When I changed jobs recently, I received a nice pay increase and I could not wait to deploy the extra cash into the market. I figured that living off of my old salary and investing the extra capital would provide a much-needed jolt to my investing portfolio to help me reach my goal of investing $15,000 in fresh capital this year. To help automate this process, I began direct depositing $400 of my paycheck into my Capital One bank account, which means the funds are available to use in my portfolio instantly. While the $400 may seem small, a series of $400 purchases in a stock adds up quickly and you can establish a strong position in a stock before you know it. Why am I bringing all of this up? Because I was paid last week and had $400 to invest, which was perfect timing for one of the stocks I own and have been building a solid position in to continue to decrease. I think you all see where I am going with this….with my most recent purchase, I added to my growing position in Norfolk Southern Corporation (NSC).
So why NSC again? For one, it is a stock that was on our Watch List, which we constructed only a few days ago. If we are keeping an eye on it, we should be ready to deploy capital if the stock continues to fall. In addition to the inclusion on the watch list, another reason for my purchase was that nothing has really changed from Lanny’s stock analysis from a few weeks ago (Which convinced me to buy shares in the first place) and the stock continues to fall…simple as that. Since my initial purchase, NSC has fallen over 5%. Best of all, NSC is still the same company it was a few weeks ago: a market leader in an industry with insane barriers to entry, has a PE ratio below the broader market (~15.3 currently), has a payout ratio below our targeted 60% (36%), has a dividend growth rate of ~10%, is currently buying back shares, and has a current yield greater than the market. So clearly, all the positives that Lanny mentioned in his analysis still hold true, as the only change in the list above was the PE ratio, which actually decreased as the price continued to fall. To me, it was a no brainer to add a few more shares while the price continues to fall. With this purchase, I added 4 shares to my current position, adding $9.44 to my forward dividend income. In total, I now proudly own 20.3301 shares, accounting for $47.98 in annual dividend income. As of now, I am pretty content with my position and may begin looking elsewhere for future purchases. However, if the price continues to fall, I may just have to purchase some more shares to continue to lower my cost basis.
I know some of you are thinking “Why does he continue to make several small purchases instead of on large, 20 share purchase of NSC?” The main reason is due to the timing of when funds are available into my account and are available to use. I wish I could always transfer in $2,000 and purchase a stock immediately, but unfortunately, that is not a reality for me on a regular basis. Every once and a while…sure! But every few week…I wish!
Another reason I have been so laser focused on increasing my position in NSC has been a result of a few conversations Lanny and I have had over the last few weeks about the size of positions in our portfolio. Does it make sense to have many smaller positions of $500 – $1,000 each or should you continue to build a basis in a stock until it has a material impact on your portfolio? In short, we do not know the answer to this question, but NSC has been my test subject for establishing a large position in a stock. Prior to our discussions, I most likely would have stopped after my first purchase of NSC, settling for 8 and began focusing on finding the next great undervalued dividend stock. This would have left me with a small position in a company that makes up a small percentage of my portfolio, especially as my portfolio continued to grow. If you want an example of this in my portfolio, look no further than my position in IBM. Currently, I only own 4.76 shares of IBM as I passed on adding shares of IBM while it was trading in the $150s. Now, the stock has increased almost 10% and announced an insane dividend increase. While I shared some of the joy with Lanny, I left any conversation wondering what could have been if I would have just focused on establishing a larger position in IBM instead of continuously adding smaller position of other stocks. In hindsight, I wish I would have increased my position to ~$2,000. This experience also played a key part in my decision to invest in NSC three different times to now build a position of 20 shares (cost basis ~$2,000). So now, any changes, dividend increases, or other significant announcements should have a sizable impact on my portfolio and forward dividend income.
Regardless of which strategy is correct, the important thing is that I continue to add positions in quality dividend growth stocks to my portfolio. And I believe I did just that with my third purchase of NSC this week. As I mentioned earlier, I have a goal of adding $15,000 in new capital to my portfolio in 2015. After this purchase, I have now purchased $5,516 in stocks from new capital in 2015, or 37% of my goal. I still have some work to do, but I feel as if I am making some steady progress on this goal. I am looking forward to the continued challenge of defeating this goal and crossing $70,000 before the year is over!
What are your thoughts on the recent purchase? Would you have added more shares of NSC or would you have looked elsewhere? Do you prefer owning smaller or larger positions? There is no right or wrong answer here, so please share your preference so we can help answer our questions!
-Bert