GE 090116 31.28 Yld 2.94 PE 37.17 MP MAX
Returns Since June 19, 2009
GE - 201.06% GE with "Divi-X" - 315.03%
In my book, "The Dividend Times: An Introduction to The "Divi-X" System," I devoted a chapter to the maximum risk level of "Divi-X" using all of the 'then' 29 of the 30 (Cisco didn't pay dividends) dividend paying securities of the Dow Jones Industrial Average at the time. I'm going to grab a page from that chapter and bring it up to date. The page in that chapter featured two companies; E. I. Dupont De Nemours and Co. which "Divi-X" outperformed 'All Cash' by a mind numbing 946.62% (that is not a typo), and General Electric which "Divi-X" outperformed 'All Cash' by a less impressive, but impressive still, 79.26%. So why, then, am I writing about General Electric instead of Dupont? Just because.
General Electric Company (GE) is a global digital industrial company. The Company's products and services range from aircraft engines, power generation and oil and gas production equipment to medical imaging, financing and industrial products. Its segments include Power segment offers products and services related to energy production and water reuse; Renewable Energy segment offers renewable power sources; Oil & Gas offers drilling, completion, production and oil field operation; Energy Management offers technologies to electrical power; Aviation designs and produces commercial and military aircraft engines, integrated digital components and mechanical aircraft systems; Healthcare provides essential healthcare technologies; Transportation is a supplier to the railroad, mining, marine, stationary power and drilling industries; Appliances & Lighting offers appliances and a subset of lighting products, and Capital offers continuing financial services businesses and products. (Source: Google Finance)
Since "Divi-X" Inception June 19, 2009
The Leverage Projection Worksheet
When I initiated coverage on GE, the price was only $12.10 a share with a dividend rate of $.10/qtr. which equated to a dividend yield of 3.31%. Assuming a $10,000 investment with a very high "Multiplier Pick" of 154, our yield was then able to afford us 608.96 additional shares giving us a grand total share count of 1345.4070. Using such a high "Multiplier Pick," surprisingly leveraged us at only 42.42%. Additionally, because we used a "Multiplier Pick" over 100, we chose the "ALL DIVs" option thereby, having all of our dividends be applied to our leveraged balance (there are tips on accessing income when applying all of your dividends to debt service in the book).
Returns To Date
A few things to note about this chart:
- Only because we used a 154 "Multiplier Pick," were we able to almost double our investment in eleven months.
- Our "Divi-X" investment easily punched through the 'double our money' mark before the end of our second year. Someone who used 'All Cash' would not have seen that milestone until a full eighteen months later!
- "Divi-X" has outperformed 'All Cash' every single year since 2009 and the return spread between the two continues to grow wider and wider in favor of "Divi-X."
- As of September 1st, 2016, our investment in General Electric made in June of 2009 is currently outperforming 'All Cash' by a whopping 113.97%, or an annual average of 15.83%/year! In dollars, "Divi-X" has earned us an additional $11,397.27 more than the 20,106.07 'All Cash' made on its own.
Now, for a look at our dividend picture.
A few things to note about this chart:
- In 2014, the "Divi-X" yield on cost surpassed the 'All Cash' yield on cost by one half of one percent.
- In 2016, that yield spread grew to a much better 2.43%.
- Every year from now on, whether there is a dividend reduction or not, or if General Electric continues to increase their dividends every year or not, the "Divi-X" yield spread will continue to grow at a wider rate above an 'All Cash' yield.
If you are reading this article and scratching your head, it's because you haven't learned our very simple system.
Running Leverage Rate
The "Divi-X" System Workbook monitors one's 'Running Leverage Rate' to keep the user aware of if and when a deteriorating share price increases an investor's risk level beyond their acceptable risk tolerance level.
A few things to note about this chart:
- Because we opted for such a high "Multiplier Pick," you can see that the 'Loan Balance' declines minimally in the first four years. That's because, early on, very little was going toward the reduction of principal and more toward interest. The downward trend intensifies quickly after year four, primarily as a result of regular dividend increases.
- As of Sept. 1st, 2016, our 'Loan Balance' stood at $3,281.36 but our shareholder value sits at $41,503.34. On our purchase date in June of 2009, our 'Loan Balance' was $7,368.42 and our shareholder value was $17,368.42.
- Our 'Levered Percentage' is the result of principal reduction, dividend increases/decreases (this matters when the 'ALL DIVs' option is used), and shareholder appreciation/depreciation. Ideally, you want both lines trending downwards. Optimally, you'll want the 'Levered Percentage' line to trend down much more quickly than the 'Loan Balance.' This is indicative of accelerated share price appreciation. As of Sept. 1st, 2016, as a result of principal reduction, dividend increases, and share price appreciation, our 'Levered Percentage' stands at 7.33% of total shareholder value. A significant decline from the initial 42.42% we started with back in 2009.
Taking a New Position
First, our new 'Leverage Projection Worksheet:'
A few things are different since June 2009. The share price is higher and the yield is a little bit lower significantly reducing the number of shares we pick up this time. We're lowering our "Multiplier Pick" to 145 from 154. The reason we're doing this is because our goal is to pay just a little bit more than the monthly interest expense and as of last month, my broker raised my margin rate a quarter percent to 8.0%, up from 7.75% ( there are cheaper margin options available which I discuss briefly in my book). The increase in the monthly interest expense is requiring me to choose a "Multiplier Pick" that applies more of my dividends to principal.
Next we'll take a look at the minimum milestones we would hope to achieve over the next few years.
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." Also, keep in mind, that these are based on expectations, and in your case, your expectations. Actual results will vary.
And finally, our dividend picture:
Our dividend picture is very 'untelling.' I really don't know how else to explain it. Factually, the smaller "Multiplier Pick" being used because of the increased interest expense will grow "Divi-X" dividend yields at a slower pace but to what extent is unknown. Generally, even modest dividend growth securities outperform our conservative dividend yield projections (the purple bar), but there are no guarantees. If you find yourself in this predicament, and the income growth rate doesn't seem that appealing to you, keep lowering the "Multiplier Pick" until it shows numbers you are more comfortable with. Just remember, early on, we sacrifice short-term yield for long-term capital appreciation. Opting for a higher yield now could have a significant impact on your long-term returns that may far outpace the short-term benefits you receive in immediate dividend income today.
There is an elevated risk when you use a maximum "Multiplier Pick." Whether that risk is unhealthy or not eventually depends on how much leverage you take on. There will be instances where you max out a "Multiplier Pick" and still be at a very low leverage rate. Other times, the higher "Multiplier Pick" can leverage you so high that there can be excess funds you could put in your pocket. I go over all of this in my book. Just remember to always keep your greed in check and always avoid taking on more than you're comfortable with.
We're going to put this one back on the shelf and review it again next year. Till next time, many happy returns!
Authored by Lee Carroll Wentker
All screen captures are taken from 'The "Divi-X" System Workbook'
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