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Thursday, July 5, 2018

Thank You Kimberly Clark Corporation!

Back in 2013 I sold a house, got a nice check at settlement and had to consider how to invest it. It was part of downsizing and the important objective was to generate income.

I looked at 3 possibilities: an annuity, the 10 year Treasury note, and dividend stocks.

The annuity paid about 4.5% but you lost control of the assets. For me, that was a non-starter. To be given serious consideration the yield would have had to been considerably higher.

The 10 year Treasury Note yielded 1.83%. It would pay a constant interest payment every 6 months for 10 years. The yield was considerably below the Fed's target rate of inflation of 2% and yields were widely expected to increase. An increase in yield would drive the price down, which did in fact happen - today it yields 2.84%. If that 10 year Treasury Note had been bought and needed to be sold today it would realize a capital loss.

The 3rd possibility was much more intriguing given the goal of generating income. At the time there were many really good stocks with yields of greater than 3%. By "good" I mean stocks that had a long history of increasing their dividend, had a low payout ratio (at least less than 60% of earnings), and a reasonable P/E ratio relative to the rest of the market.

Kimberly Clark was one that fit these criteria. At the time it was priced at $94.24/share and paid a dividend of $3.24/share to yield 3.43%. So, 5% of the portfolio was invested in Kimberly Clark. Today the stock is priced at $105.30 (+16.2%) and pays an annual dividend of $4.00/share. The dividend yield at cost is now at 4.24%! Thank you Kimberly Clark Corporation!

My thinking 5 years ago was to generate a nice income and I wasn't really concerned with the price. I considered it like Social Security or even the annuity - nobody worries about the principle value fluctuating because of the market for these 2. What is of concern is the cash flow or income generated. The risk is that the dividend is reduced or eliminated.

Thus, a big concern was to properly diversify. For example, look at Pfizer and Merck but only choose one.

Lest readers think I cherry picked, I chose Kimberly Clark just because it was the most recent dividend payer I hold. In fact, I have a couple of holdings that have more than doubled. But, again, the price increase is gravy, the dividend is the objective.

And, if I get hit by a truck (actually did in 2017 via bladder cancer but that's a whole different post!) my wife and kids will be glad I didn't hand the money over to an insurance company to buy an annuity.