My Strategy
As I described in my post here about my passive income strategy, I will be focusing on 3 key areas
- Dividends
- Options
- Mortgage
The first 2 parts all involve the stock market and my main criteria is to focus on quality companies as much as possible. During the last 2 years I have been stuck with some real humdingers, either by chasing yield or chasing premium. I have learned the hard way ( as I always do) that there are no real shortcuts. If something is too good to be true, than more than likely it will kick you in the ass.
By defining what a quality company means to me, I want to ensure I don’t make the same mistakes as I have in the past and end up with companies that have little to no growth prospects.
How do I define a Quality Company?
The must all have the following characteristics in no particular order
- Stable and growing top Line
- Stable and growing bottom line
- Stable and growing cash flows
- Ability to manage their current debt
- Management I can trust and have a strong shareholder focus.
- Have a competitive advantage and a reason I believe they can continue growth in the next 5 years
Of course, in my dividend portfolio, I will be looking at the companies dividend history along with my best guess on if they can continue to reward me over for as long as I hold them.
Dividend Strategy
My Dividend Portfolio will be divided into 2 parts –
- 70% of my portfolio will be High Dividend Growth companies from Europe and the US. These will be companies that have dividend growth above 5% over the long term.
- 30% of my portfolio will have a High Dividend Yield. These are companies and CEF’s that have a starting yield above 5%. This is designed to help “Accelerate” my passive income and dividends will be reinvested into HDG companies.
For the moment, I am not going to exclude companies based on their starting yield but preference will more than like be giving to those above 2.5%. Of course as long as companies like Microsoft exist I will consider all companies as capital gains can be just as useful.
Buy me a coffee
I have also removed the 32 company barrier and the tier system. If I have enough conviction in a company, I will invest in them regardless of how many companies I own in my portfolio. My only restriction is that I do not want any position to be more than 5% of my portfolio. As my portfolio gets bigger my target will be to have no company with more than 5% of my dividend income.
My Watchlist Criteria
To make it onto my watchlist the company have to meet the following criteria
- Stable and growing top Line
- Stable and growing bottom line
- Stable and growing cash flows
- Ability to manage their current debt
- Dividend growth of over 5% over the last 5 years
To make it onto my Buy list I will need the company to have a strong Management team I can trust with a strong shareholder focus. The company must have a competitive advantage and a reason I believe they can continue growth in the next 5 years. The company must be fairly valued.
My Watchlist
Stanley Black & Decker (Ticker: SWK)
Stanley Black & Decker is first company on my list and it seems to be very popular on twitter lately. As a former trades person, I am actually quiet familiar with Stanley black and decker’s tools. However I must admit at the time, I felt that this brand was mainly for people who like to do DIY as a hobby. I always preferred brands such as https://www.knipex.com and https://www.dewalt.ie. What did not know at the time was that DeWalt is actually owned by Stanley Black & Decker.
So does SWK deserve to be on my watchlist?
Does it have a stable and growing top Line? In FY 2012 the company posted revenues of just over $10 billion In the last annual report which was FY 2021, the company posted revenues of $15.6 billion. This is a CAGR of 4.5%. It hasn’t been a smooth ride over the past 10 years but revenue is climbing steadily.
Stable and growing bottom line? Over the same period, Net income has grown from $451 million to $1.5 billion. It is nice to see growth but it wasn’t exactly a smooth ride. The Income statement will need a little bit of a review to see if it is related to one off events or is there something else I need to worry about.
Stable and growing cash flows? Free cash flow tells a different story as it has declined from $593 million in FY 2012 to $144 million in FY 2021. Previous to 2021, the free cash flow was increasing steadily and was as high as $1.6 billion in FY 2020. I will give the company the benefit of the doubt at this point, but I will need to understand if this is a short term issue or is it possible it could be a long term problem as a decline in free cash flow could be an early sign of a dividend cut.
Ability to manage their current debt? In FY 2021 the company had a long term debt of $4.3 billion. This has been increasing slowly over the last ten years. The company has a Debt/Equity ratio of 57.25% and a long term Debt/Equity ratio of 40.4%. The company also have an interest coverage (EBIT/Interest Expense) of 9.4x and Total Debt to EBITDA of 2.6x.
Dividend growth of over 5% over the last 5 years
With a 56 dividend growth history and a 7.2% 5 year dividend growth rate, Stanley Black & decker meet my dividend growth criteria.
Dashboard created by European DGI and maintained by us both
Snap On (Ticker: SNA)
Snap on have been on my radar ever since members of our dividend talk community alerted us to this company. Truth be told, I never heard of this company before that and we likened the company to a strap on one of our episodes. (Very mature). However, our straight talking community out us straight and insisted that we give the company a decent chance. It also turns out that they are a competitor of SWK so it is worth taking a look at them.
So lets see if SNA deserve to be on my watchlist?
Does it have a stable and growing top Line?
In FY 2012 the company posted revenues of just over $3 billion In the last annual report which was FY 2021, the company posted revenues of $4.6 billion. This is a CAGR of 4.4%. Interestingly enough it follows a similar trend to SWK
Stable and growing bottom line? Over the same period, Net income has grown from $306 million to $820 million. Not the same level of growth as SWK, however it was a lot more consistent. The company have also been back shares regularly in that timeframe also.
Stable and growing cash flows? Free Cash flow is also more consistent than their competitor. In FY2012 FCF was $249 million, while in FY2021 FCF was $896 million.
Ability to manage their current debt? In FY 2021 the company had a long term debt of $1433 million. However currently they have no long term debt on their balance sheet. . The company has a Debt/Equity ratio of 0.99%. The company also have an interest coverage (EBIT/Interest Expense) of 21.5x and Total Debt to EBITDA of 1x. A very nice balance sheet
Dividend growth of over 5% over the last 5 years
With a 25 dividend growth history and a 17.46% 5 year dividend growth rate, The company looks like it has a safer dividend than its competitor.
INTEL (Ticker: INTC)
The last company on my list this month is Intel. Those who listen to dividend talk frequently will know I bought this company during their Covid lows and somehow managed to sell them at their top. My feeling at the time was that they had a relatively strong balance sheet, Dividend looked safe and they look undervalued. The delay in the 7nm chip was a concern as they had a history of meeting deadlines.
Since I wrote my initial review, a lot has happened and Intel have been beaten down quite badly. My original article is pretty much out of date. So lets see if they should stay on my watchlist for now.
Does it have a stable and growing top Line? In FY 2012 the company posted revenues of just over $53 billion In the last annual report which was FY 2021, the company posted revenues of $79 billion. This is a CAGR of 4.1%.
Stable and growing bottom line? Over the same period its Net income grew from $11 billion to $19.8 billion which is a CAGR of 7.1% and helped by some share buybacks.
Stable and growing cash flows? We have seen free cashflow growth from $7.8 billion in FY2012 to nearly $21 billion in FY202. It was this growth in FCF that heled me in the belief that the dividend was safe. However we are in a completely different environment now and FCF in FY 2021 was $9.6 billion. This is nearly a 60% drop in one year and might tell you a little bit about why the share price got hammered.
Ability to manage their current debt ? In FY 2021 the company had a long term debt of $32.5 billion. This has been over the last ten years when the cost of credit was quiet low. The company has a Debt/Equity ratio of 35.13% and a long term Debt/Equity ratio of 35.4%. The company also have an interest coverage (EBIT/Interest Expense) of 37x and Total Debt to EBITDA of 1.4x.
Dividend growth of over 5% over the last 5 years
We rated this companies dividend safety as a 71/100 even with the current FCF decline. 22 years of growth and a 7.02% 5 year dividend growth rate. It actually doesn’t look too bad from these numbers.
Conclusion
All three companies will make it on to my watchlist this month as all three have passed my initial screenings. From the three, Snap-on look the most promising with an 81% dividend safety rating, an impressive 5 year dividend growth rate and a rock solid balance sheet. SWK are been talked about alot lately but I wasn’t as impressed by them to be honest.
Intel is in the middle of trying to turn itself around. But boy it does look cheap at current prices. The questions are, How safe is the dividend and an the company actually tur this company around?
The next step for me is to analyse each company in a little more dept. I’m not sure if I will do that in writing on the blog, or a video on you tube or enlist the help of EDGI and do it on the podcast, But the plan is to analyse each one of these companies in full over the next three weeks.
Hope you enjoyed this review, If you did, please consider joining my community by signing up to my mailing list where I will keep you up to date with my investments and provide more analysis like this.
Disclaimer - Engineer my Freedom is not a licensed or registered investment adviser or broker/dealer. We are not providing you with individual investment advice on this site. Please consult with a licensed investment professional before you invest your money. This site is for entertainment, informational, and educational use only. Any opinion expressed on the site here and elsewhere on the internet is not a form of investment advice provided to you. We use information, data, and sources in the articles we believe to be correct at the time of writing them, but there is no guarantee of their accuracy, completeness, timeliness, or correctness. We are not liable for any losses suffered by any party because of information published on this site or elsewhere on the internet. Past performance is not a guarantee of future performance. By reading this site or subscribing to it, you agree that you are solely responsible for making investment decisions in connection with your funds.
My Strategy
As I described in my post here about my passive income strategy, I will be focusing on 3 key areas
The first 2 parts all involve the stock market and my main criteria is to focus on quality companies as much as possible. During the last 2 years I have been stuck with some real humdingers, either by chasing yield or chasing premium. I have learned the hard way ( as I always do) that there are no real shortcuts. If something is too good to be true, than more than likely it will kick you in the ass.
By defining what a quality company means to me, I want to ensure I don’t make the same mistakes as I have in the past and end up with companies that have little to no growth prospects.
How do I define a Quality Company?
The must all have the following characteristics in no particular order
Of course, in my dividend portfolio, I will be looking at the companies dividend history along with my best guess on if they can continue to reward me over for as long as I hold them.
Dividend Strategy
My Dividend Portfolio will be divided into 2 parts –
For the moment, I am not going to exclude companies based on their starting yield but preference will more than like be giving to those above 2.5%. Of course as long as companies like Microsoft exist I will consider all companies as capital gains can be just as useful.
Buy me a coffee I have also removed the 32 company barrier and the tier system. If I have enough conviction in a company, I will invest in them regardless of how many companies I own in my portfolio. My only restriction is that I do not want any position to be more than 5% of my portfolio. As my portfolio gets bigger my target will be to have no company with more than 5% of my dividend income.
My Watchlist Criteria
To make it onto my watchlist the company have to meet the following criteria
To make it onto my Buy list I will need the company to have a strong Management team I can trust with a strong shareholder focus. The company must have a competitive advantage and a reason I believe they can continue growth in the next 5 years. The company must be fairly valued.
My Watchlist
Stanley Black & Decker (Ticker: SWK)
Stanley Black & Decker is first company on my list and it seems to be very popular on twitter lately. As a former trades person, I am actually quiet familiar with Stanley black and decker’s tools. However I must admit at the time, I felt that this brand was mainly for people who like to do DIY as a hobby. I always preferred brands such as https://www.knipex.com and https://www.dewalt.ie. What did not know at the time was that DeWalt is actually owned by Stanley Black & Decker.
So does SWK deserve to be on my watchlist?
Does it have a stable and growing top Line? In FY 2012 the company posted revenues of just over $10 billion In the last annual report which was FY 2021, the company posted revenues of $15.6 billion. This is a CAGR of 4.5%. It hasn’t been a smooth ride over the past 10 years but revenue is climbing steadily.
Stable and growing bottom line? Over the same period, Net income has grown from $451 million to $1.5 billion. It is nice to see growth but it wasn’t exactly a smooth ride. The Income statement will need a little bit of a review to see if it is related to one off events or is there something else I need to worry about.
Stable and growing cash flows? Free cash flow tells a different story as it has declined from $593 million in FY 2012 to $144 million in FY 2021. Previous to 2021, the free cash flow was increasing steadily and was as high as $1.6 billion in FY 2020. I will give the company the benefit of the doubt at this point, but I will need to understand if this is a short term issue or is it possible it could be a long term problem as a decline in free cash flow could be an early sign of a dividend cut.
Ability to manage their current debt? In FY 2021 the company had a long term debt of $4.3 billion. This has been increasing slowly over the last ten years. The company has a Debt/Equity ratio of 57.25% and a long term Debt/Equity ratio of 40.4%. The company also have an interest coverage (EBIT/Interest Expense) of 9.4x and Total Debt to EBITDA of 2.6x.
Dividend growth of over 5% over the last 5 years
With a 56 dividend growth history and a 7.2% 5 year dividend growth rate, Stanley Black & decker meet my dividend growth criteria.
Dashboard created by European DGI and maintained by us both
Snap On (Ticker: SNA)
Snap on have been on my radar ever since members of our dividend talk community alerted us to this company. Truth be told, I never heard of this company before that and we likened the company to a strap on one of our episodes. (Very mature). However, our straight talking community out us straight and insisted that we give the company a decent chance. It also turns out that they are a competitor of SWK so it is worth taking a look at them.
So lets see if SNA deserve to be on my watchlist?
Does it have a stable and growing top Line?
In FY 2012 the company posted revenues of just over $3 billion In the last annual report which was FY 2021, the company posted revenues of $4.6 billion. This is a CAGR of 4.4%. Interestingly enough it follows a similar trend to SWK
Stable and growing bottom line? Over the same period, Net income has grown from $306 million to $820 million. Not the same level of growth as SWK, however it was a lot more consistent. The company have also been back shares regularly in that timeframe also.
Stable and growing cash flows? Free Cash flow is also more consistent than their competitor. In FY2012 FCF was $249 million, while in FY2021 FCF was $896 million.
Ability to manage their current debt? In FY 2021 the company had a long term debt of $1433 million. However currently they have no long term debt on their balance sheet. . The company has a Debt/Equity ratio of 0.99%. The company also have an interest coverage (EBIT/Interest Expense) of 21.5x and Total Debt to EBITDA of 1x. A very nice balance sheet
Dividend growth of over 5% over the last 5 years
With a 25 dividend growth history and a 17.46% 5 year dividend growth rate, The company looks like it has a safer dividend than its competitor.
INTEL (Ticker: INTC)
The last company on my list this month is Intel. Those who listen to dividend talk frequently will know I bought this company during their Covid lows and somehow managed to sell them at their top. My feeling at the time was that they had a relatively strong balance sheet, Dividend looked safe and they look undervalued. The delay in the 7nm chip was a concern as they had a history of meeting deadlines.
Since I wrote my initial review, a lot has happened and Intel have been beaten down quite badly. My original article is pretty much out of date. So lets see if they should stay on my watchlist for now.
Does it have a stable and growing top Line? In FY 2012 the company posted revenues of just over $53 billion In the last annual report which was FY 2021, the company posted revenues of $79 billion. This is a CAGR of 4.1%.
Stable and growing bottom line? Over the same period its Net income grew from $11 billion to $19.8 billion which is a CAGR of 7.1% and helped by some share buybacks.
Stable and growing cash flows? We have seen free cashflow growth from $7.8 billion in FY2012 to nearly $21 billion in FY202. It was this growth in FCF that heled me in the belief that the dividend was safe. However we are in a completely different environment now and FCF in FY 2021 was $9.6 billion. This is nearly a 60% drop in one year and might tell you a little bit about why the share price got hammered.
Ability to manage their current debt ? In FY 2021 the company had a long term debt of $32.5 billion. This has been over the last ten years when the cost of credit was quiet low. The company has a Debt/Equity ratio of 35.13% and a long term Debt/Equity ratio of 35.4%. The company also have an interest coverage (EBIT/Interest Expense) of 37x and Total Debt to EBITDA of 1.4x.
Dividend growth of over 5% over the last 5 years
We rated this companies dividend safety as a 71/100 even with the current FCF decline. 22 years of growth and a 7.02% 5 year dividend growth rate. It actually doesn’t look too bad from these numbers.
Conclusion
All three companies will make it on to my watchlist this month as all three have passed my initial screenings. From the three, Snap-on look the most promising with an 81% dividend safety rating, an impressive 5 year dividend growth rate and a rock solid balance sheet. SWK are been talked about alot lately but I wasn’t as impressed by them to be honest.
Intel is in the middle of trying to turn itself around. But boy it does look cheap at current prices. The questions are, How safe is the dividend and an the company actually tur this company around?
The next step for me is to analyse each company in a little more dept. I’m not sure if I will do that in writing on the blog, or a video on you tube or enlist the help of EDGI and do it on the podcast, But the plan is to analyse each one of these companies in full over the next three weeks.
Hope you enjoyed this review, If you did, please consider joining my community by signing up to my mailing list where I will keep you up to date with my investments and provide more analysis like this.
Disclaimer - Engineer my Freedom is not a licensed or registered investment adviser or broker/dealer. We are not providing you with individual investment advice on this site. Please consult with a licensed investment professional before you invest your money. This site is for entertainment, informational, and educational use only. Any opinion expressed on the site here and elsewhere on the internet is not a form of investment advice provided to you. We use information, data, and sources in the articles we believe to be correct at the time of writing them, but there is no guarantee of their accuracy, completeness, timeliness, or correctness. We are not liable for any losses suffered by any party because of information published on this site or elsewhere on the internet. Past performance is not a guarantee of future performance. By reading this site or subscribing to it, you agree that you are solely responsible for making investment decisions in connection with your funds.
Originally Posted in Engineer My Freedom