When & Where to Invest

There is a bit of debate over which is better, a company that pays dividends or a company that returns value to its investors through stock repurchase programs. Personally, I favor the former. I prefer companies that pay dividends because I feel that I can rely on the dividend payments more than I can rely on a company’s word to buy back its own stock — in other words, show me the money!

The things I look for when screening for stocks are:

  1. Companies with good business models. Specifically, I look for companies with products and or services that people require or desire.
  2. Strong financials (i.e. companies that are earning money on a consistent basis).
  3. Companies that pay dividends on a consistent basis. I want to know that I will be receiving some type of return for my investments.
  4. Value. Specifically, I look for companies that are not overpriced and whose stock offers some upside potential.

This is a short and simple list, and I would like to be able to tell you that the process is simple — but it’s not. There is a fair amount of work involved, and today’s economy, and modern-day changes to securities trading, have made trading and investing much more challenging. Luckily, however, not all is lost. With a little bit of work, decent investments can be found.

The best way to demonstrate this fact is with an example.[private]

As can be see in the Key Statistics page to the left, Kellogg (K) is a stock that currently trades at a trailing twelve month (ttm) Price to Earnings Ratio (P/E) of 15.04, lower than the S&P 500 Index which is currently trading somewhere around 16. Both, the Profit and Operating Margins are very positive at 9.33% and 15.43% respectively. The Return on Equity (RoE) is a whopping 62.77%! The current Dividend Yield is a healthy 3.30%, and the Dividend Payout Ratio is a very comfortable 49.00%. Finally, it’s worth noting that Kellogg has a consistent dividend history (according to Yahoo! Finance) dating back to 1985.



 From a profitability standpoint we can see from the Cash Flow Statement that Kellogg took a hit in 2009 but recovered nicely in 2010. From 2010 to 2011 Cash In and Cash Equivalents rose 39.34%, which is a very positive sign.



On the income side, we can see that Kellogg has seen an increase in Net Income over the past three years (albeit a modest one from 2010 to 2011). So, not only is the company generating revenues, the people in charge of running the company are doing a good job of managing the expenses and turning those revenues into profits.

From a technical perspective, we can see that Kellogg has had a nice run over the years. Though, with stocks, nothing moves in a straight line up or down, Kellogg’s price action pretty much follows a steadily rising chart pattern that begins in the lower left and ends at the upper right of the chart. This chart offers a good representation of why Kellogg’s RoE is so high. Capital appreciation, coupled with dividend income (or dividend reinvestment) makes for a tidy little profit.

As an investment, I like Kellogg  for its defensive characteristics. Though its competition is fierce, Kellogg currently has a market share of approximately 33%, and it currently dominates the breakfast cereal market. In sum, Kellogg is a staple of the American consumer’s diet. It stands as a defensive investment in questionable economic times, and it offers a very respectful dividend yield of 3.30% (as of this writing).

Notes: Click on images to open pdf files and to enlarge charts.
Information on Kellogg taken from Yahoo! Finance & Investopedia.com.
Charts by optionsXpress.

Disclaimer: No positions in Kellogg (K) at the time of this writing.


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