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
Bert,
NSC is a great business. One of my larger holdings, though I’m now going to be building up UNP in this industry.
As far as how much capital you add to a position, it’s an individual call. But I tend to be quite aggressive when I think the value and quality are both particularly strong. I suppose it depends on how much capital you have, what other opportunities are available, and how confident you are in your analysis.
Best of luck with the $15k goal. Sounds like the new job is really working out great, and more capital for investing is fantastic. Very happy for you! 🙂
Best regards.
DM,
I know you are working on cornering the railroad market. I am loving the two pillars you are building and the 55 year old you will thank you from establishing these positions in both NSC and UNP. Screw it, the 55 year old will thank you for all the positions you are building now haha
Maybe there will just never be a correct answer to my question and I should just consider it a case by case basis. If I can be agressive, great, let’s build a large position. If not, it is okay too. There will be other times to invest in the company in the future. I believe I purchased KRFT twice with a year time frame in between purchases. It was undervalued initially and appreciated so I backed off. However, a year later after my holding increased 15%, the stock suddenly became undervalued again so I scooped up more. So I hate to say it, but my question is answered with “It depends” haha Damn!
Thank you very much for the kind words. The extra capital from the new job has been a huge plus for me and I am thrilled that I have been able to leverage the capital to initiate all these purchases. While I am still figuring the job out and getting a feel for it, this side factor has been amazing and it has been nice to get back on track to knocking out my $15k goal. At the end of the day, I am just very thankful to be where I am.
Have a great weekend! As always, thanks for stopping by!
Bert
Hi Bert,
Great addition! I bet Lanny is jealous that you were able to buy the same company at a greater discount. 🙂
I think diversification is good. I’m invested in about 28 companies right now. There’s still a ton of companies that I would still like to own. How much diversification within equities or even if you should branch out into other investments is the more complicated question. I’d personally rather own stocks paying out greater than 4% in dividends than move into bonds when I get older. I’m anticipating being able to live on the dividends. Even pending another 2008, the majority of this income will persist.
Dollar-cost averaging down is a great strategy. If the fundamentals of the company are stable, then I am all for buying more of its stock to reduce cost basis. If I feel the money is of better use elsewhere, then why own the stock in the first place? Though I don’t sell often, one of my criteria is if the money would grow faster elsewhere. Sure, there may be elevations in PE ratio such that I wouldn’t add more to it at its current levels, but that doesn’t mean that I am going to sell.
MCD is such an example. I felt that the money I had sitting in MCD would be put to better use in a different stock, GE, in my case.
While we all talk about dividend investing, the name of the game is total growth investing. Especially if you don’t need the income now, stocks in the future can be sold to move their accumulated capital gains into dividend paying equities when the need arises. I did that with Apple recently. I still own a little over 200 shares but recently sold about $10,000 worth to move into other companies, many of which paid a higher dividend than Apple does now.
Great move into NSC. I hope to join you soon. As I mentioned on Jason’s site, I’ve been looking at the train industry since finishing Atlas Shrugged not too long ago.
Have a great weekend!
Scott,
Thank you for stopping by and the kind words! You raise a great point about what ind of investments to own. I agree with your statement and I would prefer a stock with a 4% yield over a bond every day of the week and twice on Sunday. I do not like how bonds do not appreciate in value and while stocks are not guaranteed to appreciate, I am very confident that the strong dividend companies that we are investing in are going to trend upward and appreciate over the long-term. I have thought about options and have purchased several books on the topic. But I made a decision that I would rather use the capital now to continue to build my dividend portfolio first and then begin other investment vehicles at a later date. I know how important building this dividend snowball at a young age is, so I want to focus my time, efforts and capital to growing this compounding machine now. One day I am sure I will dive into the option world like you do!
Lanny and I always talk about a 5% rule, where if a stock you purchased decreased 5% that you should invest more into the company for the reasons you described. You did the research and know it is a great company already, or else you wouldn’t have invested in it, so why not take advantage of a downturn to lower your cost basis in the stock.
I am really digging the move with Apple. Turning the gains from one stock into positions in other great dividend stocks is a way to diversify, increase your dividend income, and hopefully duplicate the success you just had with Apple. You just increased your dividend cash flow without having to transfer another dime into your brokerage account. Amazing!
Thanks for stopping by and the advice. I appreciate the time you spent reading and commenting on the article!
Bert
Hey Bert. I like the purchase. UNP / NSC / CNI / CP will be my 4 railroads when I’m ready to take the plunge. Once you make the conviction into the company, load up whatever you can. You’re doing fantastic for being so young, you have compound interest on your side my friend. I like having skin in the game. Personally, I prefer bigger positions per company. Everything is expensive right now but patience my friend. Keep building and hustle hard because you’ll thank yourself years from now that you did. Thanks for sharing and take care Bert.
Hustler!
Thank you so much, I appreciate the kind words. I cannot wait to look at back my portfolio 5 years from now and see the growth, it’ll be amazing. Compounding interest is the 8th wonder of the world! I love how you are just attacking the railroad industry. These market leaders will remain on top for a long time because of the high barriers of entry, just what long-term investors like us want to see. I am starting to lean in your thought process of adding large positions. Why not, right? You know it is a great company, so why not load up!
I’ll make sure to keep the hustle going!
Bert
Goodluck on your purchase, NSC caught my attention especially right now that its trading around its 52 week low, the entry yield is a bit lower than I like but I can make an exception for a great company.
Thanks for sharing and have a great memorial weekend!
Thank you FFF! Are you thinking or purchasing some shares since it is on your radar? Or do you have other stocks on your radar?
Have a great Memorial Day weekend as well!
Bert