This special eBook edition of Get Rich with Dividends is a … · 2016. 7. 11. · weekly show “Capital Today -Stock Market Review” on IPTV HyppTV (TM Unifi) Channel 420 Capital

www.ivsachart.com

This special eBook edition of "Get Rich with Dividends" is a production of

iVSA Mobile Technologies S.B with permission of publishing rights from

Investmatic Management.

You can also get Martin Wong's Best

Selling Book 2010 "SuperCharge Your

Investing Approach for Big Profits" from

all MPH store or order from us.

www.ivsachart.com

Like and follow us at our Facebook Page:

https://www.facebook.com/priceandvolumeinklse/

Find out about our Free Investment Workshop:

www.ivsachart.com/events.php

Interested to learn more? Contact us



www.ivsachart.com

Hi Reader,

My name is Martin Wong, co-author of

this great eBook version of "Get Rich

with Dividends". I have included the

first 3 chapters of the original book text

of "Get Rich of Dividends" and if you

really like this book, you can get a copy

of the hardcopy from your local MPH

bookstore or order from us.

Let me introduce myself, currently I oversee over RM50 million private

funds for High Net Worth (HNW) clients in KLSE, SGX, HKEx and US equities

market. I had over 15 years’ experience in the financial and investment

industry, previously attached to a prominent asset management and

investment bank.

Using my proprietary method, I had returned for my HNW clients an

average gain of +12 to +13% p.a. over the period 2003-2014, including the

global financial crisis period 2008-2009, where numerous stocks invested

has achieved more than 100% return.

I am also the co-host of a popular evening TV business and finance segment

weekly show “Capital Today -Stock Market Review” on IPTV HyppTV (TM

Unifi) Channel 420 Capital TV previously.

I have a MBA (Dist.) from University of Bath and had 3 licenses in futures,

dealer and fund management from the Securities Commission Malaysia. I

am also a registered course instructor with Securities Commission of

Malaysia.

www.ivsachart.com

I am the author of several bestselling books for Get Rich with Dividend

(2014), Dividends Don’t Lie (2012), SuperCharge Your Investing Approach for

Big Profits (2010) and Becoming Rich Fast (2007).

In 2014, I co-founded iVSA Mobile Technologies Sdn. Bhd, a technology

company which created iVSAChart, the world’s first web-based software

that is based on the century old and proven Volume Spread Analysis system.

"iVSAChart and iVSA Methods

are the foremost

authoritative investing and

trading tools which

recognizes smart money

accumulation or distributions

that all investors/ trader

should have!"

Testimonials from

Mr. Nigel Foo CIMB Top Small Cap Analyst,

EuroMoney

www.ivsachart.com

A proven system for earning double digit returns

www.ivsachart.com

BILL WERMINE

&

MARTIN WONG

Content

Preface i

Chapter 1: Why dividends? 1

The one single key to financial freedom

Money today or later?

Chapter 2: How to select high-quality dividend shares 7

A value-based approach to dividend investing

Dividend yield

Price earnings ratio

On a measure of value how does JTI stock up?

Quintiles of market return

Intrinsic value

Margin of safety

Capital to debt ratio

Free cash flow

Content

Chapter 3: Where to find value 19

Value investing with Mary Buffett

Dividend aristocrats

Chapter 4: How to find the best deal by following the

smart money Available in Hardcopy

Pipelines of income

The clipper ship strategy

Adapted from Richard Maybury, The Clipper Ship Strategy

How the ʻlittle guyʼ can outsmart the computers and beat

the stock market

Chapter 5: How to avoid traps and pitfalls Available in Hardcopy

How to recognize dividend traps in your portfolio

Why is this a trap?

How to avoid dividend traps in the KLSE

Use of beta

The IPO trap

Content

Chapter 6: When to buy and when to sell Available in Hardcopy

When to buy

When to sell

Magic Number Scanner

Dividend s̓ Don t̓ Lie Portfolio

Chapter 7: How to get the mental edge Available in Hardcopy

Getting the mental edge

The three-minute solution

The eagle and the chicken

High quality dividend shares

Content

Chapter 8: How to protect your portfolio from

inflation Available in Hardcopy

The background

Currency wars

Now it‟s your turn to get rich

The road to financial freedom: Four key points

Margin of safety for 2013

The deflation/inflation test

Dealing with volatility

Preface

In March 2010, we published our first edition of Dividends Don’t Lie

and it became a best-seller. The stocks in the high-quality Dividends Don't Lie portfolio on page 103, if purchased on March 1, 2010 and

held until June 30, 2012, earned an average annual performance of

31.1 percent, which includes dividends received and capital gains. Of the 21 shares, there were 19 winners, 2 marginal underperformers.

Obviously past performance has nothing to do with future results. We launched the book on March 1, 2010 when the KLSE was at 1324,

and presently the index is over 1600.

In this book we will update the shares in the dividend portfolio with

fresh charts. We have added a few shares and deleted others. This is

because markets are dynamic and conditions change.

Obviously, we cannot promise returns such as these in the future. We

can, however, provide a framework and method which provides capital stability and income for those who would prefer to invest in the market

rather than speculate.

This book is particularly suitable for those who wish to build wealth

for a more secure retirement or those who wish to protect their wealth

and have it grow at a reasonable rate.

As we proceed into the latter part of 2013, there is unprecedented

volatility and economic and political uncertainty in the world economy. Worldwide, interest rates are being repressed. This means inflation

rates are higher than bank fixed deposits. Placing funds in bank deposits

is a sure recipe for capital erosion.

In the current economic environment, there are few safe alternatives

for investing. Each has its advantages but also each has risks.

Investing in high-quality dividends also has risks, and the only way to minimize these risks is to have a disciplined method for examining

and analyzing companies with regard to their credit quality, position in

the industry, management and sales and earnings growth.

You must also have a very clear plan of when to buy and when to sell.

This also includes when you must exit with a small loss and when to run your profits.

i

ii ■ Get Rich With Dividends

Although the focus of this book is the KLSE, we will present a chapter on dividend shares listed on the Singapore Exchange (SGX).

This market offers some super quality dividend shares with consistent

sales and earnings. The Singapore dollar is also a world class currency

and is perhaps stronger than the Swiss Franc.

What this book will do for you

You live in an age of inflated money. Almost everything, every necessity costs you more than it did last month or last year. To have a

comfortable life and secure retirement, you need more income and

more savings.

A bigger pay check helps. A part-time business is a definite advantage.

Prudent investing can help you compound wealth over time.

This book will share the proven principles of compounding wealth

over time by dividend investing.

The goal of this book is to help you build a passive stream of dividend

income that will outpace inflation and open new worlds of freedom to

you by providing better vacations, better education for your children, more of the possessions you treasure and freedom from money worries.

These should all help you enjoy life more.

You do not need a fortune to start this program. You can start with a

few thousand and compound your returns over time.

As you continue to receive your regular income, you can operate this method. The time investment is minimal.

If you follow the guidelines in this book, you will treat dividend investing as a business. This book is a guideline for managing your

dividend investing business. There are risks, but if you are disciplined

enough to manage your risks you do have a chance to be a successful investor.

This book will provide you with guidelines for managing risk.

We do, however; make no promises or guarantees. Any investment

beyond a government bond has risks, but investing in government bonds will not make you rich.

To get rich you must take risks, but make sure the risks are calculated. Let‟s not waste time; let‟s get started building your dividend investing

business now. Join the smart money investors of this world.

Chapter 1

Why dividends?

The one single key to financial freedom

Bill Wermine

When I came to Malaysia from America in 1994 to marry my pen pal,

a local Indian Malaysian girl, little did I imagine I would still be here.

Now I am a permanent resident of Malaysia and have no intention

of ever returning to the US.

The many varieties of delicious food, the warm climate, the rich

lifestyle, friendly people and the many business opportunities and low taxes and cost of living suited me.

I tried several businesses, including exporting marble countertops, herbal products and rubber wood furniture but finally decided to trade

commodities and shares full time.

It took some time to become familiar with the KLSE so I started in a

small way and focused on blue chip dividend producing shares, as this

was my specialty in the US market.

I read the financial reports and made company visits before investing, and to this day I continue to allocate capital to these companies for

myself and clients. In 2010 I wrote Dividends Don’t Lie, which

explained the method of investing in dividend shares and included a

list of my favorite dividend shares. I intend to write an updated version of this book in the next few months with some new information.

My focus has always been on consumer product companies that

have a strong investment moat and deal in products that are absolute

necessities.

They must also have strong sales and earnings and be of the highest

credit quality with reputable management.

1

2 ■ Get Rich With Dividends

My financial goal has always been to have enough money to not have to worry about feeding my family, paying my bills or doing

exactly what I wanted to do when I wanted to do it.

I wanted financial freedom

I was trained by my parents, who lived through the 1930-1940 Depression in the US, to be thrifty, save money and avoid debt.

As a young man and until today, my policy is always to pay myself first from whatever I earn. I use these savings to invest and compound

returns over time.

At first I saved 10 percent of all my income and in time raised this

to 25 percent.

I avoided credit cards, expensive designer clothes and watches and

exotic vacations. In fact, when I first arrived in Malaysia, I paid cash

for an older model Camry and drove it 15 years before replacing it. I drove it until it collapsed and could hold together no longer and I was

forced to replace it.

The same was true for my home. I bought with cash a small, over

50-year-old, single-story terrace house in Ampang Jaya. My wife

wanted a more impressive new house but that would have involved a mortgage.

The seller was desperate for cash that he needed for his children‟s

education so I was able to buy the house at a fire sale price. This is the

same way to buy quality shares at a discount. Wait for a panic and buy

below value.

I even planted a garden and some fruit trees in the back of the house and keep a flock of geese.

Instead of living the high life, I spent a lot of time studying technical analysis, reading works of master value investors such as Warren

Buffett and Anthony Bolton.

I also subscribed to Market Pulse, a weekly fundamental newsletter

written by Salvador Dali, who also runs the Malaysia-Finance Blogspot.

I discovered the important relationship between dividend yield and the price you initially pay per share. I studied aggressively what many

others would find infinitely boring.

I also had plenty of detractors giving me an earful. “You can‟t make money by buying boring buy and hold stocks.”

Why dividends? ■ 3

The results speak otherwise. Now although I am not rich, I am

financially free and my income from dividend shares covers my modest

expenses.

Dividends from quality companies are virtually certain, unlike capital gains.

Key concept one

Over the years, I have had great admiration for Warren Buffett. His

teachings have led me to the promised land of dividend returns.

Clearly, the Oracle of Omaha‟s advice of seeking solid businesses that dominate their industries, have a wide cash moat to survive downturns

and can be had at a discounted price can serve those well who choose

to follow it.

One example is Nestle. Their products are available everywhere, they

have a solid distribution network, they are recognized by everyone of being of high quality, so with advantages like that it can be very hard

for anyone to dislodge it.

(Disclosure: I hold Nestle for myself and some of my managed share

accounts.)

Couple that advantage with a well-run business that has low debt and

plenty of cash flow and you have a company that will stand the test of

time. It‟s firms like this that can afford to maintain and grow a dividend in economic good times and bad, which is a key component for all of

us trying to build a dividend money machine.

Picture 1.1: Making money from dividend


Key concept two

“You have to figure out what your own aptitudes are. If you play games

where other people have the aptitudes and you don‟t, you‟re going to

lose. That is as close to certain as any prediction that you can make.

You have to figure out where you‟ve got the edge.”

In many fields there are brilliant scientists seeking revolutionary

breakthroughs in medicine, cancer cures, oil and gold exploration.

If some breakthroughs come out of a public company, you will have

some extremely rich shareholders.

Investors chase such dreams every day and some are thinly traded

less than 1 RM stocks. They are unproven, and financial information is extremely difficult to come by and you do not know exactly what you

are getting into when you enter a position.

If it is a company with big dreams of solving a complex problem,

chances of fully understanding the business model are dubious at best

for the average investor.

For me, I know where my strengths lie. My bets are with the big

boys, the proven money makers with the ability to make money for the shareholders.

My focus is to understand the company inside and out before I invest in it.

Key concept three

How many shares do you need? I would say you do not need many in a lifetime. Warren Buffett, who has billions in his funds, has only 10

core holdings.

Diversification is important but do not overdo it. Invest in few shares

and watch them like a hawk.

In this business, I‟ve seen people make the mistake of over

diversification time and time again. They will chase every hot tip

and trendy company until their portfolio becomes a hodgepodge of scattered stocks.

Why dividends? ■ 5

Key concept four

Keep your investing simple and focused. Build wealth over time with your dividend machine. Save regularly. Avoid credit and pay cash

when you can. Credit buying makes the bank rich. Take advantage of

value, selling at a discount and you will over time be financially free.

Money today or later

Would you take a job that paid you ONLY with stock options?

Imagine you‟re offered a job with a new, small company with a

terrific product.

The president tells you they have big plans to grow into a leader

of their industry. Then they‟ll do an IPO (Initial Public Offering) and

everybody owning stock options is sure to get rich.

You get excited. You know many people at Microsoft and Dell and

Wal-Mart are wealthy because of stock options. And you believe in this company‟s future.

But just as you‟re about to ask, “When do I start?” The president says, “I have to mention one other little thing.”

“Yes?”

“We can‟t afford to pay you anything now – that is, in cash. You‟ll get your stock options, of course. After the IPO you‟ll be wealthy. But

right now, we need all our capital to pay the company‟s other bills.”

You can‟t shake the president‟s hand. How could you even drive to

work if you had no money to buy gas? Your children want to eat three

meals (and 10 snacks) every day…

YOU want to eat every day!

Your mortgage company, your local utilities and the department store

all want a payment from you every month. They don‟t care about the

company‟s future IPO.

They want cash – NOW!

We all have daily needs and monthly bills to pay. These won‟t wait

for the future, no matter how bright.

Yet when you invest your money for GROWTH, you‟re making just such a deal.


You‟re sacrificing the present for the (uncertain) future. You‟re hoping the stock price will be higher when you retire… you‟re exchanging

today‟s money for a promise of capital gains tomorrow.

Wouldn‟t it be great to receive a regular return on your money

TODAY? Additional streams of cash you can use to pay today‟s bills?

Or to reinvest so your investment returns keep growing?

Now you can learn the safe, secure and easy way to invest for

income. Once your investment income is large enough, you can quit

working. ʻRetireʼ no matter how old you are. You‟ll have the freedom to do what you want:

Play golf, go scuba diving in Langkawi, drive around the country or play the guitar again… just like you used to, before you gave up your

dreams to take a job to pay the bills.

If you enjoy your current career, you can stay on your job because

you CHOOSE to – without worrying about layoffs or what your boss

thinks of you.

Don‟t waste another day worrying about the markets.

If this type of investing were the job above, you‟d get paid regular

pay checks whether the company ever reaches the IPO stage or not.

Live for income today – and tomorrow.

Chapter 2

How to select high-quality

dividend shares

A value-based approach to dividend investing

Recognizing value and being able to evaluate quality will give you an

edge in selecting blue chip dividend shares for your portfolio.

Warren Buffett, arguably one of the best investors of all time, has a few guidelines to measure value and quality.

These I borrowed from the Buffettology Workbook by Mary Buffett.

Quality guidelines

■ Does the company have an identifiable consumer monopoly?

■ Do you understand how it works?

■ What is the chance it will become obsolete or replaced in the next 20 years?

■ What is the company‟s earnings per share history?

■ Is the company earning a high return on shareholder‟s equity?

■ Is the company conservatively financed?

■ Is the company in question actively buying back its own

shares?

■ Is the company free to raise its prices with inflation?

■ Is the business simple to understand?

Warren Buffett said that if you can explain the business to a child in

five minutes then maybe you should consider it.

7


Answering these guidelines before you invest can help you filter out

mediocre, underperforming businesses.

Let us look an example: JTI, Japan Tobacco International, traded on

the KLSE main board. I hold this share for myself and many of my clients.

Chart 2.1: MetaStock Monthly price and Volume Chart of JTI from January 2008 to November 2013

JTI holds a consumer monopoly with its major branded cigarettes

including Winston and Camel. They focus on marketing and producing cigarettes. That is their only business.

Smokers should continue to smoke for the next 20 years. I do not foresee smoking to become obsolete. The share has shown consistent

sales, earnings and dividend growth for the last 20 years.

They have raised their prices with inflation and excise taxes and

that has not deterred consumption. They are a cash rich company with

high profit margins. This qualifies as a worthy investment under the Warren Buffett guidelines. It is a simple business that even a child

could understand.

In Malaysia we have the Dynaquest Stock Performance Guide, which

has much of this information for every Bursa Malaysia company.

Bloomberg work station also has this information.

How to select high-quality dividend shares ■ 9

Once the share you are interested in meets these quality criteria, you need

to access value. There are two simple measures of value: Dividend Yield

and Price Earnings Ratio.

I like to see rising dividends over a 10-year period. During recessions

they may flatten out, but we are looking for consistency.

Measures of value:

■ Dividend yield

■ Price earnings ratio

Dividend yield

Dividend yield, in my opinion, is the most important criteria of value. In addition to providing income, dividends reflect the company‟s health.

Dividends are real and the company will automatically credit them to your bank account. Dividends don‟t lie; they are real money. The accounting

department of a company cannot manipulate the dividend. It is either paid

or not. If it is not, that is a good reason to be on guard and perhaps exit your position.

Company directors of high-quality blue chip companies know better than anyone else the financial health of their company. They will not pay a

dividend unless they have the means to do so.

If dividends are continually rising, that is evidence of sound management

and profitability. It also shows growth in sales and earnings.

Price earnings ratio (P/E)

A price earnings ratio is a simple calculation. Divide the price by the

company‟s 12 months per share earnings.

For example, if JTI were trading at RM6.96 and their earnings were

RM0.47 then that would mean the PE was 14.8. (6.96/ 0.47 = 14.8)

The lower the PE, the larger is the margin of safety. The higher the PE,

the higher the risk.

By buying stocks at a lower price earnings ratio you are able to lock in a

higher dividend yield and if the share were a quality share you would have

a larger margin of safety.

After back testing for over 25 years, I have found the KLSE to be overvalued at 20 times earnings and attractive at 11 times.


Presently, the KLSE is trading at 15.8 times, and many high-quality

shares are at historically high PE ratios. In my opinion, for most shares there is more risk on the downside than potential upside.

On a measure of value how does JTI stock up?

From January 2002 to March 2012 the Price Earnings range has been

from 9.1 to 26.1. On July 10, 2012, when I wrote this article, the PE of

JTI was 14.8. This is just below the mid range of PE valuation. JTI is

not cheap but it is not overvalued.

The dividend yield as of July 10, 2012 was 4.3 percent.

Based on the two metrics of value, JTI is not expensive nor is it a

bargain.

Whether you purchase or not is a personal decision based on your

investment objectives and tolerance of risk. I leave that decision to you, dear reader.

Quintiles of market return

Chart 2.2: Standard and poors 1921-2007

Chart 2.2 shows the danger of buying historically high PE stocks,

which measures quintiles of market average PEs.

Quintiles measure a statistical distribution into fifths.


When PEs are in the bottom two quintiles, or 40 percent of valuation

distribution, upside potential is 11 percent.

In the mid-range of valuation, the third quintile, upside is 8 percent.

In the fourth quintile, or top 20 percent of valuation, upside is only 5

percent and when at the top of PE valuation, the fifth quintile, upside is nil.

Based on this criteria, JTI at present is in the mid-range, or third quintile, so there is a potential upside of 8 percent.

If this was correlated to the current PE of the KLSE - KLSE, returns for many stocks are between zero and 5 percent moving forward. If the

KLSE corrects back to a PE of 12 we can expect to lock in dividend

plus capital gains of over 20 percent.

However, if history is a guide, present valuations for many quality

shares in the KLSE are at the high end.

More close to home, the Dynaquest Stock Performance Guide lists the last 10 years of highs and lows of dividend yields of listed KLSE

shares.

Many shares are now trading at their high end of their earnings range

and low end in terms of dividend yield, which tells me there is not

much upside.

We should wait for a major correction to pick up quality shares at a

discount and lock in higher yields.

We need to also be mindful of what is going on around us. Most of

Europe is in recession. China is slowing down. The US has had anemic job growth while Asia is feeling the effects of the slowdown in the

developed world. Massive stimulus and money printing is losing its

effects as the world economy is weighed down with a mountain of debt, much of which will never be repaid.

From a common sense point of view, Malaysia is a part of the world economy and will be affected. Trees do not grow into the sky.

Remember the story of Baron Rothschild. He was asked how did all the members of all his family amass such vast fortunes. The baron

answered, “I sold too soon.”

The Rothschilds, according to Peter Hay in The Book of Business

Anecdotes, had developed the talent for getting out before a market

decline. This alone was enough to make them very wealthy.


Our job as investors and traders is to make a reasonable profit. Trying to be right by picking the low and the high is an ego trip. I learned this

the hard way.

Intrinsic value

Our investment approach is based on the concept of intrinsic value.

The intrinsic value of a stock is exactly that – what it is actually

worth, rather than what its price is on the stock market. Intrinsic value

is calculated through the use of valuation formulas which take into account the financial fundamentals of a business, and the amount of

risk involved with investing in a particular company.

A significant amount of information is required to establish this

intrinsic value with any degree of accuracy.

Our analysis uses the Bloomberg Research Station which has multiple

valuation tools to assist with the valuation process. You too can access our research using the Magic Number Scanner found on our blog at

www.traderstruthrevealed.com. The hard work is all done for you.

Our analysis is based on the work of Benjamin Graham and David

Dodd in their book Security Analysis.

They stated that there are four earnings factors to calculate the

intrinsic value of a corporation:

1. Level of normal earning power and profitability in the

employment of assets as distinguished from reported earnings.

2. Dividends actually paid or the capacity to pay such

dividends now and in the future. 3. A realistic expectation about the trend line growth of

earnings power. 4. Stability and predictability of the future economic value of

the enterprise

The bottom line

Every valuation model ever developed, including the Graham and Dodd

model, is subject to the risk and volatility that exists in the market, as well as the sheer irrationality of investors.

While calculating intrinsic value may not be a guaranteed way of mitigating all losses to your portfolio, it does provide a clearer

http://www.traderstruthrevealed.com/


indication of a company‟s financial health, which is vital when picking

stocks you intend on holding for the long term. Moreover, picking

stocks with market prices below their intrinsic value can also help in saving money when building a portfolio.

Margin of safety

Identifying a margin of safety when buying shares

Having identified strong companies, it is important not to rush in and

just buy shares. The market does not always price companies correctly,

and we can achieve a significant advantage by watching companies

carefully and buying where there is a discount to the intrinsic value.

The discount of price to value is known as the margin of safety. The higher the margin of safety, the greater the potential upside in price

and, importantly, the greater the degree of possible protection on the

downside if the market adjusts downward.

We carefully determine the best stocks to buy, and will only invest

if there is a sufficient margin between current share price and our

valuation.

Chart 2.3: Source Moningstar Investors


Conversely, when the price for a company‟s stock has moved to a position where the stock is AT or OVER value, then you might

consider selling your stock.

We must constantly scan for undervalued shares and also patiently

wait for undervalued opportunities.

A correction doesn‟t always happen immediately and it may take

time, but eventually price should come into line with value. We will

hold stocks for long periods of time if the value to price differential persists.

Capital to debt ratio

Picture 2.1: The lower the debt ratio the greater the strength of the company

The capital to debt ratio is the amount of interest-bearing debt a

company has divided by the amount of shareholders‟ equity. It is a

measure of the financial strength of a company. The lower the debt

ratio the greater the strength of the company.

A ratio of more than 0.5 is high while 1.0 is extremely high. Those who are 0.2 or less are financially strong. Some of the companies we

have invested in have cash on the balance sheet or no debt.

All else being equal, stocks with high C/D ratios are generally riskier

than those with low C/D ratios.

Why do investors view the debt to capital ratio as important?

Investors find it useful to compare the debt to capital ratio of a company compared to the debt to capital ratio of comparative companies and the


industry. This helps give a comparative gauge of how the organization

is perceived from a risk perspective.

The debt to capital ratio is only an indicator and simply raises more

questions; however, it is still a crucial financial ratio. Historical debt

to capital ratio analysis also provides useful information because this historical analysis (when compared with the industry analysis) can

help provide some insights into the historical risk level of the business.

Free cash flow

The metaphor of the hamburger

Here‟s an anecdote that drives home a basic, but crucial, point.

Decades ago, Henry Ford told a reporter that his personal chef made

the best hamburgers in the world. When the reporter asked the chef his “secret,” he smiled and said, “I get the finest cut of steak from the

butcher and then put the meat through the grinder and make him his

hamburgers.”

Picking winners is about finding a high-quality company at the right

price, preferably paying dividends. This will give you recurring and growing income.

What are some of the ingredients that define a high-quality company?

The key ingredient: Free cash flow

Buying a company with a strong free cash flow is paramount. Companies

such as General Motors have always had very high earnings per share. But even with a high earnings per share, GM went bankrupt because it

was still a broken business.

That‟s because most of the profits went to capital expenditures,

leaving little money to be reinvested in the business or paid out as a

dividend. Many investors get enthralled by high book-value stocks, thinking they are getting a bargain.

My friends, a business is not necessarily worth the cost of its assets. Instead, you can value it correctly by estimating the total amount of

free cash flow the business will produce each year.

Let me give you an analogy: The economic value of a college degree

is not what you paid for the degree. It is the extra income your degree

is responsible for helping you earn.


Simply put, a company‟s economic value is the amount of free cash flow divided by how much the company needs to invest to earn

it. ExxonMobil is a great business and had the largest net profit in

U.S. history. However, the oil business is capital intensive, unlike a multilevel marketing business such as Amway(M) Holdings.

Chart 2.4: MetaStock Monthly chart of Amway(M) Holdings since December 2009 to November 2013

Free cash flow tells us how much money the business is actually

collecting. As much as the earnings of a business can be manipulated

by a skilled accountant, the amount of cash reported is backed by the

real cash they are holding.

After checking growth in earnings per share Warren Buffett recommends to compare earnings per share versus free cash flow per

share. If he sees a company with consistent positive cash flow it

means the business has no difficulty collecting from its customers.

Let‟s look at Amway Malaysia.

Free cash flow per financial year EBITDA

2008: 78.49 million 119.70 2009: 17.60 million 98.43 2010: 92.70 million 115.56 2011: 95.48 million 126.20 2012: 115.72 million 138.71


These numbers are courtesy of Bloomberg Research.

Notice the consistent growth in free cash flow. They even had positive cash flow in 2009, which was a year most companies had negative

cash flow. Also note the positive growth in earnings per share. The

exception was 2009 but they still earned respectable profits in a very difficult environment.

The test of a great company is how they survive and prosper in a difficult environment and also their willingness to share a portion of

their profits in dividends. Amway (M) Holdings, a cash rich company,

pays a respectable and growing dividend averaging 6 percent.

Disclosure: Myself and clients have an interest in Amway (M)

Holdings.

Free cash flow is a check on danger

For example, the famous case of Enron showed a strong track record of earnings per share growth. Sheep investors piled in as Enron scaled

new price highs year after year. Enron was on the buy list of most stock

brokers including Goldman Sachs, Merrill Lynch and Citi Group.

However, the smart money and company insiders were selling and

selling Enron short because they discovered that Enron had consistent negative cash flow from 1996 to 2001.

They felt something was fishy, as cash was going out while earnings

were reported to be increasing.

In 2000, the accounting fraud was discovered and Enron collapsed

into bankruptcy. Thousands of employees of Enron who had their

pension funds invested in Enron stock lost their life savings. Insiders

and the smart money pocketed huge windfalls.


Chart 2.5: Price chart of Enron From Investors Business Daily

How can we access the numbers?

Bursa Malaysia website has the annual reports and quarterly reports of all the listed KLSE companies. It is easy to access and free of charge.

Before you invest, it is good idea to check free cash flow and

earnings per share. Look for consistent positive free cash flow growth

and earnings per share and dividend growth.

This can save you from large losses and potentially put the investment

odds in your favor.

Remember Warren Buffett‟s first rule of investing, „Don‟t lose

money‟ and his second rule „Always refer to the first rule.‟

Chart 2.6: MetaStock chart of Transmile Bhd showing collapse in March 2011

Chapter 3

Where to find value

Value investing with Mary Buffett

On 8 September 2012, I attended a Value Investing Conference at Marina Bay Sands in Singapore. Mary Buffett, daughter-in-law of

Warren Buffett, was the keynote speaker. There were a lot of Malaysians

in the audience. I hope Mary will hold a conference in Malaysia, as Malaysian investors are becoming more market savvy.

Picture 3.1: Mary Buffett being interviewed by myself at the Marina Bay Sands

19


Mary Buffett is an author and lecturer on investing and was married to Warren‟s son Peter for 12 years. She and David Clark, a long-time

friend of the Buffett family who is a portfolio manager, are the best-

selling authors of the internationally acclaimed bestsellers Buffettology,

The New Buffettology and The Buffettology Workbook.

I highly recommend these books to you if you are a value investor and wish to build wealth over time. Warren Buffett is currently the

third richest man in the world and he made his money in the stock

market by value investing.

In no way can I compare my investment performance to Warren

Buffett. He is the master, and all I can hope to do is apply his methods, which he has generously shared in his books. The principles in these

books are the foundation of my work as a portfolio manager.

In the conference, Mary shared the Warren Buffett approach to

buying value at a discount and applied it to 10 Singapore shares. The

Buffett methodology can be applied to any free market, including Bursa Malaysia shares.

Of the 10 selected SGX shares, only two met the Warren Buffett criteria of expanding value over a 10-year period. The two selected

shares also showed increasing sales and earnings, return on equity and

dividend growth. The graphs of the selected shares were sloping up, showing increasing earnings and profits.

The shares which were rejected were erratic, showing profit growth interspersed with losses. There was no consistency.

Mary shared that only a small percentage of shares meet the Warren Buffett criteria and that to find them takes hard work, focus and

patience.

One of the SGX shares she selected was Comfort Del Gro, the taxi

company. It met all her criteria except price and she said currently it

was over valued at 18 times earnings. She said she would put it on her shopping list and wait to buy until it is bargain priced. Patience is a

key part of Buffett‟s approach. Buffett said this is a rare quality in most

investors.

Where to find value ■ 21

Chart 3.1: MetaStock Weekly chart of Comfort Del Gro from February 2012 to February 2013 showing a solid and steady up trend.

The Warren Buffett approach includes:

Find businesses that exhibit expanding value rather than treading water

type businesses. An example is Apple Computer. They continue to

innovate and create new products which are in demand. A treading water business would be Kodak, who refused to innovate and refused

to adapt to digital photography until it was too late. They recently

declared bankruptcy.

Other treading water businesses are auto companies, airlines and

traditional publishing.

Low debt or no debt is an important criteria

When you select a business make sure they have low debt and

preferably cash on the balance sheet. An example is ECS IT Bhd. They distribute Apple and other high-end brands, as well as bread and

butter computer components such as thumb drives. They trade at a low

multiple of less than seven times and have cash on the balance sheet.

My analyst met the CEO, visited the company and was impressed by

their prudence, management of costs and focus on their core business. They also pay 30 percent of their profits in dividends, which presently

is a respectable 5 percent.


Mary used the metaphor of the toll bridge to describe Warren‟s approach. An example of a toll bridge company in the Bursa Malaysia

is Nestle. If you want Milo, you must pay a toll to Nestle. Milo, being

a staple of the Malaysian consumer for generations cannot be easily

substituted as the Milo brand name is ingrained in the Malaysian psyche.

Mary related how Warren likes businesses that are consumer

monopolies and are easy to understand. These are businesses whose

earnings are easy to predict. Examples in Bursa Malaysia would be

F&N, Guiness Anchor and Japan Tobacco International.

Disclaimer: We hold ECS/Nestle/F&N, Guiness Anchor and JTI

for ourselves, as well as accounts under management.

Mary demonstrated how Warren invests with a business perspective

in mind rather than short-term momentum, technical analysis or some

magic holy grail indicator.

The focus is on building wealth over time with the magic of

compounding.

The method does not require watching a trading screen or being

glued to CNBC.

Warren also stays within his circle of competence and avoids businesses he cannot understand. This includes most IT company and

internet ventures. Warren did not buy Facebook, as Facebook had no

record of consistent earnings, no dividend, no consumer monopoly and

untested managers.

Mary also related that these types of businesses could be easily put out of business by a group of IT experts with a better idea.

Why Buffett bought Burlington Northern

She related about Warren‟s purchase of Burlington Northern Railway in the US.

Burlington has a vast network of steel rails crossing the US. It would be impossible for another company to build a competing railway, as

land costs and material have risen dramatically. He also bought it

because gas prices are rising and transporting by railroad is the cheapest method of freight transport.


Burlington Northern is an example of a company with a durable competitive advantage with a solid moat to keep out the competition. It

is also easy to understand.

As Burlington services the grain belt and is the only rail company

in many areas, they have little competition for grain delivery; in other

words, they are a consumer monopoly. They are free to raise their delivery charges with inflation.

Continuing the value investment discussion was Jeffrey Lee, the Chief Investment Officer of Phillip Capital Mgt Singapore. He has

over 3 billion SGD under management and his team of analysts focus

on value.

Lee spoke about the big picture and progression of the value investing

universe.

In the 1970s oil and gold were the sectors in focus by most investors. In the 1980s Japan was the dominant investment theme.

From 1990 to 2000 tech stocks were in vogue.

From 2000 to 2010 BRICs were the rage of most fund managers.

All of these themes are yesterday‟s news.

Commodities being cyclical have made little progress. Japan is

continuing to collapse and is only a shadow of its former strength. The technology bubble burst and still has not returned to its former glory.

The debt crisis is still being unwound.

Brazil, Russia, India, and China are slowing. Even Australia is being

affected by the slowdown in China.

The US, UK and Europe are close to recession as their debts pile up.

Rising unemployment continues to drag on growth.

Developed markets offer more potential risk then potential reward.

The emerging markets in contrast are today‟s theme.

Lee related how Thailand, Philippines, Indonesia and Malaysia have

lower debt, low taxes, high growth, low unemployment, less entitlement programs, a focus on hard work, saving and investing

rather than welfare, bailouts, printing money, handouts and socialism.

Also there are fewer regulations and a more business friendly

environment. Many stocks in these markets are world class value

stocks and pay high dividends.


Fund managers are beginning to take notice and that is why emerging market currencies and equities are appreciating as funds are flowing

from slow growth economies to emerging markets.

Where does Singapore fit in this scenario?

Singapore is a world class business center with a strong currency, solid

banks, low debt to GDP and a well-managed economy.

I was really impressed at how efficient their transportation and

telecommunications systems are. This is why money flows from the

developing countries into Singapore.

Singapore is centrally located and easily assessable from the four

above-mentioned countries.

One testimony is from Jim Rogers, who left the USA and made his home in Singapore.

Do keep an eye on the Singapore market. You might consider diversifying some of your assets there, as the SGX has lagged the

developed and developing markets.

Singapore will benefit from the Asian boom. Asian countries learned

much from the 1998 crises and have emerged stronger.

Chart 3.2: Weekly chart of the EWS


Weekly chart of the EWS, which is an ETF holding quality blue chip shares Singapore shares traded on the NYSE. Notice upside is

approaching resistance so be as Mary Buffett. Get your shopping list

ready and wait for lower prices. This chart is created by StockCharts. com.

Dividend aristocrats

In 1979, Moody‟s Investor Services introduced a study of companies

that have increased their payment of cash dividends annually for at least 10 consecutive calendar years. Moody‟s identified these shares as

Dividend Aristocrats.

Each year Moody‟s compiled its list from more than 12,000

companies in its equity database, which includes shares in the NYSE,

American Stock Exchange and NASDAQ.

As of 2012 there are 343 dividend aristocrats on the list.

Presently a company called Mergents has taken over from Moody‟s

and compiles the list.

For those investing in US markets

The Handbook of Dividend Achievers is a well-organized, concise

resource for all investors wondering where to turn in the volatility of today‟s markets. In order to return to fundamentally sound investing,

nothing is more basic in investing than companies paying dividends. A

company‟s current valuation is the present value of future cash flows and consistent, predictable dividends provide a basis for calculating

that valuation. The book provides profiles of the 343 companies that

have had the best record of delivering consistent dividends over time. In addition, it provides other key financial ratios and qualitative

information that can serve as the basis for building a successful long-

term investment portfolio. An excellent resource for any investor!

Chart 3.3 is the chart of the Dividend Aristocrats traded on the NYSE

(SDY). This includes 60 of the highest quality dividend shares traded

on the S&P 500. They have increased their dividends each year of the past 25 years.

Our focus is on stable income to beat inflation. Capital gains are a

bonus and unsure. Dividends are more reliable. This method is


particularly useful for those nearing retirement and cannot risk their financial security on hopes and dreams.

Chart 3.3: Weekly chart of the dividend aristocrats as traded on the NYSE as of November 2013

Source: Stock Charts.com

Notice how this index has outperformed all the major US indexes

over the last year.

Martin and I have applied the dividend aristocrats methodology to

the a KLSE and SGX. We have used the Bloomberg Work Station as

our research platform to identify those shares that meet the criteria of dividend aristocrats.

The following shares meet the criteria of dividend aristocrats. This

is updated from the Dividends Donʼt Lie portfolio published in June

2010. Notice we removed four shares from the 2010 portfolio and

added two to the current portfolio.

1. BAT 2. KLK 3. Amway 4. Carlsberg 5. Digi 6. DLady 7. F&N


8. Guinness

9. JTI

10. Kian Joo

11. PetDag

12. Pet Gas

13. Public Bank

14. QL Resources

15. Telekom

16. KPJ

17. Nestle

18. LPI

For those investing in the SGX

1. OCBC Bank

2. Keppel Corp

3. Sing Tel 4. F&N Singapore

5. Comfort Del Gro

Below is the 2010 KLSE portfolio with total performance including

dividends.

Obviously for our 2012 portfolio we cannot promise returns. Past

returns are no guarantee of future returns.

21 High Yield Quality Stocks Portfolio from 1 March 2010 ‒ 30

June 2012

Stock March Price as of

30 June

2012 (RM)

Percent

return

(%)

Dividends paid

over 2 1/3 years

+ capital gain,

total return (%)

1 BAT 42.46 54.00 27 38

2 Bintulu Port 6.30 7.20 14.2 16.2

3 KLK 16.66 22.24 33 41

4 Amway 7.02 9.70 38 49

5 Carlsberg 4.41 12.04 173 185


6 Digi 22.60 32.00 (pre

split)

41 53

7 DLady 12.16 35.20 189 201

8 F&N 10.60 18.06 70.3 80.5

9 Guinness 6.95 13.36 92.2 104.1

10 JTI 5.19 7.00 34.8 53.1

11 Kian Joo 1.24 2.17 75 84

12 LPI 8.55 13.42 56.9 70.1

13 Nestle 34.48 57.50 66.7 74.6

14 PetDag 8.97 21.10 135.2 147.8

15 PPB 15.35 15.98 4.1 12.1

16 Public Bank 10.80 13.76 27.4 39.4

17 QL

Resources

1.72 3.14 82.5 86.5

18 Shell 10.70 9.20 (14) (2)

19 Tanjong

PLC

13.70 21.80

(privatized

30 July

2010)

59.1 59.1

20 Telekom 2.80 5.65 101.7 109.1

21 YTL Power 2.20 1.76 (20) (8)

Table 3.1: Dividends Don’t Lie Portfolio published in March 2010. This is on page 103 in this book.

Performance:

■ 18 wins, 2 losses

■ Average annual total return = 31.1 percent

■ Monthly average return 2.8 percent over 27 months based on

opening price on 1 March 2010 and closing price 30 June 2012

There have been many periods of speculative frenzy in world equity markets in which investors rewarded stocks with no earnings, negative

cash flow and minimal prospects merely because they presumed there

was a greater fool elsewhere that would pay a higher price for the stock at some later date. Each and every time, the stocks without solid

fundamentals crumbled like a house of cards. Investors that enjoyed


the rewards of dot-com and technology stocks with no earnings have

been humbled. The moral of this story is that fundamentals do indeed matter. Facebook is an example.

Chart 3.4: Weekly chart of Blackbury, listed on the NYSE at USD 148 per share at its IPO in 2008. It has fallen to $6.49 As of November 2013, it has fallen by 95.5 percent. For the last 3 years they have had negative cash flows and not paid dividends. As an investor, I like to see cash flows and dividends rising over time. These are real and you can bank on it.

Source: Stock Charts.com

Our portfolio of dividend aristocrats is based on the concept that

investing in high-quality fixed income securities does not necessarily

provide the most income over the long run.

With the dividend aristocrats portfolio, it is possible to achieve high

income and as earnings increase over time. Capital gains can also be earned. Money market funds, as well as fixed deposits, are poor ways

to invest. Inflation will erode capital and returns over time.

Fixed income securities held to maturity offer no capital gains.

With the current low interest environment in which governments worldwide have suppressed interest rates to below inflation, investing

in dividend aristocrats affords the opportunity to earn returns in excess

of inflation.

--------------------- This is the end of eBook version ---------------------

If you wish to read the remaining chapters, please get a copy from

your local MPH bookstore or contact us at [email protected].

Like and follow us at our Facebook Page:


Find out about our Free Investment Workshop:


Interested to learn more? Contact us



Documents

This special eBook edition of Get Rich with Dividends is a … · 2016. 7. 11. · weekly show “Capital Today -Stock Market Review” on IPTV HyppTV (TM Unifi) Channel 420 Capital