Monday, December 22, 2014

Dividend Growers and Initiators - Portfolio Answers

Hi Everyone,

Finally the wedding season is over and my wife and I can get back into a more normal routine!  The posts should come out more regularly now and I look forward to connecting with the blogging community, especially the Early Retirement and Dividend Growth Investors out there.  Which brings me to my post tonight - Dividend Growers and Initiators and my portfolio answers....

I recently just posted our current retirement portfolio (remember, this is just the taxable account) and I realized that you readers might have a question of why there are some companies in there that do not pay dividends.  Well, I just happened to be reading articles on Seeking Alpha and other websites that show that Dividend Growers and Initiators have outperformed the S&P consistently over the last 30 or so years - See Dividend Growth Investors post on this topic here.  Therefore, the 4 companies that are non-dividend paying in my portfolio will hopefully fill the Dividend Initiator category include; SAM, SN, UA and HYH.

Full disclosure on these positions is that I do not intend to hold onto SN forever, and HYH was a spin-off from KMB and is so small that it would not make sense to sell due to the commission fees.  However, Samuel Adams (SAM) and Under Armour (UA) will hopefully become Initiators in the near future.  As for SAM, earnings per share (roughly $7) are growing steadily, the share count is quite low at roughly 10M and their cash position continues to increase (roughly 60M currently).  At a 10% payout ratio of EPS, Sam Adams could pay .70 cents per share a quarter which would correspond to over a 1% dividend yield.  Last earnings report saw SAM's EPS grow at over 20% year over year which has been occurring quarter after quarter for at least the past year.  With gas prices declining, SAM should benefit with lower costs further increasing their profit and EPS growth for the coming quarter/year.  If dividends grew at a reduced rate of 10-15% as compared to EPS growth, over the next few years, you are looking at a powerful force accelerating your portfolio which is why it is in my portfolio.

Under Armour is another company that I think has great potential to become an initiator and has been an incredibly fast grower over the past few years.  Many people are suggesting that UA could become the next Nike in the sports apparel arena.  With a low share count, EPS of around $1 in the upcoming year, and growth revenue growth averaging around 25% year over year consistently it is no wonder people are thinking they could be the next Nike.  The company is starting to expand aggressively overseas as well as in the footwear division and should be able to grab more market share from the bigger competitors.  The only downfall is the extremely high PE ratio but I was willing to take that risk by starting a small position in the company at around $62.  If it drops, I'll pick up more as I think this could be a great company/dividend payer in the future.

Sanchez Energy (SN), is a play on the massive drop of oil.  I just picked up this company at $10.70 per share, which I didn't time perfectly, but I think that if oil comes back, this company should take off.  This is a short term trade (1-2 years, price target of $40) that could turn into a long term investment if the thesis remains intact.  This could become another initiator if everything comes together.  That remains to be seen, but I'm willing to wager small bets like this time and again to hopefully propel my portfolio faster than any of the big blue chips ever could.

My final stock I am looking at purchasing that could fall into an Initiator is WageWorks Inc. (WAGE).  From what I've read, WAGE is another small cap company that has few shares, EPS of around $1 which puts the PE at 62.  I realize this PE is quite high, but that's what you get with a fast growing small cap company.  Just like SAM, EPS has been growing at fast clip of say 15% year over year for the past year.  But, the thing I really like about this company is that it is essentially like a toll road like V or KMI which all of you readers know that these are very lucrative businesses and avid dividend payers/growers.  Wageworks is a play on the fast growing Health Savings Account business which I believe will continue to grow in the future.  WAGE makes more and more money when people add more money to their HSA accounts.  I could easily see WAGE growing at 10-15% year over year for the next 5-10 years with the Millennial generation taking over the workforce and more companies using the high deductible health plans along with the HSA's.  This business could turn into the ADP or PAYX of the Health Savings world.

So there you have it.  Four stocks that are in a dividend growth investors portfolio and one to add that could turn the portfolio into a Dividend Grower and Initiator Portfolio that hopefully outperforms the S&P!

Let me know what you think!  Do you try to find the next homerun in the dividend initiator category?