May 31st, 2013
It takes character to be in cash and do nothing
Companies results and dividends
As many of you know, Dividend Income Investor.com’s investment strategy is to seek out high quality dividend paying companies that are historically undervalued, based on our proprietary yield/value algorithms, in order for us to consider relevant companies for our Dividend Income Portfolio.
I am happy to say that this has worked well since we launched Dividend Income Investor.com in February 2011. Since then, on several occasions, we were able to purchase shares in a number of (than) historically undervalued high quality dividend paying companies. Since, we have happily added their increasing dividends to our growing cash holding awaiting investment.
However, since mid-2012, with returns on savings accounts and bonds remaining at historical lows, many investors have found the benefits of dividend income investing sufficiently appealing to ‘en masse’ start a rally in high quality dividend paying shares.
It is therefore no surprise that we have not added to our Dividend Income Portfolio since April 2012, as share prices from high quality dividend paying shares slipped away from their historically undervalued levels. In some cases, until two weeks ago, their share prices were even nearing their historically overvalued levels.
At several occasions recently I have warned Dividend Alerts subscribers, and, in much more detail our Dividend Income Investor.com subscribers that, while the majority of the dividend paying companies we are following are not (yet) near nor have reached their historically overvalued share price levels, the sustainability of their share prices is increasingly been driven by (the prospect of ongoing) Central Banks' money printing rather than the (expected) growth in their sales, earnings, free cash flows and dividends.
What has changed?
Recently, increasingly, investors have been taking profits on a year-long rally on concerns about the possibility of a scaling back of U.S. monetary stimulus.
I believe the situation has now fundamentally changed as Fed Chairman Ben Bernanke recently indicated that the Fed might soon pull back — even gradually — on its money printing efforts.
Until now the Fed has been buying bonds to try to ease long-term borrowing costs in order to encourage borrowing and accelerate growth in the USA. A major side effect of this has been sharp increases in share prices.
An increasing number of commentators now believe that the Fed will keep the printing presses on – at least until September – and maintain its pace of bond purchases, but only until the US job market improves substantially.
What may happen next?
While the Fed’s tapering of its bond purchases is likely to be gradual, any change from its current record-low-rate policy is already inciting anxiety in the stock markets all around the world.
A slowing of the Fed’s bond purchases would ease downward pressure on long-term interest rates. As a result, US, and, subsequently UK and Euro interest rates, are likely to rise from near-record lows, along with mortgage rates and rates on many others loans.
If and when this were to happen stocks and shares, which have been boosted by investors shifting money out of low-yielding savings accounts and bonds, are likely to drop, with some commentators, such as Kerry Balenthiran, predicting a drop of at least 20 percent, on average.
As always, the more seasoned investors have already foreseen this coming with well-known investors such as “forever-holding-stocks” billionaire investor Warren Buffett selling stocks. Buffett likes to praise himself that his stockholding period is “forever.”
Still, Buffett recently dumped his stakes in blue-chip American companies Johnson & Johnson and Procter & Gamble - Unilever investors take note!
Buffett hasn’t been the only billionaire selling out on U.S. stocks. George Soros sold all of his holdings in Johnson & Johnson and Procter & Gamble and also Intel. He did the same with Wall Street banking giants JP Morgan, Citigroup and Goldman Sachs.
What did we do?
Several weeks ago, we decided to go into ‘capital-conservation-mode’ introducing, for the first time, stop losses to all our holdings in our Dividend Income Portfolio and immediately alerted our Dividend Income Investor.com subscribers.
With the subsequent fall in share prices we were stop-lossed out from almost all our holdings securing tidy capital gains in the process.
We are now well over 80 percent in cash awaiting the second leg down in order for those high quality dividend paying companies, that we want to own mid-term, to trade yet again at historically undervalued share price levels.
In the meantime, may I leave you with this thought from Charlie Munger, business partner of Warren Buffett:
"It takes character to sit there with all that cash and do nothing. I didn’t get to where I am by going after mediocre opportunities."
Cash rich yet-again – no worries
As we are likely to remain in cash for at least several months, we are happy to endure a guaranteed loss of a couple of percent a year in real terms, which is the effect of holding cash at the moment.
Doing nothing and be able to sit it out in cash for a period gives the intelligent private investor a major edge, not only over the intelligent institutional investor, who is required to be in the market all times, but also over the ‘buy-and-hold-forever’ private investor.
Sure, it won’t be “comfortable” to hold cash, if you need the income, the next few months, as markets go down, as I expect they will, while inflation is eating away its purchasing power.
Remember fortunes are easier made on being able to buy what other people can’t afford, at the bottom of the cycle, rather than what other people are holding at the top of the market on the way down.
Crash proofing your portfolio
If and when the market crashes another 10%, 15 or even 20 percent do you know what to do and what and when to buy?
What is currently expensive will eventually get cheap; cheap shares will eventually get expensive, and vice versa.
So if you buy now, when a dividend paying shares is becoming increasingly expensive, you are more than likely to generate disappointing results in the long run. That is why I am currently rather cash rich in my own Dividend Income Portfolio.
If you are looking for a good source of information on when a high quality dividend paying share is historically undervalued or overvalued, you should consider becoming a subscriber of Dividend Income Investor.com
We focus on high-yielding, reliable dividend payers, and purchase them when they are historically undervalued. Once we believe their dividends have become unsustainable, or when they have become historically overvalued, we sell.
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Company results and dividend announcements
A number of companies have released their results and dividends, including:
National Grid issued final results for the year to 31 March. The final dividend is 26.36 pence going ex-dividend on 5 June and payable on 21 August. This makes a total of 40.85p for the year, a predictable 4 percent up on last year's 39.28 pence.
From now on, the new dividend policy for the next few years is to grow the payout at least in line with RPI inflation. The 2013/14 dividend is forecasted at 41.9 pence.
I have extensively commented on National Grid's new dividend policy: Click Here.
SSE is paying a final dividend of 59 pence going ex-dividend on 31 July with payment expected on 27 September. Up an inflation beating 5.1 percent on last year's 80.1 pence, making a total for the year of 84.2 pence. This is the 14th successive year of above inflation rises.
With the current year dividend forecast at 88.4 pence, SSE is planning to continue above inflation dividend increases whilst maintaining cover in the medium term at around 1.5.
Worryingly, though, net debt at £7,348m has worsened from £6,756m last year, driving gearing up to an increasingly uncomfortable 218 percent from 197 percent.
United Utilities is paying a final dividend of 22.88 pence going ex-dividend on 19 June with payment expected on 2 August. This makes a total for the year of 34.32 pence, up an inflation beating 7.2 percent on last year's 32.01 pence.
United Utilities dividend policy for the current five year regulatory period to 2015 to deliver annual increases of RPI+2%. The current year dividend forecast is 35.9 pence.
Compass produced its six month results to 31 March. The interim dividend at 8 pence is 11 percent ahead of last year's 7.2p. The share is going ex-dividend on 26 June and the dividend is payable on 29 July. The current year dividend forecast is 23.6 pence.
Vodafone Group announced its annual results to 31 March. The final dividend is 6.92 pence going ex-dividend on 12 June with payment on 7 August. The total for the year is 10.19 pence, up an inflation beating 7 percent on last year's 9.52 pence.
Vodafone announced a new dividend policy. For the near future they say that they aim to maintain the dividend at least at current levels. Of course, this could be interpreted that there may be no dividend increase for 2014.
Till next time.
Dividend Income Investor.com
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