Tuesday, April 14, 2015

Weekly Sharebuilder Purchases and Funds Sold

Here are my automatic investments for this week.

  • RDS-B: 4.03 shares @ $62.06 --- Yield  6.06%
  • BBL:  5.77 shares @ $43.29 --- Yield  5.73%
  • SO:  5.65 shares @ $44.23 --- Yield  4.75%  (initial position)
  • JNJ:  2.49 shares @ $100.56 --- Yield  2.78%

Total capital invested is $1000 ($250 in each company) and the combined yield of these purchases is 4.83%. This will add $48.30 to my yearly dividends.

I also sold $6000 worth of my mutual fund holdings ($3000 of CAIBX and AHITX). This sale will reduce my yearly dividends by approximately $285.

I plan on reinvesting the proceeds by the end of this week. One of the biggest factors in selling off some of the junk bonds is the major tax disadvantage. Keeping high yield bonds in a taxable account when my top rate this year was 33% is not a good idea. I may look at investing the AHITX proceeds in higher yield municipal bonds or increase my utility holdings which have similar yields but are taxed at 15% .

SO doesn't look very cheap here, but considering it was in the $53 range a couple of months ago, I decided it might be worth while to start building a position. I think it is a decent substitute for my high yield bonds.

Stocks on my radar for next week include the ones listed above as well as PG, PM, T, CVX, and XOM.



  1. Hello dividend investor,

    I like your purchases especially the Royal Dutch with a yield over 6%.

    You also wrote us that you sold $6000 of your mutual holdings.

    And you also wrote us to reinvest the proceeds by the end of the month.

    You have already 150 Microsoft in your portfolio.

    Why not considering Microsoft as a safety net.

    Dividends don’t get better than this one

    Okay why Microsoft ?

    52wk Range $38.51-$50.05 Today: $41.40

    Dividends Don't Get Better Than This One

    When I analyze the safety of a dividend, I look at several different things. The track record is critical. If a company raises the dividend every year, management has made it clear that the dividend is important. If it cuts the dividend, it's expressed that the dividend is not a priority.

    I also look at cash flow. Does the company have the ability to pay the dividend based on cash flow? Earnings are nice. But net income has all kinds of non cash items included in its calculation. Cash flow represents how much cash the company takes in.

    When cash flow is much higher than the dividend, you know that even if things get difficult, the company should have no problem paying its dividend.

    With that, let's put these metrics to use.

    This tech giant Microsoft pays a respectable 3.1% yield.

    It wasn't that long ago that Microsoft (Nasdaq: MSFT) was a high-flying tech stock.

    Today, the software company is stable, with high single-digit earnings growth.

    The company has raised its dividend every year since 2010 by at least 10% per year. Before that, it boosted the dividend in 2006, 2007 and 2008. During the financial crisis, it left the dividend unchanged for two years.

    Microsoft has plenty of cash, with $62 billion of net cash in the bank. (Net cash is cash minus debt.) The company has $28 billion in debt with $90 billion in cash. So its debt is not a concern at all.

    Over the past four quarters, Microsoft generated $27 billion in free cash flow. During that period, it paid out $9.5 billion in dividends for a payout ratio of just 35%. In other words, it pays out $0.35 of every dollar of free cash flow. That is quite low.

    I like companies to have payout ratios of 75% or lower. That way, if times get tough, there is a buffer and they won't have to cut their dividends. Think of it this way - if a company's cash flow is $1 billion and it pays out $1 billion in dividends, what happens next year if cash flow falls to $800 million?

    The company would either have to pay the other $200 million in dividends from cash on hand, borrow the money, raise the money by selling stock or cut the dividend.

    If the same company started off paying $750 million, the 20% drop in free cash flow wouldn't jeopardize the dividend.

    So Microsoft's 35% payout ratio gives it plenty of wiggle room in a down economy.

    In fact, with so much cash in the bank, I'd like to see Microsoft continue to raise the dividend, but by a more substantial amount. It could easily pay out half its free cash flow in dividends and not have to worry about it.

    This fiscal year, which ends in June, Wall Street forecasts Microsoft's free cash flow to be $23.5 billion, rising to $25.4 billion next fiscal year.

    Even if the company increases the dividends paid by 15% for each of the next two years, in fiscal 2016, it would pay out $11.7 billion, which is still well below 50% of expected free cash flow.

    Microsoft likely has at least several years of double-digit dividend growth ahead of it if management continues to reward shareholders.

    I wish every dividend company that I analyzed looked like Microsoft. It has huge sacks of cash sitting in the bank, double-digit annual dividend increases and more than enough free cash flow to fuel the dividend truck for years to come.

    Microsoft's dividend is about as secure as it gets.

    Good investing,
    And warm greetings from the Netherlands


    1. George,

      Thank you very much for that great comment. I bought my shares about 2 years ago around $31 and I believe the yield was 2.8%. The fact that the price has since risen $10 and has higher yield demonstrates what you pointed out about its dividend growth. I will seriously consider adding shares in the near future.

      Thanks again!


  2. Nice buys MDP. Smart to drop the junk bonds, for multiple reasons - tax rate being among the most important. Of all the utilities, SO is probably one of the few I want if I pursue one anytime soon. Also that comment above is really long...

    1. DG,

      I will always keep bonds in my portfolio, but the tax burden really eliminates a lot of the return. SO I think will be a good substitute and I will keep adding in the coming months.


  3. Nice buys! I also bought some RDS.B today. When energy gets back (hopefully), it will be nice for sure... :)

    1. Fab,

      Thanks. I have bought a lot of energy companies during the last nine months and can't wait until we have more of a rebound in oil prices. Quite honestly I would like to add money in different sectors and have been since the beginning of the year.


  4. RDS.B seems like a huge bargain right now. I would like to dip into the oil sector but I have been focusing on companies with a more predictable future. Not that RDS.B wont do well in the future because I am sure this will provide solid returns, but is that dividend safe at this point?

    1. DM,

      I am a little worried about the dividend in the short term, but this is a long term holding that I think looks like a good value.