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.
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.