Month 158 - 14 Large-cap A-rated Low-volatility Stocks for Retirement Income - October 2024

Situation: In a bull market, most companies in most sectors of the economy show surprisingly strong earnings growth, with companies in the transportation sector leading the way. We know that most companies have embedded risk factors, so why are those companies able to participate in the bull market? The reason is that wobbly companies have been able to grow revenues because of having a good story. So, they’ve been able to set up a good line of credit from banks. In other words, their CEOs think the company will be able to “ride out the storm” by using borrowed money, all the while knowing that many shareholders will feel forced to sell rather than continue to watch the company’s share price collapse. As Warren Buffett says: “You don’t find out who’s been swimming naked until the tide goes out.” But risk is a numbers game (not a story game), so embedded risk factors can be identified in advance.

Mission: Screen the top 200 S&P 500 companies for embedded risk factors, leaving a select list of A-rated companies for analysis: Those are 1) listed at VYM (the Vanguard High Dividend Yield ETF composed of of companies that have a dividend yield higher than that for the S&P 500 Index); 2) have a common stock that has been traded on a U.S. Stock Exchange for 20+ years; 3) have at least an A- S&P credit rating on their corporate bond issues, 4) have at least a B/M S&P stock rating, 5) having a positive earnings per share (TTM), 6) having a positive book value (mrq), 7) have long-term debts valued at no more than 2.5 times equity, and total debts valued at no more than 2.5 times EBITDA (unless covered by collateral of positive Tangible Book Value), 8) have a 10-year actual rate of return that is greater than their 10-year required rate of return (RRR), 9) have a 5-year Beta that is lower than 1.00, 10) is listed in Vanguard’s Dividend Appreciation ETF (VIG) of stocks with 10+ years of annual dividend growth, which eliminates the top 25% of dividend yielders (i.e., those with yields that are perhaps unsustainable).

Analysis: Warren Buffett’s favorite metric is found in Column T of the Table: Return on Tangible Capital Employed. He thinks a 20% return (TTM) is a good number, and 4 stocks qualify: MRK, PEP, JNJ and PG. His second point (that the company is being “run by able and honest managers”) is addressed in Morningstar reports (Column AL) and negatively impacted by the extent to which managers capitalize the company by issuing long-term bonds (Column X). No stocks have a BUY rating from Morningstar but 10 companies have a Long-Term Debt to Equity ratio lower than 1.0 (MRK, TRV, GD, CB, ADP, WMT, JNJ, PG, ABT, CME). 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; 13 companies meet that standard (MRK, CAT, TRV, GD, CB, ADP, WMT, JNJ, NEE, PG, ABT, CME, TGT). His third point (that the stock be available at a sensible price) is addressed by 1-yr and 5-yr Forward PEG ratios (Columns O and P). Five companies have a PEG lower than 2.5 at both time intervals (MRK, TRV, GD, JNJ, TGT). Three companies are cited 3 times (MRK, JNJ, PG).

Bottom Line: When buying stocks, look for embedded risks. Then decide whether returns will likely pay you enough for taking those risks.

Risk Rating: 5 (where 10-yr US Treasury Notes = 1, S&P 500 Index = 5, and go

Full Disclosure: I dollar-average into MRK, CAT, PEP, WMT, JNJ, NEE, PG, CME, and also own shares of GD and ABT.

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Month 157 - 11 Large-cap Dividend-appreciating Members of “The 2 and 8 Club” that issue A-rated bonds - September 2024

Situation: We face a volatile market landscape, with bulls and bears vying for control. By owning stock in companies that pay a good and growing dividend, you can hedge that market risk. To quantify those terms: “Good” means an above-market dividend yield (~2%), as captured by VYM (Vanguard High Dividend Yield Index ETF). “Growing” means a compound annual growth rate (CAGR) for the dividend payout over the past 5 years has been at least 8.0%, and that the dividend payout has increased annually for 10+ years without producing an unsustainably high dividend yield, as captured by VIG (Vanguard Dividend Appreciation Index ETF). When a qualifying company issues bonds that carry an S&P credit rating of A- or better and has a 20+ year trading history, we say its stock is a member of the “2 and 8 Club”.    

Mission: Analyze all the companies in the iShares Russell Top 200 ETF that meet the above requirements. 

Execution: see Table of 11 companies.

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 5 stocks qualify: TXN, ADI, HD, CME, CMCSA. 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 extent to which managers capitalize the company by issuing long-term bonds (Column Z). Two stocks (CME and CMCSA) have a BUY rating from Morningstar, and 6 companies have a Long-Term Debt to Equity ratio lower than 1.0 (TXN, ADP, ADI, BLK, ABT, CME). 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; 9 companies meet that standard (ADI, NEE, HD, BLK, ABT, CME, TGT, CMCSA). His third point (that the stock be available at a sensible price) is addressed by 1-yr and 5-yr Forward PEG ratios (Columns O and P). Four companies have a PEG lower than 2.5 at both intervals (ADI, BLK, TGT, CMCSA). There are 2 A-rated companies in Column AO (NEE and TGT). Eight companies have a 10-yr total return greater than its Required Rate of Return (capitalization cost), per Columns D & E: TXN, ADP, ADI, NEE, HD, ABT, CME, TGT. ADI, CME are cited 5 times.

Bottom Line: If you want to buy stocks likely to achieve 10+% rates of return long-term, The 2 and 8 Club is a good place to shop. That’s because the accumulation of compound interest  through a DRIP is a better way to achieve that goal than trying to estimate future capital gains.

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

Full Disclosure: I dollar-average into TXN, NEE, HD and CME.

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Month 156 - 19 Large-cap "Dow Jones Composite Average" Dividend Appreciation Companies That Issue A-rated Bonds - August 2024

Situation: Investors who want to pick individual stocks need a  “training wheels” approach. Start with a list of 65 companies that have already been vetted by Wall Street professionals: the Dow Jones Composite Average (DJCA). Then limit your attention to large-capitalization companies. Why? Because those are likely to have a) more than one product line, and b) access to a line of credit large enough and cheap enough to allow the company to “ride-out” a market crash. Finally, it is important to pick companies that have raised their dividend annually for 10+ years (but don’t have an unsustainably high dividend yield), then exclude companies that issue bonds rated lower than A- by Standard & Poor’s. 

Mission: Select from stocks found in a) the 65-stock Dow Jones Composite Average, b) the iShares Russell Top 200 ETF (IWL), and c) the Vanguard Dividend Appreciation ETF (VIG). 

Execution: see Table of 19 companies.

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 9 stocks qualify: CAT, UNH, V, JNJ, PG, MSFT, AAPL, HD, CSCO. 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 extent to which managers capitalize the company by issuing long-term bonds (Column Z). Two stocks (MSFT and NKE) have a BUY rating from Morningstar, and 10 companies have a Long-Term Debt to Equity ratio lower than 1.0 (MRK, TRV, UNH, V, WMT, JNJ, PG, MSFT, CSCO, NKE). 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; 17 companies meet that standard (MRK, CAT, TRV, UNH, KO, HON, V, WMT, JNJ, IBM, PG, MSFT, AAPL, HD, UNP, CSCO, NKE). His third point (that the stock be available at a sensible price) is addressed by 1-yr and 5-yr Forward PEG ratios (Columns O and P). Eight companies have a PEG lower than 2.5 at both intervals (MRK, TRV, UNH, V, HON, JNJ, MSFT, NKE). There are 9 A-rated companies in Column AO (MRK, CAT, TRV, WMT, JNJ, PG, NEE, UNP, CSCO). Fourteen companies have a 10-yr total return that is greater than its 10-yr Required Rate of Return (capitalization cost), as shown in Columns D and E: MRK, CAT, TRV, UNH, KO, V, WMT, JNJ, NEE, PG, JPM, MSFT, AAPL, HD. Seven companies are cited 5 or 6 times: MRK, TRV, UNH, V, JNJ, PG, MSFT.

Bottom Line: Over the past 20 years (Column Q), these 19 stocks have appreciated 5% faster/yr (in price) than SPY (the S&P 500 Index ETF), while being exposed to no greater risk of loss (Column S).

Composite Risk Rating: 6 (10-yr US Treasury Notes = 1, S&P 500 Index = 5, and gold = 10)

Full Disclosure: I dollar-average into MRK, KO, WMT, JNJ, NEE, PG, MSFT, HD and UNP, and also own shares of CAT, UNH, V, HON, IBM, JPM, AAPL, NKE and CSCO. 

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Month 155 - 10 Large-cap industrials (with good and growing dividends) that issue A-rated bonds - July 2024

Situation: “You’ve got your show horses and your work horses.” This month’s blog highlights work horses of the industrial sector, meaning those that pay an above-market dividend yield and reliably grow that payout every year.

Mission: Take the industrial companies in Vanguard’s High Dividend Yield ETF (VYM) and eliminate any that aren’t in the iShares Top 200 ETF (IWL). Also eliminate any that aren’t in the Vanguard Dividend Appreciation ETF (VIG), which is composed of companies that increase their dividend annually but leaves out companies with a dividend yield that is thought to be unsustainable (the 25% with the highest dividend yields). Also, eliminate any that issue bonds rated lower than A- by Standard & Poor’s. 

Execution: see Table of 10 companies.

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 4 companies qualify: LMT, CAT, ETN, ITW. His second point (that the company be “run by able and honest managers”) is addressed in Morningstar reports (Column AL) and is negatively impacted by the extent to which managers have capitalized the company by issuing long-term bonds (Column X). One company (HON) has a BUY rating from Morningstar, and 4 have a Long-Term Debt to Equity ratio lower than 1.0 (GD, ADP, EMR, ETN). 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; 9 companies qualify (LMT, CAT, GD, ADP, HON, WM, ETN, ITW, 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); 3 companies have PEGs lower than 2.5 at both intervals (GD, HON, UNP). There are 3 A-rated companies (see Month 153): CAT, GD, UNP. Seven companies have 10-yr total returns that exceed their 10-yr Required Rates of Return (capitalization cost), as shown in Columns D and E: LMT, CAT, GD, ADP, WM, ETN , ITW. The most highly cited company is GD (5 times).

Bottom Line: Fewer than 10% of the largest 200 companies in the S&P 500 Index meet these criteria for safety. Pricing for shares in the industrial sector is cyclical, but these 10 companies have 10% lower volatility than the S&P 500 Index (see Column C). This makes them less likely to fall steeply in price during a bear market (as shown in Column F) and therefore outperform the S&P 500 ETF (SPY) after 10 years (see Column E).

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

Full Disclosure: I dollar-average monthly into LMT, CAT, UNP, and also own shares of GD and HON.

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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.

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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).

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Month 152 - 20 Profitable Large-cap Dividend Achievers in the Dow Jones Composite Average - March 2024

Situation: The U.S. stock market lacks clear direction going forward. Investors will need to eschew risk and take a balanced position between growth stocks, bond-like stocks, and investment-grade bonds. That means giving increased attention to the Dow Jones Composite Average–where many companies issue stocks with good and growing dividends.

Mission: Use our standard spreadsheet to analyze companies in the 65-stock Dow Jones Composite Average, selecting those that 1) are included in the Russell Top 200 Index 2) are listed in the Vanguard Dividend Appreciation ETF, 3) have a 10-yr Actual Rate of Return that exceeds their 10-yr Required Rate of Return (Columns D&E) or a Return on Tangible Capital Employed (Column T) of at least 20%, 4) issue bonds rated BBB+ or better by S&P, and 5) have an S&P stock rating of B/H or higher.

Execution: see Table of 20 stocks.

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 last fiscal year is a good number. Eleven companies qualify: MRK, UNH, KO, V, HON, JNJ, PG, MSFT, AAPL, HD, UPS. His second point (that the company be “run by able and honest managers”) is addressed in Morningstar Reports (Column AP) and negatively impacted by the degree to which those managers capitalize the company by issuing long-term bonds (Column Z). Three companies have a BUY rating from Morningstar (HON, MCD, NEE), and 9 have a Debt to Equity ratio lower than 1.0 (MRK, TRV, UNH, V, JNJ, WMT, PG, MSFT, CSCO). Mr. Buffett also likes Free Cash Flow Yield (Column K) to be higher than the Dividend Yield (Column J), since Retained Earnings allow the company to expand operations (or pay down debt) at zero cost; 18 companies qualify (MRK, CAT, TRV, UNH, KO, V, HON, MCD, JNJ, WMT, PG, MSFT, AAPL, JPM, CSX, UNP, HD, CSCO). 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); 8 companies have PEGs under 2.5 at both intervals (MRK, TRV, UNH, V, HON, MCD, NEE, MSFT). Eight companies are A-rated (Column AQ): MRK, CAT, TRV, JNJ, WMT, NEE, PG, UNP, CSCO. Nine companies are cited 4 times (MRK, TRV, V, HON, MCD, JNJ, PG, MSFT, CSCO)

Bottom Line: DJCA companies are selected by a committee of Wall Street professionals to represent profitable leaders in 10 of the 11 S&P industries (Real Estate being excluded, but McDonald’s profits come mainly from rental income). 

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

Full Disclosure: I dollar-average into 14 stocks (MRK, CAT, KO, MCD, JNJ, WMT, PG, NEE, MSFT, JPM, UNP, HD, UPS and CSCO), and also own shares of UNH, HON, V and CSX.

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Month 151 - Dogs of the Dow - February 2024

Situation: Dogs of the Dow date are the 10 highest yielding Dow Jones Industrial Average (DJIA) stocks on January second of each new year. Their dividend yields are high because their stock prices are low. These “blue chips” are in the bargain basement. If an equal dollar amount is invested in all 10 early in January, it is more likely than not that their average total return for the year will beat the price-weighted DJIA.

Mission: Run our standard spreadsheet on those 10.

Execution: see Table.

Analysis: Warren Buffett’s favorite metric is Return on Tangible Capital Employed (Column U in the Table). He thinks a 20% return for the last fiscal year is a good number. Four companies qualify: AMGN, KO, JN, CSCO. His second point (that the company be “run by able and honest managers”) is addressed in Morningstar Reports (Column AU) and negatively impacted by the degree to which those managers capitalize the company by issuing long-term bonds (Column AD). Three companies have a BUY rating from Morningstar (DOW, VZ, WBA), and 4 have a Debt to Equity ratio lower than 1.0 (CVX, JNJ, CSCO). Mr. Buffett also likes Free Cash Flow Yield (Column L) to be higher than Dividend Yield (Column L), since Retained Earnings allow the company to expand operations (or pay down debt) at zero cost; 9 companies qualify (CVX, AMGN, KO, JNJ, IBM, DOW, CSCO, VZ, MMM). His third point (that the stock be available “at a sensible price”) is addressed by 1-yr and 5-year Forward PEG ratios (Columns P and Q); 2 companies have PEGs under 2.5 at both intervals (AMGN, JNJ). Two companies are A-rated (Column AV): JNJ and CSCO. Two companies are cited 4 times (JNJ, CSCO).

Bottom Line: I suggest that you consider companies that issue bonds rated A- or better (Column AH) by S&P (CVX, KO, JNJ, IBM, CSCO). Then exclude the 3 (in Columns D and E) that don’t have a 10-yr Actual Rate of Return that covers their 10-yr Required Rate of Return (CVX, KO, IBM). But include KO because it has an ROIC (Return On Invested Capital) that is more than twice its WACC (Weighted Average Cost of Capital), as shown in Columns X and Y. That leaves 3 stocks (KO, JN, CSCO) that are suitable for investment.

Risk Rating: 8 (10-yr U.S. Treasury Notes = 1, S&P 500 Index = 5, and gold bullion = 10)

Full Disclosure: I dollar-average into KO, JNJ and CSCO, and also own shares of CVX, IBM, VZ, MMM and WBA.

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