Sunday, April 28

Month 154 - 26 Large-cap Risk-averse “Dow Jones Composite Average” Dividend Achievers - June 2024

Situation: Retirement savers need a “touchstone of reality” to guide their investment decisions. I offer these focus lists: 1) the 65-stock Dow Jones Composite Average; 2) the iShares Russell Top 200 ETF (IWL), and 3) the Invesco Dividend Achievers ETF (PFM). That means you’d be researching companies that are vetted by Wall Street professionals, are among the largest 40% in the S&P 500 Index, and are committed to raising their dividend annually.

Mission: Use our Standard Spreadsheet to analyze companies that issue bonds rated BBB+ (or better) by Standard & Poor’s and meet the above criteria. Exclude stocks that lost more (relative to their 10-yr total returns/yr) than the S&P 500 ETF (SPY) during the worst year for SPY in the past 10 (see Column G in the Table).

Execution: see Table of 26 stocks.

Analysis: Warren Buffett’s favorite metric is found in Column T of the Table: Return on Tangible Capital Employed. He thinks a 20% return for the Trailing Twelve Months (TTM) is a good number, and 8 stocks qualify: UNH, V, MCD, JNJ, PG, MSFT, AAPL, HD. His second point (that the company be “run by able and honest managers”) is addressed in Morningstar reports (Column AN) and is negatively impacted by the extent to which managers have capitalized the company by issuing long-term bonds (Column X). Four companies have a BUY rating from Morningstar (AEP, MCD, DUK, NEE), and 9 have a Long-Term Debt to Equity ratio lower than 1.0 (CVX, MRK, TRV, UNH, V, JNJ, WMT, PG, MSFT). Mr. Buffett also thinks a high Free Cash Flow Yield (Column K) reflects good management because Retained Earnings allow the company to expand operations (or pay down debt) at zero cost; 20 companies meet that standard (CVX, MRK, CAT, TRV, AMGN, UNH, KO, V, HON, MCD, JNJ, WMT, IBM, PG, MSFT, JPM, AAPL, CSX, HD, UNP). His third point (that the stock be available at a sensible price) is addressed by 1-yr and 5-year Forward PEG ratios (Columns O and P); 11 companies have PEGs lower than 2.5 at both intervals (MRK, TRV, UNH, AEP, V, HON, MCD, WMT, DUK, MSFT, CSX). There are 8 A-rated companies (Column AO): MRK, CAT, TRV, JNJ, WMT, PG, NEE, UNP. Nineteen companies have 10-yr total returns that equal or exceed their 10-yr Required Rates of Return, i.e., their capitalization cost, as shown in Columns D and E: MRK, CAT, TRV, AMGN, UNH, AEP, V, SO, MCD, JNJ, WMT, PG, NEE, JPM, MSFT, AAPL, CSX, HD, UNP. The 9 most highly cited stocks are MRK, TRV, UNH, V, MCD, JNJ, WMT, PG, MSFT (5 times each).

Bottom Line: Warren Buffett’s “#1 rule is never lose money.” That means build positions in buy-and-hold stocks. We find 9 (MRK, TRV, UNH, V, MCD, JNJ, WMT, PG, MSFT).

Risk Rating: 6 (where 10-yr U.S. Treasury Note = 1, S&P 500 Index = 5, and gold bullion = 10).

Full Disclosure: I dollar-average into CVX, MRK, CAT, AEP, SO, MCD, JNJ, WMT, IBM, PG, NEE, MSFT, JPM, HD, UNP; own shares of TRV, AMGN, UNH, KO, V, HON, DUK and CSX.

"The 2 and 8 Club" (CR) 2017 Invest Tune Retire.com All rights reserved.

Post questions and comments in the box below or send email to: irv.mcquarrie@InvestTuneRetire.com.


Sunday, March 31

Month 153 - 14 A-rated High-yield Stocks for Retirement - April 2024

Situation: Retirement savers increasingly depend on income from bond-like stocks, either through workplace retirement plans and IRAs or cashing quarterly dividend checks. The trick is to find a company that has a clean Balance Sheet and pays a good and growing dividend.


Mission: Use our Standard Spreadsheet to analyze companies that meet our “A-rating” requirements, as detailed in the Appendix.

Execution: see Table of 14 companies.

Analysis: Warren Buffett’s favorite metric is Return on Tangible Capital Employed (see Column T in the Table). He thinks a 20% return for the Trailing Twelve Months (TTM) is a good number. Three companies qualify: JNJ, CSCO, PG. His second point (that the company be “run by able and honest managers”) is addressed in Morningstar Reports (Column AN) and negatively impacted by the degree to which the company is capitalized by issuing long-term bonds (Column X). Three utility companies have a BUY rating from Morningstar (WEC, NEE, LNT), and 8 companies have a Debt to Equity ratio lower than 1.0 (MRK, TRV, GD, ATO, JNJ, WMT, PG, CSCO). Mr. Buffett also likes Free Cash Flow Yield (Column K) to be higher than Dividend Yield (Column J), since Retained Earnings allow the company to expand operations (or pay down debt) at zero cost; 11 companies qualify (MRK, CAT, GD, ATO, JNJ, WMT, PG, LNT, UNP, CSCO, TGT). His third point (that the stock be available “at a sensible price”) is addressed by 1-yr and 5-year Forward PEG ratios (Columns O and P); 7 companies have PEGs under 2.5 at both intervals (MRK, TRV, GD, WMT, WEC, NEE, TGT). Five companies are cited 3 times (MRK, GD, JNJ, WMT, PG, CSCO).


Bottom Line: We’ve set high standards, which tend to favor companies in the 3 defensive industries: Utilities (4), Consumer Staples (2), and HealthCare (2).


Risk Rating: 6 (where 10-yr Treasuries = 1, S&P 500 Index = 5, and gold bullion =10)


Full Disclosure: I dollar-average into MRK, CAT, JNJ, WMT, PG, NEE, UNP and CSCO, and also own shares of TRV, GD, ATO, WEC, LNT and TGT.

Appendix: Criteria for stocks to receive an A-rating: 1) being listed at VYM (the Vanguard High Dividend Yield ETF); 2) being listed on a U.S. Stock Exchange for 20+ years; 3) having at least an A- S&P rating on the corporate bond it issues, 4) having at least a B/M S&P rating on it’s common stock, 5) having a positive earnings per share (TTM), 6) having a positive book value (mrq), 7) having long-term debts no greater than 2.5 times equity, and total debts no greater than 2.5 times EBITDA (unless covered by a positive Tangible Book Value), 8) having a 10-year actual rate of return that is greater than the 10-year required rate of return (RRR), 9) having a 5-year Beta that is lower than 1.00, 10) being listed in Vanguard’s Dividend Appreciation ETF (VIG), which eliminates the 25% of dividend-paying stocks that have the highest dividend yields. (Such high yields are likely to be unsustainable).

"The 2 and 8 Club" (CR) 2017 Invest Tune Retire.com All rights reserved.

Post questions and comments in the box below or send email to: irv.mcquarrie@InvestTuneRetire.com.