#92 March Dividend Stock Purchase

My screen v3 returned quite a few stocks so I've picked a handful to look at more deeply.

I've chosen to narrow down this list by looking at the stocks with the:

1. highest average dividend growth over 5 years
2. highest current yield
3. longest period of dividend growth
1. I chose two here as there was little difference and one was quickly ruled out

~~~~~~~~~~~~~~~~

Stock #1 has the highest average dividend growth over the last 5 years. Bellway (BWY)

Why would I buy?

It ticks all my screening requirements, has a great average dividend growth over 5 years and the payout ratio remains particularly low. They've increased operating profit year on year for 5 years whilst increasing net assets. 0/8 brokers suggest a sell, 5 a buy.

What concerns or considerations do I have?

The dividend has been cut twice - in '08 and '09. Plus the more recent annual dividend was significantly lower than the previous 5 - pointing to the dividend growth wave slowing down.

Summary

The div was indeed cut, but at least it was maintained during a horrible time for companies in this sector. If indeed the dividend wave has been ridden it was still a double digit increase last year and with the current yield this company still meets my requirement of return on capital via dividends only within 18 years with a div growth as low as 4%.

~~~~~~~~~~~~~~~~~~~~~~~

Stock #2 has the highest yield @ 6.9% = Greene King (GNK)

Why would I buy?

It ticks all v3 screen requirements and has a very high current yield with decent dividend growth. Although they've only had 7 years consecutive dividend increases the two cuts in '09 and '10 were both small reductions (13% and 4%) compared to most other cuts I have seen which when the decision is taken to cut quite a chunk (40%+) is removed.

What concerns or considerations do I have?

Whilst revenue has increased year on year for the past five years, operating profit, profit before tax and EPS have all reduced in at least one of the 5 years.
Reading the HL research view  provides explanations for this. In a nutshell they are in an ever competitive market and are being driven down on price and up on investment which has resulted in the higher revenues but reductions in profits.

Summary

If the concerns about the competitive market were not there this would not be at the current yield.
The fluctuations in the profitability of the company need to be weighed up against the high yield.

~~~~~~~~~~~~~~~~~~~~~~

Stock #3 has longest unbroken years of increasing the dividend = Spectris (SXS)

Yield only 2.2%, ave growth over 5 years is 5%, which is outside of the timeframe (23-25 years instead of 18) for dividend return on capital I have been considering. Given this I won't be investigating any further for now.

~~~~~~~~~~~~~~~~~~~~~~

Stock #4 has the second longest continuous streak of raising dividends = RPC Group (RPC)

Why would I buy?

It ticks all the requires for my v3 stock screen and has 25 years of increasing dividends. Revenue, profits and net assets have all increased annually over the last 5 years, and 5/6 brokers recommend a buy, the other is a neutral.

What concerns or considerations do I have?

Yield at 3.6% is lower than the 4% target I had buy coupled with ave dividend growth of 18% over 5 years it easily fits within the return on capital via dividends only period.

*Update* However, I've just found out that the dividend history from DividendMax website is different to that on HL and the Telegraph. So then updating the dividend growth returns a an ave growth of 14%. However, this is based on one giant increase last year by 61% and the remaining 4 years grew at a rate of 3% which would bring it below my return threshold target.

~~~~~~~~~~~~~~~~~~~~~~~~~

Decision

I'm happy to invest in BWY & RPC.

Given the amount I've learnt and the updates to my stock screen, my initial purchase of SSE looks considerably more riskier than I initially envisaged. For that reason for this stock purchase I'm going to opt for the one which I deem less risky - RPC - I'm particularly impressed by the 20+ years of consecutive dividend increases.

However, I do like what I saw with BWY and expect this to be a contender in April.

Here's the purchase...

This adds £6.96 to my expected annual income, bringing it to a total of £22.36 expected in dividends each year.

#91 Bonus > Cash or Pension

So, although I don't know the exact figures yet it's been confirmed I will get an annual bonus shortly. Great news.

I was all set to receive this and immediately pay off the car loan.

However, this morning my company announced that it was providing the option to pay bonuses direct into our employee pensions.

It seems that this is a fairly common practice but not one I had been aware of in previous years.

The big news is that this would be Tax and National Insurance exempt.

Now my initial reaction, and that of the wife, was well it's still going to be better to have the cash now. But, as we're planning on paying off the car loan, I think we can be more objective and simply make this a financial decision.

~~~~~~~~~~~~~

My bonus is 20% of £70k salary, which is £14k.

After tax and NI this would be roughly £7k net to me.

So I'm in affect paying £7k to have this bonus as cash rather than invested into my pension.

About the car loan.

This is £8k over 5 years, I can't remember the APR but the total repayment cost is £9,646

So £1,646 in interest over 5 years.

If I received the bonus in cash now I'd pay down the capital on the loan from £8k down to £7k. At a rough guess this would reduce the interest by (7/8ths) £1,441. Meaning over the term of the loan I'd expect to pay £205 in interest if paid off early rather than £1,646.

So the choice is to receive the bonus in cash and pay off a bulk of the car loan.
or
Put the bonus into pension, which would save me £7k in tax and NI, but cost me £1441 more in interest payments on the loan.

So the pension choice appears to be net £5,559 better off.

Then there is the consideration of growth over the 5 years. Cleverer people than me would work this out properly, but my view is how much growth would I expect to get during that 5 years I was still paying off the loan?

£14k increasing @ 3% (the lowest of the FCA recommended rates for pensions) could expect to increase by £2,265 over 5 years.

Now, this isn't cash, it's equities so can and will fluctuate but at least it's giving me a clear signal that...

If we put the bonus into a pension:

a) we'll save £7k in tax and NI, and invest a total of  £14k.
b) we could expect this to grow by more than the interest I'd be paying on the car loan. This is only possible due to it being based on double the capital (ie point a).


~~~~~~~~~~~~~~~

I should have it confirmed on either Wednesday or Thursday the exact figures and have to sign a formal letter declaring I wish to have it paid into my pension by Friday.

I will discuss further with the wife tonight but I think the financials are pretty compelling.

Obviously this whole post has been written with humility and understand we are in a very lucky position to be entertaining things like this. And it'd be interesting to see how this discussion would bear out if we weren't planning on immediately paying off a loanand so it couldn't be such a simple financial decision.

*UPDATE*

As the deadline approached I wasn't sure I was going to have enough courage to stick it all in the pension and not use any for the current debt payments.

As it turned out I settled for a middle ground and agreed to have 50% directed into my pension - with actual figures this will be £7,427.

And the remaining 50% I'll take as cash, which I expect will be roughly £3,700 net. With this I plan to pay off the everyday credit card (£1k), put £1k into an account to finally have an account to pay for annual bills to smoothen out the bill paying process and use the remaining £1,700 to either pay down some of the car loan or put in our ISA for our monthly dividend portfolio purchases, undecided yet, probably a but of both.