“Divi-X”: Improving Home Depot

HD 080516 136.91 Yld 2.02 PE 24.05 MP 80

Returns Since June 2009

HD - 525.66%     HD with "Divi-X" - 689.96%

This week I'll be discussing the "Divi-X" superstar, Home Depot.  Home Depot has been a stellar performer since we started covering this position in June of 2009 and hasn't let up.  It's performance to date has not been typical of the results experienced by its fellow Dow brothers and sisters, but it is not untypical of the returns that can be had using the "Divi-X" System.  On the same token, I don't want to lead you into the false assumption that every security you invest in will yield the same results.  As a matter of fact, in July 2016, the average "Divi-X" outperformance was 35.43% (cumulative since inception), which is pretty damn good.

Company Profile

The Home Depot, Inc. (The Home Depot) is a home improvement retailer. The Company sells an assortment of building materials, home improvement products, and lawn and garden products, and provides various services. The Home Depot stores serve three primary customer groups: do-it-yourself (DIY) customers, do-it-for-me (DIFM) customers and professional customers. Its DIY customers are home owners who purchase products and complete their own projects and installations. The Company assists these customers with specific product and installation questions both in its stores and through online resources and other media designed to provide product and project knowledge. Its DIFM customers are home owners who purchase materials themselves and hire third parties to complete the project or installation. Professional Customers are primarily professional renovators/remodelers, general contractors, repairmen, installers, small business owners and tradesmen (Source:  Google Finance)

https://corporate.homedepot.com/about

 

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Since "Divi-X" Inception June 2009

The Leverage Projection Worksheet

HD 061909 23.61 Yld 3.81 PE NA MP 80 Lev Proj

When we initiated our position on June 19, 2009, Home Depot sold for only $23.16 a share and paid a very respectable 3.81% dividend yield.  Using a $10,000 investment and based on our 3.81% yield and a "Multiplier Pick" of 80, we were then able to pick up an extra $3,407.16 in shares for a total share count of 567.8593 shares; 144.31 of those courtesy of "Divi-X."

Returns To Date

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A few things to note about this chart:

  1. There hasn't been a single year when "Divi-X" trailed an 'All Cash' ('Without "Divi-X") position since the June 19, 2009 purchase date.
  2. "Divi-X" managed to more than double our $10,000 investment to $21,222,29,  in just two and a half years (January 2012).  That was $2,386.65 more than the $18,835.64 using 'All Cash,' or 23.87%.
  3. As of Friday's close on August 05, 2016, "Divi-X" beats 'All Cash' by a mind-blowing $16,430.63, or 164.31%

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Dividend Yields

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A few things to note about this chart:

  1. Our "Divi-X" Yield surpassed the 'All Cash' investment yield in 2014 by 0.45%/yr.  Remember, in the beginning, you will always sacrifice short-term yields for long-term capital appreciation.  The aggressiveness of a company's dividend policy will have a great deal in determining how long.
  2. Once a "Divi-X" yield surpasses an 'All Cash' yield, the yield spread will widen year, after year, after year; even if there are no further dividend increases, or better still, even if there is a future dividend cut.  If there is a dividend elimination, then we're all out of luck.  Review Chapter 4:  Tips, Tricks, and Ideas in "The Dividend Times:  An Introduction to The "Divi-X" System" on how to handle a dividend elimination.
  3. Should Home Depot continue with its historical dividend growth, the yield spread between "Divi-X" and 'All Cash' will widen significantly over the years.  The purple bars in the chart gives you an approximation of yields for "Divi-X" over the remainder of our twenty years.

Running Leverage Rate

As noted earlier, our then yield at the time of purchase in June 2009 was 3.81%.  With that 3.81% yield, we were able to purchase an additional $3,407.16 of Home Depot, or another 144.31 shares of stock.  Using our "Multiplier Pick" of 80 with a margin rate of 7.75% and a "PmtPerc" of 1.25%, we ultimately wound up leveraging a modest 25.41% of our purchase.

Over the years, as a result of reduced principal and share price appreciation, here is how our 'Running Leverage Rate' has fared:

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This is absolutely beautiful.  We originally borrowed 25.41% to purchase our extra shares of Home Depot and just a few years later, our outstanding margin now only represents a measly 2.60% of our total share value! 

Let's break this down into easier terms.  When we purchased $13,407.16 worth of Home Depot in June of 2009, we only owned 74.59% of the total share value, or $10,000.00.  On August 05, 2016, we now own a full 97.4% of a total share value of $77,745.62, or $75,724.23!

Let's look at it another way.  We originally borrowed $3,407.16.  Our $10,000 "Divi-X" investment has earned an extra "net" $16,430.63 more than an 'All Cash' $10,000 investment.  Our return on borrowed money to date is 482.24%!!!

Taking a New Position

First, our new 'Leverage Projection Worksheet:'

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Things certainly look a lot different today than they did in 2009.  Share price is much higher, yield is considerably lower, and this new position would only have us levered at a very cautious 13.44%.  Even with the help of "Divi-X," we can't even afford a hundred shares with our $10,000 investment.  Oh well, there's something to be said about quality over quantity.

Return Scenarios

Next we'll take a look at the minimum milestones we would hope to achieve over the next few years.

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Don't be discouraged if the expectations do not seem that impressive.  You can always raise or lower that figure to your liking if you're using "The "Divi-X" System Workbook."

Dividends

And finally, our dividend picture:

HD 080516 136.91 Yld 2.02 PE 24.04 MP 80 20YR

click to enlarge

At first glance, not much to get excited about.  The bars in purple take into account future dividend increases, but until the company actually raises the dividend, we do not know how conservative or aggressive our expectations are.

Conclusion

Home Depot has been a grand slam over the years but its not likely to continue its past performance in the future.  However, it doesn't mean that it isn't a quality company deserving of new investment.  We'll put this one to bed for now and revisit it again next year.  Till then, many happy returns.

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Authored by Lee Carroll Wentker

All screen captures are taken from 'The "Divi-X" System Workbook'

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The security showcased here is for learning purposes only. It is not a recommendation or an endorsement of any kind. Do your own due diligence before making any investment.

All work is copyrighted by The Dividend Times, LLC 2015 - 2016

 

 

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