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Author: Collin Seow   |   Latest post: Fri, 9 Oct 2020, 12:31 PM

 

Profitable Mindset Of Great Traders

Author: Collin Seow   |  Publish date: Fri, 9 Oct 2020, 12:31 PM


Profitable mindset

 

The human mindset is guided by our belief systems.

Therefore, the profitable mindset of a trader will be subject to these same belief systems.

Here are 3 powerful belief systems used by some of the greatest traders of our time.

Van Tharp points out very insightfully in his famous book, Trade Your Way To Financial Freedom.

"People don't trade the market, they trade their beliefs about the market." - Van Tharp

This offers a very true and insightful perspective about trading that all traders must eventually realize.

However, traders must learn to hold belief systems of somewhat opposing natures, when approaching different aspects of the trading business.

 

profitable mindset

Long Term Mindset

For long term success, the trader must hold a rather optimistic mindset about the future.

The law of large numbers presides over the long term success of any trading career.

So the trader has to hold the mindset that by consistently executing his trade plans, regardless of any current short term drawdowns, in the long run, he will be profitable.

"Cut losses fast, and add to your winners" - Larry Hite

Larry Hite's rule aims to reduce the impact of losses, while also magnifying the impact of winners.

Sure, hit rates will be low, resulting in frequent periods of drawdown, but the next trade could be that monster winner which more than makes up for the numerous small losses.

While this approach may not be for everyone, but it is an angle to give confidence in the long term belief system needed in successful trading.

 

Short Term Mindset

In the short run, during the lifespan of each trade, a trader must hold a rather pessimistic belief system, that the trade is likely to be a loser.

"I believe the current trade I am in will be a loser... a big loser at that." - Larry Williams

Larry Williams elaborates that having this belief, we err on the side of caution instead of conviction.

Conviction of what is in reality, an uncertain future, leads us to trade too large or hold on to a trade too long.

If you have strong conviction that your trade will be a winner, that triggers a need to confirm this belief in your mind.

This will cause you to let losses run or stay with losers too long.

Cognitive biases are the bane of objectivity, hence the rise of systematic trading which dramatically reduces discretionary decision points made by a human trader.

 

Medium Term Mindset

In the medium term mindset, drawdowns are part of the business.

If you refuse to accept any drawdown periods and neglect to manage your risk, eventually you'll encounter a significant loss.

"If you can't take a small loss, sooner or later you will take the mother of all losses." - Ed Seykota

Ed Seykota couldn’t have said it any better.

So work on accepting the necessary insignificant losses, it's not personal, it's just business.

 

Your mindset is going to determine how far you travel on this journey, or whether you’ll be going round in circles.

So how far do you want to go?

 

If you’d like to find out more about systematic trading, click the banner below.

The post Profitable Mindset Of Great Traders appeared first on The Systematic Trader | Trading Courses.

  Be the first to like this.
 

Profitable Mindset Of Great Traders

Author: Collin Seow   |  Publish date: Fri, 9 Oct 2020, 12:31 PM


Profitable mindset

 

The human mindset is guided by our belief systems.

Therefore, the profitable mindset of a trader will be subject to these same belief systems.

Here are 3 powerful belief systems used by some of the greatest traders of our time.

Van Tharp points out very insightfully in his famous book, Trade Your Way To Financial Freedom.

"People don't trade the market, they trade their beliefs about the market." - Van Tharp

This offers a very true and insightful perspective about trading that all traders must eventually realize.

However, traders must learn to hold belief systems of somewhat opposing natures, when approaching different aspects of the trading business.

 

profitable mindset

Long Term Mindset

For long term success, the trader must hold a rather optimistic mindset about the future.

The law of large numbers presides over the long term success of any trading career.

So the trader has to hold the mindset that by consistently executing his trade plans, regardless of any current short term drawdowns, in the long run, he will be profitable.

"Cut losses fast, and add to your winners" - Larry Hite

Larry Hite's rule aims to reduce the impact of losses, while also magnifying the impact of winners.

Sure, hit rates will be low, resulting in frequent periods of drawdown, but the next trade could be that monster winner which more than makes up for the numerous small losses.

While this approach may not be for everyone, but it is an angle to give confidence in the long term belief system needed in successful trading.

 

Short Term Mindset

In the short run, during the lifespan of each trade, a trader must hold a rather pessimistic belief system, that the trade is likely to be a loser.

"I believe the current trade I am in will be a loser... a big loser at that." - Larry Williams

Larry Williams elaborates that having this belief, we err on the side of caution instead of conviction.

Conviction of what is in reality, an uncertain future, leads us to trade too large or hold on to a trade too long.

If you have strong conviction that your trade will be a winner, that triggers a need to confirm this belief in your mind.

This will cause you to let losses run or stay with losers too long.

Cognitive biases are the bane of objectivity, hence the rise of systematic trading which dramatically reduces discretionary decision points made by a human trader.

 

Medium Term Mindset

In the medium term mindset, drawdowns are part of the business.

If you refuse to accept any drawdown periods and neglect to manage your risk, eventually you'll encounter a significant loss.

"If you can't take a small loss, sooner or later you will take the mother of all losses." - Ed Seykota

Ed Seykota couldn’t have said it any better.

So work on accepting the necessary insignificant losses, it's not personal, it's just business.

 

Your mindset is going to determine how far you travel on this journey, or whether you’ll be going round in circles.

So how far do you want to go?

 

If you’d like to find out more about systematic trading, click the banner below.

The post Profitable Mindset Of Great Traders appeared first on The Systematic Trader | Trading Courses.

  Be the first to like this.
 

Profitable Mindset Of Great Traders

Author: Collin Seow   |  Publish date: Fri, 9 Oct 2020, 12:31 PM


Profitable mindset

 

The human mindset is guided by our belief systems.

Therefore, the profitable mindset of a trader will subject to these same belief systems.

Here are 3 powerful belief systems used by some of the greatest traders of our time.

Van Tharp points out very insightfully in his famous book, Trade Your Way To Financial Freedom.

"People don't trade the market, they trade their beliefs about the market." - Van Tharp

This offers a very true and insightful perspective about trading that all traders must eventually realize.

However, traders must learn to hold belief systems of somewhat opposing natures, when approaching different aspects of the trading business.

 

profitable mindset

Long Term Mindset

For long term success, the trader must hold a rather optimistic mindset about the future.

The law of large numbers presides over the long term success of any trading career.

So the trader has to hold the mindset that by consistently executing his trade plans, regardless of any current short term drawdowns, in the long run, he will be profitable.

"Cut losses fast, and add to your winners" - Larry Hite

Larry Hite's rule aims to reduce the impact of losses, while also magnifying the impact of winners.

Sure, hit rates will be low, resulting in frequent periods of drawdown, but the next trade could be that monster winner which more than makes up for the numerous small losses.

While this approach may not be for everyone, but it is an angle to give confidence in the long term belief system needed in successful trading.

 

Short Term Mindset

In the short run, during the lifespan of each trade, a trader must hold a rather pessimistic belief system, that the trade is likely to be a loser.

"I believe the current trade I am in will be a loser... a big loser at that." - Larry Williams

Larry Williams elaborates that having this belief, we err on the side of caution instead of conviction.

Conviction of what is in reality, an uncertain future, leads us to trade too large or hold on to a trade too long.

If you have strong conviction that your trade will be a winner, that triggers a need to confirm this belief in your mind.

This will cause you to let losses run or stay with losers too long.

Cognitive biases are the bane of objectivity, hence the rise of systematic trading which dramatically reduces discretionary decision points made by a human trader.

 

Medium Term Mindset

In the medium term mindset, drawdowns are part of the business.

If you refuse to accept any drawdown periods and neglect to manage your risk, eventually you'll encounter a significant loss.

"If you can't take a small loss, sooner or later you will take the mother of all losses." - Ed Seykota

Ed Seykota couldn’t have said it any better.

So work on accepting the necessary insignificant losses, it's not personal, it's just business.

 

Your mindset is going to determine how far you travel on this journey, or whether you’ll be going round in circles.

So how far do you want to go?

 

If you’d like to find out more about systematic trading, click the banner below.

The post Profitable Mindset Of Great Traders appeared first on The Systematic Trader | Trading Courses.

  Be the first to like this.
 

6 Blue-Chip Dividend Growth Stocks with High Dividend Growth Rate

Author: Collin Seow   |  Publish date: Fri, 25 Sep 2020, 5:34 PM


 

Why dividend growth matters

At the beginning of the week, I released a massive guide on Dividend Investing, detailing a step-by-step process on getting better acquainted with all things dividends.

In this article, I will be looking to identify 6 high-quality blue-chip dividend growth stocks that have consistently grown their dividends over the past decade.

These dividend growth stocks need to exhibit the few basic dividend growth characteristics to qualify:

  1. Past 5 years average dividend growth > 3%
  2. Past 3 years average dividend growth > 5%
  3. Past 1-year average dividend growth > 10%
  4. Dividend yield of at least 2%
  5. More than 10 years of consecutive dividend growth
  6. Market Cap > US$20bn

What we are identifying is not just a dividend growth stock, but one that has consistently increased its dividend growth rate over the past 5 years, with the latest dividend growth rate being double-digit.

Let me show you why such a dividend grower is the "preferred" stock over a "high yielding" dividend payer.

Let's assume 2 scenarios.

Scenario 1

blue chip dividend growth stocks (High div growth rate)

Peter has $100,000 to invest and he decided to invest in a stock priced at $100/share with the counter paying $2 dividends per share (DPS). This counter is growing its dividends at 10%/annum. With $100,000, Peter is entitled to 1000 shares of the stock and received $2,000 in dividends in his first year.

We make a key assumption here that the stock continues to trade at a 2% yield over the next 20 years while concurrently growing its DPS by 10% a year. Hence in year 2, his DPS will be S$2.20 while his share price will have appreciated to $110/share or also a 10% appreciation.

After 20 years, assuming that Peter did not reinvest his dividends, he would have received a total payout of $128k solely from dividends. His initial capital would also have grown from $100,000 to $672,750.

His total profits, including dividends, would have equated to approx. $700k for a 600% return over this duration.

Scenario 2

blue chip dividend growth stocks (High div yield)

Mark, on the other hand, decides to invest in a higher-yielding stock, one that pays a yield of 4%. This dividend stock however is growing its dividend by just 5% annually.

Using the same initial capital assumption as in Scenario 1 ($100k), you will see that Mark generates a higher total amount of dividends over 20 years $143k vs. $128 for Peter. However, in terms of share price appreciation, assuming that the stock continues to yield 4% over the entire horizon, the final investment will only be worth c.$265k vs. Peter's $672k.

Mark's total ROI, including dividend received, will amount to just 208% which is a huge reduction vs. Peter's massive 600% ROI over the same period.

The above 2 scenarios assume that there is no yield compression or expansion in both cases.

From this simple example, one can see that a strong dividend grower is the preferred choice vs. a high yielding counter.

Of course, the best of both worlds will be to find a high dividend-yielding stock (>4%) which is also a strong dividend grower (growing dividends by 10% annually). However, such stocks are almost non-existence.

On the other hand, we can identify a handful of blue-chip candidates that currently yield more than 2% while yet sporting a consistent dividend growth profile, as illustrated in our screening criteria.

Without further ado, let's take a look at these strong dividend growers. We exclude financial counters on this list.

Blue-Chip Dividend Growers

Blue-Chip Dividend Growth Stock #1: Automatic Data Processing (ADP)

Sector: Industrials

Market Cap: $55bn

Current yield: 2.8%

Automatic Data Processing Inc competes in the human resources administration services industry. It provides services that satisfy companies' human resources needs, such as payroll processing and benefits administration. ADP was founded in 1949 and has its headquarters in Roseland, New Jersey.

The company has been hard hit by the COVID-19 crisis, understandably so as the unemployment rate skyrockets in the US due to business shut-downs.

The company is currently paying $3.64 DPS and yields 2.8% at its current share price. With a payout ratio of 61%, a strong balance sheet with net debt of just $441m vs. annual free cash flow of $2.2bn, the company is in a comfortable position to continue its track record of paying higher dividends in 2020 despite expected earnings to drop by 12% this year.

blue chip dividend growth stocks (ADP)

ADP sports a 10-year average yield of 2.5%. Hence with its current yield at 2.8% (based on trailing DPS), it seems to indicate a certain level of undervaluation. This is rather attractive for a blue-chip dividend growth stock such as ADP whose operations are temporarily impacted by COVID-19, unless one holds the view that a high unemployment rate is here to stay.

Dividend Growth Rate

ADP looking weak at the moment.
Do have some patience while waiting for the TGPS buy signals.
The weekly candlees on the TGPS chart are still red.

 

Blue-Chip Dividend Growth Stock #2: Best Buy (BBY)

Sector: Consumer Cyclical

Market Cap: $27bn

Current yield: 2.1%

Best Buy is one of the largest consumer electronics retailers in the U.S., with product and service sales representing 9.3% of the $450 billion-plus in personal consumer electronics and appliances expenditures in 2019 based on estimates from the U.S. Bureau of Economic Analysis.

The company is focused on accelerating online sales growth, improving its multichannel customer experience, developing new in-store and in-home service offerings, optimizing its U.S., Canada, and Mexico retail store square footage, lowering the cost of goods sold through supply-chain efficiencies, and reducing selling, general, and administrative costs.

The counter has hugely outperformed the index, with a total return of 24% YTD vs. the S&P500 1.6% return.

blue chip dividend growth stocks (BBY)

 

Nonetheless, despite its strong performance in 2020, the counter still yields a decent 2.1%, just above our cut-off mark of 2%. BBY pays a DPS of $2/share with a payout ratio of just 33%, putting the counter in a strong position to continue raising its dividends regardless of the current dire macro outlook.

Also, BBY sports a net cash position, generating a free cash flow of c.$1.5bn per annum. This more than covers the dividend expense of c.$530m/annum. Assuming that the counter can continue to raise its DPS per share by 10%, that will imply a DPS of $2.20. At its current price of $106, that will imply a forward yield of 2.1% which is at the lower end of its 10-years average dividend yield of 2.7%.

Dividend Growth Rate

Best buy has a very strong uptrend in play.
On the day charts, a buying opportunity may present itself soon.
However on the weekly charts, the trend looks a little exhausted with longer term support coming in only at a little above $90.

 

Blue-Chip Dividend Growth Stock #3: Home Depot (HD)

Sector: Consumer Cyclical

Market Cap: $288bn

Current yield: 2.3%

Home Depot is the world's largest home improvement specialty retailer, operating nearly 2,300 warehouse-format stores offering more than 30,000 products in-store and 1 million products online in the United States, Canada, and Mexico. Its stores offer numerous building materials, home improvement products, lawn and garden products, and decor products and provide various services, including home improvement installation services and tool and equipment rentals.

The acquisition of distributor Interline Brands in 2015 allowed Home Depot to enter the maintenance, repair, and operations sector, while the tie-up with Company Store brought textile exposure to the lineup.

HD has been one of the major beneficiaries of COVID-19, with citizens "stuck" at home deciding to engage in home improvement activities to past time. The company has also benefitted substantially from the strength seen in its e-commerce segment

A very consistent grower of earnings, HD saw its EPS increasing from $1.86 back in 2010 to $10.06 in 2019. Consequently, the company also managed to grow its DPS from $0.94 in 2010 to $5.44 in 2020, or a CAGR of 21.5%.

While there might be concerns over a substantial net debt amount of $26bn on its balance sheet, this is offset by the free cash flow generation of $11bn a year.

blue chip dividend growth stocks (HD)

 

HD currently has a payout ratio of 52% and I believe its dividend payment is at no risk of being cut. The street is likely forecasting for another strong double-digit growth in dividend payment to $6/share. Its forward yield will equate to 2.25% at the current price. That will be generally in-line if not slightly undervalued vs. its 10-year dividend yield average of 2.15%.

Dividend Growth Rate

Home Depot had a good run as well since the big drop in March.
The strong uptrend seems to be taking a rest for the moment.
Ideally for me, I’d like to see price test the 250s area and then produce buy signals on the TGPS day charts.

 

Blue-Chip Dividend Growth Stock #4: Kroger (KR)

Sector: Consumer Defensive

Market Cap: $26bn

Current yield: 2.2%

Kroger is the leading American grocer, with 2,757 supermarkets operating under several banners throughout the country as of the end of fiscal 2019. Around 82% of stores have pharmacies, while over half also sell fuel.

The company also operated more than 300 fine jewelry stores at the end of fiscal 2019. Kroger features a leading private-label offering and manufactures around a third of its own-brand units (and 42% of its grocery own-label assortment) itself, in 35 food production plants nationwide. Kroger is a top-two grocer in 90% of its major markets (as of late 2019, according to Planet Retail and Edge Retail Insight data cited by the company. Virtually all of Kroger's sales come from the United States.

Kroger has weathered the COVID-19 crisis relatively well, with the stock up 16% YTD vs. the S&P500 appreciation of just 1.6%. The company is seen as a defensive play, one which will continue to do well regardless of the COVID-19 situation. The company's increasing e-commerce exposure also bodes well for its future growth prospects.

The street is expecting strong growth in EPS in 2020 at $3.17 vs. 2019 level of $1.96. However, that figure is expected to normalize to around $2.68 in 2021.

blue chip dividend growth stocks (KR)

While KR's earnings have not been as steady as HD, the counter has been a very consistent DPS grower, with a 10-year CAGR of 13.3%. Assuming that it grows its DPS to $0.72, the forward yield will be at 2.2%. I believe that KR has the propensity to maintain such strong growth in its DPS, given its substantially low payout ratio of just 24%.

While there might be some concerns over its high gearing profile, this is partially offset by its strong free cash flow generation.

Dividend Growth Rate

As with all crisis periods, consumer defensive holds up well to the market pressure.
Kroger’s uptrend continued since the middle of last year.
The past couple of weeks have seen Kroger share prices take a little bit of a beating, which to me spells opportunity.
The weekly trend has been in play since the middle of last year.
Watch out for long signals on this counter on the TGPS day chart.

 

Blue-Chip Dividend Growth Stock #5: Merck & Co (MRK)

Sector: Healthcare

Market Cap: $209bn

Current yield: 3%

Merck makes pharmaceutical products to treat several conditions in some therapeutic areas, including cardiovascular disease, asthma, cancer, and infections. Within cancer, the firm's immuno-oncology platform is growing as a major contributor to overall sales.

The company also has a substantial vaccine business, with treatments to prevent hepatitis B and pediatric diseases as well as HPV and shingles. Additionally, Merck sells animal health-related drugs. From a geographical perspective, close to 40% of the firm's sales are generated in the United States.

The street is generally positive on the counter, with 9 recommending a strong buy with a median target price of $92.50. While MRK's earnings have not been as steady as some other healthcare names, they are expected to grow strongly over the next 2 years, with the street forecasting EPS growth of 50% in 2020 and 11% in 2021.

blue chip dividend growth stocks (MRK)

Based on the street's estimates, DPS is expected to grow to $2.44 in 2020 vs. $2.26 in 2019 or an 8% growth rate which is slightly lower than the 1-year growth rate of 12-13%. With a forward DPS of $2.44, the counter is yielding 3%. Based on its 10-years average yield of 3.5%, the counter might be seen as still over-valued. However, the counter's yield has depressed to 3.1% over the past 5-years, hence it is not drastically "over-valued" in that sense.

With a payout ratio of approx. 58%, MRK does have a further propensity to continue growing its dividend profile.

Dividend Growth Rate

This is an interesting play. MRK is in the healthcare sector so potential for future growth remains strong.
Currently it’s a little battered and hasn’t fully recovered from the drop in March.
On the weekly chart, it looks like price are set to head higher with TGPS candles turning blue.

 

Blue-Chip Dividend Growth Stock #6: Texas Instruments (TXN)

Sector: Technology

Market Cap: $124bn

Current yield: 2.7%

Dallas-based Texas Instruments generates about 95% of its revenue from semiconductors and the remainder from its well-known calculators. Texas Instruments is the world's largest maker of analog chips, which are used to process real-world signals such as sound and power.

Texas Instruments also has a leading market share position in digital signal processors, used in wireless communications, and microcontrollers used in a wide variety of electronics applications.

TXN witnessed a substantial decline in revenue and earnings in 2019, even before the onset of COVID-19. The street expects its earnings to decline marginally by -1.3% in 2020 followed by a more modest rebound of 5.4% in 2021.

blue chip dividend growth stocks (txn)

Despite some earnings woes, the company has been a strong dividend grower, with its DPS growing by a CAGR of 23% over the past decade. Assuming a more modest 10% growth rate vs. its 2019 DPS of $3.21, the company will be paying $3.60 in 2020 or a forward yield of 2.7%. This is in-line with its past 10-year average yield of 2.7%.

TXN has a strong balance sheet profile, with net debt of just 1.8bn vs. 5.7bn or $6.16 per share. With the counter paying just $3.60 in DPS, this is well covered by its annual free cash flow generation.

Dividend Growth Rate

TXN had a good uptrend since the March drop, TGPS weekly candles are blue.
Currently doing a correction to test potential long term support around the $130+ area.
Well worth watching for long signals on the TGPS daily chart.

 

Conclusion

These are the 6 blue-chip Dividend growth stocks that have an extremely high probability of continue growing their dividends in the coming years due to a combination of operational resilience as well as balance sheet strength, with many of these counters having a low payout ratio below 60%.

These 6 stocks on average, yield 2.5%. Assuming a constant dividend growth rate of 10% over the next 2 decades, a $100k initial investment in a basket of these 6 stocks could generate a total dividend payment of $160k over 20 years, with a total ROI of 633% assuming that these stocks continue to yield on average 2.5% after 20 years.

Based on the dividend yield theory, it will seem that ADP, HD, and KR are potentially undervalued at the current price while BBY and MRK are overvalued with TXN being fairly valued at its current price. There is nothing wrong with buying stocks at fair value. Of course, it is always ideal to purchase at bargain prices when possible, with a decent margin of safety.

If you enjoyed reading this article and various other investment + personal finance articles, do visit New Academy of Finance. Royston has more than 10 years of buy and sell side experience as a financial analyst. He constantly posts interesting, valuable and actionable articles.

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The post 6 Blue-Chip Dividend Growth Stocks with High Dividend Growth Rate appeared first on The Systematic Trader | Trading Courses.

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6 Blue-Chip Dividend Growth Stocks with High Dividend Growth Rate

Author: Collin Seow   |  Publish date: Fri, 25 Sep 2020, 5:34 PM


 

Why dividend growth matters

At the beginning of the week, I released a massive guide on Dividend Investing, detailing a step-by-step process on getting better acquainted with all things dividends.

In this article, I will be looking to identify 6 high-quality blue-chip dividend growth stocks that have consistently grown their dividends over the past decade.

These dividend growth stocks need to exhibit the few basic dividend growth characteristics to qualify:

  1. Past 5 years average dividend growth > 3%
  2. Past 3 years average dividend growth > 5%
  3. Past 1-year average dividend growth > 10%
  4. Dividend yield of at least 2%
  5. More than 10 years of consecutive dividend growth
  6. Market Cap > US$20bn

What we are identifying is not just a dividend growth stock, but one that has consistently increased its dividend growth rate over the past 5 years, with the latest dividend growth rate being double-digit.

Let me show you why such a dividend grower is the "preferred" stock over a "high yielding" dividend payer.

Let's assume 2 scenarios.

Scenario 1

blue chip dividend growth stocks (High div growth rate)

Peter has $100,000 to invest and he decided to invest in a stock priced at $100/share with the counter paying $2 dividends per share (DPS). This counter is growing its dividends at 10%/annum. With $100,000, Peter is entitled to 1000 shares of the stock and received $2,000 in dividends in his first year.

We make a key assumption here that the stock continues to trade at a 2% yield over the next 20 years while concurrently growing its DPS by 10% a year. Hence in year 2, his DPS will be S$2.20 while his share price will have appreciated to $110/share or also a 10% appreciation.

After 20 years, assuming that Peter did not reinvest his dividends, he would have received a total payout of $128k solely from dividends. His initial capital would also have grown from $100,000 to $672,750.

His total profits, including dividends, would have equated to approx. $700k for a 600% return over this duration.

Scenario 2

blue chip dividend growth stocks (High div yield)

Mark, on the other hand, decides to invest in a higher-yielding stock, one that pays a yield of 4%. This dividend stock however is growing its dividend by just 5% annually.

Using the same initial capital assumption as in Scenario 1 ($100k), you will see that Mark generates a higher total amount of dividends over 20 years $143k vs. $128 for Peter. However, in terms of share price appreciation, assuming that the stock continues to yield 4% over the entire horizon, the final investment will only be worth c.$265k vs. Peter's $672k.

Mark's total ROI, including dividend received, will amount to just 208% which is a huge reduction vs. Peter's massive 600% ROI over the same period.

The above 2 scenarios assume that there is no yield compression or expansion in both cases.

From this simple example, one can see that a strong dividend grower is the preferred choice vs. a high yielding counter.

Of course, the best of both worlds will be to find a high dividend-yielding stock (>4%) which is also a strong dividend grower (growing dividends by 10% annually). However, such stocks are almost non-existence.

On the other hand, we can identify a handful of blue-chip candidates that currently yield more than 2% while yet sporting a consistent dividend growth profile, as illustrated in our screening criteria.

Without further ado, let's take a look at these strong dividend growers. We exclude financial counters on this list.

Blue-Chip Dividend Growers

Blue-Chip Dividend Growth Stock #1: Automatic Data Processing (ADP)

Sector: Industrials

Market Cap: $55bn

Current yield: 2.8%

Automatic Data Processing Inc competes in the human resources administration services industry. It provides services that satisfy companies' human resources needs, such as payroll processing and benefits administration. ADP was founded in 1949 and has its headquarters in Roseland, New Jersey.

The company has been hard hit by the COVID-19 crisis, understandably so as the unemployment rate skyrockets in the US due to business shut-downs.

The company is currently paying $3.64 DPS and yields 2.8% at its current share price. With a payout ratio of 61%, a strong balance sheet with net debt of just $441m vs. annual free cash flow of $2.2bn, the company is in a comfortable position to continue its track record of paying higher dividends in 2020 despite expected earnings to drop by 12% this year.

blue chip dividend growth stocks (ADP)

ADP sports a 10-year average yield of 2.5%. Hence with its current yield at 2.8% (based on trailing DPS), it seems to indicate a certain level of undervaluation. This is rather attractive for a blue-chip dividend growth stock such as ADP whose operations are temporarily impacted by COVID-19, unless one holds the view that a high unemployment rate is here to stay.

Dividend Growth Rate

ADP looking weak at the moment.
Do have some patience while waiting for the TGPS buy signals.
The weekly candlees on the TGPS chart are still red.

 

Blue-Chip Dividend Growth Stock #2: Best Buy (BBY)

Sector: Consumer Cyclical

Market Cap: $27bn

Current yield: 2.1%

Best Buy is one of the largest consumer electronics retailers in the U.S., with product and service sales representing 9.3% of the $450 billion-plus in personal consumer electronics and appliances expenditures in 2019 based on estimates from the U.S. Bureau of Economic Analysis.

The company is focused on accelerating online sales growth, improving its multichannel customer experience, developing new in-store and in-home service offerings, optimizing its U.S., Canada, and Mexico retail store square footage, lowering the cost of goods sold through supply-chain efficiencies, and reducing selling, general, and administrative costs.

The counter has hugely outperformed the index, with a total return of 24% YTD vs. the S&P500 1.6% return.

blue chip dividend growth stocks (BBY)

 

Nonetheless, despite its strong performance in 2020, the counter still yields a decent 2.1%, just above our cut-off mark of 2%. BBY pays a DPS of $2/share with a payout ratio of just 33%, putting the counter in a strong position to continue raising its dividends regardless of the current dire macro outlook.

Also, BBY sports a net cash position, generating a free cash flow of c.$1.5bn per annum. This more than covers the dividend expense of c.$530m/annum. Assuming that the counter can continue to raise its DPS per share by 10%, that will imply a DPS of $2.20. At its current price of $106, that will imply a forward yield of 2.1% which is at the lower end of its 10-years average dividend yield of 2.7%.

Dividend Growth Rate

Best buy has a very strong uptrend in play.
On the day charts, a buying opportunity may present itself soon.
However on the weekly charts, the trend looks a little exhausted with longer term support coming in only at a little above $90.

 

Blue-Chip Dividend Growth Stock #3: Home Depot (HD)

Sector: Consumer Cyclical

Market Cap: $288bn

Current yield: 2.3%

Home Depot is the world's largest home improvement specialty retailer, operating nearly 2,300 warehouse-format stores offering more than 30,000 products in-store and 1 million products online in the United States, Canada, and Mexico. Its stores offer numerous building materials, home improvement products, lawn and garden products, and decor products and provide various services, including home improvement installation services and tool and equipment rentals.

The acquisition of distributor Interline Brands in 2015 allowed Home Depot to enter the maintenance, repair, and operations sector, while the tie-up with Company Store brought textile exposure to the lineup.

HD has been one of the major beneficiaries of COVID-19, with citizens "stuck" at home deciding to engage in home improvement activities to past time. The company has also benefitted substantially from the strength seen in its e-commerce segment

A very consistent grower of earnings, HD saw its EPS increasing from $1.86 back in 2010 to $10.06 in 2019. Consequently, the company also managed to grow its DPS from $0.94 in 2010 to $5.44 in 2020, or a CAGR of 21.5%.

While there might be concerns over a substantial net debt amount of $26bn on its balance sheet, this is offset by the free cash flow generation of $11bn a year.

blue chip dividend growth stocks (HD)

 

HD currently has a payout ratio of 52% and I believe its dividend payment is at no risk of being cut. The street is likely forecasting for another strong double-digit growth in dividend payment to $6/share. Its forward yield will equate to 2.25% at the current price. That will be generally in-line if not slightly undervalued vs. its 10-year dividend yield average of 2.15%.

Dividend Growth Rate

Home Depot had a good run as well since the big drop in March.
The strong uptrend seems to be taking a rest for the moment.
Ideally for me, I’d like to see price test the 250s area and then produce buy signals on the TGPS day charts.

 

Blue-Chip Dividend Growth Stock #4: Kroger (KR)

Sector: Consumer Defensive

Market Cap: $26bn

Current yield: 2.2%

Kroger is the leading American grocer, with 2,757 supermarkets operating under several banners throughout the country as of the end of fiscal 2019. Around 82% of stores have pharmacies, while over half also sell fuel.

The company also operated more than 300 fine jewelry stores at the end of fiscal 2019. Kroger features a leading private-label offering and manufactures around a third of its own-brand units (and 42% of its grocery own-label assortment) itself, in 35 food production plants nationwide. Kroger is a top-two grocer in 90% of its major markets (as of late 2019, according to Planet Retail and Edge Retail Insight data cited by the company. Virtually all of Kroger's sales come from the United States.

Kroger has weathered the COVID-19 crisis relatively well, with the stock up 16% YTD vs. the S&P500 appreciation of just 1.6%. The company is seen as a defensive play, one which will continue to do well regardless of the COVID-19 situation. The company's increasing e-commerce exposure also bodes well for its future growth prospects.

The street is expecting strong growth in EPS in 2020 at $3.17 vs. 2019 level of $1.96. However, that figure is expected to normalize to around $2.68 in 2021.

blue chip dividend growth stocks (KR)

While KR's earnings have not been as steady as HD, the counter has been a very consistent DPS grower, with a 10-year CAGR of 13.3%. Assuming that it grows its DPS to $0.72, the forward yield will be at 2.2%. I believe that KR has the propensity to maintain such strong growth in its DPS, given its substantially low payout ratio of just 24%.

While there might be some concerns over its high gearing profile, this is partially offset by its strong free cash flow generation.

Dividend Growth Rate

As with all crisis periods, consumer defensive holds up well to the market pressure.
Kroger’s uptrend continued since the middle of last year.
The past couple of weeks have seen Kroger share prices take a little bit of a beating, which to me spells opportunity.
The weekly trend has been in play since the middle of last year.
Watch out for long signals on this counter on the TGPS day chart.

 

Blue-Chip Dividend Growth Stock #5: Merck & Co (MRK)

Sector: Healthcare

Market Cap: $209bn

Current yield: 3%

Merck makes pharmaceutical products to treat several conditions in some therapeutic areas, including cardiovascular disease, asthma, cancer, and infections. Within cancer, the firm's immuno-oncology platform is growing as a major contributor to overall sales.

The company also has a substantial vaccine business, with treatments to prevent hepatitis B and pediatric diseases as well as HPV and shingles. Additionally, Merck sells animal health-related drugs. From a geographical perspective, close to 40% of the firm's sales are generated in the United States.

The street is generally positive on the counter, with 9 recommending a strong buy with a median target price of $92.50. While MRK's earnings have not been as steady as some other healthcare names, they are expected to grow strongly over the next 2 years, with the street forecasting EPS growth of 50% in 2020 and 11% in 2021.

blue chip dividend growth stocks (MRK)

Based on the street's estimates, DPS is expected to grow to $2.44 in 2020 vs. $2.26 in 2019 or an 8% growth rate which is slightly lower than the 1-year growth rate of 12-13%. With a forward DPS of $2.44, the counter is yielding 3%. Based on its 10-years average yield of 3.5%, the counter might be seen as still over-valued. However, the counter's yield has depressed to 3.1% over the past 5-years, hence it is not drastically "over-valued" in that sense.

With a payout ratio of approx. 58%, MRK does have a further propensity to continue growing its dividend profile.

Dividend Growth Rate

This is an interesting play. MRK is in the healthcare sector so potential for future growth remains strong.
Currently it’s a little battered and hasn’t fully recovered from the drop in March.
On the weekly chart, it looks like price are set to head higher with TGPS candles turning blue.

 

Blue-Chip Dividend Growth Stock #6: Texas Instruments (TXN)

Sector: Technology

Market Cap: $124bn

Current yield: 2.7%

Dallas-based Texas Instruments generates about 95% of its revenue from semiconductors and the remainder from its well-known calculators. Texas Instruments is the world's largest maker of analog chips, which are used to process real-world signals such as sound and power.

Texas Instruments also has a leading market share position in digital signal processors, used in wireless communications, and microcontrollers used in a wide variety of electronics applications.

TXN witnessed a substantial decline in revenue and earnings in 2019, even before the onset of COVID-19. The street expects its earnings to decline marginally by -1.3% in 2020 followed by a more modest rebound of 5.4% in 2021.

blue chip dividend growth stocks (txn)

Despite some earnings woes, the company has been a strong dividend grower, with its DPS growing by a CAGR of 23% over the past decade. Assuming a more modest 10% growth rate vs. its 2019 DPS of $3.21, the company will be paying $3.60 in 2020 or a forward yield of 2.7%. This is in-line with its past 10-year average yield of 2.7%.

TXN has a strong balance sheet profile, with net debt of just 1.8bn vs. 5.7bn or $6.16 per share. With the counter paying just $3.60 in DPS, this is well covered by its annual free cash flow generation.

Dividend Growth Rate

TXN had a good uptrend since the March drop, TGPS weekly candles are blue.
Currently doing a correction to test potential long term support around the $130+ area.
Well worth watching for long signals on the TGPS daily chart.

 

Conclusion

These are the 6 blue-chip Dividend growth stocks that have an extremely high probability of continue growing their dividends in the coming years due to a combination of operational resilience as well as balance sheet strength, with many of these counters having a low payout ratio below 60%.

These 6 stocks on average, yield 2.5%. Assuming a constant dividend growth rate of 10% over the next 2 decades, a $100k initial investment in a basket of these 6 stocks could generate a total dividend payment of $160k over 20 years, with a total ROI of 633% assuming that these stocks continue to yield on average 2.5% after 20 years.

Based on the dividend yield theory, it will seem that ADP, HD, and KR are potentially undervalued at the current price while BBY and MRK are overvalued with TXN being fairly valued at its current price. There is nothing wrong with buying stocks at fair value. Of course, it is always ideal to purchase at bargain prices when possible, with a decent margin of safety.

If you enjoyed reading this article and various other investment + personal finance articles, do visit New Academy of Finance. Royston has more than 10 years of buy and sell side experience as a financial analyst. He constantly posts interesting, valuable and actionable articles.

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The post 6 Blue-Chip Dividend Growth Stocks with High Dividend Growth Rate appeared first on The Systematic Trader | Trading Courses.

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Sell Singapore Banks To Buy Keppel?

Author: Collin Seow   |  Publish date: Fri, 7 Aug 2020, 11:59 PM


 

This is an article written on the 30th of July, by a very experienced professional analyst, Royston, from New Academy of Finance.

It’s a very informative article with gives you an insight into what factors a professional analyst will bring into the picture when considering the investment potential of a stock.

Enjoy!


 

Two significant news hit the headlines today.

SG BANKS DIVIDENDS CAP

One: The Monetary Authority of Singapore (MAS) has called on locally-incorporated banks to cap their total dividends per share (DPS) for FY2020 at 60% of FY2019's DPS and offer shareholders the option of receiving the dividends to be paid for FY2020 in scrip in lieu of cash.

MAS highlighted that while the local banks' capital positions are strong, the dividend restrictions are a preemptive measure to bolster their resilience and capacity to support lending to businesses and individuals through an uncertain period ahead for our economy.

The news immediately took the wind out of our local banks, with their share prices falling between 3-3.8%. The general consensus on the street has been that both DBS and OCBC will likely be able to maintain their DPS payment for FY2020 while UOB will likely see a minor reduction. Hence, the MAS announcement definitely came as a negative shock.


From this TradersGPS chart, you can see that OCBC tends to move in tight ranges, the only large trend was the dip in March this year.

Our local banks' dividend payments have been viewed as "rock solid" and many investors continue to remain vested due to the fact that they will not be cutting dividends this year and the banks' high dividend yields are considered an important factor of their investment thesis when it comes to owning banks in a recessionary scenario.

In recessions or the early-stage of an economic down-cycle, banks tend to be the hardest hit and it generally doesn't make sense to be vested in banks, unless you have an extremely long-term view, like Berkshire Hathaway who continues to increase their stakes in Bank of America.

A high and possibly sustained dividend yield is typically one of the major considerations for investors to be holding to remain vested in banks under the current climate. According to Citi and UBS analysts, they believe that DBS might be the hardest hit due to the dividend restrictions, as the bank is seen as a bigger proxy for generating dividend income than its peers.

To be honest, I believe that our bank's capital ratios, typically measured by their Common Equity Tier 1 (CET1) ratios, are likely the highest among the ASEAN banks, possibly alleviating concerns over a drastic erosion of their capital structure even in the worst-case scenario. Not concern that a "bank run" will happen in Singapore.

However, while investors and possibly many financial bloggers continue to hold faith in our local banks, I don't foresee any sustainable catalyst over the horizon (now that their yields are no longer as juicy) to propel their share price higher in today's context. While we might see "one-off black-swan" trading related gains in their 2Q20 announcement, just like what the US banks had announced, this is unlikely to be sustainable heading into 2H20.

Piyush Gupta, the CEO of DBS, said in an interview with CNBC in the middle of this month, that banks could experience "far more damage" to their balance sheets when stimulus measures that are keeping many businesses afloat are rolled back. He highlighted that governments cannot keep supporting the business community financially, so defaults will start rolling in sooner or later which will spill over to the financial sector.

 

He thinks the challenge is not in 2020 but the real pain will be felt in 2021. While he did not suggest that a voluntary dividend cut would be imminent in that interview, he highlighted the possibility of that if the economic outlook turns out to be grimmer than their expectations.

Well, MAS has done that "hard work" for him.


This TradersGPS chart shows the sell signals would have caught the 30% drop in March for UOB, and more recently a buy signal that showed almost 15% gains over a few days.

 

At the end of the day, banks are still a necessity, for now. We are seeing increasing options from fintech companies offering compelling financial products for us to park money with them. However, they are not yet at the stage where they can provide a combination of trust and scale for consumers. NOT YET are the keywords here as we are already seeing banking licenses possibly being issued to these fintech companies. Once fintech companies established the trust and scale required to win over consumers totally, we might see the end of days for banks.

All said and done, I believe that investing in our local banks is the "safe route" but not necessarily the right one unless you have a really long enough time horizon. That however, is usually what investors "convince" themselves when their investments head the wrong way. Stay long term guys!

 

KEPPEL DISASTROUS 2Q20 RESULTS

The second big news is Keppel announcing a disastrous set of 2Q20 results, with a reported net loss of S$698m for the quarter. As a result, they have failed to meet a pre-condition for Temasek takeover bid. Loh Chin Hua, CEO of Keppel said the following:

"We believe that the 20% threshold in the MAC (material adverse change) clause in respect of net profit after tax has been crossed, which means that the MAC pre-condition in Temasek's pre-conditional offer has not been satisfied".

Nonetheless, the deal has a long stop date of Oct 21, meaning that Keppel could make up any shortfall in its 3Q20 results. Alternatively Temasek also has the right to waive its pre-conditions.

Analysts in general forecasted potential impairments losses of around S$150m for the quarter. Keppel surprised with a massive S$919m impairment for 2Q20 as shown in the table below.

Source: Keppel

While Keppel has provided a profit guidance a few days back (resulting in a c.4% drop in its share price after the announcement), the magnitude of these impairments likely took the market by surprise.

Whether this is a kitchen sinking exercise, a one-off for this quarter or a prelude to more pain in its O&M division remains to be seen.

However, it is clear for all to see, after our local yards' latest quarterly results, that the Oil and Gas industry remains in a trough, one where we are nowhere near the end of the tunnel to see a glimmer of light.

Just like the airline industry, the offshore industry is unlikely to witness a quick turnaround in today's context, one where economic activities around the world have been severely curtailed due to COVID-19 which is still spreading like wild-fire. I have already given up tracking the daily cases happening around the world.

The oil market could be facing a new glut again as OPEC prepares to open the taps.

In short, I believed and I have mentioned this many times, that keeping status co will be detrimental to all stakeholders in this equation (Shareholders of Keppel, SCI, SMM, Temasek, employees, etc). If nothing is done by Temasek, we might not have any rig building yards by the end of next year. Once the pride of Singapore, providing tens of thousands of employment opportunities (many of them foreign workers nonetheless), I don't think these companies can continue to sustain such massive losses for long.

Hence, I believe that the ultimate consolidation between Keppel and SMM seems to be the only viable solution in the current context, one that is facilitated by Temasek.

The wildcard here is potentially the EGM between SCI and SMM shareholders which might throw the whole situation into disarray.

SMM minority shareholders can still reject the demerger deal, with the belief that the huge dilution is not in their best interest. In this case, Temasek might not be able to gain majority control over Sembcorp Marine and the purpose of owning majority ownership of Keppel might become pointless, in the sense that a quick facilitation of a merger between our two yards might no longer be feasible.

This TradersGPS chart shows that Keppel has been in a wide range since 2015. Now we’re approaching the lower end of that range.

 

The pre-condition offer for Keppel might thus be Temasek's insurance policy. In the event that the SCI-SMM demerger deal is not approved, then it might be pointless to have majority ownership of Keppel and Temasek can just trigger that clause and walk away from the deal. If the demerger deal is approved, they can choose to waive off the pre-conditions.

The EGM between SCI and SMM might be an interesting affair to watch, with many believe that it is already a shoo-in for the deal to go through. Is it?

This is just my own speculation here hence, do read it with a pinch of salt.

The share price of Keppel will likely fall on Monday, in my view and if the fall is large enough, it could be an opportunity to buy on weakness, holding the view that the restructuring deal between our local yards remains on the table.

Will the contrarian view of selling your "stable" bank shares and buying into Keppel be one that could possibly pay the dividends that you are thirsting for?

Not a recommendation over here but a food for thought. For disclosure purposes, I have got no stakes in our banks or Keppel at the current moment, preferring to watch the developments from the sidelines.

If you enjoyed reading this article and various other investment + personal finance articles, do visit New Academy of Finance. Royston has more than 10 years of buy and sell side experience as a financial analyst. He constantly posts interesting, valuable and actionable articles.

If you’d like to find out more about the TradersGPS system, click the banner below.

The post Sell Singapore Banks To Buy Keppel? appeared first on The Systematic Trader | Trading Courses.

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