Lanny isn’t the only one to purchase stock recently, as I re-upped a stake in one position and initiated a new position in another. Both transactions have occurred over the last couple of weeks and added a nice sum of dividend income to my portfolio. This month has been crazy for me and has been one of my highest frequency trading months since I started investing a few years ago. Let’s see which companies I added!
Purchase #1: Philip Morris International (PM)
PM has been getting a lot of attention from the dividend community recently. We are familiar with PM on this site, as Lanny recently re-upped his position in PM as well by selling his stake in LO. For him, it was a well thought out decision that made perfect sense for him and I applaud him for pulling the trigger on such a large transaction. He increased his dividend income 31% with the move. Great job Lanny! Truth be told, prior to Lanny’s move (which had a major influence on my decision), we have been discussing this stock for quite some time. Last month I performed a stock analysis over PM, showing the company has a high yield, great dividend growth history (3-year average increase of 9.7%), a strong brand portfolio, and the company’s yield is currently above its 5-year average dividend yield. Overall, PM performed well in our stock screener and meets many of the additional metrics that Lanny and I review while purchasing a dividend stock. So I had the company very high on my watch list, and once PM dipped below $80/share I could no longer sit on the sidelines. I used the funds available to purchase 6 additional shares of PM, adding $24 of projected dividend income to my portfolio.
Purchase #2: Chevron Corp. (CVX)
This purchase came out of left-field for me and was a product of the turbulent oil market a few weeks ago. For one week, there were crazy swings in the oil market causing large fluctuations in the stock prices of the major integrated companies. On the day of my purchase, Chevron experienced its second consecutive day of large decrease in price, >3% each day, and that ultimately proved too large of a decrease for me to continue to sit on the sidelines and let the opportunity pass by. I was throwing around the idea of purchased additional oil to take advantage of the current environment for a while, thinking that I wanted to purchase more oil stock in this downturn than just Schlumberger, but I wanted to be careful with my purchase. Here is why I purchased shares in Chevron as opposed to other oil companies.
- Chevron performed well in our stock screener. The company’s PE ratio, between 10 and 10.5, is below the S&P 500. Plus, CVX sports one of the lowest PE ratios in the major integrated oil industry. CVX has a relatively low payout ratio (41%) and has grown their dividend for almost 20 consecutive years.
- I mentioned this in the last bullet, but the payout ratio was critical for me in this purchase. The truth is, we do not really know how long oil prices will stay depressed and what the true impact of a long period of depressed prices will have on the major companies. So far, we have seen Shell and BP cancel projects and commit to maintaining their current dividend, but who knows how long those actions are sustainable for the company’s long-term health. With this purchase, I wanted to focus on an oil company with a lower payout ratio, as this will provide a larger safety net in the event earnings growth is hampered or stagnant for an extended period of time. With Chevron’s 40% payout ratio, I felt that the current dividend level is safer than both Shell and BP, who have payout ratios of 80% and >100%, respectively, as CVX has a higher margin of safety.
- Chevron is set to increase their dividend in April and I wanted to initiate a position prior to an announcement of an increase, buyback program, etc. from management.
- Chevron sports a current dividend yield, 4.1%, and a dividend growth rate, 7%, both in excess of my current portfolio levels. As I mentioned in my 2015 goals article, I wanted each purchase to add a stock that either has a dividend yield greater than my portfolio average and/or has a dividend growth rate in excess of my portfolio’s current level. Chevron meets both of my criteria.
While initiating a position in Chevron is riskier than other investments, especially due to the current oil environment, Chevron meets all the metrics of our stock screener and has a payout ratio that I believe can weather the current oil storm. Another fit for my portfolio would have been Exxon Mobil, as their metrics are similar (if not slightly better) than Chevron’s and Exxon is set to increase their dividend in April as well. However, Chevron’s dividend yield is nearly a percent higher and Chevron has a current ratio greater than 1 (Exxon’s current ratio is .60). Current ratio isn’t the most important metric and I use it as a compliment to our stock screener; however, in the current environment, I like the fact that Chevron has the assets to cover their short-term debts. Plus, the additional dividend yield is welcomed as well. I do not chase yield and have no problem purchasing a lower yielding stock if it is fundamentally better than the alternatives. But since Chevron and Exxon have similar fundamentals, I do not mind considering dividend yield in my final decision. Note, I am passing on two higher yielding in stocks Shell and BP because I believe Chevron has better metrics. Based on my analysis, I went ahead and purchased 10 shares of Chevron, adding $42.80 in projected dividend income to my portfolio.
Summary
I am very happy with my purchases over the last couple of weeks, as I believe I added two strong companies that will serve my dividend portfolio well in the long-term. Sure, I may face some short-term headwinds, but I have a long-term investing mentality. The two purchases added $66.80 in projected dividend income to my portfolio, and hopefully Chevron’s dividend income will be increasing shortly as well. Another wrinkle to the purchases is that the two stock purchases brings me closer to my 2015 goal of investing $15,000 in new capital to my portfolio, as both purchases were made using capital transferred from my savings account. I am almost 10% closer to accomplishing this goal!
What are your thoughts on my purchases? Would you have purchased shares in Chevron, Exxon, or neither? What about PM? Are you staying away from the tobacco industry? What purchases have you made recently? I am looking forward to hearing your comments!
Bert
Thanks for sharing these purchases Bert. I like them! Chevron and PM are definitely bargains at the moment. They’re do well with a long term horizon such as yourself. Keep staying consistent and persistent. Take care Bert and Keep hustling hard bud.
Hustler!
No problem, I love sharing so others can understand my thought process. And hopefully, I can help others the way I have learned from other purchases by bloggers in the community. After all, that’s the best part of the dividend investing community, the opportunity to share ideas and strategies since we are all chasing the same goal…financial freedom!
I agree, both stocks appear to be bargains right now and should be great long-term investments. The future me will hopefully thank the current me for making these purchases. Thanks for stopping by and the kind words!
Bert
DDs,
I really like CVX, wish I had some myself. PM is a great stock, but my wife would be very unhappy if I had some. Once my % of energy stocks gets a little lower with some diversification it is the 1st one I want to pick up. Congrats.
-Gremlin
Gremlin,
You can’t upset your wife! That’s rule number 1. A solid dividend income stream is worthless if you do not have anyone to enjoy it with. I kind of have a different approach with allocation approaches in the short term. I’m not afraid to become overweight in the industry in the short-term if it means that I am buying value. I am probably done buying oil now that I purchased another oil company in Chevron, so that allocation in oil will retreat to a normal level after I purchase each successive non-oil company. That’s just my theory though. But Rule Number 2 is stick to your investing strategy, right??
Thanks for stopping by.
Bert
Bert,
PM is one of the best deals in the market right now, in my opinion. Tough to find that elusive combination of value, yield, and growth in one package.
Not interested in any oil stocks right now due to my allocation already being high and also not sure how earnings will play out this year and looking forward. My cost basis in CVX is somewhere around $100, so I’d probably have to see it drop a good percentage below that before I’d add.
Cheers!
DM,
Between Lanny, you, and others in the community, I had a lot of information indicating that PM is a great opportunity. It just didn’t make any sense to sit on the sideline any longer. The only reason I held out for so long was because I didn’t want to give Lanny the satisfaction that he was right. In the end, it was worth swallowing my pride if that means I could lower my cost basis at a price lower than $80/share. And if you hit your desired weight in oil, than there is no reason to purchase a company like Chevron. There are other discounts out there to be had.
Thanks for stopping by. It looks like we may be finally entering spring here in the buckeye state. Just in time for baseball season. It’ll be a fun battle for the central between the Indians and the Tigers. May the best team win!
Bert
CVX is a no brainer and PM I am a bit skeptical on even tho I own it as well. Global trends on tobacco have me somewhat concerned in a long term perspective but the solid dividend is hard to pass up.
Asset Grinder,
I am much longer on the international tobacco industry than I am on the domestic one. Less regulations and a greater population. The one country the large international tobacco companies have not been able to crack is China, and that is because of their own state owned company dominates the market. However, BTI and PM are knocking at the doorstep, and any incremental gain in China can hopefully offset the trends in all other areas of the world. If not, I would agree with the fact the long term trends won’t be as rosy. Also, I couldn’t hold off on CVX any longer. Low metrics, great balance sheet. I think they will be in great shape when the oil market settles down and things begin to normalize.
Thanks for stopping by!
Bert
Solid purchases, I plan to buy more CVX in the near future. Not going to invest in cigarette businesses just due to personal reasons. But it’s hard to say no to PM at current evaluations though.
Thanks for stopping by Tawcan. You have to stick to your own guns. You can’t break a personal reason for not investing just because of a dividend and a perceived discounted value. Pride and respect are worth much more. Hopefully you can catch some more CVX before things change in the oil industry, this may be a great time to re-up on your position and lower your cost basis.
Bert
I really like both of these buys. I just picked up PM myself and I’d love to buy more CVX but it’s my largest single holding so I’m trying not to.
Thanks Captain! CVX is definitely one of your largest holdings haha I am sure you could find other positions in your portfolio to re-up to increase your holdings at a lower cost basis. Have you thought about adding to your XOM position or a different oil company?
Bert
Every day I see them drop along with oil I start drooling. My last purchase of XOM was in January but I’m pretty heavy on energy so I’d prefer to buy elsewhere if possible. I definitely won’t rule it out though. It’s a long journey and if I have to allocate money into the sector while prices are low I may do that knowing that I can balance my holdings with future purchases.
I have to admit though that I am a bit worried about all of the extra oil coming out of the US nowadays. I’m concerned it could be more of a long term hit than most think. With all of the improved drilling techniques it’s really making oil easier than ever to attain and that isn’t going to change. I’m still bullish in the long term but as with any stock there are always drawbacks somewhere to worry about.
I own both of those stocks and as a matter of fact I pulled the trigger today on PM (post coming soon) to re-up my position there. I see value in PM at this time. Keep it up!
FFF,
Thank you very much. I hopefully will have a few more purchases coming down the pipeline to keep on building my dividend income. Congrats on the purchase of PM. It is such a great opportunity to re-up your position at a lower cost basis.
Keep up the great work yourself. We are making some great progress towards reaching financial freedom.
Bert
Glad to own both names with you! Really liking PM here and I want to add some more myself as soon as more capital comes through. Oil still scares me for some reason, but I could easily be convinced to add more to CVX if it were to fall a bit under $100. There’s really not much difference between my desired price and the current price for a long term investor, and I’m thinking you’ll do mighty fine with it! Solid buys all around an thanks for the update!
Ryan,
I feel like we have been talking a lot in the last couple of days haha WEll you may be convinced soon, becasue Chevron has been hovering in the low 100s for a while now. One or two bad days of oil and you may just find yourself adding more to your stake. Oil is definitely a risk right now, but that is why I considered Chevron or Exxon. Both companies have strong balance sheets and lower payout ratios to withstand a longer period of compressed earnings. And heck, if oil doesn’t work our for you, there is always your good friend PM that would love to take some more of your capital in exchange for a juicy dividend!
I am looking forward to reading about your next purchase. Hopefully it will be sooner rather than later! As always, thanks for stopping by and the kind words.
Bert
CVX is a solid purchase. When it comes to cigarette stocks such as PM, etc. I am sceptical due to future regulations, laws, and trends. Good luck on both of your purchases.
If you are looking to purchase more oil stocks, check out OXY.
Like the CVX purchase. Good pick at the current prices.
About PM, I am bit more skeptical. I realize its really popular amongst the DGIs right now, but the long term trends are concerning. I just finished writing a post about my thoughts on the tobacco industry – should be live in a couple of days. Keep an eye out.
R2R