Moving Forward – Slowly
By this time in the year, I had hoped that our portfolio’s dividend growth would have progressed further than it has. I continue making progress in the area of forward dividend income, though it feels as if I’m walking up a sand dune. I must admit that I struggle to find additional investments that I am comfortable with. For May, I made a single add and received 4 small to moderate dividend increases. Not all bad, but I will continue with my efforts to improve. I’ve been keeping my eye on utilities and REIT stocks as of late. As a group, these stocks are being pressured by fears of a rate hike.
My single purchase for May was a utility (see below). As for REITs, I am most interested in VTR, OHI and HCP. HCP has about 3.6% income weight, VTR about 1.6% and OHI is absent. HCP makes me slightly uneasy because of their tenant concentration and the fact that one of their largest tenants (HCR ManorCare) is being dogged by the Feds. HCP also had to assist HCR with a new leasing agreement due to HCR’s financial difficulties.
For the reasons above, I’ll likely refrain from adding to HCP for now. The current yield is at 6% which is the point that I start to get a little nervous. In this interest rate environment, the market doesn’t allow for a 6% yield for no reason. HCR may prove itself to be a headwind for HCP in the immediate future. Just recently, HCP announced that “Paul F. Gallagher has resigned as Executive Vice President and Chief Investment Officer, effective June 30, 2015. To promote a smooth transition, Mr. Gallagher will provide consulting services until March 15, 2016”. Yet another reason to be cautious I think. We shall see.
Should I decide to add to my REIT stash, Ventas (VTR) is the most likely candidate at this time. I think the price is reasonable here. It is distinctly possible that the price will go lower though, so any purchases I make will be incremental.
My purchase for May
On May 12, I added shares of Southern Company (SO) @ $43.25, providing a yield of 5% at the time of purchase. SO now has 4.2% NAV weight and 5.4% income weight. If the price drops a few bucks from here, I may want to add a little more, though not a lot. I view it as a full position.
S&P Quality Ranking = A- / Low Risk / Rating Hold / Target Price $45 / Fair Value $43.90
Morningstar = Credit A- / Rating of 4 stars / Low FV uncertainty / Fair Value $47.00
Utility stocks in general have been under some pressure as of late. My presumption is that this is related to interest rate hike fears. As to SO specifically, there are also some potential issues with cost overruns on some of their projects in Mississippi. From Morningstar’s analyst report….
“Southern took a further small earnings charge for ongoing cost overruns at the Kemper project, which wasn’t a meaningful amount. However, during the quarter the Mississippi Supreme Court challenged the agreement Southern had struck with the Mississippi PSC, ordering a refund of rates collected to date since the PSC hasn’t completed a prudency review of the project spending.”
This may have a material impact on SO’s earnings and fair value estimates in the future. I’m going to keep my faith in SO and continue to hold this most dependable dividend payer.
Further info on SO
Looking at the earnings and price FAST Graph for SO, the black price line intersects with the orange earnings justified “fair value” line. I also note that the 5% yield is not far from the historic high in recent years. P/E is slightly below average and the white dotted dividend line moves nicely upward. Clearly, SO is not a growth stock. I hold it for the income that I can then spend or use toward the purchase of other DG stocks.
Looking at the FAST Graphs Forecasting Calculator graphs, SO also seems reasonably priced. The first graph depicts return guesstimates using current analyst estimates and a P/E of 15. The second graph uses a “normal” P/E for SO. In either case, the price seems justified. Again, it’s certainly not a growth stock but it adequately serves its role of providing income without undue risk.
Year over year dividend comparison for May 2015
- Dividend income for May was 28.5% above last year’s monthly total.
- On a YTD basis through May, dividend income was 39.4% above last year.
Stock Sales For May
Dividend Increases for May ( I love pay raises)
- Alliance Resource Partners (ARLP) bumped up their dividend by 1.9%, ex-div May 6. This is the second increase for 2015, with the February increase being 2.2%.
- Exxon Mobil (XOM) increased their dividend by 5.8%, ex-div May 11. Not bad considering the current woes of the oil industry.
- Southern Company (SO) increased by 3.3%, ex-div May 14.
- Johnson and Johnson (JNJ) increased by 7.1%, ex-div May 21. JNJ is one of our oldest and largest holdings and was added to in April. I know you aren’t supposed to fall in love with a stock, so let’s just say I’m infatuated with this one.
2015 YTD forward dividend income (through May)
- Stock purchases have added 9.92% to our dividend income
- Dividend increases have added 3.28% to our dividend income
- Stock sales have decreased forward income by 5.71%
- Overall, our YTD forward dividend income increase is 7.49%. There is work to be done here.
Best wishes and happy investing! I hope this posting finds you happy and healthy.