Two Years In The Life Of A Contrarian Dividend Investor

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Two years ago I wrote a post called “A Contrarian’s Top Five Dividend Plays” that looked at investing in some out-of-favor stocks with great dividends and some long term stock appreciation upside, based on five large contrarian view (at the time) assumptions. As such, I purchased those five dividend producing stocks. Here,  I look at those stock purchases, the assumptions that got me there, and compare their actual performance to my expectations. Wise guy comments are in red! Revisions highlighted by strikethrough.

First, The Assumptions

On September 29, 2015, after a substantial late summer stock market correction that saw the Dow drop from 18,086 in late July, to 16,314 in late September (a 10% drop), I wrote that a person could make some money by investing in stocks that were beaten down by nervousness in the market at the time, but that had real long term potential if you could look past the current issues.

The five assumptions I based my buying decisions on were very clear in direction but a little bit vague in timing. I could do this because I was buying stocks for the long term, so specificity was not necessarily needed for my stock picks to generate value. Here are those assumptions and how each faired over the past year:

  • The oil industry in America will eventually recover
    • $49 a barrel late September 2015, $50 now but went to $28 in between
    • Boy, how little things have changed. Still $50 a barrel
  • Interest rates will eventually go up
    • Only one small rate hike in December 2015 but no real direction yet
    • I still believe this and they have somewhat, but slower than expected!
  • Health care demand will continue to grow
    • Yes, but strong political headwinds on pricing in past year
    • Still YES, but still headwinds
  • Real estate, over time, will continue to grow in value
    • This is true. Prices up a full 14-20% where I live: Austin Texas
    • Commercial and residential building has intensified, thus more demand for power, supplies and construction labor
    • The ONLY assumption that has held completely true!
  • Autos will continue set sales records due to the pent up demand since 2008
    • 2015 was a record year and 2016 will be close but perception is we have peaked
    • We have peaked and some trouble ahead with loan defaults and incentives going up!

By my own admission, most of my assumptions have not really played out…yet. Only real estate appreciation has really been dependable. All the other assumptions have either not yet been realized or are perceived as gone by (auto sales).

In the long term, however, I stand by my assumptions. I think oil will continue to go up over time. I originally said the price would go up within 18 months and I might have been a little hasty. But with consumption going up around the world, I think prices will eventually go up and stay up.

I also think interest rates will eventually go up. June 2017 seems to be the likely target for the next interest rate hike. I don’t know when they will go up but I am sure they will eventually. As for health care demand, I think this will stay tepid until after the presidential elections but the fact is, Americans are getting older and need more medicine. Last, auto demand may have  has peaked, but the simple fact is that the average car on the road is over 11 years, so I think demand will stay high for years to come. Also, I think auto makers are better prepared for the eventually demand downturn. Both Ford and General Motors have said they can be profitable at 75% of current demand.

The Contrarian Dividend Stocks

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The five stocks that I picked each lined up with my assumptions mentioned above. Let’s see how they have performed since my purchase one year ago:

Stock             Purchase Price      Current Price     Current Dividend     Dividend % Change

KMI                $29.41                       $20.43                   $.50                              -65%

MPW              $11.55                       $12.81                   $.96                              +5%

GM                  $29.40                      $33.55                    $1.52                             +10%

WFC                $51.40                      $54.60                   $1.52                              +5%

SO                    $43.41                      $49.58                    $2.32                             +5%

Let’s face it, my stocks did not perform well. The only stocks that did well, SO, did so because the underlying assumption did well (real estate/power demand would appreciate/increase). All the other stock picks were based on assumptions that have not come true yet. But I am not discouraged! I still believe my assumptions will come through and my stocks will, eventually, perform well. In the meantime, I will continue to accumulate shares of each to build a better base. In the meantime, I am collecting $725/year in dividends. Essentially being paid to wait.

Going Forward – The Upside

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Because I still believe my five assumptions will eventually come true, I am expecting both dividend growth and stock price appreciation with my five stocks. In order, I believe:

  • KMI will increase its dividend as oil prices return to historical prices and as more and more of their capital investments start making profits, especially in natural gas.
  • MPW will continue to increase dividends as their medical facilities accumulate.
  • GM will increase profits and dividends as their trucks and SUV’s, their most profitable products, increase in sales.
  • WFC will increase profits and dividends with the increase in interest rates.
  • SO will continue to increase profits and dividends with continued power demand.

Here’s another view of my stock picks and their potential:

Stock            Dividend Yield          Payout Ratio           

KMI                2.44%                          80% of free cash

MPW              7.40%                          88% of free cash

GM                 4.58%                          25%

WFC               2.79%                          38%

SO                   4.69%                         88%

I think WFC and GM have a lot of room to increase dividends for the foreseeable future. I think KMI needs oil prices to recover to increase dividends back to its previous levels but I don’t think that is out of the question. MPW and SO will continue to grow dividends slowly and pay out 7% and 4.7% respectively.

In The End…

My 18 month estimate for my market/business assumptions to play out was too aggressive, its been 24 months and it still is no where near playing out, but I still hold that they will eventually come true. In the meantime, I am being paid over $700/year to wait for that to happen. In fact, I am still accumulating more of each of these shares to build a larger base. My goal is to build up the base that by 2020 I am receiving $250/month in dividends from these five stocks, with the potential to increase 4-6% each year thereafter.

 

A trusted source for investing information for your financial future: The Street

 

What do you think of my contrarian dividend investment plan?

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