The Intelligent Investor Top 10: Growth and Income.

The Intelligent Investor Top 10:

As a new addition to the Intelligent Investor Blog, I am adding a top ten stock holdings list. Updates and news on the top ten companies to own for the longer-term will be regularly and continually updated. As a measure of personal conviction, and for full-disclosure, I will personally have a position in each and every company on the list. 


The list will be for growth and income oriented investors who wish to generate above-average total returns through both capital appreciation and rising dividends. Questions and comments on the businesses, or the list as a whole, are both invited and appreciated as it forces investors, including myself, to defend and reinforce their ownership. As an intelligent investor, if you cannot present a rational and prudent reason for owning a business, SELL IT! 


Some positions in the list are for there for defensive reasons, while others are for growth. It is always important to possess a little bit of both. No matter how right we think we are, it is important to remember that even the Intelligent Investors can never be right 100 percent of the time.


THE INTELLIGENT INVESTOR PORTFOLIO:

1. I SHARES SHORT-TERM BOND ETF XSB
2. RIOCAN REAL ESTATE REI.UN
3. I SHARES S&P 500 ETF - CDN CURRENCY XSP
4. SUNCOR ENERGY SU
5. SHOPPERS DRUG MART SC
6. BANK OF MONTREAL BMO
7. GENERAL ELECTRIC GE
8. IMPERIAL OIL IMO
9. TMX GROUP X
10. JOHNSON AND JOHNSON JNJ

Other personal positions will be added to the list when, and if, they replace one of the Top 10 holdings.


Happy Investing : ) 

How to Select Dividend Paying Stocks for Your Portfolio.

How to select a quality dividend stock is a necessary skill for enterprising investors. There are a number of key characteristics to look for before investing in a dividend-paying company.

Firstly, the intelligent investor should begin by looking at company's that have strong brand names. These brand names keep customers coming back in good times and bad, and they provide a moat that keeps new competitors at bay. A strong brand name also provides the company with the ability to generate higher profit margins than its competitors for the same goods. 

The textbook example of a company that can generate healthy and steady profits due to its brand name is Coca-Cola (NYSE:KO). Coke's products are known worldwide and the company's ability to charge higher prices than its generic competitors, such as President's Choice, Cott, and RC Cola, is proof that the public perceives the brand itself as something worth shelling out money for. To be sure, Coke's operating margin (or profit generated on each dollar in revenue before taxes) is consistently about 25%! This means that after all expenses, the company nets 25 cents in profit from every dollar it takes in. That leaves a lot of room for error before the company would start losing money on its over-priced sugar water. 

Coke's Operating Margin. 

Another key characteristic to look for in a company is one that consistently raises its dividend. Coke, for instance, has raised the amount of money that it pays out to shareholders for 48 years in a row. That means that as a shareholder, you have gotten a raise every year for almost 5 decades! Not bad for essentially selling the same product over and over again. 

In order for a company to continually raise its dividend, it has to either be able to raise the price it charges for its products, sell its product to more customers, or reduce expenses. Ideally, price increases and higher sales would be great. When it comes to price increases, tobacco companies have been among the leaders throughout the years. Philip Morris International (NYSE:PM) sells cigarettes in international markets outside of North America. Almost every year, the company is able to raise prices and maintain its customer base. Cigarettes are what economists call an "inelastic" product, which means that customers are NOT very sensitive to increases in price. As the owner of a company, being able to raise prices is a good thing, especially if there is a steady or declining market for your product. 

If you are buying a company for its dividend payments it is important to ensure that the company is not giving its shareholders more than it can afford. Johnson & Johnson (NYSE:JNJ), for instance, has raised its dividend for almost 50 years in a row and it still generates far more income than it pays out. In 2010 the company paid out 1.93 per share in earnings, but it generated 4.70 in earnings. That leaves plenty of room for it to grow its dividends in the future. 

And most importantly, never over-pay for any business. If you are looking to generate a steady stream of income payments, look for healthy yields above current 10 year bond rates, otherwise owning the company might not be worth the extra risk. 

Provide Insurance to Other Investors: Generate Income Selling Put Options.

In a stock market environment with inflated prices, the intelligent investor must look for more innovative ways to generate income and increase their wealth.

One method often overlooked is the selling of what are called "put-options." Quite simply, a put option gives the buyer the right to sell a stock at a fixed price and at a fixed date in the future. For example, if John Smith owns shares of CIBC and the current price of his shares are $50, he can buy an option to sell those shares to someone else at $48 six months from now. Why would John do this? Perhaps John owns too much CIBC and wants to just have a little insurance in case the price declines too much. If the shares decline to $30 in six months, John will be very happy that he bought the insurance as he can now sell them to someone at $48. If, however, six months go by and CIBC is still selling at more than $48, John will simply keep his shares and not want to "exercise" his right to sell the shares at $48. His insurance will simply expire.

Of course, John must buy his insurance from someone, and this insurance costs money. Personally, I like to provide this type of insurance on stocks that I would like to own anyway. You could think of it like buying stocks on Priceline.com and getting paid to do it. For instance. If I want to buy CIBC at $48, but it is currently selling at $50, I have two options. I could simply wait until it falls to $48 and then buy it... or I could agree to buy them from John in six months at $48 should he choose to want to sell them, and for this agreement I collect a fee, called an "options premium." The size of this fee changes. The more the owner and myself are worried that the price of the stock might fall in the future, the larger this premium would be.

Now, if agreements like this had to be made on an individualized basis, it would be quite difficult. Thankfully, our modern market economy has what is called an "options market." In Canada, the market is in Montreal at the Montreal Options Exchange. http://www.m-x.ca/accueil_en.php. In the United States it is in Chicago at the Chicago Board Options Exchange. http://www.cboe.com/. The more well known global names will be listed in Chicago, with the domestic Canadian names listed in Montreal.

Now, the "caveat" to this is that you must actually have enough money in your investment account to buy the shares on the date agreed to should the buyer of the put option choose to "exercise," or sell them to you, at the agreed upon price. This seems obvious, but it is important to remember that you cannot simply take your insurance premium that you collected and forget about the contract. You must then provide the insurance that was paid for if it is needed.

This may sound complicated, but the strategy is really fairly simple once you get more comfortable with puts and "options" in general. In the future, I will discuss how money can be made utilizing "call" options. Or the right to buy something at a future date and at a fixed price.

As always, just e-mail me with any questions or concerns : )