes such products as gasoline, kerosene, jet fuel, diesel oil, heating oil, lubricants, waxes, asphalt, natural and liquified gas, and various petrochemical products.

Hydrocarbons as the basis of the Oil and Gas Industry

Oil and gas is created naturally when organic material decays. It consists of the remains of plants and animals that are compressed over the millennium in sedimentary rock such as sandstone, limestone and shale. As layers of sediment were deposited on the ocean floor millions of years ago, decaying remains of plants and animals were integrated into the sediments. This organic material eventually transforms over time into oil and gas after being exposed for an extended period of time to the high temperatures and pressures inside the earth's crust.

Since water is denser than oil and gas, the hydrocarbons tend to migrate through the relatively porous sedimentary rock upward toward the earth's surface. When the hydrocarbons become trapped beneath relatively more solid rock, an oil and gas reservoir is created. To bring these hydrocarbons to the surface, a well is usually drilled through the cap rock and down into the oil and gas deposits. Once drilling reaches the oil and gas these hydrocarbons are pumped to the surface. When the drilling activity doesn't find commercially viable quantities of hydrocarbons, the well is referred to as a dry hole and it's plugged and abandoned until some time in the future when technologies can be developed that will allow the hole to become commercially viable.

Upstream Exploration and Production Companies

E&P companies measure oil production in terms of barrels. A barrel, usually abbreviated as "bbl," is 42 U.S. gallons. Companies often describe production in terms of bbl per day. A common methodology in the oil patch is to use a prefix of "m" to indicate 1,000 and a prefix of "mm" to indicate 1 million. Therefore, 1,000 barrels is commonly denoted as "mbbl" and 1 million barrels is denoted as "mmbbl." Gas production is described in terms of standard cubic feet, which is a measure of gas quantity at 60 degrees Fahrenheit and 14.65 pounds per square inch of pressure. Similar to the convention for oil, the term "mmcf" means 1 million cubic feet of gas. One billion cubic feet is denoted as "Bcf," and 1 trillion cubic feet is denoted as "Tcf."

E&P companies often describe their production in units of barrels of oil equivalent (BOE). In calculating BOE, companies usually convert gas production into oil equivalent production using an energy-equivalent basis. In this basis, one BOE has the energy equivalent of 6,040 cubic feet of gas - or roughly one bbl to 6 mcf. Oil quantity can be converted into gas quantity in a similar fashion, and gas producers often refer to production in terms of gas equivalency using the term "mcfe."

Since the discovery and acquisition of new oil and gas deposits are the primary source of future revenue, E&P companies spend a lot of time, money and effort in finding new petroleum reserves. If an E&P company stops exploring, it will generate revenue from a finite and depleting quantity of petroleum and, therefore, revenue will naturally decline over time. As a result, E&P companies can only maintain or grow a revenue base by acquiring or finding new reserves.

Dividends

Yields for these companies are excellent and currently range from 8.32% for LGCY to 11.31% for QRE. Since current yield is calculated based on and ever changing daily price, it's prudent to use these numbers for comparison only and it would also be prudent to calculate yield over a number of different days.

BBEP
LGCY
LINE
MEMP
QRE
VNR

Price
$20.02
$28.11
$32.03
$21.82
$17.24
$29.65

Dividend
$1.97
$2.34
$3.08
$2.20
$1.95
$2.49

Yield
9.84%
8.32%
9.62%
10.08%
11.31%
8.40%

During the last three years the dividends for these companies have been increasing at varying amounts annually for all six of these companies. Unfortunately none of these companies have a long record of increased dividends so comparisons are difficult. The three year dividend growth rate for BBEP is 15.32%, for LGCY it's 3.52%, for LINE it's 4.33%, and for VNR it's 4.32%. QRE has a two year dividend growth rate of 23.42% and MEMP has a one year dividend growth rate of 35.06%.

BBEP
LGCY
LINE
MEMP
QRE
VNR

Dividend 2013
$1.91
$2.31
$2.90
$2.08
$1.95
$2.49

Dividend 2012
$1.83
$2.23
$2.86
$1.54
$1.92
$2.40

Dividend 2011
$1.68
$2.14
$2.70
---
$1.28
$2.31

Dividend 2010
$1.24
$2.08
$2.55
---
---
$2.19

Overall I find these companies to be very interesting and worth additional research and monitoring. I plan to accumulate small positions in each of these companies over the next few months and then add to them as I begin to see revenues and earnings steadily increase in a more consistent and sustainable manner. I will attempt to use options to get into these stocks in order to ensure a good entry and to lock in excellent yields. These may turn out to be real gems and there may be some real value here if I can endure the temporary stress of some short term volatility in both the fundamentals and the stock price that each of these companies are currently experiencing.

Don't Buy Into Those Buy Backs

1/11/2014

"I don't like stock buybacks. I think if a company has the money to buy their stock back, then they should take that and increase the dividends. Send it back to the stockholder. Let them invest their money again from the dividends."
--T. Boone Pickens, Investor, Oil Man, Hedge Fund Chairman

Great companies generate more money that they currently need to execute their business. When that occurs companies need to make the decision as to what they will do with those excess profits. When the decision is made to buy back its own stock on the open market it signals that the company has no better productive use for that money. More importantly the company’s management has also made the decision not to share those profits with its shareholders. I can’t think of any good reasons why a company would do this, but I can think of a few bad reasons why it would.

Management has no new good ideas for the profits the company generates. Most companies have a Research and Development (R&D) Department where they develop new ideas, concepts or uses for new as well as existing products that the company produces. Companies that have products under development also have a tremendous need for whatever money the company can generate from its current product lines. A great company uses those profits to efficiently and effectively improve the company’s revenues and earnings. A company totally bankrupt of new ideas, however, will use the money to buy back shares or worse, spend it on themselves. This is not the kind of company I want to own shares in. I want to own shares of companies that either put the profits back into the business or distribute the profits to the shareholders in the form of dividends.

Management wants to artificially manipulate the earnings per share (EPS). Some companies find themselves in the unenviable position of being at a total loss on how to improve their future earnings. Their earnings may not be going down but they’re not going up or not improving as fast as they had been in previous quarters or years. These companies often make the decision to use the company’s profits to buy their own stock on the open market in order to reduce the number of shares outstanding. The company’s stagnant or declining earnings are then divided by a fewer number of shares. This artificially increases the company’s quarterly and annually calculated earnings per share. Any investor not paying attention to the company’s income statement wouldn’t notice this until it’s too late. I always feel that in these instances management isn’t being honest when they report an increase in EPS when it’s a result of fewer shares rather than increased income. This is not the kind of company that I want to own shares in.

Management wants to award themselves stock options. Most companies sell most, but not all, of the shares of their company to the public and retain a small portion of their shares for bonuses to be handed out to management based upon management’s performance (both good and bad performance!). When the company wishes to give away more shares than is in their treasury, the company takes some of their retained earnings and goes out into the open market and buys shares. The usual justification for buying shares on the open market is to reduce the overall number of shares outstanding. This decrement will consequently increase the company’s EPS even without an increase in income. In reality is often doesn’t occur because the shares are just redistributed to the managers of the company at a reduced cost. Sometimes they’re redistributed at no cost to management at all. This is simply management giving itself a raise at the expense of the shareholders. This is money that the company didn’t need to improve its future earnings and that should have been rightfully distributed to the individual shareholders. Instead it was used to buy stock and then “gift” it back to management. This is not the kind of company that I want to own shares in.

Each of these reasons why companies buy back their shares are bad reasons. None of these actions enhance the value of the shares for the individual investor in the slightest way. Companies that I am interested in are companies that increase their revenues, earnings, and dividends in a consistent and honest manner. I’m not interested in accounting “tricks” that make these data look better than they actually are. And I’m not interested in managements that don’t have the interests of the shareholder ahead of themselves.

Companies are suppose to be established for the sole purpose of creating profits. And those profits should only be used for two reasons. Profits can either be put back into the company so that the company can create new or improved products that will enhance future profits and grow the company, or profits can be returned to shareholders in the form of dividends. Any other use of those profits is a misuse of funds and management is not acting responsibly. As I analyze quarterly and annual earnings and I find this to be the case, I sell the stock and move on to another company with a more responsible management team.

Individual Investor, Inc.

1/9/2014

An individual investor is simply a one person entrepreneurial business. It’s nothing more and nothing less than this simple truth. Until I understood this simple yet profound idea, I really didn’t understand investing at all. Today I do understand and I am an individual investor. I am the owner of a business that employs only one person - me. All of the collateral that was needed to start my business was provided by me. All of the profits that my business generates are distributed to me. All of the wealth that is created remains in my portfolio but at any time that wealth can be converted to cash and distributed to the businesses owner - me. And there’s only one person responsible for all the business decisions, both good and bad, that are made each and every day - and that’s me.

My business owns inventory and my portfolio is that inventory. That inventory should never be thought of as good or bad, it’s just inventory. When I add to my inventory, I have an expectation of what that inventory will do, and I am responsible to make any and all changes in that inventory from time to time. I can buy and hold that inventory or I can buy and sell that inventory. It’s my decision. And that inventory itself has an inherent or intrinsic value. I try to buy stock (inventory) when it’s way below it’s value, hold it as long as it performs as expected, and sell it when it greatly exceeds it’s value. As a business owner, I own that inventory. That inventory doesn’t own me. I am not my inventory.

"The chief business of the American people is business. They are profoundly concerned with producing, buying, selling, investing and prospering in the world."
-- Calvin Coolidge, 30th President of the United States.

If you don’t understand these ideas, then you’re not running your portfolio as a business. You’re not analyzing your current business decisions on a daily basis to determine whether or not they are good or bad decisions for your business. And badly run businesses often fail. Miserably.

So if you’re not operating like a business, what are you really doing?

You’re an Owner of Other Companies.

You’ve often heard that “When you buy a share of stock in a company you are now a part owner of that company.” Wow. This is probably the biggest whopper ever told to shareholders by the Wall Street professionals. It’s true that if you’re rich and you buy all of the shares of a company, you become the sole owner of that company. If you’re not so rich and you buy a large share of the outstanding stock of a company, you may be on the board of directors and consulted every once in a while. You may even be considered a part owner of that company by management. But if you’re only buying 1/100th of 1% of a company, what exactly are you a part owner of?

A true owner of a company directs the affairs of an organization and is responsible for it’s mistakes. Can a shareholder do that? A part owner ends up being part of a group like the board of directors that makes group decisions on the direction of the company. Can a shareholder do that? What exactly does an owner of a few hundred shares of a company really control or direct? Probably very little if anything other than voting on the board of directors and who this year’s auditors will be.

A shareholder is only along for the ride so a shareholder needs to be on the right “ride”. Your inventory had better contain companies that match your investing plan. A single shareholder has the right to receive the same dividend as any other shareholder but he doesn’t determine what that dividend will be. He has the same right to benefit from the business’s increase in revenues and earnings in terms of stock appreciation but he really doesn’t control the operation or direction of the business. He may think of himself as an owner but it’s generally not much more than “in name only”.

You’re a Gambler.

I usually think of these investors as short term traders. That’s because they usually trade for a very short time and then they lose all their money. The lucky ones still have their “day job” so they can probably build up another “stake” to gamble on the next hot tip or great idea. Gamblers usually get their tips from all their smart friends or from hot news sites. They may not think they have insider information but they think they have information early and reliable. Usually that’s the furthest from the truth. Luckily for me these are the money donors that keep the rest of us growing. I would never discourage anyone from becoming a gambler because the market needs their money.

You’re a Chaser.

The Chaser is the guy that’s found a stock that’s already gone up. Usually way up. He’s sometimes referred to as the momentum investor. This is the guy that always confuses me. My plan is to buy stocks that increase their revenues, earnings and dividends on a consistent basis. When that stops happening, it’s time for me to find another stock that can increase revenues, earnings and dividends. The Chaser, however, seems to come in after the stock has already significantly moved up in price. So when I think it’s finally time to move on to another improving stock, the Chaser fools me and continues to drive stocks upward that have revenues, earnings, and dividends that are beginning to turn flat or decline. I always forget to remember that the Chaser will continue to drive up stocks even after it’s no longer warranted. I need to remember these guys more. The number of Chasers will always run out and the stock will eventually fall. It turns Chasers into complainers.

Conclusion.

The individual investor is really a self employed businessman who buys, holds, and sometimes sells shares of stock in other companies. An individual investor is someone who buys shares of a company that entitles the investor to an equal dividend with every other shareholder and an equal appreciation of the value of that stock certificate. As an individual investor responsible for directing his own portfolio, he needs to run his portfolio like a business. As the sole owner and manager of his business he’s responsible for the direction of his own investments. An individual investor can invest in any stock he choses so it’s critical to chose a stock that meets his own investing plan (which means if you don’t have a plan, you don’t know how to direct yourself as a business!).

An individual should be looking at his portfolio as his inventory. An inventory that can and should increase solely on the improving dividends it receives from the stock certificates it has on hand. It should also increase in value as the companies it represents increase in value. It’s absolutely necessary that if the individual investor is to succeed as a business, he needs the value of his holdings or inventory to increase over time. An individual investor needs to understand his own return on investment on his own business.

I don’t know why investing is so hard for most people. I suspect it’s because they get way too close to their investments. They internalize them and take everything personal. It’s not personal, it’s business. If the portfolio was an actual brick and mortar business, an investor wouldn’t have any problem treating it and assessing it like a business. If the portfolio was rental property you wouldn’t have a problem treating it like a business and assessing a return on investment from your rents. I’ve never been able to understand why investing in the stock of companies is any different.

If you want to be successful as an individual investor you need to run your portfolio just like you would any other business because your investments are your business. They are the company that could be referred to as “YOU Inc.”

QR Energy

1/6/2014

QR Energy (QRE) is an upstream Master Limited Partnership (MLP) focused on delivering stable cash flow from US oil and natural gas production and growing through accretive acquisitions of mature, conventional properties. QRE operates in a segment of the energy sector that's engaged in the acquisition, exploitation, development and production of oil and natural gas properties. The company’s properties consist of 4,527 gross producing wells located in Alabama, Arkansas, Florida, Kansas, Louisiana, Michigan, New Mexico, Oklahoma, and Texas (see below). It has an estimated net proved reserves of 99.1 Million Barrels of Oil Equivalent (MMBoe) of which 75% is developed and 68% contains Oil and Natural Gas Liquids (NGL). QR Energy, LP was founded in 2006 and is headquartered in Houston, Texas.

Oil and Natural Gas Locations

Master Limited Partnerships

An MLP are not like a regular corporation. Apache Oil Company was the first MLP established in 1981 when the IRS created MLPs and established them as part of the US tax code. MLPs were created to be a unique type of business organization. In order for a publicly traded company to be considered an MLP the company or partnership must derive approximately 90% of its cash flows from real estate, natural resources or commodities. Once established, the organization enjoys the advantage to being organized as an MLP which combines the tax benefits of a limited partnership with the liquidity of a publicly traded company. A master limited partnership does not have to pay any taxes from it’s profits as long as approximately 90% of the profits and all of the tax liability is passed to the individual unit holders. These unit holders, upon receiving their distributions, are then responsible for paying the tax.

Master Limited Partnerships normally have two types of partners. The first one is a Limited Partner who is the person or group of persons who provide the capital to the MLP and receives periodic income distributions from the MLP's cash flow. The second type is the General Partner who is responsible for managing the MLP and receives either a fixed fee or receives compensation that is tied to the profit of the underlying business. Limited Partners are only liable for the amount they've invested, unlike the General Partner who has unlimited personal liability.

During the development stages of a limited partnership, when costs tend to exceed any revenues, partners invest capital and then receive the tax benefit of a personal income tax deduction for part of the loss during this stages of the partnership. Limited partnerships are common when businesses are in development stages, but Master Limited Partnerships are unique in that their units are traded publicly like stock, creating much more liquidity for investors.

A similar type of organizational structure is the Limited Liability Corporation (LLC). One of the primary difference between organizations structured as MLPs versus organizations structured as a LLC is that LLCs are established without the requirement for a General Partner.

For a visual understanding of MLPs please see the video below.

QRE Stock Appreciation

Companies that pay out 90% of their profits to their shareholders or unit holders (MLPs, BDCs and REITS) will normally not see their stock price increase over time because they're retaining only 10% of their earnings for internal growth. Their stock will instead remain steady or just slightly increase over time and generally is pegged at a industry competitive multiple of it's dividend. QRE is no exception. QRE has remained on either side of $17 throughout the year and has wavered primarily within the range of $16 and $18 (see below). As long as QRE maintains a dividend of $1.95 I expect the share price to remain near this same level. The company, however, continues to look for promising property acquisitions to increase their inventory of oil and natural gas as well as new technologies for enhancing existing fields, increasing its earnings and hence, potentially increasing its dividend. In addition, their ability to raise additional capital in the future and the cost associated with raising that capital in order to increase its inventory of oil and natural gas properties will also affect the company's ability to increase their income and future dividends. Any future increases in the dividend as a result of the above actions would likely increase the value of the stock as well.

One Year Stock Chart

Revenues

Revenues look encouraging and they have been increasing steadily since 2009. It is estimated that revenues will continue to increase well into 2014. QRE's desire to acqure of new properties going forward and the continual exploitation, development and production of the existing oil and natural gas properties should ensure that those revenues continue to increase.

Year
2014
2013
2012
2011
2010
2009

Revenues (Millions)
$556.51 (Est)
$471.00 (Est)
$371.99
$360.90
$262.37
$72.80

Earnings

Earnings have been somewhat sporadic between 2009 and 2012 but earnings have come in strong in 2013 at $1.18 and estimates are that it will increase again next year to $1.30. While fully diluted EPS were going up and down, net income was generally moving up. It appears that QRE is starting to get it's income statement in order so EPS should start to move up hand-in-hand with increases in net income. These numbers will obviously have to be monitored going forward to ensure that the company is making the right moves in controlling those extraordinary items.

Year
2014
2013
2012
2011
2010

EPS
$1.30 (Est)
$1.18
$0.00
$1.09
-----

Net Income (Millions)
--------
--------
$79,751
$88,295
$19,876

Dividends

Dividends have been increasing annually and the dividend for 2013 is $1.95 per share (dividends in 2012 were $1.925 and in 2011 were $1.2823). At the current price of $17.23, QR Energy yields 11.32%. A drop in the stock price of less than $1 to 16.25 would increase the company's dividend yield to 12% annually or one percent monthly (an excellent return by any measure). This kind of drop in price is well within the stock's price range experienced within the last year and could possibly be a good entry target.

The dividend is also being changed from a quarterly distribution to a monthly distribution starting in January 2014 (see the downloadable company statement below titled "QR Energy Announces Monthly Cash Distribution"). The current quarterly distribution of $.4875 will now be split into 3 monthly distributions of $.1625 each. Investors interested primarily in dividends rather than capital gains are usually retirees looking for income to augment their company retirement or monthly Social Security payments. They are also generally looking to match their dividend income to their monthly obligations and monthly dividends are extremely appealing to that group of investors. Since similar upstream oil and natural gas companies like Vanguard Natural Resources (VNR) pay dividends in the area of 8-9%, it's possible that QRE's stock price could easily drift higher to the range of $21-$22 to approach a similar dividend yield.

Quarterly Dividends

Why I like this stock and why I'm investing in it

I generally like equities that fall into the category of Dividend Growth stocks. And the ones that I especially like are those that are included on the Dividend Aristocrat List. QR Energy is not one of those stocks because it hasn't been paying dividends for 25 years and hasn't demonstrated a legacy of increasing dividends either.

It does, however, fall into another group of equities that I like to accumulate. These are equities that don't usually increase in price but instead throw off large amounts of income in the form of dividends. In the case of QRE, that dividend is $1.95 per share, which is a dividend yield of 11.32%. That amount is in excess of the 8% total return I look for when I'm researching any investment. That amount will also provide me with a 3.32% cushion in case the price of the stock falters.

Another advantage of QR Energy is the fact that it's optionable. With options I can use Puts to get into this stock and Calls to get out of this stock and I can generally add an additional 1/2% or better increase in yield per month. With an 11.32% dividend and the potential of an additional 6% return from options, this will continue to be an exceptional investment.

Competitors

Competitors of QR Energy in this field of acquiring, exploiting, developing and producing oil and natural gas reserves that would be of interest to my style of investing which is striving for an 8% annual total return would be any of the following upstream MLPs:

BreitBurn Energy Partners (BBEP)*
Legacy Reserves (LGCY)
Linn Energy (LINE)*
LRR Energy (LRE)
Memorial Production Partners (MEMP)
Mid-Con energy Partners (MCEP)
Vanguard Natural Resources (VNR)*

*I currently own stock in BBEP, LINE, and VNR.

QR Energy Fact Sheet

qre_factsheet3q13.pdf
File Size:	2626 kb
File Type:	pdf

QR Energy Announces Monthly Cash Distribution

dividend_release.pdf
File Size:	58 kb
File Type:	pdf

3Y Weekly Stock Chart

Big Oil

1/3/2014

There’s not many things in this world as big as Big Oil. And anywhere Big Oil is talked about, the names of two companies always enter the conversation. Those companies are ExxonMobil Corporation (XOM) and Chevron Corporation (CVX). They’re also two names on the Dividend Aristocrat List because of their consistency in delivering an increasing flow of dividends annually to its shareholders. It’s those dividends and being included on the list of Dividend Aristocrats that are attractive to me. But simply being on the Dividend Aristocrats List is not enough. I just won’t make any decisions on whether to accumulate any stock in any company without looking at that company's revenues, earnings and its stock chart.

ExxonMobil Corporation engages in the exploration and production of crude oil and natural gas, and manufacture of petroleum products. The company also transports and sells crude oil, natural gas, and petroleum products. It has approximately 37,228 gross and 31,264 net operated wells. The company manufactures and markets commodity petrochemicals, including olefins, aromatics, polyethylene, polypropylene plastics, and specialty products. It also has interests in electric power generation facilities. The company has a strategic cooperation agreement with Rosneft to jointly participate in exploration and development activities in Russia, the United States, and other parts of the world. It operates in the United States, Canada/South America, Europe, Africa, Asia, and Australia/Oceania. ExxonMobil Corporation today is a result of a merger between Exxon Corporation and Mobil Corporation effective December 1, 1999 and a subsequent merger with XTO Corporation on June 25, 2010.

Chevron Corporation, through its subsidiaries, engages in petroleum, chemicals, mining, power generation, and energy operations worldwide. The company operates in two segments, Upstream and Downstream. The Upstream segment is involved in the exploration, development, and production of crude oil and natural gas; liquefaction, transportation, and regasification associated with liquefied natural gas; transportation of crude oil through pipelines; and processing, transportation, storage, and marketing of natural gas, as well as holds interest in a gas-to-liquids project. The Downstream segment engages in refining crude oil into petroleum products; marketing crude oil and refined products; transporting crude oil and refined products through pipeline, marine vessel, motor equipment, and rail car; and manufacturing and marketing commodity petrochemicals and fuel and lubricant additives, as well as plastics for industrial uses. The company is also involved in coal and molybdenum mining operations; cash management and debt financing activities; insurance operations; real estate activities; and energy services, and alternative fuels and technology businesses, as well as manages interests in 11 power assets with a total operating capacity of approximately 2,200 megawatts. Chevron Corporation today is a result of a merger with Texaco Inc effective October 9, 2001, and a merger with Unocal Corporation effective August 10, 2005.

Revenues

Revenues for these two companies increased at a respectful pace during the years 2009 thru 2011 but as the world economy slowed so did their revenues (See table below). Based on this information revenues for both companies slowed in 2012 and estimates show that revenue will not have recovered in 2014 from the revenue fall off in 2012.

ExxonMobil Corp
$438.280
$447.670
$482.295
$486.429
$383.221
$310.586

Revenues (Billions)
2014 Est.
2013 Est.
2012
2011
2010
2009

Chevron Corp
$242.170
$237.190
$230.590
$244.371
$198.198
$167.402

Earnings

Earnings for ExxonMobil Corp during the period from 2009 to 2012 increased at an annual rate of growth of 34.17%. While this is impressive, earnings only increased by 15.20% from 2011 to 2012. Earnings for Chevron Corp during the period from 2009 to 2012 increased at an annual rate of growth of 36.05% but actually declined slightly from 2001 to 2012. Based on estimates for 2013 it doesn't appear that earnings are improving for this year either.

ExxonMobil Corp
$5.46 (9 Months)
$9.70
$8.42
$6.22
$3.98

Earnings
2013
2012
2011
2010
2009

Chevron Corp
$8.52 (9 Months)
$13.32
$13.48
$9.48
$5.24

Dividends, Dividend Growth Rates, and Payout Ratios

Dividends, however, have continued to climb during this same period but at a much slower rate than the increases in earnings. While earnings for these companies were growing in the range of approximately 34-36%, dividends were only growing in the range of 9-12%. As a result of this differential, the payout ratio for ExxonMobil has declined from 41.71% in 2009 to 22.47% in 2012 and for Chevron from 50.76% in 2009 to 26.35% in 2012. This would normally be great news since it would lead the average investor to believe that since the earnings were improving faster than dividends, future dividend increases would eventually follow as the payout ratio is driven toward zero. But knowing that earnings were not expected to increase in the future as fast as they have in the past, it would be expected that the payout ratio would start to increase once again and put pressure on both of these companies to significantly decrease the rate of dividend growth. This would definitely be bad news.

ExxonMobil Corp
$2.46
$2.18
$1.85
$1.74
$1.66
$1.55
$.98

Dividends
2013 Dividend
2012 Dividend
2011 Dividend
2010 Dividend
2009 Dividend
2008 Dividend
2003 Dividend

Chevron Corp
$3.90
$3.51
$3.09
$2.84
$2.66
$2.53
$1.43

ExxonMobil Corp
12.10%
9.67%
9.64%

Dividend Growth Rate
3 Year
5 Year
10 Year

Chevron Corp
11.03%
9.04%
10.55%

ExxonMobil Corp
22.47%
21.97%
27.97%
41.71%

Payout Ratio
2012
2011
2010
2009

Chevron Corp
26.35%
22.92%
29.95%
50.76%

Dividend Yields

At the end of 2013 ExxonMobil had a dividend yield of 2.43% which was basically unchanged from 2010. The dividend for Chevron had slightly decreased from 3.42% to 3.12% from 2010 to 2013. Both of these rates are excellent and approximate the threshold of 2.5% I expect from any investment I consider buying into. In fact a small pullback in the price of Exxon Mobil to $98.40 would increase the yield on the stock to 2.5% and is well within the variability of the stock (see charts below).

ExxonMobil Corp
$101.20 (2.43%)
$70.50 (2.47%)

EOY Stock Price (Div Yield)
2013
2010

Chevron Corp
$124.91 (3.12%)
$83.00 (3.42%)

Stock Price Growth Rates

I've also calculated the three year stock price growth rate for ExxonMobil to be 12.66% and for Chevron is 14.44%. However this growth rate is calculated based upon the closing price of the stock as of 31 December and the approximate closing price on 31 December 2010. Calculations made on prices that can vary every trading day is a dangerous calculation to base any decisions on but it can be quite useful for comparison purposes.

ExxonMobil Corp
12.66%

Stock Price Growth Rate
3 Year

Chevron Corp
14.44%

The Stock Charts

Below are the three year weekly charts for both ExxonMobil Corporation and Chevron Corporation. These charts include 5 and 10 week moving averages as well as Bollinger Bands. I've also included the RSI, MACD and ADX for supporting confirmation. As always, I use fundamental analysis to filter or screen companies to determine if they meet my criteria for further analysis or investment. I then use technical analysis to determine the appropriate price and/or time to acquire a stock position. In the end, I hope to own the right stock at the right price and then add to that position over time.

ExxonMobil Corp - 3Y Weekly Chart

Chevron Corp - 3Y Weekly Chart

Conclusion

Both of these companies would be excellent candidates for consideration for my accounts based on past performance. I like how they both pay approximately 2.5% in dividends and have a consistent dividend growth rate in excess of the inflation rate. I'm also impressed that their revenues and profits have been growing at a rate faster than the general economy. But all this is in hindsight. Unfortunately going forward, revenue and earnings estimates appear to be declining. This can't be good. I honestly don't believe this will affect either company's ability to increase their dividend annually for some time to come, but it will eventually cause the payout ratio to creep higher and put pressure the company's ability to increase future dividend increases. In addition, any slowing of revenues and earnings will eventually impact the price of the stock. Since I count on a combination of the dividend yield and the increase of the stock price to be at least 8% per year and the dividend is in the area of 2.5%, then I need the stock price to increase by 5.5% per year. That will probably not be possible going forward with revenue and earnings estimates in decline.

I intend to take a wait and see on these two stocks to see how any future revenues and earnings materialize. I may, however, begin to accumulate odd lots of each of these companies if the stocks pull back from their present price. I see no hurry to accumulate these stocks at this time and waiting to see if the projected revenue and earnings estimates pan out is probably the prudent position to take at this time. They are, however, two solid companies that have been excellent long term investments for well over 100 years and I expect them to be excellent investments again.

Happy New Year

1/1/2014

The end of the year is always the perfect time to research the available annual information about companies I'm interested in owning. So that's what I've been doing the last few days. I'm most interested in how much stock prices and dividends have gone up for those companies I'm interested in. Since I'm most interested in stocks that are on the Dividend Aristocrat List, that's the information I've been digging through. I've been surfing the net for each of these company's websites as well as the NASDAQ website for all the information I can find. In a few days I'll have most of that data input into a spreadsheet so I can make sense out of it. I'll be looking for those companies that not only increase their stock price but do so at a rate faster than the overall market. I'll also be looking for companies that not only increase their dividends but do so at a rate faster than inflation. I know there's quite a few companies on the Dividend Aristocrat List that have done that in the past but that's no guarantee the they'll repeat doing it into the future. It's all based on the assumption that companies that have been great in the past will continue to be great well into the future. But like Ronald Reagan said about the Russians - Trust but Verify. For me that means buy but continue to monitor. Hopefully once I begin to mine this pile of data I'll be able to come up with some good ideas. Wish me luck.

Author

I am an Individual Investor with specific interest in long term growth and then enhancing my returns with income from dividends and derivatives. I don't recommend stocks to anyone (it's a good way to lose friends) and no one reading this should misinterpret my blog as a recommendation for any type of investment. I am writing this solely for myself and my kids.

Top 100 Blogs for Dividend Investors

Follow Me on StockTwits!

Dividend Growth Stocks
Dividend Growth Investor

I'm on Seeking Alpha too!

Archives

August 2018
July 2018
June 2018
May 2018
April 2018
March 2018
February 2018
January 2018
December 2017
November 2017
October 2017
September 2017
August 2017
July 2017
June 2017
May 2017
April 2017
March 2017
February 2017
January 2017
December 2016
November 2016
October 2016
September 2016
August 2016
July 2016
June 2016
May 2016
April 2016
March 2016
February 2016
January 2016
December 2015
November 2015
October 2015
September 2015
August 2015
July 2015
June 2015
May 2015
April 2015
March 2015
February 2015
January 2015
December 2014
November 2014
October 2014
September 2014
August 2014
July 2014
June 2014
May 2014
April 2014
March 2014
February 2014
January 2014
December 2013
November 2013
October 2013
September 2013
August 2013

ADDITIONAL RESOURCES:
4 Month INDU Chart
Dividend Ex-Dates
Bidness Etc
SharpCharts Voyeur
StockCharts.com
FINVIZ
Seeking Alpha
BDC Reporter
Roadmap2Retire
DivHut
Dividend Growth Investor
Dividend Yield
Stock Market Mentor
Chart Swing Trader
Dividend Announcements
IBD TV
Stocks to Watch Today
Dividend Detective

DISCLAIMER
I am not a licensed investment adviser, and I am not providing investment advise for you on this site. Please consult with an investment professional before you invest your money. Any opinion expressed here should not be treated as investment advice. I am not liable for any losses suffered by any party because of data or information published on this blog. Past performance is not a guarantee of future performance. Unless your investments are FDIC insured, they may decline in value.