Recent dividend stock transactions

Over the last few weeks I have made some dividend stock transactions. These transactions might be considered controversial for some dividend growth investors but I made these transactions with future growth and outlook in mind.

I liquidated the following holdings completely:

  • Kinder Morgan Inc (KMI)
  • Royal Dutch Shell (RDS.B)

With the proceeds from these two interactions and some added US cash, I then purchased…

  • 25 shares of Costco (COST)

Reasons behind the liquidation:

  • I am not completely confident with the oil sector given the crude oil price has been staggering at the same price level for the last 3 years. There will always room for oil in the next 10 or 20 years but I want to start limit our exposure to oil producers.
  • I didn’t sell Kinder Morgan when they cut the dividend payout back in late 2015. The price has been hovering around the same level since. I don’t see KMI start growing its dividend payout any time soon.
  • Royal Dutch Shell’s payout ratio is extremely high. Furthermore, there hasn’t been any dividend increase since early 2014. I don’t see RDS.B increasing dividend payout any time soon.
  • Ultimately, I believe my money can work harder elsewhere, despite taking some loss by liquidating both positions.

Reasons behind the purchase:

  • Every time I go to Costco there are always long lineups. Obviously Costco members are quite loyal and love purchasing items at Costco stores.
  • I have been Costco members for many years and like their business model. Therefore, I have been wanting to own Costco for many years but the stock price has always been a bit high to justify pulling the buy trigger. The stock price has taken a big hit since Amazon announced the acquisition of Whole Foods. This provides a good buying opportunity. If the price goes down further I will probably purchase some more Costco shares, provided that we have US cash on hand.
  • While Amazon entering the food and retail sector is a concern, I believe Costco will be fine against Amazon + Whole Foods. Costco memberships have grown at a CAGR of 7.1% over the past five years to 44.6 million last fiscal year. The membership renewal rate is quite high as the renewal rate went from 88% in 2010 to 91% in 2015 in US and Canada; the renewal rate also has risen from 86% in 2011 to 88% in 2015 globally. Costco can always increase the membership fees by a small amount to increase revenue (i.e. like how banks raise their account fees every so often).
  • I believe Amazon is overpaying for the Whole Foods acquisition. Whole Foods has less than 2% market share in the grocery sector. Amazon can probably grow Whole Foods by integrating fresh food into the delivery system but can Amazon + Whole Foods delivery fresh produce at an attractive price level to take customers away from Costco?
  • Another question is whether Amazon can lower the price of food when they have no production facilities and no control over production. Costco, on the other hand, has longstanding relationships with growers at bulk & wholes sale prices. The Kirkland brand is also a qualify brand that I would buy over other name brands. It will be tough for Amazon + Whole Foods to compete on price with Costco.
  • Mrs. T and I shop at both Costco and Amazon. We prefer buying stuff from Costco because we like to see the products first. We only buy stuff from Amazon if it is significantly cheaper. I think many people are like us.
  • Although Costco’s dividend yield is low at 1.25%, it has very impressive dividend growth rate. Costco has managed to grow its dividend by 13.2% in the last 10 years. Short term we are taking a hit on annual dividend income but from a long-term perspective, I think it’s better off holding Costco shares than KMI and RDS.B shares.

Looking Ahead

I plan to continue trimming down our holdings in the oil sector. I will look for opportunities to liquidate holdings like Chevron and ConocoPhillips. I may purchase more Costco shares if the stock price goes down more. I also like Omega Healthcare (OHI) and Care Capital Properties (CCP) due to the aging population.

 

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29 Comments

  • Reply
    CrossCountry
    June 27, 2017 at 8:18 am

    Hey Tawcan,

    I have been following your blog posts for a couple of months now and want to give you a million thumbs up for the extraordinary content you are providing ! Really inspiring for me to continue being on the path of becoming a dividend investor. Getting there slowly but surely !!

    You hit a very important topic in my opinion which I do not see being shared or talked about a lot. WHEN TO SELL? I am not planning to sell anytime soon but I think it is an important area to be focused on as well. Might need to sell especially when looking at the long term of your journey or when you do not see any growth value in some of our stocks…Maybe a future post??? Do you have any insight to share on your strategy of selling?

    Thanks.

    CrossCountry

    • Reply
      Tawcan
      June 28, 2017 at 10:19 am

      Thank you very much for your kind words. I don’t typically like to sell stocks that we hold but occasionally it makes sense to trim or liquidate the holdings. This is one of the cases.

  • Reply
    John Pedroza
    June 27, 2017 at 8:53 am

    I wanted oil to recovery but it I am convinced it is not coming back. Too many alternatives and lots of new technology is driving down the cost to drill.

    • Reply
      Tawcan
      June 28, 2017 at 10:20 am

      Once electric cars become more main stream it’ll be interesting to see what happens with the oil sector.

    • Reply
      Tawcan
      June 28, 2017 at 10:56 am

      It might still come back but in the mean time I think my money can work harder elsewhere.

  • Reply
    Desidividend
    June 27, 2017 at 8:53 am

    I think buying Costco is right move,we don’t shop at Costco,but know people who have been members for last 10 or 12 years.

    • Reply
      Tawcan
      June 28, 2017 at 11:02 am

      We’ll see whether it’s the right move in a few years. 🙂

  • Reply
    Passivecanadianincome
    June 27, 2017 at 10:04 am

    Seems like a good move. I feel the same about oil. Renewables will only become more popular as well as electric cars.
    The Amazon acquisition is overdone. I won’t be buying meat, fruits vegetables or dairy ever online. There will definally be demand for brick mortar grocery stores.

    • Reply
      Tawcan
      June 28, 2017 at 11:06 am

      I like renewable energy a lot and I’m sure that will only get more and more prominent in the future. Might be worthwhile to purchase Amazon despite not having divided.

  • Reply
    Mr Defined Sight
    June 27, 2017 at 10:05 am

    I haven’t been to a Costco (none where I live) but my in-laws love it. They drop huge amounts of cash there on every visit it seems. I do still have a soft spot for the energy companies but I can understand why you want out. It’s not for everybody at this point.

    • Reply
      Tawcan
      June 28, 2017 at 11:09 am

      Yeah it’s pretty easy to drop a large amount of cash when visiting Costco, that’s why I like Costco. I will still have play in energy companies, just trimming our exposure a little bit.

  • Reply
    Dividend Income Stocks
    June 27, 2017 at 10:10 am

    Good choice on purchasing costco shares. We became members of costco last week. Let me tell you, they are cashing in big time!!! So many people shop at costco. I beleive your money will work better at costco than in oil sector. People always got to eat 🙂

    • Reply
      Tawcan
      June 28, 2017 at 11:16 am

      Thanks I think Costco will continue making money considering all the loyal customers.

  • Reply
    Amber tree
    June 27, 2017 at 10:24 am

    When you have reasons to no longer trust the oil sector, you need to walk the talk and sell.

    For now, I keep my belief in oil. It is part of my diversification in option trading.

    • Reply
      Tawcan
      June 28, 2017 at 11:17 am

      Don’t get me wrong, I’m not liquidating all of our oil company holdings. Just getting out on some of the oil producing companies. I still like pipelines though.

      • Reply
        Microdividends
        June 29, 2017 at 2:24 pm

        KMI isn’t really an oil “producer”, they really are more of a pipeline MLP company. “The company specializes in owning and controlling oil and gas pipelines and terminals.”
        So I was a bit confuse with this statement.

        • Reply
          Tawcan
          June 29, 2017 at 3:22 pm

          Right, KMI isn’t an oil producer, sorry for the confusion.

  • Reply
    DivHut
    June 27, 2017 at 11:28 am

    Nice to see the buying continue and picking up some beaten shares of Costco. Even if the WFM and AMZN deal goes through the combined entity will control a tiny, tiny fraction of the overall grocery market. I feel that this is headline noise more than anything material, at this at this point. What will be in 5 or 10 years down the road is a guess. Thanks for sharing your recent sells and buy.

    • Reply
      Tawcan
      June 28, 2017 at 11:18 am

      Exactly, WFM and AMZN will only control a tiny tiny fraction of the overall grocery market but it might be worthwhile to buy some AMZN shares now just to be safe.

  • Reply
    Dividend Diplomats
    June 27, 2017 at 6:57 pm

    Tawcan –

    Interesting moves! I do think KMI in the 2nd half of 2018 will increase their dividend – Bold answer from me! But – if you are uncomfortable, you are uncomfortable, easy as that. And yes – Shell has hovered at an extremely high payout ratio for quite some time, and I own quite a bit of them as well, so I can understand your reason why. To me, I am learning more about cycles and am learning the oil cycle right now, so my interest and curiosity is peaked. Luckily, my oil exposure hasn’t had any additions for a few years and has been reduced each year because of my other additions & appreciation.

    As for Costco – Yep, I am very curious on the landscape of grocery stores and don’t think they’ll be replaced by any means. Smaller stores? Maybe. However, people want to see their celery & fruit. Further, I believe Amazon wanted to collect data, as well, to study buying & purchasing habits of individuals to simply learn more; in addition to other reasons mentioned.

    Great long-term view and if you got rid of something you were uncomfortable about, to something you feel comfortable about – then contentment has risen : ) Nice work.

    -Lanny

    • Reply
      Tawcan
      June 28, 2017 at 11:29 am

      Hi Lanny,

      Interesting if you think KMI will increase dividend in 2H 2018… but realistically I don’t want to wait that long. I want my money working hard for me elsewhere. We might dip back into oil companies later once the crude oil price gets higher.

  • Reply
    Mr. Tako
    June 27, 2017 at 10:54 pm

    Interesting moves Tawcan, I hope you end up being right!

    While Costco is *still* quite expensive, the moat around that business is huge. Can Amazon crack it? Well, people used to think Sears and GM were invincible too.

    Frankly, it doesn’t matter what Amazon is paying for Whole Foods… traditional measures of profitability and ROI don’t matter in the Amazon Universe.

    Imagine for a moment — what if Amazon cut prices on products sold by Costco, and undercut them by 30%. How long do you think Costco would last? This is a game Amazon has played many time before.

    Meanwhile, the U.S. is now becoming a new low cost producer for all things petroleum. Just look at exports the last couple of years.

    • Reply
      Tawcan
      June 28, 2017 at 11:35 am

      Haha I hope I end up being right but you’re correct that Amazon can cut prices to remove customers from Costco. We’ll have to see what happens. I just think our money can work harder elsewhere than oil sector right now.

  • Reply
    John R
    June 28, 2017 at 12:00 pm

    Its always a personal choice when to turn a portfolio, add-to, hold or sell.

    Bob I’m sure that you checked out every detail before purchasing Costco & trust that it works for you.

    By any chance did you look at or compare Costco tangible book value or its value/share with it’s competitors?

    http://quotes.wsj.com/COST/financials

    Are you holding any US mortgage REIT’s in any of your portfolios?

    • Reply
      Tawcan
      June 29, 2017 at 1:32 pm

      We own a few US health care REITs in our portfolios.

  • Reply
    Microdividends
    June 29, 2017 at 2:29 pm

    Hm, these are tough calls. I can recall when I had to do a bit of re-shuffling of my portfolio also. It was a hard decision for me, as I wanted to consider my position years out. But the logic and personal belief behind your decision is never easy, but in the end you have to do what you think is right.

    Most of my energy hold is flat also, but I’m going to hold on a bit longer. Thankfully they’re not the majority of my holding, so I can wait a little longer and reallocate their dividends in other sector.

  • Reply
    wealth from thirty
    June 29, 2017 at 8:12 pm

    Interesting moves Bob. I suspect oil companies might continue their usual cycle for some time yet, but it’s better to leave the party before everyone is rushing for the exits. Amazon/Whole Foods is having a curious impact in Oz too, some of the incumbents who are already under pressure from Aldi seem to be getting sold down further in response to Amazon’s arrival, and the possibility a sizeable impact from WF/Amazon Fresh will come with it.

  • Reply
    Bradley
    July 3, 2017 at 7:27 pm

    I’ve contemplated liquidating my KMI shares as well. I haven’t pulled the trigger yet, as I am still adding oil here and there. I’m about 45% under on KMI, so it would be challenging to make that money back up once I lock in the loss. Although it would be very easy to find a much better dividend payer. Not always an easy decision!

  • Reply
    Kevin
    July 4, 2017 at 4:57 pm

    Hmm I made the same move with buying Costco after it dropped, also picked up Walmart at the same time, I think they that people are over reacting with regards to the While foods deal. Maybe it will hurt smaller retailers like Kroger more, I didn’t have the guts to pick up that one after the 30% drop, but I think the larger ones will make it through just fine, especially considering walmarts improvements online.

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