Dividend Stocks and Money Management

Altria, or MO was about 75% of my portfolio to start the year in 2011.  This would not be considered a normal investment strategy, but it did allow me to make 18.5 percent on my total portfolio last year.  There is a time and place for all kinds of strategies, but MO made it easy, the whole year.  I love this stock for many reasons, and I'm going to try to explain, why this stock is so amazing.

Established companies payback shareholders in a couple different ways.  The stock can go higher, that is capital appreciation.  They can pay a dividend, most likely quarterly, so that you get money while you hold the stock.  They can also buy back shares in the market, essentially removing those shares, from the share float, making every share, slightly more valuable.  The float is how many share the company has released into the wild.  Essentially, how many pieces the company has been broken up into.  

Lets say you buy 100 shares of Altria tomorrow at $28, for a total investment of $2800.  Using round numbers Altria will pay you 6% a year on your investment, or $168 per year.  Doesn't sound like much?  Well keep listening...  Altria also increases their dividend about 1-2 times a year on average.  Meaning, instead of making 6%, next year, if the stock price is still at $28, you might make 7%.  As the years go on, the dividend yield you recieve on that original investment goes higher, so you dividend return on that money can be sky high, after many years of increases.

When you also have a company that buyback shares, they lower the share count, which increases the EPS automatically.  If the EPS (earnings per share) increases, they can also increase the dividend.

Basically if company A, has 100 shares outstanding, and makes $100 a year, then the EPS is $1/per share.  If that same company decides to buyback 5 shares that same year, and they have no increase in earnings throughout the year, next year, they will make $1.05 EPS because you can now divide $1 earnings per year, by 95 shares, rather than 100.

Basically the less shares outstanding the better for all investors.  If that float, is shrinking due to a buyback, that's a good thing overall.

Altria has a "pay out ratio" of 80%, meaning they will pay out 80% of all profits in the form of a dividend.  So they buyback shares, which decreases the float, and increases the EPS, which allows them to increase the dividend, that increased dividend increases the dividend yield, which likely increases the share price.  That is the virtuous circle I was talking about.

As always, feel free to ask me anything about this, in the comments section below.

Stocks that have safe, growing dividends are very resiliant in an up or down economy.  I use this stock to anchor my portfolio, and I would recommend you do the same.  By having 50% or more of your portfolio in a safe dividend earner, you will have a much easier time beating the market.  From there you can add the risky high fliers that really make this game exciting.

The reason I like one stock for my big dividend play, is because I just need to be right one time.  If that part of my portfolio works, then I can afford to lose, and take risks in other areas.  I can focus a lot of my energy just making sure this secure part of my portfolio really is secure.  I only have to listen to one conference call a quarter, instead of five.  Watch for one set of earnings reports.  This is not the type of investment you can afford to lose on.  Your high dividend yielder, should have money to pay that dividend for years.  It should be secure, and the business should have no real way to be undercut, or go broke.

From here all we need to do, is "Keep It Simple"...