My goal in the dividend growth account

Basically, my goal is to achieve yield on cost 10% in 10 years.

At the first glance, this goal seems very ambitious.  However, when looking into it a little deeper, I should say that this is a very reasonable and achievable goal.

Firstly, the 10% return is based on cost, the purchase price, not on market price.  If I invest in stocks with solid fundamental financials, I will be very confident to predict an uprising stock market price trend in the long run, reflecting the companies' ongoing growth.  Of course, there are ups and downs in the process, the long-term trend should be upwards.  In the meanwhile, the purchase price is very important.  I should be very patient to wait for a good reasonable entry point, because the purchase price will largely affect my initial yield rate.

Secondly, I only look at those companies that have a consistent dividend growth history in the past 10 years.  With such good record on hand, I believe they will tend to put stakeholders' benefit in a higher priority.  In the future, they will continue to endeavor to increase annual dividend.

Thirdly, here is the guideline to achieve 10% return in 10 years.

In order to achieve this goal, I only look at the gray area, which means the initial yield should be higher than 3%, and the annual dividend growth rate should be 13% or higher.  In this chart, we haven't considered dividend re-investment.  If dividend re-investment is considered, the goal will be achieved faster because of the compounding effect.  Of course, since I plan to put in additional money from my paycheck each month, I'll expect the average yield to cost will be lower than 10% in 10 years.  However, when considering each individual investment, the 10% in 10 years should be guaranteed.

Let's take Walgreen as an example in order to strengthen my analysis:-

Why do I choose to be a dividend growth investor

I used to be a self-claimed value investor.  I input a lot of time and effort to do stock analysis.  I did achieve some good return.  However, I found that I don't always have adequate time to do all those analysis.  I was quite active in year 2009.  However, due to some personal issues, I didn't participate in stock market at all in year 2010 the whole year and the first half of 2011.  When I did have time to take a look at my portfolio, I ran some performance benchmarking my portfolio versus SPY in the same period.  I was disappointed with the result.  Although there were several outstanding stocks I own with very satisfactory performance, 80% of my portfolio had performance worse than the no-brainer SPY.

I learned several lessons from this experience: 1. to be a sensible long-term investor is much better than to be a short-term impulsive one.  2. having a long-term investment strategy to follow is very essential.  3. for a person like me, to purchase a stock with solid fundamental financials and then to "forget" all it after purchase is much suitable for my character.  Capital gain is one of my goals, and long run dividend yield to cost return is much more attractive.  4. I always want to invest in real estate market which I believe can provide me more stable and more potential returns.  However, currently I don't have enough money to invest in housing market, so I decided to set up two pillars for my retirement income account: dividend growth account to begin with, and real estate investment account later when enough money is accumulated.

My goal in dividend growth is to achieve 10% yield to cost in 10 years.  This goal makes sense after analyzing several stocks initial yield and annual dividend growth rate.

WAG dividend analysis

Annual dividends and growth data

How to find proxy statement in SEC files

On this EDGAR page, input company name and form type DEF 14A in the search area.

You will get below result:-

The speech marks ” ” is used just in case the company name has a space in it and the asterisk * is used to display any filing beginning with 10-Q.  By using the asterisk you can search for amended filings that have the code 10-Q/A. If you just did FORM-TYPE=(10-Q OR 10-K), you wouldn’t see any of the amended filings.

For a list of all the other forms, this is the pdf you want.

Here is an excellent article for more detailed info about the SEC search.

When you check a company's inventory...

• You'll have to evaluate the different kinds of inventory: raw materials, work-in-progress inventory, and finished goods. (Some companies report the first two types as a single category.)

 1) A company ramping up for increased demand may increase raw materials and work-in-progress inventory at a faster rate when it expects robust future growth. As such, we might consider oversized growth in those categories to offer a clue to a brighter future, and a clue that most other investors will miss. We call it "positive inventory divergence."

2) On the other hand, if we see a big increase in finished goods, that often means product isn't moving as well as expected, and it's time to hunker down with the filings and conference calls to find out why.

•  Compare inventory turnover days among the competitors.

• Compare the company's inventory growth to sales revenue growth.

Good articles about SEC filings

What to look for in the SEC filings

How to read SEC form 4

Inside trading and how to read SEC forms 3,4,5

Auto track inside transactions

How to find special situation stocks

Quickly detect changes in footnotes

Goodwill and other intangible assets

This is extracted from PEP's 10-Q report, and I think this part is very helpful for me to understand goodwill and other intangible assets.

We sell products under a number of brand names, many of which were developed by us. The brand development costs are expensed as incurred. We also purchase brands in acquisitions. In a business combination, the consideration is first assigned to identifiable assets and liabilities, including brands, based on estimated fair values, with any excess recorded as goodwill. Determining fair value requires significant estimates and assumptions based on an evaluation of a number of factors, such as marketplace participants, product life cycles, market share, consumer awareness, brand history and future expansion expectations, amount and timing of future cash flows and the discount rate applied to the cash flows.

We believe that a brand has an indefinite life if it has a history of strong revenue and cash flow performance, and we have the intent and ability to support the brand with marketplace spending for the foreseeable future. If these perpetual brand criteria are not met, brands are amortized over their expected useful lives, which generally range from five to 40 years. Determining the expected life of a brand requires management judgment and is based on an evaluation of a number of factors, including market share, consumer awareness, brand history and future expansion expectations, as well as the macroeconomic environment of the countries in which the brand is sold.

Perpetual brands and goodwill are not amortized and are assessed for impairment at least annually. If the carrying amount of a perpetual brand exceeds its fair value, as determined by its discounted cash flows, an impairment loss is recognized in an amount equal to that excess. Goodwill is evaluated using a two-step impairment test at the reporting unit level. A reporting unit can be a division or business within a division. The first step compares the book value of a reporting unit, including goodwill, with its fair value, as determined by its discounted cash flows. If the book value of a reporting unit exceeds its fair value, we complete the second step to determine the amount of goodwill impairment loss that we should record, if any. In the second step, we determine an implied fair value of the reporting unit’s goodwill by allocating the fair value of the reporting unit to all of the assets and liabilities other than goodwill (including any unrecognized intangible assets). The amount of impairment loss is equal to the excess of the book value of the goodwill over the implied fair value of that goodwill.

Amortizable brands are only evaluated for impairment upon a significant change in the operating or macroeconomic environment. If an evaluation of the undiscounted future cash flows indicates impairment, the asset is written down to its estimated fair value, which is based on its discounted future cash flows.

In connection with our acquisitions of PBG and PAS, we reacquired certain franchise rights which provided PBG and PAS with the exclusive and perpetual rights to manufacture and/or distribute beverages for sale in specified territories. In determining the useful life of these reacquired franchise rights, we considered many factors, including the pre-existing perpetual bottling arrangements, the indefinite period expected for the reacquired rights to contribute to our future cash flows, as well as the lack of any factors that would limit the useful life of the reacquired rights to us, including legal, regulatory, contractual, competitive, economic or other factors. Therefore, certain reacquired franchise rights, as well as perpetual brands and goodwill, are not amortized, but instead are tested for impairment at least annually. Certain reacquired and acquired franchise rights are amortized over the remaining contractual period of the contract in which the right was granted.

On December 7, 2009, we reached an agreement with DPSG to manufacture and distribute Dr Pepper and certain other DPSG products in the territories where they were previously sold by PBG and PAS. Under the terms of the agreement, we made an upfront payment of $900 million to DPSG on February 26, 2010. Based upon the terms of the agreement with DPSG, the amount of the upfront payment was capitalized and is not amortized, but instead is tested for impairment at least annually.

Significant management judgment is necessary to evaluate the impact of operating and macroeconomic changes and to estimate future cash flows. Assumptions used in our impairment evaluations, such as forecasted growth rates and our cost of capital, are based on the best available market information and are consistent with our internal forecasts and operating plans. These assumptions could be adversely impacted by certain of the risks discussed in “Risk Factors” in Item 1A. and “Our Business Risks.”

We did not recognize any impairment charges for goodwill in the years presented. In addition, as of December 31, 2011, we did not have any reporting units that were at risk of failing the first step of the goodwill impairment test. In connection with the merger and integration of WBD in 2011, we recorded a $14 million impairment charge for discontinued brands. We did not recognize any impairment charges for other nonamortizable intangible assets in 2010 and 2009. As of December 31, 2011, we had $31.4 billion of goodwill and other nonamortizable intangible assets, of which approximately 70% related to the acquisitions of PBG, PAS and WBD.