July Stock Purchase – IMB, BT, HIK Power of Small Amounts 4

The stock market continued its unrelenting advance in July led by continued strong performance in tech and commodity focussed stocks. According to market observers, we are now over eight years into what has been the second longest bull market in modern history. Absent yield producing alternatives, enthusiasm for stocks remains extraordinarily high, and as a result valuations are elevated, and bargains around the world are very hard to come by.

If I was an index fund investor, I would be very worried at this stage of the bull due to the reasons mentioned above. I would even seriously consider taking some money off the table by reducing my stock market exposure – the risk reward ratio for many global index funds does not seem appealing to me at the moment. Luckily for me, I am an investor in individuals stocks as opposed to a buyer of the market as a whole. I am able to diligently scour the market for undervalued equity securities and continue to build my dividend income. With this is mind, here are the stocks I bought using my monthly stock purchase programme in July:

  • Imperial Brands (IMB) – Bought 8 shares for £34 each . Imperial Brands is a company I have talked about glowing from a purely financial standpoint in two previous posts found here and here. IMB is now my third biggest . Whenever I invest £2,000+ in a company – which is a large large sum for me – I need to be sure that the company is solid and will produce at least 12% per annum compounded returns going forward. With IMB I certainly think this will be the case. In an overvalued market that has elevated defensive shares to the sky, IMB certainly stands out.

For those of you who are keen followers of the market, you will have seen the US FDA announce a new comprehensive plan for tobacco and nicotine regulation. This announcement sent stocks in tobacco companies which have operations in the US down. Solid companies like Altria and British American Tobacco were down between 10% and 20% at one point during the day. Imperial Brands was also down close to 10% at one stage. No one as yet knows what will happen as a result of regulation but I am sure tobacco companies will continue to do well. They have overcome various rules and regulations before to produce stella investor returns. If Imperial continues to trade downward, I should purchase more shares next month. For now I am happing that my 75 shares in IMB spit out £120 in annual dividend income. (For readers that are interested in what the proposals of the FDA might accomplish, read this very interesting research paper.

  • BT – Bought 53 shares for £2.88 each. BT is a company that I have been averaging down on as I first bought the shares at approx £3.90 each last year. With this new purchase, I am close to break-even on this investment as averaging down has reduced my cost basis on the stock. At £2.88, BT offers great value due to its monopolistic position (provided no more mishaps). I now own a total of 608 shares which have annual dividend of £91.
  • Hikma (HIK) – Bought 12 shares for £14 each. Generic pharmaceutical companies have had a heard time of late. Just have a look at the share prices of Hikma, Teva or Perrigo. But just because generic producers are unfashionable today does mean that these companies are bad. Generic drug manufactures have a massive a massive tailwind on their backs due to two factors 1) increased spending on healthcare as a result of ageing populations. 2) Impending expiration of many block buster patent protected drugs opens a massive market for generic manufactures. Hikma should certainly benefit from this. In total, I now own 85 shares which pay out a dividend of £20 annually.

In total, these three companies pay me £231 a year for simply having an ownership stake in them. Isn’t passive income wonderful. And the greatest part is that £231 is not stagnant. As these companies earn higher and higher profits, they ship out higher and higher wads of cash to me in the form of dividends. I expect an overall increase in dividend of about 10% from these three companies. This means that next year, the £231 will turn into £254, it will turn into £279 the year after and £306 the following year.

Earning large dividends from Imperial Brands and BT also shows the power of small amounts. I didn’t start by buying shares using a large lump sum. Rather, I created a monthly saving plan and bought shares as and when I had money and the shares offered attractive value. I see many people being put off by thinking they don’t have enough money to invest. The purchases of BT and Imperial goes to show that you only need small sums to invest. For most of my monthly purchase, I only put an average of about £150 per stock. And sure everyone can save that much a month.