Dividend Farming Head-to-Head: Southern Company v Consolidated Edison

In previous scorecards I primarily reviewed one firm at a time.  However, when I have money to invest I’m normally checking out multiple firms at once.  This means the final decision boils down to selecting company A or company B.  As a result, I find a head-to-head (H2H) comparison helpful in making the final buy decision.

It would be nice to say the process is objective and scientific, but there is a degree of art involved.  Since good information leads to good decisions (mostly) I try to follow the facts on the ground as much as possible when deciding where to park my cash.  With that in mind, I built a Dividend Farming Scorecard H2H for Southern Company (SO) and Consolidated Edison (ED). 

	Benchmark	SO	ED	Advantage
CCC	Champion	Contender	Champion	ED
Yield	4.0%	4.07%	3.2%	SO
Sector		Utilities	Utilities	N/A
Leadership Source: Statista	Top 10	#4	#9	SO
Market Cap	$10 B+	63.66 B	30.35 B	SO
Current Ratio	>1	0.75	0.61	SO
P/E (TTM)	< 20	14.37	21.71	SO
P/B	< 2	2.46	1.74	ED
Tot. Debt / Equity (TTM)	< 1	1.8	1.2	ED
Dividend History	25 Years	19	45	ED
TTM Price Range	Lower Half	Top	Top Quartile	ED
Payout Ratio	< 75%	58.49%	70.31	SO
DATES		10.30.19	10.30.19	SO

CCC references the list of Champions, Contenders, and Challengers published by dripinvesting.org.  This is also the source for the Dividend History in many cases. 

The balance of vital statistics are sourced from Fidelity’s News & Research.

The Benchmark column lists the target metric I’m seeking for each factor.  The metrics have been culled mostly from reading Ben Graham’s work (Intelligent Investor and Security Analysis).

It’s apparent SO and ED meet most of my investment criteria but fall short in five or six areas each which shown in red text. 

SO misses the mark for:

• CCC
• Current Ratio
• Price-to-Book (P/B)
• Debt / Equity on a Trailing Twelve-Month (TTM) basis
• Dividend history
• Price is at the top of its TTM price range

In contrast, ED falls short on:

• Dividend Yield
• Current Ratio
• Price-to-Earnings (P/E) on a Trailing Twelve-Month (TTM) basis
• Debt-to-Equity (D/E)
• Price which is near the top of its TTM range as well

The Advantage column is used to show the relative benefit of one firm or the other for each item.  Looked at this way, SO shows a small lead over ED since it’s superior on 6 points while ED is a winner on 5.

The data point toward ED relative to my benchmarks, but the decision is close because SO has H2H advantage.  At this juncture subjectivity (art?) enters the mix.  If a company has a significant advantage in one or two areas important to me, it may be enough to move the purchase needle in that direction. 

For instance, I may decide the CCC ranking carries more weight than other factors.  If so, I could preference ED over SO because ED is a Champion while SO is a Contender.  However, if SO were superior to ED on 8 or 9 metrics, weighting one factor more than others isn’t likely to sway the data-driven purchase decision.  Clear as mud, right?

The SO v ED case is close, but given the number of criteria failing to meet the benchmark in both cases, I might look elsewhere for opportunity.

The thoughts expressed here are those of the author, who is not a financial professional.  Opinions should not be considered investment advice.  They are presented for discussion and information purposes only.  For specific investment advice or assistance, please contact a registered investment advisor, licensed broker, or other financial professional. 

Dividends emergency fund?

Financial coaches often tell us we should have a 6-month cash emergency fund available.  When we finally build one it means there could be a tidy sum of cash sitting in a money market or bank account.  Money that’s not working for us – or not working very hard. 

The situation represents the opportunity cost of insurance.  We pay insurance companies money we have so it doesn’t work for us -- unless there’s a disaster.  With an emergency fund we pay a bank money we have so it doesn’t work for us -- unless there’s a disaster.

Is there an alternative to the “emergency fund as insurance” scenario?  Maybe.  This post referenced the possibility briefly.

What if we build a dividend portfolio generating enough income that we could lose our jobs and live off the divs?  I believe that’s known as retirement in polite company.

What happens if we build a dividend portfolio generating enough money that the cash flow covers a portion of our living costs?  What would that look like?  The following examples may be representative.

Scenario 1:  Assume an investor normally spends $5,000 per month.  Adhering to the 6-month rule means locking $30,000 = (6 x 5,000) in a bank account generating interest at the rate of one-half of one percent insuring against possible job loss.

 

Scenario 2:  If the same investor builds a portfolio generating dividends equaling 25% of her expenses, $1,250 in monthly dividend income, she requires $3,750 = (5,000 – 1,250) from her bank account each month to make ends meet.  To conform to the 6-month target, she locks up $22,500 = (6 x 3,750) at a minimal interest rate, instead of $30,000, and remains “safe”.  Now she has $7,500 = (6 x 1,250) in additional money available to work for her.

Scenario 3:  Should she build a dividend portfolio generating cash flow equivalent to 50% of her monthly needs, she requires $2,500 from her bank account to cover her bases.  Consequently, the 6-month nut is reduced to $15,000.  Fifteen thousand additional dollars are available to invest versus letting that sum deteriorate in a bank account.

This is an example of opportunity-cost thinking applied to dividend streams vs emergency funds.  Whether or not an investor chooses the option of building dividend income in lieu of an emergency fund is one of individual preference and risk tolerance.  It’s akin to deciding whether or not to be self-insured or buy an insurance policy. 

The decision may be different at various points in an investor’s life.  Early in a career when expenses are low and portfolios small, it may be better (easier?) to save 6 months’ cash in the local bank.  Later in a career, it could make sense to focus on dividend building instead of cash hoarding.  Food for thought.  What are you thinking?

The thoughts expressed here are those of the author, who is not a financial professional.  Opinions should not be considered investment advice.  They are presented for discussion and information purposes only.  For specific investment advice or assistance, please contact a registered investment advisor, licensed broker, or other financial professional.

What can dividends do for you?

United Parcel Service (UPS) used to have the following slogan:  What can brown do for you?  That’s a fantastic question for dividends as well.  Below are 8 things dividends can do for you depending on the size of your dividend harvest.  This is why it’s important to grow your Dividend Farm.  The bigger the farm, the more work your dividends can do.

Grow your dividends.

Perks.  Even a modest dividend stream offers potential for occasional self-indulgence.  As a Dividend Farmer, I don’t recommend making it a habit since it can torpedo your long-term goals.  However, infrequent, small perks can maintain your farming motivation. 

Gifts.  Small dividend farms can produce enough cash for celebratory gifts for friends and family. 

 

Family activities.  Minor dividend distributions may fund family activities like a day at the funplex or date night with your significant other.  As dividend streams grow in frequency and volume the activities they pay for include family vacation travel or more extensive education and training.

Emergency expenses.  As your dividend income develops so does your ability to handle larger financial emergencies like an unexpected home furnace replacement or the purchase of new tires for the family van needing better tread before winter sets in.

Philanthropic giving.  No matter the size, a dividend income stream provides a means for extending help to those in need.  With the right mix of dividend stocks it’s possible to receive sufficient income to give $25 - $50 per month to your favorite charity without building a massive portfolio.  That kind of help may not mean much to you, but could mean the world to someone in need.

Emergency fund reduction.  A strong, reliable dividend stream can help reduce the cash needed to fill your emergency fund.  If you’re spending $4,000 per month and need a 6-month emergency fund you should have $24,000 on hand e.g., in a bank account.  However, if you have a consistent dividend stream producing $1,000 per month you’ll spend $3,000 each month from our emergency fund.  Consequently, your 6-month requirement is $18,000.  This means you’ll be able to put an extra $6,000 to work for you rather than parking it needlessly on the sideline.

Risk mitigation.  Powerful dividend streams reduce the financial risk when faced with an unexpected job loss.  If you find yourself unemployed but have a solid dividend stream, you’ll be able to fund part of your living expenses.  Coupled with a part-time job this may be enough to weather the storm until you’re working full time again.

Business building.  Building your own business may be your dream.  Start-up funding can be challenging.  If you’ve built a robust dividend stream and decided you’d like to stand up a side business, dividends may help fund the launch of the life you’ve dreamed of while your day job funds your current life.

These are examples of what a dividend income stream can do.  Others abound.  The point is that creating an alternate source of income – one that doesn’t require you to work a second or third job – reduces financial pressure when you’re distressed and enhances quality of life during the good times.  This is true only if you’ve invested the time and effort to build your Dividend Farm.  

If you won't take my advice, maybe Warren's wisdom is a better fit.

"Never depend on a single income, make an investment to create a second source." 

Warren Buffet

The thoughts expressed here are those of the author, who is not a financial professional.  Opinions should not be considered investment advice.  They are presented for discussion and entertainment purposes only.  For specific investment advice or assistance, please contact a registered investment advisor, licensed broker, or other financial professional.

Eliminating trading costs add up

Cut stock trading costs

Schwab, TD Ameritrade, and Fidelity recently announced they were dropping brokerage fees when buying or selling stocks through them.  As you can imagine, eliminating transaction costs may result in a significant bonus for investors.  The size of the bonus depends on the cost of the trade, the frequency with which trades are made, and the investing time horizon in question.

I use Fidelity which traditionally charged me $4.95 per transaction.  This figure is low relative to what I’ve been charged by brokerages in the past.  By dropping the trading fee, I get to put that money to work for me instead of Fidelity.  Would this savings result in a large improvement in my investing performance?  Possibly.

If my acquisitions are made periodically e.g., monthly, then saving $4.95 per month and putting it to work in my portfolio results in applying another $59.40 to my investments each year.  Do that over enough years and the delta adds up. 

The figures below demonstrate the result if you start with $1,000 in your portfolio, purchase $100 worth of stock per month for 5 years, and enjoy no yield, interest, or growth other than the money you add monthly.  The first figure (Excel Future Value computation) assumes zero transaction costs.  The second includes $4.95 per trade reducing my investment by a similar amount.

• No Fees:  $7,000
• Fees ($4.95 per trade):  $6,703

No Fee Advantage:  $297

In this simplified example, including only the invested amounts per month of $100 vs $95.05, the elimination of even a small transaction fee adds nearly $300 to my portfolio over 5 years.

What happens if I assume my investment yields 4% annually while I invest $100 each month for 5 years?

• No Fees:  $10,065.33
• Fees ($4.95 per trade):  $9,657.03

No Fee Advantage:  $408.31

Enjoying an additional $408.31 over 5 years because there are no trading fees may not be exciting, but what happens if my investing time horizon extends to 30 years instead of 5 while enjoying a 4% yield?

• No Fees:  $388,941.02
• Fees ($4.95 per):  $371,467.95

No Fee Advantage:  $17,437.07

Having nearly $17,500 more in my account when I retire because I saved $4.95 per trade over my investing life is a nice bonus.

Of course, if you’re trades are costing you north of $5 the savings might yield an even larger advantage for you between now and retirement.  Higher fees also mean your trading volume can be lower e.g., quarterly or semi-annually and you’ll still see a marked difference in outcomes.

 

Something as small as 1% can make a difference.  Take advantage of the breaks available and you’ll be amazed at how quickly the benefits accumulate.  As a Dividend Farmer I enjoy watching the “littles” compound into “bigs”.  It takes patience and perseverance but the wait is worth it.

The thoughts expressed here are those of the author, who is not a financial professional.  Opinions should not be considered investment advice.  They are presented for discussion and entertainment purposes only.  For specific investment advice or assistance, please contact a registered investment advisor, licensed broker, or other financial professional.

Money for nothing

Birthdays are wonderful things.  Not only do you live longer the more you have, but those celebrations often result in gifts to you -- just for being you!  Who doesn’t like that?

The great part about dividend paying stocks is they act much like friends and relatives by giving you a gift just for being you.  For you holding the stock, that is.  Better still, dividend stocks provide those gifts every quarter.  Heck, some do it monthly.  The frequency of dividend gifts beats that of birthdays, hands down. 

I can get a strange potholder doily from good ol’ Auntie Em once a year OR I can get cash from XYZ Corp. every three months.  I may love Auntie Em to Pluto and back, but come on, a potholder doily once a year vs cash every 90 days?  No contest.

Some dividend paying firms will “up the anti” by increasing their dividend payments periodically.  These earn the moniker Dividend Growth Stocks (DGS).  Financially solid companies might increase payments every year.  Those that have done so for 25+ years are called Champions and may be considered Cash Cows or Gift Horses.

 

This dividend growth practice would be the equivalent of Auntie Em giving me one potholder doily for my birthday this year, two next year, three the year after and increasing the number of doilies each year into the foreseeable future.  However, cash from dividend paying firms offers greater utility than I might expect from a growing stack of doilies.

The fantastic part about dividend firms is that if you automatically reinvest the dividend payments those payments beget additional dividends the next quarter.  This is called compounding and according to Mr. Einstein it’s the most powerful force known to man.  Auntie Em’s doilies don’t compound. Thankfully. 

If you’ve latched onto a DGS the natural dividend compounding effect is accelerated by the increase in dividend payments each year.  Even if the rate of dividend growth is low as a percentage of the dividend payment, small increases result in large changes over time when left to compound.

 

For example, assume two dividend payers have a rock steady stock price for a 10-year period.  One dividend payer offers a flat 4% yield every year.  However, a DGS with a 4% yield that increases its dividend by 3% annually yields 4% at the end of the first year, 4.1% the end of year two, 4.2% the end of year three and so on.  Be the end of year 10, the dividend yield approaches 5.2% which is 30% higher than when it started.  You get that increase just for holding the stock which is money for nothing.

The thoughts expressed here are those of the author, who is not a financial professional.  Opinions should not be considered investment advice.  They are presented for discussion and entertainment purposes only.  For specific investment advice or assistance, please contact a registered investment advisor, licensed broker, or other financial professional.