Recent Buy: GE

Since I started income investing in December 2014, I continue to focus on building a solid foundation for my dividend growth portfolio.

My goal is to acquire high-quality companies at fair or discounted prices, and to hold these companies for the rest of my life while extracting dividends that my partner and I can live on.

Although I am in grad school, I do not see my low income and income investing goals as mutually exclusive events. It just takes a little frugalness and a willingness to live below our means.

I spent the first week of this month sitting on my hands, playing ‘spectator.’ With oil dipping to 6-year lows, I was tempted to add to my current equity positions in XOM, CVX, BP, or BBL. We all know that oil and gas is down right now, so it’s a great time to average down on those positions. None of these positions are complete in my books, either. However, I ultimately decided to initiate a new position in a high-quality, blue-chip company that has been around for more than 100 years.

The Purchase

On 08/07/2015, I purchased 20 shares of General Electric (GE) for $25.96, giving me $18.40 in additional dividend income per year.  This brings my total annual income to a new level of $214.73. Currently, my portfolio is 14 companies large, with 12 paying out dividends.

GE management anticipates a dividend growth rate of 11.0% through 2020. If GE is truly able to raise the dividend by 11% per year, the dividend will be $1.55 by 2020, and this initial position will bring in $31 dollars annually. Over the course of those years (2016-2020), I’ll collect $6.35 in cumulative dividends, meaning I’ll have extracted close to 24% of the price paid for each share of the equity position.

I plan on reinvesting those dividends in GE, as long as management’s plans to divest GE Capital and reshape the composition of the company to a more ‘pure’ industrial one proceed as planned.

Background

GE was founded in 1892 and is a former dividend champion. The company had 32 consecutive years of dividend increases before management slashed the dividend in 2009, a move that saved the company billions of dollars during the financial crisis of 2008/9. The cut in 2009 was the first cut since 1938. GE has paid a dividend since 1899, and currently boasts a AA+ credit rating. An AA+ credit rating is a rung below the AAA credit rating GE had before the financial crisis.

New Beginnings = New Growth?

GE has several balls in the air at the moment. The company is in the process of selling off its Capital arm, which is expected to be complete in 2016. The company is also recently sold their appliance arm to Electrolux. The process of slimming down and moving away from consumers is being driven by the vision of CEO Jeff Immelt. Mr. Immelt wants to transform GE to a primarily industrial company. By 2016, Mr. Immelt envisions industrial business as a source of 75% of EPS.

Like a lot of income investors, oil has been on my mind lately. In some ways, this purchase is an alternative play on oil. GE operates in many fields, one being oil and gas. GE manufactures rigs, vessels, and other equipment (including information technology) that make deep-water oil-drilling possible and supplies these technologies to major oil and gas companies, including BP. Although the dip in oil may acutely reduce purchases from energy producers as part of a natural cycle, from a long-term standpoint, an upward trend will eventually return. I’m less concerned with the fixed price of GE now than I am with the plans for growth and ongoing restructuring that will strengthen the company in decades to come. However, the current 3.57% yield is nice.

GE is also in the process of developing cloud infrastructure for some of their services. Cloud computing has already reshaped commerce and business in the retail sector. Now, GE is using Amazon Web Services and is developing in-house cloud computing resources to help reign-in and coordinate their prototyping and manufacturing efforts, which are distributed across the globe. The company is also integrating cloud computing services with oil rigs to leverage the massive amount of data produced by each rig around the globe for research, development, and innovation. I see this as a positive direction for the company, and an opportunity for future growth.

Conclusions

GE is the kind of company that you buy and never sell. A lot of people lost-faith in GE during the financial crisis of 2008/09 and sold off positions. At the time, investors saw the dividend slashed and shares drop to $7. Some of these sold-off positions were legacy positions, handed down within families over multiple generations.

Emotion can weigh heavily on a portfolio, and sometimes with negative consequences. Recent maneuverings by management have begun to steer GE back to its roots, and the dividend is close to where it was pre-crisis.

It wasn’t an option for me to buy into GE at its historically low levels back in 2008/9. I was just beginning college, and investing was not even close to being on my mind. Today, I’m thankful for the opportunity to consider this type of decision making in my life. And although I’m still quite young and financial independence is a ways away, I have the distinct feeling that I’m getting closer.

Inch. by. Inch.

Dylan

Data Source: EPA/Thomson Reuters (http://www.eia.gov/dnav/pet/pet_pri_spt_s1_d.htm)
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  • ChasingGains

    Just curious (sorry if you have answered this before) but how much do you pay in transaction fees ? If I bought $500 worth of shares I’m hit with a $30 fee just for buying them, so I’ve just purchased and already made an instant 6% loss :/ Just wondering, Cheers !

    • http://www.mrmodernmillennial.com Mr. Modern Millennial

      I’m working with a $7 transaction cost at Vanguard for purchases in my Roth. Even at $7, it’s a lot higher than I’d like. For a $500 purchase thats 1.4% that’s taken off the top, and that eats into any income generated by the purchase. Right now I don’t have too many other options. I am using Robinhood and Loyal3 for no-fee investing, but they don’t have Roth options so any Roth purchases have to go into Vanguard.

  • Dividend Hustler

    Great buy MMM. Truly a great company with Billions in backlog. I will be buying back in. Keep hustling it up as you are beginning a wonder new chapter in your life. Thanks for sharing. Cheers bud.

    • http://www.mrmodernmillennial.com Mr. Modern Millennial

      Thanks DH. I appreciate the support. I’m learning a lot and am having a blast, too. See you around!

  • Mati

    Very nice review of your buy.
    Why in your opinion the price is fair or discounted ?

    Thanks

  • Wellroundedinvestor

    GE is breaking itself up and CEO has pledged to return capital to shareholders, so we’ll definitely see some upside in the near future. Great buy!!

  • http://www.moneyaftergraduation.com/ Bridget Casey

    GE was one of the first stocks I ever ever ever bought (for $19!!!)

    I later sold it @ $25 and rebought in a different account for tax purposes, but it’s a cornerstone player in any portfolio for sure.

  • http://www.nomorewaffles.com/ No More Waffles

    Dylan,

    Fellow shareholder here! Great purchase that will form a corner stone of your portfolio for a long time – let’s hope so at least.

    Personally I would rather go for CAT at the moment, but that’s because I already own GE. Either players are bound to enjoy good returns over the long-run.

    Cheers,
    NMW

  • Roadmap2Retire

    Glad to have found your blog…really like it. Do you have a list of holdings page? Didnt seem to find it at the top.

    GE is a great company and the record speaks for itself. The company sure is turning around and returning to industrial roots. I am bullish about the future prospects.

    Best wishes
    R2R

  • http://howtostuffyourpig.com How to $tuff Your Pig

    GE is a great buy! With the recent correction you may want to take a look at P&G. The stock pays a strong dividend and is down around 20%. A lot of other deals as well like Walmart and Alcoa.

  • Investment Hunting

    First time visitor. Nice blog. I like your GE purchase. The stock has not moved much the past year, but I think management is doing a good job eliminating the fat. 2016 should be a good year for GE.