Warren Buffett – Dividend Tycoon?

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I have been meaning to write a post about the influence of Warren Buffett on my quest to become a Dividend Tycoon since the annual Berkshire Hathaway meeting on the 30th April. It would be a dream to travel to Omaha and see Buffett in person, and to experience the meeting. However, it was a treat to watch the first ever webcast of this event from the comfort of my study. My first exposure to Buffett came when I picked up ‘Buffett: The Making of an American Capitalist‘ by Roger Lowenstein about 10 years ago. I was fascinated by his approach to investing, and I identified with much of his outlook in life. In many ways he is the ultimate Dividend Tycoon, but more on that later.

I started to see my own portfolio as my own form of Berkshire Hathaway, albeit on a miniscule scale, where I could invest for the long term, in businesses that would be around for decades, and be the capital allocator of any dividends received or new capital added. It taught me to think about stocks as businesses, not pieces of paper to be traded. I started to look at which businesses had an enduring business model, good brands and loyalty.

I have certainly made many mistakes along the way. Probably the biggest mistake I have made is impatience, see my post here: http://www.dividendtycoon.com/blog/2016/03/10/why-i-regret-being-impatient

I have not included all of them, but the following are some of the principles that I have learnt from Buffett, and which steered me in the direction of becoming a Dividend Tycoon:

Avoid excessive trading

Despite my impatience referred too, my two biggest positions have been held since 2010, and I hope to keep them for many years to come. I see these as my ‘Coca-Colas’, good cash generative businesses that can keep generating cash for the long term. I have sold stocks I should not have, but take comfort that Buffett bought 5% of the Walt Disney company in 1966 for $4 million and sold it for $6 million. Had he kept it this 5% would be worth at least $8 billion at present..

Invest for the long term

A statement made by Buffett on long term investing has always stuck with me. He said that if you owned an apartment block,  McDonald’s franchise and auto dealership in your town, why would you sell them? You would be more likely to hold onto them because the price is not quoted everyday like it is for stocks. I have tried to imitate this in my own way, see my article on How I bought a Burger King “Franchise” here: http://www.dividendtycoon.com/blog/2016/04/11/how-i-bought-a-burger-king-franchise/ I have held onto this stock, despite a lot of volatility and a falling stock price of late.

Reading

Buffett attributes much of his success to the fact that he reads a tremendous amount. He reads annual reports, newspapers, business journals, biographies and pretty much anything to do with businesses. To be a successful Dividend Tycoon I believe one needs to gain an edge over other investors and reading is one area where you may do so. You may find information about stocks which have not yet been discovered by the mainstream institutions, and an early investment in these stocks may pave the way to life changing profits or stocks that become dividend machines. Think about reading about the rise of Wal-Mart in the 1980’s, could that have been useful?

Frugality

The life blood of a Dividend Tycoon is capital to invest. Without capital to invest, all the best intentions in the world will come to nothing. Being frugal will help build the initial capital to invest. Buffett himself drove an old car for longer than he had too in order to accumulate capital. Do this long enough and eventually the dividends will pay for lifes luxuries. I have tried to be frugal where possible in order to save capital, and am starting to see some benefit in terms of passive income and dividends.

Conclusion

This post only touches on some of the lessons I have learnt from Warren Buffett. His teachings on specific stocks are for another day, his 1988 purchase of a large chunk of Coca-Cola is still a legendary purchase in my eyes and the one I remain most fascinated about. Berkshire receives over 500 million dollars per year in dividends on this one investment, so yes he is a Dividend Tycoon! (He really loves receiving those large checks from Coca-Cola every quarter)

I will in future come back to Warren Buffett and Berkshire Hathaway, but this post is just to pay tribute to him for some of the inspiration he has provided on my own journey towards becoming a Dividend Tycoon.

Further Reading: The Snowball (Highly recommended)

 

Starbucks: Better than a 1970’s Coca-Cola?

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An event a few weeks ago made me think about a stock that has been on my radar for a long time, but I have dismissed as being too expensive with a P/E ratio above 30, and having too low a dividend. The stock is Starbucks (SBUX) and the event was the opening of the first Starbucks in Johannesburg, South Africa. There were long queues, much fanfare, and it was a massive success. I believe it will be highly successful in South Africa.
I also like the fact that there has been a recent pullback in the stock price due to weaker than expected numbers. When it comes to stocks I like to think of myself as a business owner, and if I find a suitable investment I think in terms of performance over decades, not quarters.

Global coffee culture:

Now, why would the opening of one store, in a country beset with economic problems, make me sit up and think? After all, Starbucks has more than 23000 stores in around 67 countries. Quite frankly I believe the opportunity for Starbucks is massive. Other than a few Starbucks in places like Morocco and Egypt, Africa is virtually untapped. Just in Cape Town, where I live in South Africa, there are hundreds of coffee shops, and a big coffee culture. Detractors may say that the existing chains will limit the potential growth of Starbucks, but will they? I remember reading the excellent book called “Starbucked” by Taylor Clark, in which the author pointed out that when Starbucks entered a neighborhood, the existing coffee shops often increased their sales. Starbucks has the effect of encouraging a coffee culture, and then in time they become the main beneficiary of this, due to the fact that they are a “third place” away from work and home where people feel comfortable and where it is also seen as the place to be. I believe the quality of the coffee is good enough, but that it is not the deciding factor for most people in going to Starbucks.

Comparison to Coca-Cola in the 1970’s:

Now, when one thinks of the massive gains a stock like Coca-Cola has made since the 1970’s, it puts the Starbucks opportunity into some perspective. I grew up in South Africa in the 1970’s and Coca-Cola was already in every corner store, every school canteen, every gas station, and Coca-Cola stock still increased massively in value since then.

$_20 (18)
Coca-Cola has been part of the South African landscape for decades already.

So what is the opportunity for Starbucks when they are only just getting started in Africa? Not to mention the growth opportunities in places like China where stores are rapidly being rolled out, and the numerous other countries they have still to enter. I will not go into these as there have been quite a number of articles recently about the China effect, which while being huge, will not be the only driver of growth.

Another reason which made me think about the opportunity is the fact that I have a headache most mornings, if I do not get my caffeine fix. As the coffee culture grows around the world I will not be alone with this ailment, and Starbucks will certainly benefit from selling a product, that lets face it, is rather addictive.

Conclusion:

I do in fact think that the stock is expensive at around $56. I hate paying over 30 P/E for a stock, but perhaps sometimes one has to make an exception when you think the stock itself is an exception to the norm. I do not have the funds at present to pull the trigger, so I will be closely monitoring the price, if it sinks further and becomes a bargain I will reallocate capital to this opportunity. Had I been able to buy Coca-Cola in the 1970’s on a P/E as high as Starbucks, I would today certainly be very glad I was brave enough to have taken the chance and that I had the vision to see what lay ahead. Oh, and since I started writing this article, the second store has opened in Johannesburg..

*Not a recommendation to buy or sell. Please do your own research.

Dividend update – April 2016

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April 2016 Dividend Income: Nil

I have not purchased any international stocks yet. The main reason is that I have been using any cash flow I have to buy two stocks in South Africa. One is what I consider to be very similar to Shake Shak in the USA, but at a far lower valuation as the Shak Shak part is still a small part of the business; the other is a retailer that I hope is similar to an early Walmart, but on the African continent. I believe that allocating capital to these two ideas will reap greater long term benefits, and dividends, than any current ideas I have with US or UK stocks. (Please see further on about my thoughts on a separate site to let you know more about such stocks, should there be sufficient interest.)

I am somewhat frustrated by not having made a purchase of an international stock yet as I am itching to buy, but feel that I cannot let these opportunities pass, while the valuations are reasonable, and the valuations on my shortlist for international stocks are fairly stretched. I have recently read Howard Marks excellent book “The most important thing”, and what he really drums home is that an excellent business is not always a good investment. He is referring to the fact that popular investments are often over priced. I have tried to remember these words, and will only allocate capital where I see the best investment case.

All the same, I must confess that I  am very tempted to buy Starbucks, and intend to write an article about this company, while watching the price, which has become slightly cheaper recently on weaker results.

I have already written an article about one South African company which I have invested in, which has the rights to the Burger King franchise in SA. I think there was a fair amount of interest, and am thinking of a separate site which highlights stocks in South Africa, and the rest of Africa. Please let me know if you would have any interest in hearing about such stocks so that I can gauge the interest, as well as any other feedback you may have about this site.

 

 

Visiting your dividend machines

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When it comes to time spent on investments, the majority of my time is spent reading. Reading is varied and includes books about businesses I am interested in. In the last 3 months I have read books on Wal-Mart, Johnson and Johnson, Guiness (now Diageo), McDonald’s and Coca Cola. I also spend time reading articles about potential acquisitions, reading forums, reading other dividend investing sites etc. Sometimes it feels like nothing material is being achieved, but the knowledge is cumulative, and I try to learn something new every day. Then there are company filings and annual reports which are important for getting the hard facts, and trying to understand where the business is going, and what the prospects are going forward.

However, I can find reading gets a little tiring at times, and one can start to feel somewhat disconnected from the real world, only learning about the world through books and filings and press reports, and blogs..

For this reason, I particularly enjoy an area of research which is perhaps not as important, but still vital, the Dividend Tycoon’s equivalent of walking the factory floor. As a Dividend Tycoon you cannot afford to sit in your office all day, you need to get out and visit your businesses, and in fact, even your employees, because yes every person who works for a business in which you own stock is in fact an employee of yours, although please don’t try firing them if they give you bad service.. So what do i do?

Well, often it can be as simple as a trip to the local mall. The mall itself may be a part of a REIT i have some stock of. I have some stocks of a retailer, so how busy are they, are the shelves well stocked, do the employees look happy, is the service good? Have a closer look at the shelves, how much space is devoted to Unilever products, how much space does Procter and Gamble have, is there a new product that you have not heard about? Take note and google the manufacturer when you get home, perhaps they are a little known stock, for now.

Then perhaps take a break at a coffee shop which belongs to a company in which I own stock. In a friendly way ask your waiter if they are very busy,  do they enjoy their job? and finally, did your coffee taste good!

As i have alluded to in previous articles, I own stock in the company which has the rights to Burger King in South Africa. Now, fortunately I am a fan of the Whopper Burger, so going to visit every now and then and get the feel for the place is not a serious chore. I also go to new locations opened in my city to see how they are performing and how busy they are. I also take note for example that they sell Pepsi, not Coca-Cola, but i can file that away for later.

One does not need to ‘walk the factory floor’ every day or even every week, but it is important. It is so easy to forget when you receive a dividend that there is a real product or service behind it, working constantly to make a profit. You need to monitor your dividend sources and to perhaps get ideas for new sources of income. Every biography I read about great business leaders, whether it is Sam Walton or Ray Kroc or whoever, they all made a lot of time to visit stores, talk to employees, and get the feel for the business. As responsible Dividend Tycoon’s, I feel we should do the same.

It is Friday, so I just wish I had stock in Altria or Inbev, so that I could test their beer out. Will have to work on that! Have a great weekend, and perhaps let me know what you do to monitor your dividend machines?

 

 

 

 

 

 

Shake Shack vs McDonald’s

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I have been doing some research on stocks in the restaurant business, primarily a restaurant group in South Africa that has a new chain of restaurants similar to Shake Shack (the US custom made burger chain stock, which had a very successful IPO). While I am very excited about the prospects of this particular stock, the aim of this post is not to discuss that. What my research caused me to think about, was what the quickest route to becoming a Dividend Tycoon is?

This was also prompted by reading a few books on Coca-Cola and understanding what would have happened had you got in on the ground floor of that company. Even buying the stock 40 years after the stock went public, when it already blanketed a large part of the world, would have made you incredibly wealthy had you bought a fair amount and held it for 25 years. This led me to think about the prospects for Shake Shack which is relatively small still, but could have the potential to be vastly bigger in time to come, perhaps also spreading to most countries in the world. It is very popular and has a loyal following. The problem, dividends will take a while to flow. McDonald’s on the other hand has a proven model and the dividends grow each year. The problem, McDonald’s is mature and is already in most countries, hence future growth will be slower. However, I do believe that if one buys McDonald’s at a reasonable valuation, it could be a cornerstone of a Dividend Tycoon portfolio, you are essentially a part owner of over 35000 restaurants around the world.

So the dilemma to me is do I buy the potential next Coca-Cola or Starbucks, or do I stick to the slow and steady stock? Well for me I am not prepared to pay very high valuations (over 30 P/E), or for stocks not making a profit yet, no matter what the potential may be. A key to becoming a Dividend Tycoon is to not lose money, and should the company not live up to expectations, this is what may happen.

My approach to this particular sector, is to look for stocks which have been around a while, that are on reasonable valuations, that pay a dividend, but still have a growth kicker left. An example of this would be a restaurant group that starts a new line of business in a growth area, while still harvesting the cash flows of the original business. I believe I have found such a company in South Africa, but a good example would have been McDonald’s, which used to own 90% of Chipotle Mexican Grill. Now, they sold their stake in Chipotle in 2006 for $1.5bn dollars, and today Chipotle has a market value of $14bn, so the sale has been deemed by most to be a big mistake, as Chipotle has gone on to great success. The key though is to look for other stocks which have quietly gone about exploring growth avenues, while keeping the original cash cow intact. McDonald’s invested in Chipotle when it had less than 20 locations, and built it up to over 500.

What I am trying to say is that there is a difference to being a Dividend Investor (and there are countless sites which can help you on that path) and being a Dividend Tycoon. Becoming a Dividend Tycoon requires a bit more work, a bit more research, a bit more digging into filings and presentations and reading company reports. But, should you find a gem, which multiplies like a Starbucks over 20 years, you will be certainly glad you did.

*Please note that I am not an investment adviser and do not recommend or advise against any stocks mentioned, please do your own research.

Recommended reading:

 

 

How I bought a Burger King “franchise”

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I have stated a few times on this site, that in order to become a Dividend Tycoon, it helps immensely to think like a business owner. Trading stocks as pieces of paper may make you money in the short term and if an opportunity presents itself I still do this in order to generate income. However, the really big money, and the easier money in my opinion, comes from buying businesses, good businesses, and holding them for the long term. These businesses can eventually shower you with dividends. Think Coca-Cola, Unilever, Pepsico and Procter and Gamble.

I recently wrote an article for a South African publication about how I bought a Burger King “franchise”. I wish to share that article with you because it explains what i mean by thinking like a business owner. The company which has the license for Burger King, as well as interests in a casino and other gaming assets in South Africa, is called Grand Parade Investments, and has been a good investment for me. The point of my article though is not to get you to go out and buy stocks in this business, you need to do your own investigation on that, and you will need to decide whether you want exposure to a developing economy, but to help you to think of stocks as businesses rather than pieces of paper.

Please note that the article has very minor adjustments to cater for readers outside of South Africa.

I hope you enjoy the article:

How i bought a Burger King “franchise” in South Africa

If you could buy any franchise in South Africa, which one would it be? Listening to people one often hears that “KFC is a goldmine”, but you cant buy them anymore in SA. They also say McDonald’s would be good, but they do not have the R5m (US$340,000) plus to buy a franchise, if you can. Well in my view a Burger King franchise will in time be just as good as these. The only problem is that they are not for sale in SA, not yet anyway, and when they are you are probably looking at not less than R5m (US$340,000).

Burger King1
The first Burger King in South Africa in 2013. Now there are over 60, and growing.

The solution, a share of Grand Parade Investments (GPI). GPI owns 91.1% of Burger King in SA, so as a stockholder you effectively are the master franchisor, you get a bit of the profit from each and every store (close to 60 at last count). GPI expects Burger King to be profitable by the 2016 year-end after making initial losses in the start up phase. Being a part owner of all the stores also diversifies your risk from owning one store.

Buying a stock of GPI also gives you a share of GrandWest casino and its LPM slots business. GrandWest casino will be the subject of another article, but lets just say for now the cash flows from these assets are busy expanding your Burger King empire as we speak, or about to come your way as a dividend.

Of course in the last few months it has been announced that GPI has the rights to Dunkin Donuts and Baskin-Robbins in SA, so as a GPI shareholder your empire is growing. GPI also has a 10% stake in restaurant group Spur, so whenever you tuck into a Spur burger or a Panarottis pizza, you are adding to GPI’s profit.

dunkin1
I will soon also be a Dunkin Donuts “franchisee”.

To me, investing in stocks should not be complicated, I do not want to study actuarial tables to try and understand the balance sheet of an insurance company, or guess how much platinum the Chinese will want in 2020 before investing in a mining share. It amazes me though that so many people will see the queues at Burger King, the popularity of Spur since 1967, and never think how they could get a piece of the action. You should do your own homework, but I believe that in GPI you are buying quality assets, in a business that is easy to understand, at a price that currently looks attractive. My passion is to make people understand that as a stockholder, you are the owner of these businesses.

So maybe this should be the year you finally start your own business, perhaps a few food franchises would not be a bad place to start?

*Not a recommendation to buy, stocks can be risky. More a way to think about stocks. I currently own shares in Grand Parade Investments.

 

Why dividends always beat a salary

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I had a small taste of what it would like to be a fully fledged Dividend Tycoon recently. My Mother, who lives in England, came to visit me in Cape Town for three weeks. It was a special time for me as she has not been here for over 10 years, and it is not always easy to go there. My girlfriend also had some leave so we were all able to take a holiday together within the three weeks.

Me on holiday
Me on holiday

During the three weeks my Mother was here I did not do very much work, mostly I kept up to date on my portfolio stocks and made some minor trades when the opportunity looked too good to pass. I always kept up with my reading however, as this is a crucial part of becoming a better investor. This enabled me to spend a lot of time going for walks, swimming in the sea, taking drives, going for coffee and going away for a few days. Now had I been earning a salary I probably not have been able to get the leave, and certainly would not have had nearly as much time to do these things while my Mother was here. I would most likely have come home tired and late from my job.

Now, do not get me wrong, I have to work especially hard this month to make up for the time off, I am not completely independent, but I did have some dividends come in from my South African stocks which meant I had a cushion to pay the necessities, and some savings covered the rest. The point is, that those dividends were the key to me being able to take the time off, and I did not have to sit in an office all day so that I would receive my salary at month end.

In other words, I was not working, but my stocks were. I had people making and serving burgers at Burger King on my behalf (through the company that has the South African license for Burger King), I had people running a hotel on my behalf (through a small cap hotel group I have stocks in). I did not have to do any of the work involved in these and other businesses, but as a stock holder I am entitled to my share of the income, and receive part of that as a dividend.

Burger King staff at a new branch in Cape Town
Burger King staff at a new branch in Cape Town

I will write a future post on some of these businesses as I believe some are world class despite being based in a developing country.

So this is why I say I had a taste of being a fully fledged Dividend Tycoon, and it does feel great. It has made me more motivated than ever to be able to not worry where the next bit of income is going to come from. I still rely to some extent on short term trading opportunities in order to generate income, but I am very focused on building a portfolio of dividend paying stocks which will work full time for me. I have been focused on this for some time in South Africa and have made good progress, but the aim of this site is to obtain this level of freedom with international stocks, that journey has only just begun though. What I have learnt over the last few weeks however, is that having time to spend as you wish, with the people you want to spend time with, is priceless and worth striving for.

Dividend update – March 2016

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March 2016 Dividend Income: Nil

I do not have any dividend income from international stocks to report. As I said in the section of the site about myself, I expected a slow start. On the positive side, I am expecting some good cash flow soon, as my largest holding in South Africa is due to declare a dividend, hopefully.

There are a few reasons for the slow start. There is the current issue facing any investor from an emerging market economy, a weak currency. South Africa, like Brazil and Russia, has experienced a sharp depreciation in the value of the currency with which I earn. This can be due to issues as random as the country’s credit rating, over which one has no control. This has been quite scary at times, and added to that the political risk which has increased as a result, has been one of the reasons which made me want to become a Dividend Tycoon with international stocks.

However, one of the keys of investment success is not too rush into an investment due to fear, or to sell when there is blood on the floor. Currently there is blood on the floor when it comes to the South African rand, the Brazilian real or the Russian ruble, and converting these currencies into dollars or pounds right now may be a classic investment mistake. So, in short there is no rush right now. However, one should also not try to time the markets too much, and I am determined as ever to start on this road, so watch this space in the coming (perhaps a few) months. I am warming up and ready to go. I am increasing my knowledge on international stocks, I am currently reading a book on Wal-Mart in fact, and i have some stocks in mind. I cannot wait to deploy some capital into these stocks!

Please bear with me for now, or let me know about any suggestions or comments you may have.

 

 

 

 

Lessons from Johnson & Johnson

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I came across a book in my local library a few weeks ago, called Johnson vs Johnson. I have been fairly busy, so am only about a quarter of the way through it, and the book is more about the sad saga of battle between family members contesting the will of one of the second generation Johnsons, and the sometimes blighted lives of the children who inherited stock in the company. The book is fairly old now too, it was published in 1987.

However, the idea for an article came to me very early on in the book, as I read some amazing facts about the stock, even though the book is almost 30 years old, and the stock has in that time multiplied by about 30 times the price it was back then (split adjusted), and a dividend which is approaching the then price of the stock. The amazing thing is that if I had read the book back in 1987 I may have thought that the growth in the stock was fantastic, but surely it must come to an end soon, given such an incredible return.

So what did I read? “Seward Johnson was a second-generation inheritor. In order to accumulate his vast fortune, all he had to do was hold on to the stock in Johnson & Johnson bequeathed to him by his father and let his brother run the show.” This to me was very powerful in its relevance to becoming a Dividend Tycoon, because you could quite easily replace his brother with the current board of directors or employees, the key point is you do not have to do any work yourself, you can sit back after making the investment and enjoy the growth and subsequent dividends. However, what I read next was even more powerful. “In 1944 Seward Johnson’s stockholdings were worth approximately $9 million. Today those same holdings would be worth approximately $2 billion.” This was in 1987! Imagine what they would have been worth today, and all he had to do was hold on to the stock.

Now you may say he was lucky because nobody knew in 1944 where the stock would go, but if you had bought the stock in 1987 after watching this success over the previous 43 years, you would have a Johnson & Johnson dividend machine by now, it was hardly a secret success story in 1987.

Now, I have only just read part of this book, and have not analysed Johnson & Johnson in detail yet (I plan to though!), but the key point for me is that this is why it is great to be a Dividend Tycoon, and to hold stocks that are consistently profitable, and raise their dividends every year like clockwork, you are almost guaranteed a great result. It is not even hard to find them, it did not take me long to look around my house until I found a Johnson & Johnson product.

Now please excuse me as I go and look through the bathroom cabinet and kitchen cupboards for some other ideas for becoming a Dividend Tycoon.

 

 

 

 

 

 

Why I regret being impatient

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I believe one of the most important skills one has too learn in order to become a Dividend Tycoon is patience. The act of being patient can result in a higher level of initial income when acquiring a business, whereas impatience may lead to you paying a high price for a business and getting little initial income.

There is no need to rush, as becoming a Dividend Tycoon will in most cases take several years anyway, so why rush into buying a stock at any price. There are many great businesses such as Johnson & Johnson or Unilever, which are always tempting to buy, whatever the price, because you see their products in your house and think you want to own them, and you probably should. But there is a time and place for everything and sometimes it pays to sit on your hands. Sometimes cash is king.

I felt this acutely when the markets took a big dip recently, and even more during the 2008/2009 financial crisis. Wonderful companies being sold off cheaply, but I did not have any cash to participate in the feast. I could have turbo-charged my Dividend income and moved more quickly to becoming a Dividend Tycoon, so it was painful to watch these opportunities slip away. Charlie Munger has said that inactivity is the key, and waiting for a fat pitch, but then loading up.

I would be further ahead on the road to financial independence if I was more patient, but have resolved to not rush into buying stocks anymore, and too keep cash aside for those once in a while market crashes.

This site is not only about what one needs to do to become a Dividend Tycoon, but also about what one needs to not do, and being impatient is not good on your path to becoming a Dividend Tycoon.

Happy waiting!