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Significant Expected Growth Rate Earns Dominian Resource A Bullish Thesis

Summary Company’s future performance will remain strong due to strong potentials of growth efforts and capital spending. D’s performance and execution of growth projects highlight ability to attain anticipated level of earnings growth in years ahead. Analysts have anticipated a strong next five-years growth rate of 6.25% for D. I have a bullish stance on Dominion Resource (NYSE: D ); the company is efficiently executing its infrastructural growth strategy that focuses on getting a regulated asset base through the extension of its renewable energy generation project. As a matter of fact, there are a series of ongoing strong infrastructural growth projects being undertaken by the company, which will positively impact its long-term earnings growth. Given the strong potential of its strategic growth investments, I believe the company’s cash flow base will remain strong in the years ahead, due to which D will continue to increase its dividends at a decent pace, which will positively affect the stock price. Growth Investments Are Keeping Me Bullish on D’s Long-Term U.S. utility companies have accelerated their growth investments in order to strengthen their infrastructure and better serve customers. Owing to these hefty growth investments, utility companies will experience growth on their top and bottom-line numbers. Like all other companies in the U.S. utility sector, D has also designed a growth strategy that is centered on the idea of establishing a large and improved energy generation infrastructure through hefty capital investments. In fact, the company has announced that its average annual spending till 2020 will be in a range of $1.2 billion. The following graph details D’s capital investments plan from 2014 to 2020. (click to enlarge) Source: Investors Presentation Currently, there are several ongoing construction projects of the company, which I believe will act as important drivers of its long-term growth; in the first half of 2015, D invested more than $500 million in electric transmission projects. The company is working hard to get an extensive network of regulated, renewable energy generation resources through its hefty investments, in order to comply with strict carbon dioxide regulations. In this regard, two of D’s promising gas supply-based renewable energy generation projects, the Atlantic Cost pipeline (ACP) and Cove point facility, are currently progressing in-line with the schedule. At Cove point, the overall project is 31% complete and around 90% of engineering is near to completion. And for ACP, recent reports reveal that ACP is running ahead of the management’s original plan, with operations expected in November ’18. Due to the effectiveness exhibited by ACPs’ management, I believe investor confidence will improve, which will portend well for the stock price. Moreover, there are several other promising gas generation projects at D, like the project to build 1358MW of natural gas combined cycle facility in Brunswick country, which is proceeding well by staying on-time and on-budget; so far, around 75% of work related to this project is complete and it is expected to begin service in mid-2016. Also, the company has filed for construction approval of 1,588MW gas-fired combined cycle facility in Greensville country, VA, which is expected to be in service in December 2018. The plant is expected to be one of the largest combined cycle gas plants in North America, which will be built under a rate rider, if approved. Apart from its gas-based energy generation projects, the company has been allocating sufficient funds to develop solar energy generation resources. D had invested $700 million to build multiple solar-energy generation projects in Virginia, which will in supply total 400MW of electricity. And under this plan, the first step was taken in January 2015, when the company filed a case for rate rider and CPN for a 20MW solar facility at its Remington power station. If approved, the 20MW facility will be in service by late 2016. In addition, D recently acquired a 265MW solar farm in Utah from SunEdison (NYSE: SUNE ) for $320 million , as part of a joint venture that the two companies had entered into last month. Given the fact that utility companies are growing their renewable asset bases to comply with environmental regulations, I believe all of the above-mentioned renewable energy generation projects of the company will allow it to generate strong sales and healthy earnings in the years ahead. Owing to the strong growth potentials attached to these projects, D’s management is confident of achieving its promising earnings growth target of 6% to 7% through 2020. Also, analysts have projected healthy next five-years earnings growth of 6.25% as shown below. (click to enlarge) Source: Nasdaq.com Investors Remain Rewarded At D Over the past few years, the company has maintained its policy of paying healthy dividends to shareholders, which are backed by its cash flows. D currently offers an attractive dividend yield of 3.77% . Owing to their strong infrastructural growth and development-related investments, all of which will ensure strong cash flows for D, the company’s management has affirmed that they will continue to increase dividends in future, as shown in the graph below. (click to enlarge) Source: Investors Presentation Also, given D’s strong growth prospects, analysts have projected consistent increases in the company’s book value and cash flows per share, as shown below. (click to enlarge) Source: 4-Traders.com Risks The company continues to face the risk of lagging behind the management’s expectations, due to possible construction delays or cost overruns at its ongoing projects. Moreover, unforeseen negative economic headwinds, utility regulations, rate case risk and unfavorable weather conditions are the key risks that might adversely affect D’s future stock price performance. Conclusion I believe D’s performance will remain strong in future due to the strong potentials of the company’s growth efforts and capital spending directed at strengthening its asset base. Also, the company’s performance and execution of growth projects highlight its ability to attain the management’s anticipated level of earnings growth in the years ahead. Moreover, the strong growth efforts will create a strong and stable earnings base for D. Also, the company’s growth efforts will portend well for its cash flows and will allow the company to consistently increase dividends in future years, which will positively affect the stock price. Also, analysts have anticipated a strong next five-years growth rate of 6.25% for D. Due to the aforementioned factors, I am bullish on D. Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. (More…) I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Vanguard Dividend Growth Fund: A Solid Core Holding

Summary VDIGX has low expenses and has outperformed its peers over the years. Don Kilbride looks for stocks that can pay a steady and growing stream of dividends. Vanguard also offers a Dividend Appreciation Index fund which will compete with VDIGX. Overall Objective and Strategy: Growth and Income The Vanguard Dividend Growth Fund (MUTF: VDIGX ) seeks to provide a growing income stream along with long term capital growth by investing in high quality companies that not only pay a dividend, but also have good prospects for growth in both earnings and dividends. Dividend yield is expected to be above the market average, but stocks with very high dividends but no growth are avoided. Stays diversified across all market sectors. Can allocate up to 25% of assets to foreign securities. Benchmark: the NASDAQ U.S. Dividend Achievers Select Index. Fund Expenses The expense ratio for VDIGX is 0.32% which is very low for an actively managed equity fund. Morningstar has computed the average expense ratio of similar funds to be 1.04%, so you pick up over 70 basis points of relative outperformance through lower expenses alone. Vanguard does not offer a lower cost Admiral share class for this fund. Vanguard does offer a passively managed index fund with similar goals to VDIGX – the Vanguard Dividend Appreciation Index Fund (MUTF: VDADX ) which requires a $10,000 minimum investment with an expense ratio of only 0.10%. VDADX is weighted more to mega-cap companies and has a higher allocation to the Consumer Staples sector than VDIGX. Minimum Investment VDIGX has a minimum initial investment of $3,000. Past Performance VDIGX is classified by Morningstar in the “Large Blend” or LB category. Compared with other mutual funds in this category, VDIGX has performed quite well, largely because of its low expenses and consistent stock selection. These are the annual performance figures computed by Morningstar since inception in December 2013 (as of September 14, 2015). Investors who compare their performance to the S&P 500, might be a little disappointed with the recent performance of VDIGX, since its five year performance of 13.56% lags the 14.13% performance of the S&P 500. But I wouldn’t blame the fund for this, since its Dividend Appreciation strategy has been a bit out of favor for the last five years. I believe the fund should outperform the S&P 500 over a full market cycle including some bear market periods. VDIGX Category (LB) +/- Category Percentile Rank in Category YTD -3.85% -4.48% +0.63% 41 1 Year +1.08% -1.58% +2.66% 17 3 Year +11.79% +11.37% +0.43% 48 5 Year +13.56% +12.58% +0.97% 34 10 Year +8.42% +6.25% +2.17% 4 15 Year +5.07% +3.97% +1.10% NA Source: Morningstar Mutual Fund Ratings Lipper Ranking : Funds are ranked based on total return within a universe of funds with similar investment objectives. The Lipper peer group is Equity Income. 1 Yr #21 out of 509 funds 5 Yr #23 out of 299 funds 10 Yr #5 out of 192 funds Morningstar Rating : Overall 4 Stars (out of 1,388 funds) 3 Yr 3 Stars (out of 1,388 funds) 5 Yr 4 Stars (out of 1,225 funds) 10 Yr 5 Stars (out of 872 funds) Fund Management The fund has been managed by Donald Kilbride since February 2006. Kilbride seeks to build a portfolio that produces a steady and growing stream of dividends. He looks for companies that have the ability and the willingness to increase their dividends over time. Kilbride does not buy non-dividend paying companies that may begin to offer a payout in the future- he wants the dividends now. Volatility Measures Beta: 0.91 (less volatile than the S&P 500) R- Squared: 0.93 (fairly high correlation with S&P 500) Sharpe Ratio: 1.39 Standard Deviation: 9.27 Comments VDIGX is a concentrated fund and is not an index hugger. It has $24 billion in assets invested in only 46 securities. These are the top ten holdings as of June 30, 2015: Top 10 Holdings % Weight United Parcel Service (NYSE: UPS ) 3.21% Microsoft (NASDAQ: MSFT ) 2.92% UnitedHealth Group Inc (NYSE: UNH ) 2.90% TJX Companies (NYSE: TJX ) 2.87% Honeywell (NYSE: HON ) 2.74% Nike Inc (NYSE: NKE ) 2.69% ACE Ltd (NYSE: ACE ) 2.68% Coca-Cola (NYSE: KO ) 2.60% Accenture PLC (NYSE: ACN ) 2.60% Praxair Inc (NYSE: PX ) 2.49% VDIGX is an excellent mutual fund that can serve as a core holding, especially in a retirement account. In 2008, it held up relatively well losing only 25.57% versus a 37.79% loss for its category peers and a 37% drop in the S&P 500. In times of severe financial stress, VDIGX is a good way to continue investing, since its holdings are very solid and unlikely to go into bankruptcy. Vanguard has set up an interesting competition between VDIGX and VDADX (which is pegged to the Dividend Appreciation Index). These two funds are good test vehicles for active versus passive management using the same basic strategy and it will be interesting to see whether Kilbride can outperform over the longer term. Last year, there was a friendly controversy here on Seeking Alpha between Geoff Considine and Larry Swedroe. Considine listed reasons why dividends are a valid basis upon which to select stocks, while Swedroe disagreed citing some research from DFA. Take a look at this Seeking Alpha article from last year for more information- ” Why Dividends Matter: A Review of Recent Research “. Considine later published a summary on Advisor Perspectives- ” Understanding the Controversy over Dividend‐Based Investing “. I believe that dividend-based investing has a place in any diversified portfolio, especially in retirement accounts. But for those in a higher tax bracket, I think it also makes sense to hold some non-dividend paying stocks (like Berkshire Hathaway (NYSE: BRK.A )) in taxable accounts. Over time, the tax savings will add up. Disclosure: I/we have no positions in any stocks mentioned, but may initiate a long position in VDIGX over the next 72 hours. (More…) I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

International Small-Cap Equity: 3 Options And 2 Theories

Summary SCZ has a much higher expense ratio than SCHC or VSS. SCZ also has a smaller volume of holdings than either of the other companies. Despite those drawbacks, it thoroughly outperformed the peers over the last several years. When using daily numbers, it appears that SCZ is a riskier investment. If investors switch to using monthly numbers, SCZ becomes less volatile than the other two. When investors are considering adding some international small-cap equity exposure to their portfolio, three of the first names to come up may be the iShares MSCI EAFE Small-Cap ETF (NYSEARCA: SCZ ), the Schwab International Small-Cap Equity ETF (NYSEARCA: SCHC ), and the Vanguard FTSE All-World ex-US Small-Cap ETF (NYSEARCA: VSS ). These three ETFs all have well over a thousand international small-cap holdings to offer investors to a less developed part of the equity market that may be expected to have decent returns on the basis of limited analysis in foreign small-cap equity markets leading to companies trading at low valuations due to higher risk premiums. If the investor can diversify away a significant portion of the risk and rely on those markets to become more developed, it could be expected that the companies will trade at higher valuations when lower risk premiums are demand. That can make this exposure fairly attractive for an investor that is using ETFs to establish very large amounts of diversification within their portfolio. Expense Ratio The first metric for comparing these ETFs is simply looking at the amount of value that will flow out of the fund to pay for the management expenses. When it comes to expense ratios SCHC and VSS are extremely similar but SCZ struggles with a dramatically higher expense ratio. If investors assumed that markets were fairly efficient the lower expense ratios would make SCHC and VSS very easy picks over SCZ. However, if the investor assumed that markets were that efficient, it is unclear why they would also believe that international small-cap equity was going to warrant much higher risk premiums and therefore be expected to outperform over a long time period. It would simply be contrary to only look at the expense ratio and argue for efficient markets while selecting the sector on the basis of inefficient markets. Holdings A larger volume of holdings can reduce idiosyncratic risk by reducing the importance of each individual holding. The following chart shows the number of holdings within each ETF. It might be reasonable to think that the number of holdings would be correlated with the expense ratio, but that assumption would be faulty. With less holdings and higher expense ratios, it would seem that SCZ should be riskier and produce lower returns. However, that concept is about to be challenged. Portfolio Test I ran a portfolio test using returns since early 2010 through Investspy: (click to enlarge) Looking from left to right, everything appears to be about right. SCZ has the highest annualized volatility and the greatest risk contribution of the three international ETFs. To adjust for the fact that it would be absurd for an investor to only hold international small-cap equity, I used a 70% allocation to the SPDR S&P 500 Trust ETF (NYSEARCA: SPY ) as the core of the portfolio. SCZ also suffers from a higher beta than the other funds, but when investors look at the total return it should seem very curious that SCZ substantially outperformed the other two ETFs. It appears that SCZ actually beat the costs of more expensive management and more portfolio volatility by delivering materially stronger returns. Switching to Monthly I changed the strategy for comparing the ETFs to running the numbers through my own spreadsheets to test monthly data. By switching to monthly data it is possible to get a different picture from looking at longer term data which may do a better job of showing the volatility in the value of the underlying holdings rather than focusing on swings in the share price on a single day. When I run correlation on the monthly numbers the resulting data is very similar but it shows SCHC as having a slightly high correlation. Of course, the numbers are still within a reasonable margin of error. The more interesting numbers come when I run standard deviation on the monthly numbers. When the numbers are ran on a monthly basis the volatility of returns for SCZ are actually lower than for the other two funds. Given that the correlations appear to be fairly similar, the natural conclusion is that perhaps the required return on SCZ should be slightly lower rather than the slightly higher assumption made from the previous conclusion of a higher beta being assigned to SCZ. Conclusion SCHC and VSS appear to be the natural choices, but SCZ has done very well and assuming that the performance is simply luck and that expense ratios will drive the long term performance may be assuming that markets are too efficient. If the markets are that efficient, what is the point of investing in this segment? When I’m covering the mREIT sector my goal is to rapidly spot market failures and those seem to occur most frequently with smaller companies. When those smaller companies also have investors that are less familiar with how the company works, they are prime candidates for deviating from intrinsic value. If SCZ is able to deliver superior performance through paying for some high quality analysis to determine where to allocate more of their money, it may be possible for them to continue delivering strong performance. On the other hand, it could simply be a matter of choosing to make larger allocations (by luck) to the right areas or the right sectors within those areas which would be less likely to lead to stronger performance in the future. This is an area where investors may want to look deeper in determining which small-cap ETF is the best fit for their portfolio. Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. (More…) I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article. Additional disclosure: Information in this article represents the opinion of the analyst. All statements are represented as opinions, rather than facts, and should not be construed as advice to buy or sell a security. Ratings of “outperform” and “underperform” reflect the analyst’s estimation of a divergence between the market value for a security and the price that would be appropriate given the potential for risks and returns relative to other securities. The analyst does not know your particular objectives for returns or constraints upon investing. All investors are encouraged to do their own research before making any investment decision. Information is regularly obtained from Yahoo Finance, Google Finance, and SEC Database. If Yahoo, Google, or the SEC database contained faulty or old information it could be incorporated into my analysis.