Whenever I make a new purchase for my portfolio I feel it's only fair to get a post written giving all of the juicy details. I want to be as transparent as possible with my journey to reach financial independence through dividend growth investing. Being open about the moves I make allows for better discussion with all of you and helps spread ideas around as well as letting me create my own "investing journal" to chronicle why I purchased a company in the first place and that way I can revisit if something changes and make the decision on whether to continue owning the company or not.
On Friday, March 6th I made two purchases, both in new positions. I know I'm trying to build up cash, but I promise to slow down my purchases. I just couldn't help myself after taking 3 months off. Let's just call it an itchy trigger finger. Of course there's much worse things that I could do with this capital than continue to build up my dividend stream.
The first purchase was in shares of Omega Healthcare Investors, Inc. (OHI). I purchased 40 shares at $39.00 per share. After commission my per share cost basis came to $39.20. Based on the current quarterly dividend of $0.53 per share these shares will carry a YOC of 5.41% and provide $84.80 in annual dividends before any future increases or reinvestment.
Much like my recent purchase of Ventas, Inc. (VTR), I'm bullish on REITs especially those tied to the health care sector. The health care industry as a whole should continue to be one of the faster growing segments of the economy as the population, in general, ages. With more innovations in health care, people are living longer and fortunately/unfortunately that means more costs for health related issues. So there's definitely a large tailwind pushing the health care sector along. There might be some short term pain once interest rates start to rise, but I believe that this won't be an issue for any solidly run REIT in the long term. Plus any short term weakness in share prices that aren't related to the fundamentals of the companies just gives investors better opportunities to buy on the dips.
Omega Healthcare Investors has a 13 year history of rewarding shareholders with increasing dividends. Considering that spans the financial crisis that's a pretty big feat. They actually have an 11 consecutive quarter streak going currently as well. Management at OHI is withholding guidance for 2015 until the AVIV REIT deal closes, but based on 2014's numbers FFO came in at $2.71 per share and adjusted FFO came in at $2.53 per share. Based on the current quarterly dividend of $0.53 the FFO payout ratio sits at 78.2% and the aFFO payout ratio is at 83.8%. The P/E ratio is not a good measure of value for REITs but instead it's common to use the P/FFO or P/aFFO. Based on 2014's numbers, I purchased shares at 14.5 P/FFO and 15.5 P/aFFO. With the AVIV REIT deal set to close and be accretive to FFO, I expect to see continued high dividend growth from OHI.
At the end of 2014, OHI's 1 year dividend growth rate was 8.6%, 3 year dividend growth rate was 9.2%, 5 year dividend growth rate was 11.0, and the 10 year growth rate was 10.9%. Using the Gordon Growth Model to calculate the value of OHI using the currently annualized dividend of $2.12, a 10% discount rate and 5% constant growth rate, shares are valued at $44.52. My cost basis is at an 11.9% discount to the this price. At my purchase price of $39.20 per share, a 10% discount rate, and the current annualized dividend of $2.12, OHI would need to grow distributions at a 4.36% rate to be fairly valued.
The second purchase was telegraphed if you read my most recent stock analysis on Seeking Alpha. I purchased 20 shares of T. Rowe Price, Inc. (TROW) at $82.5499 per share. After commission my per share cost basis came to $82.95. Based on the current quarterly dividend of $0.52 these shares will carry a YOC of 2.51% and provide $41.60 in annual dividends before any future increases or reinvestment.
I'm pretty bullish on TROW and asset managers in general. They're kind of a quasi-toll road company. While I personally believe that most investors can do well investing in index funds or on their own if they want to put in the time. The key is they need to put in the time which most people aren't willing to do. That's just fine by me now that I'm an owner of a great company with a 29 year streak of rewarding investors with growing dividends. Also people, in general, will pick a financial advisor or asset management company and stick with them. It's just too much hassle to change. If you're bullish on the US and global stock markets and economic output to increase over the long-term then asset managers could be a great investment opportunity. I won't go into too much detail on the value I see in T. Rowe since I just recently did a full write up on the company. You can check out the full stock analysis here.
The great thing about the timing of my purchase of TROW is that it's in time for the next quarterly dividend, which was recently increased by 18%, and also the $2 special dividend that will be paid in April. The special dividend is essentially a quick 2.4% rebate on my purchase price and will bring my effective yield for the first year up to 4.92%.
My forward 12-month dividends are now at $5,405.74 for my FI Portfolio. Total taxable accounts', Loyal3 and FI Portfolio, forward dividends are at $5,460.92.
I've updated my Portfolio page to reflect this purchase.