August 2009 Updates

• Added an input field (Cell J12) to enter “Years of consecutive dividend increases”
• Modified Cell B48 to point to the Annual NPV of MMA Differential, which is a more correct value than the cumulative that was previously used.
• Updated the default MMA Yield to 3.90%
• The NPV of MMA Differential target in cell C48 now calculates based on “Years of consecutive dividend increases” input in cell J12.

The 3.90% rate is an average of the last two years highest ending MMA rate that I held. The rate will fluctuate +/- 0.5% as MMA rates change. In addition, I will continue to compare the rate to The 20-Year Treasury Yield. On August 1st, this rate was 4.40%; however, it has continued to drop since then. I will monitor the rate and adjust accordingly in the future.

New Methodology

Years of consecutive dividend increases: Enter here the number of consecutive years the company has increased its dividend. This input will calculated the target NPV of MMA Differential below.

NPV of MMA Differential: This is the net present value of the MMA Differential calculated in the projected information section above for each of the scenarios. The minimum acceptable level (target) for the annual scenario in column C is calculated based on the Years of consecutive dividend increases entered above. This calculation now uses the Annual NPV of MMA Differential, which is a more correct value than the cumulative amount that was previously used.

The examples in Pre-Screening Dividend Stocks – Part II have been updated. The model is free for your personal use. As always, if you run across any bugs or glitches, please be sure to let me know.

Disclaimer
This model is for illustrative and educational purposes only. The author and Dividends4Life makes no claims or assertions as to the model’s accuracy, completeness, appropriateness of use, or any other claim or assertion. You are responsible for determining if the models calculations are correct and appropriate for whatever you choose to use the model for.

Normal Year-End Updates

• Changed year from 2008 to 2009
• Updated the default MMA Yield to 3.54%

The 3.54% rate is an average of the last two years highest ending MMA rate that I held. The rate will fluctuate +/- 0.5% as MMA rates change. In addition, I will continue to compare the rate to The 20-Year Treasury Yield. On December 1st, this rate was 3.51%; however, it has continued to drop since then. I will monitor the rate and adjust accordingly in the future.

Projected Information Section
This section was significantly reworked and expanded. Recently, I noticed a logic flaw in the NPV of MMA Differential calculation. The NPV was being calculated on a series of differences between the cumulative values of the stock and MMA. I added an annual calculation (row 23), below the errant calculation (row 22), which I left and continue to calculate a NPV of. The errant calculation generally followed the correct annual calculation and when calculating a NPV allowed for a wider range. The new correct NPV is found in cell B50. In an effort to calibrate the correct calculation, I will watch both during 2009.

Previous models only included the No Price Appreciation calculation. In his version, I added two other alternatives: Price Appreciation = Dividend Growth and Dividends/Interest Not Reinvested. Each are described below:

No Price Appreciation
This model assumes that the share price remains constant, thus the dividend yield grows each year based on the dividend growth rate. It also assumes all dividends and interest are reinvested.

Price Appreciation = Dividend Growth
This model assumes that the share price grows at the dividend growth rate, thus the dividend yield remains constant. It also assumes all dividends and interest are reinvested.

Dividends/Interest Not Reinvested
This model is identical to the No Price Appreciation model, except the dividends and interest are not reinvested.

The NPV of MMA Differential and the Sum of MMA Differential for each of the above calculations is found on rows 50 and 51.

Of the various models, I think that the Price Appreciation = Dividend Growth model provides the most realist results, but I generally do not use it because it includes capital growth, which is not accessible unless you sell the security. This runs counter to a income-based buy-and-hold philosophy.

If you run across any bugs or glitches, please be sure to let me know.

Disclaimer
This model is for illustrative and educational purposes only. The author and Dividends4Life makes no claims or assertions as to the model’s accuracy, completeness, appropriateness of use, or any other claim or assertion. You should not rely on this model or base any financial decisions on it.

In January 2008 I released my Dividend Stock Pre-Screen Model. Since then I’ve modified the model several times to add additional functionality, correct bugs and update annual information such as the default MMA Yield. The updated model is linked on the Excel Models page as D4L-PreScreen.xls.

The file contains the following tabs:

• Screen: Is where you enter information about a stock and a recommendation is generated.
• Database: Over time I keep “rediscovering” the same stocks. The database tab allows me to keep up with what stocks I have previously screened, the results of the screen and when the stock is eligible to be screened again.
• Revisions: History of changes.

The Screen tab is divided the following five sections:

I. Input: All cells requiring your input are shaded yellow. They include:

• Symbol: Enter the stock’s symbol here.
• Year: Enter the last year in which annual dividend data is available.
• Current Yield: Enter the stock’s dividend yield.
• Calculated Price: The calculated price based on Current Yield and Current Dividend [NOT AN INPUT]
• Calc. Div. Growth: This field calculates the stock’s dividend growth [NOT AN INPUT]
• MMA Yield: Enter estimated average money market account yield for the next 20 years.
• Max Div. Growth: Enter here the cap (maximum) for Calc. Div. Growth.
• Override Div. Gro: Enter here an override rate for Calc. Div. Growth.
• Annual Dividend/Share: Enter here historic annual dividend information.
• Years of consecutive dividend increases: Enter here the number of consecutive years the company has increased its dividend. This input will calculated the NPV of MMA Differential below.

II. Projected Information: This section calculates 20 years of balances for two hypothetical $1,000 investments; one in a MMA earning the yield input above, and another in the stock entered above.

Both the dividends and interest are reinvested. The MMA differential is the difference between the two investments. Proj. Yield on Cost is the projected yield on cost based on the stock’s dividend growing at Calc. Div. Growth or Override Div. Gro. above and the stock’s original cost.

Three scenarios are considered:

1. No Price Appreciation This model assumes that the share price remains constant, thus the dividend yield grows each year based on the dividend growth rate. It also assumes all dividends and interest are reinvested.
2. Price Appreciation = Dividend Growth
   This model assumes that the share price grows at the dividend growth rate, thus the dividend yield remains constant. It also assumes all dividends and interest are reinvested.
3. Dividends/Interest Not Reinvested
   This model is identical to the No Price Appreciation model, except the dividends and interest are not reinvested.
   

Of the various models, I think that the Price Appreciation = Dividend Growth model provides the most realist results, but I generally do not use it because it includes capital growth, which is not accessible unless you sell the security. This runs counter to a income-based buy-and-hold philosophy.

III. Interpretative Analysis: Calculates several relevant pieces of information and allows you to set a minimum threshold on certain items. The items calculated are:

• NPV of MMA Differential: This is the net present value of the MMA Differential calculated in the projected information section above for each of the scenarios and for the cumulative scenario. The minimum acceptable level for the annual scenario in column C is calculated based on the Years of consecutive dividend increases entered above. If you liked the old way this was calculated you can edit the formula in column B and remove “*0+B50″ at the end.
• Sum of MMA Differential: This is a simple sum of the annual values calculated in the projected information section above for each of the scenarios.
• Metrics 1-5: Are specifically defined within the worksheet. Metrics 2 and 3 allow you to enter the minimum acceptable level in column C.

IV. Recommended Action: Based on the information entered above this section provides you with one of two possible recommendations 1.) This security should not be purchased or 2.) This security is worthy of additional consideration. Additional commentary is provided in this section along with a recommend year for reevaluation if the recommendation is to not purchase.

V. Disclaimer: Too many attorneys with not enough work for my liking….

The Database tab allows you to keep up with what stocks have been pre-screened along with the results of the of the screening and the recommended year for the next screening. I have it divided into three sections:

1. Stocks To Consider (green): These are stocks that you currently own or would consider buying in the future.
2. Reconsider Later (gray): These are stocks that have previously failed the pre-screen. They are listed here to let you know that they have been screened before and when they are due to be screened again.
3. Never Consider (red): If you are opposed to stock and know you will never consider owning it, listing it in this section ensures it will always be rejected.

For each stock there are three fields of information:

1. The stock symbol (column A): The ticker symbol is used to look up information that is stored on the Database tab, but is displayed on the Screen tab.
2. Flag (column B): A “X” in this column will flag the stock as rejected and display the comment on the Screen tab in cell D7.
3. Comment: Whatever you want to say about the stock. As noted above, the comment is displayed on the Screen tab in cell D7 when there is an “X” in the Flag field.

Disclaimer: This model is for illustrative and educational purposes only. The author and Dividends4Life makes no claims or assertions as to the model’s accuracy, completeness, appropriateness of use, or any other claim or assertion. You should not rely on this model or base any financial decisions on it.

The examples in Part III have been updated to match the changes made in the model. These examples will walk you through several different situations and point out things to look for.

(Photo: Steve Woods)

As with most investment analytical work, I added a new tab in one of my two massive spreadsheets and set it up so that I can update it by cutting-and-pasting information from Morningstar into my spreadsheet. From start to finish, the whole updating process can be completed in about 20 minutes.

After that post, I received a comment requesting that I make this spreadsheet available. So once again I pulled out my surgical knife and extracted a template that can be used as a starting point for reviewing your asset allocation across all your holdings. It is linked on the tools page as D4L-Asset-Allocaton.xls.

As with all the models I post, I assume that you have a working knowledge of Excel. Once you open the above-linked model you will note that I have stripped it down to Income ETFs, Income Stocks and Other. This will provide sufficient examples for you to expand the model to meet your specific needs considering the various types of available investments. As you will note, for each type of investments there is a $ and a % column. The dollars are accumulated then the percentages are calculated based on the dollars. You will also note that above the column headings you can expand and collapse the dollar columns either one at a time by press [+] or [-] or all with them by pressing the [1] or [2] buttons. To begin with, press the [2] button to expand all the columns.

Income Stocks
Let’s look at the income stocks first since they are the easiest to work with. This section begins at cell A88. Column A is the ticker symbol; col. B is the capitalization Large, Mid or Small; col. C is the country of origin; col. D is the current market value. As noted in last week’s article, I use Morningstar for all my investments to ensure classification consistency. Let’s take a look at ACAS as an example.

The above link to ACAS will take you to the company’s snapshot. Look at the Key Stats next to the performance graph. The line Morningstar Style Box will show the stock capitalization. In the case of ACAS it is listed as Mid Value so it is a “Mid-Cap” stock as entered in cell B90. It is important to use the capitalization terms exactly as I have them in the spreadsheet (Small-Cap, Mid-Cap and Large-Cap) since I use a sumif() formula to summarize the various capitalizations. This calculation occurs around cell G114.

Back to Moriningstar (still in Key Stats), move down a couple of lines to Sector. Here you will see ACAS is listed as “Financial Services”, which is entered into cell D90. Again it is important to use the tags (e.g. Financial Services) just as they are in the model since I once again use a sumif() formula to add them up. This calculation occurs around cell H90.

In col. C is the country of origin. This can be determined by clocking on the Company Profile tab above the performance graph. For ACAS, Bethesda, MD would mean it is a “U.S.” company. This is calculated at cell N89. For those outside the U.S. you can change the formula in column N to list your country as “domestic”.

To view another company go to the top left and enter a new symbol in the Quote box. Individual stocks held in your IRA or other investment type would work identical to what was described above.

Mutual Funds and ETFs
Now let’s look at mutual funds and ETFs. This is where the potential problem could have been. Since these type of investments are made up of multiple stocks across various sectors, this is where Morningstar really steps up and helps us through the process. Let’s look at the ETF SDY as an example.

Note I use Internet Explorer instead of FireFox for the next section since IE does a much better job interacting with Excel via copying and pasting.

Go down below the Premium Features section to the Portfolio Analysis section. To the right you will see Sector Breakdown. Starting with the number to the right of “Utilities”, use your mouse to highlight the table up through the icon to the left of “Information”. Right click, copy, then paste into Excel at cell A134. Beginning at cell B127 you can see where the value associated with SDY is allocated across the various sectors. Repeat the process for your various other investments moving to the right. Everything is totaled up in beginning in cell Q157. A couple of items of note, AOD is a relatively new fund and when I first put this together it did not have a sector breakdown so I listed it as unclassified. Also, VNQ (Vanguard’s Real Estate REIT) did not have a sector box so I set up a separate sector for Real Estate.

The capitalization and origin classifications work identical to those in the Income Stock section above. Obviously this is not a plug-and-play template. It will take some work on your part to customize it to meet your specific needs.

I hope you find this template as useful as I have.

Related Articles

• Time is My Friend
• Share Buybacks – Do they really help?
• Fishing in the Bathtub
• When Is A Lot of Cash A Bad Thing?
• Dynamic Dividend Investing

In the article The Winning Score – Part 2 of 2, I extracted from my two massive financial spreadsheets a sample model [it is linked on the tools page as D4L-Portfolio.xls] from the portfolio section. This model contains several elements worthy of discussion. Today we will focus the Yield On Cost (YOC) calculation.

YOC is tracked in columns Q and R. Rows 1, 2 and 3 provide a color-coded key for your reference. Cell Q11 contains the investment’s most recent yield, R11 provides a weighted-average YOC for all the shares of the investment held.

Moving down one row, cell Q12 displays what the BAC’s yield was on 4/22/2005, when I purchased 34 shares. In this case it was 4.01%, based on a quarterly dividend of $0.45, as shown in cell R13. Since I purchased BAC on 4/22/2005, the quarterly dividend has increased to $0.64 per share. Cell R12 contains the YOC for the 4/22/2005 purchase. You can see the dramatic effect of the three dividend increases, taking the initial yield of 4.01% to a 5.71% YOC.

In cells Q14, Q20, and Q27, you can see BAC has had some impressive dividend increases of 11.11%, 12.00% and 14.29%, respectively. On the date of each subsequent purchase of BAC, the per share price and current yield (col. Q) were higher than my initial purchase. This means the dividend per share was rising faster than the share price – From 04/22/2005 to 07/05/2007 the share price increased 10.8% while the dividend increased 42.2%.

The date in cell A1 has been hard-coded to =DATE(2008,2,4). If you decide to use some variation of this model, you will want to change the formula in cell A1 to =NOW(). This will populate the cell with the current date, which in turn will constantly update the YTD and LTD IRR calculations.

As always, I hope you find this model entertaining and useful.

Disclaimer: This model is for illustrative and educational purposes only. The author and Dividends4Life makes no claims or assertions as to the model’s accuracy, completeness, appropriateness of use, or any other claim or assertion. You should not rely on this model or base any financial decisions on it.

Related Articles:

• Yield on Cost: Measuring for Success
• Investing Goals
• The Winning Score – Part 2 of 2
• Share Buybacks – Do they really help?
• Dividends4Life Toolbox

Price:
11-21-2007: $67.75
02-11-2008: $62.03 (Good!)

P/E:
11-21-2007: 19
02-11-2008: 17.3 (Good!)

Yield:
11-21-2007: 2.48%
02-11-2008: 2.64% (Good!)

Avg. P/E Price:
11-21-2007: Unfavorable
02-11-2008: Favaorable (Good!)

Years to MMA:
11-21-2007: 14
02-11-2008: 11 (still one more than I prefer as a maximum, by 1 year)

NPV MMA Diff:
11-21-2007: $471
02-11-2008: $2,517 (More than 5 times the November 21st amount)

Since new dividend data was available, I used my model D4L-PreScreen.xls to update some of the above analysis. I input the following data:

Symbol: JNJ
Year: 2007
Current Yield: 2.64%
Calc. Div. Growth: 11.0%
MMA Yield: 4.86%
Max Div. Growth: 20.0%
Override Div. Gro: 0.0%

Dividends:
2007 2006 2005 2004 2003 2002 2001 2000 1999 1998 1997
1.62 1.46 1.28 1.10 0.93 0.80 0.70 0.62 0.55 0.49 0.43

The calculated NPV MMA Diff only changed slightly. I determined that it would take a dividend growth rate of 11.7% to get the Years to MMA down to 10 (the maximum I like to see). Since I use a conservative method of estimating the dividend growth rate, a 11.7% is not unrealistic given the 11-year average is 14.0%. Using the Override Div. Gro. field I entered 14.0% to see what that did to the NPV MMA Diff – it increased to $8,132. I entered 5,000 in cell C25 then pressed the button in D12 to backsolved for the growth rate needed to give me a NPV MMA Diff of $5,000. It was 12.6% which is not unreasonable.

My conclusion: Buy. Like General Electric Company (GE), JNJ is one of those boring predictable companies that finds its way into most every dividend investor’s portfolio. JNJ is a well-managed, well-run company and has been that way for decades. I like owning companies like JNJ and GE because it offsets some of my more riskier investments, but I will not buy in at just any price. I purchased a small block of JNJ and will continue to watch it for opportunities to add to my position.

Full Disclosure: At the time of this writing, I proudly own shares of JNJ.

Tomorrow: What did I sell to buy JNJ and why?

Related Articles:

• Stock Analysis: Johnson & Johnson (JNJ)
• It Was An Odd Odyssey
• General Electric Company (GE)
• Citigroup Inc. (C)
• Sometimes Things Aren’t As They Appear
• More Stock Analyses

I have extracted out of my two massive financial spreadsheets a sample model [D4L-Portfolio.xls] from the portfolio section. This model contains several elements worthy of discussion, but today we will focus on how to calculate an IRR for an individual stock investment.

First some general notes. At the top of the Portfolio tab is a summary section were I summarize each investment on a single line. Within the summary section, the inputs are in columns H and L. Specifically for BAC the most recent price is entered in cell I7 and the annual dividend is entered in cell L7. In my spreadsheet these are linked to another tab where I cut and paste information from my MSN portfolio.

Go to cell Q31 if there is a #VALUE! or #NAME? error you likely do not have the the Analysis ToolPak add-in activated. For instructions on activating this add-in, please refer to the Analysis Toolpak Help tab within the spreadsheet. Once the add-in is functioning, the value in cell Q31 will be 0.72%.

Pressing [F2] with the cell pointer in cell Q31 reveals the following formula:

=XIRR(P12:P31,O12:O31)

The XIRR function calculates an IRR with uneven cash flows and periods – kind of the way life happens. The syntax for XIRR() is as follows:

XIRR(Values,Dates,Guess[optional])

Values: A series of cash flows with additions (purchases) of the security shown as positive, and reductions (including dividends) shown as negatives.

Dates: The date of the cash flow using the Excel Date(year,month,day) function.

Guess: your best guess at what the answer will be. This is optional and meant to speed up the calculation.

Cell Q31 calculates the life-to-date (LTD) IRR, while cell U31 calculates the year-to-date (YTD) return. These calculated values are also shown in cells F7 and E7, respectively. To get a feel for what will happen as the share price changes go to cell I7 and enter some values:

• At $50 – YTD return = 601.45%; LTD Return = 7.79%
• At $40 – YTD return = -26.98%; LTD Return = -4.69%

Note that in cells Q16, Q22 and Q29 I hardcoded the LTD return at that point in time. In cells U16, U22 and U29 I hardcoded the YTD return at the end of each year prior to rolling to the new year. This allows me to go back and quickly review the performance of each of my securities.

I hardcoded the date in cell A1 to =DATE(2008,2,4). If you decide to use some variation of this model, you will want to change the formula in cell A1 to =NOW(). This will populate the cell with the current date, which in turn will constantly update the YTD and LTD IRR calculations. To see the effect of time on the IRR, edit A1 to =DATE(2008,12,4). All other things being equal, this drops the YTD return to 0.49% and the LTD return to 7.56%.

As always, I hope you find this model entertaining and useful.

Disclaimer: This model is for illustrative and educational purposes only. The author and Dividends4Life makes no claims or assertions as to the model’s accuracy, completeness, appropriateness of use, or any other claim or assertion. You should not rely on this model or base any financial decisions on it.

Related Articles:

• The Winning Score – Part 1 of 2
• Passing the Torch – Part 2 of 2
• Reaching Your 10-Year Investing Goal
• Pre-Screening Dividend Stocks – Part II
• Dividends4Life Toolbox

If winning isn’t everything, why do they keep score?
– Vince Lombardi

There is a lot of truth in that statement. We live in a highly competitive world that extends well beyond the sports field. Employers are competing for the best employees so they can better compete for your business. A better business then allows them to compete in the financial markets for your investing dollars. As investors we pit one investment against another when deciding what to add to our portfolio and it shouldn’t stop there. Once an investment makes it into your portfolio, it should continue to compete with other investments to keep its spot.

To compete you must keep score. One of the metrics that I use to score an individual stock’s performance is Internal Rate of Return (IRR). The IRR is the discount rate that equates the present value of an investment’s cash flow to its initial cost and subsequent investments and withdrawals. In simple terms, it is the interest rate you would need to earn to make the same money off of an interest bearing account assuming the same investment.

I have extracted out of my two massive financial spreadsheets a sample model from the portfolio tab that demonstrates how to calculate an IRR for an individual stock investment. Tomorrow I will post a link to the model and describe how to use it.

Related Articles:

• The Winning Score – Part 2 of 2
• Passing the Torch – Part 2 of 2
• Reaching Your 10-Year Investing Goal
• Pre-Screening Dividend Stocks – Part II
• Dividends4Life Toolbox

When questioned by Jill how this happened the father explained that the most important aspect of investing is not how much you contribute, but when you contribute it. Attached here [JackJill.xls] is the spreadsheet used to generate the schedule comparing Jack and Jill’s results.

If you want to compare how well you are doing versus Jack and Jill, find your age in column B, then on that same row enter the value of your equity investments in column K and finally enter the amount you expect to contribute each year in column J. The amounts in col J can be adjusted by years if you so desire.

After entering the above, cell K6 will display your total contributions while cell K5 will display your estimated balance at age 65. The assumed rate of return can be changed for all three in cell E4, or individually overridden in cells H4 and K4.

As always, I hope you find this model entertaining and useful.

Discussion items raised by my kids:
_____________________________
Q1: Wow, that’s neat. Are you saying I can skip college, work 10 years and save $5,000 a year, then I can kick back and do whatever I want for the rest of my life?

A1: No, in the story Jack had a financially difficult life (note references to meager earnings) since he did not go to college and adequately prepare himself to raise a family.
_____________________________
Q2: But if Jack remembered the money, he could have used it to have a better life.

A2: The power of compounding is tied to time. If Jack were to make withdrawals prior to his retirement, that would significantly reduce the final amount, and in some cases eliminate the entire balance.
_____________________________

Disclaimer: This model is for illustrative and educational purposes only. The author and Dividends4Life makes no claims or assertions as to the model’s accuracy, completeness, appropriateness of use, or any other claim or assertion. You should not rely on this model or base any financial decisions on it.

Related Articles:

• Passing the Torch – Part 1 of 2
• Reaching Your 10-Year Investing Goal
• Investing In What’s Important
• 5 Lessons Learned About Investing
• Dividends4Life Toolbox